Test Bank For Economics 11th Global Edition By Michael Parkin by welldoneassistant

Test Bank For th Economics 11 Global Edition By Michael Parkin (All Chapters, 100% Original Verified, A+ Grade)

Economics, 11e, Global Edition (Parkin) Chapter 1 What Is Economics? 1 Definition of Economics 1) All economic questions are about A) how to make money. B) what to produce. C) how to cope with scarcity. D) how to satisfy all our wants. Answer: C Topic: Scarcity Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

2) All economic questions arise because we A) want more than we can get. B) want more than we need. C) have an abundance of resources. D) have limited wants that need to be satisfied. Answer: A Topic: Scarcity Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

3) Economics is best defined as the study of how people, businesses, governments, and societies A) choose abundance over scarcity. B) make choices to cope with scarcity. C) use their infinite resources. D) attain wealth. Answer: B Topic: Scarcity Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

4) Scarcity is a situation in which A) people cannot satisfy all their wants. B) most people can get only bare necessities. C) people can satisfy all their wants. D) some people can get all they want and some cannot. Answer: A Topic: Scarcity Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

5) Economists point out that scarcity confronts A) neither the poor nor the rich. B) the poor but not the rich. C) the rich but not the poor. D) both the poor and the rich. Answer: D Topic: Scarcity Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Ethical Reasoning

6) Scarcity is A) our inability to satisfy all our wants. B) a situation that exists during economic recessions but not during economic booms. C) eliminated by choices. D) an economic problem only for poor people. Answer: A Topic: Scarcity Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

7) When an economist talks of scarcity, the economist is referring to the A) ability of society to employ all of its resources. B) ability of society to consume all that it produces. C) inability of society to satisfy all human wants because of limited resources. D) ability of society to continually make technological breakthroughs and increase production. Answer: C Topic: Scarcity Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

8) Fundamental economic problems basically arise from A) the fact that society has more than it needs. B) turmoil in the stock market. C) the unequal distribution of income. D) our wants exceeding our scarce resources. Answer: D Topic: Scarcity Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

9) Scarcity exists because A) society and people are greedy and wasteful. B) our wants exceed the resources available to satisfy them. C) of the inefficient choices we make. D) poor people need more food and other goods. Answer: B Topic: Scarcity Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

10) Scarcity can be eliminated through A) the use of market mechanisms. B) exploration that helps us find new resources. C) wise use of our resources. D) None of the above because scarcity cannot be eliminated. Answer: D Topic: Scarcity Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

11) As an economic concept, scarcity applies to A) both money and time. B) money but not time. C) time but not money. D) neither time nor money. Answer: A Topic: Scarcity Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

12) In every economic system, choices must be made because resources are ________ and our wants are ________. A) unlimited; limited B) limited; unlimited C) unlimited; unlimited D) limited; limited Answer: B Topic: Scarcity Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

13) The problem of "scarcity" applies A) only in industrially developed countries because resources are scarce in these countries. B) only in underdeveloped countries because there are few productive resources in these countries. C) only in economic systems that are just beginning to develop because specialized resources are scarce. D) to all economic systems, regardless of their level of development. Answer: D Topic: Scarcity Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

14) Scarcity requires that people must A) cooperate. B) compete. C) trade. D) make choices. Answer: D Topic: Scarcity Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

15) People must make choices because A) most people enjoy shopping. B) of scarcity. C) there are many goods available. D) None of the above answers is correct. Answer: B Topic: Scarcity Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

16) An incentive A) could be a reward but could not be a penalty. B) could be a penalty but could not be a reward. C) could be either a reward or a penalty. D) is the opposite of a tradeoff. Answer: C Topic: Incentive Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

17) An inducement to take a particular action is called A) the marginal benefit. B) the marginal cost. C) opportunity cost. D) an incentive. Answer: D Topic: Incentive Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

18) Economics is best defined as A) how people make money and profits in the stock market. B) making choices from an unlimited supply of goods and services. C) making choices with unlimited wants but facing a scarcity of resources. D) controlling a budget for a household. Answer: C Topic: Definition of Economics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

19) The study of economics A) focuses mainly on individual consumers. B) arises from the fact that our wants exceed available resources. C) recognizes that scarcity does not affect rich nations. D) deals mainly with microeconomics. Answer: B Topic: Definition of Economics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

20) Economics is best defined as the science of choice and how people cope with A) differences in wants. B) differences in needs. C) scarcity. D) different economic systems. Answer: C Topic: Definition of Economics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

21) Economics is the study of A) the distribution of surplus goods to those in need. B) affluence in a morally bankrupt world. C) the choices we make because of scarcity. D) ways to reduce wants to eliminate the problem of scarcity. Answer: C Topic: Definition of Economics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

22) The study of the choices made by individuals is part of the definition of A) microeconomics. B) positive economics. C) macroeconomics. D) normative economics. Answer: A Topic: Microeconomics and Macroeconomics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

23) In part, microeconomics is concerned with A) how a business firm decides upon the amount it produces and the price it sets. B) changes in the economy's total output of goods and services over long periods of time. C) factors that explain changes in the unemployment rate over time. D) the Federal Reserve's policy decisions. Answer: A Topic: Microeconomics and Macroeconomics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

24) The study of the decisions of individual units in the economy is known as A) macroeconomics. B) microeconomics. C) the study of incentives. D) ceteris paribus study. Answer: B Topic: Microeconomics and Macroeconomics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

25) Studying the determination of prices in individual markets is primarily a concern of A) positive economics. B) negative economics. C) macroeconomics. D) microeconomics. Answer: D Topic: Microeconomics and Macroeconomics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

26) The analysis of the behavior of individual decision-making units is the definition of A) microeconomics. B) positive economics. C) macroeconomics. D) normative economics. Answer: A Topic: Microeconomics and Macroeconomics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

27) Which of the following is a microeconomic topic? A) How a trade agreement between the United States and Mexico affects both nations' unemployment rates. B) Comparing inflation rates across countries. C) How rent ceilings impact the supply of apartments. D) How a tax rate increase will impact total production. Answer: C Topic: Microeconomics and Macroeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

28) Which of the following questions is NOT a microeconomic question? A) Can the Federal Reserve keep income growing by cutting interest rates? B) How would a tax on e-commerce affect eBay? C) What is Britney's opportunity cost of having another baby? D) Does the United States have a comparative advantage in information technology services? Answer: A Topic: Microeconomics and Macroeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

29) Which of the following is an example of a microeconomic decision? A) an individual deciding how to allocate the time he or she has for work and leisure B) a small shoe factory deciding how much leather to purchase for the next quarter's production need C) a multinational company deciding where to relocate its world headquarter D) All of the above answers are correct. Answer: D Topic: Microeconomics and Macroeconomics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

30) Which of the following is a microeconomic topic? A) The reasons why Kathy buys less orange juice. B) The reasons for a decline in average prices. C) The reasons why total employment decreases. D) The effect of the government budget deficit on inflation. Answer: A Topic: Microeconomics and Macroeconomics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

31) Which of the following questions is a topic that would be studied by microeconomics? A) Why did production and the number of jobs shrink in 2009? B) Will the current budget deficit affect the well-being of the next generation? C) How will a lower price of digital cameras affect the quantity of cameras sold? D) What is the current unemployment rate in the United States? Answer: C Topic: Microeconomics and Macroeconomics Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

32) An example of a question that might be explored in microeconomics is to determine A) the number of workers employed by Intel. B) savings by the household sector. C) why the U.S. economy has grown more rapidly than the Japanese economy. D) the total employment within the U.S. economy. Answer: A Topic: Microeconomics and Macroeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

33) In part, microeconomics is concerned with the study of A) unemployment and economic growth. B) the Federal Reserve's policies. C) the effect government regulation has on the price of a product. D) national output of goods and services. Answer: C Topic: Microeconomics and Macroeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

34) The branch of economics that deals with the analysis of the whole economy is called A) macroeconomics. B) marginal analysis. C) microeconomics. D) metroanalysis. Answer: A Topic: Microeconomics and Macroeconomics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

35) Macroeconomics is concerned with A) individual consumers. B) government decision making concerning farm price supports. C) economy-wide variables. D) the effects on Ford Motor of a strike by the United Auto Workers. Answer: C Topic: Microeconomics and Macroeconomics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

36) Macroeconomics differs from microeconomics in that: A) macroeconomics studies the decisions of individuals. B) microeconomics looks at the economy as a whole. C) macroeconomics studies the behavior of government while microeconomics looks at private corporations. D) macroeconomics focuses on the national economy and the global economy. Answer: D Topic: Microeconomics and Macroeconomics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

37) Which of the following is a macroeconomic decision or concept? A) the price of oil B) how many television sets to produce C) the unemployment rate for the entire economy D) the unemployment rate for each firm Answer: C Topic: Microeconomics and Macroeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

38) Which of the following questions is a macroeconomic issue? A) How many more pounds of cookies will a consumer purchase if the price of cookies decreases? B) What effect would a cure for Mad Cow Disease have on the market for beef? C) What is the future growth prospect for an economy? D) How many workers should the owner of a business hire? Answer: C Topic: Microeconomics and Macroeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

39) In broad terms the difference between microeconomics and macroeconomics is that A) they use different sets of tools and ideas. B) microeconomics studies decisions of individual people and firms and macroeconomics studies the entire national economy. C) macroeconomics studies the effects of government regulation and taxes on the price of individual goods and services whereas microeconomics does not. D) microeconomics studies the effects of government taxes on the national unemployment rate. Answer: B Topic: Microeconomics and Macroeconomics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

40) Which of the following is a macroeconomic issue? A) How a rise in the price of sugar affects the market for sodas. B) How federal government budget deficits affect interest rates. C) What determines the amount a firm will produce. D) The cause of a decline in the price of peanut butter. Answer: B Topic: Microeconomics and Macroeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

41) Which of the following is a macroeconomic issue? A) The purchasing decisions that an individual consumer makes. B) The effect of increasing the money supply on inflation. C) The hiring decisions that a business makes. D) The effect of an increase in the tax on cigarettes on cigarette sales. Answer: B Topic: Microeconomics and Macroeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

42) Macroeconomic topics include A) total, nationwide employment. B) studying what factors influence the price and quantity of automobiles. C) studying the determination of wages and production costs in the software industry. D) the impact of government regulation of markets. Answer: A Topic: Microeconomics and Macroeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

43) The fact that wants cannot be fully satisfied with available resources reflects the definition of A) the what tradeoff. B) scarcity. C) the big tradeoff. D) for whom to produce. Answer: B Topic: Study Guide Question, Definition of Economics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

44) Studying the effects choices have on the individual markets within the economy is part of A) scarcity. B) microeconomics. C) macroeconomics. D) incentives. Answer: B Topic: Study Guide Question, Macroeconomics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

45) Economics can be defined as the social science that explains the ________. A) choices made by politicians B) choices we make when we trade in markets C) choices that we make as we cope with scarcity D) choices made by households Answer: C Topic: MyEconLab Questions Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

46) Scarcity is a situation in which ________. A) some people are poor and others are rich B) something is being wasted C) we are unable to satisfy all our wants D) long lines form at gas stations Answer: C Topic: MyEconLab Questions Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

47) Microeconomics is the study of ________. A) the choices that individuals and businesses make B) all aspects of scarcity C) the global economy D) the national economy Answer: A Topic: MyEconLab Questions Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

2 Two Big Economic Questions 1) When an economy produces more houses and fewer typewriters, it is answering the ________ part of one of the two big economic questions. A) "what" B) "how" C) "where" D) "for whom" Answer: A Topic: What Goods and Services Are Produced? Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

2) When firms in an economy start producing more computers and fewer televisions, they are answering the ________ part of one of the two big economic questions. A) "when" B) "for whom" C) "what" D) "where" Answer: C Topic: What Goods and Services Are Produced? Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

3) If Taco Bell decides to produce more tacos and fewer burritos, Taco Bell is answering the ________ part of one of the two big economic questions. A) "what" B) "why" C) "when" D) "scarcity" Answer: C Topic: What Goods and Services Are Produced? Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

4) When a farmer decides to raise hogs instead of cattle, the farmer is answering the ________ part of one of the two big economic questions. A) "what" B) "for whom" C) "how" D) "why" Answer: A Topic: What Goods and Services Are Produced? Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

5) When a country decides to produce fewer bombers and more public housing projects, it is answering the ________ part of one of the two big economic questions. A) "how" B) "what" C) "defense" D) "for whom" Answer: B Topic: What Goods and Services Are Produced? Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

6) When a firm decides to produce more electric cars and fewer gas guzzlers, it is most directly answering the ________ part of one of the two big economic questions. A) "how" B) "scarcity" C) "what" D) "for whom" Answer: C Topic: What Goods and Services Are Produced? Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

7) U.S. producers decide to produce more compact cars and fewer SUVs as the price of gasoline rises. Producers are answering the ________ part of one of the two big economic questions. A) "what" B) "how" C) "when" D) "how many" Answer: A Topic: What Goods and Services Are Produced? Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

8) Which of the following statements is correct? A) The United States produces more goods than services. B) The United States produces more services than goods. C) The percentage of people producing goods in the United States has steadily increased over the last 60 years. D) The United States produces an equal amount of goods and services. Answer: B Topic: Trends in Production Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

9) In the U.S. economy, which of the following statements is true? A) More goods are produced than services. B) More services are produced than goods. C) Production is divided evenly between goods and services. D) The economy is too complex to determine the proportion of production that is devoted to producing services. Answer: B Topic: Trends in Production Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

10) The largest part of what the United States produces today is ________ such as ________. A) goods; food and electronic equipment B) goods; education and entertainment C) services; trade and health care D) services; textbooks and computers Answer: C Topic: Trends in Production Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

11) When China builds a dam using few machines and a great deal of labor, it is answering the ________ part of one of the two big economic questions. A) "what" B) "how" C) "where" D) "for whom" Answer: B Topic: How Are Goods and Services Produced? Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

12) When a textile company keeps track of its inventory using a computer and its competitor uses a pad of paper and a pencil, they are both answering the ________ part of one of the two big economic questions. A) "what" B) "how" C) "for whom" D) "where" Answer: B Topic: How Are Goods and Services Produced? Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

13) When a California farmer decides to harvest lettuce using machines instead of by migrant workers, the farmer is answering the ________ part of one of the two big economic questions. A) "how" B) "for whom" C) "scarcity" D) "what" Answer: A Topic: How Are Goods Produced? Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

14) An art museum decides to offer tours by having visitors listen to cassette tapes rather than have tour guides. The museum is answering the ________ part of one of the two big economic questions. A) "scarcity" B) "what" C) "why" D) "how" Answer: D Topic: How Are Goods and Services Produced? Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

15) The fact that people with higher incomes get to consume more goods and services addresses the ________ part of one of the two big economic questions. A) "for whom" B) "when" C) "where" D) "how" Answer: A Topic: For Whom Are Goods and Services Produced? Skill: Conceptual Status: Modified 10th edition AACSB: Ethical Reasoning

16) Which of the following is NOT a factor of production? A) the water used to cool a nuclear power plant B) the effort of farmers raising cattle C) the wages paid to workers D) the management skill of a small business owner Answer: C Topic: Factors of Production Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

17) Which of the following are considered factors of production used to produce goods and services? I. Land II. Labor III. Capital IV. Entrepreneurship A) I and II only B) I and III only C) I, II and III only D) I, II, III and IV Answer: D Topic: Factors of Production Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

18) Which of the following is correct? Factors of production are A) land, labor, the price system, and capital. B) the inputs used to produce goods and services. C) the fundamental source of abundance. D) only land and labor. Answer: B Topic: Factors of Production Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

19) Factors of production include A) the economic system. B) land, labor, capital and entrepreneurship. C) labor and capital (not land, which is fixed). D) only capital, land, and labor. Answer: B Topic: Factors of Production Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

20) Factors of production include all of the following EXCEPT A) machines made in past years. B) money. C) entrepreneurship. D) a wheat field that is not irrigated. Answer: B Topic: Factors of Production Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

21) Factors of production are grouped into four categories: A) land, labor, capital, entrepreneurship. B) land, labor, capital, money. C) land, capital, money, entrepreneurship. D) labor, capital, money, entrepreneurship. Answer: A Topic: Factors of Production Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

22) Which of the following is NOT a factor of production? A) vans used by a bakery company for deliveries B) a person developing a production schedule for a new product C) 175 shares of Microsoft stock D) wilderness areas that have yet to be developed Answer: C Topic: Factors of Production Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

23) Keeping in mind economists' definition of factors of production, which of the following is NOT a factor of production? A) money B) low-skilled labor C) coal D) an engineer Answer: A Topic: Factors of Production Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

24) Which of the following is NOT a factor of production? A) mineral resources B) a university professor C) an apartment building D) 100 shares of Microsoft stock Answer: D Topic: Factors of Production Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

25) The income earned by the people who sell the services of the factor of production ________ is called ________. A) capital; rent B) entrepreneurship; wages C) land; profit D) entrepreneurship; profit Answer: D Topic: Factors of Production Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

26) Which factor of production earns profit? A) land B) human capital C) money D) entrepreneurship Answer: D Topic: Factors of Production Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

27) Which factor of production earns most income in the United States? A) capital B) labor C) money D) entrepreneurship Answer: B Topic: Factors of Production Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

28) Which of the following best defines capital as a factor of production? A) The gifts of nature that businesses use to produce goods and services. B) The knowledge and skills that people obtain from education and use in production of goods and services. C) Financial assets used by businesses. D) Instruments, machines, and buildings used in production. Answer: D Topic: Capital Stock Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

29) In economics, the term "land" means A) only land that is used in agricultural production. B) land, mineral resources, and nature's other bounties. C) land that is devoted to economic pursuits. D) land used for agricultural and urban purposes. Answer: B Topic: Land Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

30) A natural resource, such as fishing territories, is considered an example of A) both land and labor. B) land, labor, capital and entrepreneurship. C) land only. D) only capital. Answer: C Topic: Land Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

31) The "gifts of nature" are included as part of which factor of production? A) labor B) land C) capital D) entrepreneurship Answer: B Topic: Land Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

32) Copper falls into which factor of production category? A) land B) labor C) capital D) entrepreneurship Answer: A Topic: Land Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

33) Overtime worked by a JCPenney associate is considered ________ and earns ________. A) labor; wages B) entrepreneurship; profit C) human capital; interest D) labor; profit Answer: A Topic: Labor Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

34) The term human capital refers to A) labor resources used to make capital equipment. B) buildings and machinery. C) people's knowledge and skill. D) entrepreneurship and risk-taking. Answer: C Topic: Human Capital Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

35) Human capital is A) all capital owned by individuals, but not by corporations or governments. B) all capital owned by individuals or corporations, but not by governments. C) machinery that meets or exceeds federal safety standards for use by humans. D) the skill and knowledge of workers. Answer: D Topic: Human Capital Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

36) Joy is training to become a chef. The skills she is obtaining from her training and education will increase Joy's ________. A) human capital B) physical capital C) entrepreneurship D) None of the above answers are correct. Answer: A Topic: Human Capital Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

37) Which of the following is NOT an investment in human capital? A) a business student takes a seminar in using a laptop computer B) a student purchases a laptop computer C) a computer science student learns how to repair a laptop computer D) a computer science student takes a course on programming a laptop computer Answer: B Topic: Human Capital Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

38) Samantha goes to college to become an engineer. This is an example of an A) investment in physical capital. B) investment in human capital. C) increase in entrepreneurship. D) increase in labor. Answer: B Topic: Human Capital Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

39) In economics, the term "capital" refers to A) the money in one's pocket. B) buildings and equipment. C) mineral resources. D) consumer goods. Answer: B Topic: Capital Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

40) Human resources that perform the functions of organizing, managing, and assembling the other resources are called A) physical capital. B) venture capital. C) entrepreneurship. D) productive capital. Answer: C Topic: Entrepreneurship Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

41) The economic resource that organizes the use of other economic resources is called A) labor. B) capital. C) entrepreneurship. D) land. Answer: C Topic: Entrepreneurship Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

42) Entrepreneurs do all of the following EXCEPT A) organize labor, land, and capital. B) come up with new ideas about what and how to produce. C) bear risk from business decisions. D) own all the other resources used in the production process. Answer: D Topic: Entrepreneurship Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

43) Entrepreneurs directly do all of the following EXCEPT A) create new ideas about what and how to produce. B) make business decisions. C) face risks that arise from making business decisions. D) decide for whom goods and services are produced. Answer: D Topic: Entrepreneurship Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

44) Differences in income are most directly related to which of the following economic question? A) What goods and services are produced? B) In what quantities are various goods and services produced? C) How are goods and services produced? D) Who consumes the goods and services that are produced? Answer: D Topic: For Whom Are Goods and Services Produced? Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

45) The fact that some people can afford to live in beautiful homes while others are homeless, is most directly an example of an economy facing the ________ part of one of the two big economic questions. A) "for whom" B) "when" C) "how" D) "why" Answer: A Topic: For Whom Are Goods and Services Produced? Skill: Conceptual Status: Modified 10th edition AACSB: Ethical Reasoning

46) The fact that a rock star earns $5 million a year while a teacher earns $25,000 annually is most directly an example of an economy answering the ________ part of one of the two big economic questions. A) "when" B) "for whom" C) "how" D) "why" Answer: B Topic: For Whom Are Goods and Services Produced? Skill: Conceptual Status: Modified 10th edition AACSB: Ethical Reasoning

47) One economist says that raising taxes on gas would be in the social interest. What does this economist mean? A) Higher taxes on gas would benefit society as a whole. B) Raising taxes on gas would benefit most of the people. C) Higher taxes on gas would benefit everyone. D) Both answers A and C are correct. Answer: A Topic: Social Interest Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

48) An outcome is considered efficient if A) it is not possible to make someone better off without making anyone else worse off. B) it is the best available choice for an individual. C) it results in fair shares for everyone involved. D) it is possible to make someone better off without making anyone else worse off. Answer: A Topic: Self-Interest and Social Interest Skill: Definition Status: New AACSB: Reflective Thinking

49) Suppose Company A's profits increase by $10 million and nobody is made worse off. The CEO of Company A keeps all $10 million for herself. This situation A) is definitely efficient. B) is definitely not in the self-interest of Company A. C) is definitely not in the social interest. D) is definitely fair. Answer: A Topic: Self-Interest and Social Interest Skill: Conceptual Status: New AACSB: Analytical Skills

50) The Occupy Wall Street movement advocates A) a shift away from market capitalism. B) a shift towards more market capitalism. C) centrally planned socialism. D) following the teachings of Adam Smith. Answer: A Topic: At Issue: The Protest Against Market Capitalism Skill: Conceptual Status: New AACSB: Analytical Skills

51) An economic system in which the government decides what, how, and for whom to produce, directs workers to jobs, and owns all the land and capital is A) centrally planned socialism. B) market capitalism. C) mixed economy. D) supported by economists as the best system available. Answer: A Topic: At Issue: The Protest Against Market Capitalism Skill: Definition Status: New AACSB: Reflective Thinking

52) According to Adam Smith, A) government intervention in markets is not desirable because an invisible hand leads decisions made in pursuit of self-interest to unintentionally promote the social interest. B) politicians are well-equipped to regulate corporations and intervene in markets to improve market outcomes. C) when big corporations pursue their self-interest of maximum profit, they will inevitably conflict with social interest. D) in a market transaction buyers can either get what they want for less than they would be willing to pay or sellers can earn a profit, but both buyers and sellers can't gain simultaneously. Answer: A Topic: At Issue: The Protest Against Market Capitalism Skill: Conceptual Status: New AACSB: Reflective Thinking

53) The 2010 Patient Protection and Affordable Care Act (Obamacare) contains a provision that may require individuals to either purchase private health insurance or pay a tax. This is an example of A) a mixed economy. B) market capitalism. C) centrally planned socialism. D) the invisible hand. Answer: A Topic: At Issue: The Protest Against Market Capitalism Skill: Conceptual Status: New AACSB: Analytical Skills

54) According to economists, A) market capitalism is the best system available and some government intervention and regulation can either help or harm the social interest. B) market capitalism is the best system available and any government intervention and regulation will inevitably harm the social interest. C) centrally planned socialism is the best system available since governments generally make decisions that are in social interest. D) centrally planned socialism and pure market capitalism are equally capable of promoting social interest, but a mixed economy is an undesirable compromise between the two that will harm social interest. Answer: A Topic: At Issue: The Protest Against Market Capitalism Skill: Conceptual Status: New AACSB: Reflective Thinking

55) Which of the following is NOT part of the first big economic question? A) What goods and services are produced? B) How are goods and services produced? C) For whom are goods and services produced? D) Why do incentives affect only marginal costs? Answer: D Topic: Study Guide Question, Two Big Economic Questions Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

3 The Economic Way of Thinking 1) In economics we learn that A) tradeoffs allow us to have more of everything we value. B) tradeoffs allow us to avoid the problem of opportunity cost. C) opportunity costs are all of the possible alternatives given up when we make a choice. D) None of the above answers is correct. Answer: D Topic: Tradeoffs Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

2) Because we face scarcity, every choice involves A) money. B) the question "what." C) giving up something for nothing. D) an opportunity cost. Answer: D Topic: Tradeoff and Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 26 Copyright © 2014 Pearson Education, Inc.

3) The term used to emphasize that making choices in the face of scarcity involves a cost is A) substitution cost. B) opportunity cost. C) utility cost. D) accounting cost. Answer: B Topic: Opportunity Cost Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

4) The loss of the highest-valued alternative defines the concept of A) marginal benefit. B) scarcity. C) entrepreneurship. D) opportunity cost. Answer: D Topic: Opportunity Cost Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

5) Opportunity cost means the A) accounting cost minus the marginal cost. B) highest-valued alternative forgone. C) accounting cost minus the marginal benefit. D) monetary costs of an activity. Answer: B Topic: Opportunity Cost Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

6) The opportunity cost of any action is A) all the possible alternatives given up. B) the highest-valued alternative given up. C) the benefit from the action minus the cost of the action. D) the dollars the action cost. Answer: B Topic: Opportunity Cost Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

7) The opportunity cost of something you decide to get is A) all the possible alternatives that you give up to get it. B) the highest valued alternative you give up to get it. C) the value of the item minus the cost you paid for it. D) the amount of money you pay to get it. Answer: B Topic: Opportunity Cost Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

8) Opportunity cost is best defined as A) how much money is paid for something. B) how much money is paid for something, taking inflation into account. C) the highest-valued alternative that is given up to get something. D) all the alternatives that are given up to get something. Answer: C Topic: Opportunity Cost Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

9) Which of the following statements are correct? I. The "highest-valued alternative given up to get something" is the opportunity cost. II. Wealthy economies don't experience opportunity costs. III. Scarcity creates opportunity costs. A) I only B) I and II C) I and III D) I, II, and III Answer: C Topic: Opportunity Cost Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

10) Opportunity cost is defined as the A) total value of all the alternatives given up. B) highest-valued alternative given up. C) cost of not doing all of the things you would like to do. D) lowest-valued alternative given up. Answer: B Topic: Opportunity Cost Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

11) You have the choice of going on vacation to Florida for one week, staying at work for the week, or spending the week doing fix-up projects around your house. If you decide to go to Florida, the opportunity cost of the trip is A) working and doing fix-up projects. B) working or doing fix-up projects, depending on which you would have done otherwise. C) working because you would be giving up dollars. D) nothing because you will enjoy the trip to Florida. Answer: B Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

12) The night before a midterm exam, you decide to go to the movies instead of studying for the exam. You score 60 percent on your exam. If you had studied the night before, you'd have scored 70 percent. What was the opportunity cost of your evening at the movies? A) 10 percent off your grade B) 60 percent C) 70 percent D) zero Answer: A Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

13) On Saturday morning, you rank your choices for activities in the following order: go to the library, work out at the gym, have breakfast with friends, and sleep late. Suppose you decide to go to the library. Your opportunity cost is A) working out at the gym, having breakfast with friends, and sleeping late. B) working out at the gym. C) zero because you do not have to pay money to use the library. D) not clear because not enough information is given. Answer: B Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

14) Fred and Ann are both given free tickets to see a movie. Both decide to see the same movie. We know that A) both bear an opportunity cost of seeing the movie because they could have done other things instead of seeing the movie. B) both bear the same opportunity cost of seeing the movie because they are doing the same thing. C) it is not possible to calculate the opportunity cost of seeing the movie because the tickets were free. D) the opportunity cost of seeing the movie is zero because the tickets were free. Answer: A Topic: Opportunity Cost Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

15) You have the choice of going to Hawaii for a week, staying at work for the week, or spending the week skiing. If you decide to go to Hawaii, the opportunity cost is A) the value of working and skiing. B) the value of working or skiing, depending on which you would have done rather than go to Hawaii. C) working, because you would be giving up a week's pay. D) None of the above if you enjoy the time spent in Hawaii. Answer: B Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

16) Today, Julie attended her 12:30 Economics class. If she hadn't gone to class, Julie would have gone out to lunch with friends. She had other options; she could have worked or slept in. Julie's opportunity cost of going to class is the A) income she gave up. B) lunch she gave up. C) sleep she gave up. D) income, pleasure, and sleep she gave up. Answer: B Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

17) Joe likes to sleep late in the mornings and play tennis in the afternoons. The opportunity cost of Joe attending his morning class for one hour is A) an hour of tennis given up. B) an hour of sleep given up. C) both the tennis given up and the sleep given up. D) nothing because he is paying for his class. Answer: B Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

18) John has two hours of free time this evening. He ranked his alternatives, first go to a concert, second go to a movie, third study for an economics exam, and fourth answer his e-mail. What is the opportunity cost of attending the concert for John? A) attending a movie B) studying for an economics exam C) answering his e-mail D) attending a movie, studying for an economics exam, and answering his e-mail Answer: A Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

19) You decide to take a vacation and the trip costs you $2,000. While you are on vacation, you do not go to work where you could have earned $750. In terms of dollars, the opportunity cost of the vacation is A) $2,000. B) $750. C) $2,750. D) $1,250 Answer: C Topic: Opportunity Cost Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

20) The opportunity cost of attending college includes the cost of A) the tuition but not the job at which you would otherwise have worked. B) the highest valued alternative to attending college. C) the highest valued alternative to attending college plus the cost of tuition. D) tuition, books, and the lost wages for the hours spent studying. Answer: C Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

21) Misty has the option of purchasing one of three products: Brand A, Brand B, or Brand C. Each costs ten dollars. If she decides that Brand A meets her needs best, then the opportunity cost of this decision is A) Brand B plus Brand C. B) twenty dollars. C) Brand A. D) Brand B or Brand C, depending on which is considered the highest-value alternative forgone. Answer: D Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

22) Which of the following is NOT an example of an opportunity cost? A) By spending Thursday night studying for an economics exam, a student was unable to complete a homework assignment for calculus class. B) Because David used all of his vacation time to paint his house, he was unable to visit the Caribbean last year. C) Because Mary is now being paid a higher wage, she can afford to buy a new car even though she is moving into a bigger apartment. D) By choosing to attend college, Jean was not able to continue working as an electrician; as a result, she gave up more than $85,000 in earnings while she was in college. Answer: C Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

23) From 8 to 11 p.m., Sam can either attend a basketball game, a hockey match or the symphony. Suppose that Sam decides to attend the hockey match and thinks to herself that if she did not go to the match she would go to the symphony. Then the opportunity cost of attending the hockey match is A) going to the symphony and the basketball game. B) going to the symphony. C) going to the basketball game. D) three hours of time. Answer: B Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

24) After you graduate, you have decided to accept a position working at the Bureau of Labor Statistics for $45,000.00 a year. The two other offers you received were working for Wal-Mart for $38,000 and working for Ernst and Young consulting for $42,000. Of these two offers, you would have preferred the job at Ernst and Young. What is the opportunity cost of accepting the position at the Bureau of Labor Statistics? A) the $45,000 you are paid for working at the Bureau of Labor Statistics B) the $42,000 you would have been paid working for Ernst and Young C) the $38,000 you would have been paid working for Wal-Mart D) the $42,000 you would have been paid working for Ernst and Young and the $38,000 you would have been paid working for Wal-Mart Answer: B Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

25) Bill Bonecrusher graduates from college with a choice of playing professional football at $2 million a year or coaching for $50,000 a year. He decides to play football, but eight years later, though he could continue to play football at $2 million a year, he quits football to make movies for $3 million a year. His opportunity cost of playing football at graduation was ________ and eight years later the opportunity cost of making movies was ________. A) $50,000; $2 million B) $2 million; $2 million C) $2 million; $3 million D) $50,000; $50,000 Answer: A Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

26) During the summer you have made the decision to attend summer school, which prevents you from working at your usual summer job in which you normally earn $6,000 for the summer. Your tuition cost is $3,000 and books and supplies cost $1,300. In terms of dollars, the opportunity cost of attending summer school is A) $10,300. B) $6,000. C) $4,300. D) $3,300. Answer: A Topic: Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

27) The term "opportunity cost" points out that A) there may be such a thing as a free lunch. B) not all individuals will make the most of life's opportunities because some will fail to achieve their goals. C) executives do not always recognize opportunities for profit as quickly as they should. D) any decision regarding the use of a resource involves a costly choice. Answer: D Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

28) When the government chooses to use resources to build a dam, these sources are no longer available to build a highway. This choice illustrates the concept of A) a market mechanism. B) macroeconomics. C) opportunity cost. D) a fallacy of composition. Answer: C Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

29) Jill, an economics student, has already spent 5 hours cleaning her room. In deciding whether or not to continue cleaning for another hour, she applies the economic principle of A) scarcity. B) ceteris paribus. C) choosing at the margin. D) productivity. Answer: C Topic: Choices at the Margin Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

30) Marginal benefit is the benefit A) that your activity provides to someone else. B) of an activity that exceeds its cost. C) that arises from the secondary effects of an activity. D) that arises from an increase in an activity. Answer: D Topic: Marginal Benefit/Marginal Cost Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

31) A benefit from an increase in activity is called the A) marginal benefit. B) economic benefit. C) total benefit. D) opportunity benefit. Answer: A Topic: Marginal Benefit Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

32) The marginal benefit is the A) additional gain from one more unit of an activity. B) additional cost from one more unit of an activity. C) loss of the highest-valued alternative. D) additional gain from one more unit of an activity minus the additional cost from one more unit of the activity. Answer: A Topic: Marginal Benefit Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

33) In terms of dollars, the marginal benefit of working five days a week instead of four days a week is A) the wages received for the fifth day of work. B) the wages received for 5 days of work. C) the wages received for 4 days of work. D) None of the above answers is correct. Answer: A Topic: Marginal Benefit Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

34) Your employer has asked you to start working overtime and has offered to pay $18 per hour for every hour you work beyond forty hours a week. The wage rate for each of the first forty hours will continue to be the usual $15 per hour. In terms of dollars, what is the marginal benefit of working each hour of overtime? A) zero B) $3.00 C) $15.00 D) $18.00 Answer: D Topic: Marginal Benefit Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

35) A student is studying for an exam 2 hours a day and is debating whether to study an extra hour. The student's marginal benefit A) depends on the grade the student earns on the exam. B) is the benefit the student receives from studying all 3 hours. C) is the benefit the student receives from studying the extra hour. D) is greater than the student's marginal cost. Answer: C Topic: Marginal Benefit Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

36) A student athlete is deciding whether to work out for an extra hour. Her marginal benefit from another hour of exercise A) is the benefit she gets from all the hours she's worked out all week. B) is the benefit she receives from exercising the additional hour. C) is less than the marginal cost of the additional hour. D) depends on the cost of the workout. Answer: B Topic: Marginal Benefit Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

37) Suppose that you are spending two hours a day studying economics, and your grade is 85 percent. You want a higher grade and decide to study for an extra hour a day. As a result, your grade rises to 90 percent. Your marginal benefit is the A) 5 point increase in your grade minus the opportunity cost to you of spending the hour studying. B) extra hour per day you spend on studying. C) 5 point increase in your grade. D) three hours per day you spend on studying. Answer: C Topic: Marginal Benefit Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

38) Marginal cost is the cost A) that your activity imposes on someone else. B) that arises from an increase in an activity. C) of an activity that exceeds its benefit. D) that arises from the secondary effects of an activity. Answer: B Topic: Marginal Cost Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

39) A cost due to an increase in activity is called A) an incentive loss. B) a marginal cost. C) a negative marginal benefit. D) the total cost. Answer: B Topic: Marginal Cost Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

40) Marginal cost is the A) cost of an increase in an activity. B) total cost of an activity. C) cost of an activity minus the benefits of the activity. D) cost of all forgone alternatives. Answer: A Topic: Marginal Cost Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

41) Laura is a manager for HP. When Laura must decide whether to produce a few additional printers, she is choosing at the margin when she compares A) the total revenue from sales of printers to the total cost of producing all the printers. B) the extra revenue from selling a few additional printers to the extra costs of producing the printers. C) the extra revenue from selling a few additional printers to the average cost of producing the additional printers. D) HP's printers to printers from competing companies, such as Lexmark. Answer: B Topic: Marginal Analysis Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

42) A lawn service is deciding whether to add an additional employee to its summer crew. The marginal cost of hiring this worker depends on the A) total amount paid to only the new worker. B) total amount paid to all previously hired workers. C) the total amount paid to all the workers, both the new one and the previously hired workers. D) the additional revenue created by having an additional worker minus the cost of hiring the worker. Answer: A Topic: Marginal Cost Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

43) If the marginal cost of an activity exceeds the marginal benefit, then A) the activity will occur because the high marginal cost means it must be highly valued. B) the forgone alternatives' costs must be increased. C) an alternative action will be selected. D) the person must concentrate on the activity's total benefits. Answer: C Topic: Marginal Benefit/Marginal Cost Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

44) A store remains open from 8 a.m. to 4 p.m. each weekday. The store owner is deciding whether to stay open an extra hour each evening. The owner's marginal benefit A) is the benefit the owner receives from staying open from 8 a.m. to 5 pm. B) depends on the revenues the owner makes during the day. C) must be greater than or equal to the owner's marginal cost if the owner decides to stay open. D) is the benefit the owner receives from staying open from 8 a.m. to 6 pm. Answer: C Topic: Marginal Benefit/Marginal Cost Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

45) Which of the following creates an incentive to increase the amount of an activity? A) an increase in the marginal cost of the activity and a decrease in the marginal benefit of the activity B) a decrease in the marginal cost of the activity and an increase in the marginal benefit of the activity C) constant marginal cost and constant marginal benefit of the activity D) None of the above create an incentive to increase the amount of an activity. Answer: B Topic: Incentives, Marginal Cost and Marginal Benefit Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

46) Suppose that the government of New York state promises to decrease taxes to a firm if it decides to stay in New York instead of moving to another state. This policy on the part of the state constitutes ________, to make the ________ of the firm remaining in New York. A) an incentive; marginal benefit exceed the marginal cost B) an incentive; marginal cost exceed the marginal benefit C) a command; marginal benefit exceed the marginal cost D) a command; marginal cost exceed the marginal benefit Answer: A Topic: Incentives, Marginal Cost and Marginal Benefit Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

47) Jed had an exam score of 50 percentage points. There is an extra credit assignment that Jed can complete that will raise his exam score by 20 percentage points. Jed has determined that the extra credit assignment will take 10 hours of his time. Jed will complete the assignment he values the A) 20 percentage points more than the 10 hours of his time. B) 10 hours of his time more than the 20 percentage points. C) 70 percentage points more than the 10 hours of his time. D) wants a higher score. Answer: A Topic: Incentives, Marginal Cost and Marginal Benefit Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

48) From 8 P.M. to 10 P.M.., Susan can attend a movie, study, or talk with friends. Suppose that Susan decides to go to the movie but thinks that, if she hadn't, she would otherwise have talked with friends. The opportunity cost of attending the movie is A) talking with friends and studying. B) studying. C) talking with friends. D) two hours of time. Answer: C Topic: Study Guide Question, Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

49) When the government hires people to serve in the army, these people are no longer available to do other work. This choice illustrates the concept of A) an incentive. B) a social interest/private interest conflict. C) opportunity cost. D) marginal benefit. Answer: C Topic: Study Guide Question, Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

50) When the government chooses to spend the tax dollars that it collects on homeland security, its choice ________. A) involves a tradeoff of other goods and services such as education for more homeland security B) illustrates that scarcity does not always exist C) involves no tradeoff because the defense is necessary D) primarily affects who gets the goods and services produced. Answer: A Topic: MyEconLab Questions Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

51) Making a choice at the margin means ________. A) letting someone else choose for you B) waiting until the last minute to make a choice C) deciding to do a little bit more or a little bit less of an activity D) making a choice by comparing the total benefit and the total cost Answer: C Topic: MyEconLab Questions Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

52) Suppose that for the past two months, you have studied economics one hour a day. You now decide to study economics two hours a day. For the past two months, ________. A) your marginal cost of studying economics for an hour must have exceeded its marginal benefit B) the marginal cost of studying economics must have fallen C) your marginal benefit from studying economics an hour must have been greater than its marginal cost D) the opportunity cost of studying economics must have risen. Answer: C Topic: MyEconLab Questions Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

4 Economics as Social Science and Policy Tool 1) In economics, positive statements are about A) the way things ought to be. B) the way things are. C) macroeconomics, not microeconomics. D) microeconomics, not macroeconomics. Answer: B Topic: Positive and Normative Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

2) A positive statement is A) about what ought to be. B) about what is. C) the result of a model's normative assumptions. D) valid only in the context of a model with simple assumptions. Answer: B Topic: Positive and Normative Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

3) A positive statement is A) about what ought to be. B) about what is. C) always true. D) one that does not use marginal concepts. Answer: B Topic: Positive and Normative Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

4) Which of the following are true regarding "positive" statements? I. They describe what "ought to be." II. They describe what is believed about how the world appears. III. They can be tested as to their truthfulness. A) I and II B) II and III C) I and III D) I, II and III Answer: B Topic: Positive and Normative Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

5) Positive and normative statements differ in that A) positive statements can be tested, whereas normative statements cannot. B) normative statements can be tested, whereas positive statements cannot. C) normative statements depict "what is" and positive statements depict "what ought to be." D) normative statements never use the word "should." Answer: A Topic: Positive and Normative Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

6) Positive economic statements A) prescribe what should be. B) are related only to microeconomics. C) can be tested against the facts. D) cannot be tested against the facts. Answer: C Topic: Positive and Normative Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

7) Which of the following is a positive statement? A) An unemployment rate of 9 percent is a national disgrace. B) Unemployment is a more important problem than inflation. C) When the national unemployment rate is 9 percent, the unemployment rate for inner-city youth is often close to 40 percent. D) Unemployment and inflation are equally important problems. Answer: C Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

8) Which of the following is a positive statement? A) The United States should fight inflation even if it raises unemployment. B) What to do with Social Security is the most important economic issue today. C) A 5 percent increase in income leads to a 3 percent increase in the consumption of orange juice. D) Because they decrease productivity, labor unions should be eliminated. Answer: C Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

9) Which of the following is a positive statement? A) People buy more of a good or service when its price falls. B) The distribution of income is fair. C) The government ought to provide health care to everyone. D) Corporations should be more socially responsible. Answer: A Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

10) Which of the following is an example of a positive statement? A) Government should not redistribute income. B) Business firms ought to contribute more to charities. C) Households are the primary source of saving. D) The foreign sector should be more tightly controlled. Answer: C Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

11) Which of the following is an example of a positive statement? A) We should cut back on our use of carbon-based fuels such as coal and oil. B) Increasing the minimum wage results in more unemployment. C) Every American should have equal access to health care. D) The Federal Reserve ought to cut the interest rate. Answer: B Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

12) Which of the following is a positive statement? A) Taxes should be lower because then people get to keep more of what they earn. B) My economics class should last for two terms because it is my favorite class. C) A 10 percent increase in income leads to a 4 percent increase in the consumption of beef. D) Given their negative impact on productivity, the government should eliminate labor unions. Answer: C Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

13) Which of the following is a positive statement? A) Our planet is warming because of an increased carbon dioxide buildup in the atmosphere. B) A minimum wage of $7.50 per hour is a shame for a rich country like the United States. C) Both of these statements are positive. D) Neither of these statements is positive. Answer: A Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

14) Which of the following is a positive statement? A) The government must lower the price of a pizza so that more students can afford to buy it. B) The best level of taxation is zero percent because then people get to keep everything they earn. C) My economics class should last for two terms because it is my favorite class. D) An increase in tuition means fewer students will apply to college. Answer: D Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

15) Which of the following is a positive statement? A) Low rents decrease the amount of housing landlords make available for rent. B) Low rents are good because they make apartments more affordable. C) Housing costs too much. D) Owners of apartment buildings ought to be free to charge whatever rent they want. Answer: A Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

16) When Al makes the statement, "The cost of living has increased 10 percent over the past 10 years," he is A) making a normative statement. B) making a positive statement. C) testing an economic model. D) facing the standard of living tradeoff. Answer: B Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

17) Which of the following is a positive statement? A) State lotteries are good methods to use for raising revenues. B) Increased prison sentences are the best way to reduce the crime rate. C) An increase in gas prices leads people to car pool more. D) Inflation is a more serious problem than is deflation. Answer: C Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

18) The statement "Managers with a college education earn $18 an hour while ski instructors who did not complete college earn $10" is A) a political statement. B) a positive statement. C) a normative statement. D) an ethical statement. Answer: B Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

19) The statement "An increase in the price of gasoline will lead to a decrease in the amount purchased" is A) a political statement. B) a positive statement. C) a normative statement. D) a scientific statement. Answer: B Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

20) The statement "The unemployment rate for teens is higher than that for adults" is A) a political statement. B) a positive statement. C) a normative statement. D) an ethical statement. Answer: B Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

21) Which of the following is NOT a normative statement? A) People buy more of a good or service when its price falls. B) The distribution of income is fair. C) The government ought to provide health care to everyone. D) Corporations should be more socially responsible. Answer: A Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

22) A normative statement concerns A) what is provable. B) what is correct. C) what is incorrect. D) a value judgment. Answer: D Topic: Positive and Normative Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

23) Normative economic statements A) describe what ought to be. B) describe what is rather than what ought to be. C) describe the process of economic policy-making. D) deal with economic hypotheses that are not well-established laws. Answer: A Topic: Positive and Normative Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

24) The statement that "peach ice cream is better than chocolate ice cream" A) can be tested using the scientific approach. B) is a normative statement. C) is a positive statement. D) provides a basis for predicting which type of ice cream will exhibit the most sales. Answer: B Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

25) The statement "Unemployment should be below 6 percent" is A) a positive statement. B) a normative statement. C) a prediction. D) an assumption. Answer: B Topic: Positive and Normative Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

26) Statements about what ought to be are called A) positive statements. B) normative statements. C) assumptions. D) implications. Answer: B Topic: Positive and Normative Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

27) Normative statements are statements about A) prices. B) quantities. C) what is. D) what ought to be. Answer: D Topic: Positive and Normative Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

28) A normative statement is A) about what ought to be. B) about what is. C) always true. D) one that does not use marginal concepts. Answer: A Topic: Positive and Normative Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

29) In economics, normative statements are about A) the way things ought to be. B) the way things are. C) marginal benefits, not marginal costs. D) marginal costs, not marginal benefits. Answer: A Topic: Positive and Normative Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

30) Which of the following is a normative statement? A) The price of candy bars is $1.25 each. B) Candy bars are more expensive than newspapers. C) You should eat less candy. D) Popcorn and candy are sold in movie theaters. Answer: C Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

31) Which of the following is a normative statement? A) The unemployment rate is too high. B) Forty percent of the public believes that the unemployment rate is too high. C) The unemployment rate rose last month. D) None of the above are normative statements. Answer: A Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

32) Which of the following is a normative statement? A) The United States has a comparative advantage compared to the European Union in the production of wheat. B) The main reason why the United States has a trade deficit with China is because China's trade practices are unfair. C) Both these statements are normative. D) Neither of these statements is normative. Answer: B Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

33) "Government should act to reduce poverty levels." A) This statement is a normative statement. B) This statement is a positive statement. C) This statement is an example of the fallacy of composition. D) This statement is an example of the post hoc fallacy. Answer: A Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

34) When Susan makes the statement, "The government should spend less money to take care of national parks," she is A) making a normative statement. B) making a positive statement. C) testing an economic model. D) not dealing with scarcity. Answer: A Topic: Positive and Normative Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

35) "The rich should pay higher income tax rates than the poor" is an example of a A) normative statement. B) positive statement. C) descriptive statement. D) theoretical statement. Answer: A Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

36) Which of the following is a normative statement? A) Studying more hours leads to an increase in your GPA. B) An increase in tax rates means people work fewer hours. C) Taking extra vitamin C prevents catching a cold. D) States should require all motorcycle riders to wear helmets to reduce the number of riders killed. Answer: D Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

37) Which of the following is a normative statement? A) Low rents will restrict the supply of housing. B) Low rents are good because they make apartments more affordable. C) Housing costs are rising. D) Owners of apartment buildings are free to charge whatever rent they want. Answer: B Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

38) Which of the following is a normative statement? A) Next year's inflation rate will be under 4 percent. B) Consumers will buy more gasoline over the Christmas holiday even if the price of gas is 10 cents higher than it was during the Thanksgiving holiday. C) The government's cuts in welfare spending impose an unfair hardship on the poor. D) The current butter surplus is the result of federal policies. Answer: C Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

39) Economic models A) are essentially different from those used in other sciences. B) always use graphs. C) simplify reality. D) include all relevant facts. Answer: C Topic: Model Building Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

40) A good economic model A) describes every aspect of the economic world, with no exception. B) includes all those features of the world that can be described numerically. C) includes only those features of the world that are needed for the purpose at hand. D) should not include more than two variables. Answer: C Topic: Model Building Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

41) An economic model is A) a generalization that summarizes all the normative assumptions we make about a particular issue. B) a description of some aspect of the economic world that includes only those features of the world that are needed for the purpose at hand. C) a statement that describes how the world should be. D) a collection of facts that describe the real world. Answer: B Topic: Models Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

42) A normative statement is A) about what ought to be. B) about what is. C) always true. D) one that is based on an economic experiment. Answer: A Topic: Study Guide Question, Positive and Normative Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

43) Which of the following is a positive statement? A) The government must provide health insurance so that the poor can obtain decent medical treatment. B) The government should spend more on education. C) My favorite dinner is pizza and soda. D) An increase in the price of pizza will lead fewer students to buy pizza. Answer: D Topic: Study Guide Question, Positive and Normative Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

44) An economic model includes A) only normative statements. B) no use of marginal concepts. C) all known details in order to increase its accuracy. D) only details considered essential. Answer: D Topic: Study Guide Question, Economic Model Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

45) The statement that ________ is a positive statement. A) more students should study economics B) the price of gasoline is too high C) too many people in the United States have no health care insurance D) the price of sugar in the United States is higher than the price in Australia Answer: D Topic: MyEconLab Questions Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

5 News Based Questions 1) Ben Bernanke, Chairman of the Federal Reserve, must choose whether tomorrow he meets with the Secretary of the Treasury or with the Congress regarding the financial crisis. This choice reflects the A) fact that Bernanke faces scarcity. B) concept of entrepreneurship. C) fact that Bernanke responds to incentives D) use of capital. Answer: A Topic: Scarcity Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

2) When the president of the Bank of America addresses Congress regarding lending standards in that industry, he is discussing A) a macroeconomic topic. B) a microeconomic topic. C) incentives. D) the big tradeoff. Answer: B Topic: Microeconomics and Macroeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

3) When Ben Bernanke, Chairman of the Federal Reserve, addresses Congress regarding the United States role in the world economy, he is discussing A) a macroeconomic topic. B) a microeconomic topic. C) scarcity. D) incentives. Answer: A Topic: Microeconomics and Macroeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

4) Dell Computers decides to produce PCs and sell them directly over the Internet and via Best Buy. This is an example of A) incentives. B) a microeconomic decision. C) a macroeconomic decision. D) scarcity. Answer: B Topic: Microeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

5) Consider the following events: I. Samsung hires associates to market their HDTV sets to Best Buy. II. The Dallas Cowboys build a new football stadium. III. eBay fires 10 percent of its workforce. IV. Ten million stocks were traded on the New York Stock Exchange in one day. V. Pennsylvania builds a new state park. Which of the events describe use of factors of production? A) I, II, III, and V B) II, IV, and V C) I and III only D) IV only Answer: A Topic: Factors of Production Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

6) Panasonic sends its HDTV salespeople to training sessions. This is an example of A) a macroeconomic decision. B) scarcity. C) a firm investing in workers' human capital D) entrepreneurship. Answer: C Topic: Human Capital Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

7) "When OPEC increases the supply of oil to the market, the price of gasoline falls." This is an example of A) a normative statement. B) the failure of opportunity cost to determine prices. C) a positive statement. D) a macroeconomic statement. Answer: C Topic: Positive and Normative Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

8) "As part of the financial crisis bailout plan in 2009, the Federal Reserve bought stakes in banks. This policy will result in an increase in the inflation rate." This is an example of A) a positive statement. B) a normative statement. C) a microeconomic statement. D) an economic model. Answer: A Topic: Positive and Normative Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

9) "As part of the financial crisis bailout plan in 2008, the Federal Reserve should not bail out banks that made risky loans." This is an example of A) a positive statement. B) the Federal Reserve taking actions that are not at the margin. C) opportunity costs. D) a normative statement. Answer: D Topic: Positive and Normative Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

10) "OPEC should supply more oil so that the world's economies can grow more rapidly." This is an example of A) a normative statement. B) a positive statement. C) a decision at the margin. D) OPEC overcoming scarcity Answer: A Topic: Positive and Normative Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

6 Essay Questions 1) What do economists mean when they discuss "scarcity"? Answer: Scarcity occurs whenever people's wants exceed the ability of the available resources to meet these wants. Because people's wants are effectively infinite—it is always possible to imagine more good things to want to have—wants will always exceed what can be produced with the available resources, and so scarcity will always be present. Topic: Scarcity Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Communication

2) What is the relationship between wants, factors of production, scarcity, and choices? Discuss the relationship for an individual and for a society. Answer: A person faces scarcity whenever his or her wants exceed what he or she can obtain using his or her resources. Because the person cannot fulfill all of his or her wants, the person is forced to choose which wants will be satisfied and which wants will remain unsatisfied. The same results hold true for a society. All societies face scarcity because people's wants are essentially infinite, so that the factors of production available are not sufficient to fulfill everyone's wants. Because of this fact, societies must make choices about which (and whose) wants will be satisfied and which (and whose) wants will remain unsatisfied. Topic: Scarcity Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Communication

3) Why do economists say that even very rich people face scarcity? Answer: A person faces scarcity whenever his or her wants exceed what he or she can obtain using his or her resources. Even very rich people want things that they cannot have. An older rich person, for instance, might want to have all of his or her youthful energy, but medical science cannot (yet) provide this service. Alternatively, another rich person might enjoy life so much that he or she wants 25 hours in a day in order to have more time for more enjoyment. But, such a want is impossible. By way of another, perhaps more realistic example, Malcolm Forbes was the founder of Forbes magazine and was very rich. However, he did not win every piece of art that he bid upon at auctions. Even though Mr. Forbes was very rich, he still passed on some art when the price got so high that he thought given his resources, the price exceeded what he was willing to pay. Mr. Forbes wanted the art, but he was not willing to bid higher in order to win it. Mr. Forbes faced scarcity. Topic: Scarcity Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Ethical Reasoning

4) Explain why both rich and poor people experience scarcity. Answer: Scarcity exists when people's wants exceed their ability to satisfy the wants. People's wants are literally infinite, so just as a poor person can want more, so too can a richer person. Therefore, both rich and poor experience scarcity. Topic: Scarcity Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Ethical Reasoning

5) What is the difference between scarcity and poverty? Answer: Scarcity exists when availability is less than people want. Poverty exists when availability is less than people need. Everyone suffers scarcity; only an unfortunate minority suffers poverty. Topic: Scarcity Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Ethical Reasoning

6) Define economics and describe its branches of study. Answer: Economics is the social science that studies the choices made by individuals, businesses, government, and entire societies as they cope with scarcity. It has two branches, microeconomics and macroeconomics. Microeconomics is the study of the choices made by individuals and businesses, the way they interact, and the influence that governments exert on these choices. Macroeconomics is the study of the aggregate (total) effects on the national economy and the global economy of the choices that individuals, businesses, and governments make. Topic: Definition of Economics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Communication

7) What is the difference between microeconomics and macroeconomics? Answer: Microeconomics studies the decisions of smaller economic actors, such as individual consumers or individual firms, and how the government can affect these decisions, say through how it regulates an industry. Macroeconomics studies the aggregate, or economy-wide, consequences of the decisions made by individuals and firms. Macroeconomics also studies the aggregate effects of government policies, such as the Federal Reserve's decisions to raise or lower interest rates. Topic: Microeconomics and Macroeconomics Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Communication

8) What is the difference between microeconomics and macroeconomics? Give an example of an issue each studies. Answer: Essentially microeconomics studies individual units within the economy, such as the choices made by individual consumers or individual firms. Macroeconomics studies the overall or aggregate economy. Microeconomics examines the factors that affect employment at an individual firm. Macroeconomics examines the factors that affect economy-wide unemployment. Topic: Microeconomics and Macroeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Communication

9) Below is a student's answer to the question "What is microeconomics?" If you were the instructor, how would you correct the student's answer? "Microeconomics is the study of how government influences the choices made by individuals and businesses and of the performance of the whole national economy." Answer: The answer is partially correct. Microeconomics is the study of the choices that individuals and businesses make, the way these choices interact in markets, and the influence of the government. But the performance of the national economy is the subject of macroeconomics, not microeconomics. Topic: Microeconomics and Macroeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Communication

10) China's population is over 1.5 billion, while the population of the United States is about 300 million. This fact means that China has much more human capital than the U.S. does. True or false? Explain your answer. Answer: False. Population can measure the quantity of a nation's labor resource, but the population numbers don't tell us anything about skills that this labor force obtained from education, on-the-job training, and work experience, which are called human capital. Thus, the population numbers in the statement only tell us that China is likely to have more labor than the United States, but it does not necessarily mean that it also has more human capital. Topic: Human Capital Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Communication

11) Explain what entrepreneurship is and why it is considered a factor of production. Answer: Entrepreneurship is the resource (the people) that runs businesses. Entrepreneurs organize the other resources, land, labor, and capital. It is a factor of production because people with the desire and talent to successfully organize a business are needed to run businesses. Topic: Entrepreneurship Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Communication

12) An analyst on a local news channel argues that the recent corporate scandals "demonstrated very clearly that self-interest always contradicts social interest." Do you agree or disagree? Substantiate your answer. Answer: You should disagree. The recent corporate scandals only show that self-interest might contradict social interest. But they don't prove that this is necessarily the case as we can find many real-world examples of how people guided by self-interest promote society's well-being. In fact, under the market system the whole economy operates through the decisions made by self-interested individuals. And countries such as the United States have proven to be more successful in promoting social interest than were centrally planned, or communist, economies where people's self-interest was suppressed and all important economic decisions were made by government. Topic: Self-Interest and Social Interest Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Ethical Reasoning

13) What is a tradeoff? Give an example. Answer: A tradeoff occurs when one thing must be given up to get another. Tradeoffs are pervasive; at the personal level, students trade off time spent studying for time they otherwise could have spent socializing. Topic: Tradeoffs Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Communication

14) What is opportunity cost? Answer: Opportunity cost is the highest-valued alternative given up when selecting an action. For instance, the opportunity cost of studying an hour is whatever the highest-valued alternative would have been for the hour spent studying. Topic: Opportunity Cost Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Communication

15) Your friend is preparing for this exam and in your practice session makes the following statement: "Instead of attending microeconomics class for two hours, Kiki could have played tennis or watched a movie. Therefore, the opportunity cost of attending class is the tennis and the movie she had to give up." Is your friend's analysis correct or not? Explain your answer. Answer: Your friend's analysis is incorrect. The opportunity cost of an action is the highest-valued alternative forgone, not all alternatives forgone. Kiki's opportunity cost of studying for her exam is either the tennis or the movie, whichever she would have done had she not studied. Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Communication

16) Rather than go out to eat by yourself, you decide to stay at home and fix dinner for yourself and your two roommates. Your roommates applaud your decision. Your first roommate tells you that your decision to eat at home has no opportunity cost because you already have all the dinner ingredients in your pantry. Is this roommate's comment correct? Answer: Your first roommate's comment is incorrect. The opportunity cost of preparing dinner at home is whatever is the highest-valued alternative forgone, which, given your choice boiled down to staying home or going out, is going out to eat. Hence the opportunity cost of fixing dinner at home is going out to eat. Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Communication

17) Define marginal cost and marginal benefit. Answer: Marginal cost is the opportunity cost of an increase in an activity. Marginal benefit is the benefit of an increase in an activity. Topic: Marginal Benefit and Marginal Cost Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Communication

18) In New State, the bottling law requires that people get a refund of five cents when they return an empty bottle or can. Why does the state pay people to return bottles? In your answer, be sure to mention the role played by incentives. Answer: Policy makers know that people making choices respond to incentives. Instead of throwing away bottles and cans, people will now bring the used bottles and cans to the designated areas for recycling in order to receive their payment. Thus policy makers have taken advantage of people's decision making by increasing the marginal benefit of returning bottles in order to reduce litter and clean the environment. Topic: Incentives, Marginal Cost and Marginal Benefit Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Communication

19) If the government raises the tax on cigarettes, what is the effect on people's incentives and choices? Answer: The government raises the tax on cigarettes to discourage smoking. With a higher tax the price of cigarettes rises. The opportunity cost of smoking increases, which gives people incentive to cut their consumption of cigarettes. Topic: Incentives, Marginal Cost and Marginal Benefit Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Communication

20) What is the difference between positive and normative statements? Answer: Positive statements tell what is and normative statements tell what ought to be. Positive statements can be tested to determine if they are correct or not, while normative statements use value judgments and so cannot be tested. For example, two economists might agree on the positive assertion that if the government spent its funds purchasing pharmaceutical drugs for poor older Americans rather than poor children, then poor older Americans would use more drugs and poor children would use fewer. But they might disagree on the normative conclusion of whether the government should pursue this policy. One economist might argue "It is not fair to have senior citizens suffer because they cannot afford medicine" and the other economist might argue "It is not fair to have children suffer because their parents cannot afford medicine." Topic: Positive and Normative Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Communication

21) "The difference between positive and normative statements is that a positive statement is always true while a normative statement might or might not be true." True or false? Explain. Answer: False. The difference between positive and normative statements is that a positive statement is about what is, while a normative statement is about what ought to be. A positive statement can be tested against the facts and may be proved to be right or wrong, whereas a normative statement depends on values and cannot be tested. Topic: Positive and Normative Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Communication

22) Two economists can agree that raising the minimum wage creates unemployment yet one might argue that raising the minimum wage is a good policy and the other that it is a bad policy. Why can this difference exist? Be sure to use the terms positive and normative in your answer. Answer: Positive statements are statements that describe how the world is. Positive statements can be tested and so, ultimately, any disagreements about positive statements should be resolved. The statement that "Raising the minimum wage creates unemployment" is a positive statement and, on the basis of repeated testing, most economists agree that it is a correct positive statement. Normative statements, however, are statements that describe how the world ought to be. Normative statements depend on people's values and cannot be tested. So one economist might argue that raising the minimum wage is a good policy because this economist thinks that, although it is unfortunate that some people lose their jobs, the fact that others retain their jobs and their wages rise more than outweighs the harm created by the unemployment. Another economist might strongly differ because the second economist thinks that the harm inflicted on people who lose their jobs more than outweighs any good from some workers being paid more. This difference of opinion can last indefinitely because there is no way to test the two economists' beliefs to determine which is correct. Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Ethical Reasoning

23) Explain whether the statement, "There is life on Mars," is a normative or positive statement. Answer: The statement is a positive statement because it does not depend on a value judgment. Instead, it is a statement that tries to describe "what is" and hence is testable. Of course, in order to test the assertion, it would be necessary to go to Mars to ascertain if there is life present. While it is difficult (!) at present to actually carry out the test, nonetheless the statement is testable and hence is a positive statement. Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Communication

24) Explain whether the statement, "Hillary Clinton was elected President of the United States in 2012," is a normative or positive statement. Answer: The statement is a positive statement because it does not depend on a value judgment. Instead, it is a statement that tries to describe "what is" and hence is testable. Now, it is indeed the case that Hillary Clinton was not elected president in 2012, so when we test the statement we discover that it is incorrect. But, whether the statement is correct or not has no bearing on whether the statement is positive or normative. Thus, the statement "Hillary Clinton was elected President in 2012" is a positive, albeit incorrect, statement. Topic: Positive and Normative Skill: Conceptual Status: Revised AACSB: Communication

25) What is a normative statement? Give an example. Answer: A normative statement is a statement about what ought to be. It is a value judgment or opinion and so cannot be proven true or false. An example of a normative statement is "Students should attend school year round to receive a better education." Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Communication

26) Explain whether the statement "The government should increase tariffs on Japanese cars to protect the American car industry from competition," is a normative or positive statement. Answer: The statement is normative. The statement is a normative statement because it depends on a value judgment, namely that the government should protect the American car industry from competition. Topic: Positive and Normative Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Communication

7 Numeric and Graphing Questions 1) Suppose you are working four nights per week at your courses and your grade point average is 3.5. You want a higher grade and decide to study an extra night each week. Your GPA now rises to 3.8. What is your marginal benefit from studying for one additional night a week? Answer: Marginal benefit is the benefit that arises from an increase in an activity. Your marginal benefit is the 0.3 increase in your grade. It's not the 3.8 grade because you already have the benefit from studying for four nights a week and should not count this benefit as resulting from the decision you are now making. Topic: Marginal Benefit Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

2) Jerry is studying three nights per week and his grade point average is 3.1. He wants a higher GPA and decides to study an extra night each week. His GPA now rises to 3.5. Had Jerry not decided to study an extra night, he would have spent this night with his friends. What is Jerry's marginal benefit from studying for one additional night a week? What is his marginal cost of increasing the study time by one night per week? Why does Jerry decide to study an extra night? Answer: Marginal benefit is the benefit that arises from an increase in an activity. Jerry's marginal benefit is the 0.4 increase in his grade. Marginal cost is the opportunity cost of an increase in an activity. Jerry's marginal cost is a night spent with his friends that he gives up. Jerry decides to stud an extra night because he values the marginal benefit from it (the 0.4 increase in his grade) more highly than its marginal cost (a night spent with his friends). Topic: Marginal Benefit and Marginal Cost Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

8 True or False 1) Scarcity applies to both the rich and the poor. Answer: TRUE Topic: Scarcity Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

2) Scarcity affects only those who are in need. Answer: FALSE Topic: Scarcity Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

3) Microeconomics is the study of topics such as national production and unemployment. Answer: FALSE Topic: Microeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

4) Macroeconomics is the study of aggregate variables such as national production and unemployment. Answer: TRUE Topic: Macroeconomics Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

5) The tools, instruments, machines, and buildings that people use to produce goods and services are called human capital. Answer: FALSE Topic: Human Capital Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

6) Most income in the United States is earned by business owners as profit. Answer: FALSE Topic: Labor Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

7) The United States produces more services than goods. Answer: TRUE Topic: Production Trends Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 62 Copyright © 2014 Pearson Education, Inc.

8) When I buy an $8.00 movie ticket rather than two paperback books, the opportunity cost of going to the movie is the two paperback books I did not buy. Answer: TRUE Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

9 Extended Problems 1) Suppose you plan to go to school this summer. The cost of tuition and textbooks is $1,400 and housing, board, and entertainment will cost you $500. If you didn't go to school, you'd live in your parents' house for free, but your other living expenses would be about the same. Also, if you didn't go to school you'd work full time and could earn $8,000. You can still work part time while attending the summer school, but you will earn only $3,000. a) What will the summer school cost you in terms of money explicitly paid? b) What are the opportunity costs of going to summer school that you don't pay explicitly? Explain. c) What is your total opportunity costs of going to school this summer? Explain your answer. Answer: a) You explicitly pay the cost of tuition and textbooks ($1,400) and the cost of housing ($500), so your total explicit costs are $1,900. b) Your opportunity cost is what your give up to go to summer school. You forego a fulltime job, at which you would earn $8,000, in exchange for a part-time job, where you earn $3,000, which means you give up $5,000. Although you don't pay this money explicitly, you lose the opportunity to earn it and so it's an opportunity cost of attending summer school. c) First, your opportunity cost includes the cost that you pay explicitly ($1,900), which you have to pay only if you go to school. If you decide not to go to school, you can use this money to buy something else—an opportunity you are giving up. Second, as explained in the previous part, you are also giving up $5,000, although not paying this money explicitly. So your full opportunity cost of going to school is $1,900 + $5,000 = $6,900. Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

2) Jane is deciding whether to go to school for 8 weeks this summer. The cost of tuition and textbooks is $1,700 and housing and other expenses will cost her $600. If she does not go to school, she will live in her parents' house for free and they will cover her food and other expenses for her. Also, if Jane does not go to summer school she could work fulltime. But the best job she can get pays only $600 per week, and Jane would only agree to give up her free time for no less than $750 per week. However, if she goes to summer school, she'll have to spend 40 hours a week attending classes and studying. a) What will the summer school cost Jane in terms of money spent? b) What are the opportunity costs of going to summer school that Jane does not pay explicitly? Explain. c) What is Jane's total opportunity cost of going to school this summer? Explain your answer. d) Suppose that if Jane does not go to summer school, she will eventually take the classes anyway. What is Jane's marginal benefit of going to summer school? e) Suppose Jane decides to go to school in the summer. Explain her decision using the concepts of marginal cost and marginal benefit. Answer: a) Jane explicitly pays the cost of tuition and textbooks ($1,700) and the cost of housing ($600), so her total explicit costs are $2,300. b) Jane's opportunity cost is what she gives up (her best alternative forgone) to go to summer school. In this case she forgoes 40 hours per week of her free time, which she values more highly then the income from the best job she could find. To place a dollar value on this time, notice that the value that she places on this time is the amount of money she is willing to accept to give it up: $750 per week. So for the eight weeks, her free time has a value of $750 × 8 = $6,000. Although she does not pay $6,000 explicitly, she gives up this value of her free time and hence it's an opportunity cost to her. c) Jane's total opportunity cost includes the cost that she pays explicitly, $2,300, which she has to pay only if she goes to school. Also, as explained in the previous part, Jane is giving up the value of her free time, $6,000. Thus, her full opportunity cost of going to school is $2,300 + $6,000 = $8,300. d) Jane's marginal benefit of going to summer school is the possibility of getting her degree faster. For instance, if the summer school allows her to graduate one semester earlier, she can start to work and earn income earlier. The additional income and work experience that she gets because of her earlier graduation is what she gains if she decides to go to school in the summer. e) Jane decides to go to school in the summer if her marginal benefit from this decision, the value of extra income and work experience that she gets if she graduates earlier, is greater than the marginal cost of her summer school, $8,300. Topic: Marginal Analysis Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

3) Suppose Canon Inc. decided to invest 45 billion yen in developing and launching a new model of its digital camera, expecting that it will bring additional sales of 60 billion yen. The company has already invested 38 billion yen when the marketing department suddenly finds out that the introduction of a similar camera by Sony will reduce Canon's expected additional sales to 30 billion yen. The company's management is trying to decide whether to continue investing in the new product or close the project. Canon hires you as an economic consultant. So, think like an economist to help the company's management make their decision: a) At this point in time, what is Canon's marginal cost of introducing the new product? b) What is Canon's marginal benefit from introducing the new product? c) Will you advise Canon to finish the project and introduce the new product? Why or why not? What principles of economic thinking will help you analyze the situation and make the right choice? Answer: a) Canon's marginal cost is the additional investment needed to finish the project, which is 7 billion yen. b) Canon's marginal benefit is the benefit that arises from the new product, the additional revenue from sales, which in the changed situation is expected to be 30 billion yen. c) The principle of choosing at the margin will help. According to this principle, the amount of money already spent is irrelevant to the decision you are making now. That is, you should only consider the marginal costs and marginal benefits that will result from the decision in question. Now, if Canon goes ahead, finishes the project and introduces the new camera, it will cost them additional 7 billion yen, but they will gain additional sales of 30 billion yen. The marginal benefit of introducing the new product exceeds the marginal cost, which means the company should invest 7 billion yen to finish development and introduce the new product. Notice also that if Canon abandons the project, there will be no additional money costs, but the opportunity cost will be the additional sales (30 million yen) that the company is potentially losing. Thus, the concept of opportunity cost also helps to clarify the situation. Topic: Marginal Analysis Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

4) Your student association is looking for an auditorium to rent for an all-day conference. The university's Performing Arts Center is vacant on that day, so the association wants to rent it. The physical plant manager tells you that the daily rent is $660, which includes $400 to cover part of the cost paid to build the Center, $40 to cover part of its regular maintenance cost, $50 to help pay for the building's insurance, $100 to cover the extra cost of electricity that the university would incur because of the conference, and $70 to pay for additional janitorial services for the conference. You know that no one else wants to rent the Center on that day and you think that the price that the manager charges is too high. But how much should you pay? Use the economic way of thinking to answer this question and to convince the manager to accept your offer: a) If you rent the Center, what will be the university's marginal cost of renting the center to you? b) If you rent the Center, what will be the university's marginal benefit of renting the center to you? c) What amount of rent should you offer? Convince the manager to accept your offer. Answer: a) The university's marginal cost is $170. These are the extra cost of electricity ($100) and janitorial services ($70) that the university will only pay if you rent the Center. The costs of building the Center, insurance, and regular maintenance costs are not extra costs incurred because you rent the Center. The university has already paid for building it and pays the cost of insurance and regular maintenance no matter whether you rent the Center or not. Therefore these costs are not marginal costs of renting the center to you. b) The university's marginal benefit is the amount of rent that you pay. c) You should start negotiating from $171. Because the university's marginal cost is $170 and the amount you pay is its marginal benefit, the university will be better off if it accepts any amount greater than $170. If the manager is still not convinced, tell the manager that, since no one else wants to rent the Center on that day, declining your offer is not cost free. The opportunity cost of not accepting it will be the difference between the offered rent and $170. In practice, of course, there are transaction costs, such as the time spent by both parties to negotiate and sign the agreement, and accepting your offer will cost the manager some extra time and organizational effort. Also, as you learnt in this chapter, people are guided by self-interest when they make their decisions and the manager's self-interest is not necessarily the same as the university's interest. On the other hand, you might want to support your university. Therefore the amount of rent you will agree upon is likely to be higher than $171. Topic: Marginal Analysis Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

10 Appendix: Graphing Data 1) The horizontal axis in a graph A) measures time in a scatter diagram. B) measures the quality of a variable. C) is named the y-axis. D) is named the x-axis. Answer: D Topic: Graphing Data Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

2) The vertical axis in a graph A) is named the y-axis. B) is named the x-axis. C) is not used in a scatter diagram. D) has no origin. Answer: A Topic: Graphing Data Skill: Recognition Status: Modified 10th edition AACSB: Analytical Skills

3) The value of the y-coordinate of a point in a graph is the length of a line from the point to the A) origin. B) scalar. C) x-axis. D) y-axis. Answer: C Topic: Graphing Data Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

4) The value of the x-coordinate of a point in a graph is the length of a line from the point to the A) origin. B) scalar. C) x-axis. D) y-axis. Answer: D Topic: Graphing Data Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

5) On the horizontal axis of a graph, generally A) values increase from left to right. B) values increase from right to left. C) values can be positive and/or negative. D) Both answers A and C are correct. Answer: D Topic: Graphing Data Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

6) In the above figure, the x-coordinate of point b is A) 1. B) 2. C) 3. D) 14. Answer: C Topic: Graphing Data Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

7) In the above figure, the y-coordinate of point b is A) 1. B) 2. C) 3. D) 14. Answer: D Topic: Graphing Data Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

8) In the above figure, when income is zero, household expenditures equal A) 0. B) $1000. C) $4000. D) $8000. Answer: D Topic: Graphing Data Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

9) In the figure above, the value on the x-axis increases as we move from A) point G to point A. B) point C to point A. C) point F to point A. D) point E to point A. Answer: A Topic: Graphing Data Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

10) In the figure above, the value on the y-axis decreases as we move from A) point G to point A. B) point C to point A. C) point F to point A. D) point E to point A. Answer: D Topic: Graphing Data Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

11) In the figure above, point B is A) on the x-axis. B) on the y-axis. C) at the origin. D) a coordinate. Answer: A Topic: Graphing Data Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 70 Copyright © 2014 Pearson Education, Inc.

12) Using the above figure, the origin is at which point? A) Point a B) Point b C) Point c D) None of the points in the figure is the origin. Answer: B Topic: Graphing Data Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

13) Using the above figure, which of the following is true? A) Axis 1 is typically called the y-axis. B) Axis 1 is also known as the origin. C) Axis 2 is typically called the x-axis. D) Point b is known as the origin. Answer: D Topic: Graphing Data Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

14) A scatter diagram shows the A) level of one variable over time. B) change in one variable over time. C) relationship between two variables. D) evolution of a variable. Answer: C Topic: Scatter Diagrams Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

15) A scatter diagram will be most useful A) in discerning a possible relationship between height and weight for individuals. B) in resolving a dispute over two normative assertions. C) in predicting next year's rate of unemployment. D) All of the above are correct. Answer: A Topic: Scatter Diagrams Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

16) You notice that when interest rates increases, new residential housing prices tend to decrease. This observation indicates that A) there must be false causality between interest rates and housing prices. B) higher interest rates must cause low housing prices. C) a scatter diagram between interest rates and housing prices will show a negative relationship. D) a scatter diagram between interest rates and housing prices will show a direct relationship. Answer: C Topic: Scatter Diagrams Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

17) The above figure plots income and consumption in a nation. In 2007 A) consumption was equal to $25,000 and income was equal to $28,000. B) consumption was equal to $28,000 and income was equal to $25,000. C) consumption was equal to $25,000 and income was equal to $25,000. D) consumption was equal to $27,000 and income was equal to $31,000. Answer: A Topic: Scatter Diagrams Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

18) The above figure graphs the price of a bushel of wheat and housing starts. The graph shows the variables are A) strongly positively related. B) strongly negatively related. C) not related. D) related via an indirect relationship. Answer: C Topic: Scatter Diagrams Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

19) The figure above shows that in 1996, unemployment was equal to about ________ and the inflation rate was equal to about ________. A) 7.0 percent; 3.0 percent B) 3.0 percent; 5.5 percent C) 5.5 percent; 3.0 percent D) 6.0 percent; 4.0 percent Answer: C Topic: Scatter Diagrams Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

20) The above figure reveals A) no relationship between household income and average household expenditure on automobiles. B) that as household income increases the average household expenditure on automobiles decreases. C) that as household income increases the average household expenditure on automobiles increases. D) All of the above are possible. Answer: C Topic: Scatter Diagrams Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

21) In the above figure, the axis breaks are used A) to create a misleading graph. B) to indicate that there are jumps from the origin, 0, to the first values recorded along the axes. C) to indicate that there are not enough data to be included in the graph. D) to show that there are no data available for the omitted ranges. Answer: B Topic: Breaks in the Axes Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

22) In the above figure, the axis break in the x-axis A) reflects the fact that for the years covered in the figure, the unemployment rate was never less than 3 percent. B) shows that there is no relationship between inflation and unemployment. C) misleadingly shows that inflation has changed very little even though the unemployment rate has increased a great deal. D) implies that for the years covered in the figure, the inflation rate was always greater than 1 percent. Answer: A Topic: Breaks in the Axes Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

23) On a graph, high correlation between the variable measured along the x-axis and the variable measured along the y-axis A) means that changes in the variable measured along the x-axis must cause changes in the variable measured along the y-axis. B) means that changes in the variable measured along the y-axis must cause changes in the variable measured along the x-axis. C) means that changes in either variable must cause changes in the other variable. D) does NOT mean that a change in the variable measured along the x-axis must cause a change in the variable measured along the y-axis. Answer: D Topic: Correlation and Causation Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

24) You notice that when the inflation rate increases, the interest rate tends to increase. This observation indicates that A) there might be false causality between inflation and the interest rate. B) higher inflation rates must cause a higher interest rate. C) a scatter diagram of the inflation rate and the interest rate will show a positive relationship. D) the variables have an inverse relationship. Answer: C Topic: Study Guide Question, Scatter Diagrams Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

25) In the figure above, when income equals $20,000, what does consumption equal? A) $0 B) $10,000 C) $20,000 D) impossible to tell Answer: D Topic: Study Guide Question, Scatter Diagrams Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

11 Appendix: Graphs Used in Economic Models 1) If two variables are positively related, then A) they move in opposite directions. B) they are independent of each other. C) they move in the same direction. D) their graph will have a negative slope. Answer: C Topic: Variables That Move in the Same Direction Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

2) If two variables both increase at the same time or decrease at the same time, they are A) unrelated to each other. B) positively related. C) negatively related. D) conversely related. Answer: B Topic: Variables That Move in the Same Direction Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

3) If there is a direct relationship between two variables, A) the graph of the relationship will be upward-sloping. B) the graph of the relationship will be downward-sloping. C) the slope of the line (or the slope of a tangent line to the curve) will be negative. D) Both answers A and C are correct. Answer: A Topic: Variables That Move in the Same Direction Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

4) The variable measured on the y-axis increases whenever the variable measured on the x-axis increases. As a result, the relationship between the variables will A) be negatively sloped. B) have a slope of zero. C) be a vertical line. D) be none of the above. Answer: D Topic: Variables That Move in the Same Direction Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

5) A positive relationship exists between two variables if A) one variable has "positively" no effect on the other variable. B) a reduction in one variable is associated with an increase in the other variable. C) a reduction in one variable is associated with a decrease in the other variable. D) both variables are inflation-distorted. Answer: C Topic: Variables That Move in the Same Direction Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

6) If the slope of a line that graphs the relationship between variable x and variable y is positive, then we know that A) when the value of variable x increases, then the value of variable y decreases. B) when the value of variable x decreases, then the value of variable y decreases. C) the two variables are unrelated. D) the two variables have an inverse relationship. Answer: B Topic: Variables That Move in the Same Direction Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

7) For the Jones household it has been estimated that for every ten degrees increase in the outdoor temperature the consumption of ice tea increases by 5 glasses. What type of relationship exists between temperature change and the consumption of ice tea? A) negative relationship B) positive relationship C) no relationship D) maximum relationship Answer: B Topic: Variables That Move in the Same Direction Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

8) In the above figure, which curve shows a positive relationship between x and y? A) Only curve A. B) Only curve B. C) Only curve C. D) All the curves show a positive relationship. Answer: D Topic: Variables That Move in the Same Direction Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

9) In the above figure, which curve shows a negative relationship between x and y? A) Only curve A. B) Only curve B. C) Only curve C. D) None of the curves show a negative relationship. Answer: D Topic: Variables That Move in the Same Direction Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

10) A scatter diagram with the price of vacations to Mexico on the vertical axis and the price of vacations to California on the horizontal axis shows a positive relationship. If the price of vacations to Mexico were placed on the horizontal axis, and the price of vacations to California on the vertical axis, the relationship would be A) negative relationship, also called a direct relationship. B) negative relationship, also called an inverse relationship. C) positive relationship, also called a direct relationship. D) positive relationship, also called an inverse relationship. Answer: C Topic: Variables That Move in the Same Direction Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

11) The figure above shows ________ relationship between the two variables. A) a positive B) a negative C) no D) an inverse Answer: A Topic: Variables That Move in the Same Direction Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

12) "As you devote more hours to studying, your GPA increases." A graph of this relationship would show A) a positive relationship. B) a direct relationship. C) an inverse relationship. D) Both answers A and B are correct. Answer: D Topic: Variables That Move in the Same Direction Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

13) "As interest rates rise, people save more money." A graph displaying this relationship would show A) an inverse relationship. B) a positive relationship. C) a cross-section graph. D) a positive then a negative relationship. Answer: B Topic: Variables That Move in the Same Direction Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

14) "If you hire 1 worker, the worker can produce 20 pizzas a day. If you hire a 2nd worker, that worker can produce 10 more pizzas. If you hire a 3rd worker, that worker can produce 2 more pizzas a day." A graph displaying this relationship between the number of employees and total pizza output per day would show A) a positive linear relationship. B) an upward-sloping curve that becomes less steep. C) a negative linear relationship. D) a negatively-sloped curve that becomes less steep. Answer: B Topic: Variables That Move in the Same Direction Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

15) If you study 3 hours for an exam, you can raise your score by 30 points. If you study for another 3 hours your score increases by 10 points. And if you study for another 3 hours, your score will increase by 5 more points. A graph displaying this relationship between the number of hours studied and your total exam score would show A) a positive linear relationship. B) an upward-sloping curve that becomes less steep. C) a negative linear relationship. D) an upward-sloping curve that becomes more steep. Answer: B Topic: Variables That Move in the Same Direction Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills 84 Copyright © 2014 Pearson Education, Inc.

16) Suppose you produce 10 bikes a day for a total cost of $1000. Total costs increase to $1100 when you produce 15 bikes. Finally, total costs increase to $1300 if you make 20 bikes. A graph showing the relationship between total costs and the number of bikes produced would be A) a negatively-sloped line that becomes steeper. B) a positively-sloped line that becomes steeper. C) a negatively-sloped line that becomes flatter. D) a positively-sloped line that becomes flatter. Answer: B Topic: Variables That Move in the Same Direction Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

Total household income (dollars) 30,000 40,000 50,000

Total consumption (dollars) 27,000 35,000 38,000

17) The data in the table above shows the relationship between the Joneses' total consumption and total household income. Based on these data, total consumption varies A) directly with their total household income. B) independently of their total household income. C) inversely with their total household income. D) negatively with their income. Answer: A Topic: Variables That Move in the Same Direction Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

x 0 2 4 6 8 10

y 0 6 12 18 24 30

18) In the above table, when x increases from 4 units to 6 units, y changes by ________ units. A) 2 B) -2 C) 6 D) -6 Answer: C Topic: Variables That Move in the Same Direction Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

19) The above table indicates that variables x and y are A) positively related. B) inversely related. C) negatively related. D) not related. Answer: A Topic: Variables That Move in the Same Direction Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

x 0 1 2 3 4 5

y 2 5 8 11 14 17

20) Given the information in the above table, the relationship between x and y is A) positive, and the curve becomes flatter as x increases. B) positive, and the curve becomes steeper as x increases. C) positive and linear. D) negative and linear. Answer: C Topic: Variables That Move in the Same Direction Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

21) In the above figure, the relationship between x and y is A) positive, and the curve becomes flatter as x increases. B) positive, and the curve becomes steeper as x increases. C) positive and linear. D) negative and linear. Answer: C Topic: Variables That Move in the Same Direction Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 87 Copyright © 2014 Pearson Education, Inc.

22) The above figure shows the relationship between the Joneses' total consumption and total household income. The figure illustrates that the Joneses' total consumption varies A) directly with their total household income. B) independently of their total household income. C) inversely with their total household income. D) negatively with their income. Answer: A Topic: Variables That Move in the Same Direction Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

23) The relationship depicted in the above figure is A) a negative linear relationship. B) a positive linear relationship. C) a positive becoming less steep relationship. D) a positive becoming steeper relationship. Answer: C Topic: Variables That Move in the Same Direction Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

24) Whenever one variable increases, another variable decreases. The two variables are A) definitely related through a third variable. B) negatively related. C) positively related. D) unrelated to each other. Answer: B Topic: Variables That Move in Opposite Directions Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

25) If variable x always increases when variable y decreases, x and y are said to be A) positively related. B) negatively related. C) unrelated. D) trend related. Answer: B Topic: Variables That Move in Opposite Directions Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills 89 Copyright © 2014 Pearson Education, Inc.

26) If there is an inverse relationship between variable x and variable y, then an increase in the value of variable x will be accompanied by A) an increase in the value of variable y. B) a decrease in the value of variable y. C) no change in the value of variable y. D) variable y reaching its maximum value. Answer: B Topic: Variables That Move in Opposite Directions Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

27) If there is an inverse relationship between two variables, the graph of this relationship A) will be a horizontal line. B) will be downward-sloping. C) might be horizontal. D) will be upward-sloping. Answer: B Topic: Variables That Move in Opposite Directions Skill: Recognition Status: Modified 10th edition AACSB: Analytical Skills

28) A negative relationship exists between the variable measured along the y-axis and the variable measured along the x-axis if A) a reduction in the variable measured along the x-axis is associated with a reduction in the variable measured along the y-axis. B) an increase in the variable measured along the x-axis is associated with an increase in the variable measured along the y-axis. C) the variable measured along the x-axis and the variable measured along the y-axis move in the opposite direction. D) the variable measured along the x-axis and the variable measured along the y-axis move in the same direction. Answer: C Topic: Variables That Move in Opposite Directions Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

29) Along a curve, when one variable increases, the other variable decreases. The curve showing this relationship A) might be horizontal. B) has a positive slope. C) has a negative slope. D) has an increasing then a decreasing slope. Answer: C Topic: Variables That Move in Opposite Directions Skill: Recognition Status: Modified 10th edition AACSB: Analytical Skills 90 Copyright © 2014 Pearson Education, Inc.

30) "As the price of gasoline increases, fewer people buy cars that are gas guzzlers." A graph showing this relationship would have A) a negative slope. B) a positive relationship. C) a direct relationship. D) a horizontal line. Answer: A Topic: Variables That Move in Opposite Directions Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

31) A graph shows that as fees to use ATM machines increase, people use them less frequently. The graph of this relationship would show A) an inverse relationship. B) a negative relationship. C) a direct relationship. D) Both answers A and B are correct. Answer: D Topic: Variables That Move in Opposite Directions Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

32) As the number of days without rain increases, the amount of wheat per acre grown declines. A graph showing this relationship would have a curve A) that is a horizontal line. B) that is a vertical line. C) showing a positive relationship. D) None of the above answers are correct. Answer: D Topic: Variables That Move in Opposite Directions Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

33) As a firm produces more and more CDs, the average cost of producing each CD falls. A curve showing the behavior of the average cost of a CD as more CDs are produced A) would be positively and then negatively-sloped. B) would be positively sloped. C) would be horizontal. D) would be negatively sloped. Answer: D Topic: Variables That Move in Opposite Directions Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

34) Suppose that we find that student grades and time spent at parties move in opposite directions. A graph of the relationship between these two variables would curve A) upward and be linear. B) upward and may be linear or nonlinear. C) downward and be linear. D) downward and may be linear or nonlinear. Answer: D Topic: Variables That Move in Opposite Directions Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

35) The faster an automobile is driven (speed), the lower the miles per gallon (mpg) for that automobile. Given this information, we say that an automobile's speed and mpg have A) a direct relationship. B) an inverse relationship. C) a linear relationship. D) a maximum relationship. Answer: B Topic: Variables That Move in Opposite Directions Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

36) If the quantity of wood purchased decreases when the price of wood rises, a graph representing these variables would have A) time on the vertical axis. B) the slope on the vertical axis. C) a negative slope. D) a positive slope. Answer: C Topic: Variables That Move in Opposite Directions Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

37) A scatter diagram with the price of peanut butter on the vertical axis and the price of jelly on the horizontal axis shows a negative relationship. If the price of jelly was placed on the vertical axis and the price of peanut butter was placed on the horizontal axis, the relationship would be a A) negative relationship, also called a direct relationship. B) negative relationship, also called an inverse relationship. C) positive relationship, also called a direct relationship. D) positive relationship, also called an inverse relationship. Answer: B Topic: Variables That Move in Opposite Directions Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

38) In the above figure, if there is a negative relationship between the variables x and y, which of the graphs above can be used to indicate this? A) Figure A B) Figure B C) Figure C D) both Figure A and Figure C Answer: D Topic: Variables That Move in Opposite Directions Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

39) In the above figure, which of the graphs demonstrates a curve with a decreasing slope, that is, a slope getting smaller in magnitude as x increases? A) Figure A B) Figure B C) Figure C D) Figure D Answer: C Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

40) In the above figure, a negative relationship is demonstrated in which of the graphs? A) Figure A B) Figure B C) Figure C D) Figure D Answer: B Topic: Variables That Move in Opposite Directions Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

41) The above figure depicts a A) positive non-linear relationship between age and the number of hamburgers purchased per year. B) negative non-linear relationship between age and the number of hamburgers purchased per year. C) positive linear relationship between age and the number of hamburgers purchased per year. D) negative linear relationship between age and the number of hamburgers purchased per year. Answer: D Topic: Variables That Move in Opposite Directions Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

42) In the above figure, the relationship between costs and quantity is negative A) between point A and point B. B) between point B and point C. C) along the entire curve. D) nowhere along the curve. Answer: A Topic: Variables That Move in Opposite Directions Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

43) In the above, a positive relationship between price and quantity is shown in A) Figure A. B) Figure B. C) both Figure A and Figure B. D) neither Figure A nor Figure B. Answer: B Topic: Variables That Move in the Same Direction Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

44) In the above figure, a negative relationship between price and quantity is shown in A) Figure A. B) Figure B. C) Both Figure A and Figure B. D) Neither Figure A nor Figure B. Answer: A Topic: Variables That Move in Opposite Directions Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

45) If a graph shows a negative relationship between two variables which then becomes a positive relationship, this curve would A) always be an upward-sloping line. B) have a minimum point. C) have a maximum point. D) always be a downward-sloping line. Answer: B Topic: Maximum and Minimum Points Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

46) As a firm expands its output, cost per unit of output (average cost) decreases and then increases. Average cost and output have A) a relationship with a minimum. B) a relationship with a maximum. C) no relationship. D) a linear positive relationship. Answer: A Topic: Variables That Have a Maximum or Minimum Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

47) In the above figure, the relationship between the tax rate and tax revenue is positive and becoming less steep between tax rates of A) 0 percent and 30 percent. B) 30 percent and 100 percent. C) 0 percent and 100 percent. D) None of the above answers are correct. Answer: A Topic: Variables That Have a Maximum or Minimum Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

48) In the above figure, if the tax rate is increased from 20 percent to 30 percent, tax revenue A) decreases. B) is constant. C) increases. D) may increase or decrease. Answer: C Topic: Variables That Have a Maximum or Minimum Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

49) In the above figure, tax revenue is at a maximum when the tax rate is A) 0 percent. B) 30 percent. C) 50 percent. D) 100 percent. Answer: B Topic: Variables That Have a Maximum or Minimum Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

50) As a curve approaches a maximum point, the slope will A) be positive, then negative after the maximum point. B) be negative, then positive after the maximum point. C) remain constant on either side of the maximum point. D) increase before and after the maximum point. Answer: A Topic: Maximum and Minimum Points Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

51) In the figure above, the relationship between the x variable and the y variable A) is positive. B) is negative. C) starts by being positive and then becomes negative. D) starts by being negative and then becomes positive. Answer: C Topic: Variables That Have a Maximum or Minimum Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

Total number of workers 4 10 13 15

Average cost of producing a television set (dollars) 125 75 77 85

52) Graphing the data in the above table with the number of workers on the horizontal axis and the average cost on the vertical axis, the graph would show A) first a negative and then a positive relationship. B) a horizontal line. C) no relationship. D) a linear relationship. Answer: A Topic: Variables That Have a Maximum or Minimum Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

53) If a curve rises and then falls, it shows a A) maximum. B) minimum. C) linear relationship. D) constant slope relationship. Answer: A Topic: Maximum and Minimum Points Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

54) If a curve falls and then rises, it shows A) a maximum. B) a minimum. C) a linear relationship. D) a constant slope relationship. Answer: B Topic: Maximum and Minimum Points Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

55) When y changes, x stays the same. The line depicting this relationship would be A) vertical. B) horizontal. C) linear with a negative slope. D) linear with a positive slope. Answer: A Topic: Variables That Are Unrelated Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

56) A graph measures y on the vertical axis and x on the horizontal. The curve on the graph is a horizontal line. From this fact we know that A) the value of x never changes. B) the value of y does not depend on the value of x. C) the ratio of x to y is constant. D) the slope of the line is not defined because y never changes. Answer: B Topic: Variables That Are Unrelated Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

57) A graph measures y on the vertical axis and x on the horizontal. The curve on the graph is a vertical line. From this fact we know that A) the value of x does not change when the value of y changes. B) the value of y is constant. C) the ratio of x to y is constant. D) the ratio of y to x is constant. Answer: A Topic: Variables That Are Unrelated Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

58) The graph of two variables, x and y, is a horizontal line. This result indicates that x and y are A) positively related. B) negatively related. C) not related. D) falsely related. Answer: C Topic: Variables That Are Unrelated Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

59) A diagram shows the quantity of tomatoes on the horizontal axis and the quantity of coffee on the vertical axis. The quantity of tomatoes remains constant as the quantity of coffee increases. The graph of these data is A) a horizontal line. B) a vertical line. C) a positively sloped line. D) a negatively sloped line Answer: B Topic: Variables That Are Unrelated Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

60) A graph shows the price of a pound of cucumbers on the vertical axis and the quantity of new cars sold by GM on the horizontal axis. The price of a pound of cucumbers remains constant as the quantity of new cars sold increases. The graph of these data is A) a horizontal line. B) a vertical line. C) a curve with a maximum. D) a positively-sloped line. Answer: A Topic: Variables That Are Unrelated Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

61) If two variables are unrelated, a scatter diagram of those variables will A) be a vertical line. B) be a horizontal line. C) be either a vertical or horizontal line. D) have a constant positive slope. Answer: C Topic: Variables That Are Unrelated Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

62) Which of the following correctly describes the above figure? I. There is no relationship between the price of an avocado and a student's grade in economics. II. The value of variable measured on the y-axis is constant as the variable measured on the x-axis increases. III. As a student's grade in economics increases, the price of an avocado increases. A) I B) I and II C) II and III D) I, II, and III Answer: B Topic: Variables That Are Unrelated Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

63) In the above, as the y variable increases A) the x variable is constant. B) the x variable increases. C) the x variable decreases. D) the x variable at first increases but then decreases. Answer: A Topic: Variables That Are Unrelated Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

64) Which of the following correctly describes the above figure? A) There is no relationship between x and y. B) There is a positive relationship between x and y. C) There is a negative relationship between x and y. D) None of the above answers are correct. Answer: A Topic: Variables That Are Unrelated Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

65) In the above figure, which curve indicates that the level of food production does not affect the population growth rate? A) F B) G C) H D) I Answer: C Topic: Variables That Are Unrelated Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

66) In the above figure, the relationship between income and expenditures is A) positive. B) negative. C) independent. D) random. Answer: A Topic: Variables That Move in the Same Direction Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

67) The relationship in the above figure suggests that when the interest rate is 5 percent, A) a decrease in income will be associated with a decrease in expenditures. B) a decrease in income will be associated with an increase in expenditures. C) an increase in income will be associated with a decrease in expenditures. D) There is no relationship between expenditures and income. Answer: A Topic: Variables That Move in the Same Direction Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

68) If variables x and y move up and down together, they are A) positively related. B) negative related. C) unrelated. D) trend related. Answer: A Topic: Study Guide Question, Variables That Move Same Direction Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills 108 Copyright © 2014 Pearson Education, Inc.

69) The term "direct relationship" means the same as A) correlation. B) trend. C) positive relationship. D) negative relationship. Answer: C Topic: Study Guide Question, Variables That Move Same Direction Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

70) The relationship between income and consumption illustrated in the figure above is A) positive and linear. B) positive and nonlinear. C) negative and linear. D) negative and nonlinear. Answer: A Topic: Study Guide Question, Variables That Move Same Direction Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

71) The figure above shows A) a positive relationship. B) a direct relationship. C) a negative relationship. D) no relationship between the variables. Answer: C Topic: Study Guide Question, Variables That Move Opposite Direction Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

72) The relationship between two variables, x and y, is a vertical line. Thus x and y are A) positively correlated. B) negatively correlated. C) not related. D) falsely related. Answer: C Topic: Study Guide Question, Variables That Are Unrelated Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

12 Appendix: The Slope of a Relationship 1) The slope of a line equals the A) change in the variable measured along the x-axis divided by the change in the variable measured along the y-axis. B) change in the variable measured along the y-axis divided by the change in the variable measured along the x-axis. C) change in the variable measured along the x-axis minus the change in the variable measured along the y-axis. D) change in the variable measured along the x-axis multiplied by the change in the variable measured along the y-axis. Answer: B Topic: The Slope of a Relationship Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

2) A curve is plotted with y measured on the vertical axis and x measured on the horizontal axis. The slope of the curve equals A) y divided by x. B) the change in y divided by x. C) the change in y divided by the change in x. D) y divided by the change in x. Answer: C Topic: The Slope of a Relationship Skill: Recognition Status: Modified 10th edition AACSB: Analytical Skills

3) The slope of a line A) can never equal zero. B) is always a constant. C) measures the ratio of the change in the value of the y-axis variable relative to the change in the value of the x-axis variable. D) measures the value of the y-axis variable relative to the value of the x-axis variable. Answer: C Topic: The Slope of a Relationship Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

4) The slope of a positive relationship is A) positive. B) undefined. C) positive to the right of the maximum point and negative to the left. D) constant as long as the relationship is nonlinear. Answer: A Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

5) In which of the following cases is the slope of a line positive? A) As x increases, y increases. B) As x increases, y decreases. C) As x increases, y remains the same. D) As x increases, y equals a positive number. Answer: A Topic: The Slope of a Relationship Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

6) If a large change in the variable measured on the x-axis is associated with a small change of the variable measured on the y-axis, the line is ________ and the slope is ________. A) downward-sloping; large B) downward-sloping; small C) upward-sloping; small D) either downward or upward-sloping; small Answer: D Topic: The Slope of a Relationship Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

7) Suppose we are considering the relationship between two variables y and x. y is measured on the y-axis and x is measured on the x-axis, and the relationship between then is a straight line. Suppose that the slope of the line is positive and is less than 1. This slope means that a change in x is associated with A) a bigger change in y. B) a smaller change in y. C) no change in y. D) an equal change in y. Answer: B Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

8) Suppose we are considering the relationship between two variables y and x. y is measured on the y-axis and x is measured on the x-axis, and the relationship between then is a straight line. Suppose that the slope of the line is equal to 1. This slope means that A) a change in x is associated with a bigger change in y. B) a change in x is associated with a smaller change in y. C) a change in x is associated with no change in y. D) a change in x is associated with an equal change in y. Answer: D Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

9) Suppose we are considering the relationship between two variables y and x. y is measured on the y-axis and x is measured on the x-axis, and the relationship between then is a straight line. Suppose that the slope of the line is greater than 1. This slope means that A) a change in x is associated with a bigger change in y. B) a change in x is associated with a smaller change in y. C) a change in x is associated with no change in y. D) a change in x is associated with an equal change in y. Answer: A Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

10) In which of the following cases is the slope of a line positive and less than infinity? A) As the variable measured on the x-axis decreases, the variable measured on the y-axis decreases. B) As the variable measured on the x-axis increases, the variable measured on the y-axis decreases. C) As the variable measured on the y-axis increases, the variable measured on the x-axis does not change. D) As the variable measured on the y-axis increases, the variable measured on the x-axis decreases. Answer: A Topic: The Slope of a Relationship Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

11) In a graph, a line has a negative slope if A) the line is vertical. B) the line is horizontal. C) the line rises from right to left. D) the line rises from left to right. Answer: C Topic: The Slope of a Relationship Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

12) Suppose that for a curve, as the variable measured on the x-axis increases, the variable measured on the y-axis decreases. The curve has a ________ slope. A) tangent B) positive C) negative D) hypothetical Answer: C Topic: The Slope of a Relationship Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

13) If the slope of the relationship between savings and interest rates is 0.5, then A) savings and interest rates have a positive relationship. B) savings and interest rates have a negative relationship. C) savings and interest rates have no relationship. D) savings and interest rates have an inverse relationship. Answer: A Topic: The Slope of a Relationship Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

14) If an increase in x (the variable on the horizontal axis) from 6 to 8 units causes a decrease in y (the variable on the vertical axis) from 4 to 3 units, the slope equals A) 2. B) -2. C) 1/2. D) -1/2. Answer: D Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

x 0 2 4 6 8 10

y 0 6 12 18 24 30

15) In the table above, y is measured along the y-axis and x along the x-axis. The slope of the relationship between x = 0 and x = 2 is A) -6. B) 2. C) 3. D) 6. Answer: C Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

x 10 9 8 7 6 5

y 50 70 100 130 170 220

16) In the table above, y is measured along the y-axis and x along the x-axis. What is the value of the slope between the x = 8 and x = 6? A) -0.057 B) -19.28 C) -35 D) 70 Answer: C Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

Point a b c d e f

X 100 200 300 400 500 600

Y 50 75 100 100 75 50

17) In the table above, Y is measured along the y-axis and X along the x-axis. The slope between points a and b is A) 25. B) 4. C) 0.25. D) -0.25. Answer: C Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

18) In the table above, Y is measured along the y-axis and X along the x-axis. The slope between points c and d is A) 100. B) 0. C) 0.25. D) -4. Answer: B Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

19) In the table above, Y is measured along the y-axis and X along the x-axis. The slope between points e and f is A) -25. B) 4. C) 0.25. D) -0.25. Answer: D Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

20) In the above figure, the curve has a slope that is ________. A) positive and becoming larger in magnitude B) positive and becoming smaller in magnitude C) negative and becoming larger in magnitude D) negative and becoming smaller in magnitude Answer: A Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

21) In the above figure, the curve has a slope that is ________. A) positive and becoming larger in magnitude B) positive and becoming smaller in magnitude C) negative and becoming larger in magnitude D) negative and becoming smaller in magnitude Answer: C Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

x 0 1 2 3 4

y 4 5 8 13 20

22) In the above table, the relationship between x and y is ________ and, with y measured on the vertical axis, the slope between y = 5 and y = 8 is equal to ________. A) negative; 8 B) negative; 6 C) positive; 5 D) positive; 3 Answer: D Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

23) The slope of a straight line is A) variable. B) increasing. C) decreasing. D) constant. Answer: D Topic: The Slope of a Straight Line Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

24) The slope of a straight line is A) always equal to zero. B) calculated as y/x at any point. C) constant. D) always greater than zero. Answer: C Topic: The Slope of a Straight Line Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

25) With y measured on the vertical axis and x measured on the horizontal axis, the slope of a straight line is defined as A) y/x. B) x/y. C) (change in y)/ (change in x). D) (change in x)/ (change in y). Answer: C Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

26) Along a straight line, when x equals 90, then y equals 30. When x equals 120, then y equals 40. The slope of the straight line is A) 1/3. B) -1/3. C) 3. D) -3. Answer: A Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

27) Along a straight line, the value of y is always equal to the value of x. The slope of the line is A) -1. B) 0. C) 1. D) infinite. Answer: C Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

x 0 1 2 3 4 5

y 0 3 6 9 12 15

28) Using the data in the table above, with y measured on the vertical axis, the slope of the line relating y to x is A) 1/3. B) 1. C) 3. D) 6. Answer: C Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

x-variable (on the horizontal axis) 10 15 20

y-variable (on the vertical axis) 28 31 34

29) The above table shows data on two variables. If these data were graphed, the slope of the line would be A) 3/5. B) 3. C) 5/3. D) impossible to determine from the information given. Answer: A Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

x-variable (on the horizontal axis) 8 10 12

y-variable (on the vertical axis) 14 18 22

30) The above table gives data on two variables. If these data were graphed, the slope of the line would be A) 1. B) -2. C) 2. D) -4. Answer: C Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

31) The above table gives data on two variables. If these data were graphed, their relationship would A) be a straight line. B) be a curved line. C) show a negative relationship. D) nonexistent. Answer: A Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

x-variable (on the horizontal axis) 100 200 300

y-variable (on the vertical axis) 50 125 200

32) The above table shows data on two variables. If these data were graphed, the slope of the line would be A) 1/2. B) 4/3. C) 2/3. D) 3/4. Answer: D Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

Quantity 0 8 16 24 32 36

Price 50 40 30 20 10 5

33) Using the data in the above table, A) the variables quantity and price are positively related. B) the variables quantity and price are negatively related. C) the variables quantity and price are neither positively nor negatively related. D) an increase in price is likely to cause an increase in quantity. Answer: B Topic: Variables That Move in Opposite Directions Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

34) If we use the numbers in the above table to draw a graph, with the price on the vertical axis and the quantity on the horizontal axis, the line relating price and quantity has a slope of A) 0.8. B) -8.0. C) -1.25. D) 8.0. Answer: C Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 122 Copyright © 2014 Pearson Education, Inc.

Income (dollars per month) 50 100 150 200

Amount spent on restaurant meals (dollars per month) 20 40 60 80

35) Using the data in the above table, if income is on the x-axis and the amount spent on restaurant meals is on the y-axis, the graph of the two variables would be A) upward sloping. B) downward sloping. C) vertical. D) horizontal. Answer: A Topic: Variables That Move in the Same Direction Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

36) Using the data in the above table, if income is on the x-axis and the amount spent on restaurant meals is on the y-axis, the slope of the straight line graph equals A) 0.2. B) 0.4. C) 0.5. D) 2.5. Answer: B Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

x 100 200 300 400

y 500 300 100 -100

37) Based on the information in the table above, what is the relationship between x and y? A) direct B) inverse C) positive D) No relationship exists between x and y. Answer: B Topic: Variables That Move in Opposite Directions Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

38) Using the information in the table above, what does the slope of the line between x and y equal? A) 5 B) -0.5 C) 2 D) -2 Answer: D Topic: The Slope of a Straight Line Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

39) In the above, which figure shows a linear relationship? A) Figure A B) Figure B C) both Figure A and Figure B D) neither Figure A nor Figure B Answer: C Topic: Linear Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

40) In the above, which figure shows a line with a slope of 1.0? A) Figure A B) Figure B C) both Figure A and Figure B D) neither Figure A nor Figure B Answer: A Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

41) The slope of the line shown in the above figure is A) -1/3. B) -5. C) -1. D) -3. Answer: D Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

42) The slope of the line shown in the above figure is A) 5. B) 2/5. C) 2/3. D) 5/2. Answer: B Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

43) The slope of the line shown in the above figure is A) -1 1/3. B) -1 2/3. C) -1.25. D) -0.80. Answer: C Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

44) The slope of the line shown in the above figure is A) 2. B) 0.75. C) 0.25. D) 1 1/3. Answer: B Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

45) The slope of the line shown in the above figure is A) 0.90. B) 1.5. C) 1.11. D) 2. Answer: A Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

46) The slope of the line in the above figure is A) -1/2. B) -3. C) -4. D) -1/3. Answer: B Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

47) The slope of the line in the above figure is A) 8. B) 0.05. C) 0.125. D) 0.10. Answer: C Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

48) The slope of the line in the above figure is A) 2/5 = 0.4. B) 5/2 = 2.5. C) -2/5 = -0.4. D) -5/2 = -2.5. Answer: A Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

49) The slope of the line in the above figure is A) 1/2 = 0.5. B) 2. C) -1/2 = -0.5. D) -2. Answer: C Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

50) The slope of the line in the above figure is A) -10. B) 10. C) 5. D) -5. Answer: D Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

51) The slope of the line shown in the above figure is A) -1 3/8. B) -1 2/3. C) 5/8. D) -0.625. Answer: D Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

52) The slope of the line shown in the above figure is A) 3/4. B) 2/3. C) 1 1/3. D) 1 3/4. Answer: C Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

53) In the above figure, A) consumption expenditures are a linear function of labor income. B) the slope of the function depicted is 0.9. C) consumption expenditures are positively related to labor income. D) All of the above answers are correct. Answer: D Topic: Slope Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

54) The slope of the line in the above figure is A) -4. B) -2.5. C) -1.0. D) 1.0. Answer: D Topic: The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

55) On a graph, an upward-sloping curve that is flatter as you move away from the origin indicates a A) positive relationship with an increasing slope. B) positive relationship with a decreasing slope. C) negative relationship with an increasing slope. D) negative relationship with a decreasing slope. Answer: B Topic: The Slope of a Curved Line Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

56) In the above figure, the curve's slope is A) positive and is becoming steeper. B) positive and is becoming less steep. C) negative and is becoming steeper. D) negative and is becoming less steep. Answer: B Topic: Slope of a Curved Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

57) If the price of apples is on the vertical axis and the quantity of apples demanded is on the horizontal axis, the slope between two points on the line describing the relationship between price and quantity is A) the change in price multiplied by the change in quantity. B) the change in price divided by the change in quantity. C) the change in quantity divided by the change in price. D) price divided by quantity. Answer: B Topic: The Slope of a Curved Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

58) The formula for the slope across an arc is used to approximate the slope for A) linear relationships only. B) a curved line. C) a positive relationship only. D) a negative relationship only. Answer: B Topic: The Slope Across an Arc Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

59) The slope of a curved line can be approximated by A) the average of the variable measured along the y-axis divided by the average of the variable measured along the x-axis. B) the inverse of the straight-line method. C) the average of the variable measured along the x-axis divided by the average of the variable measured along the y-axis. D) the slope across an arc from one point on the curve to another point on the curve. Answer: D Topic: The Slope Across an Arc Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

60) In the above figure, the slope across the arc between c and d is A) 1/2. B) 1. C) 4/3. D) 2. Answer: A Topic: The Slope Across an Arc Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

61) In the above figure, the slope across the arc between b and c is A) 1/2. B) 2/3. C) 1. D) 2. Answer: C Topic: The Slope Across an Arc Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

62) In the above figure, the slope across the arc between a and b is A) 2/5. B) 1. C) 3/2. D) 5/2. Answer: D Topic: The Slope Across an Arc Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 142 Copyright © 2014 Pearson Education, Inc.

63) In the above figure, the slope at point b is A) 1. B) 5/2. C) between 1 and 5/2. D) greater than 5/2. Answer: C Topic: The Slope at a Point Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

64) In the above figure, the relationship between x and y is A) positive, with slope decreasing as x increases. B) negative, with slope decreasing as x increases. C) negative, with slope increasing as x increases. D) positive, with slope increasing as x increases. Answer: A Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

65) The slope in the above figure is A) negative and increasing. B) negative and decreasing. C) positive and increasing. D) positive and decreasing. Answer: D Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

66) In the above figure, using the slope across an arc, the slope of the curve between points b and c is A) 1/3. B) -1/3. C) 3. D) -3. Answer: A Topic: Slope Across an Arc Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

67) In the above figure, using the slope across an arc, the slope of the curve between points a and c is A) -3/5. B) 3/5. C) 5/3. D) -5/3. Answer: B Topic: Slope Across an Arc Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

68) In the above figure, using the slope across an arc, the slope of the curve between points a and b is A) 1/2. B) -1/2. C) 2. D) -2. Answer: B Topic: Slope Across an Arc Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

69) In the above figure, using the slope across an arc, the slope of the curve between points a and c is A) 3/5. B) 5/3. C) -3/5. D) -5/3. Answer: D Topic: Slope Across an Arc Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

70) In the above figure, the slope across the arc between a and b is A) 1. B) -4. C) 1/4. D) -1/4. Answer: B Topic: The Slope Across an Arc Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

71) In the above figure, the slope across the arc between b and d is A) 1/2. B) 1/3. C) 5/3. D) 6/5. Answer: C Topic: Slope Across an Arc Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

72) In the above figure, the slope at point b A) lies between 1/3 and 1. B) equals 1. C) lies between 1 and 2. D) exceeds 2. Answer: A Topic: Slope Across an Arc Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

73) In the above figure, the slope across the arc between c and d is A) 1/6. B) 12/11. C) 3. D) 4. Answer: C Topic: Slope Across an Arc Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills 147 Copyright © 2014 Pearson Education, Inc.

74) In the above figure, the slope across the arc between a and b is A) 3. B) 1. C) 3/5. D) 1/3. Answer: D Topic: Slope Across an Arc Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

75) Along a curved line, the slope at the maximum A) is greater than zero. B) is zero. C) is less than zero. D) may be greater than, less than, or equal to zero. Answer: B Topic: Maximum and Minimum Points Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

76) Consider a diagram in which the variable measured on the y-axis remains constant while the variable measured on the x-axis increases. The graph is of this relationship is a A) perpendicular line. B) line with slope equal to zero. C) line that has positive slope. D) line that has a negative slope. Answer: B Topic: Variables That Are Unrelated Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

77) The slope of a negative relationship is A) negative. B) undefined. C) positive to the right of the maximum point and negative to the left. D) constant as long as the relationship is nonlinear. Answer: A Topic: Study Guide Question, The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

78) A linear relationship A) always has a maximum. B) always has a constant slope. C) always slopes up to the right. D) never has a constant slope. Answer: B Topic: Study Guide Question, The Slope of a Straight Line Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

79) In the above figure, between x = 2 and x = 3, what is the slope of the line? A) 1 B) -1 C) 2 D) 3 Answer: A Topic: Study Guide Question, The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

80) In the above figure, how does the slope of the line between x = 4 and x = 5 compare with the slope between x = 2 and x = 3? A) The slope is greater between x = 4 and x = 5. B) The slope is greater between x = 2 and x = 3. C) The slope is the same. D) The slope is not comparable. Answer: C Topic: Study Guide Question, The Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

81) The relationship between x and y in the above figure is A) positive with an increasing slope. B) positive with a decreasing slope. C) negative with an increasing slope. D) negative with a decreasing slope. Answer: A Topic: Study Guide Question, The Slope Across an Arc Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

82) In the above figure, the slope across the arc between points a and b equals A) 5. B) 4. C) 2. D) 1. Answer: C Topic: Study Guide Question, The Slope Across an Arc Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

13 Appendix: Graphing Relationships Among More Than Two Variables 1) Ceteris paribus when graphing a relationship refers to A) letting all the variables change at once. B) changing the origin of the graph. C) holding constant all but two variables. D) rescaling the coordinates. Answer: C Topic: Graphing Relationships, Two+ Variables, Ceteris Paribus Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

2) In evaluating a relationship between x and y, ceteris paribus means other variables A) are not relevant to x and y. B) move in opposite directions to x and y. C) are not changing while x and y change. D) move in the same direction as x and y. Answer: C Topic: Graphing Relationships, Two+ Variables, Ceteris Paribus Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

3) On a graph showing the relationship between x and y, the ceteris paribus condition implies that A) no other variables are related to x and y. B) the value of x is held constant. C) the value of y is held constant. D) other variables not shown are held constant. Answer: D Topic: Graphing Relationships, Two+ Variables, Ceteris Paribus Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

4) Assume that the quantity consumed of pizza is dependent on three factors: the price of a pizza, the income of pizza purchasers, and consumers' taste for pizza. When graphing the relationship between the price of a pizza and the quantity of pizza consumed, A) the price of a pizza and the income of pizza consumers are the only variables that are allowed to change. B) the price of pizza and quantity consumed of pizza are the only variables that are allowed to change. C) consumers' taste for pizza and the income of pizza purchasers are the only variables that are allowed to change. D) None of the above answers are correct. Answer: B Topic: Graphing Relationships, Two+ Variables, Ceteris Paribus Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

5) To graph a relationship among several variables, we hold all but ________ variable(s) constant and use the ________ assumption. A) one; scarcity B) two; ceteris paribus C) three; marginal benefit D) one; ceteris paribus Answer: B Topic: Graph Relationships-More than Two Variables, Ceteris Paribus Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

6) In the above figure, while moving along the line showing the relationship between household income and expenditure, A) household expenditures are held constant. B) household income is held constant. C) the interest rate is held constant. D) no variable is held constant. Answer: C Topic: Graphing Relationships Among More Than Two Variables Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

7) In the above figure, if the interest rate is negatively related to household expenditures for any given level of household income, an increase in the interest rate will A) shift the line vertically upward. B) shift the line vertically downward. C) make the line negatively sloped. D) cause no change in the line's position. Answer: B Topic: Graphing Relationships Among More Than Two Variables Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

8) The slope of the line in the above figure is A) positive. B) negative. C) direct. D) independent. Answer: B Topic: Graphing Relationships Among More Than Two Variables Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

9) In the above figure, when the interest rate is 8 percent and household income is $40,000, household consumption is A) $0. B) $20,000. C) $35.000. D) $60,000. Answer: B Topic: Graphing Relationships Among More Than Two Variables Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

10) The relationship in the above figure indicates that A) a decrease in the interest rate leads to a decrease in household income. B) a decrease in household consumption leads to a decrease in interest rates. C) a decrease in household income will lead household consumption to increase. D) none of the above Answer: D Topic: Graphing Relationships Among More Than Two Variables Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

11) Household consumption depends on both income and interest rates. In the above figure A) household consumption is held constant. B) interest rates are held constant. C) household income is held constant. D) no variable is held constant. Answer: C Topic: Graphing Relationships Among More Than Two Variables Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

12) In the above figure, if household consumption is positively related to household income, then an increase in household income will A) shift the line rightward. B) shift the line leftward. C) make the line positively sloped. D) cause a movement along the line. Answer: A Topic: Graphing Relationships Among More Than Two Variables Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

13) The above figure shows how many pounds of peanuts farmers are willing to sell at different prices per pound of peanuts. If the price of a pound of peanuts is $1 and the price of a pound of pecans is $2, peanut farmers are willing to sell A) no peanuts. B) 1000 pounds of peanuts. C) 2000 pounds of peanuts. D) 4000 pounds of peanuts. Answer: A Topic: Graphing Relationships Among More Than Two Variables Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

14) In the above figure, while drawing the line showing the relationship between the price of a pound of peanuts and the quantity sold, the A) price of a pound of pecans is held constant. B) price of a pound of peanuts is held constant. C) quantity of peanuts that farmers supply is constant. D) Both answers A and B are true. Answer: A Topic: Graphing Relationships Among More Than Two Variables Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

15) In the figure above, suppose the price of a pound of pecans is negatively related to the quantity of peanuts that farmers are willing to supply. If the price of pecans increases, A) the curve will shift rightward. B) the curve will shift leftward. C) there is a movement along the curve. D) the curve will be unaffected. Answer: B Topic: Graphing Relationships Among More Than Two Variables Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

16) In the above figure, x is A) positively related to y and negatively related to z. B) positively related to both y and z. C) negatively related to y and positively related to z. D) negatively related to both y and z. Answer: C Topic: Study Guide Question, Graphing Relationships Among 2+ Var. Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

17) In the figure above, ceteris paribus, an increase in x is associated with A) an increase in y. B) a decrease in y. C) a decrease in z. D) None of the above answers is correct. Answer: A Topic: Study Guide Question, Graphing Relationships Among 2+ Var. Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

18) In the figure above, an increase in z leads to a A) movement up along one of the lines showing the relationship between x and y. B) movement down along one of the lines showing the relationship between x and y. C) rightward shift of the line showing the relationship between x and y. D) leftward shift of the line showing the relationship between x and y. Answer: C Topic: Study Guide Question, Graphing Relationships Among 2+ Var. Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

14 Appendix: Essay Questions 1) Why do economists use graphs? Answer: Graphs help economists, and others, to visualize the relationships between economic variables. Graphs that plot variables together help economists understand if the variables are related and how they are related. Graphs also help provide a visual picture of economic models that link different variables. Indeed, many other disciplines use such visual models. For example, architects work with blueprints (their model) and the blueprints represent every detail of a building. Economists' models do not reflect of every detail of the real world, but the graphs that they use nonetheless are valuable because they help clarify the linkages between the variables. Topic: Graphing Data Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Communication

2) What are the two different types of relationships that variables can have? Explain each. What do these relationships look like when they are graphed? Answer: Variables can have two relationships: positive (or direct) and negative (or inverse). A positive relationship occurs when the variables move in the same direction, so that when one increases, the other also increases. A negative relationship occurs when the variables move in the opposite direction, so that when one increases, the other decreases. When a positive relationship is graphed, the line slopes upward to the right. When a negative relationship is graphed, the line slopes downward to the right. Topic: Relationships Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Communication

3) What is the difference between a positive and a negative relationship? Answer: Two variables are positively related when an increase (decrease) in one is associated with an increase (decrease) in the other. In this case, the variables move together, in the same direction. Two variables are negatively related when an increase (decrease) in one is associated with a decrease (increase) in the other. In this case, the variables move in the opposite direction. Topic: Relationships Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Communication

4) A graph of two variables is a vertical line. What is the interpretation of this result? Answer: When the graph of two variables is a vertical line, the variables are not related because, with this graph, whenever the variable measured along the vertical axis changes, the variable measured along the horizontal axis does not change. Topic: Unrelated Variables Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

5) What does the slope of a straight line equal? How is the slope of a curved line calculated at a point on the curve? Answer: The slope of a straight line is calculated between two points on the line. Between the two points on the line, the slope equals the change in the value of the variable measured on the vertical axis (the yaxis) divided by the change in the value of the variable measured on the horizontal axis (the x-axis). The slope of a curved line calculated at a point on the curve is equal to the slope of a tangent straight line. At that point on the curved line, draw a straight line that touches the curved line at only that point. Then, calculate the slope of the straight line. The slope of the curved line at that point equals the slope of the straight line. Topic: Slope Skill: Recognition Status: Modified 10th edition AACSB: Analytical Skills

6) "It is impossible to represent a three variable relationship in a two-dimensional graph." Is this statement true or false? Explain your answer. Answer: The statement is false because it is possible to represent a three variable relationship in a two dimensional graph. To do so, start by focusing on two of the variables. Assume that the third variable does not change (the ceteris paribus assumption) and then graph the relationship between the two variables. The graph shows how these two variables are related when the third variable does not change. When the third variable does change, then the entire relationship between the two graphed variables changes. In other words, the line showing the relationship between the two graphed variables shifts so that it becomes an entirely new line. The shift in the line shows how the third variable influences the other two. Topic: Graphing Relationships Among More Than Two Variables Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Communication

15 Appendix: Numeric and Graphing Questions

1) The figure above shows how the sales of the video game "Tomb Raider—Lara Retires" change when the advertising spent on the game changes. Is the relationship between advertising and the number of games sold positive, negative, or neither? Explain your answer. Answer: The figure shows that there is a positive relationship between advertising and the number of video games sold. The relationship is positive because the two variables move together: If advertising increases, so, too, does the number of games sold. Topic: Positive Relationship Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

2) The figure above shows how the relationship between the number of hours per week a high school student spends on the web and the student's SAT score. Is the relationship between hours on the web and the SAT score positive, negative, neither? Explain your answer. Answer: The figure shows that there is a negative relationship between hours on the web and the student's SAT score. The relationship is negative because the two variables move in opposite directions: If hours on the web increase, the SAT score decreases. Topic: Negative Relationship Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

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

The point is a maximum point. Examine the figure above. The slope of a curved line at any point equals the slope of a straight line that touches the curved line at only that one point. Thus to the left of the maximum point, take point A. The slope of the straight line that touches the curved line at only point A is positive, so the slope of the relationship is positive. Similarly, take point B to the right of the maximum point. As the straight line shows, the slope of the relationship at point B is negative. Indeed, whenever there is a maximum point, the slope of the relationship to the left of the maximum is positive and the slope to the right is negative. Topic: Maximum Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

4) In the figure above, what can you deduce about the slope of the curve? Answer: The slope is positive and increasing in size as we move rightward along the curve. Topic: Slope Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

5) If two points on a line are x = 2, y = 5 and x = 7, y= 10, what is the slope of this line? Answer: The slope equals the change in the y-variable divided by the change in the x-variable. So, the slope equals (10 – 5)/(7 – 2) = (5)/(5) = 1.00. Topic: Slope Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

Katie's income (dollars per year) 50,000 70,000 90,000 110,000

Katie's purchases (books per year) 14 16 18 20

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

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

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

X 2 4 6 8

Y 20 16 12 8

7) Graph the data in the table above in the figure. Label the axes. a) Is the relationship between X and Y positive or negative? b) What is the slope when X = 4? c) What is the slope when X = 8?

Answer:

The figure labels the axes and graphs the relationship. a) The relationship between X and Y is negative. b) The slope equals -2. c) The slope equals -2. Topic: Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

8) In the above diagram, draw a straight line with a slope of zero. Answer:

A horizontal line has a slope of zero. The figure above shows a horizontal line with a slope of zero. Topic: Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

9) What does the slope of the line shown in the above figure equal? Answer: The slope equals the change in variable on the y-axis divided by the change in the variable on the x-axis, or (150 – 300)/(600 – 800) = 0.75. Topic: Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

10) What does the slope of the line shown in the above figure equal? Answer: The slope equals the change in variable on the y-axis divided by the change in the variable on the x-axis, or (18 – 27)/(10 – 20) = 0.90. Topic: Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

11) What does the slope of the line shown in the above figure equal? Answer: The slope equals the change in variable on the y-axis divided by the change in the variable on the x-axis, or (30 – 60)/(25 – 15) = -3.0. Topic: Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

12) What does the slope of the line shown in the above figure equal? Answer: The slope equals the change in variable on the y-axis divided by the change in the variable on the x-axis, or (5 – 10)/(60 – 100) = 0.125. Topic: Slope of a Straight Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

13) What does the slope of the curved line at point A shown in the above figure equal? Answer: The slope of a curved line equals the slope of a straight line that touches the curved line at only that point. And, the slope of a straight line equals the change in variable on the y-axis divided by the change in the variable on the x-axis. Measure the slope of the straight line from point A to where the line crosses the x-axis, at 15. Thus the straight line has a slope of (30 – 0)/(10 – 15) = -6. Therefore the curve line at point A also has a slope equal to -6. Topic: Slope of a Curved Line Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

Hours studies (per week) 2 4 6 8 10

SAT scores 900 1000 1050 1075 1090

14) Jamie is preparing to take his SAT tests. The table above shows how Jamie's score depends on the number of hours a week Jamie studies. a) Plot the relationship in the figure, putting the hours studied on the horizontal axis. b) Is the relationship you plotted positive or negative? c) What happens to the slope of the relationship as hours studied increase? d) Suppose Jamie can enroll in an SAT prep course and, by so doing, for every possible number of hours he studies, his score will be 100 points higher. Plot the new relationship between the number of hours studied and Jamie's SAT score in the figure. e) How many variables are involved in the figure you just completed?

Answer:

a) The figure above plots the relationship between the number of hours Jamie studies and his SAT score. b) The relationship is positive: As Jamie increases the hours he studies, his SAT score increases. c) The relationship is nonlinear, so the slope of the relationship changes as the number of hours studied changes. In the figure, the slope of the relationship decreases in size as the number of hours studied increases. d) The figure above also plots the relationship between the hours Jamie studies and his SAT score if Jamie takes an SAT preparation course. e) There are three variables: The number of hours Jamie studies, whether or not he takes an SAT preparation course, and his SAT score. Topic: Graphing Relationships Among More Than Two Variables Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

16 Appendix: True or False 1) The vertical axis of a graph shows only positive values. Answer: FALSE Topic: Graphing Data Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

2) A scatter diagram plots the value of one economic variable against time. Answer: FALSE Topic: Graphing Data Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

3) A cross-section graph can show how economic variables for different groups of people vary over time. Answer: FALSE Topic: Graphing Data Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

4) If the x-axis variable increases while the y-axis variable decreases, the variables x and y are negatively related. Answer: TRUE Topic: Graphs Used in Economic Models Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

5) A graph cannot be used to show that two variables are unrelated. Answer: FALSE Topic: Graphs Used in Economic Models Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

6) When graphed, variables that are unrelated are shown by either a horizontal or a vertical line. Answer: TRUE Topic: Graphs Used in Economic Models Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

7) The slope of a line is the change in the y-axis variable divided by the change in the x-axis variable. Answer: TRUE Topic: The Slope of a Relationship Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Analytical Skills

8) The slope of a straight line increases as the numbers on the x-axis become larger. Answer: FALSE Topic: The Slope of a Relationship Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

9) To calculate the slope of a curved line, you can calculate the slope at a point on the curve or across an arc of the curve. Answer: TRUE Topic: The Slope of a Relationship Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Analytical Skills

10) If the change in the y-axis variable is 4 and the change in the x-axis variable is 2, the slope of this line is 1/2. Answer: FALSE Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

11) If the change in the y-axis variable is 6 and the change in the x-axis variable is 5, the slope of this line is 6/5. Answer: TRUE Topic: The Slope of a Relationship Skill: Analytical Status: Previous edition, Chapter 1 AACSB: Analytical Skills

12) To graph a relationship that involves more than two variables, we use the "ceteris paribus" assumption. Answer: TRUE Topic: Graphing Relationships Among More Than Two Variables Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

13) "Ceteris paribus" refers to the idea that if more than two variables are graphed, only one variable must be held constant. Answer: FALSE Topic: Graphing Relationships Among More Than Two Variables Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

Economics, 11e, Global Edition (Parkin) Chapter 2 The Economic Problem 1 Production Possibilities and Opportunity Cost 1) The production possibilities frontier is the boundary between A) those combinations of goods and services that can be produced and those that can be consumed. B) those resources that are limited and those that are unlimited. C) those combinations of goods and services that can be produced and those that cannot. D) those wants that are limited and those that are unlimited. Answer: C Topic: Production Possibilities Frontier Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

2) The production possibilities frontier is A) upward sloping and reflects unlimited choices. B) upward sloping and reflects tradeoffs in choices. C) downward sloping and reflects unlimited choices. D) downward sloping and reflects tradeoffs in choices. Answer: D Topic: Production Possibilities Frontier Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

3) The production possibilities frontier A) depicts the boundary between those combinations of goods and services that can be produced and those that cannot given resources and the current state of technology. B) shows how many goods and services are consumed by each person in a country. C) is a model that assumes there is no scarcity and no opportunity cost. D) is a graph with price on the vertical axis and income on the horizontal axis. Answer: A Topic: Production Possibilities Frontier Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

4) The production possibilities frontier itself illustrates A) all goods that can be produced by an economy. B) the combination of goods and services that can be produced efficiently. C) all goods and services that are desired but cannot be produced due to scarce resources. D) all possible production of capital goods. Answer: B Topic: Production Possibilities Frontier Skill: Recognition Status: Previous edition, Chapter 1 AACSB: Reflective Thinking 1 Copyright © 2014 Pearson Education, Inc.

5) The production possibilities frontier is the boundary between those combination of goods and services that can be A) produced and those that can be consumed. B) consumed domestically and those that can be consumed by foreigners. C) produced and those that cannot be produced. D) consumed and those that cannot be produced. Answer: C Topic: Production Possibilities Frontier Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

6) The production possibilities frontier itself shows A) the maximum amount of resources available at any given time. B) combinations of goods and services that do not fully use available resources. C) the maximum rate of growth of output possible for an economy. D) the maximum levels of production that can be attained. Answer: D Topic: Production Possibilities Frontier Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

7) The production possibilities frontier represents A) the maximum amount of labor and capital available to society. B) combinations of goods and services among which consumers are indifferent. C) the maximum levels of production that can be attained. D) the maximum rate of growth of capital and labor in a country. Answer: C Topic: Production Possibilities Frontier Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

8) Which of the following is NOT true concerning a society's production possibilities frontier (PPF)? A) It reveals the maximum amount of any two goods that can be produced from a given quantity of resources. B) Tradeoffs occur when moving along a PPF. C) Production efficiency occurs when production is on the frontier itself. D) Consumers will receive equal benefits from the two goods illustrated in the PPF. Answer: D Topic: Production Possibilities Frontier Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

9) The production possibilities frontier separates ________. A) the goods and services that people want from those that they do not want B) the types of goods that can be attained from those that can't be attained C) the quantities of goods and services that can be produced from those that cannot be produced D) the combinations of goods that people value and those that they don't Answer: C Topic: Production Possibilities Frontier Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

10) When producing at a production efficient point, ________. A) our choice of the goods can be either on or within the production possibilities frontier B) we can satisfy our all wants C) the opportunity cost of another good is zero D) we face a tradeoff and incur an opportunity cost Answer: D Topic: Production Efficiency Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

11) Harry produces 2 balloon rides and 4 boat rides an hour. Harry could produce more balloon rides but to do so he must produce fewer boat rides. Harry is ________ his production possibilities frontier. A) producing inside B) producing on C) producing outside D) producing either inside or on Answer: B Topic: Production Possibilities Frontier Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

12) Production efficiency occurs when production ________. A) is at a point beyond the production possibilities frontier B) is on the production possibilities frontier or inside it C) is at any attainable point D) is on the production possibilities frontier Answer: D Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

13) A point outside a production possibilities frontier indicates A) that resources are not being used efficiently. B) an output combination that society cannot attain given its current level of resources and technology. C) that resources are being used very efficiently. D) that both goods are characterized by increasing costs. Answer: B Topic: Production Possibilities Frontier Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

14) Which of the following is NOT illustrated by a production possibilities frontier? A) scarcity B) opportunity cost C) necessity for choice D) who gets the goods Answer: D Topic: Production Possibilities Frontier Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

15) A production possibilities frontier figure does NOT illustrate A) the limits on production imposed by our limited resources and technology. B) the exchange of one good or service for another. C) opportunity cost. D) attainable and unattainable points. Answer: B Topic: Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

16) Any production point outside the production possibilities frontier is A) unattainable. B) associated with unused resources. C) attainable only if prices fall. D) attainable only if prices rise. Answer: A Topic: Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

17) Which of the following statements regarding the production possibilities frontier is true? A) Points outside the frontier are attainable. B) Points inside the frontier are attainable. C) Points on the frontier are less efficient than points inside the frontier. D) None of the above because all of the above statements are false. Answer: B Topic: Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

18) Jane produces only corn and cloth. Taking account of her preferences for corn and cloth A) makes her production possibilities frontier straighter. B) makes her production possibilities frontier steeper. C) makes her production possibilities frontier flatter. D) does not affect her production possibilities frontier. Answer: D Topic: Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

19) On the vertical axis, the production possibilities frontier shows ________; on the horizontal axis, the production possibilities frontier shows ________. A) the quantity of a good; the number of workers employed to produce the good B) the quantity of a good; the price of the good C) the quantity of a good; a weighted average of resources used to produce the good D) the quantity of one good; the quantity of another good Answer: D Topic: Production Possibilities Frontier Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Analytical Skills

20) Scarcity is represented on a production possibilities frontier figure by A) the amount of the good on the horizontal axis forgone. B) the fact that there are only two goods in the diagram. C) technological progress. D) the fact there are attainable and unattainable points. Answer: D Topic: Production Possibilities Frontier Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

21) The figure above shows Roger's production possibilities frontier. Point a is an ________ point and at that point production is ________. A) attainable; efficient B) attainable; inefficient C) unattainable; inefficient D) unattainable; efficient Answer: B Topic: Production Possibilities Frontier Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

22) The above figure illustrates that if this country wishes to move from its current production point (labeled "Current") and have 10 more tons of food, it can do this by producing A) 10 more tons of clothing. B) 10 fewer tons of clothing. C) 5 more tons of clothing. D) 5 fewer tons of clothing. Answer: D Topic: Production Possibilities Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

23) Suppose the country of Popcorn produces only jets and corn. If Popcorn cannot produce any more jets without giving up corn, we say that Popcorn has achieved A) the highest marginal benefit. B) production efficiency. C) the lowest marginal cost. D) the highest opportunity cost. Answer: B Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

24) A society that is producing on its production possibilities frontier is A) not utilizing all of its resources. B) not being technologically efficient. C) producing too much output. D) fully utilizing all of its productive resources. Answer: D Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

25) If a country must decrease current consumption to increase the amount of capital goods it produces today, then it must A) be using resources inefficiently today, but will be more efficient in the future. B) be producing along the production possibilities frontier today and its production possibilities frontier will shift outward if it produces more capital goods. C) must be producing outside the production possibilities frontier and will continue to do so in the future. D) must not have private ownership of property and will have to follow planning authorities' decisions today and in the future. Answer: B Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

26) A country that must decrease production of one good in order to increase the production of another A) must be using resources inefficiently. B) must be producing on its production possibilities frontier. C) must be producing beyond its production possibilities frontier. D) must have private ownership of property. Answer: B Topic: Production Efficiency Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

27) If an economy is operating at a point inside the production possibilities frontier, then A) society's resources are being inefficiently utilized. B) the PPF curve will shift inward. C) society's resources are being used to produce too many consumer goods. D) economic policy must retard further growth of the economy. Answer: A Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

28) Any point on a production possibilities frontier (PPF) itself is A) production efficient. B) unattainable. C) inefficient. D) equitable. Answer: A Topic: Production Efficiency Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

29) If production point is inside the production possibilities frontier, A) it is not possible to produce more of both goods. B) production is inefficient. C) in order to produce more of one good, less of the other must be produced. D) production is in the "unattainable" region. Answer: B Topic: Production Efficiency Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

30) If a society is operating at a point inside its production possibilities frontier, then this society's A) resources are being inefficiently utilized. B) production possibilities frontier will shift rightward. C) resources are being used in the most efficient manner. D) economy will grow too fast. Answer: A Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

31) A president of the United States promises to produce more defense goods without any decreases in the production of other goods. This promise can be valid A) if the United States is producing at a point on its production possibilities frontier. B) if the United States is producing at a point inside its production possibilities frontier. C) if the United States is producing at a point beyond its production possibilities frontier. D) only if the production possibilities frontier shifts rightward. Answer: B Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

32) Using the production possibilities frontier model, unemployment is described as producing at a point A) on the exact middle of the PPF curve. B) on either end of the PPF curve. C) inside the PPF curve. D) outside the PPF curve. Answer: C Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

33) A reduction in the amount of unemployment A) shifts the production possibilities frontier outward. B) moves the economy's point of production closer to the production possibilities frontier. C) moves the economy's point of production along the production possibilities frontier. D) moves the economy's point of production further away from the production possibilities frontier. Answer: B Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

34) A point inside a production possibilities frontier A) could indicate that some resources are unemployed. B) is unattainable. C) is more efficient than points on the production possibilities frontier. D) implies that too much capital and not enough labor are being used. Answer: A Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

35) A point inside a production possibilities frontier A) could indicate that resources are misallocated. B) is more efficient than a point on the production possibilities frontier. C) reflects the fact that more technology needs to be developed to fully employ all resources. D) implies that too much labor and not enough capital is being used. Answer: A Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

36) Production points inside the production possibilities frontier A) are unattainable. B) are attainable only with the full utilization of all resources. C) are associated with unused or misallocated resources. D) result in more rapid growth. Answer: C Topic: Production Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

37) When resources are assigned to inappropriate tasks, that is, tasks for which they are not the best match, the result will be producing at a point A) where the slope of the PPF is positive. B) where the slope of the PPF is zero. C) inside the PPF. D) outside the PPF. Answer: C Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

38) Some time ago the government of China required many highly skilled technicians and scientists to engage in unskilled agricultural labor in order to develop "proper social attitudes." This policy probably caused China to produce A) at an inappropriate point along its production possibilities frontier. B) outside its production possibilities frontier with respect to food, but inside with respect to hightechnology goods. C) inside its production possibilities frontier with respect to food, but outside with respect to hightechnology goods. D) inside its production possibilities frontier. Answer: D Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

39) Sam's production possibilities frontier has good A on the horizontal axis and good B on the vertical axis. If Sam is producing at a point inside his frontier, then he A) can increase production of both goods with no increase in resources. B) is fully using all his resources. C) values good A more than good B. D) values good B more than good A. Answer: A Topic: Production Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

40) A situation in which some resources are NOT fully utilized is represented in a production possibilities frontier diagram by A) any point on either the horizontal or the vertical axis. B) the midpoint of the production possibilities frontier. C) a point outside the production possibilities frontier. D) a point inside the production possibilities frontier. Answer: D Topic: Production Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

41) Consider the PPF for office buildings and housing shown in the figure above. Which point in the diagram shows that resources to produce office buildings and housing are being misallocated, unused, or both? A) Point F B) Point G C) Point H D) Point I Answer: A Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

42) Refer to the production possibilities frontier in the figure above. Which production point indicates that resources are NOT fully utilized or are misallocated? A) Point a B) Point b C) Point c D) Point e Answer: C Topic: Production Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

43) Refer to the production possibilities frontier in the figure above. Which production point is unattainable? A) Point a B) Point b C) Point c D) Point e Answer: D Topic: Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

44) Refer to the production possibilities frontier in the figure above. Production point ________ represents an ________ production point. A) b; unattainable. B) c; unattainable. C) e; inefficient. D) c; inefficient. Answer: D Topic: Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

45) In the figure above, moving from production at point d to production at point a requires A) technological change. B) a decrease in unemployment. C) decreasing the output of consumer goods in order to boost the output of capital goods. D) both capital accumulation and a decrease in unemployment. Answer: C Topic: Tradeoff Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

46) Refer to the production possibilities frontier in the figure above. Suppose a country is producing at point a. A movement to point ________ means that the country ________. A) d; must give up 20 million capital goods B) e; is not operating efficiently C) d; gives up 10 million consumer goods. D) b; is producing at an inefficient point. Answer: A Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

47) Refer to the production possibilities frontier in the figure above. If the country moves from point a to point c, the opportunity cost of the move is A) 30 million capital goods. B) 20 million capital goods. C) 10 million capital goods. D) 10 million consumption goods. Answer: B Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

48) Point C on the production possibilities frontier in the above diagram illustrates A) a point that achieves production efficiency. B) a combination of goods and services that cannot be produced efficiently. C) all goods and services that are desired but cannot be produced due to scarce resources. D) a production point that has underutilization of resources. Answer: A Topic: Production Efficiency Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

49) In the above figure, which point represents an unattainable production combination of the two goods? A) Point C B) Point L C) Point D D) Point N Answer: B Topic: Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

50) In the above figure, which point represents an attainable but inefficient production point? A) Point C B) Point N C) Point L D) Point D Answer: B Topic: Production Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

51) A tradeoff is A) represented by a point inside a PPF. B) represented by a point outside a PPF. C) a constraint that requires giving up one thing to get another. D) a transaction at a price either above or below the equilibrium price. Answer: C Topic: Tradeoff Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

52) When producing goods and services along a PPF, tradeoffs exist because A) not all production is efficient. B) society has only a limited amount of productive resources. C) buyers and sellers often must negotiate prices. D) human wants and needs are limited at a particular point in time. Answer: B Topic: Tradeoffs Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

53) Considering a PPF with health care services on the vertical axis and other goods and services on the horizontal axis, the increasing production of health care services in the United States as a result of the aging population represents A) a movement upward along the PPF. B) an outward shift of the PPF from the vertical axis. C) an outward shift of the PPF from the horizontal axis. D) a movement downward along the PPF. Answer: A Topic: Tradeoffs Skill: Conceptual Status: New AACSB: Analytical Skills

54) A tradeoff is illustrated by A) a point inside the PPF. B) a point outside the PPF. C) a change in the slope of the PPF. D) the negative slope of the PPF. Answer: D Topic: Tradeoff Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

55) Moving from one point on the production possibilities frontier to another A) involves a tradeoff but does not incur an opportunity cost. B) involves an opportunity cost but no tradeoff. C) involves a tradeoff and incurs an opportunity cost. D) involves no tradeoff but it does incur an opportunity cost. Answer: C Topic: Opportunity Cost and Tradeoff Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

56) When we choose a particular option, we must give up alternative options. The highest-valued alternative forgone is the ________ of the option chosen. A) opportunity cost B) comparative advantage C) nonmonetary cost D) absolute advantage Answer: A Topic: Opportunity Cost Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

57) Ted can study for his economics exam or go to a concert. He decides to study for his economics exam instead of going to the concert. The concert he will miss is Ted's ________ of studying for the exam. A) opportunity cost B) explicit cost C) implicit cost D) discretionary cost Answer: A Topic: Opportunity Cost Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

58) Opportunity cost is best defined as A) the amount of money that an individual is willing to pay to purchase a good that means a great deal to that person. B) the amount of money lost by one individual in an exchange process so that another individual might gain. C) the highest-valued alternative that is forgone when choosing among various alternatives. D) a situation in which one individual cannot have an absolute advantage over another individual in the production of all goods. Answer: C Topic: Opportunity Cost Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

59) Most students attending college pay tuition and are unable to hold a full-time job. For these students, tuition is A) part of the opportunity cost of going to college. So are their forgone earnings from not holding a fulltime job. B) part of the opportunity cost of going to college. Their forgone earnings from not holding a full-time job are not part of the opportunity cost of attending college. C) not part of the opportunity cost of going to college, but their forgone earnings from not holding a fulltime job are part of the opportunity cost of attending college. D) not part of the opportunity cost of going to college. Neither are their forgone earnings from not holding a full-time job. Answer: A Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

60) If Sam is producing at a point on his production possibilities frontier, then he A) cannot produce any more of either good. B) can produce more of one good only by producing less of the other. C) will be unable to gain from trade. D) is not subject to scarcity. Answer: B Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

61) Opportunity cost is illustrated in a production possibilities frontier (PPF) by a movement A) from the region within the PPF to a point on the PPF. B) from the region within the PPF to the region outside of the PPF. C) from the region outside of the PPF to a point on the PPF. D) along the PPF where to gain more of one good it is necessary to give some of another good. Answer: D Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

62) When moving along the production possibilities frontier, opportunity cost is measured as the A) increase in the quantity produced of one good divided by the decrease in the quantity produced of another good. B) decrease in the quantity produced of one good divided by the increase in the quantity produced of another good. C) quantity produced of one good divided by the quantity produced of another good. D) quantity produced of one good multiplied by the quantity produced of another good. Answer: B Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

63) While producing on the production possibilities frontier, if additional units of a good could be produced at a constant opportunity cost, the production possibilities frontier would be A) bowed outward. B) bowed inward. C) positively sloped. D) a straight line. Answer: D Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

64) Opportunity cost is represented on the production possibilities frontier by A) attainable and unattainable points. B) efficient and inefficient points. C) the amount of good Y forgone when more of good X is produced. D) technological progress. Answer: C Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

65) At one point along a PPF, 50 tons of coffee and 100 tons of bananas are produced. At another point along the same PPF, 30 tons of coffee and 140 tons of bananas are produced. The opportunity cost of a ton of coffee between these points is A) 7/5 of a ton of bananas per ton of coffee. B) 1/2 of a ton of bananas per ton of coffee. C) 5/7 of a ton of bananas per ton of coffee. D) 2 tons of bananas per ton of coffee. Answer: D Topic: Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

66) When operating on its PPF, a country can produce 2 tons of butter and 200 cars OR 3 tons of butter and 150 cars. The opportunity cost of 1 ton of butter is ________ cars per ton of butter. A) 300 B) 200 C) 50 D) 0.75 Answer: C Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

67) In one day, Sue can change the oil on 20 cars or change the tires on 20 cars. In one day, Fred can change the oil on 20 cars or change the tires on 10 cars. Sue's opportunity cost of changing oil is ________ than Fred's and her opportunity cost for changing tires is ________ than Fred's. A) greater; less B) less; greater C) less; less D) greater; greater Answer: A Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

68) At one point along a PPF, 10 pizzas and 7 sandwiches can be produced. At another point along the same PPF, 9 pizzas and 10 sandwiches can be produced. The opportunity cost of a pizza between these points is ________ per pizza. A) 7/10 of a sandwich B) 10/7 of a sandwich C) 1/3 of a sandwich D) 3 sandwiches Answer: D Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 20 Copyright © 2014 Pearson Education, Inc.

69) At one point along a PPF 40 tons of wheat are produced while 80 tons of rice are produced. At another point along the same PPF, 41 tons of wheat are produced while 70 tons of rice are produced. The opportunity cost of producing a ton of wheat between these points is ________ per ton of wheat. A) 1/2 ton of rice B) 10 tons of rice C) 1/10 ton of rice D) 4/7 ton of rice Answer: B Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

Point A B C D E F

Production of grain Production of cars (tons) (cars) 0 30 2 28 4 24 6 18 8 10 10 0

70) The table above lists six points on the production possibilities frontier for grain and cars. Given this information, which of the following combinations is unattainable? A) 6 tons of grain and 18 cars B) 4 tons of grain and 26 cars C) 2 tons of grain and 27 cars D) 7 tons of grain and 10 cars Answer: B Topic: Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

71) The table above lists six points on the production possibilities frontier for grain and cars. From this information you can conclude that production is inefficient if this economy produces A) 6 tons of grain and 18 cars. B) 4 tons of grain and 26 cars. C) 2 tons of grain and 27 cars. D) 8 tons of grain and 10 cars. Answer: C Topic: Production Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

72) The table above lists six points on the production possibilities frontier for grain and cars. What is the opportunity cost of producing the 5th ton of grain? A) 16 cars per ton of grain B) 6 cars per ton of grain C) 3 cars per ton of grain D) 2 cars per ton of grain Answer: C Topic: Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

73) The table above lists six points on the production possibilities frontier for grain and cars. What is the opportunity cost of producing the 26th car? A) 2 tons of grain per car B) 4 tons of grain per car C) 0.25 tons of grain per car D) 0.5 tons of grain per car Answer: D Topic: Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

Point A B C D E

Production Production cans chocolate bars of cola 0 100 10 90 20 70 30 40 40 0

74) The above table shows production points on Sweet-Tooth Land's production possibilities frontier. Which of the following statements is TRUE? A) Producing 0 chocolate bars and 100 cans of cola is both attainable and efficient. B) Producing 20 chocolate bars and 80 cans of cola is attainable, but inefficient. C) Producing 30 chocolate bars and 38 cans of cola is only attainable with an increase in technology. D) Producing 40 chocolate bars and 0 cans of cola is unattainable and inefficient. Answer: A Topic: Production Possibilities Frontier Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

75) The above table shows production points on Sweet-Tooth Land's production possibilities frontier. Which of the following is an example of a point that is inefficient? A) 0 chocolate bars and 100 cans of cola B) 20 chocolate bars and 80 cans of cola C) 32 chocolate bars and 40 cans of cola D) 38 chocolate bars and 0 cans of cola Answer: D Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

76) The above table shows production points on Sweet-Tooth Land's production possibilities frontier. What is the opportunity cost of one chocolate bar if Sweet-tooth Land moves from point C to point D? A) 30 cans of cola per chocolate bar B) 10 cans of cola per chocolate bar C) 3 cans of cola per chocolate bar D) 1/3 can of cola per chocolate bar Answer: C Topic: Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

77) The above table shows production points on Sweet-Tooth Land's production possibilities frontier. What is the opportunity cost of one can of cola if Sweet-tooth Land moves from point C to point B? A) 20 chocolate bars per can of cola B) 10 chocolate bars per can of cola C) 2 chocolate bars per can of cola D) 1/2 chocolate bars per can of cola Answer: D Topic: Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

78) The above table shows production points on Sweet-Tooth Land's production possibilities frontier. A movement from ________ represents the greatest opportunity cost of increasing cola production. A) point E to point D B) point D to point C C) point C to point B D) point B to point A Answer: D Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

Point A B C D E

Production of X Production of Y 0 40 3 36 6 28 9 16 12 0

79) The above table shows production combinations on a country's production possibilities frontier. Which of the following is an example of a point that is unattainable? A) 0 units of good X and 40 units of good Y B) 6 units of good X and 28 units of good Y C) 10 units of good X and 16 units of good Y D) 3 units of good X and 35 units of good Y Answer: C Topic: Production Possibilities Frontier Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

80) The above table shows production combinations on a country's production possibilities frontier. Which of the following is an example of a production point that is inefficient? A) 0 units of good X and 40 units of good Y B) 6 units of good X and 28 units of good Y C) 10 units of good X and 16 units of good Y D) 3 units of good X and 35 units of good Y Answer: D Topic: Production Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

81) The above table shows production combinations on a country's production possibilities frontier. Which of the following points signifies efficient production? A) 0 units of good X and 40 units of good Y B) 3 units of good X and 25 units of good Y C) 10 units of good X and 16 units of good Y D) 12 units of good X and 1 unit of good Y Answer: A Topic: Production Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

82) The above table shows production combinations on a country's production possibilities frontier. The opportunity cost of increasing the production of Y from 16 to 28 units is ________ units of good X per unit of good Y. A) 12 B) 6 C) 3 D) There is no opportunity cost when moving from one point to another along a production possibilities frontier so none of the above answers is correct. Answer: C Topic: Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

83) The above table shows production combinations on a country's production possibilities frontier. What is the opportunity cost of one unit of Y when the production of good Y increases from 16 to 28 units? A) 4 units of good X per unit of good Y B) 3 units of good X per unit of good Y C) 1/4 unit of good X per unit of good Y D) There is no opportunity cost when moving from one point to another along a production possibilities frontier. Answer: C Topic: Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

84) The above table shows production combinations on a country's production possibilities frontier. What is the opportunity cost of increasing the production of X from 0 to 3 units? A) 40 units of good Y per unit of good X B) 3 units of good Y per unit of good X C) 4/3 units of good Y per unit of good X D) 0 units of good Y per unit of good X Answer: C Topic: Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

85) The above table shows production combinations on a country's production possibilities frontier. A movement from ________ involves the greatest opportunity cost of increasing the production of good Y. A) point E to point D B) point D to point C C) point C to point B D) point B to point A Answer: D Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 25 Copyright © 2014 Pearson Education, Inc.

86) The opportunity cost of moving from point a to point b in the above figure is ________. A) zero B) 3/2 pairs of socks per sweater C) 3 pairs of socks D) 2 sweaters Answer: A Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

87) The opportunity cost of producing a unit of consumption at point b in the figure ________ point a. A) is greater than at B) is less than at C) cannot be compared with D) is the same as Answer: B Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

88) In the above figure, which of the following is TRUE regarding the movements from point A to B and from point C to D? I. The movement from point A to B shows that the economy has chosen to produce 100 more jets. II. The movement from point C to D shows that the economy has chosen to produce 100 more jets. III. The movement from point A to B and from point C to D have the same opportunity cost. A) I and II B) I and III C) II and III D) I, II and III Answer: A Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

89) Molly just graduated from high school. The figure shows her possibilities frontier. If Molly goes to college, she will move from point M to point K. In terms of consumption goods, Molly's opportunity cost of going to college is A) MK. B) OL. C) KL. D) LM. Answer: D Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

90) In the figure above, the curve is known as the A) production possibilities frontier. B) substitution options frontier. C) production function. D) opportunity cost curve. Answer: A Topic: Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

91) The figure above illustrates that if this country wishes to have F2 - F1 additional food by moving from point A to point B, it will A) have to find additional workers, because the country already is operating on its production possibilities frontier. B) be unable to do so until additional technological progress is made. C) have to sacrifice C1 - C2 clothing in order to free the resources necessary to produce the additional food. D) require that all the unemployed resources in the country be put to work. Answer: C Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

92) The bowed outward shape of the production possibilities frontier in the above figure indicates that A) some resources are better suited for producing computers. B) the opportunity cost of producing more computers decreases as more computers are produced. C) computer technology is subject to the principle of decreasing costs. D) All of the above answers are correct. Answer: A Topic: Production Possibilities Frontier Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Analytical Skills

93) According to the figure above, the opportunity cost of producing another computer is A) higher at A. B) higher at B. C) the same at every point along the frontier. D) different at most points along the frontier but equal at points A and B because they are equally distant from the axes. Answer: B Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

94) In the production possibilities frontier depicted in the figure above, which of the following combinations of hats and bananas is unattainable? A) 4 million pounds of bananas and 4 million hats B) 2 million pounds of bananas and 5 million hats C) 0 pounds of bananas and 6 million hats D) 1 million pounds of bananas and 3 million hats Answer: A Topic: Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

95) In the production possibilities frontier depicted in the figure above, which of the following combinations of hats and bananas is inefficient? A) 4 million pounds of bananas and 4 million hats B) 2 million pounds of bananas and 5 million hats C) 0 pounds of bananas and 6 million hats D) 1 million pounds of bananas and 3 million hats Answer: D Topic: Production Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

96) In the production possibilities frontier depicted in the figure above, what is the opportunity cost of increasing the production of bananas from two million pounds to three million pounds? A) 1/2 hat per pound of bananas B) 1 hat per pound of bananas C) 2 hats per pound of bananas D) 3 hats per pound of bananas Answer: B Topic: Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

97) Jane produces only corn, measured in tons, and cloth, measured in bolts. For her, the opportunity cost of one more ton of corn is A) the same as the opportunity cost of one more bolt of cloth. B) the inverse of the opportunity cost of one more bolt of cloth. C) the ratio of all the bolts of cloth she produces to all the tons of corn she produces. D) the ratio of all the tons of corn she produces to all the bolts of cloth she produces. Answer: B Topic: Opportunity Cost is a Ratio Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

98) The principle of increasing opportunity cost leads to A) a production possibilities frontier (PPF) that is bowed inward from the origin. B) a production possibilities frontier (PPF) that is bowed outward from the origin. C) an inward shift of the production possibilities frontier (PPF). D) an outward shift of the production possibilities frontier (PPF). Answer: B Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

99) A PPF bows outward because A) not all resources are equally productive in all activities. B) consumers prefer about equal amounts of the different goods. C) entrepreneurial talent is more abundant than human capital. D) resources are used inefficiently. Answer: A Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

100) Generally, opportunity costs increase and the production possibilities frontier bows outward. Why? A) Unemployment is inevitable. B) Resources are not equally useful in all activities. C) Technology is slow to change. D) Labor is scarcer than capital. Answer: B Topic: Increasing Opportunity Cost Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

101) Increasing opportunity cost occurs along a production possibilities frontier because A) resources are not equally productive in all activities. B) increasing wants need to be satisfied. C) in order to produce more of one good decreasing amounts of another good must be sacrificed. D) production takes time. Answer: A Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

102) Increasing opportunity cost while moving along a production possibilities frontier is the result of A) taxes. B) firms' needs to produce profits. C) the fact that it is more difficult to use resources efficiently the more society produces. D) the fact that resources are not equally productive in alternative uses. Answer: D Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

103) Increasing opportunity cost implies that A) producing additional units of one good results in proportionately smaller reductions in the output of the other good. B) producing additional units of one good results in increasing amounts of lost output of the other good. C) the production possibilities frontier will be a straight line. D) the society will be producing inside its production possibilities frontier. Answer: B Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

104) When the production possibilities frontier is bowed outwards, the opportunity cost of producing more of one good A) increases in terms of the amount foregone of the other good. B) decreases in terms of the amount foregone of the other good. C) remains constant. D) cannot be determined. Answer: A Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

105) As a country that has a bowed-out production possibilities frontier produces more of one good, the opportunity cost of a unit of that good ________. A) might increase or decrease B) remains the same C) increases D) decreases Answer: C Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

106) As we move along a bowed-out production possibility frontier, producing more tacos and less pizza, the opportunity cost of a pizza ________. A) increases B) remains the same C) decreases D) increases and then decreases Answer: C Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

107) The production possibilities frontier bows outward because A) opportunity costs are decreasing as the production of a good increases. B) opportunity costs are increasing as the production of a good increases. C) opportunity costs are fixed as the production of a good increases. D) resources are of uniform quality. Answer: B Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

108) The fact of increasing opportunity costs means that a production possibilities frontier will A) be a straight line. B) reach a maximum and then gradually decrease. C) bow outward. D) shift outward over time. Answer: C Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

109) A bowed outward production possibilities frontier occurs when A) opportunity costs are constant. B) resources are not scarce. C) as more of a good is produced, producing additional units of it require greater reductions in the other good. D) the society is operating on the production possibilities frontier. Answer: C Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

110) When the production possibilities frontier bows outward from the origin, A) some of society's resources are unemployed. B) opportunity costs are constant. C) opportunity costs are increasing. D) opportunity costs are decreasing. Answer: C Topic: Increasing Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

111) The slope of a production possibilities frontier that displays increasing opportunity cost is A) positive and constant. B) negative and constant. C) steeper near the horizontal intercept than near the vertical intercept. D) steeper near the vertical intercept than near the horizontal intercept. Answer: C Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

112) Assuming farmers can plant either corn or soybeans, as U.S. farmers plant more corn to meet rising global demand, A) the opportunity cost of producing corn increases. B) the opportunity cost of producing corn decreases. C) the U.S. PPF for corn and other goods and services shifts outward. D) the United States produces at a point beyond its PPF. Answer: A Topic: Increasing Opportunity Cost Skill: Analytical Status: New AACSB: Analytical Skills

113) The fact that individual productive resources are NOT equally useful in all activities A) implies that a production possibilities frontier will be bowed outward. B) implies that gain from specialization and trade is unlikely. C) follows from the law of demand. D) implies a linear production possibilities frontier. Answer: A Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication

114) Consider a PPF for tapes and soda. If the opportunity cost of a tape increases as the quantity of tapes produced increases and also the opportunity cost of a soda increases as the quantity of soda produced increases, then the PPF between the two goods will be A) a straight, downward-sloping line. B) a straight, upward-sloping line. C) bowed outward. D) All of the above are possible and more information is needed to determine which answer is correct. Answer: C Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

115) One point on a PPF shows production levels at 50 tons of coffee and 100 tons of bananas. Remaining on the PPF, an increase of banana production to 140 tons shows coffee production at 30 tons. Still remaining on the PPF, coffee production at 10 tons allows banana production at 160 tons. The opportunity cost of a ton of bananas is A) constant because coffee production decreased by the same amount each time. B) decreasing, since the increase in banana production is less at each point considered. C) 16 to 1, that is every 1 ton of coffee given up will result in 16 more tons of bananas. D) increasing from 1/2 ton of coffee per ton of bananas to 1 ton of coffee per ton of bananas. Answer: D Topic: Increasing Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

116) The nation's production possibilities frontier is bowed outward. Suppose that the government decides to increase the production of armaments by $20 billion, and that as a result the output of consumer goods falls by $20 billion. If a further $20 billion increase beyond the initial $20 billion increase in armaments output is sought, we can expect that the output of consumer goods and services will fall further by A) less than $20 billion. B) $20 billion. C) more than $20 billion. D) There is not enough information to determine the answer. Answer: C Topic: Increasing Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

Possibility A B C D E F

Production possibilities Pizza Soda (per hour) (cases per hour) 0 100 1 95 2 80 3 60 4 35 5 0

117) In the above table, the production of 3 pizzas and 80 cases of soda is A) impossible unless more resources become available or technology improves. B) feasible but would involve unemployed or misallocated resources. C) possible only if the economy produces with maximum efficiency. D) possible only if there is inflation. Answer: A Topic: Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

118) In the above table, the production of 3 pizzas and 35 cases of soda is A) impossible unless more resources become available. B) feasible but would involve unemployed or misallocated resources. C) possible only if the economy produces with maximum efficiency. D) possible only if there is inflation. Answer: B Topic: Production Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

119) In the above table, the opportunity cost of the 2nd pizza is A) 0 cases of soda per pizza. B) 15 cases of soda per pizza. C) 95 cases of soda per pizza. D) 80 cases of soda per pizza. Answer: B Topic: Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

120) Based on the above table, as the production of pizza increases, the opportunity cost of pizza in terms of forgone cases of soda A) increases. B) decreases. C) does not change. D) initially increases then decreases. Answer: A Topic: Increasing Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

121) As Rainclouds Inc. moves downward along its production possibilities frontier, illustrated in the figure above, the opportunity cost of a raincoat ________. A) decreases B) depends on the initial quantity produced C) increases D) remains the same Answer: A Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

122) In the figure above, the point labeled C in the production possibilities frontier A) is unattainable; it is beyond the productive capability of this country. B) represents a highly desirable output level in the long run, because it conserves scarce resources. C) represents either unemployed or inefficiently utilized resources. D) represents the maximum sustainable output level for this nation in the long run. Answer: C Topic: Production Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

123) The country whose production possibilities frontier is illustrated above is currently at position A on the production possibilities frontier. If it wishes to move to position B, it will A) find this change impossible to achieve given the resources it currently possesses. B) have to employ all currently unemployed resources to accomplish this. C) incur an opportunity cost of having to give up some butter in order to make the additional amount of guns desired. D) be able to make the desired switch only if there is a significant improvement in the technology available to the nation. Answer: C Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

124) In the figure above, moving from point B to point D A) has an opportunity cost of one ton of butter per month. B) has an opportunity cost of one ton of guns per month. C) requires an increase in technology. D) is impossible. Answer: A Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

125) In the figure above, which of the following movements has the largest opportunity cost? A) from point C to point B B) from point C to point A C) from point B to point A D) from point A to point E Answer: D Topic: Increasing Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

126) A PPF, such as the one above, that bows outward illustrates A) decreasing opportunity cost. B) increasing opportunity cost. C) that technology is improving. D) that productivity is falling. Answer: B Topic: Increasing Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 42 Copyright © 2014 Pearson Education, Inc.

127) In the figure above, A) moving from point a to point b would require new technology. B) production at point b is efficient whereas production at point a is not efficient. C) some resources must be unemployed at point c. D) opportunity costs are decreasing. Answer: B Topic: Production Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

128) As we increase the production of computers, we find that we must give up larger and larger amounts of DVD players per computer. A) This situation illustrates increasing opportunity cost. B) As a result, we should specialize in the production of DVD players. C) The production possibilities frontier for computers and DVD players is a straight line. D) DVD players will be more highly regarded by consumers than computers. Answer: A Topic: Increasing Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

129) As output moves from point a to point b to point c along the PPF in the above figure, the opportunity cost of one more unit of good X A) rises. The opportunity cost of one more unit of good Y also rises. B) rises. The opportunity cost of one more unit of good Y falls. C) falls. The opportunity cost of one more unit of good Y rises. D) falls. The opportunity cost of one more unit of good Y also falls. Answer: B Topic: Increasing Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

130) Refer to the production possibilities frontier in the figure above. More of good X must be given up per unit of good Y gained when moving from point b to point a than when moving from point c to point b. This fact A) illustrates decreasing opportunity cost. B) illustrates increasing opportunity cost. C) indicates that good X is more capital intensive than good Y. D) indicates that good Y is more capital intensive than good X. Answer: B Topic: Increasing Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

131) The figure above illustrates Mary's production possibilities frontier. If Mary wants to move from point b to point c, she must A) improve technology. B) increase the accumulation of capital. C) give up some of good Y in order to obtain more of good X. D) give up some of good X in order to obtain more of good Y. Answer: C Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

132) The above figure illustrates Mary's production possibilities frontier. If Mary wants to move from point d to point c, she must A) improve technology. B) increase her accumulation of capital. C) give up some of good X in order to obtain more of good Y. D) give up some of good Y in order to obtain more of good X. Answer: C Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

133) The above figure illustrates Mary's production possibilities frontier. Which of the following movements show opportunity costs increasing? A) point a to point b to point c B) point a to point f C) point f to point a D) point c to point f to point d Answer: A Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

134) Refer to the production possibilities frontier figure above. Which of the following movements requires the largest opportunity cost, in terms of good X forgone, per extra unit of good Y? A) from point e to point d B) from point d to point c C) from point c to point b D) from point b to point a Answer: D Topic: Increasing Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

135) Refer to the production possibilities frontier in the figure above. Which of the following movements requires the largest opportunity cost, in terms of good Y forgone, per extra unit of good X? A) from point a to point b B) from point b to point c C) from point c to point d D) from point d to point e Answer: D Topic: Increasing Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

Point a b c d e

Production of X 0 4 8 12 16

Production of Y 40 36 28 16 0

136) Refer to the table above, which gives five points on a nation's PPF. The production of 7 units of X and 28 units of Y is A) impossible given the available resources. B) possible but leaves some resources less than fully used or misallocated. C) on the production possibilities frontier between points c and d. D) on the production possibilities frontier between points b and c. Answer: B Topic: Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

137) Refer to the table above, which gives five points on a nation's PPF. The opportunity cost of increasing the production of Y from 16 to 36 units is a total of A) 1/5 unit of X per unit of Y. B) 2/5 unit of X per unit of Y. C) 1/2 unit of X per unit of Y. D) 3/5 unit of X per unit of Y. Answer: B Topic: Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

138) Refer to the table above, which gives five points on a nation's PPF. As we increase the production of X, A) the output of Y increases. B) unemployment increases. C) the opportunity cost of each new unit of X increases. D) the opportunity cost of each new unit of X decreases. Answer: C Topic: Increasing Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

139) If the United States can increase its production of automobiles without decreasing its production of any other good, the United States must have been producing at a point A) within its PPF. B) on its PPF. C) beyond its PPF. D) None of the above is correct because increasing the production of one good without decreasing the production of another good is impossible. Answer: A Topic: Study Guide Question, Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

140) Production points inside the PPF are A) efficient but not attainable. B) efficient and attainable. C) inefficient and not attainable. D) inefficient and attainable. Answer: D Topic: Study Guide Question, Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

141) In the above figure, at point a what is the opportunity cost of producing one more audio tape? A) 1 video tape per audio tape B) 2 video tapes per audio tape C) 14 video tapes per audio tape D) There is no opportunity cost. Answer: A Topic: Study Guide Question, Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

142) In the above figure, at point b what is the opportunity cost of producing 2 more audio tapes? A) 1/2 video tape per audio tape B) 1 video tape per audio tape C) 6 video tapes per audio tape D) There is no opportunity cost. Answer: A Topic: Study Guide Question, Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

143) Production efficiency means that A) scarcity is no longer a problem. B) producing more of one good is possible only if the production of some other good is decreased. C) as few resources as possible are being used in production. D) producing another unit of the good has no opportunity cost. Answer: B Topic: Study Guide Question, Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 49 Copyright © 2014 Pearson Education, Inc.

144) The existence of the tradeoff along the PPF means that the PPF is A) bowed outward. B) linear. C) negatively sloped. D) positively sloped Answer: C Topic: Study Guide Question, Tradeoff Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

145) The bowed-outward shape of a PPF A) is due to capital accumulation. B) reflects the unequal application of technology in production. C) illustrates the fact that no opportunity cost is incurred for increasing the production of the good measured on the horizontal axis but it is incurred to increase production of the good measured along the vertical axis. D) is due to the existence of increasing opportunity cost. Answer: D Topic: Study Guide Question, Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

146) Moving along a bowed-out PPF between milk and cotton, as more milk is produced the marginal cost of an additional gallon of milk A) rises. B) does not change. C) falls. D) probably changes, but in an ambiguous direction. Answer: A Topic: Study Guide Question, Increasing Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

147) A nation can produce at a point outside its PPF A) when it trades with other nations. B) when it produces inefficiently. C) when its PPF is bowed out. D) never. Answer: D Topic: Study Guide Question, Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Communication

148) In the above figure, point A is ________, and point B is ________. A) attainable, attainable B) attainable, unattainable C) unattainable, attainable D) unattainable, unattainable Answer: A Topic: Parallel MyEconLab Questions, Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

149) Abe can catch 15 pounds of fish an hour or pick 30 pounds of fruit an hour. He works an 8-hour day, spending 5 hours picking fruit and 3 hours catching fish. Calculate Abe's opportunity cost of a pound of fruit. A) 6 minutes B) 3 hours a day C) 2 pounds of fish D) 0.5 pounds of fish Answer: D Topic: Parallel MyEconLab Questions, Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

150) In the figure above, if the quantity of yogurt produced increases from 2 gallons an hour to 3 gallons an hour, the opportunity cost of a gallon of yogurt in terms of ice cream is A) half a gallon. B) 1 gallon. C) 3 gallons. D) 4 gallons. Answer: B Topic: Parallel MyEconLab Questions, Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

151) Claire and Dag are farmers who produce beef and corn. In a year, Claire can produce 16 tons of beef or 40 bushels of corn, while Dag can produce 5 tons of beef or 25 bushels of corn. The opportunity cost of producing a ton of beef is A) 10 bushels of corn for Dag and 8 bushels of corn for Claire. B) 5 bushels of corn for Dag and 2.5 bushels of corn for Claire. C) 20 bushels of corn for Dag and 50 bushels of corn for Claire. D) 36.5 days for Dag and 45.6 days for Claire. Answer: B Topic: Parallel MyEconLab Questions, Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

152) Abe can catch 10 pounds of fish an hour or pick 10 pounds of fruit. Zeb can catch 30 pounds of fish an hour or pick 20 pounds of fruit. The opportunity cost of fish is ________ for Abe than for Zeb, and the opportunity cost of fruit is ________ for Abe than for Zeb. A) higher; lower B) lower; higher C) higher; higher D) lower; lower Answer: A Topic: Parallel MyEconLab Questions, Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

2 Using Resources Efficiently 1) Marginal cost is the opportunity cost A) that your activity imposes on someone else. B) that arises from producing one more unit of a good or service. C) of a good or service that exceeds its benefit. D) of a good or service divided by the number of units produced. Answer: B Topic: Marginal Cost Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

2) Marginal cost is the ________ one more unit of a good and ________ of the good increases. A) opportunity cost of producing; increases as production B) opportunity cost of producing; decreases as production C) price that must be paid to consume; increases as consumption D) price that must be paid to consume; decreases as consumption Answer: A Topic: Marginal Cost Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

3) Moving along a PPF, marginal cost is A) the cost of producing the first unit of a good or service. B) the total cost, less the production of the other good or service. C) greater than the opportunity cost. D) equal to the opportunity cost of producing one more unit of a good or service. Answer: D Topic: Marginal Cost Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

4) The quantity of shoes produced is measured along the horizontal axis of a PPF and the quantity of shirts is measured along the vertical axis. As you move down toward the right along the PPF, the marginal cost of A) shoes decreases. B) shoes increases. C) shirts increases. D) shoes and shirts is equal at the midpoint between the vertical and horizontal axis. Answer: B Topic: Opportunity Cost and Marginal Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

5) Marginal cost A) increases as more is produced. B) remains constant as more is produced. C) decreases as more is produced. D) decreases as marginal benefits decrease. Answer: A Topic: Marginal Cost Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

6) When the opportunity cost of producing more of a good is increasing, the marginal cost of producing more of the good is A) decreasing. B) constant. C) increasing. D) More information is needed to answer the question. Answer: C Topic: Marginal Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

7) A marginal cost curve A) is upward sloping. B) shows that as more of a good is produced, opportunity costs of producing another unit increase. C) is bowed inward so that its slope can become negative. D) Both answers A and B are correct. Answer: D Topic: Marginal Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

Quantity of beans Quantity of carrots (bushels) (bushels) 5 0 4 5 8 9 2 12 1 14 0 15 8) The table above represents different points along a production possibilities curve. What is the marginal cost of moving from 2 bushels to 3 bushels of beans? A) 9 bushels of carrots per bushel of beans B) 12 bushels of carrots per bushel of beans C) 3 bushels of carrots per bushel of beans D) 21 bushels of carrots per bushel of beans Answer: C Topic: Marginal Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

9) Victor currently produces nuts and bolts at point a in the figure. Victor's marginal cost of producing an additional nut is ________. A) 1 bolt per nut B) 1/2 bolt per nut C) 8/6 bolts per nut D) 8 bolts per nut Answer: A Topic: Marginal Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

10) In the figure above, the marginal cost of producing a computer A) increases as more computers are produced. B) stays the same as more computers are produced. C) decreases as more computers are produced. D) is the same as the marginal cost of producing a television set. Answer: A Topic: Marginal Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

11) In the figure above, the marginal cost of the second computer is A) 2 television sets per computer. B) 3 television sets per computer. C) 5 television sets per computer. D) 30 television sets per computer. Answer: B Topic: Marginal Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

12) In the figure above, the marginal cost of the fifth computer is A) 0 television sets per computer. B) 4 television sets per computer. C) 20 television sets per computer. D) 35 television sets per computer. Answer: C Topic: Marginal Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 57 Copyright © 2014 Pearson Education, Inc.

13) Marginal cost curves slope A) upward because of increasing opportunity cost. B) upward because of decreasing opportunity cost. C) downward because of increasing opportunity cost. D) downward because of decreasing opportunity cost. Answer: A Topic: Marginal Cost Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

14) Marginal benefit is the benefit A) that your activity provides to someone else. B) of producing a good or service when the total benefit from the good or service exceeds its total cost. C) that is received from consuming one more unit of a good or service. D) of consuming another good or service divided by the total number of goods or services produced. Answer: C Topic: Marginal Benefit Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

15) Marginal benefit is the A) benefit that a person receives from consuming one more unit of a good or service. B) amount of one good or service that a person gains when another good or service is consumed. C) minimum amount a person is willing to pay for one more unit of a good or service. D) dollars sacrificed to purchase a good or service. Answer: A Topic: Marginal Benefit Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

16) The marginal benefit from a good is the amount a person is willing to pay for A) all of the good the person consumes. B) one more unit of the good. C) all of the units of the good the person consumes divided by the number of units he or she purchases. D) one more unit of the good divided by the number of units purchased. Answer: B Topic: Marginal Benefit Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

17) We measure the marginal ________ of a good by what a ________ for another unit of the good. A) benefit; person must pay B) cost; person is willing to pay C) benefit; person is willing to pay D) cost; person's preferences are Answer: C Topic: Marginal Benefit Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

18) The marginal benefit of a good or service A) increases as more is consumed. B) decreases as more is consumed. C) remains constant as more is consumed. D) decreases as less is consumed. Answer: B Topic: Marginal Benefit Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

19) The principle of decreasing marginal benefit means that as the quantity of a good consumed A) decreases, its marginal benefit decreases. B) increases, its marginal benefit decreases. C) increases, its total benefit decreases. D) None of the above answers is correct. Answer: B Topic: Marginal Benefit Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

20) As a person consumes more of a good, the A) marginal benefit increases. B) marginal benefit decreases. C) marginal benefit increases or decreases depending whether or not the economy is on the PPF. D) price of the good falls. Answer: B Topic: Marginal Benefit Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

21) The principle of decreasing marginal benefit implies that the A) additional benefit from obtaining one more of a good or service decreases as more is consumed. B) additional benefit from obtaining one more of a good or service increases as more is consumed. C) total benefit from obtaining more of a good or service decreases as more is consumed. D) total benefit from obtaining more of a good or service remains the same as more is consumed. Answer: A Topic: Marginal Benefit Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

22) Which of the following is TRUE regarding marginal benefit? I. The marginal benefit curve shows the benefit firms receive by producing another unit of a good. II. Marginal benefit increases as more of a good is consumed. A) I and II B) I only C) II only D) neither I nor II Answer: D Topic: Marginal Benefit Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

23) Susan likes to drink sodas. The ________ soda Susan drinks, the ________ of the last soda. A) more; higher the marginal benefit B) less; higher the opportunity cost C) less; lower the marginal benefit D) more; lower the marginal benefit Answer: D Topic: Marginal Benefit Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

24) Marginal benefit is the benefit ________ one more unit of the good and ________ of the good increases. A) of producing; increases as production B) of producing; decreases as production C) from consuming; increases as consumption D) from consuming; decreases as consumption Answer: D Topic: Marginal Benefit Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

25) A marginal benefit curve shows A) the efficient use of resources. B) the quantity of one good that must be forgone to get more of another good. C) the quantity of one good that people are willing to forgo to get another unit of another good. D) there are increasing opportunity costs. Answer: C Topic: Marginal Benefit Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

26) Marginal benefit curves slope A) upward because of increasing opportunity cost. B) upward, but not because of increasing opportunity cost. C) downward because of increasing opportunity cost. D) downward, but not because of increasing opportunity cost. Answer: D Topic: Marginal Benefit Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

27) Marginal benefit curves slope ________ and marginal cost curves slope ________. A) upward; upward B) upward; downward C) downward; downward D) downward; upward Answer: D Topic: Marginal Benefit Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

28) Suppose that the government is trying to decide between allocating its resources to build more dams or to build more freeways. In terms of forgone dams, as more freeways are constructed, the marginal benefit of additional freeways ________ and the marginal cost of additional freeways ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: C Topic: Marginal Benefit and Marginal Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

Television sets Willingness to pay (millions per (computers per year) television set) 1 2.5 2 2.0 3 1.5 4 1.0 5 0.5 29) In the table above, the marginal benefit of the 4 millionth television set is A) negative 0.5 computers per television set. B) 0.25 computers per television set. C) 0.5 computers per television set. D) 1.0 computer per television set. Answer: D Topic: Marginal Benefit Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

30) Resource use is allocatively efficient when A) we produce the goods with the highest opportunity cost. B) we produce the goods with the lowest opportunity cost. C) we cannot produce more goods and services. D) we produce the amount of the different goods we value most highly. Answer: D Topic: Allocatively Efficient Use of Resources Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Communication

31) When we cannot produce more of any good without giving up some other good that we value more highly, we have achieved A) production. B) equity. C) allocative efficiency. D) the production point where the marginal benefit exceeds the marginal cost by as much as possible. Answer: C Topic: Allocatively Efficient Use of Resources Skill: Recognition Status: Modified 10th edition AACSB: Communication

32) If the marginal benefit of a good exceeds its marginal cost, A) we've achieved efficient resource use. B) we should produce more to achieve the allocatively efficient use of resources. C) we should produce less to achieve the allocatively efficient use of resources. D) we cannot tell if more or less should be produced to achieve the allocatively efficient use of resources. Answer: B Topic: Allocatively Efficient Use of Resources Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication

33) When an economy produces at its allocatively efficient production point, A) scarcity is not a problem. B) resources are not limited. C) a society can increase the production of all goods. D) a society can increase the production of one good only by decreasing the production of some other good that is valued more highly. Answer: D Topic: Allocatively Efficient Use of Resources Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Communication

34) Allocative efficiency occurs when A) we cannot produce more of any good without giving up some other good that we value more highly. B) we cannot produce more of any one good without giving up some other good. C) marginal benefit exceeds marginal cost. D) opportunity costs are decreasing. Answer: A Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Communication

35) Allocative efficiency occurs when it is A) possible to produce more of one good without giving up the production of some other good. B) possible to produce more of all goods. C) not possible to produce more of one good without giving up the production of some other good that is valued less highly. D) not possible to produce more of one good without giving up the production of some other good that is valued more highly. Answer: D Topic: Allocatively Efficient Use of Resources Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

36) An efficient allocation of resources occurs when we A) produce the goods and services that people need. B) cannot produce more of a good or service without giving up some other good or service that we value more highly. C) produce the goods and services that people want. D) cannot produce more of a good or service without giving up some other good or service that we need. Answer: B Topic: Allocatively Efficient Use of Resources Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

37) Which of the following statements can used to describe efficiency? I. Efficiently using resources means that producers make the highest profits possible. II. Using resources efficiently means that we cannot produce more of one good without producing less of another good that has a higher value. III. Resource use is efficient when we produce goods and services that people value most highly. A) I only B) I and II C) II and III D) I, II and III Answer: C Topic: Allocatively Efficient Use of Resources Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

38) Resource use is allocatively efficient when marginal benefit is A) greater than marginal cost. B) equal to marginal cost. C) less than marginal cost. D) at its maximum value. Answer: B Topic: Allocatively Efficient Use of Resources Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Communication

39) Resource use is allocatively efficient A) when marginal benefit equals marginal cost. B) whenever marginal benefit exceeds marginal cost. C) whenever marginal cost exceeds marginal benefit. D) when the maximum possible quantity is being produced. Answer: A Topic: Allocatively Efficient Use of Resources Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Communication

40) Resource use is allocatively efficient if the A) total cost of what the resource produces is less than the total benefit of what is produced. B) total cost of what the resource produces is equal to the total benefit of what is produced. C) marginal benefit of what the resource produces has diminished to zero. D) marginal cost of what the resource produces is equal to the marginal benefit of what is produced. Answer: D Topic: Allocatively Efficient Use of Resources Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Communication

41) A country produces only pencils and erasers. Pencil production is allocatively efficient if the marginal ________ of a pencil equals the marginal ________ of ________. A) cost; benefit; an eraser B) cost; cost; an eraser C) benefit; benefit; an eraser D) benefit; cost; a pencil Answer: D Topic: Allocatively Efficient Use of Resources Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Communication

42) If the marginal benefit of consuming another unit of a good is positive, then to reach the allocatively efficient level of output more of the good should be produced and consumed A) no matter what.. B) as long as the consumer can afford to pay for it. C) if the total benefit of the good is greater than its total cost. D) if the marginal benefit of the good is greater than its marginal cost. Answer: D Topic: Allocatively Efficient Use of Resources Skill: Conceptual Status: Modified 10th edition AACSB: Communication

Quantity (pizzas per day) 10 20 30 40 50 60 70

Marginal Marginal cost benefit (cans per day) (cans per day) 26 14 24 16 22 18 20 20 18 22 16 24 14 26

43) The table above shows the marginal benefit from pizza and the marginal cost of pizza in cans of soda forgone. If ________ pizzas are produced, the quantity of soda that people are willing to give up to get an additional pizza is more than the quantity of soda that they must give up to get that additional pizza. A) any quantity other than 40 B) 40 C) more than 40 D) fewer than 40 Answer: D Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

44) The table above shows the marginal benefit from pizza and the marginal cost of pizza in cans of soda forgone. The allocatively efficient quantity of pizza is ________ pizzas per day. A) 70 B) 10 C) more than 70 D) 40 Answer: D Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: New 10th edition AACSB: Analytical Skills

Camel rides (per day)

Marginal benefit (tubes of sunscreen)

1 2 3 4 5 6

20 18 16 14 12 10

Marginal cost (tubes of sunscreen) 11 12 13 14 15 16

45) Leisure Land produces only sun screen and camel rides. The table shows the marginal benefit and marginal cost schedules for sun screen and camel rides. The allocatively efficient number of camel rides is ________. A) 1 ride per day because the marginal benefit exceeds the marginal cost by as much as possible B) 2 rides per day C) 4 rides per day D) 6 rides per day because that is the maximum number of rides Answer: C Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

Quantity of pizza 5 6 7 8

Marginal benefit 25 20 15 10

Marginal cost 11 13 15 17

46) The table above represents the marginal cost and marginal benefit associated with pizza (in terms of movies). What quantity of pizza should be produced if resources are to be used efficiently? A) 5 pizzas B) 6 pizzas C) 7 pizzas D) 8 pizzas Answer: C Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

47) According to the diagram in the above figure, what is the marginal benefit of consuming the 3 millionth gallon of gasoline per month? A) 5 pounds of shrimp per gallon of gasoline B) 3 pounds of shrimp per gallon of gasoline C) 2 pounds of shrimp per gallon of gasoline D) 1 pound of shrimp per gallon of gasoline Answer: D Topic: Marginal Benefit Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

48) According to the diagram in the figure above, what is the marginal cost of producing the 3 millionth gallon of gasoline per month? A) 5 pounds of shrimp per gallon of gasoline B) 4 pounds of shrimp per gallon of gasoline C) 3 pounds of shrimp per gallon of gasoline D) 1 pound of shrimp per gallon of gasoline Answer: A Topic: Marginal Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

49) According to the diagram in the figure above, an allocatively efficient use of resources requires that production and consumption of gasoline be A) 1 million gallons of gasoline per month. B) 2 million gallons of gasoline per month. C) 3 million gallons of gasoline per month. D) 4 million gallons of gasoline per month. Answer: B Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

50) In the above figure, the curve labeled a is the ________ curve and the curve labeled b is the ________ curve. A) marginal cost; marginal benefit B) marginal cost; trade line C) marginal benefit; trade line D) production possibilities frontier; trade line Answer: A Topic: Marginal Benefit and Marginal Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

51) In the above figure, curve b shows the A) bottles of soda that people are willing to forgo to get another bicycle. B) bottles of soda that people must forgo to get another bicycle. C) benefits of producing more bicycles is greater than the benefits of producing more soda. D) benefits of producing more soda is greater than the benefits of producing more bicycles. Answer: A Topic: Marginal Benefit Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

52) In the above figure, when 2000 bicycles are produced each month, we can see that A) the marginal benefit from another bicycle is greater than the marginal cost of another bicycle. B) more bicycles should be produced to reach the allocatively efficient level of output. C) the economy is very efficient at the production of bicycles because the marginal benefit exceeds the marginal cost. D) Both answers A and B are correct. Answer: D Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

53) In the above figure, if 4000 bicycles are produced per month, A) marginal benefit is greater than marginal cost. B) fewer bicycles should be produced to reach the allocatively efficient level of output. C) the marginal cost of production is 2 bottles of soda per bicycle. D) Both answers A and B are correct. Answer: B Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

54) In the above figure, if 2 million computers are produced per year then the ________ should be produced to achieve the allocatively efficient use of resources A) marginal cost of a computer exceeds the marginal benefit of a computer, so more computers B) marginal cost of a computer exceeds the marginal benefit of a computer, so fewer computers C) marginal benefit of a computer exceeds the marginal cost of a computer, so more computers D) marginal benefit of a computer exceeds the marginal cost of a computer, so fewer computers Answer: C Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

55) In the figure above, if 4 million computers are produced per year then the ________ should be produced to achieve the allocatively efficient use of resources A) marginal cost of a computer exceeds the marginal benefit of a computer, so more computers B) marginal cost of a computer exceeds the marginal benefit of a computer, so fewer computers C) marginal benefit of a computer exceeds the marginal cost of a computer, so more computers D) marginal benefit of a computer exceeds the marginal cost of a computer, so fewer computers Answer: B Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

56) In the figure above, the allocatively efficient output of computers is A) 2 million per year. B) 3 million per year. C) 4 million per year. D) the largest amount possible. Answer: B Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

57) In the figure above, at the allocatively efficient level of computer production consumers are willing to give up A) 0 televisions per computer. B) between 0 and 3 televisions per computer. C) 3 televisions per computer. D) more than 3 televisions per computer. Answer: C Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

58) In the figure above, at the allocatively efficient level of computer production the marginal cost of producing a computer is A) 0 televisions per computer. B) between 0 and 3 televisions per computer. C) 3 televisions per computer. D) more than 3 televisions per computer. Answer: C Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

59) The most anyone is willing to pay for another purse is $30. Currently the price of a purse is $40, and the cost of producing another purse is $50. The marginal benefit of a purse is A) $50. B) $40. C) $30. D) an amount not given in the answers above. Answer: C Topic: Study Guide Question, Marginal Benefit Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

60) If the marginal benefit from another computer exceeds the marginal cost of the computer, then to use resources allocatively efficiently, A) more resources should be used to produce computers. B) fewer resources should be used to produce computers. C) if the marginal benefit exceeds the marginal cost by as much as possible, the efficient amount of resources are being used to produce computers. D) None of the above is correct because marginal benefit and marginal cost have nothing to do with using resources allocatively efficiently. Answer: A Topic: Study Guide Question, Efficient Use of Resources Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

3 Economic Growth 1) An expansion of the production possibilities frontier is A) called economic growth. B) proof that scarcity is not a binding constraint. C) a free gift of nature. D) something that has occurred only rarely in history. Answer: A Topic: Economic Growth Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

2) Economic growth can be represented by A) a movement down the production possibilities frontier (PPF). B) a movement up the production possibilities frontier (PPF). C) an inward shift of the production possibilities frontier (PPF). D) an outward shift of the production possibilities frontier (PPF). Answer: D Topic: Economic Growth Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

3) When economic growth occurs, the A) economy moves along its production possibilities frontier. B) production possibilities frontier shifts outward. C) production possibilities frontier becomes steeper. D) production possibilities frontier shifts outward but no longer limits the amount that can be produced. Answer: B Topic: Economic Growth Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

4) After Hurricane Katrina devastated parts of Mississippi and New Orleans in 2005, we can be sure that the production possibilities frontier for that area temporarily A) shifted inward, toward the origin. B) shifted outward, away from the origin. C) became flatter. D) became steeper. Answer: A Topic: Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

5) Economic growth is the result of all of the following EXCEPT A) technological change. B) capital accumulation. C) opportunity cost. D) investment in human capital. Answer: C Topic: Economic Growth Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

6) A key factor that leads to economic growth is A) human capital accumulation. B) increasing current consumption. C) avoiding the opportunity cost of investment. D) Both answers A and B are correct. Answer: A Topic: Economic Growth Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

7) Technological progress makes the production possibilities frontier A) shift inward toward the origin. B) become more linear and less bowed. C) shift outward from the origin. D) become less linear and more bowed. Answer: C Topic: Economic Growth Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

8) Economic growth is shown on the production possibilities frontier as A) a movement from one point on the PPF to another. B) an outward shift in the PPF. C) an inward shift in the PPF. D) the curvature of the PPF. Answer: B Topic: Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

9) Economic growth can be pictured in a production possibilities frontier diagram by A) making the production possibilities frontier more bowed out. B) making the production possibilities frontier less bowed out. C) shifting the production possibilities frontier outward. D) shifting the production possibilities frontier inward. Answer: C Topic: Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

10) Using a production possibilities frontier, economic growth is illustrated by a A) point inside the curve. B) point on the curve. C) movement from one point on the curve to another point on the curve. D) rightward shift of the curve. Answer: D Topic: Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

11) Capital accumulation definitely A) has no impact on the production possibilities frontier. B) shifts the production possibilities frontier inward. C) makes the production possibilities frontier steeper. D) shifts the production possibilities frontier outward. Answer: D Topic: Economic Growth Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

12) President Obama has proposed a goal that everyone complete at least one year of formal education or training beyond high school. This policy would A) increase human capital and increase economic growth. B) increase physical capital and increase economic growth. C) increase financial capital and increase economic growth. D) eliminate opportunity costs and increase economic growth. Answer: A Topic: Production Possibilities Skill: Analytical Status: New AACSB: Analytical Skills

13) Economic growth comes from ________. A) people willing to increase their skills in which case, economic growth is free B) producing more goods than people want to consume C) capital accumulation and the avoidance of opportunity cost D) capital accumulation and technological advance Answer: D Topic: Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

14) The production possibilities frontier shifts as A) tastes and preferences change. B) the money supply grows or shrinks. C) technology changes. D) the unemployment rate changes. Answer: C Topic: Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

15) Technological change A) generates economic growth. B) shifts the PPF leftward. C) creates inefficiency. D) Both answers A and C are correct. Answer: A Topic: Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

16) As an economy's capital stock increases, the economy A) generally experiences increased unemployment of other resources, such as labor. B) generally decides to engage in international trade. C) experiences economic growth. D) gains an absolute advantage in the production of capital goods. Answer: C Topic: Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

17) An increase in the production of capital goods A) must increase the current production of consumer goods. B) must decrease the future production of consumer goods. C) shifts the production possibilities frontier inward in the future. D) shifts the production possibilities frontier outward in the future. Answer: D Topic: Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

18) Suppose a scientific breakthrough made free solar power available in unlimited quantities in the United States. The effect of this invention would be to move the A) United States beyond its production possibilities frontier. B) United States inside its production possibilities frontier. C) U.S. production possibilities frontier outward. D) U.S. production possibilities frontier inward. Answer: C Topic: Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

19) In March a factory used new technology to produce its output. Then in August a fire destroys half the factory. The new technology shifted the factory's PPF ________ and the fire shifted it ________. A) inward; outward B) outward; inward C) outward; outward D) inward; inward Answer: B Topic: Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

20) Suppose the United States discovers a way to produce clean nuclear fuel. The effect of this discovery would be to A) lead the United States to produce less nuclear fuel. B) force the United States to produce at a point inside its PPF. C) shift the U.S. PPF outward. D) shift the U.S. PPF inward. Answer: C Topic: Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

21) Consider a production possibilities frontier with corn on the vertical axis and cars on the horizontal. Unusually good weather for growing corn shifts A) the horizontal intercept rightward and the vertical intercept upward. B) the horizontal intercept rightward but does not shift the vertical intercept. C) the vertical intercept upward but does not shift the horizontal intercept. D) neither the horizontal intercept nor the vertical intercept. Answer: C Topic: Economic Growth Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

22) In the figure above, how can the economy represented by the production possibilities frontier move from point C to point F? A) Increase the available amount of resources. B) Increase the level of technology. C) Redistribute the existing resources to produce more apples and fewer oranges. D) First move to point B and then move to point F. Answer: C Topic: Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

23) In the figure above, a point showing an inefficient production point is point A) A. B) B. C) C. D) D. Answer: D Topic: Production Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

24) In the figure above, what can be said about point B? A) It can be reached only after economic growth occurs. B) It can be attained only if some resources are left unused. C) It represents all resources being devoted to the production of apples. D) It represents all resources being devoted to the production of oranges. Answer: A Topic: Economic Growth Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

25) In the figure above, point D is A) less production efficient than point C. B) production efficient and point A is not production efficient. C) not production efficient and point B is production efficient. D) production efficient and point B is not production efficient. Answer: B Topic: Production Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

26) In the figure above, point A is undesirable because A) there is an inefficient use of resources. B) too much health care is being produced. C) the opportunity costs of health care is too high. D) point E is a more realistic option in this economy. Answer: A Topic: Production Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

27) In the figure above, the opportunity cost of moving from point C to point D is A) the loss in production in the health care sector. B) the increase in production in the education sector. C) zero. D) the loss in production in the education sector. Answer: A Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

28) In the figure above, point E could be obtained if A) resources were shifted from education to health care. B) resources were used more efficiently. C) society's resources increased. D) resources were shifted from health care to education. Answer: C Topic: Economic Growth Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

29) Two countries, Alpha and Beta, have identical production possibilities frontiers illustrated above. If Alpha produces at point a and Beta produces at point b, then ________. A) Beta's economic growth rate will exceed Alpha's B) Alpha consumes less than Beta today, but it will grow faster than Beta C) Alpha's and Beta's economic growth rates will be the same D) Beta's future consumption will be greater than Alpha's Answer: B Topic: Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

30) In the figure above, an economy would grow fastest if it produces at point A) A. B) B. C) C. D) D. Answer: A Topic: Economic Growth Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

31) In 2006, Country X and Country Y had the same production possibilities, illustrated in the figure above. Country X chose to produce at point A, while country Y chose to produce at point B. In 2012, most likely, Country X will be at point such as ________ while Country Y will be at point such as ________. A) A; B B) B; A C) N; Q D) Q; N Answer: C Topic: Economic Growth Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

32) In the above figure, in order for this country to move from production possibilities frontier PPF1 to PPF2, it might A) increase the skills and productivity of its work force. B) put all unemployed resources to work producing desired output. C) engage in exchange with other nations. D) increase the average level of prices for all goods produced and consumed. Answer: A Topic: Economic Growth Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

33) In the above figure, once on PPF2, a country would grow slowest by producing at point A) A. B) B. C) C. D) D. Answer: D Topic: Economic Growth Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

34) The figure above shows the production possibilities frontiers for four nations that have identical production possibilities frontiers in the present. The one that will grow most rapidly in the future is most likely to be producing at point A) A. B) B. C) C. D) D. Answer: C Topic: Economic Growth Rate Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

35) Based on the above, which figure shows the impact of a decrease in the population available to work? A) Figure A B) Figure B C) Figure C D) Figure D Answer: D Topic: Economic Growth Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

36) Which graph shows the impact of scientists developing a more powerful fertilizer? A) Figure A B) Figure B C) Figure C D) Figure D Answer: A Topic: Economic Growth Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

37) Economic growth A) leads to less consumption in the present and increased consumption in the future. B) is free. C) is the major reason we face scarcity. D) allows us to increase our consumption in the present and in the future. Answer: A Topic: The Cost of Economic Growth Skill: Conceptual Status: Modified 10th edition AACSB: Communication

38) The opportunity cost of more capital goods today is A) fewer capital goods in the future. B) fewer consumer goods in the future. C) fewer consumer goods today. D) more unemployed resources in the future. Answer: C Topic: The Cost of Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

39) The opportunity cost of economic growth is A) future consumption that a nation gets if it gives up some present consumption. B) future consumption that a nation gives up to consume more today. C) present consumption that a nation gives up to accumulate capital. D) present investment that a nation gives up to increase its economic growth. Answer: C Topic: The Cost of Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

40) An opportunity cost of economic growth is A) essentially zero because economic growth leads to such large gains in the long run. B) the decrease in production of consumption goods in the present time period. C) decreased by the creation of capital goods rather than consumption goods. D) so high that places such as Hong Kong have had to do without it. Answer: B Topic: The Cost of Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

41) The tradeoff between current consumption and the production of capital goods also reflects a tradeoff between A) the future production of capital goods and future consumption of goods. B) economic growth and technological change. C) satisfying today the needs of the poor and the wants of the wealthy. D) current consumption and future consumption. Answer: D Topic: The Cost of Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

42) President Obama has proposed a goal that everyone complete at least one year of formal education or training beyond high school. This policy would ________ the production of current consumption goods and services and ________ the future production of consumption goods and services. A) decrease; increase B) increase; decrease C) not change; increase D) increase; increase Answer: A Topic: The Cost of Economic Growth Skill: Analytical Status: New AACSB: Analytical Skills

43) Economic growth A) creates unemployment. B) has no opportunity cost. C) shifts the PPF outward. D) makes it more difficult for a nation to produce on its PPF. Answer: C Topic: Study Guide Question, Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

44) The PPF shifts if A) the unemployment rate falls. B) people decide they want more of one good and less of another. C) the prices of the goods and services produced rise. D) the resources available to the nation change. Answer: D Topic: Study Guide Question, Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

45) An increase in the nation's capital stock will A) shift the PPF outward. B) cause a movement along the PPF upward and leftward. C) cause a movement along the PPF downward and rightward. D) move the nation from producing within the PPF to producing at a point closer to the PPF. Answer: A Topic: Study Guide Question, Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

46) One of the opportunity costs of economic growth is A) capital accumulation. B) technological change. C) reduced current consumption. D) the gain in future consumption. Answer: C Topic: Study Guide Question, Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

47) In general, the more resources that are devoted to technological research, the A) greater is current consumption. B) higher is the unemployment rate. C) faster the PPF shifts outward. D) more the PPF will bow outward. Answer: C Topic: Study Guide Question, Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

48) An increase in the nation's capital stock will A) shift the PPF outward. B) cause a movement along the PPF up and to the left. C) cause a movement along the PPF down and to the right. D) move the nation from producing within the PPF to producing at a point closer to the PPF. Answer: A Topic: Study Guide Question, Economic Growth Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

4 Gains From Trade 1) Because of the existence of comparative advantage, the total output of goods is higher when each producer A) produces many different goods. B) produces at the midpoint of its PPF. C) specializes in the production of one good or a few goods. D) makes both intermediate and final goods. Answer: C Topic: Comparative Advantage Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

2) A person has a comparative advantage in producing a particular good if that person A) has higher productivity in producing it than anyone else has. B) can produce it at lower opportunity cost than anyone else can. C) has less desire to consume that good than anyone else has. D) has more human capital related to that good than anyone else has. Answer: B Topic: Comparative Advantage Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

3) Comparative advantage is A) the ability to perform an activity at a lower opportunity cost than anyone else. B) the ability to perform an activity at a higher opportunity cost than anyone else. C) the ability to perform an activity at a zero opportunity cost. D) another name for absolute advantage. Answer: A Topic: Comparative Advantage Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

4) A person has a comparative advantage in an activity if that person can A) produce more goods in a given amount of time than another person. B) produce fewer goods in a given amount of time than another person. C) perform the activity at a lower opportunity cost than anyone else. D) perform that activity at a higher opportunity cost than anyone else. Answer: C Topic: Comparative Advantage Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

5) A person has a comparative advantage in an activity whenever he or she A) has an absolute advantage in the activity. B) can perform the activity at a lower opportunity cost than can anyone else. C) can do the activity in less time than anyone else. D) can do everything better than anyone else. Answer: B Topic: Comparative Advantage Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

6) A country possesses a comparative advantage in the production of a good if A) the opportunity cost in terms of forgone output of alternative goods is lower for this country than it is for its trading partners. B) it possesses an absolute advantage in the production of this good. C) it is able to produce more of this good per hour than can any other country. D) all of the above Answer: A Topic: Comparative Advantage Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

7) Individuals A and B both produce good X. A has a comparative advantage in the production of good X if A A) has a lower opportunity cost of producing good X than has B. B) has a lower opportunity cost of producing good X than of producing good Y. C) can produce more units of X in a given time period than can B. D) can produce X using newer technology than can B. Answer: A Topic: Comparative Advantage Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

8) Which of the following describes comparative advantage? A) To produce a bushel of wheat Farmer John must give up 2 bushels of corn whereas Farmer Ben must give up 3 bushels of corn. B) Company A can produce 4 boxes of cereal in a day whereas Company B can produce 5 boxes of cereal in a day. C) Firm A can produce a good at a cost of $3 and Firm B can produce the good at a cost of $4. D) Jane can type 50 words per minute and Joe can type 60 words per minute. Answer: A Topic: Comparative Advantage Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication

9) In an eight-hour day, Andy can produce either 24 loaves of bread or 8 pounds of butter. In an eighthour day, Bob can produce either 8 loaves of bread or 8 pounds of butter. Andy has a comparative advantage in the production of A) bread, while Bob has a comparative advantage in the production of butter. B) butter, while Bob has a comparative advantage in the production of bread. C) bread, and neither has a comparative advantage in the production of butter. D) both bread and butter. Answer: A Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

10) The kitchen manager at an Italian restaurant is deciding what assignments he should give to his two cooks, John and David. John can make 25 pizzas or 40 servings of pasta per hour and David can make 20 pizzas or 30 servings of pasta. Which of the following should be the manager's choice? A) Fire David because he is not as productive as John. John will do both jobs. B) John will make pizza because he has comparative advantage in making pizza. C) David will make pizza because he has comparative advantage in making pizza. D) John and David both will spend half their time making pizza and half their time making pasta because each has a comparative advantage in making pizza. Answer: C Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

11) An economy produces only food and shelter. There are two individuals in the economy: Bill and Mary. Mary's opportunity cost of producing 1 unit of shelter is 2 units of food. Bill's opportunity cost of producing 1 unit of shelter is 4 units of food. A) Bill has a comparative advantage over Mary in the production of shelter. B) Mary has a comparative advantage over Bill in the production of food. C) Mary has a comparative advantage over Bill in the production of shelter. D) Bill has an absolute advantage over Mary in the production of shelter. Answer: C Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

12) Country A can produce 1 cello by giving up the production of 5 guitars. Country B can produce 1 guitar by giving up the production of 4 cellos. In which good does country A have a comparative advantage? A) guitars B) cellos C) both goods D) neither good Answer: A Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

13) The opportunity cost of producing one ton of wheat for Country Gamma is 4 tons of corn. The opportunity cost of producing one ton of wheat for Country Beta is 8 tons of corn. Which country has the comparative advantage in the production of wheat? A) Gamma B) Beta C) Neither country has a comparative advantage. D) Both countries have the comparative advantage. Answer: A Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

14) Suppose that in an hour Joe can prepare 10 sandwiches or 5 pizzas. The opportunity cost of Joe producing one sandwich is A) 2 pizzas. B) 1/2 pizza. C) 5 pizzas. D) 1 pizza. Answer: B Topic: Comparative Advantage, Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

15) Suppose Joe can prepare 10 sandwiches or 5 pizzas in an hour and Beth can produce 12 sandwiches or 9 pizzas. Which of the following is true? A) Beth should produce pizza because she has a higher opportunity cost of producing pizza than does Joe. B) Beth should produce pizza because she has a lower opportunity cost of producing pizza than does Joe. C) Joe should produce pizza because he has a higher opportunity cost of producing pizza than does Beth. D) Joe should produce pizza because he has a lower opportunity cost of producing pizza than does Beth. Answer: B Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills 94 Copyright © 2014 Pearson Education, Inc.

16) Suppose Joe can prepare 20 sandwiches or 10 pizzas in an hour and Beth can produce 36 sandwiches or 27 pizzas. The concept of comparative advantage concludes that A) Beth should produce both goods because she can produce more of both goods in an hour than can Joe. B) Beth should produce sandwiches and Joe should produce pizza. C) Beth should produce pizza and Joe should produce sandwiches. D) Beth should produce both goods and Joe should produce sandwiches. Answer: C Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

17) Tom takes 20 minutes to cook an egg and 5 minutes to make a sandwich. Jerry takes 15 minutes to cook an egg and 3 minutes to make a sandwich. Tom has a comparative advantage in ________ and Jerry has a comparative advantage in ________. A) cooking eggs; making sandwiches B) making sandwiches; cooking eggs C) neither of these activities; both activities D) both activities; neither of these activities Answer: A Topic: Comparative Advantage Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

18) Tom takes 20 minutes to cook an egg and 5 minutes to make a sandwich. Jerry takes 15 minutes to cook an egg and 3 minutes to make a sandwich. If Tom and Jerry trade A) Tom will benefit and Jerry will not. B) Jerry will benefit and Tom will not. C) both will benefit. D) none of them will benefit. Answer: C Topic: Comparative Advantage Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

19) Tom takes 20 minutes to cook an egg and 5 minutes to make a sandwich. Jerry takes 15 minutes to cook an egg and 3 minutes to make a sandwich. Both individuals will be better off if A) Tom trades sandwiches in exchange for eggs. B) Jerry trades sandwiches in exchange for eggs. C) they trade, no matter who trades sandwiches and who eggs. D) they don't trade. Answer: B Topic: Comparative Advantage Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

20) In one week Alice can produce 5 pairs of shoes or 4 bookshelves while Roger can produce 10 pairs of shoes or 6 bookshelves. Alice has ________ advantage in producing ________. A) an absolute; shoes B) a comparative; shoes C) an absolute; bookshelves D) a comparative; bookshelves Answer: D Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

21) In one week Alice can produce 5 pairs of shoes or 4 bookshelves while Roger can produce 10 pairs of shoes or 6 bookshelves. Alice should specialize in the production of A) shoes. B) bookshelves. C) either shoes or bookshelves. D) neither shoes nor bookshelves. Answer: B Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

22) In an hour, Andy can make either 5 pizzas or 12 pies and Chris can make either 6 pizzas or 18 pies. ________ advantage in making pizzas. A) Andy has an absolute B) Andy has a comparative C) Chris has a comparative D) None of the above answers is correct. Answer: B Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

23) Betty and Ann live on a desert island. With a day's labor, Ann can produce 8 fish or 4 coconuts; Betty can produce 6 fish or 2 coconuts. Ann's opportunity cost of producing 1 coconut is ________ and she should specialize in the production of ________. A) 8 fish per coconut; fish B) 2 fish per coconut; coconuts C) 6 fish per coconut; coconuts D) 0 fish per coconut; coconuts Answer: B Topic: Comparative Advantage Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

24) Betty and Ann live on a desert island. With a day's labor, Ann can produce 6 fish or 4 coconuts; Betty can produce 3 fish or 1 coconut. Betty's opportunity cost of producing 1 fish is ________, and she should specialize in the production of ________. A) 1/3 coconut per fish; fish B) 2/3 coconut per fish; coconuts C) 1 coconut per fish; fish D) 4 coconuts per fish; fish Answer: A Topic: Comparative Advantage Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

25) Homer and Teddy are stranded on a desert island. To feed themselves each day they can either catch fish or pick fruit. In a day, Teddy could pick 60 pieces of fruit or catch 20 fish. Homer could pick 100 pieces of fruit or catch 150 fish. Which of the following is correct? A) Homer has a comparative advantage in catching fish and Teddy has a comparative advantage in picking fruit. B) Homer has a comparative advantage in picking fruit and Teddy has a comparative advantage in catching fish. C) Homer has a comparative advantage in both catching fish and picking fruit. D) Teddy has a comparative advantage in both catching fish and picking fruit. Answer: A Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

Blue Violet's Orange Rose's production possibilities production possibilities Teapots Coffeepots Teapots Coffeepots (number (number (number (number per week) per week) per week) per week) 150 & 0 75 & 0 100 & 25 50 & 50 50 & 50 25 & 100 0 & 75 0 & 150 26) Two countries, Blue Violet and Orange Rose, produce only two goods: teapots and coffeepots. The table above gives their production possibilities. ________ has a comparative advantage in teapots and ________ has a comparative advantage in coffeepots. A) Orange Rose; Blue Violet B) Blue Violet; Orange Rose C) Blue Violet; Blue Violet D) Orange Rose; Orange Rose Answer: B Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

Blue Violet's Sweet Pansy's production possibilities production possibilities Teapots Coffeepots Teapots Coffeepots (number (number (number (number per week) per week) per week) per week) 150 & 0 150 & 0 100 & 25 100 & 50 50 & 50 50 & 100 0 & 75 0 & 150 27) Two countries, Blue Violet and Sweet Pansy, produce only two goods: teapots and coffeepots. The table above gives their production possibilities. A) Blue Violet has a comparative advantage in teapots. B) Sweet Pansy has a comparative advantage in teapots. C) Both have a comparative advantage in teapots. D) Sweet Pansy has an absolute advantage in teapots. Answer: A Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

28) Two countries, Blue Violet and Sweet Pansy, produce only two goods: teapots and coffeepots. The table above gives their production possibilities. With specialization and trade, Sweet Pansy produces ________ and Blue Violet produces ________. A) 150 coffeepots, 150 teapots B) 150 teapots, 75 coffeepots C) 150 teapots and 150 coffeepots, nothing D) 100 teapots and 25 coffeepots, 100 teapots and 50 coffeepots Answer: A Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

Country A Good X Good Y (units of X) (units of Y) 0 16 2 12 4 8 6 4 8 0

Country B Good X Good Y (units of X) (units of Y) 0 12 2 9 4 6 6 3 8 0

29) In the table above, country A is producing 4 units of X and 8 units of Y and country B is producing 4 units of X and 6 units of Y. The opportunity cost of producing more of A) good X is the same for both countries. B) good Y is the same for both countries. C) good X is lower in country A. D) good Y is lower in country A. Answer: D Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

30) In the table above, country A is producing 4 units of X and 8 units of Y and country B is producing 4 units of X and 6 units of Y. Regarding the production of good X, A) country A has an absolute advantage. B) country B has an absolute advantage. C) country A has a comparative advantage. D) country B has a comparative advantage. Answer: D Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

31) In the table above, country B is producing 4 units of X and 6 units of Y. For country B, the opportunity cost of producing an additional unit of X is A) 4 units of Y per unit of X. B) 2 units of Y per unit of X. C) 3/2 units of Y per unit of X. D) 1 unit of Y per unit of X. Answer: C Topic: Comparative Advantage Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

32) In the table above, country B is producing 4 units of X and 6 units of Y. For country B, the opportunity cost of producing an additional unit of Y is A) 1/2 unit of X per unit of Y. B) 2/3 unit of X per unit of Y. C) 2 units of X per unit of Y. D) 3 units of X per unit of Y. Answer: B Topic: Comparative Advantage Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

33) Both Mergatroid and the Geebocks produce only gizmos and widgets. It is possible for Mergatroid to have A) an absolute and a comparative advantage in both products. B) an absolute but not a comparative advantage in both products. C) a comparative but not an absolute advantage in both products. D) neither a comparative nor an absolute advantage in both products. Answer: B Topic: Absolute Advantage Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

34) A person who has an absolute advantage in the production of all goods will A) also have a comparative advantage in the production of all goods. B) not be able to gain from specialization and exchange. C) have a production possibilities frontier with a constant slope. D) have a comparative advantage in the production of some goods but not in the production of others. Answer: D Topic: Absolute Advantage Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

35) A country that has an absolute advantage in producing all goods will ________. A) have a comparative advantage in some goods but not all B) produce all goods at lowest opportunity cost C) have a comparative advantage in all goods D) not gain from specialization and trade Answer: A Topic: Comparative Advantage Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

36) Homer and Teddy are stranded on a desert island. To feed themselves each day they can either catch fish or pick fruit. In a day, Teddy could pick 60 pieces of fruit or catch 20 fish. Homer could pick 100 pieces of fruit or catch 150 fish. Which of the following statements is correct? A) Homer has an absolute advantage in catching fish and Teddy has an absolute advantage in picking fruit. B) Homer has an absolute advantage in picking fruit and Teddy has an absolute advantage in catching fish. C) Homer has an absolute advantage in both catching fish and picking fruit. D) Teddy has an absolute advantage in both catching fish and picking fruit. Answer: C Topic: Absolute Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

Pens Pencils

Don's production possibilities 10 20

Bob's production possibilities 5 15

37) The above table shows the number of pencils or pens that could be produced by Don and Bob in an hour. This schedule shows that A) Don has an absolute advantage in the production of pencils, and Bob has an absolute advantage in the production of pens. B) Bob has an absolute advantage in the production of pencils, and Don has an absolute advantage in the production of pens. C) Don has a comparative advantage in the production of both pencils and pens. D) Bob has a comparative advantage in the production of pencils. Answer: D Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

Steel Concrete

U.S. production possibilities 100 200

France's production possibilities 25 100

38) The above table shows the tons of steel and concrete that can be produced by the United States and France in an hour. From the data in the table, A) France has a comparative advantage in the production of concrete. B) the United States has a comparative advantage in the production of concrete. C) France has an absolute advantage in the production of concrete. D) the United States has a comparative advantage in the production of both goods. Answer: A Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

39) Agnes can produce either 1 unit of X or 1 unit of Y in an hour, while Brenda can produce either 2 units of X or 4 units of Y in an hour. The opportunity cost of producing a unit of X is A) 1 unit of Y per unit of X for Agnes and 2 units of Y per unit of X for Brenda. B) 1 unit of Y per unit of X for Agnes and 1/2 unit of Y per unit of X for Brenda. C) 1 hour for Agnes and 1/2 hour for Brenda. D) 1 hour for Agnes and 2 hours for Brenda. Answer: A Topic: Comparative Advantage Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

40) Agnes can produce either 1 unit of X or 1 unit of Y in an hour, while Brenda can produce either 2 units of X or 4 units of Y in an hour. The opportunity cost of producing a unit of Y is A) 1 unit of X per unit of Y for Agnes and 2 units of X per unit of Y for Brenda. B) 1 unit of X per unit of Y for Agnes and 1/2 unit of X per unit of Y for Brenda. C) 1 hour for Agnes and 1/2 hour for Brenda. D) 1 hour for Agnes and 2 hours for Brenda. Answer: B Topic: Comparative Advantage Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

41) Agnes can produce either 1 unit of X or 1 unit of Y in an hour, while Brenda can produce either 2 units of X or 4 units of Y in an hour. There can be gains from exchange A) if Agnes specializes in the production of X and Brenda specializes in the production of Y. B) if Agnes specializes in the production of Y and Brenda specializes in the production of X. C) only if Agnes becomes faster at producing X. D) only if Brenda becomes faster at producing X or Y. Answer: A Topic: Achieving the Gains From Trade Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

42) Agnes can produce either 1 unit of X or 1 unit of Y in an hour, while Brenda can produce either 2 units of X or 4 units of Y in an hour. A) Brenda has an absolute advantage in the production of X and Y. B) Agnes has a comparative advantage in the production of Y. C) Brenda has a comparative advantage in the production of X. D) Brenda cannot gain from trade. Answer: A Topic: Absolute Advantage Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

43) Vicky currently produces at point a in the figure above. If Vicky moves from point a to point b to point c, her opportunity cost of a modem ________. A) decreases B) increases C) is zero D) remains the same Answer: D Topic: Comparative Advantage, Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

44) The figure above shows Freda's PPF. Freda currently produces 10 packets of fudge and no cookies. If Freda decides to produce 1 packet of cookies, her opportunity cost of the packet of cookies is ________ of fudge. A) 1 packet B) 1/2 packet C) 2 packets D) 0 packets Answer: C Topic: Comparative Advantage, Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

45) An economy produces at point a on the PPF shown in the above figure. A drought reduces the amount of wheat produced and the economy produces at point b. The opportunity cost of a unit of wheat ________. A) remains the same B) increases C) is impossible to calculate without numbers on the axes D) decreases Answer: B Topic: Comparative Advantage, Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

46) In the figure above, Joe is producing at point A. Joe's opportunity cost of producing one shirt is A) 5/3 of a pair of pants per shirt. B) 3/5 of a pair of pants per shirt. C) 5 pairs of pants per shirt. D) 2 pairs of pants per shirt. Answer: D Topic: Comparative Advantage Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

47) In the figure above, Jill is producing at point A. Jill's opportunity cost producing one pair of pants is A) 2 shirts per pair of pants. B) 3 shirts per pair of pants. C) 3/5 of a shirt per pair of pants. D) 5/3 of a shirt per pair of pants. Answer: A Topic: Comparative Advantage Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

48) In the figure above, both Joe and Jill initially produce at point A. If Joe and Jill realize that they each possess a comparative advantage, which outcome can we expect? A) Joe will specialize in shirts and Jill will specialize in pants. B) Joe will specialize in pants and Jill will specialize in shirts. C) Joe and Jill each will be able to consume more than 2 shirts and 2 pairs of pants. D) Both answers B and C are correct. Answer: D Topic: Achieving the Gains From Trade Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

49) One of the largest categories of exports from the United States is now pop culture: movies, music, TV programming, and videos. A direct conclusion from this information is that, compared to other countries, the United States has A) lower wages for producers of pop culture. B) higher wages for producers of pop culture. C) an absolute advantage in producing pop culture. D) a comparative advantage in producing pop culture. Answer: D Topic: Achieving the Gains From Trade Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

50) One of the largest categories of exports from the United States is now pop culture: movies, music, TV programming, and videos. A direct conclusion from this information is that, compared to other countries, the United States has A) lower wages for producers of pop culture. B) higher wages for producers of pop culture. C) a higher opportunity cost of producing pop culture. D) a lower opportunity cost of producing pop culture. Answer: D Topic: Achieving the Gains From Trade Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

51) A country that has a comparative advantage in producing capital goods will ________ a country that has a comparative advantage in consumption goods. A) reap all of the gains from trade when it trades with B) grow slower than C) reap fewer of the gains from trade when it trades with D) specialize in producing capital goods and trade with Answer: D Topic: Achieving the Gains From Trade Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

52) George and Michael can gain from exchange A) unless one has an absolute advantage in all goods. B) if each specializes in the production of the good for which he has the higher opportunity cost. C) if each specializes in the production of the good for which he has the lower opportunity cost. D) unless they have different opportunity costs. Answer: C Topic: Achieving the Gains From Trade Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

53) Tom and Di grow tomatoes and turnips. Tom has a comparative advantage in growing tomatoes if ________. A) Tom can grow more tomatoes than Di can B) his opportunity cost of tomatoes is less than Di's opportunity cost of tomatoes C) his opportunity cost of tomatoes is less than his opportunity cost of turnips D) his marginal benefit from tomatoes is greater than Di's Answer: B Topic: Comparative Advantage Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

54) If Tom and Di specialize in producing the goods in which he and she have a comparative advantage and they exchange goods, then ________. A) each will produce a combination of goods that is within her/his production possibility frontier B) they will lose because they are no longer able to produce and consume both goods C) each will gain because each can consume a combination of goods that is outside her/his production possibility frontier D) one of them will gain and the other will lose Answer: C Topic: Achieving the Gains From Trade Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

55) When a nation has a comparative advantage in the production of a particular good, A) the nation tends to avoid specialization. B) the comparative advantage encourages self-sufficiency. C) the opportunity cost of producing that good is higher than that of other goods. D) the nation can gain from trade. Answer: D Topic: Achieving the Gains From Trade Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

56) To obtain the gains available from comparative advantage, individuals or countries must do more than specialize; they must also A) save. B) invest. C) engage in research and development. D) trade. Answer: D Topic: Achieving the Gains From Trade Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

57) According to the principle of comparative advantage, if a rich country trades with a poor country, then A) the rich country will benefit and the poor country will lose. B) the rich country will lose and the poor country will benefit. C) both countries will benefit. D) neither of the countries will benefit. Answer: C Topic: Achieving the Gains From Trade Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication

58) The idea of comparative advantage implies that people or countries A) should specialize in the production of goods. B) can gain from trading. C) can consume at a point outside their production possibilities frontier. D) all of the above Answer: D Topic: Achieving the Gains From Trade Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

59) By specialization and trade, two individuals can A) consume at a point beyond their individual production possibilities frontiers. B) increase their comparative advantage. C) increase their absolute advantage. D) shift their individual production possibilities frontiers outward. Answer: A Topic: Achieving the Gains From Trade Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

60) Suppose that the United States and Cuba decide to open up trade. If each country specializes in the good in which it has a comparative advantage, ________ will gain from that trade because ________. A) both countries; consumption possibilities in both Cuba and the United States will lie outside their PPFs. B) neither country; their consumption possibilities will not change. C) only the United States; consumption possibilities in Cuba will lie outside its PPF and U.S. consumption possibilities will not change. D) only Cuba; consumption possibilities in Cuba will lie outside its PPF and U.S. consumption possibilities will not change. Answer: A Topic: Achieving the Gains From Trade Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication

61) In one day, Sue can change the oil on 20 cars or change the tires on 20 cars. In one day, Fred can change the oil on 20 cars or change the tires on 10 cars. Sue and Fred can gain from trade if Sue changes the ________ and Fred changes the ________. A) tires; oil B) oil; oil C) oil; tires D) tires; tires Answer: A Topic: Achieving the Gains From Trade Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

62) Missouri can produce 10,000 tons of pecans per year or 5,000 tons of pears per year. Washington can produce 12,000 tons of pecans per year or 48,000 tons of pears per year. Which of the following statements about opportunity cost is correct? A) The opportunity cost of a ton of pecans is 2 tons of pears per ton of pecans for Missouri and 1/4 ton of pears per ton of pecans for Washington. B) The opportunity cost of a ton of pears is 2 tons of pecans per ton of pears for Missouri and 1/4 ton of pecans per ton of pears for Washington. C) The opportunity cost of a ton of pecans is 1/2 ton of pears per ton of pecans for Missouri and 4 tons of pears per ton of pecans for Washington. D) Both answers B and C are correct. Answer: D Topic: Achieving the Gains From Trade Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

63) Missouri can produce 10,000 tons of pecans per year or 5,000 tons of pears per year. Washington can produce 12,000 tons of pecans per year or 48,000 tons of pears per year. Which of the following statements is true? A) Washington has an absolute advantage in the production of both pecans and pears. B) Washington has a comparative advantage in the production of both pecans and pears. C) Washington has a comparative advantage in producing pecans and Missouri has a comparative advantage in producing pears. D) Both answers A and C are correct. Answer: A Topic: Achieving the Gains From Trade Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

64) Missouri can produce 10,000 tons of pecans per year or 5,000 tons of pears per year. Washington can produce 12,000 tons of pecans per year or 48,000 tons of pears per year. If these two states were to engage in trade, which of the following is true? A) Missouri would specialize in pear production and trade pears to Washington pecans. B) Missouri would specialize in pecan production and trade pecans to Washington for pears. C) Washington would produce both pears and pecans and Missouri would produce neither. D) Half of both Washington's and Missouri's resources would be devoted to pears and the other half to pecans because that is the comparative advantage. Answer: B Topic: Achieving the Gains From Trade Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

65) Suppose that a typical German factory can produce 20 cameras or 1 computer in an hour, and that a typical American factory can produce 10 cameras or 1 computer in an hour. The opportunity cost of 20 cameras in terms of computers in Germany is A) 10 computers per camera. B) 2 computers per camera.. C) 1 computer per camera. D) 1/20 of a computer per camera.. Answer: C Topic: Achieving the Gains From Trade Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

66) Suppose that a typical German factory can produce 20 cameras or 1 computer in an hour, and that a typical American factory can produce 10 cameras or one computer in an hour. The opportunity cost of 20 cameras in terms of computers in the United States is A) 10 computers per camera. B) 2 computers per camera. C) 1 computer per camera. D) 1/20 of a computer per camera. Answer: B Topic: Achieving the Gains From Trade Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

67) Suppose that a typical German factory can produce 20 cameras or 1 computer in an hour, and that a typical American factory can produce 10 cameras or one computer in an hour. If Germany produces one less computer and switches resources to cameras, and the United States produces one more computer and takes resources out of cameras, then the net change in camera production in both countries taken together is A) 0. B) minus 10 cameras. C) plus 10 cameras. D) plus 20 cameras. Answer: C Topic: Achieving the Gains From Trade Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

68) Suppose that a typical German factory can produce 20 cameras or 1 computer in an hour, and that a typical American factory can produce 10 cameras or one computer in an hour. Germany wishes to purchase computers from the United States in exchange for cameras. What is the maximum number of cameras per computer that Germany would be willing to pay the United States? A) 10 cameras per computer B) 20 cameras per computer C) 1 camera per computer D) 2 cameras per computer Answer: B Topic: Achieving the Gains From Trade Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

Steel Concrete

U.S. production possibilities 100 200

France's production possibilities 25 100

69) The data in the above table demonstrates that gains from trade can be captured if A) the United States produced both goods. B) the United States produced steel in exchange for concrete produced in France. C) the United States produced concrete in exchange for steel produced in France. D) each country became self-sufficient, produced both goods for itself, and did not engage in trade. Answer: B Topic: Achieving the Gains From Trade Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

70) Anna and Maria produce shirts and ties. The figure above shows Anna's PPF and Maria's PPF. Anna and Maria can achieve the gains from trade if Anna produces ________ and Maria produces ________. A) ties; shirts B) shirts and ties; only ties C) only ties; shirts and ties D) shirts; ties Answer: A Topic: Gains from Trade Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

71) In the figure above, suppose that Mac and Izzie trade and reach point c. Then A) Mac produces outside his production possibilities frontier. B) Izzie produces outside her production possibilities frontier. C) Mac and Izzie both produce outside their production possibilities frontiers. D) neither Mac nor Izzie produce outside their production possibilities frontiers. Answer: D Topic: Gains from Trade Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

72) In the figure above, suppose that Mac and Izzie trade and reach point c. Then A) Mac and Izzie should both produce at point a. B) Mac should produce at point b and Izzie should produce at point d. C) Mac should produce at point d and Izzie should produce at point b. D) Mac and Izzie should both produce at point c. Answer: B Topic: Gains from Trade Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

73) In the figure above, if Mac and Izzie both completely specialized and traded with one another, their joint output would be A) 3 computers and 3 TV sets per month. B) 6 computers and 6 TV sets per month. C) 12 computers and 12 TV sets per month. D) 24 computers and 24 TV sets per month. Answer: C Topic: Gains from Trade Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

74) In the figure above, suppose that Mac and Izzie specialize and trade to reach point c. Mac sends Izzie A) 12 computers in exchange for 12 TVs. B) 12 computers in exchange for 6 TVs. C) 6 computers in exchange for 12 TVs. D) 6 computers in exchange for 6 TVs. Answer: D Topic: Gains from Trade Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

75) In order to achieve the maximum gains from trade, people should specialize according to A) property rights. B) PPF. C) absolute advantage. D) comparative advantage. Answer: D Topic: Study Guide Question, Gains From Trade Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

76) In one day, Brandon can either plow 10 acres or plant 20 acres. In one day, Christopher can either plow 14 acres or plant 14 acres. Which of the following statements about comparative advantage is correct? A) Brandon has a comparative advantage in both plowing and planting. B) Brandon has a comparative advantage only in plowing. C) Brandon has a comparative advantage only in planting. D) Christopher has a comparative advantage in both plowing and planting. Answer: C Topic: Study Guide Question, Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

77) In one day, Brandon can either plow 10 acres or plant 20 acres. In one day, Christopher can either plow 14 acres or plant 14 acres. Brandon and Christopher can A) gain from exchange if Brandon specializes in planting and Christopher specializes in plowing. B) gain from exchange if Brandon specializes in plowing and Christopher specializes in planting. C) exchange, but only Brandon will gain from the exchange. D) exchange, but only Christopher will gain from the exchange. Answer: A Topic: Study Guide Question, Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

78) Refer to the above figure. Mario is self-sufficient and so is Mia. Each produces 6 dishes of pasta and 4 pizzas. Mario and Mia decide to specialize and trade. After they have specialized and traded, compared to the initial situation, Mia's opportunity cost of pasta has ________ and Mario's opportunity cost of a pizza has ________. A) decreased, decreased B) decreased, increased C) increased, increased D) increased, decreased Answer: C Topic: Parallel MyEconLab Questions, Achieving the Gains from Trade Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

5 Economic Coordination 1) The term "market" refers to A) physical structures only. B) locations where buyers and sellers physically meet. C) any arrangement that enables buyers and sellers to get information and trade with one another. D) trading arrangements that have been approved by the government. Answer: C Topic: Markets Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

2) Markets are best defined as A) arrangements where buyers and sellers get together to buy and sell. B) specific geographic locations where people get together to buy and sell. C) hypothetical constructs used to analyze how people form their tastes and preferences. D) places where people can inspect goods and services carefully. Answer: A Topic: Markets Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

3) Markets A) facilitate trade. B) allow traders to enjoy gains from trade. C) coordinate price information between buyers and sellers. D) All of the above answers are correct. Answer: D Topic: Markets Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

4) Which of the following is TRUE regarding markets? I. Economists define a market as a geographic location where trade occurs. II. A market enables buyers and sellers to get information about each other and to buy and sell from each other. III. Markets coordinate decisions through prices. A) I only B) I and III C) II and III D) I, II and III Answer: C Topic: Markets Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking 118 Copyright © 2014 Pearson Education, Inc.

5) Two social institutions that are essential for trade to be organized are ________. A) property rights and laws B) markets and banks C) businesses and banks D) markets and property rights Answer: D Topic: Markets Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

6) The social arrangements that govern the ownership, use, and disposal of property are referred to as A) the double coincidence of wants. B) capitalism. C) private enterprise. D) property rights. Answer: D Topic: Property Rights Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

7) In order to societies to reap the gains from trade, it is necessary to A) define and enforce property rights. B) foster economic growth. C) distribute resources equally. D) achieve productive efficiency. Answer: A Topic: Property Rights Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

8) In a world lacking property rights, it would be ________ to realize the gains from trade and there would be ________ specialization. A) easier; less B) easier; more C) harder; less D) harder; more Answer: C Topic: Property Rights Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

9) The rights of an owner to use and exchange property are A) capitalist rights. B) socialist rights. C) property rights. D) money rights. Answer: C Topic: Property Rights Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

10) The social arrangement that gives John Grisham, the writer of best-selling novels, the ownership of his novels is A) a market. B) property rights. C) absolute advantage. D) dynamic comparative advantage. Answer: B Topic: Property Rights Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

11) If property rights are not clearly defined and enforced, then A) incentives for specialization based on comparative advantage are weakened. B) some potential gains from specialization and trade are lost. C) resources are devoted to protecting possessions rather than to production. D) All of the above answers are correct. Answer: D Topic: Property Rights Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

12) A system of property rights A) encourages economic growth by creating incentives to invest in capital and to be innovative. B) discourages economic growth by discouraging the development of new ideas and ways of doing things. C) reduces the efficiency of government, which reduces the growth rate of the economy over time. D) encourages investment but discourages entrepreneurial activity, so the effect on economic growth is uncertain. Answer: A Topic: Property Rights Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

13) Intellectual property A) is protected by common law rather than by written laws. B) is protected by people's sense of decency rather than by written laws. C) belongs to everyone with the necessary human capital to use it. D) is often protected by copyrights and patents. Answer: D Topic: Property Rights Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

14) A computer software program is most strongly an example of A) real property. B) fiat property. C) intellectual property. D) vicarious property. Answer: C Topic: Property Rights Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

15) A factor market is a market in which A) households buy goods and services. B) households sell the services of the factors of production they control. C) firms sell the services of the factors of production. D) firms sell goods and services. Answer: B Topic: The Circular Flows Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

16) In goods markets ________ and in factor markets ________. A) households sell to firms; firms sell to households B) firms sell to households; households sell to firms C) households sell to firms; households sell to firms D) firms sell to households; firms sell to households Answer: B Topic: Circular Flows Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

17) Individual economic decisions are coordinated by A) markets through adjustments in sales levels. B) markets through adjustments in prices. C) government through adjustments in sales taxes. D) government through adjustments in income taxes. Answer: B Topic: Coordinating Decisions Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

18) Which of the following does NOT help organize trade? A) property rights B) markets C) the production possibilities frontier D) None of the above because all these answers given help organize trade. Answer: C Topic: Study Guide Question, Coordinating Decisions Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

19) In markets, people's decisions are coordinated by A) specialization according to absolute advantage. B) changes in property rights. C) learning-by-doing. D) adjustments in prices. Answer: D Topic: Study Guide Question, Coordinating Decisions Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

6 News Based Questions 1) The state of Georgia offers free college tuition to high school students with a "B" average. In 2007, the state raised the requirement so that fewer students qualified for the scholarship. At the same time, Georgia increased state spending on health care. Suppose that college education is on the vertical axis and health care is on the horizontal axis of a PPF. These changes A) are example of a tradeoff. B) are an example of incentives. C) will cause a shift out of the PPF. D) will cause a shift in the of the PPF. Answer: A Topic: Production Possibilities and Tradeoffs Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

2) The state of Georgia offers free college tuition to high school students with a "B" average. In 2007, the state raised the requirement so that fewer students qualified for the scholarship. At the same time, Georgia increased state spending on health care. Suppose that college education is on the vertical axis and health care is on the horizontal axis of a PPF. Georgia's change in spending would be shown as A) a movement up along the PPF. B) a movement down along the PPF. C) a shift out of the PPF. D) a shift in of the PPF. Answer: B Topic: Production Possibilities Frontier Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

3) The United States uses tax funds to build and repair the interstate highway system and to provide health care services via Medicare. Suppose Medicare services are on the horizontal axis and highway miles are on the vertical axis of a PPF. If the government decides to reduce funding to Medicare, this change would be shown as A) a shift out of the PPF. B) the PPF becoming flatter. C) a movement down along the PPF. D) a movement up along the PPF. Answer: D Topic: Production Possibilities Frontier Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

4) BAE, a British defense company, has the contract to produce Tornado aircraft for the Royal Air Force. The BBC produces high-quality mystery shows for the British government. Both produce at the lowest possible cost. On a PPF with aircraft and mystery shows on the axes, A) BAE and the BBC do not face increasing opportunity costs. B) BAE and the BBC are achieving production efficiency. C) BAE and the BBC are producing at a point outside the PPF. D) the British government is operating outside its PPF. Answer: B Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

5) BAE, a British defense company, has the contract to produce Tornado aircraft for the Royal Air Force. BAE is producing the aircraft at the lowest possible cost. If the RAF orders one more Tornado, there will be A) a decrease in opportunity costs as average costs decrease. B) a misallocation of resources. C) an increase in opportunity cost for Tornados. D) an outward shift in the PPF. Answer: C Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

6) Employees at Bank of America are good at providing banking services and workers at Ben & Jerry's are good at making ice cream. If some bankers are moved to making ice cream, we get a small increase in the amount of ice cream produced and a large decrease in the amount of banking services provided. If the PPF has banking services on the vertical axis and ice cream on the horizontal axis, the effect of the change reflects A) decreasing opportunity costs. B) a bowed out PPF for banking services and ice cream. C) production efficiency. D) a shift to a flatter PPF. Answer: B Topic: Production Possibilities Frontier Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

7) Employees at Bank of America are good at providing banking services and workers at Ben & Jerry's are good at making ice cream. The figure above shows the marginal cost and marginal benefit curves for ice cream. As Ben & Jerry's increases production from 1 to 2 million gallons of ice cream, the A) marginal cost curve shifts downward. B) marginal cost curve shifts upward. C) opportunity cost of ice cream decreases. D) opportunity cost of ice cream increases to 2 banking services per gallon. Answer: D Topic: Using Resources Efficiently Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

8) Employees at Bank of America are good at providing banking services and workers at Ben & Jerry's are good at making ice cream. The figure above shows the marginal cost and marginal benefit curves for ice cream. A movement from point a to point b reflects A) the economy must give up banking services to get extra gallons of ice cream. B) the opportunity cost of banking services increases. C) a decrease in the tradeoff between ice cream and banking services. D) a leftward shift in the marginal benefit curve. Answer: A Topic: Marginal Cost Curve Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

9) Employees at Bank of America are good at providing banking services and workers at Ben & Jerry's are good at making ice cream. The figure above shows the marginal cost and marginal benefit curves for ice cream. Point b represents ________ of banking services and ice cream. A) allocation efficiency and possibly production efficiency B) neither allocative nor production efficiency C) allocative and production efficiency in the production D) production efficiency and possibly allocative efficiency in the production Answer: C Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

10) Employees at Bank of America are good at providing banking services and workers at Ben & Jerry's are good at making ice cream. The figure above shows the marginal cost and marginal benefit curves for ice cream. If 3 million gallons of ice cream are produced, marginal cost ________ marginal benefit and ________ produced. A) exceeds; too much ice cream is B) is less than; too much ice cream is C) exceeds; not enough ice cream is D) is less than; not enough banking services are Answer: A Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

11) Employees at Bank of America are good at providing banking services and workers at Ben & Jerry's are good at making ice cream. The figure above shows the marginal cost and marginal benefit curves for ice cream. If 1 million gallons of ice cream are being produced, A) the cost an additional gallon of ice cream is more than people think it is worth. B) more banking services should be produced. C) the marginal cost of an additional gallon of ice cream is greater the value people place on it. D) people value an additional gallon of ice cream more highly than its cost of production. Answer: D Topic: Allocatively Efficient Use of Resources Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

12) China's State Council has encouraged more spending to "improve transportation links and other infrastructure...." It will also "step up its spending on vocational training and other educational programs for adults." www.nytimes.com, Keith Bradsher, October 19, 2008 Suppose that capital goods are on the vertical axis while consumption goods are on the horizontal axis of China's PPF. As a result of enacting the policies, China's PPF will A) shift outward. B) shift inward. C) rotate outward. D) become flatter. Answer: A Topic: Economic Growth Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

13) China's State Council has encouraged more spending to "improve transportation links and other infrastructure...." It will also "step up its spending on vocational training and other educational programs for adults." www.nytimes.com, Keith Bradsher, October 19, 2008 Suppose that capital goods are on the vertical axis while consumption goods are on the horizontal axis of China's PPF. As a result of enacting the policies, we would expect I. an expansion of China's production possibilities. II. capital accumulation. III. an increase in human capital. A) I and II only B) I, II and III C) I and III only D) II and III only Answer: B Topic: Economic Growth Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

14) Suppose that when NBC produces 1 new drama series in a season it gives up the chance to produce 3 new reality shows. This means that A) the opportunity cost of a new drama series is 1/3 of a new reality show. B) the opportunity cost of a 1 new reality show is 1/3 of a new drama series. C) NBC has a comparative advantage in producing new drama series. D) NBC has a comparative advantage in producing new reality shows. Answer: B Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

15) In the United States, Texas ranks number one in the amount of installed megawatts for wind power generation and Florida ranks number one in the number of beach vacations. These facts point out that A) Texas has a comparative advantage in wind power generation. B) Texas definitely has an absolute advantage in wind power generation. C) Florida should produce more wind energy. D) Florida can produce wind energy at a lower opportunity cost than can Texas. Answer: A Topic: Comparative Advantage Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

7 Essay Questions 1) A production point beyond the production possibilities frontier represents what? Answer: A production point beyond the production possibilities frontier is an unattainable combination of goods and services. Topic: Production Possibilities Frontier Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Communication

2) Explain how the production possibilities frontier illustrates scarcity. Answer: The PPF illustrates scarcity because we cannot attain the points outside the frontier. Topic: Production Possibilities Frontier Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Communication

3) "If Mexico is currently operating at a point beyond its production possibilities frontier, then there are unemployed resources in Mexico." Is this statement true or false? Briefly explain your answer. Answer: The statement is false. It is false on two counts. First, production points beyond the production possibilities frontier are unattainable, so it is not possible for Mexico to be producing at such a point. Second, points within not beyond the production possibilities frontier have unemployed resources. Topic: Production Possibilities Frontier Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Communication

4) "If Mexico is currently operating at a point inside its production possibilities frontier, then there are unemployed resources in Mexico." Is this statement true or false? Briefly explain your answer. Answer: The statement is true. Points within the production possibilities frontier are attainable, so it is possible for Mexico to be producing at a point within its frontier. At points within the production possibilities frontier, there are unemployed resources. Topic: Production Possibilities Frontier Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Communication

5) Are all points inside the production possibilities frontier unattainable? Answer: No, all points within the production possibilities frontier are attainable, though there are unemployed or misallocated resources at these points. Topic: Production Possibilities Frontier Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Communication

6) In the movie Cast Away, Tom Hanks plays a FedEx efficiency expert stranded on a deserted island. While on the island, he divides his time between catching fish, gathering coconuts, painting, and building a raft. Suppose that these were Mr. Hanks' only activities. Did he face an opportunity cost from pursuing any of these activities? Why or why not? Answer: Yes, Mr. Hanks faces an opportunity cost from all of these endeavors. If he decides to use his time catching fish, he cannot gather coconuts, paint, or build a raft. Whatever he would have been otherwise doing is his opportunity cost of catching fish. Similarly, time spent on building his raft means less time painting, or fewer coconuts for breakfast, or fewer fish for dinner. Topic: Production Possibilities and Tradeoffs Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication

7) Explain the connection between opportunity cost and the PPF. Answer: When moving along the production possibilities frontier, more of one good or service can be obtained only by giving up another good or service. The good or service given up is the opportunity cost of the good or service obtained. Topic: Production Possibilities and Opportunity Costs Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication

8) Explain why the production possibilities frontier bows outward. Answer: The bowed outward PPF reflects increasing opportunity costs. The opportunity cost increases as we produce more of a good because resources are not equally productive in all activities. For example, people with several years of experience working for Sony are good at producing DVDs, but not very good at making pizza. So if we want more pizza and move some of these workers from Sony to Domino's, we get a relatively large decrease in the quantity of DVDs per one additional pizza produced. Of course, first we try to move those workers who have less experience with Sony and who may have some skills to produce pizza. But if we want to produce even more pizza, we eventually will have to move some more experienced Sony workers to Domino's, where they might be very unproductive and therefore the quantity of DVDs that we will give up to produce an additional pizza, which is the opportunity cost of producing pizza, will increase. Topic: Production Possibilities Frontier Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication

9) What economic concepts are represented in the production possibilities model? Answer: There are a large number of economic concepts illustrated by the production possibilities frontier: • Scarcity of resources: The production possibilities frontier is a frontier between attainable and unattainable combinations. • Opportunity cost: The negative slope of the production possibilities frontier indicates that in order to get more of one good, you must produce less of the other (a tradeoff). • Increasing opportunity cost: The bowed out production possibilities frontier represents the increasing opportunity cost when more of a good or service is produced. • Efficiency: Points on the production possibilities frontier use all resources while points below the production possibilities frontier represent unemployment or misallocated resources. Topic: Production Possibilities Frontier Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication

10) When economists state that the opportunity cost of a product increases as more of it is produced, what do they mean? What is the opportunity cost? Answer: In general, the opportunity cost of increasing the production of one good or service is the forgone production of another good or service. The statement that the opportunity cost of a product increases as more of it is produced applies to production points on the production possibilities frontier. On the production possibilities frontier, resources are fully employed. Hence to increase the production of one good or service, resources must be switched away from the production of another good or service and hence the production of that good or service decreases. And, as more of the first good or service is produced, the opportunity cost of an additional unit becomes larger, so that the opportunity cost increases. Topic: Increasing Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication

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

12) Why does the marginal benefit curve have a negative slope? Answer: Each successive increase in the consumption of any good or service provides a lower level of satisfaction, or benefit, than the preceding unit of consumption. For a specific example, think of drinking water on a hot day. What is the first glass worth? How about the second and third? The marginal benefit is the benefit from each additional glass of water and, as the example indicates, the marginal benefit decreases as the amount of the good increases. Topic: Marginal Benefit Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Communication

13) Explain the difference between marginal cost and marginal benefit. Answer: Marginal benefit is the benefit someone in society obtains when another unit of a good or service is produced. Marginal cost is the cost to someone in society of producing another unit of a good or service. Topic: Marginal Benefit and Marginal Cost Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication

14) Compare and contrast production efficiency and allocative efficiency. Answer: Production efficiency means that we are operating at a point on the production possibilities frontier and so we cannot produce more of a good or service without producing less of some other good or service. Production efficiency occurs at all points on the PPF. At any point inside the frontier, production is inefficient because we have unemployed resources. Allocative efficiency means that we are producing the goods and services that society values most highly and so allocative efficiency implies that we are operating on the frontier. But not every point on the production possibilities frontier is the combination of goods and services valued most highly by society. Allocative efficiency only occurs at a single point on the PPF. To insure that allocative efficiency exists, we must compare the marginal benefit of a good with its marginal cost. When production is such that the marginal benefit equals the marginal cost, then we are producing the allocatively efficient level of output. Topic: Efficient Use of Resources Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication

15) "Allocative efficiency in the production of cherries means that consumers can eat all of the cherries they desire." Is this statement true or false? Answer: Allocative efficiency means that we are producing the goods and services society values most highly. It does not mean that consumers can afford all of the cherries that they desire. The allocatively efficient quantity of cherries is the level of production such that the marginal benefit of a pound of cherries equals the marginal cost of a pound of cherries. The marginal cost of any product will be positive, so the marginal cost of a pound of cherries at the allocatively efficient quantity will be positive. Hence for the allocatively efficient quantity of cherries, the marginal benefit of cherries also must be positive. In order for consumers to have all the cherries they desire, the marginal benefit of a pound of cherries must be zero. (If the marginal benefit is positive, consumers desire more cherries.) Therefore the allocatively efficient quantity of cherries is not the quantity at which consumers are able to eat all they desire. Topic: Allocative Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication

16) "If an economy is producing at a point on its PPF, it has achieved allocative efficiency." True or false? Explain. Answer: If an economy is producing at a point on its PPF, it has achieved production efficiency, but not necessarily allocative efficiency. We have achieved allocative efficiency if we are producing at the point on the PPF that we prefer to all other points because at this point we cannot produce more of any good without giving up some other good that we value more highly. Topic: Allocative Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication

17) "Allocative efficiency requires that the maximum number of people have access to all of the goods and services that our economy produces." Is this statement true or false? Explain your answer. Answer: The statement is false. Allocative efficiency requires that production be such that the marginal benefit equals the marginal cost. Allocative efficiency has nothing to do with requiring that the maximum number of people have access to all the goods and services produced. Topic: Allocative Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication

18) What factors generate economic growth? Answer: Two key factors create economic growth: Technological change and capital accumulation, including the accumulation of additional human capital. Both technological change and capital accumulation shift the nation's PPF outward. Topic: Economic Growth Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Communication

19) What is comparative advantage? Give an example. Answer: Comparative advantage is the ability of a person to produce a good at a lower opportunity cost compared to another person. A lower opportunity cost means that the person gives up less to produce the good compared to another person. For example, one person may need to give up one hour of typing to get dinner made while another person must give up two hours of typing to produce the same dinner. Topic: Comparative Advantage Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication

20) Why is it likely that the United States has an absolute advantage in goods and yet it still ends up importing them from other countries? Answer: The United States might have an absolute advantage in producing a good but not a comparative advantage. In this case, the opportunity cost of producing the good in the United States is higher than in another country. Thus the United States will import the product from the other country. Topic: Comparative Advantage and Absolute Advantage Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication

21) The United States has an absolute advantage in producing sugar over all of the other sugar producing countries. Does this fact mean that we should not import any sugar from the other countries? Answer: Having an absolute advantage doesn't mean that the United States should engage in the production of sugar. If the opportunity cost of sugar in the United States is higher than in the other countries, then the other countries will have the comparative advantage. The countries with the comparative advantage are the ones that should do the producing. Quite likely these other nations have the comparative advantage and so it would be good policy for the United States to import sugar from these nations. Topic: Comparative Advantage and Absolute Advantage Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication 133 Copyright © 2014 Pearson Education, Inc.

22) Why does it make sense for economies to specialize according to comparative advantage and trade? Answer: A person has a comparative advantage in an activity that they can perform at a lower opportunity cost than other people. By participating in the activity in which they have a comparative advantage, less is given up. Because resources are scarce, more can be produced with available resources when less is given up. And, by trading people can consume more than just what they produce. Topic: Gains from Trade Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication

23) "The United States is more productive in most activities than are most of other countries because it has an absolute advantage in the production of most goods and services. Therefore we should restrict international trade as it only benefits other countries at the expense of the United States." Comment on this statement. Answer: The United States may be more productive than other countries in producing most goods and services so that it has an absolute advantage in most products, but it still has a comparative disadvantage in many goods and services. Thus the United States and can gain from buying these goods and services from other countries and selling to these other countries the goods and services in which the United States has a comparative advantage to them. For example, the United States can have an absolute advantage over China in producing both cars and grain, but if China has a comparative advantage in grain, it can produce grain with a lower opportunity cost, that is, fewer cars given up to get a thousand tons of grain, than can the United States. In this case, the United States can benefit by importing Chinese grain and paying for it with fewer cars then the United States would have to give up if the same amount of grain was produced domestically. Topic: Gains from Trade Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication

24) How do property rights help organize production and trade? Answer: Property rights are necessary in order for people to specialize. If people specialize in production, they will want to consume more than just what they produce. Without property rights, people would worry that someone else would take their production, leaving them with little or nothing to trade for the other goods and services they want to consume. Topic: The Market Economy Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Communication

8 Numeric and Graphing Questions 1) Draw a production possibilities frontier between beans and peas. Label the unattainable points, the attainable points with fully employed resources, and the attainable points with unemployed resources. Answer:

The production possibilities frontier, with the points labeled, is above. Any point beyond the production possibilities frontier is unattainable. Any point on the production possibilities frontier is attainable and resources are fully employed. Finally, any point within the production possibilities frontier is attainable and has unemployed resources. Topic: Production Possibilities Frontier Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

2) The figure above shows a nation's production possibilities frontier for apples and oranges. a) What combination of goods is represented by point A? b) What combination of goods is represented by point B? c) Which point represents an unattainable combination of goods? Answer: a) 3 million bushels of apples and 3 million bushels of oranges b) 3 million bushels of apples and 4 million bushels of oranges c) Point B is an unattainable point. Topic: Production Possibilities Frontier Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

3) Before the first Gulf War in 1991, Kuwait had the capacity to produce a certain amount of oil from its oil wells. After the war, it found that capacity greatly diminished because the oil wells had been set on fire. Draw Kuwait's PPF before and after the war, assuming that the only two goods produced are oil and food. Further assume that setting the oil wells on fire did not affect Kuwait's ability to produce food. Explain why the PPF before the war is different from the PPF after the war. Answer:

When a PPF is drawn, we draw it for a fixed amount of natural resources, along with fixed amounts of the other factors of production such as labor, capital, etc. Fire reduced Kuwait's natural resources temporarily, so the PPF after the war shifted inwards. However, because setting the oil wells on fire did not affect Kuwait's ability to produce food, the maximum amount of food production, the point where the PPF intersects the vertical axis, did not change. Topic: Production Possibilities Frontier Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Analytical Skills

Production point A B C D E F G

Pizza produced 0 4 8 12 16 20 24

and and and and and and and

CDs produced 42 40 36 30 22 12 0

4) The table above lists seven points on the production possibilities frontier for pizza and CDs. Graph the PPF. What is the opportunity cost of producing the first four pizzas? What is the opportunity cost of producing the 10th pizza. What is the opportunity cost of producing the first 12 CDs? What is the opportunity cost of producing the 26th CD? Answer:

The PPF graph is shown above. The opportunity cost of the first four pizzas is 2 CDs per pizza. The 10th pizza is the midpoint between 8 and 12 pizzas. The opportunity cost of gaining 4 additional pizzas by producing 12 pizzas instead of 8 pizzas is 6 CDs given up, so the opportunity cost of an additional pizza is 6 ÷ 4 = 1.5 CDs per pizza. The opportunity cost of the first 12 CDs is 4 pizzas. The 26th CD is the midpoint between 22 and 30 CDs. The opportunity cost of gaining 8 CDs by producing 30 CDs instead of 22 CDs is 4 pizzas given up, so the opportunity cost of an additional CD is 4 ÷ 8 = 0.5 pizzas per CD. Topic: Production Possibilities Frontier Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

Production point A B C D E

Milk (gallons) 0 2 4 6 8

and and and and and

Shirts (number) 100 90 70 40 0

5) A (very, very small) country produces milk and shirts and its production possibilities frontier is in the table above. The nation is currently producing at point B. What is the opportunity cost of two additional gallons of milk? At point C? At point D? What do your results show? Answer: At point B, the opportunity cost of 2 additional gallons of milk is 20 shirts per gallon of milk. At point C, the opportunity cost of 2 additional gallons of milk at 30 shirts per gallon of milk. At point D, the opportunity cost of 2 additional gallons of milk is 40 shirts per gallon of milk. The opportunity cost of 2 additional gallons of milk increases as more milk is produced. Topic: Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

Production point A B C D E

Pages typed 0 40 70 90 100

and and and and and

Web pages created 4 3 2 1 0

6) Jean can either type her term paper or create Web pages during the limited time she has available. The table above shows her PPF. a) Can Jean type 90 pages and create 2 Web pages? b) Use the above numbers to calculate the opportunity cost of a typed page as she increases her time typing and decreases time creating a Web page. Answer: a) Jean cannot type 90 pages and create 2 Web pages because, as row D shows, that combination is beyond her PPF. Movement from A to B B to C C to D D to E

Increase in typed pages 40 30 20 10

Decrease in Web pages 1 1 1 1

Opportunity cost 1/40 1/30 1/20 1/10

b) The opportunity cost is the ratio of the decrease in the number of Web pages divided by the increase in the number of typed pages. The table above gives the opportunity cost for typed pages. Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

Production point A B C D

Wheat (bushels) 1,500 1,000 500 0

and and and and

Soybeans (bushels) 0 2,250 3,500 4,000

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

Opportunity cost

Movement from D to C C to B B to A

Opportunity cost

Answer:

Movement from A to B B to C

Opportunity cost (bushels of soybeans per bushels of wheat) 0.22 0.40

Movement from D to C C to B

Opportunity cost (bushels of wheat per bushels of soybeans) 1.00 2.50

The table above gives the opportunity costs. The units of the opportunity costs are in the column headings. Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

8) The figure above represents the production possibilities frontier for a country. a) The nation is currently producing at point B and wants to move to point C. What is the opportunity cost of the move? b) The nation is currently producing at point B and wants to move to point A. What is the opportunity cost of the move? Answer: a) By moving from point B to point C, the production of automobiles decreases by 1 million, from 3 million to 2 million. The 1 million decrease in automobiles is the opportunity cost of the movement. b) By moving from point B to point A, the production of cameras decreases by 3 million, from 3 million to 0 million. The 3 million decrease in cameras is the opportunity cost of the movement. Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

Production point A B C D

Beef (pounds) 0 2 4 6

and and and and

Wheat (bushels) 9 7 4 0

9) The table above presents the production possibilities of Farmer Brown. Use these data to calculate Farmer Brown's opportunity cost of additional beef as Farmer Brown moves from point A to B to C to D. Also use the data to calculate Farmer Brown's opportunity cost of additional wheat as Farmer Brown moves from point D to C to B to A. Based on these costs, does Farmer Brown use resources that are more productive in one activity than the other? Explain your answer. Answer: The opportunity cost of a pound of beef is 1 bushel of wheat per pound of beef between points A and B, 11/2 bushels of wheat per pound of beef between points B and C, and 2 bushels of wheat per pound of beef between points C and D. The opportunity cost of a bushel of wheat is 1/2 pound of beef per bushel of wheat between points D and C, 2/3 pound of beef per bushel of wheat between points C and B, and 1 pound of beef per bushel of wheat between points B and A. Farmer Brown does use resources that are more productive in one activity than the other because the opportunity costs of producing beef and wheat increase as more beef and wheat are produced. If the resources were equally productive in both activities, the opportunity costs would be constant. Topic: Increasing Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

Production point A B C D E

Fish (pounds) 0 1 2 3 4

and and and and and

Berries (pounds) 50 45 35 20 0

10) The table above shows the production possibilities frontier for the nation of Isolanda. a) Find the marginal cost of a pound of fish using the above PPF. b) How does the marginal cost of a pound of fish change as more fish are caught? Answer: Fish Marginal cost (pounds) (pounds of berries) 0.5 5 1.5 10 2.5 15 3.5 20 a) The table above shows the marginal cost of a pound of fish. Remember that marginal cost is calculated at the mid-point, that is, midway between the two production possibilities. For instance, moving from production point A to production point B has an opportunity cost of 5 pounds of berries per pound of fish. Because this movement gains 1 pound of fish, the marginal cost is 5 pounds of berries. We then attribute this marginal cost to the point midway between points A and B, which is 0.5 pounds of fish per pound of berries. b) As more fish are caught, the marginal cost of a fish increases. Topic: Marginal Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

11) At the current point of production on a nation's production possibilities frontier, the marginal benefit of a slice of pizza is 500 tacos per slice of pizza while the marginal cost of producing a slice of pizza is 750 tacos per slice of pizza. To be allocatively efficient, what should be done? Answer: The marginal benefit of a slice of pizza is less than its marginal cost. Therefore to be allocatively efficient, less pizza and more tacos should be produced. Topic: Allocative Efficiency Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

Quantity (millions of bushes of apples) 5 10 15 20 25

Marginal benefit (oranges per bushel) 10 8 6 4 2

Marginal Cost (oranges per bushel) 1 3 6 9 12

12) Using the values for the marginal benefit and the marginal cost of a bushel of apples given in the table above, what is the allocatively efficient quantity of apples? Suppose 10 million bushels of apples are produced. Should the quantity be increased or decreased? What if 20 million bushels are produced; should the quantity be increased or decreased? Answer: The allocatively efficient quantity of apples is 15 million bushels because this is the quantity at which the marginal benefit equals the marginal cost. If 10 million bushels of apples are produced, the marginal benefit exceeds the marginal cost, so more apples should be produced. If 20 million bushels of apples are produced, the marginal cost exceeds the marginal benefit and so fewer apples should be produced. Topic: Allocative Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

13) Suppose a factory can be designed to produce either trucks or cars. The figure above shows the marginal cost and marginal benefit of producing trucks in terms of the forgone cars. a) What is the marginal benefit of the 25th truck? b) What is the marginal cost of the 25th truck? c) Should the 25th truck be produced? Why or why not. d) What is the marginal benefit of the 75th truck? e) What is the marginal cost of the 75th truck? f) Should the 75th truck be produced? Why or why not? g) What is the allocatively efficient quantity of trucks? Answer: a) 3 cars per truck b) 1 car per truck c) This truck should be produced because people value the 25th truck at 3 cars per truck, but it only costs 1 car per truck to make it. d) 1 car per truck e) 3 cars per truck f) This truck should not be produced because people value the 75th truck at 1 car per truck, but it costs 3 cars per truck to make it. g) 50 trucks is the allocatively efficient quantity of trucks. Topic: Allocative Efficiency Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

China's production Pakistan's production in in 1 day 1 day Cloth 8 Cloth 4 Cheese 16 Cheese 12 14) The table above shows the amounts of cloth and cheese that China and Pakistan can produce in an hour. Which country has the comparative advantage in cloth and which country has the comparative advantage in cheese? Answer: In China, to produce 8 cloths has an opportunity cost of 16 cheeses, so the opportunity cost of 1 cloth is (16 cheese)/(8 cloths) = 2 cheeses per cloth. In Pakistan, to produce 4 cloths has an opportunity cost of 12 cheeses. Hence the opportunity cost of 1 cloth is (12 cheeses)/(4 cloths) or 3 cheeses per cloth. Because China's opportunity cost of a cloth is lower, China has the comparative advantage in producing cloth. In China, to produce 16 cheeses has an opportunity cost of 8 cloths, so the opportunity cost of 1 cheese is (8 cloths)/(16 cheeses) = 1/2 cloth per cheese. In Pakistan, to produce 12 cheeses has an opportunity cost of 4 cloths. Hence the opportunity cost of 1 cheese is (4 cloths)/(12 cheeses) or 1/3 cloth per cheese. Because Pakistan's opportunity cost of a cheese is lower, Pakistan has the comparative advantage in producing cheese. Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

Omar's production in 1 John's production in 1 day day Computers fixed 12 Computers fixed 4 Lines of code 800 Lines of code 200 15) Omar and John can fix computers or write computer programs. The table above shows the number of computers they can fix and the lines of code they can write in a day. a) Who, if anyone, has the absolute advantage? b) Who has the comparative advantage in fixing computers? Why? c) Who has the comparative advantage in writing programs? Why? Answer: a) Omar has an absolute advantage in fixing computers and writing code because he can fix 12 per day compared to John who can fix only 4 per day, and can write 800 lines of code per day compared to John who can write only 200 lines a day. b) John has the comparative advantage in fixing computers. He has the comparative advantage because his opportunity cost of fixing one computer is 50 lines of computer code. Omar does not have a comparative advantage in fixing computers because his opportunity cost of fixing a computer is higher at 66.7 lines of code. c) Omar has the comparative advantage in writing programs. His opportunity cost of writing one line of code is .015 of a computer fixed. John does not have the comparative advantage in writing programs because his opportunity cost of writing one line of code is 0.02 computers fixed. (Alternatively, to write 1 line of code costs Omar the opportunity to repair 1.5 percent of a computer and costs John the opportunity to repair 2.0 percent of a computer.) Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

16) Jake takes 40 minutes to fry a chicken and 10 minutes to toast a slice of bread. His brother Elwood takes 60 minutes to fry a chicken and 4 minutes to toast a slice of bread. Calculate each brother's opportunity cost. Who has a comparative advantage in which activity? Explain. Will the brothers gain if they specialize? Answer: Jake can spend an hour to fry 1.5 chickens or toast 6 slices of bread, which means 1 chicken costs him 6 slices of bread ÷ 1.5 chickens = 4 slices of bread per chicken while 1 slice of bread costs him 1.5 chickens ÷ 6 slices of bread = 0.25 of a chicken per slice of bread. Elwood spends an hour to fry 1 chicken or toast 15 slices of bread, which means 1 chicken costs him 15 slices of bread ÷ 1 chicken = 15 slices of bread per chicken while 1 slice of bread costs him 1 chicken ÷ 15 slices of bread = 0.067 of a chicken per slice of bread. Thus, Jake has a comparative advantage (a lower opportunity cost) in frying chickens, whereas Elwood has a comparative advantage in toasting bread. The brothers can gain from specialization. For example, suppose each of them spends 2 hours to fry chickens and 2 hours to toast bread. Then, Jake will produce 3 chickens and 12 slices of bread and Elwood will produce 2 chickens and 30 slices of bread, so that together they will produce 5 chickens and 42 slices of bread. But, if Jake specializes in his comparative advantage, frying chickens and spends all 4 hours frying chickens, he will produce 6 chickens. And if Elwood specializes in his comparative ad-vantage, toasting bread, and spends all 4 hours toasting bread, he will produce 60 slices of bread. Then, together they will produce 6 chickens and 60 slices of bread. The gain from specialization is 1 extra chicken and 18 extra slices of bread. Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

17) Mary takes 4 minutes to make a sandwich and 6 minutes to mix a cocktail. Her sister Ash takes 4 minutes to make a sandwich and 4 minutes to mix a cocktail. Calculate each sister's opportunity cost. Which of the two sisters has an absolute advantage in making sandwiches? In mixing cocktails? Which of the two has a comparative advantage in making sandwiches? In mixing cocktails? Answer: Mary can spend an hour to make 15 sandwiches or mix 10 cocktails, which means 1 sandwich costs her 10 cocktails ÷ 15 sandwiches = 0.67 of a cocktail per sandwich while 1 cocktail costs her 15 sandwiches ÷ 10 cocktails = 1.5 sandwiches per cocktail. Ash can spend an hour to make 15 sandwiches or mix 15 cocktails, which means 1 sandwich costs her 15 cocktails ÷ 15 sandwiches = 1 cocktail per sandwich and 1 cocktail costs 1 sandwich per cocktail. The sisters are equally productive in sandwiches (15 sandwiches per hour) and therefore neither of them has an absolute advantage in sandwiches. But Ash has an absolute advantage in cocktails. She can mix 15 cocktails per hour while Mary can only mix 10. To see the sisters' comparative advantage we compare their opportunity costs. Mary's opportunity cost of a sandwich (0.67 of a cocktail per sandwich) is lower than Ash's (1 cocktail per sandwich), so Mary has a comparative advantage in sandwiches. Ash's opportunity cost of a cocktail (1 sandwich per cocktail) is lower than Mary's (1.5 sandwiches per cocktail), so Ash has a comparative advantage in cocktails. Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

Nation A's production Nation B's production in 1 day in 1 day Computers 100 Computers 120 Software 140 Software 150 18) Two nations can produce computers and software in the amounts given in the table above. Does either nation have an absolute advantage in producing the products? Which nation has a comparative advantage in computers? Which nation has a comparative advantage in software? Explain your answers. Answer: Nation B has an absolute advantage in producing both goods because it can produce more of both in one day than can Nation A. Nation B has the comparative advantage in computer production and Nation A has the comparative advantage in software. The nation with the lowest opportunity cost of producing a good has the comparative advantage in that good. In Nation A, to produce 100 computers has the opportunity cost of 140 units of software forgone, so the opportunity cost of 1 computer equals (140 units of software)/(100 computers) = 1.4 units of software per computer. In Nation B, similar calculations show that the opportunity cost for a computer is 1.25 units of software per computer. Nation B's opportunity cost is lower, so Nation B has the comparative advantage in computers. For software, in Nation A the opportunity cost of a unit of software is (100 computers)/(140 units of software) = 0.71 computers per unit of software while in Nation B the opportunity cost is (120 computers)/(150 units of software) = 0.80 computers per unit of software. Nation A's opportunity cost is lower, so Nation A has the comparative advantage in software. Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

19) Japan can use all of its resources to produce 100 videos or 400 shoes. China can use all of its resources to produce 25 videos or 200 shoes. Which nation has the comparative advantage in shoes and which nation has the comparative advantage in videos? Answer: In Japan, the opportunity cost of producing a video is 4 shoes and in China it is 8 shoes. Therefore Japan has the comparative advantage in producing videos because its opportunity cost is lower. In Japan, the opportunity cost of producing a shoe is 1/4 of a video and in China the opportunity cost of producing a shoe is 1/8 of a video. China has the comparative advantage in producing shoes because its opportunity cost is lower. Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

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

9 True or False 1) Points outside the production possibilities frontier illustrate production points that cannot be attained. Answer: TRUE Topic: Production Possibilities Frontier Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

2) If a country operates on its PPF, it achieves production efficiency. Answer: TRUE Topic: Production Possibilities and Opportunity Costs Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

3) Moving downward along a PPF, the opportunity cost of another unit of the good measured along the horizontal axis decreases. Answer: FALSE Topic: Production Possibilities and Opportunity Costs Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

4) We have achieved production efficiency if we can produce more of one good without producing less of some other good. Answer: FALSE Topic: Production Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

5) Each point on the production possibilities frontier achieves allocative efficiency. Answer: FALSE Topic: Allocative Efficiency Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

6) We are using resources efficiently if we can produce more of one good without producing less of some other good that we value more highly. Answer: FALSE Topic: Using Resources Efficiently Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

7) The more we have of a good or service, the smaller is its marginal benefit and the less we are willing to pay for an additional unit of it. Answer: TRUE Topic: Using Resources Efficiently Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

8) As long as the marginal benefit from a good is greater than its marginal cost, an economy is operating efficiently. Answer: FALSE Topic: Using Resources Efficiently Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

9) If marginal benefit is greater than marginal cost for the production of cars, to reach the allocative efficient quantity of cars, the production of cars must be increased. Answer: TRUE Topic: Using Resources Efficiently Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

10) When a nation is producing the allocatively efficient quantity of a product, the marginal benefit of producing the good equals the marginal cost of producing that good. Answer: TRUE Topic: Using Resources Efficiently Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

11) As long as technology increases, economic growth is free. Answer: FALSE Topic: Economic Growth Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

12) Over the past several decades, the United States has devoted a greater fraction of its resources to consumption than Hong Kong, which is why the U.S. economy grew faster than Hong Kong's economy. Answer: FALSE Topic: Economic Growth Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

13) If Hong Kong continues to devote more resources to accumulating capital than the United States, Hong Kong will continue to grow more rapidly than the United States. Answer: TRUE Topic: Economic Growth Skill: Conceptual Status: New 10th edition AACSB: Reflective Thinking

14) A country has a comparative advantage in the production of a good if its opportunity cost is lower compared to another country. Answer: TRUE Topic: Comparative Advantage Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

15) Specialization and trade allow countries to consume beyond their PPFs. Answer: TRUE Topic: Gains from Trade Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

16) If two countries specialize in the production of goods in which they have a comparative advantage, they can experience gains from trade. Answer: TRUE Topic: Gains from Trade Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

17) Property rights facilitate the development of trade. Answer: TRUE Topic: The Market Economy Skill: Conceptual Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

18) A circular flow diagram shows the flows from the goods and resources markets. Answer: TRUE Topic: The Market Economy Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

19) Households are buyers in factor markets and sellers in goods markets. Answer: FALSE Topic: The Market Economy Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

20) In the United States, the government coordinates most of the economic activity. Answer: FALSE Topic: The Market Economy Skill: Recognition Status: Previous edition, Chapter 2 AACSB: Reflective Thinking

10 Extended Problems

Extra study time Quidditch (hours per week) (hours per week) 10 0 8 2 6 4 4 6 2 8 0 10

Harry's grade (points) 90 87 82 75 66 55

Marginal benefit Quidditch of an extra hour (hours per week) (points) 1 3.0 3 2.5 5 2.0 7 1.5 9 1.0 1) Harry usually spends 10 hours a week playing Quidditch. However, his Defense Against the Dark Arts exam is coming and he needs more time to study for the exam. If he does not study at all, the lowest grade he will receive is 55. But Harry realizes that this grade is unacceptable and so he has to give up some of his Quidditch time. But how much? He asks his friend Hermione, who is very good at Magical Economics, to help him figure this out. Together, they come up with the schedules of Harry's possibilities and values in the tables above. Then Hermione quickly finds the solution. But Harry still looks puzzled. Help Hermione to explain her solution to Harry. a) Draw Harry's production possibilities frontier with the Quidditch hours on the horizontal axis and Harry's grade, starting at 55, on the vertical axis. b) What is the opportunity cost of the first two hours of Quidditch? What is the marginal cost of the 5th hour? c) What is Harry's opportunity cost of raising his grade from 82 points to 87 points? d) Draw Harry's marginal cost of playing Quidditch curve. What happens to the marginal cost if Harry spends more time playing Quidditch? e) Draw Harry's marginal benefit from playing Quidditch curve. Describe the relationship between Harry's time spent playing Quidditch and the marginal benefit from playing Quidditch. f) For how many extra hours did Hermione recommend Harry to study? Why? If Harry follows her advice, what grade will he expect? What do you think Hermione said when Harry asked why he should not spend more time playing Quidditch?

Answer:

a) The figure above shows Harry's production possibilities frontier. b) Harry's opportunity cost of the first two hours of Quidditch is three points off his grade. According to the PPF, if Harry does not play Quidditch at all, the best grade he can get is 90 points, but if he plays Quidditch two hours a week, his grade falls to 87 points. So Harry gives up three points of his grade to get his first two hours of Quidditch. When Harry increases his Quidditch time from 4 hours to 6 hours, he gives up 7 points of his grade, which means each additional hour costs him 3.5 points. So the marginal cost of the 5th hour is 3.5 points. c) If Harry wants to raise his grade from 82 points to 87 points, he must give up 2 hours of Quidditch by playing 2 hours per week instead of 4 hours. So the opportunity cost of these 5 extra points is 2 hours of Quidditch.

d) To draw Harry's marginal cost curve, we calculate the marginal costs of the 1st, 3rd, 7th, and 9th hours of Quidditch the same way we calculated the marginal cost of the 5th hour. The marginal cost curve is shown in the figure above as MC. Harry's marginal cost of playing Quidditch increases as he spends more time playing. e) Harry's marginal benefit from playing Quidditch is measured by the value of an extra hour of Quidditch in terms of Harry's grade. The marginal benefit curve is graphed in the figure above using the data in the second table. The relationship between Harry's time spent to play Quidditch and the marginal benefit from playing is an inverse relationship. f) Hermione recommended to Harry that he study 7 extra hours a week, which leaves him only 3 hours per week to play Quidditch. The figure above shows that if Harry plays Quidditch 3 hours a week, the marginal cost of playing Quidditch equals the marginal benefit (Hermione calls this allocative efficiency). If Harry follows Hermione's advice, his grade will be 84.5 points. When Harry asked why he should not spend more time playing Quidditch, Hermione (who is a magical economist) probably said: "If you play for one more hour, your marginal cost will be 3 points off your grade, whereas your marginal benefit from this hour is only 2.25 points. I mean, the value that you get from your fourth hour of Quidditch is lower than the cost you pay for it, so you are worse off by spending more than three hours a week on Quidditch. This isn't magic, it's pure economics. Only the greatest wizards truly understand economics..." Topic: Allocative Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

Combination A B C D E F G

Wine Bread (thousands of (thousands of bottles per year) loaves per year) 0 21 2 20 4 18 6 15 8 11 10 6 12 0

Wine Willingness to pay (thousands of (loaves of bread per bottles per year) bottle of wine) 1 2.5 3 2.0 5 1.5 7 1.0 9 0.5 2) The Hobbits of the Shire are trying to decide how much bread and how much wine to produce. They ask you to be their economic consultant and give you the information in the first table above about different combinations of wine and bread that they can produce if they are fully employed and doing their best. The Hobbits also give you the information in the second table above about their willingness to pay for wine depending on how much wine they already have. To help the Hobbits solve their problem: a) Draw the Shire's production possibilities frontier. Put wine on the horizontal axis. b) What is the opportunity cost of the first two thousand bottles of wine? What is the marginal cost of the 3,000th bottle of wine? What is the marginal cost of the 3,000th loaf of bread? c) Draw the marginal cost of wine curve. What happens to the marginal cost if production of wine increases? Why? d) Draw the marginal benefit from wine curve on the same figure on which you put the marginal cost curve. Describe the relationship between the quantity of wine produced and the marginal benefit from wine. e) What combination of bread and wine will you recommend the Hobbits to produce? Why? Explain to the Hobbits why they would be worse off by producing a different combination of bread and wine.

Answer:

a) The figure above shows the Shire's production possibilities frontier. b) As the PPF shows, if the Hobbits produce no wine, they can produce 21,000 loaves of bread, but if they want to produce 2,000 bottles of wine, they can only produce 20,000 loaves of bread. The 1,000 loaves of bread that they have to give up to produce 2,000 bottles of wine is their opportunity cost of producing the first 2,000 bottles of wine, so the opportunity cost of the first 2,000 bottles of win is 1,000 loaves of bread. When the Hobbits increase their production of wine from 2,000 to 4,000, they give up 2,000 loaves of bread, which means each additional bottle of wine costs them 1 loaf of bread. The 3,000th bottle of wine is midway between 2,000 and 4,000, so the marginal cost of the 3,000th bottle is 1 loaf of bread. Similarly, when the Hobbits increase their production of bread from zero to 6,000, they give up 2,000 bottles of wine, or 1/3 of a bottle per loaf. The 3,000th loaf is in the middle of 0 and 6,000 loaves, so the marginal cost of the 3,000th loaf of bread is 1/3 of a bottle of wine.

c) To draw the marginal cost curve, we calculate the marginal costs of the 1,000th, 5,000th, 7,000th, 9,000th, and 11,000th bottles of wine the same way we calculated the marginal cost of the 3,000th bottle. The marginal cost curve is shown in the figure above as the curve labeled MC. The marginal cost of wine is increasing because all Hobbits are not equally productive in both activities. Some Hobbits are good at producing bread but not very good at producing wine. So if they stop producing bread and start to produce wine instead, the Shire will lose a large quantity of bread for a small quantity of additional wine, which means the cost of an additional bottle of wine in terms of bread, or the marginal cost of wine, will increase. d) The marginal benefit of wine is measured by what the Hobbits are willing to pay for an additional bottle. So, the marginal benefit curve can be graphed using the willingness to pay data in the table and is the curve in the figure labeled MB. The relationship between the quantity of wine produced and the marginal benefit from wine is an inverse relationship. If wine is relatively scarce, the Hobbits place a high value on it. But if they already have plenty of wine, they are not likely to be willing to pay a high price to get an extra bottle. e) You recommend that the Hobbits produce 5,000 bottles of wine and 16,500 loaves of bread. The figure shows that if the Shire produces 5,000 bottles, the marginal cost of wine equals the marginal benefit, and the Hobbits will achieve allocative efficiency. If the Hobbits produce 5,000 bottles of wine, they will have just enough resources (be on their PPF) to produce 16,500 loaves of bread. If the Hobbits produce a different combination of these two goods, they will be worse off. For example, if they produce 4,000 bottles of wine and 18,000 loaves of bread, the marginal benefit from wine is 1.75 loaves of bread while the marginal cost of wine is only 1.25 loaves. In this case, the Hobbits value an additional bottle of wine more than it costs them to produce it. So they can get more value from their resources by producing additional wine. On the other hand, if the Hobbits produce 6,000 bottles of wine, each additional bottle after the 5,000th will cost them more than the value they place on it. The Hobbits will be better off if they decrease their production of wine and increase their production of bread. Topic: Allocative Efficiency Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

3) Sarah and her boyfriend Mike want to save some money to pay for their wedding. So they decided to help people in the neighborhood by cleaning their garages and mowing lawns. Sarah takes 60 minutes to clean a garage and 80 minutes to mow a lawn. Mike takes 80 minutes to clean a garage and 80 minutes to mow a lawn. Sarah and Mike devote 10 hours per week each to these activities and get paid $25 for each garage they clean and $25 for each lawn they mow. Sarah says to Mike: "I have an absolute advantage in cleaning and we are equally productive in mowing. Therefore I should do both cleaning and mowing but you should only mow lawns." Mike disagrees. He thinks Sarah should specialize in cleaning garages and he should specialize in mowing lawns. Help Sarah and Mike to resolve their dispute. a) Who has an absolute advantage in cleaning garages? In mowing lawns? Explain. b) Draw Sarah's and Mike's production possibilities frontiers. What are each individual's opportunity costs? c) Who has a comparative advantage in cleaning garages? In mowing lawns? Explain. d) Is Sarah right when she says that she should do both cleaning and mowing while Mike should only mow lawns? Or may be Mike is right when he suggests that Sarah specializes in cleaning and he specializes in mowing? Illustrate and substantiate your answer with a numerical example. Answer: a) Sarah has an absolute advantage in cleaning as she is more productive in this activity. She can clean 10 garages per week while Mike can only clean 7.5 garages. Sarah and Mike are equally productive in mowing lawns (each can mow 7.5 lawns per week) and therefore none of them has an absolute advantage in this activity.

b) Sarah's and Mike's PPFs are shown in the figure above. If Sarah works 10 hours a week, she can either mow 7.5 lawns or clean 10 garages. If she mows 7.5 lawns, she gives up 10 garages, which means her opportunity cost of one lawn is 1.33 garages (10 ÷ 7.5). If she cleans 10 garages, she gives up 7.5 lawns and her opportunity cost is 0.75 lawns per garage (7.5 ÷ 10). Mike can either mow 7.5 lawns or clean 7.5 garages, so his opportunity costs are 1 lawn per garage and 1 garage per lawn. c) Sarah has a comparative advantage in cleaning garages. Her opportunity cost of cleaning a garage (0.75 lawns) is lower than Mike's (1 lawn). Mike has a comparative advantage in mowing lawns. His opportunity coast of mowing a lawn (1 garage) is lower than Sarah's (1.33 garages).

d) Sarah is wrong and Mike is right. Individuals can gain if they specialize in the activities where they have a comparative advantage. Therefore Sarah should specialize in cleaning while Mike should specialize in mowing. A simple numerical example can show how Mike and Sarah are better off if they specialize this way. Suppose first that Sarah and Mike specialize as Sarah suggests. For example, Sarah spends 8 hours per week cleaning garages and 2 hours per week mowing lawns. Then, she will clean 8 garages and move 1.5 lawns per week. Mike spends all his time mowing lawns and mows 7.5 lawns per week. Together they will clean 8 garages and move 9 lawns, earning $425 ($25 × 8 garages + $25 × 9 lawns). Now, suppose Sarah and Mike specialize as Mike suggests. Then, Sarah will clean 10 garages a week while Mike will mow 7.5 lawns a week, so they will earn $437.5 ($25 × 10 garages + $25 × 7.5 lawns). Topic: Comparative Advantage and Absolute Advantage Skill: Analytical Status: Previous edition, Chapter 2 AACSB: Analytical Skills

Economics, 11e, Global Edition (Parkin) Chapter 3 Demand and Supply 1 Markets and Prices 1) A relative price is the A) slope of the demand curve. B) difference between one money price and another. C) slope of the supply curve. D) ratio of one money price to another. Answer: D Topic: Price and Opportunity Cost Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

2) A relative price is A) the number of dollars that must be given up in exchange for the good. B) also called the money price. C) not an opportunity cost. D) the ratio of one price to another price. Answer: D Topic: Price and Opportunity Cost Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

3) The opportunity cost of good A in terms of good B is equal to the A) money price of good A minus the money price of good B. B) money price of good B minus the money price of good A. C) ratio of the money price of good A to the money price of good B. D) ratio of the money price of good B to the money price of good A. Answer: C Topic: Price and Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

4) The relative price of a good is A) an opportunity cost. B) equal to the money price of a good. C) equal to the price of that good divided by the quantity demanded of the good. D) what you get paid for babysitting your cousin. Answer: A Topic: Price and Opportunity Cost Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

5) The opportunity cost of a hot dog in terms of hamburgers is the A) ratio of the slope of the demand curve for hot dogs to the slope of the demand curve for hamburgers. B) ratio of the slope of the supply curve for hot dogs to the slope of the supply curve for hamburgers. C) money price of a hot dog minus the money price of a hamburger. D) ratio of the money price of a hot dog to the money price of a hamburger. Answer: D Topic: Price and Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

6) Joe pays $8,000.00 in tuition. The 8,000 dollar tuition Joe pays is an example of what economists call A) a relative price. B) a money price. C) an indexed price. D) an opportunity price. Answer: B Topic: Price and Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

7) If the price of a candy bar is $1 and the price of a fast food meal is $5, then the A) relative price of a candy bar is 5 fast food meals per candy bar. B) money price of a candy bar is 1/5 of a fast food meal per candy bar. C) relative price of a fast food meal is 5 candy bars per fast food meal. D) money price of a fast food meal is 1/5 of a candy bar per fast food meal. Answer: C Topic: Price and Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

8) If the price of a hot dog is $2 and the price of a hamburger is $4, then the A) relative price of a hot dog is 1/2 of a hamburger per hot dog. B) money price of a hot dog is 2 hamburgers per hot dog. C) relative price of a hamburger is 1/2 of a hot dog per hamburger. D) money price of a hamburger is 2 hot dogs per hamburger. Answer: A Topic: Price and Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

9) Suppose the price of a football is $20.00 and the price of a basketball is $10.00. The ________ of a football is ________. A) relative price; 2 basketballs per football B) relative price; 1/2 basketball per football C) opportunity cost; $20.00 D) opportunity cost; $10.00 Answer: A Topic: Price and Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

10) The price of a bag of corn chips is $3, and the price of a bottle of soda is $1. What is the relative price of a bag of corn chips? A) 3 bottles of soda per bag of corn chips B) 1/3 bottle of soda per bag of corn chips C) $3 D) 33¢ Answer: A Topic: Price and Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

11) The price of a bag of corn chips is $3, and the price of a bottle of soda is $1. What is the relative price of a bottle of soda? A) 3 bags of corn chips per bottle of soda B) 1/3 bag of corn chips per bottle of soda C) $3 D) 33¢ Answer: B Topic: Price and Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

12) An ice cream cone costs $1.50. A can of soda costs $0.75. The relative price of an ice cream cone is A) 1/2 can of soda per ice cream cone, the opportunity cost of an ice cream cone. B) $1.50, the opportunity cost of a can of soda. C) 2 cans of soda per soda, the opportunity cost of an ice cream cone. D) $0.75, the opportunity cost of a can of soda. Answer: C Topic: Price and Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

13) Twenty years ago a stove cost $300 and a refrigerator cost $1,500. Today a stove costs $600, while a refrigerator costs $1,800. Which of the following statements is true? A) The relative price of stoves and refrigerators has not changed. B) The relative price of a refrigerator has increased. C) The relative price of a stove has increased. D) The money price of a refrigerator has fallen. Answer: C Topic: Price and Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

14) If the money price of wheat increases and no other prices change, the A) relative price of wheat falls. B) opportunity cost of wheat rises. C) demand for wheat increases. D) relative price of wheat is unaffected. Answer: B Topic: Price and Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

15) If the money price of hats rises and no other prices change, the I. relative price of a hat rises. II. opportunity cost of a hat rises. A) only I B) both I and II C) only II D) neither I nor II Answer: B Topic: Price and Opportunity Cost Skill: Conceptual Status: New 10th edition AACSB: Reflective Thinking

16) The price of a DVD rental is $1.50 and the price of a downloaded movie is $1.00. If the price of a DVD rental increases by $0.50, the relative price a downloaded movie A) rises. B) falls. C) does not change. D) might change, but more information is needed. Answer: B Topic: Price and Opportunity Cost Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

17) The price of a DVD rental is $2.50 and the price of a downloaded movie is $1.00. If the price of a DVD rental falls by $0.50, the relative price a downloaded movie A) rises. B) falls. C) does not change. D) might change, but more information is needed. Answer: A Topic: Price and Opportunity Cost Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

18) The opportunity cost of a good is the same as its A) money price. B) relative price. C) price index. D) none of the above Answer: B Topic: Study Guide Question, Price and Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

19) The money price of a pizza is $12 per pizza and the money price of a taco is $2 per taco. The relative price of a pizza is A) $12 per pizza. B) $24 per pizza. C) 6 tacos per pizza. D) 1/6 pizza per taco. Answer: C Topic: Study Guide Question, Price and Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

2 Demand 1) Wants, as opposed to demands, A) are the unlimited desires of the consumer. B) are the goods the consumer plans to acquire. C) are the goods the consumer has acquired. D) depend on the price. Answer: A Topic: Demand Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

2) Demands differ from wants because A) demands are unlimited, whereas wants are limited by income. B) wants require a plan to acquire a good but demands require no such plan. C) wants imply a decision about which demands to satisfy, while demands involve no specific plan to acquire the good. D) demands reflect a decision about which wants to satisfy and a plan to buy the good, while wants are unlimited and involve no specific plan to acquire the good. Answer: D Topic: Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

3) Scarcity guarantees that A) demands will exceed wants. B) wants will exceed demands. C) demands will be equal to wants. D) most demands will be satisfied. Answer: B Topic: Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

4) The quantity demanded of a good or service is the amount that A) a consumer would like to buy but might not be able to afford. B) is actually bought during a given time period at a given price. C) consumers plan to buy during a given time period at a given price. D) firms are willing to sell during a given time period at a given price. Answer: C Topic: Quantity Demanded Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

5) The quantity demanded is A) always equal to the equilibrium quantity. B) independent of the price of the good. C) the amount of a good that consumers plan to purchase at a particular price. D) independent of consumers' buying plans. Answer: C Topic: Demand Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

6) When graphing a demand curve for corn, we are showing the relationship between the quantity demanded of corn and the A) money price of corn. B) relative price of corn. C) income effect. D) substitution effect. Answer: B Topic: Law of Demand Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

7) The "law of demand" states that changes in A) demand are related directly to changes in supply. B) the quantity demanded of a good are not related to changes in the quantity supplied. C) the quantity demanded of a good are inversely related to changes in its price. D) demand are inversely related to changes in supply. Answer: C Topic: Law of Demand Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

8) The "law of demand" is illustrated by a A) rightward shift of the demand curve. B) leftward shift of the demand curve. C) movement along the demand curve. D) Both answers A and B are correct. Answer: C Topic: Law of Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

9) The law of demand states that, other things remaining the same, the higher the price of a good, the A) smaller is the demand for the good. B) larger is the demand for the good. C) smaller is the quantity of the good demanded. D) larger is the quantity of the good demanded. Answer: C Topic: Law of Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

10) The law of demand states that the quantity of a good demanded varies A) inversely with its price. B) inversely with the price of substitute goods. C) directly with income. D) directly with population. Answer: A Topic: Law of Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

11) The "law of demand" refers to the fact that, all other things remaining the same, when the price of a good rises A) the demand curve shifts rightward. B) the demand curve shifts leftward. C) there is a movement down along the demand curve to a larger quantity demanded. D) there is a movement up along the demand curve to a smaller quantity demanded. Answer: D Topic: Law of Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

12) The "law of demand" states that, other things remaining the same, the quantity demanded of any good is A) inversely related to its price. B) directly related to its price. C) positively related to its price. D) directly related to the supply of the good. Answer: A Topic: Law of Demand Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

13) The "law of demand" states that, other thing remaining the same, the higher A) the price of a good, the lower is the demand for this good. B) consumers' incomes, the greater is the demand. C) the price of a good, the higher is the quantity demanded. D) the price of a good, the smaller is the quantity demanded. Answer: D Topic: Law of Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

14) The law of demand implies that, other things remaining the same, A) as the price of a cheeseburger rises, the quantity of cheeseburgers demanded will increase. B) as the price of a cheeseburger rises, the quantity of cheeseburgers demanded will decrease. C) as income increases, the quantity of cheeseburgers demanded will increase. D) as the demand for cheeseburgers increases, the price of a cheeseburger will fall. Answer: B Topic: Law of Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

15) The "law of demand" predicts that, other things being equal, A) an increase in the price of downloaded music decreases the demand for downloaded music. B) a decrease in the price of gasoline decreases the quantity of gasoline demanded. C) an increase in the price of pizza decreases the quantity of pizza demanded. D) an increase in the price of coffee decreases the quantity of tea demanded. Answer: C Topic: Law of Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

16) The law of demand implies that demand curves A) slope down. B) slope up. C) shift rightward whenever the price rises. D) shift leftward whenever the price rises. Answer: A Topic: Law of Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

17) Which of the following is consistent with the law of demand? A) An increase in the price of a DVD causes an increase in the quantity of DVDs demanded. B) An increase in the price of a soda causes a decrease in the quantity of soda demanded. C) A decrease in the price of a gallon of milk causes a decrease in the quantity of milk demanded. D) A decrease in the price of juice causes no change in the quantity of juice demanded. Answer: B Topic: Law of Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Communication

18) The law of demand implies that if nothing else changes, there is A) a positive relationship between the price of a good and the quantity demanded. B) a negative relationship between the price of a good and the quantity demanded. C) a linear relationship between price of a good and the quantity demanded. D) an exponential relationship between price of a good and the quantity demanded. Answer: B Topic: Law of Demand Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

19) As the relative price of a good falls, the substitution effect implies that people buy A) less of that good and more of its substitutes. B) more of that good and less of its substitutes. C) less of that good and less of its substitutes. D) more of that good and more of its substitutes. Answer: B Topic: Demand; Substitution Effect Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

20) When the price of a pizza decreases from $12 to $10, it is definitely the case that the A) income effect means people buy less pizza. B) substitution effect means people buy more pizza. C) quantity demanded of pizza will not change. D) None of the above answers is correct. Answer: B Topic: Demand; Substitution Effect Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Communication

21) The price of cereal rises. As a result, people have cereal for breakfast on fewer days and eat eggs instead. This behavior is an example of A) a decrease in the quantity demanded of cereal because of the substitution effect. B) an increase in the quantity demanded of eggs because of the income effect. C) a decrease in the quantity supplied of cereal because of the substitution effect. D) an increase in the quantity supplied of eggs because of the income effect. Answer: A Topic: Demand; Substitution Effect Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Communication

22) In the market for magazines, the "income effect" means that A) magazines are usually purchased by people with higher than average incomes. B) a decrease in the price of a substitute product like books will make magazine readers feel a little poorer than they were before. C) an increase in the price of magazines will reduce the total purchasing power of magazine readers, making them able to afford fewer magazines. D) an increase in the price of magazines will raise the relative price of magazines to books, causing magazine readers to read more books and fewer magazines. Answer: C Topic: Demand; Income Effect Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

23) The "income effect" in the market for aspirin means that A) aspirin are generally taken by people with higher than average incomes. B) a decrease in the price of a substitute good like acetaminophen will make aspirin takers feel a little poorer than they were before. C) an increase in the price of aspirin will reduce the total purchasing power of aspirin takers, making them able to afford fewer aspirin. D) an increase in the price of aspirin will cause headache sufferers to look for a lower priced remedy. Answer: C Topic: Demand; Income Effect Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

24) When the price of a pizza decreases from $14 to $12, A) the income effect means people buy less pizza. B) the income effect points out that the total purchasing power of people who buy pizza increases. C) the income effect means that the demand for pizza will not change. D) None of the above answers is correct. Answer: B Topic: Demand; Income Effect Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

25) When the price of a good falls, the income effect for a normal good implies that people buy A) less of that good because the relative price of the good has fallen. B) more of that good because the relative price of the good has risen. C) less of that good because they cannot afford to buy all the things they previously bought. D) more of that good because they can afford to buy more of all the things they previously bought. Answer: D Topic: Demand; Income Effect Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

26) For normal goods which of the following explains why demand curves slope downward? A) prices and income B) substitutes and complements C) resources and technology D) substitution effect and income effect Answer: D Topic: Demand; Income and Substitution Effects Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

27) Apples are a normal good, so if the price of an apple increases from 50¢ to 60¢, the quantity of apples demanded decrease because of A) the substitution effect only. B) the income effect only. C) a change in income. D) the substitution and income effects. Answer: D Topic: Demand; Income and Substitution Effects Skill: Recognition Status: Modified 10th edition AACSB: Analytical Skills

28) When the price of an inferior good falls, the substitution effect leads to ________ in the quantity purchased and the income effect leads to ________ in the quantity purchased. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease Answer: B Topic: Demand; Income and Substitution Effects Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

29) When the price of a normal good falls, the substitution effect leads to ________ in the quantity purchased and the income effect leads to ________ in the quantity purchased. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease Answer: A Topic: Demand; Income and Substitution Effects Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

30) Which of the following influences people's buying plans and does NOT shift the demand curve? A) the price of the good B) the prices of related goods C) income D) preferences Answer: A Topic: Demand Curve and Demand Schedule Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

31) Each point on the demand curve reflects A) all the wants of a given household. B) the highest price consumers are willing and able to pay for that particular unit of a good. C) the highest price sellers will accept for all units they are producing. D) the lowest-cost technology available to produce a good. Answer: B Topic: Willingness and Ability to Pay Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

32) The quantity of iPods that people plan to buy this month depends on all of the following EXCEPT the A) price of CD players. B) price of an iPod. C) technology used to produce an iPod. D) price of a music download from iTunes. Answer: C Topic: Change in Demand Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

33) A substitute is a good A) that can be used in place of another good. B) that is not used in place of another good. C) of lower quality than another good. D) of higher quality than another good. Answer: A Topic: Change in Demand, Prices of Related Goods Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

34) People buy more of good 1 when the price of good 2 rises. These goods are A) complements. B) substitutes. C) normal goods. D) inferior goods. Answer: B Topic: Change in Demand, Prices of Related Goods Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

35) Which of the following pairs of goods are most likely substitutes? A) DVDs and DVD players B) cola and lemon lime soda C) lettuce and salad dressing D) peanut butter and gasoline Answer: B Topic: Change in Demand, Prices of Related Goods Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

36) A complement is a good A) of lower quality than another good. B) used in conjunction with another good. C) used instead of another good. D) of higher quality than another good. Answer: B Topic: Change in Demand, Prices of Related Goods Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

37) Suppose people buy more of good 1 when the price of good 2 falls. These goods are A) complements. B) substitutes. C) normal. D) inferior. Answer: A Topic: Change in Demand, Prices of Related Goods Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

38) Ham and eggs are complements. If the price of ham rises, the demand for eggs will A) increase or decrease but the demand curve for ham will not change. B) decrease and the demand curve for ham will shift rightward. C) not change but there will be a movement along the demand curve for eggs. D) decrease and the demand curve for eggs will shift leftward. Answer: D Topic: Change in Demand, Prices of Related Goods Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

39) A change in which of the following shifts the demand curve for hamburgers? A) an increase in the price of the meat used to produce hamburgers B) an increase in the price of a hamburger C) a fall in the price of french fries, a complement for hamburgers D) an increase in the number of hamburger restaurants Answer: C Topic: Change in Demand, Prices of Related Goods Skill: Recognition Status: Modified 10th edition AACSB: Analytical Skills

40) Which of the following shifts the demand curve for oranges? A) disastrous weather that destroys about half of this year's orange crop B) a decrease in the price of a pound of bananas, a substitute in consumption for oranges C) an increase in the price of the fuel used to transport oranges to supermarkets D) great weather that produces a bumper orange crop this year Answer: B Topic: Change in Demand, Prices of Related Goods Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

41) What happens to the demand for Xbox games if the price of an Xbox falls? A) The demand for Xboxes decreases because the price of a substitute falls. B) The demand for Xboxes increases because the price of a complement falls. C) The demand for Xboxes decreases because the price of a complement falls. D) The demand for Xboxes remains unchanged. Answer: B Topic: Change in Demand, Prices of Related Goods Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

42) Oatmeal is a normal good and cold cereal is a substitute for oatmeal. Raisins are a complement for oatmeal. Which of the following increases the demand for oatmeal? A) an increase in the price of raisins B) a decrease in income C) a decrease in population D) an increase in the price of cold cereal Answer: D Topic: Change in Demand, Prices of Related Goods Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

43) Which of the following shifts the demand curve for hot dogs leftward? A) an increase in the price of a hot dog bun B) a decrease in the price of a hot dog bun C) an increase in the price of a hot dog D) an increase in the price of a hamburger Answer: A Topic: Change in Demand, Prices of Related Goods Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

44) If the price of product X falls and this change increases the demand for product Y, then A) X and Y are complements. B) X and Y are substitutes. C) X is an inferior good. D) Y is an inferior good. Answer: B Topic: Change in Demand, Prices of Related Goods Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

45) You observe that an increase in the price of salsa decreases the demand for tortilla chips and increases the demand for potato chips. You can conclude that A) salsa and tortilla chips are substitutes. B) salsa and potato chips are complements. C) tortilla chips and potato chips are complements. D) salsa and tortilla chips are complements. Answer: D Topic: Change in Demand, Prices of Related Goods Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

46) Cupcakes and granola bars are substitutes in consumption. The price of a granola bar increases so the demand for A) granola bars will increase, that is, the demand curve will shift rightward. B) cupcakes will increase, that is, the demand curve will shift rightward. C) granola bars will decrease, that is, the demand curve will shift leftward. D) cupcakes will decrease, that is, the demand curve will shift leftward. Answer: B Topic: Change in Demand, Prices of Related Goods Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

47) Sweatshirts and tee-shirts are complements in consumption and the price of a sweatshirt increases. As a result, the demand for A) sweatshirts will increase, that is, the demand curve will shift rightward. B) tee-shirts will increase, that is, the demand curve will shift rightward. C) sweatshirts will decrease, that is, the demand curve will shift leftward. D) tee-shirts will decrease, that is, the demand curve will shift leftward. Answer: D Topic: Change in Demand, Prices of Related Goods Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

48) If the price of an Xbox player falls, then in the market for Xbox games, A) the demand curve for Xbox games shifts rightward. B) the demand curve for Xbox games shifts leftward. C) there is a movement downward along the demand curve for Xbox games. D) there is a movement upward along the demand curve for Xbox games. Answer: A Topic: Change in Demand, Prices of Related Goods Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

49) The observation that the demand curve for grape jelly shifts rightward every time the price of peanut butter falls means that grape jelly and peanut butter are A) complements. B) substitutes. C) inferior goods. D) normal goods. Answer: A Topic: Change in Demand, Prices of Related Goods Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

50) A decrease in the price of bowling shifts the A) demand curve for bowling balls leftward. B) demand curve for bowling balls rightward. C) supply curve of bowling balls leftward. D) supply curve of bowling balls rightward. Answer: B Topic: Change in Demand, Prices of Related Goods Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

51) The price of a tomato increases and people buy more lettuce. You infer that lettuce and tomatoes are ________. A) complements B) normal goods C) substitutes D) inferior goods Answer: C Topic: Change in Demand, Prices of Related Goods Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

52) Students can rent a Blu-ray movie at Campus Video for $4. As the price of Blu-ray players fall, the A) quantity supplied of Blu-ray movies will decrease. B) demand for Blu-ray movies will increase. C) supply of Blu-ray movies will decrease. D) quantity demanded of Blu-ray movies will increase. Answer: B Topic: Change in Demand, Prices of Related Goods Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

53) If the price of chicken falls, then in the market for beef, A) the demand curve for beef shifts rightward. B) the demand curve for beef shifts leftward. C) there is a movement downward along the demand curve for beef. D) there is a movement upward along the demand curve for beef. Answer: B Topic: Change in Demand, Prices of Related Goods Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

54) The demand for a good increases when the price of a substitute ________ and also increases when the price of a complement ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls Answer: B Topic: Change in Demand, Prices of Related Goods Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

55) An increase in the expected future price of a good A) increases its demand. B) decreases its demand. C) increases its supply. D) has no effect on either its demand or its supply. Answer: A Topic: Change in Demand, Expected Future Prices Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

56) Which of the following increases the demand for a normal good? A) a decrease in income B) an decrease in the price of a substitute C) an increase in the price of a complement D) the price of the good is expected to increase in the future Answer: D Topic: Change in Demand, Expected Future Prices Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

57) A decrease in the expected future price of cars A) increases the current quantity demanded of cars, that is, there is a movement downward along the demand curve for cars. B) increases the current demand for cars, that is, there is a rightward shift of the demand curve for cars. C) decreases the current quantity demanded of cars, that is, there is a movement upward along the demand curve for cars. D) decreases the current demand for cars, that is, there is a leftward shift of the demand curve for cars. Answer: D Topic: Change in Demand, Expected Future Prices Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

58) If consumers but not producers expect that the price of soda will rise in November, the A) supply of soda in October will increase. B) demand for soda in October will decrease. C) demand for soda in October will increase. D) supply of soda in October will decrease. Answer: C Topic: Change in Demand, Expected Future Prices Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

59) Consumers expect that the price of a gallon of gasoline will rise next week. As a result, A) today's supply of gasoline increases. B) today's demand for gasoline increases. C) the price of a gallon of gasoline falls today. D) next week's supply of gasoline decreases. Answer: B Topic: Change in Demand, Expected Future Prices Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

60) The demand curve for a normal good shifts leftward if income ________ or the expected future price ________. A) decreases; falls B) decreases; rises C) increases; falls D) increases; rises Answer: A Topic: Change in Demand Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

61) If income increases or the price of a complement falls, the A) demand curve for a normal good shifts leftward. B) demand curve for a normal good shifts rightward. C) supply curve of a normal good shifts leftward. D) supply curve of a normal good shifts rightward. Answer: B Topic: Change in Demand Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

62) If income decreases or the price of a complement rises, A) the demand curve for a normal good shifts leftward. B) the demand curve for a normal good shifts rightward. C) there is an upward movement along the demand curve for the good. D) there is a downward movement along the demand curve for the good. Answer: A Topic: Change in Demand Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

63) A consumer might consider in-line skates and elbow pads to be A) products with upward sloping demand curves. B) unrelated goods. C) complements. D) substitutes. Answer: C Topic: Change in Demand, Prices of Related Goods Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

64) When people's incomes increase, the demand for a good increases. The good is called A) an inferior good. B) a complement. C) a substitute. D) a normal good. Answer: D Topic: Change in Demand, Income Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

65) Normal goods are those for which demand decreases as A) the price of a complement falls. B) the price of a substitute falls. C) income decreases. D) the good's own price rises. Answer: C Topic: Change in Demand, Income Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

66) Which of the following decreases the demand for an inferior good? A) an increase in income B) a decrease in the price of a complement C) a decrease in income D) an increase in the price of a substitute Answer: A Topic: Change in Demand, Income Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

67) If consumers' incomes increase and the demand for bus rides decreases, A) bus rides are a normal good. B) consumers are behaving irrationally. C) bus rides are an inferior good. D) none of the above Answer: C Topic: Change in Demand, Income Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

68) Which of the following is true? A) For an inferior good, when income increases, the demand curve shifts leftward. B) The demand curve for a good shifts leftward when the price of a substitute rises. C) If consumers expect the price of a good will rise in the future, the demand curve shifts leftward. D) An increase in population shifts the demand curve for most goods leftward. Answer: A Topic: Change in Demand, Income Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

69) A normal good is a good for which demand A) decreases when income increases. B) increases when income increases. C) decreases when population increases. D) increases when population increases. Answer: B Topic: Change in Demand, Income Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

70) Inferior goods are those for which demand increases as A) the price of a substitute falls. B) the price of a substitute rises. C) income decreases. D) income increases. Answer: C Topic: Change in Demand, Income Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

71) By definition, an inferior good is a A) want that is not expressed by demand. B) normal substitute good. C) good for which demand decreases when its price rises. D) good for which demand decreases when income increases. Answer: D Topic: Change in Demand, Income Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

72) An inferior good is a good for which demand A) decreases when income increases. B) increases when income increases. C) decreases when population increases. D) increases when population increases. Answer: A Topic: Change in Demand, Income Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

73) Kelly graduates and her income increases by $25,000 a year. Other things remaining the same, she increases the quantity of clothes she buys. For Kelly, clothes are ________. A) an inferior good B) a normal good C) a substitute good D) a complement good Answer: B Topic: Change in Demand, Income Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

74) Which of the following shifts the demand curve for movie downloads rightward? A) a decrease in the price of downloading a movie B) a 10 percent increase in people's income if movie downloads are a normal good C) a decrease in the price of cable television service D) an increase in the quantity and quality of programming included in the basic cable television service package Answer: B Topic: Change in Demand, Income Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

75) If macaroni and cheese is an inferior good, an increase in income will A) not affect the demand for macaroni and cheese. B) decrease the demand for macaroni and cheese. C) increase the demand for macaroni and cheese. D) create no income effect. Answer: B Topic: Change in Demand, Income Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

76) If macaroni and cheese is an inferior good, then a decrease in income will result in A) an increase in the demand for macaroni and cheese. B) a decrease in the demand for macaroni and cheese. C) an increase in the supply of macaroni and cheese. D) a decrease in the supply of macaroni and cheese. Answer: A Topic: Change in Demand, Income Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

77) Jeep Cherokees are a normal good. If people's incomes increase, the direct result will be A) an increase in the supply of the vehicles. B) a decrease in the demand for the vehicles. C) an increase in the demand for the vehicles. D) Both answers A and C are correct. Answer: C Topic: Change in Demand, Income Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

78) Homer changes jobs and his new job pays him a higher income. Before he changed jobs, Homer purchased 3 pounds of tuna and 2 pounds of chicken. After he changed jobs, Homer now purchases 2 pounds of tuna and 3 pounds of chicken. For Homer, A) tuna is a normal good and chicken is an inferior good. B) tuna is an inferior good and chicken is a normal good. C) both tuna and chicken are normal goods. D) both tuna and chicken are inferior goods. Answer: B Topic: Change in Demand, Income Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

79) If the demand for digital cameras increases when consumers' income rise, then digital cameras are A) a normal good. B) an inferior good. C) a substitute good for video cameras. D) a complement to video cameras. Answer: A Topic: Change in Demand, Income Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

80) When income increases, the demand curve for X shifts rightward and the demand curve for Y shifts leftward. These shifts mean that A) X and Y are complements. B) X and Y both normal goods. C) X is an inferior good and Y is a normal good. D) X is a normal good and Y is an inferior good. Answer: D Topic: Change in Demand, Income Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

81) Georgine buys more sweaters when her income increases. For Georgine, sweaters are A) a substitute. B) a complement. C) an inferior good. D) a normal good. Answer: D Topic: Change in Demand, Income Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

82) Gruel is an inferior good. Hence, a decrease in people's incomes A) shifts the supply curve of gruel leftward. B) decreases the quantity of gruel supplied. C) shifts the demand curve for gruel rightward. D) shifts the demand curve for gruel leftward. Answer: C Topic: Change in Demand, Income Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

83) An increase in the number of consumers A) results only in a movement along the demand curve. B) shifts the supply curve leftward C) shifts the demand curve rightward. D) Both answers B and C are correct. Answer: C Topic: Change in Demand, Population Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

84) When economists speak of preferences as influencing demand, they are referring to A) directly observable changes in prices and income. B) an individual's attitudes toward goods and services. C) the excess of wants over the available supplies. D) the availability of a good to all income classes. Answer: B Topic: Change in Demand, Preferences Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

85) A change in which of the following shifts the demand curve? A) the number of sellers in the market B) the price of the resources used to produce the product C) the technology with which the product is produced D) the tastes and preferences of consumers Answer: D Topic: Change in Demand, Preferences Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

86) An unusually warm winter shifts the A) supply curve of gloves rightward. B) supply curve of gloves leftward. C) demand curve for gloves rightward. D) demand curve for gloves leftward. Answer: D Topic: Change in Demand, Preferences Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

87) Which of the following does NOT shift the demand curve for broccoli? A) an increase in the cost of fertilizer used to grow broccoli B) a warning by the U.S. Surgeon General that broccoli causes schizophrenia C) an increase in the price of spinach, a substitute for broccoli, because rodents gobbled up much of this year's spinach crop D) a decrease in the price of spinach, a substitute for broccoli, because of a bumper crop of spinach this year Answer: A Topic: Change in Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

88) Which of the following lists has variables that all shift a good's demand curve? A) price of the good, preferences, prices of substitution goods, income B) income, preferences, number of buyers, price of complementary good C) expectation of future price, price of the good, number of buyers, income D) Both answers A and B are correct. Answer: B Topic: Change in Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

89) The price of the steel used to produce car engines increases. How does this price hike affect the demand curve for cars? A) The demand curve shifts leftward. B) The demand curve shifts rightward. C) The demand curve does not shift. D) There is not enough information to tell how the change shifts the demand curve for cars. Answer: C Topic: Change in Demand Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

90) The quantity demanded of a good or service is the quantity that a consumer A) is willing to buy at a particular price during a given time period. B) actually buys at a particular price during a given time period. C) needs to buy at a particular price during a given time period. D) should buy at a particular price during a given time period. Answer: A Topic: Change in the Quantity Demanded Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

91) If the price of chocolate chip cookies rises, then A) the demand curve for chocolate chip cookies shifts rightward. B) the demand curve for chocolate chip cookies shifts leftward. C) there is a movement downward along the demand curve for chocolate chip cookies. D) there is a movement upward along the demand curve for chocolate chip cookies. Answer: D Topic: Change in the Quantity Demanded Skill: Recognition Status: Modified 10th edition AACSB: Analytical Skills

92) Which of the following leads to a movement along the demand curve for spinach but does not shift the demand curve for spinach? A) a rise in the price of spinach B) a newly discovered health benefit from eating spinach C) an increase in the price of broccoli, a substitute for spinach D) an increase in income for all spinach lovers Answer: A Topic: Change in the Quantity Demanded Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

93) A change in the price of a good A) shifts the good's demand curve and also causes a movement along it. B) shifts the good's demand curve but does not cause a movement along it. C) does not shift the good's demand curve but does cause a movement along it. D) neither shifts the good's demand curve nor causes a movement along it. Answer: C Topic: A Change in Quantity Demanded Versus a Change in Demand Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

94) If shoes rise in price, the demand curve for shoes ________ and the quantity of shoes demanded ________. A) shifts leftward; decreases B) shifts leftward; does not change C) does not shift; decreases D) does not shift; does not change Answer: C Topic: A Change in Quantity Demanded Versus a Change in Demand Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

95) A decrease in quantity demanded because of an increase in price is represented by a A) rightward shift of the demand curve. B) leftward shift of the demand curve. C) movement up and to the left along the demand curve. D) movement down and to the right along the demand curve. Answer: C Topic: A Change in Quantity Demanded Versus a Change in Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

96) A change in which of the following alters buying plans for cars but does NOT shift the demand curve for cars? A) A 5 percent increase in people's income. B) A 10 percent decrease in the price of car insurance. C) A 20 percent increase in the price of a car. D) An increased preference for walking rather than driving. Answer: C Topic: A Change in Quantity Demanded Versus a Change in Demand Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

97) Which of the following would NOT shift the demand curve for turkey? A) an increase in income B) a decrease in the price of ham C) a change in people's preferences for turkey D) a change in the price of a turkey Answer: D Topic: A Change in Quantity Demanded Versus a Change in Demand Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

98) The statement that "demand increases" means that there is a A) movement to the right along a demand curve. B) movement to the left along a demand curve. C) rightward shift of the demand curve. D) leftward shift of the demand curve. Answer: C Topic: A Change in Quantity Demanded Versus a Change in Demand Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

99) Cable television companies must pay increased charges by the networks for the programs the cable companies carry. As a result, the price of cable television rises. Thus A) the demand curve for cable television service shifts rightward. B) the demand curve for cable television service shifts leftward. C) there is a movement down the demand curve for cable television to a higher quantity demanded. D) there is a movement up the demand curve for cable television to a smaller quantity demanded. Answer: D Topic: A Change in the Quantity Demanded Versus a Change in Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

100) As the price of a pound of peanuts falls, the A) demand for peanuts increases. B) demand for peanuts decreases. C) quantity of peanuts demanded increases. D) Both answers A and C are correct. Answer: C Topic: A Change in the Quantity Demanded Versus a Change in Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

101) For "an increase in the quantity demanded" but not "an increase in demand" to occur, there must be a A) rightward shift of the demand curve. B) movement along the demand curve. C) rightward shift of the demand curve and a movement along the demand curve. D) Both answers B and C are correct. Answer: B Topic: A Change in the Quantity Demanded Versus a Change in Demand Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

102) If the price per bushel of apples increased from $7.00 to $8.00 because of a poor harvest, the A) demand for apples decreases. B) quantity of apples demanded decreases. C) quantity of apples supplied decreases. D) Both answers A and B are correct. Answer: B Topic: A Change in the Quantity Demanded Versus a Change in Demand Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

103) Which of the following statements is correct? A) A change in the quantity demanded means a shift in the demand curve. B) A change in demand means a movement along the demand curve. C) A change in demand and change in quantity demanded means the same thing. D) A change in demand means a shift in the demand curve while change in the quantity demanded means a movement along the demand curve. Answer: D Topic: A Change in the Quantity Demanded Versus a Change in Demand Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

104) Which of the following best reflects an increase in quantity demanded and not an increase in demand? A) A college expects enrollment to increase, despite no change in the tuition. B) Skiing becomes a fashionable winter sports activity. C) The price of hair styling falls. D) Consumers expect lower prices next month for computers. Answer: C Topic: A Change in the Quantity Demanded Versus a Change in Demand Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

105) In the above figure, an increase in the quantity demanded is represented by a movement from point d to A) point b only. B) point c only. C) point a. D) both points b and c. Answer: C Topic: A Change in the Quantity Demanded Versus a Change in Demand Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

106) The figure above shows the demand for fruit snacks. Which movement reflects an increase in demand? A) from point a to point e B) from point a to point b C) from point a to point c D) from point a to point d Answer: D Topic: A Change in Quantity Demanded Versus a Change in Demand Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

107) The figure above shows the demand for fruit snacks. Which movement reflects a decrease in demand? A) from point a to point e B) from point a to point b C) from point a to point c D) from point a to point d Answer: C Topic: A Change in Quantity Demanded Versus a Change in Demand Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

108) The figure above shows the demand for fruit snacks. Which movement reflects a decrease in quantity demanded but NOT a decrease in demand? A) from point a to point e B) from point a to point b C) from point a to point c D) from point a to point d Answer: A Topic: A Change in Quantity Demanded Versus a Change in Demand Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

109) The figure above shows the demand for fruit snacks. Which movement reflects how consumers would react to an increase in the price of a non-fruit snack? A) from point a to point e B) from point a to point b C) from point a to point c D) from point a to point d Answer: D Topic: Change in Demand, Prices of Related Goods Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

110) The figure above shows the demand for fruit snacks. Which movement reflects an increase in the price of a substitute for fruit snacks? A) from point a to point e B) from point a to point b C) from point a to point c D) from point a to point d Answer: D Topic: Change in Demand, Prices of Related Goods Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

111) The figure above shows the demand for fruit snacks. Which movement reflects an increase in the price of a complement for fruit snacks? A) from point a to point e B) from point a to point b C) from point a to point c D) from point a to point d Answer: C Topic: Change in Demand, Prices of Related Goods Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

112) The figure above shows the demand for fruit snacks. Which movement reflects how consumers would react to an increase in the price of a fruit snack that is expected to occur in the future? A) from point a to point e B) from point a to point b C) from point a to point c D) from point a to point d Answer: D Topic: Change in Demand, Expected Future Prices Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

113) The figure above shows the demand for fruit snacks. Which movement reflects an increase in income if fruit snacks are an inferior good? A) from point a to point e B) from point a to point b C) from point a to point c D) from point a to point d Answer: C Topic: Change in Demand, Income Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

114) The figure above shows the demand for fruit snacks. Which movement reflects an increase in income if fruit snacks are a normal good? A) from point a to point e B) from point a to point b C) from point a to point c D) from point a to point d Answer: D Topic: Change in Demand, Income Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

115) The figure above shows the demand for fruit snacks. Which movement reflects a decrease in population? A) from point a to point e B) from point a to point b C) from point a to point c D) from point a to point d Answer: C Topic: Change in Demand, Population Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

116) Consider the demand curves for soft drinks shown in the figure above. Moving from point a to point c means that A) the marginal benefit of each additional soft drink falls. B) the opportunity cost of another soft drink increases. C) people's incomes have decreased. D) the price of a soft drink has increased. Answer: A Topic: Change in the Quantity Demanded Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

117) Consider the demand curves for soft drinks shown in the figure above. Suppose the economy is at point a. An increase in the price of a soda results in a movement to a point such as A) none of the points illustrated. B) b. C) c. D) d. Answer: D Topic: Change in the Quantity Demanded Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

118) Consider the demand curves for soft drinks shown in the figure above. Suppose the economy is at point a. Which of the following could result in a movement to point c? A) a decrease in income B) an increase in the relative price of a soft drink C) a decrease in the relative price of a soft drink D) a decrease in the price of bottled water Answer: C Topic: Change in the Quantity Demanded Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

119) Consider the demand curves for soft drinks shown in the figure above. Suppose the economy is at point a. Which of the following could result in a movement to point d? A) a decrease in income B) an increase in the relative price of a soft drink C) a decrease in the relative price of a soft drink D) a decrease in the price of bottled water Answer: B Topic: Change in the Quantity Demanded Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

120) Consider the demand curves for soft drinks shown in the figure above. Suppose the economy is at point a. What of the following could result in a movement to point b? A) an increase in the price of bottled water B) a decrease in the price of bottled water C) an increase in the opportunity cost of soft drinks D) a decrease in the relative price of a soft drink Answer: A Topic: Change in Demand, Prices of Related Goods Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

121) Consider the demand curves for soft drinks shown in the figure above. Initially the economy is at point a. If people come to expect that the price of a soft drink will increase in the future, there will be a movement to a point such as A) none of the points illustrated. B) b. C) c. D) d. Answer: B Topic: Change in Demand, Expected Future Prices Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

122) Consider the demand curves for soft drinks shown in the figure above. A movement from point a to point c represents A) a decrease in quantity demanded. B) an increase in demand. C) an increase in quantity demanded. D) a decrease in demand. Answer: C Topic: A Change in the Quantity Demanded Versus a Change in Demand Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

123) Consider the demand curves for soft drinks shown in the figure above. A movement from point a to point b represents A) a decrease in quantity demanded. B) an increase in demand. C) an increase in quantity demanded. D) a decrease in demand. Answer: B Topic: A Change in the Quantity Demanded Versus a Change in Demand Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

124) The law of demand concludes that a rise in the price of a golf ball ________ the quantity demanded and ________. A) increases; shifts the demand curve for golf balls rightward. B) decreases; shifts the demand curve for golf balls leftward. C) decreases; creates a movement up along the demand curve for golf balls. D) increases; creates a movement down along the demand curve for golf balls. Answer: C Topic: Study Guide Question, Law of Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

125) If a decrease in the price of gasoline increases the demand for large cars, then A) gasoline and large cars are substitutes in consumption. B) gasoline and large cars are complements in consumption. C) gasoline is an inferior good. D) large cars are an inferior good. Answer: B Topic: Study Guide Question, Change in Demand, Prices of Related Good Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

126) A normal good is one A) with a downward sloping demand curve. B) for which demand increases when the price of a substitute rises. C) for which demand increases when income increases. D) none of the above Answer: C Topic: Study Guide Question, Change in Demand, Income Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

127) Some sales managers are talking shop. Which of the following quotations refers to a movement along the demand curve? A) "Since our competitors raised their prices our sales have doubled." B) "It has been an unusually mild winter; our sales of wool scarves are down from last year." C) "We decided to cut our prices, and the increase in our sales has been remarkable." D) none of the above Answer: C Topic: Study Guide Question, Change in Quantity Demanded Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Communication

128) A recession occurs and people's incomes decrease. Knowing that an iPad is a normal good, you predict that the demand for an iPad A) increases. B) decreases. C) might increase or decrease. D) remains unchanged. Answer: B Topic: Parallel MyEconLab Questions, Change in Demand, Income Skill: Analytical Status: Modified 10th edition AACSB: Reflective Thinking

3 Supply 1) Which of the following is NOT one of the factors that influences the supply of a product? A) technology B) income C) number of suppliers D) expected future prices Answer: B Topic: What Determines Selling Plans? Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

2) The quantity of CDs that firms plan to sell this month depends on all of the following EXCEPT the A) number of producers of CDs. B) quantity of CDs that people plan to buy. C) wage rate of workers who produce CDs. D) price of a CD. Answer: B Topic: What Determines Selling Plans? Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

3) The quantity supplied of a good is A) the same thing as the quantity demanded at each price. B) the amount that the producers are planning to sell at a particular price during a given time period. C) equal to the difference between the quantity available and the quantity desired by all consumers and producers. D) the amount the firm would sell if it faced no resource constraints. Answer: B Topic: Quantity Supplied Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

4) The quantity supplied of a good or service is the amount that A) producers wish they could sell at a higher price. B) is actually bought during a given time period at a given price. C) people are willing to buy during a given time period at a given price. D) producers plan to sell during a given time period at a given price. Answer: D Topic: Quantity Supplied Skill: Definition Status: New 10th edition AACSB: Reflective Thinking

5) The quantity supplied of a good or service is the quantity that a producer ________ at a particular price during a given time period. A) is willing to sell B) actually sells C) needs to sell D) should sell Answer: A Topic: Quantity Supplied Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

6) The "law of supply" states that, other things remaining the same, firms produce A) more of a good the less it costs to produce it. B) less of a good the more it costs to produce it. C) more of a good the higher its price. D) less of a good as the required resources become scarcer. Answer: C Topic: The Law of Supply Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

7) The "law of supply" refers to the fact that, all other things remaining the same, when the price of a good rises, A) the supply curve shifts leftward. B) the supply curve shifts rightward. C) there is a movement up along the supply curve to a larger quantity supplied. D) there is a movement down along the supply curve to a smaller quantity supplied. Answer: C Topic: The Law of Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

8) Which of the following explains why supply curves slope upward? A) prices and income B) increasing marginal cost C) resources and technology D) substitutes in production and complements in production Answer: B Topic: The Law of Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

9) The supply curve slopes upward when graphed against ________, because of ________. A) the price of the good; increasing marginal cost B) the price of the good; decreasing marginal cost C) income; increasing marginal cost D) income; decreasing marginal cost Answer: A Topic: The Law of Supply Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

10) A fall in the price of a good causes producers to reduce the quantity of the good they are willing to produce. This fact illustrates A) the law of supply. B) the law of demand. C) a change in supply. D) the nature of an inferior good. Answer: A Topic: The Law of Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

11) Because of increasing marginal cost, most supply curves A) are horizontal. B) are vertical. C) have a negative slope. D) have a positive slope. Answer: D Topic: Supply Curve and Supply Schedule Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

12) A supply curve shows the relation between the quantity of a good supplied and A) income. Usually a supply curve has negative slope. B) income. Usually a supply curve has positive slope. C) the price of the good. Usually a supply curve has negative slope. D) the price of the good. Usually a supply curve has positive slope. Answer: D Topic: Supply Curve and Supply Schedule Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

13) Which of the following is NOT held constant while moving along a supply curve? A) expected future prices B) the number of sellers C) the price of the good itself D) prices of factors of production Answer: C Topic: Supply Curve and Supply Schedule Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

14) Each point on a supply curve represents A) the highest price buyers will pay for the good. B) the lowest price for which a supplier can profitably sell another unit. C) the lowest price buyers will accept per unit of the good. D) the highest price sellers can get for each unit over time. Answer: B Topic: Minimum Supply Price Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

15) In the above figure, what is the minimum supply price for the fourth gallon of ice cream? A) $2.00 B) $3.00 C) $4.00 D) $5.00 Answer: D Topic: Minimum Supply Price Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

16) Which of the following shifts the supply curve for gasoline rightward? A) a situation in which the quantity demanded exceeds the quantity supplied B) an increase in the price of gasoline C) a decrease in the price of a resource used to produce gasoline, such as crude oil D) an increase in the demand for gas-guzzling, sport utility vehicles Answer: C Topic: Change in Supply, Prices of Factors of Production Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 43 Copyright © 2014 Pearson Education, Inc.

17) Changes in which of the following shifts the supply curve of hamburgers? A) a rise in the price of soda, a complement for hamburgers B) new research that establishes a link between hamburgers and heart problems C) an increase in the price of meat used to produce hamburgers D) an economy-wide decrease in income because of a long recession Answer: C Topic: Change in Supply, Prices of Factors of Production Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

18) Which of the following decreases the supply of restaurant meals? A) Waiters get a pay raise. B) Consumers' incomes increase and restaurant meals are a normal good. C) Consumers' incomes decrease and restaurant meals are a normal good. D) The price of movies, a complement to restaurant meals, falls. Answer: A Topic: Change in Supply, Prices of Factors of Production Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

19) Which of the following shifts the supply curve rightward? A) an increase in the population B) a positive change in preferences for the good C) a decrease in the price of the good D) a decrease in the price of a factor of production used to produce the good Answer: D Topic: Change in Supply, Prices of Factors of Production Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

20) Auto workers negotiate a wage increase. How does this wage hike affect the supply of cars? A) It decreases the supply. B) It increase the supply. C) It has no effect. D) There is not enough information to tell if the change increases, decreases, or has no effect on the supply of cars. Answer: A Topic: Change in Supply, Prices of Factors of Production Skill: Analytical Status: Modified 10th edition AACSB: Reflective Thinking

21) If a producer can use resources to produce either good A or good B, then A and B are A) complements in production. B) substitutes in production. C) substitutes in consumption. D) complements in consumption. Answer: B Topic: Change in Supply, Prices of Related Goods Produced Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

22) Good A and good B are substitutes in production. The demand for good A increases so that the price of good A rises. The increase in the price of good A shifts the A) demand curve for good B leftward. B) demand curve for good B rightward. C) supply curve of good B leftward. D) supply curve of good B rightward. Answer: C Topic: Change in Supply, Prices of Related Goods Produced Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

23) Blank DVDs and prerecorded DVDs are substitutes in production. An increase in the price of a blank DVD will lead to A) an increase in the supply of prerecorded DVDs. B) a decrease in the supply of prerecorded DVDs. C) an increase in the quantity supplied of prerecorded DVDs but not in the supply of prerecorded DVDs. D) a decrease in the quantity supplied of prerecorded DVDs but not in the supply of prerecorded DVDs. Answer: B Topic: Change in Supply, Prices of Related Goods Produced Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

24) If the price of lumber rises, then, in the market for sawdust, A) the supply curve of sawdust shifts leftward. B) the supply curve of sawdust shifts rightward. C) there is a movement downward along the supply curve for sawdust. D) there is a movement upward along the supply curve for sawdust. Answer: B Topic: Change in Supply, Prices of Related Goods Produced Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

25) A bakery can produce either cakes or cookies. If the price of cookies rises, then A) the supply curve of cake shifts leftward. B) the supply curve of cake shifts rightward. C) there is a movement downward along the supply curve of cakes. D) there is a movement upward along the supply curve of cakes. Answer: A Topic: Change in Supply, Prices of Related Goods Produced Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

26) Good A and good B are substitutes in production. The demand for good A decreases, which lowers the price of good A. The decrease in the price of good A A) decreases the supply of good B. B) increases the supply of good B. C) decreases the demand for good B. D) increases the demand for good B. Answer: B Topic: Change in Supply, Prices of Related Goods Produced Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

27) Growers expect that the price of a bushel of wheat will increase in one month. This belief results in A) an increase in current supply of wheat. B) a decrease in current supply of wheat. C) a decrease in future supply of wheat. D) no change in current or future supply of wheat. Answer: B Topic: Change in Supply, Expected Future Price Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

28) An increase in the number of suppliers in a market results in a A) movement up along the supply curve. B) rightward shift in the supply curve. C) leftward shift in the supply curve. D) Both answers A and C are correct. Answer: B Topic: Change in Supply, Number of Suppliers Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

29) An increase in the number of fast-food restaurants A) raises the price of fast-food meals. B) increases the demand for fast-food meals. C) increases the supply of fast-food meals. D) increases the demand for substitutes for fast-food meals. Answer: C Topic: Change in Supply, Number of Suppliers Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

30) Which of the following increases the supply of a product? A) a fall in the price of the product B) a smaller number of sellers producing the product C) an increase in foreign imports of the product D) higher taxes imposed upon producers of the product Answer: C Topic: Change in Supply, Number of Suppliers Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

31) Which of the following decreases the supply of popcorn? A) a decrease in the price of popcorn B) an increase in the price of popcorn C) a technological advance in the production of popcorn D) a decrease in the number of popcorn producers Answer: D Topic: Change in Supply, Number of Suppliers Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

32) Over the past decade technological improvements that have lowered the cost of producing an automobile have increased A) both the supply and the demand for automobiles. B) the supply but not the demand for automobiles. C) the demand but not the supply of automobiles. D) neither the supply nor the demand for automobiles. Answer: B Topic: Change in Supply, Technology Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

33) An increase in technology for producing personal computers leads to A) an increase in the demand for personal computers. B) a decrease in the demand for personal computers. C) an increase in the supply of personal computers. D) a decrease in the supply of personal computers. Answer: C Topic: Change in Supply, Technology Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

34) Which of the following shifts the supply curve of broccoli? A) an increase in income B) a newly discovered increase in the nutritional value of broccoli C) a newly discovered link between broccoli consumption and tooth decay D) the destruction of much of this year's broccoli crop by hurricanes Answer: D Topic: Change in Supply, State of Nature Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

35) A severe drought has damaged this year's lettuce crop. The initial effect on the lettuce market is a A) decrease in the demand for lettuce. B) decrease in the supply of lettuce. C) decrease in both the demand and supply of lettuce. D) rightward movement along the demand curve for lettuce. Answer: B Topic: Change in Supply, State of Nature Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

36) The figure above shows supply curves for soft drinks. Suppose the economy is at point a. A movement to point c could be the result of A) a decrease in technology. B) a decrease in the relative price of a soft drink. C) an increase in the relative price of a soft drink. D) an increase in the money price of a soft drink. Answer: B Topic: Change in the Quantity Supplied Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

37) The figure above shows supply curves for soft drinks. Suppose the economy is at point a. An increase in the price of a soft drink is shown as a movement from point a to A) none of the points that are illustrated. B) point b. C) point c. D) point d. Answer: D Topic: Change in the Quantity Supplied Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

38) The figure above shows supply curves for soft drinks. Suppose the economy is at point a. A movement to point d would be the result of A) an increase in technology. B) a decrease in the relative price of a soft drink. C) an increase in the relative price of a soft drink. D) an increase in the number of soft drink suppliers. Answer: C Topic: Change in the Quantity Supplied Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

39) The figure above shows supply curves for soft drinks. Suppose the economy is at point a. A decrease in the price of sugar used to make soft drinks is shown as a movement from point a to a point such as A) none of the points that are illustrated. B) point b. C) point c. D) point d. Answer: B Topic: Change in Supply, Prices of Factors of Production Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

40) The figure above shows supply curves for soft drinks. Suppose the economy is at point a. An increase in the number of suppliers would be shown as a movement from point a to a point such as A) none of the points that are illustrated. B) point b. C) point c. D) point d. Answer: B Topic: Change in Supply, Number of Suppliers Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

41) The figure above shows supply curves for soft drinks. Suppose the economy is at point a. A movement to point b could be the result of A) an increase in technology. B) a decrease in the relative price of a soft drink. C) an increase in the relative price of a soft drink. D) an increase in the money price of a soft drink. Answer: A Topic: Change in Supply, Technology Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

42) Which of the following shifts the supply curve for good X leftward? A) a situation in which quantity demanded exceeds quantity supplied B) an increase in the cost of the machinery used to produce X C) a technological advance in the production of X D) a decrease in the wages of workers employed to produce X Answer: B Topic: Change in Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

43) Which of the following will NOT shift the supply curve for pick-up trucks? A) a technological advance B) an increase in the price of a resource used to produce pick-up trucks C) a change in the number of firms supplying pick-up trucks D) a change in the price of pick-up trucks Answer: D Topic: Change in Supply Skill: Recognition Status: Modified 10th edition AACSB: Analytical Skills

44) A change in which of the following would NOT shift the supply curve for sneakers? A) an increase in technology for making sneakers B) an increase in the price of rubber, used to make sneakers C) an increase in the price of sneakers D) None of the above, that is, each change shifts the supply curve. Answer: C Topic: Change in Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

45) Which of the following shifts the supply curve for oranges? A) disastrous weather that destroys about half of this year's orange crop B) a newly discovered increase in the nutritional value of oranges C) an increase in the price of bananas, a substitute in consumption for oranges D) an increase in income for all orange consumers Answer: A Topic: Change in Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

46) Which of the following leads to a movement along the supply curve for shredded wheat but does not shift the supply curve for shredded wheat? A) a fall in the price of shredded wheat B) an increase in the cost of machinery used to shred wheat C) perfect weather conditions that resulted in a large wheat crop D) a decrease in the number of shredded wheat producers Answer: A Topic: A Change in Quantity Supplied Versus a Change in Supply Skill: Recognition Status: Modified 10th edition AACSB: Analytical Skills

47) Which of the following results in a movement along the supply curve of spinach but does not shift the supply curve of spinach? A) disastrous weather that destroys half of this year's spinach crop B) a rise in the price of of spinach C) an increase in wages for workers in spinach fields D) great weather that produces a bumper spinach crop this year Answer: B Topic: A Change in Quantity Supplied Versus a Change in Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

48) Which of the following does NOT shift the supply curve? A) a technological advance B) a decrease in the wages of labor used in production of the good C) a fall in the price of a substitute in production D) an increase in the price of the good Answer: D Topic: A Change in Quantity Supplied Versus a Change in Supply Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

49) If the price of chocolate chip cookies falls, then A) the supply curve of chocolate chip cookies shifts rightward. B) the supply curve of chocolate chip cookies shifts leftward. C) there is a movement downward along the supply curve of chocolate chip cookies. D) there is a movement upward along the supply curve of chocolate chip cookies. Answer: C Topic: A Change in Quantity Supplied Versus a Change in Supply Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

50) As the price of a pound of peanuts falls, the A) supply of peanuts increases. B) supply of peanuts decreases. C) quantity of peanuts supplied increases. D) quantity of peanuts supplied decreases. Answer: D Topic: A Change in the Quantity Supplied Versus a Change in Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

51) For a "change in the quantity supplied" but not "a change in supply" to occur, there must be a A) rightward shift of the supply curve. B) rightward shift of the demand curve. C) leftward shift of the demand curve. D) Both answers B and C are correct. Answer: D Topic: A Change in the Quantity Supplied Versus a Change in Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

52) If the price of a good changes but everything else influencing suppliers' planned sales remains constant, there is a A) new supply curve that is to the right of the initial supply curve. B) new supply curve that is to the left of the initial supply curve. C) movement along the supply curve. D) rotation of the initial supply curve around the initial price. Answer: C Topic: A Change in Quantity Supplied Versus a Change in Supply Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

53) A decrease in the quantity supplied is represented by a A) movement down the supply curve. B) movement up the supply curve. C) rightward shift in the supply curve. D) leftward shift in the supply curve. Answer: A Topic: A Change in Quantity Supplied Versus a Change in Supply Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

54) Which of the following increases the quantity supplied of good X but does NOT increase the supply of good X? A) a fall in the price of a factor production used to produce X B) an advance in the technology for producing X C) an increase in the price of good Y, a complement in the production of X D) an increase in the price of X Answer: D Topic: A Change in Quantity Supplied Versus a Change in Supply Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

55) Consider the market for broccoli. If the price of a pound of broccoli increases, what happens to the supply of broccoli? A) The supply of broccoli decreases. B) The supply of broccoli increases. C) There will be no change in the supply of broccoli, but instead there is an increase in the quantity supplied of broccoli. D) There will be no change in the supply of broccoli, but instead there is a decrease in the quantity supplied of broccoli. Answer: C Topic: A Change in the Quantity Supplied Versus a Change in Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

56) Which of the following statements is TRUE? A) An increase in the price of gasoline will decrease the demand for gasoline. B) An increase in the price of gasoline will increase the quantity demanded of gasoline. C) An increase in the price of gasoline will increase the supply of gasoline. D) An increase in the price of gasoline will increase the quantity supplied of gasoline. Answer: D Topic: A Change in the Quantity Supplied Versus a Change in Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

57) In the figure above, an increase in the supply of oil would result in a movement from A) point a to point e. B) point a to point b. C) point a to point c. D) point a to point d. Answer: B Topic: A Change in Quantity Supplied Versus a Change in Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

58) In the figure above, an increase in the quantity of oil supplied but NOT an increase in the supply of oil is shown by a movement from A) point a to point e. B) point a to point b. C) point a to point c. D) point a to point d. Answer: A Topic: A Change in Quantity Supplied Versus a Change in Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

59) In the figure above, a decrease in the quantity of oil supplied but NOT a decrease in the supply of oil is shown by a movement from A) point a to point e. B) point a to point b. C) point a to point c. D) point a to point d. Answer: C Topic: A Change in Quantity Supplied Versus a Change in Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

60) In the figure above, which movement could be the result of an increase in the wages paid to oil workers? A) point a to point e B) point a to point b C) point a to point c D) point a to point d Answer: D Topic: Change in Supply, Prices of Factors of Production Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

61) In the figure above, which movement could be the result of the development of a new, more efficient refining technology? A) point a to point e B) point a to point b C) point a to point c D) point a to point d Answer: B Topic: Change in Supply, Technology Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

62) The figure above shows the market for candy. People become more concerned that eating candy causes them to gain weight, which they do not like. As a result, the A) demand curve shifts from D2 to D1 and the supply curve does not shift. B) demand curve shifts from D1 to D2 and the supply curve shifts from S1 to S2. C) demand curve shifts from D2 to D1 and the supply curve shifts from S2 to S1. D) demand curve does not shift, and the supply curve shifts from S1 to S2. Answer: A Topic: Changes in Demand, Preferences Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

63) The above figure shows the market for oil. Because of the development of a new deep sea drilling technology, the A) demand curve shifts from D1 to D2 and the supply curve does not shift. B) demand curve shifts from D1 to D2 and the supply curve shifts from S1 to S2. C) demand curve does not shift, and the supply curve shifts from S2 to S1. D) demand curve does not shift, and the supply curve shifts from S1 to S2. Answer: D Topic: Change in Supply, Technology Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

64) The above figure shows the market for gasoline. When a hurricane destroys a major refinery that refines oil into gasoline, the A) demand curve for gasoline shifts from D1 to D2 and the supply curve of gasoline does not shift. B) demand curve for gasoline shifts from D1 to D2 and the supply curve of gasoline shifts from S2 to S1. C) demand curve for gasoline does not shift, and the supply curve of gasoline shifts from S2 to S1. D) demand curve for gasoline does not shift, and the supply curve of gasoline shifts from S1 to S2. Answer: C Topic: Changes in Supply Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

65) The above figure shows the market for bicycles. When there is a physical fitness craze so that everyone wants to exercise, the A) demand curve for bicycles shifts from D1 to D2. B) demand curve for bicycles shifts from D2 to D1. C) demand curve and the supply curve of bicycles do not shift. D) supply curve of bicycles shifts from S1 to S2. Answer: A Topic: Changes in Demand, Preferences Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

66) The above figure shows the market for french fries at fast food joints. If the price of potatoes rises and simultaneously people become concerned that french fries can cause heart attacks, the A) demand curve for french fries shifts from D2 to D1 and the supply curve of french fries does not shift. B) demand curve for french fries shifts from D2 to D1 and the supply curve of french fries shifts from S2 to S1. C) demand curve for french fries shifts from D2 to D1 and the supply curve of french fries shifts from S1 to S2. D) demand curve for french fries does not shift, and the supply curve of french fries shifts from S1 to S2. Answer: B Topic: Change in Demand/Supply; Preferences/Prices of Resources Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

67) A rise in the price of a good causes producers to supply more of the good. This statement illustrates A) the law of supply. B) the law of demand. C) a change in supply. D) the nature of an inferior good. Answer: A Topic: Study Guide Question, The Law of Supply Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Reflective Thinking 58 Copyright © 2014 Pearson Education, Inc.

68) Which of the following influences does NOT shift the supply curve? A) a rise in the wages paid workers who produce the good B) the development of new technology C) people deciding that they want to buy more of the product D) a decrease in the number of suppliers Answer: C Topic: Study Guide Question, Change in Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

69) To say that "supply increases" for any reason, means there is a A) movement rightward along a supply curve. B) movement leftward along a supply curve. C) shift rightward in the supply curve. D) shift leftward in the supply curve. Answer: C Topic: Study Guide Question, Change in Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

70) The price of jet fuel falls. This fall shifts the A) demand curve for airplane trips rightward. B) demand curve for airplane trips leftward. C) supply curve of airplane trips rightward. D) supply curve of airplane trips leftward. Answer: C Topic: Study Guide Question, Change in Supply, Prices of Resources Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

71) An increase in the cost of producing video tape shifts the supply curve of video tape ________ and shifts the demand curve for video tape ________. A) rightward; leftward B) leftward; leftward C) leftward; not at all D) not at all; leftward Answer: C Topic: Study Guide Question, Change in Supply, Prices of Resources Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

72) An increase in the number of producers of gruel ________ the supply of gruel and shifts the supply curve of gruel ________. A) increases; rightward B) increases; leftward C) decreases; rightward D) decreases; leftward Answer: A Topic: Study Guide Question, Change in Supply, Number of Suppliers Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

73) Wages for workers producing iPods and similar products will rise next year. Walkman Watch asks you to predict the effect of this change in next year's market for iPods. You predict that the major effect will be that the A) demand curve for an iPod will shift rightward. B) demand curve for an iPod will shift leftward. C) supply curve for an iPod will shift leftward. D) supply curve for an iPod will shift rightward. Answer: C Topic: Parallel MyEconLab Question-Change in Supply, Resource Price Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

74) Producers of DVDs are able to lower the wage rate that they pay to their workers. You predict that the A) price will rise. B) quantity supplied will decrease. C) supply curve will shift leftward. D) supply curve will shift rightward. Answer: D Topic: Parallel MyEconLab Question-Change in Supply, Resource Price Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

75) The wage rate paid by Walkman producers falls and at the same time the price of raw materials used in the production of Walkmans rises. You predict that the supply curve of Walkmans will A) shift either leftward or rightward. B) surely shift rightward. C) surely shift leftward. D) surely become steeper. Answer: A Topic: Parallel MyEconLab Question-Change in Supply, Resource Price Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

4 Market Equilibrium 1) In a supply and demand figure, the equilibrium price and quantity are found at the A) point where quantity supplied equals quantity demanded. B) horizontal intercept of the demand curve. C) vertical intercept of the supply curve. D) horizontal intercept of the supply and the demand curves. Answer: A Topic: Market Equilibrium Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

2) When a market is in equilibrium, A) everyone has all they want of the commodity in question. B) there is no shortage and no surplus at the equilibrium price. C) the number of buyers is exactly equal to the number of sellers. D) the supply curve has the same slope as the demand curve. Answer: B Topic: Market Equilibrium Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

3) The equilibrium price is the price at which the quantity A) sold equals the quantity bought. B) demanded equals the quantity sold. C) demanded equals the quantity supplied. D) supplied equals the quantity bought. Answer: C Topic: Market Equilibrium Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

4) Which of the following is the best way to describe equilibrium in a market? At equilibrium, the A) price is the lowest possible. B) price is usually affordable to most people. C) supply and demand curves can never shift again. D) quantity supplied equals the quantity demanded. Answer: D Topic: Market Equilibrium Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

5) The interaction of supply and demand explains A) the prices of goods and services but not their quantities. B) the quantities of goods and services but not their prices. C) both the prices and the quantities of goods and services. D) neither the prices nor the quantities of goods and services. Answer: C Topic: Market Equilibrium Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

6) The figure illustrates the market for pens. The equilibrium quantity is A) between 400 and 600 pens, but it is impossible to be precise. B) 5 pens a month. C) 2 pens a month. D) 500 pens a month. Answer: D Topic: Equilibrium Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

7) In the above figure, if the demand curve is D2, then A) the equilibrium price will be P1 and the equilibrium quantity will be Q2. B) the equilibrium price will be P1 and the equilibrium quantity will be Q1. C) there will be a shortage equal to Q2 - Q1. D) an increase in price will shift the demand curve to D3. Answer: A Topic: Market Equilibrium Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

8) If the price of a CD is equal to the equilibrium price, there will be ________ of CDs and the price will ________. A) surplus; rise B) surplus; fall C) shortage; fall D) neither a shortage nor surplus; not change Answer: D Topic: Market Equilibrium Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

9) When the price is below the equilibrium price, the quantity demanded A) is less than the equilibrium quantity and the quantity supplied also is less than the equilibrium quantity. B) is less than the equilibrium quantity but the quantity supplied exceeds the equilibrium quantity. C) exceeds the equilibrium quantity and the quantity supplied also exceeds the equilibrium quantity. D) exceeds the equilibrium quantity but the quantity supplied is less than the equilibrium quantity. Answer: D Topic: Market Equilibrium Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

10) If a market is NOT in equilibrium, then which of the following is likely to occur? A) The demand curve will shift to bring the market to equilibrium. B) The supply curve will shift to bring the market to equilibrium. C) The price will adjust to bring the market to equilibrium. D) Both A and B are correct. Answer: C Topic: Price Adjustments Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

11) If the price of a video download is below its equilibrium price, the quantity supplied is ________ than the quantity demanded. If the price of a video download is above its equilibrium price, the quantity supplied is ________ than the quantity demanded. A) less; greater B) greater; less C) less; less D) greater; greater Answer: A Topic: Shortage and Surplus Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

12) A price below the equilibrium price results in A) a surplus. B) a shortage. C) excess supply. D) a further price fall. Answer: B Topic: Price Adjustments; Shortage Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

13) If the price of a video rental is below its equilibrium price, there will be a ________ of video rentals and the price will ________ . A) shortage; rise B) shortage; fall C) surplus; rise D) surplus; fall Answer: A Topic: Price Adjustments; Shortage Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

14) Which of the following correctly describes how price adjustments eliminate a shortage? A) As the price rises, the quantity demanded decreases while the quantity supplied increases. B) As the price rises, the quantity demanded increases while the quantity supplied decreases. C) As the price falls, the quantity demanded decreases while the quantity supplied increases. D) As the price falls, the quantity demanded increases while the quantity supplied decreases. Answer: A Topic: Price Adjustments; Shortage Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

15) Ticket scalpers at the NCAA basketball tournament last year charged prices high above the printed ticket price. This observation is evidence of A) a surplus at printed ticket prices. B) a shortage at printed ticket prices. C) the tournament not being televised. D) the tournament getting too much television exposure. Answer: B Topic: Price Adjustments; Shortage Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

16) If the quantity of textbooks supplied is 10,000 per year and the quantity of textbooks demanded is 12,000 per year, there is a ________ in the market and the price will ________. A) shortage; rise B) shortage; fall C) surplus; rise D) surplus; fall Answer: A Topic: Price Adjustments; Shortage Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

17) When there is a shortage in the market, the quantity sold is A) greater than the quantity supplied. B) equal to the quantity supplied. C) less than the quantity supplied. D) less than the quantity bought. Answer: B Topic: Price Adjustments; Shortage Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

18) When the price is less than the equilibrium price, A) there will be a shortage. B) some consumers will be willing to pay a price higher than the prevailing price. C) the price will be forced higher. D) All of the above answers are correct. Answer: D Topic: Price Adjustments; Shortage Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

19) If there exists a shortage in the market for snowmobiles, then the price of a snowmobile will A) rise. B) fall. C) neither rise nor fall. D) at first fall then rise. Answer: A Topic: Price Adjustments; Shortage Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

20) The existence of a shortage A) means resources are being allocated efficiently. B) is impossible in a market economy. C) pushes the price up. D) pushes the price down. Answer: C Topic: Price Adjustments; Shortage Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

21) A shortage causes the A) demand curve to shift leftward. B) supply curve to shift rightward. C) price to fall. D) price to rise. Answer: D Topic: Price Adjustments; Shortage Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

22) If the quantity demanded exceeds the quantity supplied, then there is A) a shortage, and the price is below the equilibrium price. B) a shortage, and the price is above the equilibrium price. C) a surplus, and the price is below the equilibrium price. D) a surplus, and the price is above the equilibrium price. Answer: A Topic: Price Adjustments; Shortage Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

Price (dollars per pound) 3 4 5 6 7

Quantity supplied (pounds) 1 2 4 5 6

Quantity demanded (pounds) 7 5 4 2 1

23) The above table shows the demand schedule and supply schedule for chocolate chip cookies. What is the equilibrium quantity and equilibrium price for chocolate chip cookies? A) 7 pounds, $3.00 per pound B) 2 pounds, $3.00 per pound C) 2 pounds, $6.00 per pound D) 4 pounds, $5.00 per pound Answer: D Topic: Market Equilibrium Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

24) The above table shows the demand schedule and supply schedule for chocolate chip cookies. If the price is $4.00 per pound, there is a A) shortage of 2 pounds of chocolate chip cookies. B) shortage of 3 pounds of chocolate chip cookies. C) shortage of 5 pounds of chocolate chip cookies. D) surplus of 3 pounds of chocolate chip cookies. Answer: B Topic: Price Adjustments; Shortage Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

25) The above table shows the demand schedule and supply schedule for chocolate chip cookies. An increase in income results in an increase in the demand for chocolate cookies by an amount of 3 pounds at every price. What are the new equilibrium quantity and equilibrium price? A) 5 pounds, $4.00 per pound B) 5 pounds, $6.00 per pound C) 5 pounds, $5.00 per pound D) 4 pounds, $5.00 per pound Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

26) If the quantity supplied exceeds the quantity demanded, then there is A) a shortage and the price is below the equilibrium price. B) a shortage and the price is above the equilibrium price. C) a surplus and the price is below the equilibrium price. D) a surplus and the price is above the equilibrium price. Answer: D Topic: Price Adjustments; Surplus Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

27) The price of a good will fall if A) there is a surplus at the current price. B) the current price is less than the equilibrium price. C) the quantity demanded exceeds the quantity supplied. D) the price of a complement in consumption falls. Answer: A Topic: Price Adjustments; Surplus Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

28) When there is a surplus in the market, the quantity sold is A) equal to the quantity supplied. B) equal to the quantity demanded. C) less than the quantity demanded. D) greater than the quantity bought. Answer: B Topic: Price Adjustments; Surplus Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

29) Suppose the equilibrium price for soft drinks is $1.00. If the current price in the soft drink market is $1.25 each, A) there will be a surplus of soft drinks. B) there will be a shortage of soft drinks. C) the supply curve of soft drinks will shift leftward. D) the demand curve for soft drinks will shift leftward. Answer: A Topic: Price Adjustments; Surplus Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

30) If the quantity of textbooks supplied is 10,000 per year and the quantity of textbooks demanded is 8,000 per year, there is a ________ in the market and the price will ________. A) shortage; rise B) shortage; fall C) surplus; rise D) surplus; fall Answer: D Topic: Price Adjustments; Surplus Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

31) A surplus occurs when the price is A) less than the equilibrium price. B) equal to the equilibrium price. C) greater than the equilibrium price. D) None of the above because the existence of a surplus is independent of the price of the good. Answer: C Topic: Price Adjustments; Surplus Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

32) If the price is above the equilibrium price, then there is a A) surplus, and market forces will operate to lower price. B) surplus, and market forces will operate to raise price. C) shortage, and market forces will operate to lower price. D) shortage, and market forces will operate to raise price. Answer: A Topic: Price Adjustments; Surplus Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

33) When the price of a good is A) below the equilibrium price, quantity supplied exceeds quantity demanded and price rises. B) below the equilibrium price, quantity demanded exceeds quantity supplied and price falls. C) above the equilibrium price, quantity supplied exceeds quantity demanded and price falls. D) above the equilibrium price, quantity demanded exceeds quantity supplied and price rises. Answer: C Topic: Price Adjustments; Surplus Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

34) Suppose a market begins in equilibrium. If supply increases, then at the original equilibrium price the quantity demanded A) is less than the quantity supplied and a surplus results. B) is less than the quantity supplied and a shortage results. C) exceeds the quantity supplied and a surplus results. D) exceeds the quantity supplied and a shortage results. Answer: A Topic: Price Adjustments; Surplus Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

Price (dollars per pair) 30 40 50 60 70 80 90

Quantity demanded (pairs per week) 130 120 110 100 90 80 70

Quantity supplied (pairs per week) 70 80 90 100 110 120 130

35) The table shows the demand and supply schedules for jeans. A) At $60 a pair, there is a shortage of jeans and the price will fall. B) At $60 a pair, there is a surplus of jeans and the price will rise. C) At $40 a pair, there is a shortage of jeans and the price will rise. D) At $40 a pair, there is a shortage of jeans and the price will fall. Answer: C Topic: Price Adjustments; Shortage Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

Price (dollars per disc) 4 8 12 16 20 24 28 32 36

Quantity demanded 36,000 32,000 28,000 24,000 20,000 16,000 12,000 8,000 4,000

Price (dollars per disc) 4 8 12 16 20 24 28 32 36

Quantity supplied 4,000 8,000 12,000 16,000 20,000 24,000 28,000 32,000 36,000

36) The above table gives the demand and supply schedules for Blu-ray discs. If the price of a Blu-ray disc is $8, there is a ________ and the price of a compact disc will ________. A) shortage; rise B) shortage; fall C) surplus; rise D) surplus; fall Answer: A Topic: Price Adjustments; Shortage Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills 71 Copyright © 2014 Pearson Education, Inc.

37) The above table gives the demand and supply schedules for Blu-ray discs. Suppose that the price of a Blu-ray disc player increases, resulting in the demand for Blu-ray discs decreasing by 8,000 units at all prices. What are the new equilibrium quantity and equilibrium price of Blu-ray discs? A) 8,000 and $8 B) 16,000 and $16 C) 20,000 and $20 D) 28,000 and $28 Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

38) The above table gives the demand and supply schedules for Blu-ray discs. Based on the table, the equilibrium quantity and price of Blu-ray discs is A) 28,000 and $12. B) 20,000 and $20. C) 16,000 and $24. D) 16,000 and $16. Answer: B Topic: Market Equilibrium Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

Price (dollars per cellular phone) 100 80 50 20

Quantity demanded (thousands) 50 55 60 100

Quantity supplied (thousands) 100 80 60 40

39) Using the data in the above table, the equilibrium quantity and equilibrium price for a cellular telephone is A) 50 thousand and $100. B) 80 thousand and $80. C) 60 thousand and $50. D) 40 thousand and $20. Answer: C Topic: Market Equilibrium Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

40) Using the data in the above table, at the price of $80 a phone, a A) shortage of 25 thousand cellular telephones occurs. B) surplus of 80 thousand cellular telephones occurs. C) surplus of 25 thousand cellular telephones occurs. D) shortage of 55 thousand cellular telephones occurs. Answer: C Topic: Price Adjustments; Surplus Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

41) The equilibrium price in the above figure is A) $2. B) $4. C) $6. D) $8. Answer: C Topic: Market Equilibrium Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

42) The equilibrium quantity in the above figure is A) 200 units. B) 300 units. C) 400 units. D) 600 units. Answer: B Topic: Market Equilibrium Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills 73 Copyright © 2014 Pearson Education, Inc.

43) At a price of $10 in the above figure, there is A) a surplus of 200 units. B) a shortage of 200 units. C) a surplus of 400 units. D) a shortage of 400 units. Answer: C Topic: Surplus Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

44) At a price of $4 in the above figure, A) the equilibrium quantity is 400 units. B) there is a surplus of 200 units. C) the quantity supplied is 400 units. D) there is a shortage of 200 units. Answer: D Topic: Shortage Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

45) If the good in the above figure is a normal good and income rises, then the new equilibrium quantity A) is less than 300 units. B) is 300 units. C) is more than 300 units. D) could be less than, equal to, or more than 300 units. Answer: C Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

46) The initial supply and demand curves for a good are illustrated in the above figure. If there are technological advances in the production of the good, then the new equilibrium price for the good A) is less than $6. B) is $6. C) is more than $6. D) could be less than, equal to, or more than $6. Answer: A Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

47) The initial supply and demand curves for a good are illustrated in the above figure. If there is a rise in the price of a factor of production used to produce the good, then the new equilibrium price A) is less than $6. B) is $6. C) is more than $6. D) could be less than, equal to, or more than $6. Answer: C Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

48) In the above figure, a price of $15 per dozen for roses would result in A) equilibrium. B) a shortage. C) a surplus. D) downward pressure on prices. Answer: B Topic: Price Adjustments Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

49) In the above figure, a price of $15 per dozen roses would result in a ________ so that the price of roses will ________. A) surplus; rise B) surplus; fall C) shortage; rise D) shortage; fall Answer: C Topic: Price Adjustments Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 75 Copyright © 2014 Pearson Education, Inc.

50) In the above figure, a price of $35 per dozen would result in A) a shortage. B) equilibrium. C) a surplus. D) upward pressure on prices. Answer: C Topic: Price Adjustments Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

51) In the above figure, if the price is $8 then there is a A) surplus of 100. B) surplus of 200. C) shortage of 100. D) shortage of 200. Answer: B Topic: Price Adjustments Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

52) Based on the above figure, which of the following is true? A) At a price of $6, quantity demanded is equal to quantity supplied. B) At a price of $4, quantity demanded is greater than quantity supplied. C) At a price of $8, quantity demanded is less than quantity supplied. D) All of the above answers are correct. Answer: D Topic: Price Adjustments Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

53) If the market for Twinkies is in equilibrium, then A) Twinkies must be a normal good. B) producers would like to sell more at the current price. C) consumers would like to buy more at the current price. D) the quantity supplied equals the quantity demanded. Answer: D Topic: Study Guide Question, Equilibrium Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

54) In a market, at the equilibrium price, A) neither buyers nor sellers can do business at a better price. B) buyers are willing to pay a higher price, but sellers do not ask for a higher price. C) buyers are paying the minimum price they are willing to pay for any amount of output and sellers are charging the maximum price they are willing to charge for any amount of production. D) None of the above is true. Answer: A Topic: Study Guide Question, Equilibrium Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

55) If there is surplus of a good, then the quantity demanded ________ the quantity supplied and the price will ________. A) is less than; rise B) is less than; fall C) is greater than; rise D) is greater than; fall Answer: B Topic: Study Guide Question, Price Adjustments, Surplus Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

5 Predicting Changes in Price and Quantity 1) When the demand for a good decreases, its equilibrium price ________ and equilibrium quantity ________. A) falls; decreases B) falls; increases C) rises; decreases D) rises; increases Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

2) When demand increases, the equilibrium price ________ and the equilibrium quantity ________. A) rises; decreases B) falls; decreases C) rises; increases D) falls; increases Answer: C Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

3) Which of the following statements is correct? A) When demand increases, both the price and the quantity increase. B) When demand decreases, the price rises and the quantity decreases. C) When supply increases, the quantity decreases and the price rises. D) When supply decreases, both the price and the quantity decrease. Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

4) If the U.S. Surgeon General announces that increased wheat consumption could cause heightened anxiety levels among children and adults, what happens to the equilibrium price and quantity of shredded wheat? A) The equilibrium price rises and the equilibrium quantity increases. B) The equilibrium price falls and the equilibrium quantity decreases. C) The equilibrium price rises and the equilibrium quantity decreases. D) The equilibrium price falls and the equilibrium quantity increases. Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

5) In March, the quantity of orange juice sold in the town of Jackson was 3000 cartons and the price $3. In May, the quantity of orange juice sold in the town of Jackson was 3500 cartons and the price was $3.20. This change in the price and quantity sold could have been the result of A) the release of a medical study suggesting that consuming orange juice helps prevent cancer. B) a reduction in the number of orange juice coupons provided by local markets. C) the after effects of a cold winter in Florida that killed half of the orange crop. D) the after effects of a warm winter in Florida that increased the orange crop yield by 50 percent. Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

6) Suppose the equilibrium price of bottled water has risen from $1.00 per bottle to $2.00 per bottle and the equilibrium quantity has increased. These changes are a result of a ________ shift of the ________ curve for bottled water. A) rightward; demand B) rightward; supply C) leftward; supply D) leftward; demand Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

7) If good A is a normal good and income increases, the equilibrium price of A ________ and the equilibrium quantity of A ________. A) rises; increases B) rises; decreases C) falls; decreases D) falls; increases Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

8) The price of a gallon of milk falls. Which of the following is a possible cause? A) a decrease in the price of oatmeal, a complement to milk B) a discovery that milk cause diabetes C) Milk is a normal good and people's incomes rise. D) a drought that reduces supplies of feed grains fed to cows that produce milk Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

9) An increase in demand combined with no change in supply A) raises the equilibrium price. B) lowers the equilibrium price. C) results in only a movement rightward along the demand curve. D) decreases demand because the supply curve does not shift. Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

10) For consumers, goods A and B are complementary goods. The cost of a resource used in the production of A decreases. As a result, A) the equilibrium price of B will fall and the equilibrium price of A will rise. B) the equilibrium price of B will rise and the equilibrium price of A will fall. C) the equilibrium prices of both A and B will rise. D) the equilibrium prices of both A and B will fall. Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

11) Which of the following raises the equilibrium price and increases the equilibrium quantity of used cars? A) a fall in income if used cars are an inferior good B) an increase in the wage rate paid to used car salespeople C) Neither of the above because the question suggests a violation of the "law of demand." D) Neither of the above because the question suggests a violation of the "law of supply." Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

12) Coffee and sugar are complements. If a poor sugar harvest leads to an increase in the price of sugar, there will also be A) an increase in the price of coffee. B) a decrease in the price of coffee. C) a rightward shift in the demand curve for coffee. D) a leftward shift of the supply curve of coffee. Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

13) Long-distance travel by bus is an inferior good. As people's incomes increase and other things remain the same, you predict that the A) price of long-distance travel by bus will fall and the demand for long-distance travel by bus will increase. B) price of long-distance travel by bus will fall. C) demand for long-distance travel by bus will decrease and the price will rise. D) demand for long-distance travel by bus will increase as the price of long-distance travel by bus falls. Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

14) If the demand for hamburgers decreases, the equilibrium price A) rises and the equilibrium quantity increases. B) falls and the equilibrium quantity increases. C) rises and the equilibrium quantity decreases. D) falls and the equilibrium quantity decreases. Answer: D Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

15) Suppose that people find out that eating more fish improves their health, leading them to increase their demand for fish. As a result, the equilibrium price of fish ________ and the equilibrium quantity ________. A) rises; decreases B) rises; increases C) falls; decreases D) falls; increases Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

16) Doctors find that one aspirin per day reduces the risk of heart attacks. Demand for aspirin will A) increase, so that equilibrium price and equilibrium quantity will increase. B) decrease, so that equilibrium price and equilibrium quantity will increase. C) increase, so that equilibrium price will decrease and equilibrium quantity will increase. D) increase, but the new equilibrium price and quantity are indeterminate. Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

17) Until 2007, the price of sport utility vehicles (SUVs) rose and each year more were purchased. This experience suggests that A) there must have been technological advances in the way SUVs are produced. B) the "law of demand" does not hold true in this market. C) there must have movement leftward along the supply curve for SUVs. D) there must have been a rightward shift of the demand curve for SUVs. Answer: D Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

18) Between 2001 and 2010, equilibrium college tuition rose from $15,000 to $21,000 and equilibrium enrollment increased from 16 million to 21 million students. These changes could be the result of A) an increase in demand. B) an increase in supply. C) a decrease in demand. D) a decrease in supply. Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: New AACSB: Analytical Skills

19) If the U.S. Surgeon General announced that increased grapefruit juice consumption could help prevent heart attacks, what would happen to the equilibrium price and quantity of grapefruit juice? A) Price and quantity both increase. B) Price and quantity both decrease. C) Price increases but quantity decreases. D) Price decreases but quantity increases. Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

20) If the price of a movie download falls, the rental rate of DVDs ________ and the equilibrium quantity of DVDs rented ________. A) rises; decreases B) rises; increases C) falls; decreases D) falls; increases Answer: C Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: New 10th edition AACSB: Analytical Skills

21) What will happen to the equilibrium price and equilibrium quantity of ice cream cones when consumers' incomes decrease? A) If ice cream cones are a normal good, then the equilibrium price and quantity of ice cream cones will decrease. B) If ice cream cones are a normal good, then the equilibrium price and equilibrium quantity of ice cream cones will increase. C) If ice cream cones are an inferior good, then the equilibrium price for an ice cream cone will increase and the equilibrium quantity of ice cream cones will decrease. D) If ice cream cones are an inferior good, then the equilibrium price and quantity of ice cream cones will decrease. Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

22) Which of the following raises the price of a used car and increases the equilibrium quantity sold? A) a new 8 percent federal excise tax placed on all new car purchases B) an increase in wages for used car salespeople C) a special rebate program on all new cars D) None of the above answers is correct. Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

23) Coffee and sugar are complements. If the supply curve of coffee shifts leftward because of poor weather, then there will be A) an increase in the price of sugar. B) a decrease in the price of sugar. C) a leftward shift of the demand curve for coffee. D) a leftward shift of the supply curve for sugar. Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

24) Peanut butter and jelly are complements for consumers. In 2011, the price of peanut butter increased. As a result, the ________ which lead to ________ in the price of jelly and ________ in the quantity of jelly. A) demand for jelly; a decrease; a decrease B) supply of jelly; a decrease; an increase C) supply of jelly; an increase; a decrease D) demand for jelly; an increase; an increase Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: New AACSB: Analytical Skills 83 Copyright © 2014 Pearson Education, Inc.

25) A decrease in the demand for beef because of concerns over cholesterol results in A) lower beef prices. B) higher beef prices. C) an increase in the supply of beef. D) an offsetting increase in the demand for beef if the price of beef falls. Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

26) If more people buy hybrid cars that have high gas mileage, the equilibrium price of gasoline will ________ and the equilibrium quantity will ________. A) rise; increase B) rise; decrease C) fall; increase D) fall; decrease Answer: D Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

27) During the last decade, the price of shoes rose substantially yet people bought more pairs of new shoes each year. This experience suggests that the A) supply curve of shoes shifted leftward. B) demand curve for shoes shifted leftward. C) supply curve of shoes shifted rightward. D) demand curve for shoes shifted rightward. Answer: D Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

28) Suppose we observe that both the equilibrium price of digital cameras and the equilibrium quantity of digital cameras have increased. Which of the following events could be responsible for this? A) technological advances in digital camera production B) consumers' preferences changed in favor of digital cameras C) the price of film cameras fell D) workers who make digital cameras received a pay raise Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

29) Suppose we observe that both the equilibrium price of film cameras and the equilibrium quantity of film cameras have fallen. Which of the following could be responsible for this? A) Consumers' preferences changed in favor of digital cameras. B) Technological advances were made in film camera production. C) Workers who make cameras received a pay raise. D) The price of digital cameras increased. Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

30) During the past twenty years, the prices of prescription drugs, relative to the prices of other goods, have risen, yet Americans buy more prescription drugs than ever. This might be because A) with higher incomes and more older Americans, we have moved rightward along our demand curve for drugs. B) with higher incomes and more older Americans, the demand curve for prescription drugs has shifted rightward. C) more new firms entered the pharmaceutical industry each year, which caused a rightward shift in the supply curve of prescription drugs. D) Both answers A and C are correct. Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

31) You observe that in the market for coffee that both the equilibrium price of coffee and the equilibrium quantity have increased. You predict that the demand for coffee A) has increased with no change in the supply of coffee. B) has increased but it is not as large as the increase in supply. C) has not changed but that the supply of coffee has decreased. D) has increased less than supply of coffee has decreased. Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

32) Every spring, motorists do more driving than during the winter months. Every spring, the price of gasoline increases and the motorists buy more gasoline. This experience suggests that the A) "law of supply" does not always hold for necessities like gasoline. B) "law of demand" does not always hold for necessities like gasoline. C) laws of supply and demand are both contradicted for gasoline, though only during the spring driving season. D) None of the above answers are correct. Answer: D Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

33) After the sugar substitute saccharin was found to cause cancer in laboratory mice, its price dropped dramatically. This change in the price was because A) the supply of saccharin decreased. B) the demand for saccharin decreased. C) the government ordered the price reduction. D) saccharin producers felt sorry for their past customers and were making an honest attempt to compensate them. Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

34) When supply decreases and demand does not change, the equilibrium quantity ________ and the equilibrium price ________. A) increases; rises B) decreases; falls C) increases; falls D) decreases; rises Answer: D Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

35) As a result of an increase in the supply of a good, the equilibrium quantity ________ and the equilibrium price ________. A) increases; falls B) increases; rises C) decreases; falls D) decreases; rises Answer: A Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

36) Beef and leather belts are complements in production. If people's concern about health shifts the demand curve for beef leftward, the result in the market for leather belts will be a A) lower equilibrium price for a leather belt because there is an increase in the supply of leather belts. B) lower equilibrium price for a leather belt because there is a decrease in the supply of leather belts. C) higher equilibrium price for a leather belt because there is a decrease in the supply of leather belts. D) higher equilibrium price for a leather belt because there is an increase in the supply of leather belts. Answer: C Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

37) In 2011, the price of peanuts was rising, which lead peanut butter buyers to expect the price of peanut butter would rise in the future. Consequently, in the current market for peanut butter there was ________ which resulted in ________ in the price of peanut butter and ________ in the quantity of peanut butter. A) an increase in demand for peanut butter; an increase; an increase B) an increase in supply of peanut butter; a decrease; an increase C) a decrease in demand for peanut butter; a decrease; a decrease D) a decrease in supply of peanut butter; an increase; a decrease Answer: A Topic: Predicting Changes in Price and Quantity; Demand Increases Skill: Analytical Status: New AACSB: Analytical Skills

38) You observe that the price of a good rises and the quantity decreases. These observations can be the result of the A) demand curve shifting rightward. B) demand curve shifting leftward. C) supply curve shifting rightward. D) supply curve shifting leftward. Answer: D Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

39) Leather belts and leather shoes are substitutes in production. If style changes increase the demand for leather belts, the supply curve of leather shoes will shift A) leftward and the equilibrium price of leather shoes will fall. B) leftward and the equilibrium price of leather shoes will rise. C) rightward and the equilibrium price of leather shoes will fall. D) rightward and the equilibrium price of leather shoes will rise. Answer: B Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

40) If technological advances lower the cost of computer chips, in the market for computers the equilibrium price will ________ and the equilibrium quantity will ________. A) fall; increase B) fall; decrease C) rise; increase D) rise; decrease Answer: A Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

41) If the price of crude oil falls, the equilibrium price of gasoline ________ and the equilibrium quantity ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases Answer: C Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

42) Which of the following statements is correct? A) When demand decreases, both the price and the quantity increase. B) When demand increases, both the price and the quantity decrease. C) When supply increases, the quantity increases and the price falls. D) When supply decreases, both the price and the quantity decrease. Answer: C Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

43) Bicycles are made out of steel. If the price of steel increases, there is a shift in the supply curve of bicycles that leads to A) a shift in the demand curve for bicycles. B) a temporary surplus of bicycles. C) a permanent surplus of bicycles. D) an increase in the price of a bicycle. Answer: D Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

44) If workers who make DVDs get a pay raise, the equilibrium price of a DVD ________ and the equilibrium quantity of DVDs ________. A) rises; increases B) rises; decreases C) falls; decreases D) falls; increases Answer: B Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

45) "The recent hurricanes in Florida are bringing financial gain to California citrus growers. Due to extensive damage to the Florida citrus crop, California citrus products are commanding their highest prices ever." Which of the following statements best explains the economics of this quotation? A) The supply of Florida oranges decreased, causing their price to increase, which then increased the demand for substitute California oranges. B) The supply of Florida oranges decreased, causing the supply of California oranges to increase and the price of California oranges to rise. C) The demand for Florida oranges decreased because of the hurricanes, causing a greater demand for California oranges and an increase in the price of California oranges. D) The demand for Florida oranges decreased, causing their prices to rise, therefore increasing the demand for California oranges. Answer: A Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

46) In the market for bananas, the price is $2.00 a bunch. An increase in the supply of bananas decreases the price of bananas and ________. A) the quantity supplied increases because the price falls B) increases the demand for bananas C) increases the quantity of bananas demanded D) creates a shortage of bananas Answer: C Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

47) Crude oil can be refined into home heating oil or gasoline. If very cold weather caused the price of home heating oil to increase, then the A) supply of gasoline would increase. B) demand for gasoline would increase. C) equilibrium price of gasoline would rise. D) Both answers A and C are correct. Answer: C Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

48) A fall in the price of wheat fertilizer ________ the equilibrium price of wheat and ________ the equilibrium quantity of wheat. A) raise; increase B) raise; decrease C) lower; increase D) lower; decrease Answer: C Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

49) There is a technological advance in the production of ice cream. As a result, the supply curve of ice cream shifts ________ and ________. A) leftward; both the equilibrium price and equilibrium quantity fall B) rightward; both the equilibrium price and equilibrium quantity fall C) rightward; the equilibrium price falls while the equilibrium quantity increases D) rightward; both the equilibrium price and equilibrium quantity rise Answer: C Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

50) If the price of aluminum used to make bicycles increases, the price of a bicycle rises because of a A) rightward shift of the demand curve for bicycles. B) rightward shift of the supply curve of bicycles. C) leftward shift of the demand curve for bicycles. D) leftward shift of the supply curve of bicycles. Answer: D Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

51) An increase in the price of jet fuel will ________ air flights and the equilibrium quantity of air flights will ________. A) decrease the supply of; decrease B) increase the demand for; increase C) decrease the supply of; increase D) decrease the demand for; decrease Answer: A Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

52) There is a technological advance in the production of a good and simultaneously also an increase in the expected future price. Which of the following will happen? A) The equilibrium price will rise because the supply curve shifts rightward. B) The equilibrium price falls because the supply curve shifts leftward. C) The technological improvement shifts the supply curve rightward while the increase in the expected future price shifts the supply curve leftward. The net effect is not known. D) The demand curve shifts rightward and the supply curve does not shift. Answer: C Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

53) If a technological advance takes place in the computer industry, then the equilibrium price of a computer will ________ and the equilibrium quantity will ________. A) fall; increase B) fall; decrease C) rise; increase D) rise; decrease Answer: A Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

54) What is the effect on the price and quantity of wooden desks of a rise in the price of wood? A) The equilibrium quantity of wooden desks increases and the equilibrium price falls. B) The equilibrium quantity of wooden desks increases and the equilibrium price rises. C) The equilibrium quantity of wooden desks decreases and the equilibrium price falls. D) The equilibrium quantity of wooden desks decreases and the equilibrium price rises. Answer: D Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

55) Which of the following increases the equilibrium price of a used car and decreases the equilibrium quantity? A) an announcement by the U.S. Attorney General that the windows on older cars were made with cheaper glass that can explode at high speeds B) new federal legislation that raises the legal driving age to twenty-four in all states C) a new fee that used car dealers must pay to the government on all sales of used cars D) All of the above because each is consistent with the "law of demand." Answer: C Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

56) We observe that the equilibrium price of digital cameras has fallen and the equilibrium quantity of digital cameras has increased. Which of the following events could be responsible for this? A) Technological advances in digital camera production. B) Consumers' preferences changed in favor of digital cameras. C) The price of film cameras rose. D) Workers who make digital cameras received a pay raise. Answer: A Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

57) During the last decade, the price of a computer fell every year and the quantity sold increased every year. This experience suggests that the A) "law of demand" was definitely contradicted. B) "law of supply" was definitely contradicted. C) demand curve shifted rightward. D) supply curve shifted rightward. Answer: D Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

58) After 2009, the price of tablets fell each year and manufacturers of tablets produced and sold more tablets each year. This result is because the A) "law of supply" does not apply to companies in the "high-tech" sector of the economy. B) "law of demand" does not apply to customers in the "high-tech" sector of the economy. C) supply curve of tablets shifted rightward. D) demand curve for tablets shifted leftward. Answer: C Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

59) Suppose the equilibrium price of a gallon of gasoline drops from $4.00 to $3.85 and the equilibrium quantity increases from 365 millions of gallons per week to 372 millions of gallons per week. These changes can be the result of A) an increase in supply. B) an increase in demand. C) a decrease in supply. D) a decrease in demand. Answer: A Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: New AACSB: Analytical Skills

60) Many Southern farmers face a choice between planting peanuts or cotton. In 2011, farmers anticipated higher prices for cotton. In the market for peanuts in 2011, there would be ________ in the supply of peanuts, which leads to ________ in the price of peanuts and ________ in the quantity of peanuts. A) a decrease; an increase; a decrease B) an increase; a decrease; a decrease C) a decrease; an increase; an increase D) an increase; an increase; a decrease Answer: A Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: New AACSB: Analytical Skills

61) In 2011, the price of peanuts increased. In the market for peanut butter, this change lead to ________ and which therefore ________ the price of peanut butter and ________ the quantity of peanut butter. A) a decrease in the supply; increased; decreased B) an increase in supply; decreased; increased C) a decrease in demand; decreased; decreased D) an increase in demand; increased; increased Answer: A Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: New AACSB: Analytical Skills

62) In 2011, the price of peanuts was rising, which lead peanut butter sellers to expect the price of peanut butter would rise in the future. Consequently, in the current market for peanut butter there was ________ which resulted in ________ in the price of peanut butter and ________ in the quantity of peanut butter. A) an increase in demand for peanut butter; an increase; an increase B) an increase in supply of peanut butter; a decrease; an increase C) a decrease in demand for peanut butter; a decrease; a decrease D) a decrease in supply of peanut butter; an increase; a decrease Answer: B Topic: Predicting Changes in Price and Quantity; Demand Increases Skill: Analytical Status: New AACSB: Analytical Skills 93 Copyright © 2014 Pearson Education, Inc.

63) If both demand and supply increase, what will be the effect on the equilibrium price and quantity? A) Both the price and the quantity will increase. B) The quantity will increase but the price could either rise, fall, or remain the same. C) The price will fall but the quantity will increase. D) The price will rise but the quantity could either increase, decrease, or remain the same. Answer: B Topic: Predicting Changes in Price/Quantity; Demand/Supply Increase Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

64) If both the demand and supply increase, the equilibrium quantity ________ and the equilibrium price ________. A) increases; falls B) decreases; might rise, fall, or not change C) decreases; rises D) increases; might rise, fall, or not change Answer: D Topic: Predicting Changes in Price/Quantity; Demand/Supply Increase Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

65) The equilibrium quantity of a good will increase and its equilibrium price might rise, fall, or stay the same when A) its demand and supply both increase. B) its demand increases and supply decreases. C) its demand decreases and supply increases. D) its demand and supply both decrease. Answer: A Topic: Predicting Changes in Price/Quantity; Demand/Supply Increase Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

66) If good growing conditions increase the supply of strawberries and hot weather increases the demand for strawberries, the quantity of strawberries bought ________. A) increases and the price might rise, fall or not change B) increases and the price rises C) doesn't change and the price falls D) doesn't change and the price rises Answer: A Topic: Predicting Changes in Price/Quantity; Demand/Supply Increase Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

67) Suppose a medical study reveals new benefits to consuming beef and at the same time a bumper corn crop reduces the cost of feeding steers. The equilibrium price of beef will A) fall. B) perhaps rise, fall, or stay the same, but more information is needed to determine which it does. C) stay the same. D) rise. Answer: B Topic: Predicting Changes in Price/Quantity; Demand/Supply Increase Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

68) Beef is a normal good and people's incomes fall. At the same time a bumper corn crop reduces the cost of feeding steers. These changes result in A) an increase in the equilibrium quantity of beef. B) an increase in the equilibrium quantity of beef if the shift in the demand curve is smaller than the shift in the supply curve. C) an increase in the equilibrium quantity of beef if the shift in the demand curve is larger than the shift in the supply curve. D) no change in the equilibrium quantity of beef. Answer: B Topic: Predicting Changes in Price/Quantity; Demand/Supply Increase Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

69) When supply and demand both increase, the A) quantity definitely decreases. B) quantity definitely increases. C) price definitely increases. D) price definitely decreases. Answer: B Topic: Predicting Changes in Price/Quantity; Demand/Supply Increase Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

70) Between 2000 and 2010, advances in PC production technology increased the supply of PCs sharply. The demand for PCs also increased, but not nearly as much as the supply did. As a result, the price of a PC ________ and the quantity of PCs sold ________. A) rose; decreased B) rose; increased C) fell; decreased D) fell; increased Answer: D Topic: Predicting Changes in Price/Quantity; Demand/Supply Increase Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

71) Between 2000 and 2010, the price of a PC fell and the quantity of PCs sold increased. Which of the explanations below is consistent with these facts? A) The demand for PCs increased by more than the supply of PCs increased. B) The supply of PCs increased by more than the demand for PCs increased. C) The demand for PCs decreased by more than the supply of PCs increased. D) Both the supply of PCs and the demand for PCs decreased. Answer: B Topic: Predicting Changes in Price/Quantity; Demand/Supply Increase Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

72) If the demand curve for bottled water shifts rightward and the supply curve of bottled water shifts rightward, the equilibrium A) price of bottled water definitely increases. B) price of bottled water definitely decreases. C) quantity of bottled water definitely increases. D) quantity of bottled water definitely decreases. Answer: C Topic: Predicting Changes in Price/Quantity; Demand/Supply Increase Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

73) Which of the following statements is correct? A) When both demand and supply increase, the quantity decreases and the price might rise, fall, or remain the same. B) When both demand and supply increase, the price rises and the quantity might increase, decrease, or remain the same. C) When both demand and supply decrease, the quantity increases and the price might rise, fall, or remain the same. D) When both demand and supply decrease, the quantity decreases and the price might rise, fall, or remain the same. Answer: D Topic: Predicting Changes in Price/Quantity; Demand/Supply Decrease Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

74) If the demand for bathing suits and supply of bathing suits both decrease, then definitely the equilibrium A) price will decrease. B) price will increase. C) quantity will increase. D) quantity will decrease. Answer: D Topic: Predicting Changes in Price/Quantity; Demand/Supply Decrease Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 96 Copyright © 2014 Pearson Education, Inc.

75) The equilibrium quantity will decrease and the price might rise, fall, or stay the same when the A) demand and the supply of a good both increase. B) demand for a good increases and the supply of it decreases. C) demand for a good decreases and the supply of it increases. D) demand and the supply of a good both decrease. Answer: D Topic: Predicting Changes in Price/Quantity; Demand/Supply Decrease Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

76) If the demand curve for bottled water shifts leftward and the supply curve of bottled water shifts leftward, the equilibrium A) price of bottled water definitely increases. B) price of bottled water definitely decreases. C) quantity of bottled water definitely increases. D) quantity of bottled water definitely decreases. Answer: D Topic: Predicting Changes in Price/Quantity; Demand/Supply Decrease Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

77) Flights to Paris are a normal good and people's incomes rise. At the same time, the price of jet fuel rises. The equilibrium price of a flight to Paris ________ and the equilibrium quantity of flights to Paris ________. A) might rise, fall, or not change; increases B) falls; decreases. C) rises; increases D) rises; might increase, decrease, or not change Answer: D Topic: Predicting Changes in Price/Quantity; Demand/Supply Decrease Skill: Analytical Status: New 10th edition AACSB: Analytical Skills

78) In the market for oranges, the demand and supply of oranges decrease by the same amount. The equilibrium quantity will ________ and the equilibrium price will ________. A) decrease; not change B) decrease; fall C) remain the same; either rise or fall D) remain the same; rise Answer: A Topic: Predicting Changes in Price/Quantity; Demand/Supply Decrease Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

79) What will happen to the equilibrium price and quantity of coffee if it is discovered to help prevent colds and, at the same time, Brazil and Vietnam emerge in the global market as massive producers of coffee? A) The price will fall and the effect on the quantity is uncertain. B) The quantity will increase and the effect on the price is uncertain. C) The quantity will decrease and the price will rise. D) The quantity will increase and the price will remain unchanged. Answer: B Topic: Predicting Changes in Price/Quantity; Demand/Supply Increase Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

80) Which of the following always raises the equilibrium price? A) an increase in both demand and supply B) a decrease in both demand and supply C) an increase in demand combined with a decrease in supply D) a decrease in demand combined with an increase in supply Answer: C Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

81) The equilibrium price will rise and the equilibrium quantity might increase, decrease, or stay the same when the A) demand and the supply of a good both increase. B) demand for a good increases and the supply of it decreases. C) demand for a good decreases and the supply of it increases. D) demand and the supply of a good both decrease. Answer: B Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

82) If demand increases and supply decreases, what is the effect on equilibrium price and equilibrium quantity? A) The price falls and the quantity might increase, decrease, or remain the same. B) The price rises and the quantity might increase, decrease or remain the same. C) The quantity decreases and the price might rise, fall, or remain the same. D) The quantity increases and the price might rise, fall, or remain the same. Answer: B Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

83) If the supply of bottled water decreases and at the same time the demand for bottled water increases, the equilibrium price ________ and the equilibrium quantity ________. A) might rise, fall, or stay the same; decreases B) might rise, fall, or stay the same; increases C) falls; increases D) rises; might increase, decrease, or stay the same Answer: D Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

84) When the demand curve shifts rightward and the supply curve shifts leftward, then the equilibrium price ________ and the equilibrium quantity ________. A) rises; decreases B) falls; increases C) rises; probably changes but the direction of the change cannot be determined D) probably changes but the direction of the change cannot be determined; increases Answer: C Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

85) In 2011, the price of peanuts was rising, which lead peanut butter sellers and peanut butter buyers to expect the price of peanut butter would rise in the future. Consequently, in the current market for peanut butter there was ________ which resulted in a ________ in the price of peanut butter and ________ in the quantity of peanut butter. A) a decrease in supply of peanut butter and an increase in demand for peanut butter; rise; an increase, decrease or possibly no change B) a decrease in supply of peanut butter and a decrease in demand for peanut butter; rise, fall, or possibly no change; a decrease C) an increase in supply of peanut butter and a decrease in demand for peanut butter; fall; an increase, decrease or possibly no change D) a decrease in supply of peanut butter and an increase in demand for peanut butter; fall; an increase, decrease or possibly no change Answer: A Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: New AACSB: Analytical Skills

86) In 2011, the price of peanuts was rising, which lead peanut butter sellers and peanut butter buyers to expect the price of peanut butter would rise in the future. Suppose the effect on the buyers was larger than the effect on the sellers. Consequently, in the current market for peanut butter there is a ________ in the price of peanut butter and ________ in the quantity of peanut butter. A) rise; an increase B) rise; a decrease C) fall; a decrease D) fall; an increase Answer: A Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: New AACSB: Analytical Skills

87) In 2011, the price of peanuts was rising, which lead peanut butter sellers and peanut butter buyers to expect the price of peanut butter would rise in the future. Suppose the effect on the sellers was larger than the effect on the buyers. Consequently, in the current market for peanut butter there is a ________ in the price of peanut butter and ________ in the quantity of peanut butter. A) rise; an increase B) rise; a decrease C) fall; a decrease D) fall; an increase Answer: B Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: New AACSB: Analytical Skills

88) In 2011, the price of peanuts was rising, which lead peanut butter sellers and peanut butter buyers to expect the price of peanut butter would rise in the future. In the current market for peanut butter, the price falls and the quantity decreases. This set of results means that A) supply decreased by more than demand increased. B) demand increased by more than supply decreased. C) demand increased by more than supply increased. D) supply decreased by more than demand decreased. Answer: A Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: New AACSB: Analytical Skills

89) In 2011, the price of peanuts was rising, which lead peanut butter sellers and peanut butter buyers to expect the price of peanut butter would rise in the future. In the current market for peanut butter, the price rises and the quantity increases. This set of results means that A) demand increased by more than supply decreased. B) supply decreased by more than demand increased. C) demand increased by more than supply increased. D) supply decreased by more than demand decreased. Answer: A Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: New AACSB: Analytical Skills

90) All shredded wheat producers have decided to add a new ingredient to shredded wheat, the "crunch enhancer." Crunch enhancer keeps cereals crisper longer in milk and, as a result, consumers decide they like shredded wheat more than before. What happens to the supply and demand curves for shredded wheat now that is costs more to produce and consumers like it better? A) The supply and demand curves both shift rightward. B) The supply curve shifts rightward and the demand curve doesn't shift. C) The supply curve shifts leftward and the demand curve shifts rightward. D) The supply curve shifts leftward and the demand curve doesn't shift. Answer: C Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

91) An increase in the demand for computers and a decrease in the number of sellers of computers will definitely ________. A) increase the number of computers bought B) increase the price of a computer C) increase the price of a computer and the number of computers bought D) not change the price of a computer and increase the number of computers bought Answer: B Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

92) Consider gardening books. What will happen to the market for these books as gardening becomes more popular and simultaneously printing costs increase? A) The price of gardening books definitely increases. B) The quantity of gardening books definitely increases. C) The price of gardening books might increase or decrease. D) The quantity of gardening books definitely stays the same. Answer: A Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 101 Copyright © 2014 Pearson Education, Inc.

93) If the demand curve for bottled water shifts rightward and the supply curve of bottled water shifts leftward, the equilibrium A) price of bottled water definitely increases. B) price of bottled water definitely decreases. C) quantity of bottled water definitely increases. D) quantity of bottled water definitely decreases. Answer: A Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

94) The cost of producing aspirin increases simultaneously as doctors find that one aspirin per day reduces the risk of heart attacks. The supply of aspirin ________ and the demand for aspirin ________ so that the equilibrium price of aspirin ________. A) increases; increases; rises B) decreases; increases; rises C) increases; decreases; might rise, fall, or stay the same D) decreases; increases; might rise, fall, or stay the same Answer: B Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

95) All grapefruit juice producers have decided to blend tangerine juice with the grapefruit juice. This blend results in a higher cost of production, but studies show that consumers prefer the taste of the blend to straight grapefruit juice. What will happen to the equilibrium price and quantity of the new "blended" grapefruit juice now that it costs more to produce but consumers like it better? A) The price rises and the quantity increases. B) The price falls and the quantity increases. C) The effect on the price is uncertain but the quantity increases. D) The price rises, but the effect on the quantity is uncertain. Answer: D Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

96) Which of the following always lowers the equilibrium price? A) an increase in both demand and supply B) a decrease in both demand and supply C) an increase in demand combined with a decrease in supply D) a decrease in demand combined with an increase in supply Answer: D Topic: Predicting Changes: Demand Decreases, Supply Increases Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills 102 Copyright © 2014 Pearson Education, Inc.

97) The equilibrium price will fall and the equilibrium quantity might increase, decrease, or stay the same when the A) demand and the supply of a good both increase. B) demand for a good increases and the supply of it decreases. C) demand for a good decreases and the supply of it increases. D) demand and the supply of a good both decrease. Answer: C Topic: Predicting Changes: Demand Decreases, Supply Increases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

98) If the demand curve for bikes shifts leftward and the supply curve for bikes shifts rightward, the equilibrium A) price of bikes definitely increases. B) price of bikes definitely decreases. C) quantity of bikes definitely increases. D) quantity of bikes definitely decreases. Answer: B Topic: Predicting Changes: Demand Decreases, Supply Increases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

Price (dollars per ride) 2 4 6 8 10 12

Quantity Quantity demanded supplied (rides per day) (rides per day) 100 40 90 50 80 60 70 70 60 80 50 90

99) The table gives the demand and supply schedules for boat rides. If the supply of boat rides increases by 20 rides a day, the price will ________. A) remain unchanged B) fall to $6 a ride C) rise to $6 a ride D) rise to $10 a ride Answer: B Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

100) The figure illustrates the demand for and supply for jeans. Suppose jeans are a normal good and people's incomes increase. At the initial price of $50 for a pair of jeans, after the increase in income the quantity demanded is ________ than the equilibrium quantity and there is a ________ of jeans. A) greater; surplus B) greater; shortage C) less; surplus D) less; shortage Answer: D Topic: Predicting Changes in Price and Quantity; Demand Increases Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

101) The figure illustrates the market for chairs. If the supply of chairs increases, the price of a chair ________ $40 and the quantity ________. A) will rise above; demanded will decrease B) will rise above; supplied will increase C) will fall below; demanded will increase D) will fall below; demanded will decrease Answer: C Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

102) The above figure shows the market for pizza. Which figure shows the effect of a decrease in the price of a hamburger, which for consumers is a substitute for pizza? A) Figure A B) Figure B C) Figure D D) Figures B and C Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

103) The above figure shows the market for pizza. Which figure shows the effect of an increase in the price of a complement such as soda? A) Figure A B) Figure B C) Figure C D) Figure D Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

104) The above figure shows the market for pizza. Which figure shows the effect of an increase in the price of sandwiches, which for consumers are substitutes for pizza? A) Figure A B) Figure B C) Figure C D) Figure D Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

105) The above figure shows the market for pizza. Which figure shows the effect of an increase in the price of the tomato sauce used to produce pizza? A) Figure A B) Figure B C) Figure C D) Figure D Answer: C Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

106) The above figure shows the market for pizza. Which figure shows the effect of a new report by the U.S. Surgeon General that eating pizza lowers cholesterol levels, an outcome many people want? A) Figure A B) Figure B. C) Figure C D) Figure D Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

107) The above figure shows the market for hamburger. Which figure shows the effect of an announcement by the U.S. Food and Drug Administration (FDA) that eating hamburger causes early death? A) Figure A B) Figure B C) Figure C D) Figure D Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

108) The above figure shows the market for hamburger. Which panel shows the effect of a drought in "cattle country"? A) Figure A B) Figure B C) Figure C D) Figure D Answer: C Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

109) The above figure shows the market for hamburger. Which panel shows the effect of a new excise tax on all beef products? A) Figure A B) Figure B C) Figure C D) Figure D Answer: C Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

110) The above figures show the market for hamburger meat. Which figure(s) shows the effect of a new report by the U.S. Surgeon General that beef consumption is healthier than previously believed? A) Figure A B) Figure B C) Figure D D) Figure A and B Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

111) The above figures show the market for hamburger meat. Which figure(s) shows the effect of an increase in the price of a hamburger bun, a complement for hamburger meat? A) Figure B B) Figure C C) Figure D D) Figures A and B Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

112) The above figures show the market for hamburger meat. Which figure(s) shows the effect of an increase in the number of people who eat hamburger meat? A) Figure A B) Figure B C) Figure C D) Figures A and C Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

113) The above figures show the market for hamburger meat. Which figure(s) shows the effect of a decrease in the price of a hamburger complement such as hamburger buns? A) Figure A B) Figure B C) Figure D D) Figures A and B Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

114) The above figures show the market for hamburger meat. Which figure(s) shows the effect of an increase in the price of a substitute like hot dogs? A) Figure A B) Figure C C) Figure D D) Figures A and C Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

115) The above figures show the market for hamburger meat. Which figure shows the effect of a decrease in the price of a substitute like hot dogs? A) Figure A B) Figure B C) Figure C D) Figure D Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

116) The above figures show the market for hamburger meat. Which figure(s) shows the effect of a nation-wide strike by butchers and meat-packers? A) Figure B B) Figure C C) Figure D D) Figures B and C Answer: B Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

117) The above figures show the market for hamburger meat. Which figure shows the effect of a newly invented machine which grinds beef at twice the speed previously possible? A) Figure A B) Figure B C) Figure C D) Figure D Answer: D Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

118) The above figures show the market for hamburger meat. Which figure shows the effect when more farmers decide to raise cows that are processed into hamburger meat? A) Figure A B) Figure B C) Figure C D) Figure D Answer: D Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

119) The above figures show the market for gasoline. Which figure shows the effect of a nation-wide strike by municipal bus drivers, which causes more people to drive their cars to work? A) Figure A B) Figure B C) Figure C D) Figure D Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

120) The above figures show the market for gasoline. Which figure shows the effect of an increased preference for cars that are smaller and more fuel efficient? A) Figure A B) Figure B C) Figure C D) Figure D Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

121) The above figures show the market for gasoline. Which figure shows the effect of motorists increasing the number of times they take the bus to work rather than driving their own cars? A) Figure A B) Figure B C) Figure C D) Figure D Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

122) The above figures show the market for gasoline. Which figure(s) shows the effect of a decision by the OPEC countries in the Middle East to export less oil to the rest of the world? A) Figure B B) Figure C C) Figure D D) Figures B and C Answer: B Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

123) The above figures show the market for gasoline. Which figure(s) shows the effect of a freezing cold winter which drives up the price of home heating oil (a substitute in production for gasoline because each is made from crude oil)? A) Figure B B) Figure C C) Figure D D) Figures B and C Answer: B Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

124) The above figures show the market for gasoline. Which figure(s) shows the effect of a new U.S. tax on oil that suppliers must pay? A) Figures A and C B) Figures B and D C) Figure A only D) Figure C only Answer: D Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

125) The above figures show the market for gasoline. Which figure shows the effect of the end of a nine month strike by workers at all U.S. oil refineries? A) Figure A B) Figure B C) Figure C D) Figure D Answer: D Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

126) The above figures show the market for oranges. Which figure shows the effect of changing consumer preferences for more orange juice and less coffee in the morning? A) Figure A B) Figure B C) Figure C D) Figure D Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

127) The above figures show the market for oranges. Which figure(s) shows the effect of a new government program that provides each public school child with an orange to start the day? A) Figure A B) Figure D C) Figures A and C D) Figures A and D Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

128) The above figures show the market for oranges. Which figure(s) shows the effect of an increase in the price of bananas, a substitute for oranges? A) Figure A B) Figure C C) Figure D D) Figure A and C Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

129) The above figures show the market for oranges. Which figure(s) shows the effect of new successful advertising campaigns to eat more oranges? A) Figure A B) Figure B C) Figure D D) Figures A and D Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

130) The above figures show the market for oranges. Which figure(s) shows the effect of a nation-wide consumer boycott of eating oranges? A) Figure B B) Figure C C) Figures B and C D) Figures A and D Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

131) The above figures show the market for oranges. Which figure shows the effect of great growing conditions that produce an above-average sized crop? A) Figure A B) Figure B C) Figure C D) Figure D Answer: D Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

132) The above figures show the market for oranges. Which figure shows the effect of a new technology called "the orange picker," which harvests oranges less expensively than ever before? A) Figure A B) Figure B C) Figure C D) Figure D Answer: D Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

133) The above figures show the market for oranges. Which figure(s) shows the effect of existing orange growers increasing the size of their orange groves? A) Figures A and C B) Figures B and D C) Figure A D) Figure D Answer: D Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

The Market for Wapanzo Beans Quantity Demanded Price Quantity Supplied (millions of pounds (dollars per (millions of pounds per year) pound) per year) Case Case Case Case A Case B Case C 1 2 3 15 10 15 $1 1 2 3 12 8 4 $2 2 4 6 9 6 3 $3 3 6 9 6 3 2 $4 4 8 12 3 2 1 $5 5 10 15 134) Refer to the table above. Suppose that in normal years demand is represented by Case 2 and supply is represented by Case B. In a normal year the price of wapanzo beans will be A) $1 per pound. B) $2 per pound. C) $3 per pound. D) $4 per pound. Answer: C Topic: Market Equilibrium Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

135) Refer to the table above. Suppose that in normal years demand is represented by Case 2 and supply is represented by Case B. In a normal year the equilibrium quantity of wapanzo beans will be A) 2 million pounds. B) 4 million pounds. C) 6 million pounds. D) 8 million pounds. Answer: C Topic: Market Equilibrium Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

136) Refer to the table above. Suppose that in normal years demand is represented by Case 2 and supply is represented by Case B. If there is a drought in the wapanzo bean growing region then supply will ________ and demand will ________. A) become case A; become case 1 B) become case A; stay at case 2 C) stay at case B; become case 3 D) stay at case B; become case 1 Answer: B Topic: Change in Supply Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 117 Copyright © 2014 Pearson Education, Inc.

137) Refer to the table above. Suppose that in normal years demand is represented by Case 2 and supply is represented by Case B. If there is exceptionally good growing weather in the wapanzo bean growing region then supply will ________ and demand will ________. A) become case C; become case 1 B) become case C; stay at case 2 C) become case C; become case 3 D) stay at case B; become case 1 Answer: B Topic: Change in Supply Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

138) Refer to the table above. Suppose that in normal years demand is represented by Case 2 and supply is represented by Case B. If it is discovered that wapanzo beans help prevent cancer, then supply will ________ and demand will ________. A) become case C; become case 1 B) become case C; stay at case 2 C) stay at case B; become case 1 D) become case A; become case 1 Answer: C Topic: Change in Demand, Preferences Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

139) In the above figure, a change in quantity demanded with unchanged demand is represented by a movement from A) point a to point e. B) point a to point b. C) point a to point c. D) None of the above represent a change in the quantity demanded with an unchanged demand. Answer: A Topic: A Change in Quantity Demanded Versus a Change in Demand Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

140) In the above figure, a change in quantity supplied with unchanged supply is represented by a movement from A) point a to point e. B) point b to point a. C) point e to point c. D) point b to point e. Answer: B Topic: A Change in Quantity Supplied Versus a Change in Supply Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

141) In the above figure, if D2 is the demand curve, then a price of P3 would result in A) a shortage of Q3 - Q1. B) a shortage of Q4 - Q3. C) a surplus of Q3 - Q1. D) a surplus of Q4 - Q0. Answer: C Topic: Surplus Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

142) In the above figure, if D2 is the original demand curve for a normal good and income decreases, which price and quantity might result? A) point a, with price P2 and quantity Q2 B) point b, with price P1 and quantity Q1 C) point c, with price P3 and quantity Q3 D) point d, with price P1 and quantity Q3 Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

143) In the above figure, if D2 is the original demand curve and the price of a substitute in consumption rises, which price and quantity might result? A) point a, with price P2 and quantity Q2 B) point b, with price P1 and quantity Q1 C) point c, with price P3 and quantity Q3 D) point d, with price P1 and quantity Q3 Answer: C Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

144) In the above figure, if D2 is the original demand curve and consumers come to expect that the price of the good will rise in the future, which price and quantity might result? A) point a, with price P2 and quantity Q2 B) point b, with price P1 and quantity Q1 C) point c, with price P3 and quantity Q3 D) point d, with price P1 and quantity Q3 Answer: C Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

145) In the above figure, if D2 is the original demand curve and the population falls, which price and quantity might result? A) point a, with price P2 and quantity Q2 B) point b, with price P1 and quantity Q1 C) point c, with price P3 and quantity Q3 D) point d, with price P1 and quantity Q3 Answer: B Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

146) In the figure, the equilibrium price is initially $3 per bushel of wheat. If suppliers come to expect that the price of a bushel of wheat will rise in the future, but buyers do not, the current equilibrium price will A) rise. B) not change. C) fall. D) Perhaps rise, fall, or stay the same, depending on whether there are more demanders or suppliers in the market. Answer: A Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

147) In the figure, the equilibrium price is initially $3 per bushel of wheat. If buyers come to expect that the price of a bushel of wheat will rise in the future, but sellers do not, the current equilibrium price will A) rise. B) not change. C) fall. D) Perhaps rise, fall, or stay the same, depending on whether there are more demanders or suppliers in the market. Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

148) Using the above figure, suppose that roses are a normal good. If there is an increase in income, A) the equilibrium price will rise above $25 per dozen roses. B) the equilibrium quantity will decrease below 10 dozen roses. C) we cannot predict what will happen to the equilibrium price. D) we cannot predict what will happen to the equilibrium quantity. Answer: A Topic: Predicting Changes in Price and Quantity; Demand Increases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

149) Using the above figure, suppose there is a decrease in the number of suppliers. Then A) the equilibrium price will decrease below $25 per dozen roses. B) we cannot predict what will happen to equilibrium quantity. C) the equilibrium quantity will decrease below 10 dozen roses. D) both the equilibrium price and quantity will increase. Answer: C Topic: Predicting Changes in Price and Quantity; Supply Decreases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills 122 Copyright © 2014 Pearson Education, Inc.

150) In the above figure, in order for the equilibrium price to remain constant while the equilibrium quantity increases, the A) supply and demand curves both would have to shift leftward. B) supply curve would have to shift leftward and the demand curve would have to shift rightward. C) supply curve would have to shift rightward and the demand curve would have to shift leftward. D) supply and demand curves both would have to shift rightward. Answer: D Topic: Predicting Changes in Price/Quantity; Demand/Supply Increase Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

151) Using the above figure, suppose that roses are a normal good. If incomes decrease while simultaneously there is an increase in the price of the resources used to produce roses, then A) the price will definitely increase above $25 per dozen roses. B) the quantity will definitely decrease below 10 dozen roses. C) the price will definitely decrease below $25 per dozen roses. D) we cannot tell what will happen to equilibrium quantity. Answer: B Topic: Predicting Changes in Price/Quantity; Demand/Supply Decrease Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

152) Pizza and hamburgers are substitutes for consumers. A fall in the price of a pizza ________ the price of a hamburger and ________ the quantity of hamburgers. A) raises; increases B) raises; decreases C) lowers; increases D) lowers; decreases Answer: D Topic: SGQ, Predicting Changes in Price & Quantity; Demand Changes Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

153) How does an unusually warm winter affect the equilibrium price and quantity of gloves? A) It raises both the price and the quantity. B) It raises the price and decreases the quantity. C) It lowers the price and increases the quantity. D) It lowers both the price and the quantity. Answer: D Topic: SGQ, Predicting Changes in Price & Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

154) You notice that the price and quantity of wheat both decrease. This observation can be the result of the A) demand curve for wheat shifting rightward. B) demand curve for wheat shifting leftward. C) supply curve of wheat shifting rightward. D) supply curve of wheat shifting leftward. Answer: B Topic: SGQ, Predicting Changes in Price & Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

155) The number of firms producing computer memory chips decreases. As a result, the price of a memory chip ________ and the quantity of memory chips ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases Answer: C Topic: SGQ, Predicting Changes in Price & Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

156) A technological improvement lowers the cost of producing coffee. At the same time, consumers' preferences for coffee increase. The equilibrium price of coffee will A) rise. B) fall. C) remain the same. D) rise, fall, or stay the same, depending on the relative size of the shifts in the demand and supply curves. Answer: D Topic: Predicting Changes in Price/Quantity; Demand/Supply Increase Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Analytical Skills

157) Producers of tablet computers will be able to lower the wage rate that they pay to their workers. You are asked to predict the effects on the supply of tablet computers, and the price of a tablet computer. You predict that the supply curve shifts A) rightward, and the price is constant. B) leftward, and the price is constant. C) rightward, and the price falls. D) leftward, and the price rises. Answer: C Topic: Parallel MyEconLab Q., Predicting Change in Price & Quantity Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

6 News Based Questions 1) A ticket to see the Radio City Rockettes costs $90. You buy a ticket for $30 to see the New York Jets play football. The money price for A) the Rockettes ticket is $90 and the relative price is 3 Jets tickets per Rockette ticket. B) the Rockettes ticket is 3 Jets tickets per Rockette ticket and the relative price is $90. C) a Jets ticket is $30 and the relative price is 3 Rockettes tickets per Jets ticket. D) a Jets ticket is $30 and $3 for a Rockettes ticket. Answer: A Topic: Price and Opportunity Cost Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

2) You can buy a season ticket to the Metropolitan Opera for $800. A season ticket plan to see the New York Knicks is $1600. Which of the following is a correct statement? A) The money price of opera tickets is 1/2 of a Knicks ticket per opera ticket. B) The opportunity cost of a Knicks ticket is 2 opera tickets per Knicks ticket. C) The relative price of an opera ticket is $800. D) the money price of a Knicks ticket is 2 opera tickets per Knicks ticket. Answer: B Topic: Price and Opportunity Cost Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

3) There are 72,922 seats in Lambeau Field where the Green Bay Packers play football. The Packers have sold out their season tickets since 1960. There are about 80,000 people on the waiting list to buy season tickets in 2010. This means that at the price in 2010, the A) quantity demanded of Packer season tickets is 72,922. B) quantity demanded of Packer season tickets is about 80,000. C) quantity demanded of Packer season tickets is about 153,000. D) demand for Packer season tickets is 72,922. Answer: C Topic: Quantity Demanded Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

4) There are 72,922 seats in Lambeau Field where the Green Bay Packers play football. The Packers have sold out their season tickets since 1960. There are about 80,000 people on the waiting list to buy season tickets in 2010. If the Packers raised ticket prices, the A) demand for Packers tickets decreases. B) demand curve for Packers tickets shifts leftward. C) demand curve for Packers tickets shifts rightward. D) the quantity demanded of Packers tickets decreases. Answer: D Topic: Law of Demand Skill: Analytical Status: Modified 10th edition AACSB: Reflective Thinking

5) There are 72,922 seats in Lambeau Field where the Green Bay Packers play football. The Packers have sold out their season tickets since 1960. There are about 80,000 people on the waiting list to buy season tickets in 2010. Packers tickets are a normal good. As a result of the economic recession in 2010 during which people's incomes decreased, the A) demand for Packers tickets decreased. B) demand curve for Packers tickets shifted rightward. C) quantity demanded of Packers tickets decreased. D) substitution effect changed the quantity demanded. Answer: A Topic: Change in Demand, Income Skill: Analytical Status: Modified 10th edition AACSB: Reflective Thinking

6) In 2007 Nike reduced the price of its running shoes by 20 percent. As a result, the substitution effect caused A) the demand for Nike shoes to increase. B) people to switch from Adidas shoes and buy more Nikes. C) the relative price of Nikes to increase. D) the demand curve for Nikes to shift rightward. Answer: B Topic: Demand; Substitution Effect Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

7) In mid-2008 Delta increased the price of a New York to LA ticket by 10 percent. As a result of this price hike, there was a ________ shift in the demand curve for a ticket on Continental because the price of a ________ had risen. A) rightward; complement B) leftward; substitute C) leftward; complement D) rightward; substitute Answer: D Topic: Change in Demand Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

8) The figure above shows the market for airline tickets. If airline tickets are a normal good, then the recession in 2008 that caused people's incomes to decrease lead to a shift from A) D0 to D1. B) D1 to D0. C) S0 to S1. D) S1 to S0. Answer: A Topic: Change in Demand, Income Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

9) The figure above shows the market for airline tickets. In early 2008 the price of jet fuel rose. This change is shown in the figure as a shift from A) D0 to D1. B) D1 to D0. C) S0 to S1. D) S1 to S0. Answer: C Topic: Change in Supply, Prices of Factors of Production Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

10) The figure above shows the market for airline tickets. In early 2008 firms negotiated lower wages with their workers. This change is shown in the figure as a shift from A) D0 to D1. B) D1 to D0. C) S0 to S1. D) S1 to S0. Answer: C Topic: Change in Supply, Prices of Factors of Production Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

11) The Miami Dolphins play football in Joe Robbie Stadium which holds 76,500 seats. In 2009, attendance averaged about 70,000 fans per game. This means that the quantity supplied of seats is A) 76,500. B) 70,000. C) 6,500. D) 126,500. Answer: A Topic: Quantity Supplied Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

12) General Electric (GE) produces wind turbines that generate wind power. Over the past 10 years, the advances in technology used to produce wind turbines has resulted in A) a movement up along the supply curve for wind-generated power. B) a rightward shift in the supply curve for wind-generated power. C) a decrease in the supply of wind-generated power. D) GE increasing the quantity supplied of wind turbines. Answer: B Topic: Change in Supply, Technology Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

13) Farmers can use their land to grow soy beans or corn. If the price of corn rises, A) the supply of soybeans decreases and the soybean supply curve shifts leftward. B) the supply of soybeans increases. C) the supply of corn increases and the corn supply curve shifts rightward. D) the supply of corn increases. Answer: A Topic: Change in Supply, Prices of Related Goods Produced Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

14) In 2006, the base price of a Hummer SUV was about $30,000. By 2008, as gasoline prices increased, A) the demand curve for Hummers shifted leftward and Hummer prices decreased. B) the demand curve for Hummers shifted rightward and Hummer prices increased. C) there was a movement down along the Hummer demand curve. D) there was a movement up along the Hummer supply curve. Answer: A Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

7 Essay Questions 1) Explain why a relative price is an opportunity cost. Answer: A relative price is the ratio of the price of one good or service to the price of another good or service. It tells us how much of one good or service must be given up in order to obtain more of the other good. Topic: Price and Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Communication

2) What is the difference between a money price and a relative price? When the demand and supply model predicts that the price of coffee will rise, is the model predicting that the money price rises or the relative price rises? Answer: The money price of a good is the number of dollars that must be given up in exchange for it. A relative price is the opportunity cost of a good in terms of another good. A relative price of good X is the quantity good Y that we forgo to get a unit of good X. When the supply-and-demand model predicts that the price of coffee will rise, it is the relative price, that is the model predicts that the price of coffee will rise relative to the average price of other goods. The money price might or might not rise. Topic: Price and Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Communication

3) What is the law of demand? Answer: The law of demand states that other things remaining the same, if the price of a good rises, the quantity demanded of that good decreases, and if the price of a good falls, the quantity demanded of that good increases. Topic: Law of Demand Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Communication

4) What leads to a decrease in the quantity demanded of a good or service? Answer: The quantity demanded of a good or service decreases when the price of the product increases. Topic: Law of Demand Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Communication

5) An economist says: "The demand curve has two interpretations." What does the economist mean? Answer: The first interpretation is that the demand curve shows the quantities of a good or service that consumers are willing and able to buy at each price, other things being equal. The second interpretation is that the demand curve is a willingness-and-ability-to-pay curve, so that for each quantity it shows the highest price that someone is willing and able to pay for one more unit. Topic: Demand Curve Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Communication

6) List the factors change demand and shift the demand curve. Tell what happens to demand and the demand curve when there is an increase in the factor. Answer: One factor that changes demand is a change in income. An increase in income increases demand and shifts the demand curve rightward for a normal good. An increase in income decreases demand and shifts the demand curve leftward for an inferior good. A change in the price of a substitute or complement also changes demand. An increase in the price of a substitute increase demand and shifts the demand curve rightward while an increase in the price of a complement decreases demand and shifts the demand curve leftward. Expectations, the population, and preferences also change demand. If people expect their income to increase, or if they expect the price of the good to be higher in the future, or if the population increases (so that the number of buyers increases), or if people's preferences for the good increase, demand increases and the demand curve shifts rightward. Topic: Change in Demand Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Analytical Skills

7) Computers are a complement to computer software. Suppose the price of a computer falls. How does this fall in price affect the demand for computer software and the demand curve for computer software? Answer: The fall in the price of a complement increases the demand for a product. Hence the fall in the price of a computer increases the demand for computer software and shifts the demand curve for computer software rightward. Topic: Change in Demand, Prices of Related Goods Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Communication 130 Copyright © 2014 Pearson Education, Inc.

8) What is the difference between a normal good and an inferior good? Give an example of each. Answer: A good is a normal good if an increase in incomes leads to an increase in demand for a good. Most goods are normal goods. An example of a normal good is new clothes. A good is an inferior good if an increase in income leads to a decrease in demand for the good. Second-hand clothing that can be purchased at thrift stores is an inferior good. Topic: Change in Demand, Income Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Communication

9) Consumers' income declines and, as a result, the demand for margarine increases. Is margarine a normal or an inferior good? Explain. Answer: Margarine is an inferior good. An inferior good is one for which demand increases as income decreases, which describes the situation outlined for margarine in the question. Topic: Change in Demand, Income Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Communication

10) Explain the difference between a change in demand and a change in quantity demanded. What leads to each of these changes? Answer: A change in demand occurs when consumers will buy more or less of a product at every price; a change in the quantity demanded occurs when the price changes and consumers buy more or less. A change in demand is reflected by a shift of the entire demand curve, while a change in the quantity demanded is reflected by a movement along one demand curve. Only a change in the price of the good brings about a change in the quantity demanded. A change in demand is brought about by a change in any of the other influences on demand, namely, the prices of related goods, income, expectations, the number of buyers, and preferences. Topic: A Change in the Quantity Demanded Versus a Change in Demand Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Communication

11) Your friend Tony opened a pizzeria. You helped him to advertise his pizza, which is in fact the best pizza in town. As a result, the demand for Tony's pizza increases and your friend, noticing lines of customers, raises the price of his pizza. But then he fears that the higher price will cause demand to decline, which will cause the price to drop. Is Tony right in his analysis of the situation? Explain. Answer: Tony is confusing a change in demand (a shift of the demand curve) with a change in quantity demanded (a movement along the demand curve). An increase in the price of his pizza cannot cause the demand for his pizza to decline, that is, it cannot shift the demand curve for his pizza leftward.. The rise in the price results in a decrease in the quantity of pizza demanded. So Tony need not fear that the demand for his pizza will decrease as a result of a higher price. Topic: A Change in the Quantity Demanded Versus a Change in Demand Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Communication

12) An economist says: "The supply curve has two interpretations." What does the economist mean? Answer: The first interpretation is that the supply curve shows the quantities of a good or service that producers are willing and able to sell at each price, other things being equal. The second interpretation is that the supply curve is a minimum-supply-price curve, so that for each quantity it shows the lowest price at which someone is willing to sell another unit. Topic: Demand Curve Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Communication

13) List the factors that change supply and shift the supply curve. Tell what happens to supply and the supply curve when there is an increase in the factor. Answer: The factors that change supply are technology, the number of sellers, expected future prices, prices of factors of production, and prices of related goods. An advance in technology, an increase in the price of a complement in production, an increase in expected prices, and an increase in the number of sellers all lead to an increase in supply and a rightward shift in the supply curve. An increase in the price of a substitute in production or an increase in the prices of factors of production leads to a decrease in supply and a leftward shift in the supply curve. Topic: Change in Supply Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Communication

14) What are substitutes in production? Answer: Goods are substitutes in production when one good can be produced in place of the other, that is, when the goods are produced using the same resources. Topic: Change in Supply, Prices of Related Goods Produced Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Communication

15) Suppose that the number of companies selling computer software decreases. How does this change affect the supply of computer software and the supply curve of computer software? Answer: A decrease in the number of sellers decreases the supply. Hence the decrease in the number of companies selling computer software decreases the supply of computer software and shifts the supply curve of computer software leftward. Topic: Change in Supply, Number of Suppliers Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Communication

16) Suppose that the technology used to produce computers advances. How does this change affect the supply of computers and the supply curve of computers? Answer: An advance in technology increases the supply of computers. Hence increases in technology shift the supply curve of computers rightward. Topic: Change in Supply, Technology Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Communication

17) What leads to a decrease in the quantity supplied of a good or service? Answer: The quantity supplied of a good or service decreases when the price of the product decreases. Topic: A Change in the Quantity Supplied Versus a Change in Supply Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Communication

18) What is the difference between quantity supplied and supply? Answer: Quantity supplied is the amount that people are willing to sell during a specific period for a specific price. It deals with one quantity at one price. Supply is the relationship between the quantity supplied and the price of the good. Supply applies to various prices and various quantities. Topic: A Change in the Quantity Supplied Versus a Change in Supply Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Communication

19) Explain how price can be a regulator, that is, how it can coordinate the plans of buyers and sellers. Answer: If the price is too high, the quantity supplied exceeds the quantity demanded so there is a surplus. The surplus forces the price lower. The lower price increases the quantity demanded and decreases the quantity supplied bringing the market to equilibrium, where the quantity demanded equals the quantity supplied and where the plans of buyers and sellers are coordinated. If the price is too low, the quantity demanded exceeds the quantity supplied so there is a shortage. The shortage forces the price higher. The higher price decreases the quantity demanded and increases the quantity supplied bringing the market to equilibrium, again coordinating the plans of buyers and sellers. Topic: Price Adjustments; Surplus Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Communication

20) When does a shortage occur? Answer: A shortage occurs when the price is below the equilibrium price. When the price is less than the equilibrium price, the quantity demanded is greater than the quantity supplied. Topic: Price Adjustments; Shortage Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Communication

21) When does a surplus occur? Answer: A surplus occurs when the price is above the equilibrium price. When the price exceeds the equilibrium price, the quantity supplied is greater than the quantity demanded. Topic: Price Adjustments; Surplus Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Communication

22) At prices above the equilibrium price, what occurs? Answer: If the price exceeds the equilibrium price, there is a surplus because the quantity supplied exceeds the quantity demanded. With a surplus, the law of markets points out that the price will fall. As the price falls, the quantity supplied decreases and the quantity demanded increases, thus decreasing the size of the surplus. The price will continue to fall as long as there is a surplus, that is, as long as the price exceeds the equilibrium price. Ultimately the price will fall to equal the equilibrium price, at which time the surplus will be eliminated and the price will no longer change. Topic: Price Adjustments; Shortage Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Communication

23) When the demand for blue jeans increases, what happens next? Answer: If the demand for blue jeans increases, then at all prices buyers are more willing and more able to buy blue jeans. The demand curve for blue jeans shifts rightward. With the curve shifts, at the initial price a shortage of jeans will emerge. The law of supply and demand will force the price higher. Hence an increase in demand for blue jeans leads to a rise in the price of a pair of blue jeans and an increase in the quantity of blue jeans. Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Communication

24) Why does an increase in the supply of computers lead to a lower price for a computer? Answer: When the supply of a good, such as computers, increases, the supply curve shifts rightward. This shift means sellers are more willing and more able to sell computers at all prices than they were before. With this change, a surplus of computers results. The surplus forces the price to fall, which, when the price falls enough, eliminates the surplus. Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Communication

25) "If the price of crude oil falls, the demand for gasoline will increase, so people will by more gas and the price of gas will go up." Is this statement true or false? Explain. Answer: The analysis is false. If the price of crude oil falls, the supply of gasoline increases, because crude oil is a resource used to produce gasoline. The prices of resources used to produce the good influence its supply, not demand. So, if the price of oil falls, the supply of gasoline increases and the supply curve shifts rightward. The equilibrium price of gasoline falls. It is true that people will buy more gasoline, but this happens not because the demand increases, but because a lower price results in a movement down the demand curve so that the quantity demanded increases. Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Communication

26) Personal computers are becoming less expensive as new technology reduces the cost of production. In a supply and demand model, explain the effects of the technological innovations and their effect on the quantity of computers. Answer: Advances in technology increase the supply of computers and the supply curve of computers shifts rightward. The price of a computer thus falls. The demand curve does not shift. Rather, on the demand side there is an increase in quantity demanded, or movement along the curve, in response to the falling price. The equilibrium quantity of computers increases. Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Communication

27) In the market for bicycles, explain what happens to the supply and demand curves when there is an increase in the price of steel used to make bikes. Answer: An increase in the price of steel is an increase in the price of a resource used to make the good. As a result, the supply of bicycles decreases and the supply curve shifts leftward. There is no change to the demand, so the demand curve does not shift. The equilibrium price of a bicycle rises and the equilibrium quantity decreases. Topic: Predicting Changes in Price and Quantity; Supply Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

28) What is the effect on the price and quantity of a product if both the demand and supply simultaneously increase? Answer: The equilibrium quantity unambiguously increases. The effect on the equilibrium price is ambiguous. The equilibrium price rises if the increase in demand exceeds the increase in supply. The equilibrium price falls if the increase in supply exceeds the increase in demand. The equilibrium price is unchanged if the increase in demand equals the increase in supply. Topic: Predicting Changes in Price/Quantity; Demand/Supply Increase Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Communication

29) What is the effect on the price and quantity of a product if the demand decreases and the supply simultaneously increases? Answer: The equilibrium price unambiguously falls. The effect on the equilibrium quantity is ambiguous. The equilibrium quantity decreases if the decrease in demand exceeds the increase in supply. The equilibrium quantity increases if the increase in supply exceeds the decrease in demand. The equilibrium quantity is unchanged if the decrease in demand equals the increase in supply. Topic: Predicting Changes: Demand Decreases, Supply Increases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Communication

30) Computers are a complement to computer software. Suppose the price of a computer falls. Simultaneously, suppose that the number of companies selling computer software decreases. How do these changes affect the price and quantity of computer software? Answer: The fall in the price of a computer increases the demand for computer software and the demand curve for computer software shifts rightward. A decrease in the number of sellers decreases the supply of computer software and the shifts the supply curve of computer software leftward. The increase in demand and decrease in supply both raise the price, so the price definitely rises. The increase in demand increases the quantity and the decrease in supply decreases the quantity. Hence the net effect on the quantity is ambiguous. Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Communication

31) In early 2009 the price of computer memory chips rose. In a demand and supply model, shifts in what curve(s) could have brought about the higher price? Answer: The higher price could have been brought about by an increase in demand, a decrease in supply, or the combination of an increase in demand combined with a decrease in supply. Hence the higher price could have been the result of a rightward shift in the demand curve, a leftward shift in the supply curve, or a combined rightward shift of the demand curve and leftward shift of the supply curve. Topic: Predicting Changes: Demand Increases, Supply Decreases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Communication

32) If the equilibrium relative price for a two-liter bottle of Coca-Cola is $1.50 today, just like it was ten years ago, can we safely say that all supply and demand conditions in the market for Coke have remained very stable all these years? Answer: Not necessarily. The demand curve might have shifted rightward continuously due to population growth in the United States and growing demand for Coke in other countries world-wide. Although that alone would have driven up the price, there could have been other factors shifting the supply curve rightward, such as improved technology for producing and transporting Coke, or declining sugar prices because of some great sugar harvests. Regardless of the reason, if the supply increased, so that the supply curve shifted rightward, then the increase in supply, which leads to a fall in the equilibrium price, can offset any increase in the demand. So, even if the price has remained constant, the only accurate statement is that any change in demand was accompanied by an equal sized change in the supply in the same direction. Topic: Market Equilibrium Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Communication

8 Numeric and Graphing Questions 1) The price of a computer is $1,000 and the price of a car is $12,000. What is the relative price of a car? What is the relative price of a computer? Answer: The relative price of a car is $12,000 per car ÷ $1,000 per computer = 12 computers per car. The relative price of a computer is $1,000 per computer ÷ $12,000 per car = 0.083 of a car per computer. Topic: Price and Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

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

The increase in the price of milk increases the demand for soft drinks, as illustrated in the figure above. Topic: Change in Demand, Prices of Related Goods Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

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

The increase in the income increases the demand for soft drinks, as illustrated in the figure above. Topic: Change in Demand, Income Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

Price Quantity Quantity (dollars per demanded supplied pound of cat (tons of cat food (tons of cat food food) per year) per year) 1.00 52 15 1.50 46 26 2.00 43 34 2.50 40 30 3.00 35 44 4) The above table gives the demand and supply schedules for cat food. If the price is $3.00 per pound of cat food, will there be a shortage, a surplus, or is this price the equilibrium price? If there is a shortage, how much is the shortage? If there is a surplus, how much is the surplus? If $3.00 is the equilibrium price, what is the equilibrium quantity? Answer: At a price of $3.00 per pound of cat food, there is a surplus. The surplus equals 44 tons (the quantity supplied) minus 35 tons (the quantity demanded), or 9 tons of cat food. Topic: Surplus Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

5) The above table gives the demand and supply schedules for cat food. If the price is $1.00 per pound of cat food, will there be a shortage, a surplus, or is this price the equilibrium price? If there is a shortage, how much is the shortage? If there is a surplus, how much is the surplus? If $3.00 is the equilibrium price, what is the equilibrium quantity? Answer: At a price of $1.00 per pound of cat food, there is a shortage. The shortage equals 52 tons (the quantity demanded) minus 15 tons (the quantity supplied), or 37 tons of cat food. Topic: Shortage Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

6) The above table gives the demand and supply schedules for cat food. What is the equilibrium price and quantity? Answer: The equilibrium price is $2.50 per pound of cat food because that is the price at which the quantity demanded equals the quantity supplied. The equilibrium quantity of cat food is 40 tons per year. Topic: Equilibrium Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

7) The above table gives the demand and supply schedules for cat food. If the supply increases by 20 tons at every price, what is the new equilibrium price and quantity? Answer: The equilibrium price is $1.50 per pound of cat food because that is the price at which the quantity demanded equals the (new) quantity supplied. The equilibrium quantity of cat food is 46 tons per year. Topic: Predicting Changes: Demand Decreases, Supply Increases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

8) The diagram above illustrates the market for apartments in Victoria, British Columbia. a) If the current rent is $300 per month, is there a shortage or surplus in the apartment market and how much is the shortage or surplus? b) What is the equilibrium rent and quantity of apartments? Answer: a) If the rent is $300 per month, there is a shortage of 30,000 apartments. b) The equilibrium rent is $400 per month and the equilibrium quantity is 40,000 apartments. Topic: Shortage Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

9) In the figure above, if the price is $8 a unit, is there a shortage or surplus and what is the amount of any shortage or surplus? What is the equilibrium price and quantity? Answer: At a price of $8 there is a surplus because the quantity supplied exceeds the quantity demanded. The amount of the surplus is 4 units per month. The equilibrium price is $4 a unit and the equilibrium quantity is 3 units per month. Topic: Shortage Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

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

The demand for kerosene heaters increased, so the demand curve shifted rightward, as illustrated above. As a result, the price rises and quantity increases. Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

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

Natural gas and home heating oil are substitutes. The increase in the price of natural gas increases the demand for home heating oil, so the demand curve for home heating oil shifts rightward, as illustrated above. As a result, the price rises and quantity increases. Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

Price (dollars per disk) 0.50 1.00 1.50 2.00 2.50 3.00

Quantity demanded (millions of disks per month) 50 40 30 20 10 0

Quantity supplied (millions of disks per month) 0 15 30 45 60 75

12) Suppose the market for CD-Rs has the demand and supply schedules shown in the table above. What is the equilibrium price and the equilibrium quantity in this market? Suppose the current price is $2.00. What is the quantity of CD-Rs sold? Explain. Is there a shortage or a surplus? How big is it? Explain. Answer: The equilibrium price is $1.50. The equilibrium quantity is 30 million disks per month. The quantity sold is 20 million disks per month. Although at $2.00 suppliers want to sell 45 million disks, the buyers want to buy only 20 million and so 25 million disks won't be sold. Since the quantity supplied, 45 million disks, is greater than the quantity demanded, 20 million, there is a surplus, 25 million disks. Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

13) Suppose the market for CD-Rs has the demand and supply schedules shown in the table above. Suppose a technological advance increases the quantity of disks supplied at each price by 25 million. What is the new equilibrium price and the new equilibrium quantity of CD-Rs? Answer: The initial equilibrium price is $1.50 and the initial equilibrium quantity is 30 million disks per month. The technological advance increases the supply by 25 million disks. As a result, the equilibrium price falls to $1.00 and the equilibrium quantity increases to 40 million disks. Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

14) Suppose the market for CD-Rs has the demand and supply schedules shown in the table above. Suppose a decrease in the price of a CD burner increases the quantity of disks demanded at each price by 20 million. What are the new equilibrium price and equilibrium quantity of CD-Rs? Answer: The initial equilibrium price is $1.50 and the initial equilibrium quantity is 30 million disks per month. The decrease in the price of a CD increases the demand by 25 million disks. As a result, the equilibrium price rises to $2.00 and the equilibrium quantity increases to 45 million disks. Topic: Predicting Changes in Price and Quantity; Demand Changes Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

9 True or False 1) A relative price is the product of two money prices. Answer: FALSE Topic: Markets and Prices Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

2) The relative price of a good is greater than the money price of a good. Answer: FALSE Topic: Markets and Prices Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

3) A demand curve is also a willingness-and-ability-to-pay curve. Answer: TRUE Topic: Demand Curve Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

4) A movement along the demand curve shows a change in demand. Answer: FALSE Topic: Demand Curve Skill: Recognition Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

5) An increase in the incomes of baseball fans in New York leads to a rightward movement along the demand curve but does not shift the demand curve for Yankees tickets. Answer: FALSE Topic: Demand Curve Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

6) For consumers, chocolate chip cookies and doughnuts are substitutes. So, an increase in the price of chocolate chip cookies will lead to a rightward shift in the demand curve for doughnuts. Answer: TRUE Topic: Demand Curve Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

7) Young drivers often buy used cars. An increase in the legal driving age to twenty-one would result in a leftward movement along the demand curve for used cars, whereas lowering the age to fifteen would result in a rightward movement along the demand curve. Answer: FALSE Topic: Demand Curve Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

8) Young drivers often buy used cars. An increase in the legal driving age to twenty-one shifts the demand curve for used cars leftward, whereas lowering the age to fifteen shifts the demand curve rightward. Answer: TRUE Topic: Demand Curve Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

9) The supply curve indicates the minimum quantity that a producer would be willing to supply at alternative prices. Answer: FALSE Topic: Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

10) A supply curve is also a maximum-supply-price curve. Answer: FALSE Topic: Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

11) An increase in price results in increase in supply but not an increase in the quantity supplied. Answer: FALSE Topic: Supply Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

12) An increase in technology will shift the good's supply curve rightward. Answer: TRUE Topic: Supply Curve Skill: Conceptual Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

13) If house purchases and renting an apartment are substitutes, then an increase in the price of a new house results in a rise in the rent charged for apartments. Answer: TRUE Topic: Predicting Changes in Price and Quantity Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

14) During the mid-2000s, the average price of a used car fell by nearly $500 and the quantity sold nationwide decreased by several thousands each year. This set of results is a contradiction of the law of demand. Answer: FALSE Topic: Predicting Changes in Price and Quantity Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

15) When both the demand for a good increases and the supply of the good increases, the equilibrium quantity definitely increases. Answer: TRUE Topic: Predicting Changes in Price and Quantity Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

16) In the market for chocolate chip cookies, if the demand decreases while the supply increases, the price definitely falls but the quantity might increase, decrease, or remain the same. Answer: TRUE Topic: Predicting Changes in Price and Quantity Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Reflective Thinking

17) If the demand and supply curves are described by the following equations P = a - bQ and P = c + dQ, respectively, the equilibrium quantity is Q* = (a-c)/(b+d). Answer: TRUE Topic: Mathematical Note Skill: Analytical Status: New 10th edition AACSB: Reflective Thinking

18) If the demand and supply curves are described by the following equations P = a - bQ and P = c + dQ, respectively, the equilibrium price is P* = (ad + bc)/(b+d). Answer: TRUE Topic: Mathematical Note Skill: Analytical Status: New 10th edition AACSB: Reflective Thinking

10 Extended Problems 1) Using supply-and-demand diagrams, show and explain the effects of the following events on the price of CD-Rs and the quantity of CD-Rs sold. For each event, identify which of the determinants of demand or supply is affected, how it influences demand or supply, and what happens to the equilibrium price and quantity. a) The price of a CD burner falls. b) Workers who make CD-Rs get a pay raise. c) Producers introduce new cost-saving technologies in their CD-R production plants. d) Consumers' incomes increase and CD-Rs are a normal good. e) Free peer-to-peer music exchange through the Internet becomes legal. Answer:

a) The figure above shows the effect of fall in the price of CD burner. CD burners and CD-Rs are complementary goods in consumption. So when the price of a CD burner falls, the demand for CD-Rs increases and the demand curve shifts rightward. As a result, the equilibrium price rises, from P0 to P1 and the equilibrium quantity increases from Q0 to Q1.

b) The figure above shows the effect of rise in the wage page workers who make CD-Rs. In this case, the price of a factor of production (labor) used to produce CD-Rs rises. So the supply of CD-Rs decreases and the supply curve shifts leftward. As a result, the equilibrium price rises from P0 to P1 and the equilibrium quantity decreases from Q0 to Q1.

c) The figure above shows the effect of a technological advancement in the production of CD-Rs. The new technology increases the supply of CD-Rs, shifting the supply curve rightward. As a result, the equilibrium price falls from P0 to P1 and the equilibrium quantity increases from Q0 to Q1.

d) The figure above shows the effect of an increase in income. Because CD-Rs are a normal good, an increase in income increases the demand for CD-Rs and the demand curve shifts rightward. As a result, the equilibrium price rises, from P0 to P1 and the equilibrium quantity increases from Q0 to Q1.

e) The figure above shows the effect of making free peer-to-peer downloading of music legal. Making free peer-to-peer music downloading legal leads to more downloads and more people copying music files to CDs. Therefore, the demand for CD-Rs increases and the demand curve shifts rightward. As a result, the equilibrium price rises, from P0 to P1 and the equilibrium quantity increases from Q0 to Q1. Topic: Predicting Changes in Price and Quantity Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

Quantity demanded Quantity supplied Price (thousands of gallons (thousands of (cents per gallon) per week) gallons per week) 290 80 20 300 70 30 310 60 40 320 50 50 330 40 60 340 30 70 350 20 80 2) A market research team has come up with the demand and supply schedules for gasoline in Motorville in the table above. Use these data to analyze the situation in the market for gas in Motorville. a) Draw a figure showing the demand curve for gasoline and the supply curve of gasoline. What are the equilibrium price and quantity? b) Suppose the price is $3.30. Describe the situation in the market and explain how the market adjusts. Now suppose the price is $3.00. Describe the situation in the market and explain how the market adjusts. c) The market research report also predicts that a rise in the price of crude oil will decrease the quantity of gas supplied by 20,000 gallons a week at each price. Suppose the price of crude oil does rise. Use your figure to show how this will affect the market for gas. How will the market adjust? What will be the new equilibrium price and quantity? Answer:

a) See the figure above. The equilibrium price is $3.20 and the equilibrium quantity is 50,000 gallons per week. b) If the price is $3.30, there is a surplus of 20,000 gallons. The surplus leads to a fall in the price. The lower price increases the quantity demanded and decreases the quantity supplied bringing the market to equilibrium at $3.20. If the price is $3.00, there is a shortage of 40,000 gallons. The shortage leads to a rise in the price. The higher price decreases the quantity demanded and increases the quantity supplied bringing the market to equilibrium at $3.20. 151 Copyright © 2014 Pearson Education, Inc.

c) The figure above shows the effect of the rise in crude oil prices. This rise decreases the supply and the supply curve shifts leftward by 20,000 gallons at each price from S0 to S1. As a result, at the old price, $3.20, there is a shortage of 20,000 gallons of gasoline. Therefore the price rises, bringing the market to equilibrium at $3.30 with 40,000 gallons of gas sold. Topic: Predicting Changes in Price and Quantity; Supply Decreases Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

Price (dollars per pizza) 5 6 7 8 9 10 11 12

Quantity demanded Quantity supplied (pizzas per week) (pizzas per week) 750 700 650 600 550 500 450 400

300 400 500 600 700 800 900 1,000

3) A market research team has come up with the demand and supply schedules for pizza in Cheeseboro. These schedules are given in the table above. Use these data to analyze the situation in the market for pizza. a) Draw a figure showing the demand curve for pizza and the supply curve of pizza. What are the equilibrium price and quantity? b) Suppose the price is $10. Describe the situation in the market and explain how the price of pizza adjusts. Now suppose the price is $6. Describe the situation in the market and explain how the price of pizza adjusts. c) The market research report also includes a prediction about the effect on the market for pizza in Cheeseboro of a recent news published in Cheeseboro Herald. The Herald reported that pizza has been discovered to help prevent heart diseases. Unfortunately, your dog chewed up the report and all you can read about the prediction is "quantity... by 150 at each price." What does the prediction say? Use your graph to show the predicted effects on the market for pizza. What are the predicted equilibrium price and quantity? How will the market adjust? Answer:

a) See the figure above. The equilibrium price is $8 and the equilibrium quantity is 600 pizzas.

b) If the price is $10, there is a surplus of 300 pizzas. The surplus leads to a fall in the price. The lower price increases the quantity demanded and decreases the quantity supplied bringing the market to equilibrium at $8, where the quantity demanded equals the quantity supplied. If the price is $6, there is a shortage of 300 pizzas. The shortage leads to a rise in the price. The higher price decreases the quantity demanded and increases the quantity supplied bringing the market to equilibrium at $8.

c) The report predicts that the news will change consumer preferences in favor of pizza, which will "increase the quantity of pizza demanded by 150 at each price." The increase in demand means the demand curve shifts rightward by 150 pizza at every price, as illustrated in the above figure by the shift from D0 to D1. The equilibrium price is $9 and quantity is 700. When the demand curve shifts, at the old price, $8, there is a shortage of 150 pizzas and therefore the price rises bringing the market to equilibrium at $9. Topic: Predicting Changes in Price and Quantity; Demand Increases Skill: Analytical Status: Previous edition, Chapter 3 AACSB: Analytical Skills

Economics, 11e, Global Edition (Parkin) Chapter 4 Elasticity 1 Price Elasticity of Demand 1) Suppose the price of burgers increases from $2 to $3 each. The degree to which quantity demanded responds to this price increase depends on the A) price elasticity of demand. B) the price elasticity of supply. C) income elasticity of demand. D) cross elasticity of demand. Answer: A Topic: Price Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

2) The price elasticity of demand measures A) how often the price of a good changes. B) the slope of a budget curve. C) how sensitive the quantity demanded is to changes in demand. D) the responsiveness of the quantity demanded to changes in price. Answer: D Topic: Price Elasticity of Demand Skill: Definition Status: Old AACSB: Analytical Skills

3) Elasticity measures the A) percentage change in a variable. B) slope of a curve. C) change in a variable. D) responsiveness of a variable to a change in another variable. Answer: D Topic: Price Elasticity of Demand Skill: Definition Status: Old AACSB: Analytical Skills

4) The price elasticity of demand for purses is measured in what units? A) dollars B) purses C) dollars per purse D) The price elasticity of demand is a unitless measure. Answer: D Topic: Price Elasticity of Demand Skill: Recognition Status: Revised AACSB: Analytical Skills 1 Copyright © 2014 Pearson Education, Inc.

5) The price elasticity of demand is defined as the magnitude of the A) change in quantity demanded divided by the change in price. B) change in price divided by the change in quantity demanded. C) percentage change in quantity demanded divided by the percentage change in price. D) percentage change in price divided by the percentage change in quantity demanded. Answer: C Topic: Price Elasticity of Demand Skill: Definition Status: Old AACSB: Analytical Skills

6) The price elasticity of demand is calculated as the absolute value of the A) percentage change in quantity demanded divided by the percentage change in price. B) percentage change in price divided by the percentage change in quantity demanded. C) change in quantity demanded divided by the change in price. D) change in price divided by the change in quantity demanded. Answer: A Topic: Price Elasticity of Demand Skill: Definition Status: Old AACSB: Analytical Skills

7) The price elasticity of demand equals magnitude of the A) change in the price divided by the change in quantity demanded. B) change in the quantity demanded divided by the change in price. C) percentage change in the price divided by the percentage change in the quantity demanded. D) percentage change in the quantity demanded divided by the percentage change in the price. Answer: D Topic: Calculating Elasticity Skill: Definition Status: Old AACSB: Analytical Skills

8) The price elasticity of demand is equal to the ________ in the ________ divided by the ________ in the ________. A) percentage change; price; percentage change; quantity demanded B) change; price; change; quantity demanded C) percentage change; quantity demanded; percentage change; price D) change; quantity demanded; change; price Answer: C Topic: Price Elasticity of Demand Skill: Definition Status: Old AACSB: Analytical Skills

9) The price elasticity of demand depends on A) the units used to measure price and the units used to measure quantity. B) the units used to measure price but not the units used to measure quantity. C) the units used to measure quantity but not the units used to measure price. D) neither the units used to measure price nor the units used to measure quantity. Answer: D Topic: Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

10) When the quantity of coal is measured in kilograms instead of pounds, the demand for coal becomes A) more elastic. B) less elastic. C) neither more nor less elastic. D) undefined. Answer: C Topic: Calculating Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

11) The price elasticity of demand for oranges ________ change if the units of the quantity was changed from pounds to kilograms and ________ change if the units of the price was changed from dollars to cents. A) would; would B) would; would not C) would not; would D) would not; would not Answer: D Topic: Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

12) Suppose the quantity of gasoline is measured in gallons and the price of gasoline is measured in dollars. The price elasticity of demand is 0.67. If the price of gasoline was now measured in cents rather than dollars, the price elasticity of demand would now be A) 0.0067. B) 0.67. C) 6.7. D) 67.0. Answer: B Topic: Price Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

13) A decrease in the price of eggs from $1.50 to $1.30 per dozen resulted in an increase in egg purchases in two cities. In Philadelphia, daily egg purchases increased from 6000 to 8000 dozens; in nearby Dover, Delaware, daily egg purchases increased from 300 to 400 dozens. The price elasticity of demand is therefore A) lower in the smaller city as would be expected. B) greater in the smaller city as would be expected. C) certainly affected by population differences in different markets. D) the same in Philadelphia as in Dover. Answer: D Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

14) Dan sells newspapers. Dan says that a 4 percent increase in the price of a newspaper will decrease the quantity of newspapers demanded by 8 percent. According to Dan, the demand for newspapers is ________. A) inelastic B) unit elastic C) perfectly elastic D) elastic Answer: D Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

15) The price elasticity of demand for furniture is estimated at 1.3. This value means a one percent increase in the A) price of furniture will increase the quantity of furniture demanded by 1.3 percent. B) price of furniture will decrease the quantity of furniture demanded by 1.3 percent. C) quantity of furniture demanded will decrease the price of furniture by 1.3 percent. D) quantity of furniture demanded will increase the price of furniture by 1.3 percent. Answer: B Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

16) The price elasticity of demand for oil is estimated at 0.05. This value means a 10 percent increase in the A) quantity of oil demanded will result from a 0.5 percent increase in the price of oil. B) quantity of oil demanded will result from a 0.5 percent decrease in the price of oil. C) price of oil will increase the quantity of oil demanded by 0.5 percent. D) price of oil will decrease the quantity of oil demanded by 0.5 percent. Answer: D Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills 4 Copyright © 2014 Pearson Education, Inc.

17) If a 6 percent decrease in the price leads to a 5 percent increase in the quantity demanded, the price elasticity of demand is A) 0.30. B) 0.60. C) 0.83. D) 1.20. Answer: C Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

18) A 10 percent increase in the quantity of spinach demanded results from a 20 percent decline in its price. The price elasticity of demand for spinach is A) 0.5. B) 2.0. C) 10.0. D) 20.0. Answer: A Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

19) A 20 percent increase in the quantity of pizza demanded results from a 10 percent decline in its price. The price elasticity of demand for pizza is A) 0.5. B) 2.0. C) 10.0. D) 20.0. Answer: B Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

20) If a 20 percent increase in the price of a used car results in a 10 percent decrease in the quantity of used cars demanded, then the price elasticity of demand equals A) 0.5. B) 1.0. C) 2.0. D) 10.0. Answer: A Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

21) If the price of a movie ticket increases by 4 percent and the quantity of movies demanded falls by 2 percent, the price elasticity of demand is A) 2.0. B) 4.0. C) 0.5. D) some amount that cannot be determined without more information. Answer: C Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

22) If the price of a burger decreases by 5 percent and as a result the quantity of burgers demanded increases by 8 percent, the price elasticity of demand equals A) 0.60. B) 0.40. C) 1.60. D) 0.625. Answer: C Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

23) If the quantity demanded of hamburgers increases by 20 percent when the price decreases by 5 percent, then the price elasticity of demand is A) 0.25. B) 4.0. C) 20.0. D) 5.0. Answer: B Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

24) Suppose that the quantity of pizza demanded decreased by 15 percent after an increase in price of 10 percent. What is the price elasticity of demand for pizza? A) 1.50. B) 0.67. C) -1.50. D) -0.67. Answer: A Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

25) Suppose a drought increased the price of corn by 25 percent while it decreased the quantity by 50 percent. The price elasticity of demand equals A) 2.00. B) 0.50. C) 20.0. D) Zero. Answer: A Topic: Calculating Elasticity Skill: Analytical Status: New AACSB: Analytical Skills

26) The worst drought in over 50 years has decimated crops of soy beans and corn in the United States. (Source: New York Times, August 10, 2012). Because the production of corn has decreased, prices are expected to increase by 25 percent. These data are insufficient for calculating the elasticity of demand because we also need to know the A) percentage increase in income. B) percentage increase in quantity. C) percentage decrease in quantity. D) increase in bushels per acre. Answer: C Topic: Calculating Elasticity Skill: Conceptual Status: New AACSB: Reflective Thinking

27) When the price of a movie ticket increases from $5 to $7, the quantity of tickets demanded decreases from 600 to 400 a day. What is the price elasticity of demand for movie tickets? A) 0.83 B) 1.20 C) 1.00 D) 2.32 Answer: B Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

28) Suppose a rise in the price of peaches from $5.50 to $6.50 per bushel decreases the quantity demanded from 12,500 to 11,500 bushels. The price elasticity of demand is A) 0.5. B) 1.0. C) 2.0. D) 1000.0. Answer: A Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

29) Taco Bell's economists determine that the price elasticity of demand for their tacos is 2.0. So, if Taco Bell raises the price of its tacos by 6.0 percent, the quantity demanded will decrease by ________ percent. A) 2.0 B) 3.0 C) 6.0 D) 12.0 Answer: D Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

30) Using average price and average quantity, calculate the price elasticity of demand if a price rise from $8 to $10 and decreases the quantity demanded from 20 units to 15 units. The price elasticity of demand equals A) 2.5. B) 1.29. C) 0.78. D) 0.06 Answer: B Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

31) A local pizzeria raised its price from $9 to $11 for each pizza and the sales of its pizza decreased from 150 to 100 per day. What is the price elasticity of demand in this case? A) 1/2 B) -2 C) -1/2 D) 2 Answer: D Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

32) Using the average price and average quantity, what is the elasticity of demand for oranges when the price of oranges changes from $200 to $160 per bushel and so the quantity demanded changes from 1000 to 1400 bushels? A) 1.5 B) 0.1 C) 10.0 D) 0.67 Answer: A Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

33) If the price of a soda increases from 75¢ to $1.00 and as a result the quantity demanded of sodas decreases from 10 to 9 per week, the elasticity of demand for sodas equals A) 2.72. B) 0.37. C) 0.83. D) 1.20. Answer: B Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

34) When the price of oranges increases from $4 to $6 per bag, the quantity demanded of oranges decreases from 800 bags to 700 bags. The price elasticity of demand over this price range is equal to A) 3. B) 3/7 or 0.4286. C) 1/3 or 0.3333. D) 1/4 or 0.25. Answer: C Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

35) Florida State University has just lowered the price of its season football tickets from $350.00 to $300.00. As a result, there was an increase in the number of season tickets purchased from 43,000 to 47,000. The price elasticity of demand for season tickets equals A) 1.71. B) 1.58. C) 0.71. D) 0.58. Answer: D Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

36) Suppose the quantity demanded is 5 units when the price is $1.00. If the price rises to $2.00, the quantity demanded falls to 3 units. The price elasticity of demand is A) 0.5. B) 0.75. C) 1.33. D) 2.00. Answer: B Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

37) A fall in the price of lemons from $10.50 to $9.50 per bushel increases the quantity demanded from 19,200 to 20,800 bushels. The price elasticity of demand is A) 0.80. B) 1.20. C) 1.25. D) 8.00. Answer: A Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

38) Last year the price of corn was $3 per bushel and the quantity of corn demanded was 8 million bushels. This year the price of corn is $4 per bushel and the quantity of corn demanded is 7 million bushels. Assuming that the demand curve has not shifted, what is the price elasticity of demand for corn? (Use the midpoint formula.) A) 1 B) 0.47 C) 2.14 D) 0.29 Answer: B Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

39) A fall in the price of cabbage from $10.50 to $9.50 per bushel increases the quantity demanded from 18,800 to 21,200 bushels. The price elasticity of demand is A) 0.80. B) 1.20. C) 1.25. D) 8.00. Answer: B Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

40) Suppose that the quantity of root beer demanded declines from 103,000 gallons per week to 97,000 gallons per week as a consequence of a 10 percent increase in the price of root beer. The price elasticity of demand is A) 0.60. B) 1.40. C) 1.66. D) 6.00. Answer: A Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills 10 Copyright © 2014 Pearson Education, Inc.

41) The price elasticity of demand is 5.0 if a 10 percent increase in the price results in a ________ decrease in the quantity demanded. A) 2 percent B) 5 percent C) 10 percent D) 50 percent Answer: D Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

42) A shift of the supply curve of DVDs raises the price of a DVD from $9.50 to $10.50 a DVD and reduces the quantity demanded from 41 million to 39 million DVDs a month. The price elasticity of demand for DVDs is A) 2 million DVDs a month per dollar. B) $1 per 2 million barrels a day. C) 0.5. D) 2.0. Answer: C Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

43) A decrease in the supply of sugar increases the price of sugar from $1.00 a packet to $1.25 a packet. The quantity decreases from 100 packets a day to 80 packets a day. The price elasticity of demand of sugar is ________. A) 0.75 B) 0.5 C) 1.0 D) 1.25 Answer: C Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

44) Suppose the price elasticity of demand for oil is 0.1. In order to lower the price of oil by 20 percent, the quantity of oil supplied must be increased by A) 200 percent. B) 20 percent. C) 2 percent. D) 0.2 percent. Answer: C Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

45) The price elasticity of demand for cigarettes is 0.4. If government wants to reduce smoking by 10 percent, by how much should it raise the price of cigarettes by imposing a tax? A) by 10 percent B) by 20 percent C) by 25 percent D) by 50 percent Answer: C Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

46) The price elasticity of demand for DVDs is 2. If the price of a DVD increased by 2 percent, the quantity demanded will ________. A) decrease by 2 percent B) not change C) decrease by 4 percent D) decrease by 1 percent Answer: C Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

47) Suppose the price elasticity of teenagers' demand for cigarettes is 2.0. If the government imposes a tax on cigarettes that raises the price by 10 percent, by how much will it reduce teenaged smoking? A) by 5 percent B) by 10 percent C) by 15 percent D) by 20 percent Answer: D Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

48) According to one study, the price elasticity of demand for cigarettes is 0.25. To decrease the consumption of cigarettes by 8 percent, a tax on cigarettes must raise the price of cigarettes by A) 32 percent. B) 25 percent. C) 2 percent. D) 3.1 percent. Answer: A Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

49) The "Economics in Action" in the text mentions that the elasticity of demand for agricultural products is 0.42. If a drought boosts the price of corn 25 percent, then we can calculate the quantity of corn demanded ________. A) increased by 10.5 percent B) decreased by 10.5 percent C) increased by 8.4 percent D) decreased by 8.4 percent Answer: B Topic: Calculating Elasticity Skill: Analytical Status: New AACSB: Analytical Skills

50) Because of an increase in the price of leather, the price of a pair of women's dress shoes increased 12 percent. If the price elasticity of demand for women's dress shoes is 0.85, which of the following will happen? A) Total expenditure on women's dress shoes decreases. B) The number of pairs of women's dress shoes demanded decreases by 10.2 percent. C) Total revenue from the sale of women's dress shoes decreases. D) none of the above Answer: B Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

51) The price elasticity of demand for new cars is 1.2. Hence, a 10 percent price increase will A) decrease the quantity of new cars demanded by 1.2 percent. B) increase consumer expenditure on new cars by 1.2 percent. C) decrease the quantity of new cars demanded by 12 percent. D) increase consumer expenditure on new cars by 12 percent. Answer: C Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

52) The price of a good rises by 12 percent and the price elasticity of demand for the good is 0.85. Which of the following is a correct interpretation of these facts? A) When the price rises by 12 percent, the quantity demanded decreased by 0.85 percent. B) For each 1 percent that the price rose, the quantity demanded decreased by 10.2 percent. C) For each 0.85 percent that the price rose, the quantity demanded decreased by 1 percent. D) For each 1 percent that the price rose, the quantity demanded decreased by 0.85 percent. Answer: D Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

53) If the price elasticity of demand for clothing is 0.64, this implies that A) a 6.4 percent increase in price the price of clothing leads to a 10 percent decrease in the quantity demanded. B) a 10 percent increase in the price of clothing leads to a 6.4 percent decrease in the quantity demanded. C) if there is an increase in the price of clothing the total expenditures on clothing decreases. D) Both answers A and C are correct. Answer: B Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

54) If the price elasticity of demand for a good is 0.8, then a A) 1 percent rise in the price leads to a 0.8 percent decrease in the quantity demanded. B) one dollar rise in the price leads to a 0.8 percent decrease in the quantity demanded. C) 1 percent rise in the price leads to an 80 percent decrease in the quantity demanded. D) 1 percent rise in the price leads to an 8 percent decrease in the quantity demanded. Answer: A Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

Price (dollars per bushel) 8 7 6 5 4 3

Quantity demanded (bushels) 2,000 4,000 6,000 8,000 10,000 12,000

55) The table above gives the demand schedule for snow peas. The price elasticity of demand between $6.00 and $7.00 per bushel is A) 1.0. B) 2.0. C) 2.6. D) 5.0. Answer: C Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

56) The table above gives the demand schedule for snow peas. If the price of snow peas falls from $4.00 to $3.00 a bushel, total revenue will A) increase because demand is elastic in this range. B) decrease because demand is elastic in this range. C) increase because demand is inelastic in this range. D) decrease because demand is inelastic in this range. Answer: D Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

57) The table above gives the demand schedule for snow peas. The demand curve for snow peas is a straight line and so the elasticity of demand is A) 1 at all prices. B) the same at all prices but not 1. C) higher at higher prices. D) lower at higher prices. Answer: C Topic: Elasticity Along a Straight-Line Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

A B C D E

Price (dollars per bushel) 10 8 6 4 2

Quantity demanded (bushels) 0 4 8 12 16

58) The table above gives the demand schedule for peas. Between point A and point B, the price elasticity of demand equals A) 0.11. B) 0.50. C) 0.22. D) 9.09. Answer: D Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

59) The table above gives the demand schedule for peas. Between point C and point D, the price elasticity of demand is A) elastic. B) unit elastic. C) 0.75. D) 3.00. Answer: B Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

60) The table above gives the demand schedule for peas. Which of the following statements correctly describes the price elasticity of demand? A) The price elasticity of demand is larger at point A than at point B. B) The price elasticity of demand is larger at point D than at point A. C) The price elasticity of demand is constant because the slope is constant. D) The price elasticity of demand increases moving from point A to point B to point C to point D to point E. Answer: A Topic: Calculating Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

61) The figure shows the demand curve for popsicles. The price elasticity of demand when the price of a popsicle increases from $0.30 to $0.50 is ________. A) 0 B) 1 C) 1/2 D) 2 Answer: B Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

62) The figure illustrates the demand for hamburgers. When the price is $1.00 a hamburger, the elasticity of demand is ________ and a 1 percent increase in the price will ________ the quantity of hamburgers demanded by ________ percent. A) 1.00; decrease; 0.40 B) 0.40; decrease; 0.40 C) 2.50; increase; 2.50 D) 5.00; decrease; 5.00 Answer: B Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

63) The price elasticity of demand can range between A) zero and one. B) negative infinity and infinity. C) zero and infinity. D) negative one and one. Answer: C Topic: Inelastic and Elastic Demand Skill: Analytical Status: Old AACSB: Analytical Skills

64) If the quantity demanded changes by a relatively small amount for a given change in price, then demand is A) perfectly inelastic. B) perfectly elastic. C) elastic. D) inelastic. Answer: D Topic: Inelastic and Elastic Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

65) If the price elasticity is between 0 and 1, demand is A) elastic. B) inelastic. C) unit elastic. D) perfectly elastic. Answer: B Topic: Inelastic and Elastic Demand Skill: Definition Status: Old AACSB: Analytical Skills

66) Demand is inelastic if A) a large change in quantity demanded results in a small change in price. B) the quantity demanded is very responsive to changes in price. C) the price elasticity of demand is less than 1. D) the price elasticity of demand is greater than 1. Answer: C Topic: Inelastic and Elastic Demand Skill: Definition Status: Old AACSB: Analytical Skills

67) When the percentage change in quantity demanded is less than the percentage change in price, the demand for the good is ________. A) inelastic B) unit elastic C) perfectly inelastic D) elastic Answer: A Topic: Inelastic and Elastic Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

68) If a 20 percent increase in the price of a used car results in a 10 percent decrease in the quantity of used cars demanded, then the demand for used cars is A) elastic. B) inelastic. C) unit elastic. D) arc elastic. Answer: B Topic: Inelastic and Elastic Demand Skill: Definition Status: Old AACSB: Analytical Skills

69) Demand is price inelastic if a relatively ________ price increase leads to a relatively ________ in the quantity demanded. A) large; small increase B) small; large decrease C) large; small decrease D) small; large increase Answer: C Topic: Inelastic and Elastic Demand Skill: Analytical Status: Old AACSB: Analytical Skills

70) If a consumer is relatively insensitive to changes in the price of a good, then the consumer's demand for the good is A) elastic. B) unit elastic. C) inelastic. D) perfectly elastic. Answer: C Topic: Inelastic and Elastic Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

71) If the price of salt increases and the quantity demanded does not change, then A) the price elasticity of demand is equal to zero. B) demand is perfectly inelastic. C) the demand curve for salt is horizontal. D) Both answers A and B are correct. Answer: D Topic: Inelastic and Elastic Demand Skill: Analytical Status: Old AACSB: Analytical Skills

72) Marvin loves chocolate truffles. As the price of a chocolate truffle increases from $1 to $2 to $3, Marvin continues to buy a dozen chocolate truffles every week. Marvin's demand for chocolate truffles is ________. A) elastic B) unit elastic C) illustrated by a horizontal demand curve D) perfectly inelastic Answer: D Topic: Inelastic and Elastic Demand Skill: Analytical Status: Old AACSB: Analytical Skills

73) If the price of a good increases from $3 to $4, and the quantity demand remains unchanged, then the demand is A) perfectly inelastic. B) perfectly elastic. C) somewhat elastic. D) infinite. Answer: A Topic: Inelastic and Elastic Demand Skill: Analytical Status: Old AACSB: Analytical Skills

74) When the price elasticity of demand for a good equals A) 0, the demand curve is vertical. B) 0, the demand curve is horizontal. C) 1, the demand curve is vertical. D) 1, the demand curve is horizontal. Answer: A Topic: Inelastic and Elastic Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

75) A straight-line demand curve along which the price elasticity of demand equals 0 is one that A) forms a 45 degree angle with the vertical axis. B) forms a 60 degree angle with the horizontal axis. C) is vertical. D) is horizontal. Answer: C Topic: Inelastic and Elastic Demand Skill: Analytical Status: Old AACSB: Analytical Skills

76) Demand is perfectly inelastic when A) shifts in the supply curve results in no change in price. B) the good in question has perfect substitutes. C) shifts of the supply curve result in no change in quantity demanded. D) shifts of the supply curve result in no change in the total revenue from the quantity sold. Answer: C Topic: Inelastic and Elastic Demand Skill: Definition Status: Revised AACSB: Analytical Skills

77) A good with a vertical demand curve has a price elasticity of demand that ________ . A) is equal to 1 B) is equal to infinite C) is equal to zero D) varies between 0 and 1 Answer: C Topic: Inelastic and Elastic Demand Skill: Definition Status: Old AACSB: Analytical Skills

78) If the demand for a good is elastic, when the price increases, the A) demand will decrease. B) quantity demanded will increase. C) quantity demanded will decrease by a smaller percentage than the price increased. D) quantity demanded will decrease by a greater percentage than the price increased. Answer: D Topic: Inelastic and Elastic Demand Skill: Definition Status: Old AACSB: Analytical Skills

79) If demand is price elastic, A) a 1 percent decrease in the price leads to an increase in the quantity demanded that exceeds 1 percent. B) a 1 percent increase in the price leads to an increase in the quantity demanded that exceeds 1 percent. C) a 1 percent decrease in the price leads to a decrease in the quantity demanded that is less than 1 percent. D) the price is very sensitive to any shift of the supply curve. Answer: A Topic: Inelastic and Elastic Demand Skill: Definition Status: Old AACSB: Analytical Skills

80) A hot dog vendor on a street corner could increase the quantity of hot dogs her customers demand by 12 percent if she lowers the price of a hot dog 10 percent. The demand for the hot dogs is A) cross elastic. B) arc elastic. C) unit elastic. D) elastic. Answer: D Topic: Inelastic and Elastic Demand Skill: Definition Status: Old AACSB: Analytical Skills

81) Demand is price elastic if a A) relatively large price increase leads to a relatively small decrease in the quantity demanded. B) relatively small price increase leads to a relatively large decrease in the quantity demanded. C) price increase leads to a decrease in the quantity demanded. D) price increase leads to an increase in the quantity demanded. Answer: B Topic: Inelastic and Elastic Demand Skill: Analytical Status: Old AACSB: Analytical Skills

82) If the demand for a good is elastic, the price elasticity of demand is ________. A) greater than 1 B) equal to 1 C) between 0 and 1 D) less than zero Answer: A Topic: Inelastic and Elastic Demand Skill: Definition Status: Old AACSB: Analytical Skills

83) "Last October, due to an early frost, the price of a pumpkin increased by 10 percent compared to the price in the previous Halloween seasons. As a result, the quantity demanded county-wide decreased from 2 million to 1.5 million." Based on this statement, the A) demand for pumpkins is elastic. B) demand for pumpkins is inelastic. C) demand for pumpkins is unit elastic. D) demand curve for pumpkins shifted rightward. Answer: A Topic: Inelastic and Elastic Demand Skill: Definition Status: Old AACSB: Analytical Skills

84) If the price elasticity of demand for peanut butter is 2.4, then peanut butter A) has an elastic demand. B) has an inelastic demand. C) has a unit elastic demand. D) is a normal good. Answer: A Topic: Inelastic and Elastic Demand Skill: Definition Status: Old AACSB: Analytical Skills

85) If the quantity demanded changes by an infinitely large amount for a given change in price, then demand is A) perfectly inelastic. B) perfectly elastic. C) elastic. D) inelastic. Answer: B Topic: Inelastic and Elastic Demand Skill: Definition Status: Old AACSB: Analytical Skills

86) When the demand for a good is perfectly elastic, ________. A) total revenue is as large as possible B) the demand curve for the good is vertical C) the price elasticity of demand is infinite D) the price elasticity of demand is zero Answer: C Topic: Inelastic and Elastic Demand Skill: Recognition Status: Old AACSB: Analytical Skills

87) If the demand for a good is perfectly elastic, the price elasticity of demand is ________ and the demand curve is ________. A) infinite; vertical B) zero; vertical C) zero; horizontal D) infinite; horizontal Answer: D Topic: Inelastic and Elastic Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

88) A good with a horizontal demand curve has a demand A) with an income elasticity of demand equal to 0. B) with a price elasticity of demand equal to 0. C) with a price elasticity of demand equal to infinity. D) for which there are no substitutes. Answer: C Topic: Inelastic and Elastic Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

89) If the price elasticity of demand for gasoline is 0.8 and the price elasticity of demand for plane tickets is 2.2 then the demand for gasoline is ________ and the demand for plane tickets is ________. A) elastic; inelastic B) inelastic; elastic C) elastic; elastic D) inelastic; inelastic Answer: B Topic: Inelastic and Elastic Demand Skill: Analytical Status: Old AACSB: Analytical Skills

90) If the price elasticity of demand for airline travel is 0.52 in the short run and 1.46 in the long run, then the demand for airline travel is ________ in the short run and ________ in the long run. A) elastic; elastic B) elastic; inelastic C) inelastic; elastic D) inelastic; inelastic Answer: C Topic: Inelastic and Elastic Demand Skill: Analytical Status: Old AACSB: Analytical Skills

91) The demand for movies is unit elastic if A) a 5 percent decrease in the price leads to an infinite increase in the quantity demanded. B) a 5 percent increase in the price leads to a 5 percent decrease in the quantity demanded. C) any increase in the price leads to a 1 percent decrease in the quantity demanded. D) a 5 percent increase in the price leads to a 5 percent increase in total revenue. Answer: B Topic: Inelastic and Elastic Demand Skill: Analytical Status: Old AACSB: Analytical Skills

92) Unit elastic demand means that the A) ratio of a change in the quantity demanded to a change in the price equals 1. B) ratio of a percentage change in the quantity demanded to a percentage change in the price equals 1. C) demand curve is vertical. D) demand curve is horizontal. Answer: B Topic: Inelastic and Elastic Demand Skill: Analytical Status: Old AACSB: Analytical Skills

93) Freezing temperatures in California have sharply reduced the supply of oranges in the U.S. You predict that the price of oranges will ________, and the more elastic the demand for oranges, the ________ will be the effect on the price. A) fall; smaller B) fall; greater C) rise; smaller D) rise; greater Answer: C Topic: Inelastic and Elastic Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

94) If the elasticity of demand for peaches is 1.76 and the elasticity of demand for apples is 1.59, then consumers are A) more sensitive to a change in the price of peaches than they are to a change in the price of apples. B) less sensitive to a change in the price of peaches than they are to a change in the price of apples. C) more sensitive to a change in the quantity of peaches than they are to a change in the quantity of apples. D) less sensitive to a change in the quantity of peaches than they are to a change in the quantity of apples. Answer: A Topic: Inelastic and Elastic Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

95) The demand curve in the figure above illustrates the demand for a product with A) zero price elasticity of demand at all prices. B) infinite price elasticity of demand. C) unit price elasticity of demand at all prices. D) a price elasticity of demand that is different at all prices. Answer: A Topic: Inelastic and Elastic Demand Skill: Analytical Status: Old AACSB: Analytical Skills

96) In the above figure, which demand curve illustrates perfectly elastic demand? A) G B) H C) I D) J Answer: D Topic: Inelastic and Elastic Demand Skill: Analytical Status: Old AACSB: Analytical Skills

97) The demand curve in the figure above illustrates a product whose demand has a price elasticity of demand equal to A) zero at all prices. B) infinity. C) one at all prices. D) a different amount at different prices. Answer: B Topic: Inelastic and Elastic Demand Skill: Analytical Status: Old AACSB: Analytical Skills

98) The demand curve in the figure above illustrates the demand for a product with A) zero price elasticity of demand at all prices. B) infinite price elasticity of demand. C) unit price elasticity of demand at all prices. D) a price elasticity of demand that is different at all prices. Answer: C Topic: Inelastic and Elastic Demand Skill: Analytical Status: Old AACSB: Analytical Skills

99) If the demand curve for oranges is a downward sloping straight line, the price elasticity of demand will increase the A) higher the price of oranges. B) higher the price of other fruits. C) higher the income level of consumers. D) lower the price of oranges. Answer: A Topic: Elasticity Along a Straight-Line Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

100) If the demand curve is a downward sloping straight line, the price elasticity of demand always A) increases as the demand curve shifts rightward. B) increases as the demand curve shifts leftward. C) increases with movements upward along the demand curve. D) decreases with movements upward along the demand curve. Answer: C Topic: Elasticity Along a Straight-Line Demand Curve Skill: Conceptual Status: Old AACSB: Analytical Skills

101) Along a straight-line demand curve, as the price falls the A) demand becomes more elastic. B) demand becomes less elastic. C) elasticity of demand is constant. D) demand is always unitary elastic. Answer: B Topic: Elasticity Along a Straight-Line Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

102) The price elasticity of demand ________ in value when moving downward along a ________ line demand curve. A) falls; straight B) rises; curved C) falls, curved D) rises; straight Answer: A Topic: Elasticity Along a Straight-Line Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

103) The demand for bus rides is a downward-sloping straight line demand curve. The price elasticity of demand for bus rides ________. A) increases as the price of a bus ride falls B) decreases as the price of a bus ride falls C) is the same no matter what the price of a bus ride D) decreases as the price of a bus ride rises Answer: B Topic: Elasticity Along a Straight-Line Demand Curve Skill: Recognition Status: Old AACSB: Analytical Skills

104) The demand for computer chips is a downward sloping straight line. If there is an increase in the supply of computer chips, this change will A) increase the price elasticity of demand for computer chips. B) decrease the price elasticity of demand for computer chips. C) have no effect on the price elasticity of demand for computer chips. D) have an unpredictable effect on the price elasticity of demand for computer chips. Answer: B Topic: Elasticity Along a Straight-Line Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

105) At the midpoint of a downward sloping straight-line demand curve, the demand A) is elastic. B) is unit elastic. C) is inelastic. D) has an elasticity exactly equal to zero. Answer: B Topic: Elasticity Along a Straight-Line Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

106) A straight-line demand curve with negative slope intersects the horizontal axis at 200 tons per week. The point on the demand curve at which the price elasticity of demand is 1 corresponds to a quantity demanded A) of 0 tons. B) of 100 tons. C) of 200 tons. D) that would be negative if a negative quantity demanded were possible. Answer: B Topic: Elasticity Along a Straight-Line Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

107) If the demand curve for a good is a downward sloping straight line, the demand for the good will be more price elastic the higher is the A) price of the good. B) price of complements. C) income of consumers. D) income elasticity of demand for that good. Answer: A Topic: Elasticity Along a Straight-Line Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

108) The demand curve for microwave popcorn is linear. Which of the following definitely makes the demand for microwave popcorn more inelastic? A) a decrease in the price of microwave popcorn B) an increase in the price of microwave popcorn C) an increase in income D) a decrease in income Answer: A Topic: Elasticity Along a Straight-Line Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

109) If the demand curve for tacos is a downward sloping straight line, at which of the following prices is the demand the most elastic? A) a price of $0.50 per taco B) a price of $1.00 per taco C) a price of $1.50 per taco D) There is not enough information given to determine at which price the demand is most elastic. Answer: C Topic: Elasticity Along a Straight-Line Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

110) On a linear demand curve that intersects both axes, A) the elasticity exceeds 1.00 at all prices. B) the elasticity is less than 1.00 at all prices. C) the elasticity equals 1.00 at all prices. D) the elasticity decreases as the price falls and quantity increases. Answer: D Topic: Elasticity Along a Straight-Line Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

111) On a straight-line downward-sloping demand curve, the maximum elasticity of demand occurs A) at its vertical intercept. B) at its midpoint. C) at its horizontal intercept. D) where it intersects the supply curve. Answer: A Topic: Elasticity Along a Straight-Line Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

112) A straight-line demand curve with negative slope intersects the horizontal axis at 100 tons per week. At the midpoint on the demand curve (corresponding to 50 tons per week) the price elasticity of demand is A) 0. B) 0.5. C) 1.0. D) unknown without more information. Answer: C Topic: Elasticity Along a Straight-Line Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

113) Which of the following statements is FALSE? A) A good with a vertical demand curve has a perfectly inelastic demand. B) A good with a straight line, downward sloping demand curve has a demand whose elasticity is constant. C) A good with a horizontal demand curve has a perfectly elastic demand. D) All of the above statements are false. Answer: B Topic: Elasticity Along a Straight-Line Demand Curve Skill: Recognition Status: Old AACSB: Analytical Skills

114) The figure above illustrates a linear demand curve. By comparing the price elasticity in the $2 to $4 price range with the elasticity in the $8 to $10 range, you can conclude that the elasticity is A) greater in the $8 to $10 range. B) greater in the $2 to $4 range. C) the same in both price ranges. D) greater in the $8 to $10 range when the price rises but greater in the $2 to $4 range when the price falls. Answer: A Topic: Elasticity Along a Straight-Line Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

115) The figure above illustrates a linear demand curve. If the price falls from $8 to $6, A) total revenue increases. B) total revenue decreases. C) total revenue remains unchanged. D) the quantity demanded increases by less than 20 percent. Answer: A Topic: Elasticity Along a Straight-Line Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

116) The figure above illustrates a linear demand curve. In the range from $8 to $6, A) the demand is price elastic. B) the demand is unit elastic. C) the demand is price inelastic. D) more information is needed to determine if the demand is price elastic, unit elastic, or inelastic. Answer: A Topic: Elasticity Along a Straight-Line Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

117) The figure above illustrates a linear demand curve. If the price falls from $6 to $4, A) total revenue increases. B) total revenue decreases. C) total revenue remains unchanged. D) quantity demanded increases by more than 100 percent. Answer: C Topic: Elasticity Along a Straight-Line Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

118) The figure above illustrates a linear demand curve. In the price range from $8 to $6, demand is ________ and in the price range $4 to $2, demand is ________. A) elastic; elastic B) elastic; inelastic C) inelastic; elastic D) inelastic; inelastic Answer: B Topic: Elasticity Along a Straight-Line Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

119) The figure above illustrates a linear demand curve. If the price rises from $6 to $8 demand is ________ and if the price falls from $8 to $6 demand is ________. A) elastic; elastic B) elastic; inelastic C) inelastic; elastic D) inelastic; inelastic Answer: A Topic: Elasticity Along a Straight-Line Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

120) The demand curve in the figure above illustrates the demand for a product with a price elasticity of demand A) equal to zero at all prices. B) equal to infinite at all prices. C) equal to one at all prices. D) that is different at all prices. Answer: D Topic: Elasticity Along a Straight-Line Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

121) The figure illustrates Anne's demand for books. At ________ a book, Anne's demand for books is inelastic. A) all prices between $15 and $30 B) all prices between $10 and $15 C) all prices between $10 and $20 D) all prices below $30 Answer: B Topic: Elasticity Along a Straight-Line Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

122) According to the total revenue test, a price cut increases total revenue if demand is A) inelastic. B) perfectly inelastic. C) elastic. D) unit elastic. Answer: C Topic: Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

123) Demand is inelastic when a price ________ results in total revenue ________. A) rise; decreasing B) fall; increasing C) rise, increasing D) fall, remaining the same Answer: C Topic: Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

124) Demand is elastic when a price ________ results in total revenue ________. A) rise, decreasing B) fall, decreasing C) rise, increasing D) fall; remaining constant Answer: A Topic: Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

125) When the demand for a good is inelastic and its price increases, the total revenue from the sale of the good will ________. A) increase B) decrease initially and then increase C) decrease D) not change Answer: A Topic: Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

126) When demand is ________, a decrease in price ________ total revenue. A) elastic; decreases B) inelastic; decreases C) unit elastic; increases D) elastic; does not change Answer: B Topic: Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

127) If demand is inelastic, an increase in the price will A) decrease total revenue. B) increase total revenue. C) not change total revenue. D) increase the quantity demanded. Answer: B Topic: Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

128) To maximize its revenue, A) a firm facing inelastic demand should always raise its price. B) a firm facing elastic demand should always raise its price. C) a firm should always charge the highest price possible regardless of the elasticity of demand. D) None of the above answers is correct. Answer: A Topic: Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

129) The demand for a good is elastic if A) an increase in its price results in an increase in total revenue. B) a decrease in its price results in a decrease in total revenue. C) an increase in its price results in a decrease in total revenue. D) the good is a necessity. Answer: C Topic: Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

130) Demand is unit elastic when A) the slope of the demand curve is -1. B) a shift of the supply curve leads to no change in price. C) a shift of the supply curve leads to an equal shift of the demand curve. D) a change in the price of the product leads to no change in the total revenue. Answer: D Topic: Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

131) Producers' total revenue will decrease if A) income increases and the good is a normal good. B) the price rises and demand is elastic. C) the price rises and demand is inelastic. D) income falls and the good is an inferior good. Answer: B Topic: Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

132) Producers' total revenue will increase if A) income increases and the good is an inferior good. B) the price rises and demand is elastic. C) the price rises and demand is inelastic. D) income falls and the good is a normal good. Answer: C Topic: Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

133) If University of Nebraska increased its season football ticket sales from 43,000 to 47,000 when it lowered price from $350.00 to $300.00, then its demand for season tickets must be ________ because total revenue ________ when the price was lowered. A) elastic; decreased B) elastic; increased C) inelastic; decreased D) inelastic; increased Answer: C Topic: Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

134) "Last October, due to an early frost, the price of a pumpkin increased by 10 percent compared to the price in the previous Halloween season. As a result, the quantity demanded county-wide decreased from 2 million to 1.5 million." Based on this statement, it is certain that the A) demand curve for Halloween costumes shifted leftward. B) price elasticity of demand for pumpkins decreased from its value in previous years. C) demand curve for pumpkins shifted leftward. D) total revenue from the sale of pumpkins decreased. Answer: D Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Reflective Thinking

135) At a local ice cream parlor, when the price of half-gallons of chocolate ice cream was lowered by fifty cents per half-gallon, total revenue from the sale of chocolate ice cream decreased. This result indicates that A) there are more people who like vanilla ice cream than there are people who like chocolate ice cream. B) the demand for chocolate ice cream is inelastic. C) the demand for chocolate ice cream is elastic. D) None of the above answers is correct. Answer: B Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

136) If Sam wants to increase her total revenue from her sales of flowers and she knows that the demand for flowers is price elastic, she should A) lower her price to increase the demand and shift the demand curve rightward. B) raise her price because she knows that the quantity demanded will also increase. C) raise her price because she knows that the percentage decrease in the quantity demanded will be smaller than the percentage increase in price. D) lower her price because she knows that the percentage increase in the quantity demanded will be greater than the percentage decrease in price. Answer: D Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

137) A local transit authority charges $1 for a bus ride. An economics study suggests that in the price range from $0.50 to $1.50, the elasticity of demand for bus trips is 1.1. To increase its revenue, the transit authority should A) raise the fare. B) lower the fare. C) leave the fare as it is. Answer: B Topic: Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

138) The taxicab fare in Newville is regulated. The fare currently charged is $6 a ride. Newville taxicab drivers want to obtain government's permission to lower the fare, which they think will increase their total revenue. From this we can conclude that the drivers believe that the demand for taxicab rides is A) elastic. B) inelastic. C) unit elastic. D) perfectly inelastic. Answer: A Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

139) If Sam wants to increase her total revenue from her sales of flowers and she knows that the demand for flowers is price inelastic, she should A) lower her price to increase the demand and shift the demand curve rightward. B) raise her price because she knows that the quantity demanded will also increase. C) raise her price because she knows that the percentage decrease in the quantity demanded will be smaller than the percentage increase in price. D) lower her price because she knows that the percentage increase in the quantity demanded will be greater than the percentage decrease in price. Answer: C Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

140) In 1973 and again in 1979, the Organization of Petroleum Exporting Countries (OPEC) raised the world price of crude oil and increased their revenue as well. Which of the following is a true statement regarding these OPEC price hikes? A) Their revenue increased because the demand for oil was income inelastic. B) Their revenue increased because the demand for oil was price inelastic. C) Their revenue would have increased regardless of income elasticity or price elasticity because oil is an imported product for most nations. D) Their revenue only increased because oil was already very expensive. Answer: B Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

141) The marketing people at Ben and Jerry's Ice Cream Company believe that if they lower the price of their Cherry Garcia flavor ice cream by 25 percent, the quantity demanded will increase by 5 percent. If they are correct in their belief, then A) the demand for Cherry Garcia is price elastic. B) their total revenue from Cherry Garcia will increase if they lower the price. C) the demand for Cherry Garcia is income elastic. D) their total revenue from Cherry Garcia will decrease if they lower the price. Answer: D Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

142) The marketing people for AT&T believe that if they lower the price of long-distance phone calls by 5 percent, their quantity demanded will increase by 15 percent. If they are correct in their belief, then A) the demand for long-distance phone calls is price inelastic. B) the total revenue from long-distance phone calls will increase if they lower the price. C) the demand for long-distance phone calls is income elastic. D) the total revenue from long-distance phone calls will decrease if they lower the price. Answer: B Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

143) One year, the government boosted regulated taxi fares in New York City by 15 percent with the expectation that the total revenue from taxi rides would also increase by 15 percent. The taxi commission that authorized this fare increase must have believed that the demand for taxi service was A) elastic, but not perfectly elastic. B) inelastic, but not perfectly inelastic. C) unit elastic. D) perfectly inelastic. Answer: D Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

144) Suppose Sandy's Candies wants to increase its total revenues. If Sandy increases the price of her candy, she must be assuming that the demand for candy is A) unit elastic. B) inelastic. C) elastic. D) income elastic. Answer: B Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

145) Suppose Carol's Candid Cameras wants to increase its total revenue. If the firm lowers the price of cameras by 2 percent, Carol must be predicting that the quantity A) supplied will increase by more than 2 percent. B) demanded will increase by more than 2 percent. C) demanded will decrease by less than 2 percent. D) supply will decrease by less than 2 percent. Answer: B Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

146) Suppose Clem's Chemical Company wants to increase its total revenue. If there are few substitutes for Clem's Chemicals, A) Clem should increase the price of his chemicals. B) Clem should decrease the price of his chemicals. C) the demand for chemicals is elastic. D) Clem will not be able to change the price of his chemicals. Answer: A Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

147) If an increase in price results in no change in total revenue, then demand must be A) inelastic. B) elastic. C) unit elastic. D) infinitely elastic. Answer: C Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

148) If demand for Farmer John's maple syrup is inelastic, then when Farmer John raises the price of maple syrup, his total revenue will A) increase. B) decrease. C) stay the same. D) probably change, but more information is needed to determine if the total revenue increases, decreases, or stays the same. Answer: A Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

149) If the total revenue received by sellers of DVDs increases by 20 percent when price increases by 10 percent, then demand for DVDs is A) perfectly elastic. B) unitary elastic. C) inelastic. D) elastic. Answer: C Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

150) Total revenue received by surfboard manufacturers increases by $2 million when the price of a surfboard decreases by $10. The price the elasticity of demand for surfboards is A) between 0 and 1. B) greater than 1. C) equal to 0. D) some amount that is impossible to determine without more information. Answer: B Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

151) If a 20 percent decrease in the price of a good leads to a 15 percent increase in the quantity demanded, then demand is ________ and total revenue will ________ as a result of the fall in price. A) elastic; increase B) elastic; decrease C) inelastic; increase D) inelastic; decrease Answer: D Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

152) The price elasticity of demand for wheat is 0.42. A drought cuts the supply of wheat. What will happen to the farmers' total revenue? A) The total revenue will increase. B) The total revenue will decrease. C) The total revenue will not change. D) There is not enough information to determine what happens to the total revenue. Answer: A Topic: Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

153) The price elasticity of demand for corn is 0.4. A new hybrid of corn is discovered and all farmers start to use it, which increases the quantity of corn they can produce from each acre. What happens to the farmers' total revenue? A) The total revenue will increase. B) The total revenue will decrease. C) The total revenue will not change. D) There is not enough information to determine what happens to the total revenue. Answer: B Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

154) A university conducts a survey of students, which shows that a 10 percent tuition hike would lead to a 12 percent decrease in the enrollment. If the university wants to increase its total revenue, it should ________ tuition because the demand for education at this university is ________. A) raise; elastic B) not raise; elastic C) raise; inelastic D) not raise; inelastic Answer: B Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

155) A university conducts a survey of students, which shows that a 10 percent tuition hike would lead to a 7 percent decrease in the enrollment. If the university wants to increase its total revenue, it should ________ tuition because the demand for education at this university is ________. A) raise; elastic B) not raise; elastic C) raise; inelastic D) not raise; inelastic Answer: C Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

156) The price of a bus ride decreases, and the total revenue of the bus company decreases. The demand for bus rides is ________. A) perfectly elastic B) inelastic C) unit elastic D) elastic but not necessarily perfectly elastic Answer: B Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills 47 Copyright © 2014 Pearson Education, Inc.

157) The price elasticity of demand for gasoline is 0.40. If the price of gasoline rises by 20 percent, there will be A) a decrease of more than 20 percent in the quantity of gasoline demanded. B) an increase in the total revenue received from the sale of gasoline. C) a loss of total revenue for gasoline producers, because at a higher price the quantity of gasoline demanded decreases. D) no change in the quantity of gasoline sold because people need gasoline. Answer: B Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

158) When Monica's Catering lowered the price of catered meals from $60 per person to $20 per person, the quantity demanded doubled from 500 meals to 1,000 meals. You can conclude that the demand for Monica's catered meals over the price range of $20 to $60 is A) upward sloping. B) unit elastic. C) elastic. D) inelastic. Answer: D Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

159) If the demand for a good is unit elastic, A) a 5 percent increase in price results in a 5 percent increase in total revenue. B) a 5 percent increase in price results in a 5 percent decrease in total revenue. C) a 5 percent increase in price does not change total revenue. D) the demand curve is a straight line with slope of -1. Answer: C Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

160) If OPEC, a group of oil producing nations, cuts oil production to increase the total revenue, OPEC presumes that the demand for oil is A) perfectly elastic. B) unit elastic. C) elastic. D) inelastic. Answer: D Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

161) A shift of the supply curve of oil raises the price from $70 a barrel to $80 a barrel and reduces the quantity demanded from 40 million to 38 million barrels a day. You can conclude that the A) demand for oil is elastic. B) demand for oil is inelastic. C) supply of oil is elastic. D) supply of oil is inelastic. Answer: B Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

162) A shift of the supply curve of oil raises the price from $60 a barrel to $75 a barrel and reduces the quantity demanded from 40 million to 20 million barrels a day. You can conclude that the A) demand for oil is elastic. B) demand for oil is inelastic. C) supply of oil is elastic. D) supply of oil is inelastic. Answer: A Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

163) The price of milk rises, so the supply of ice cream decreases. there is, as a result a 5 percent increase in the price of ice cream and a 3 percent decrease in the quantity of ice cream sold. The revenue received by ice cream suppliers will ________ because the demand for ice cream is ________. A) decrease; price inelastic B) increase; price inelastic C) increase; price elastic D) decrease; price elastic Answer: B Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

164) This summer the lobster catch in Maine has been especially large, but instead of celebrating the fisherman are suffering from a lower total revenue. (Source: New York Times, July 28, 2012) As the lobster catch increases there is A) a movement along the demand curve, resulting in a higher price and a decreased quantity. B) a movement along the demand curve, resulting in a lower price and an increased quantity. C) no change in either the price or the quantity. D) a movement along the demand curve, resulting in a higher price and an increased quantity. Answer: B Topic: Total Revenue and Elasticity Skill: Conceptual Status: New AACSB: Analytical Skills

165) This summer the lobster catch in Maine has been especially large, but instead of celebrating the fisherman are suffering from a lower total revenue. (Source: New York Times, July 28, 2012) We learn from the article that despite the larger quantity of lobster caught, the total revenue of the fisherman has decreased. This fact means that the demand for lobster is A) unit elastic. B) elastic. C) inelastic. D) perfectly elastic. Answer: C Topic: Total Revenue and Elasticity Skill: Analytical Status: New AACSB: Analytical Skills

166) When the price of a Caesar salad is $5.00, the demand for Caesar salads is elastic, and when the price is $4.00, the demand is inelastic. If Mike's Roadside Restaurant cuts the price from $5.00 to $4.00, its total revenue from Caesar salads ________. A) will increase B) will decrease C) will remain the same D) might increase, decrease, or remain the same Answer: D Topic: Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

167) Suppose that the demand for corn is price inelastic. If a technological advance makes corn farms more productive, the equilibrium price of corn will ________ and the farmers' total revenue will ________. A) rise; increase B) rise; decrease C) fall; increase D) fall; decrease Answer: D Topic: Total Revenue Skill: Conceptual Status: Old AACSB: Analytical Skills

168) Total revenue for skis is at a maximum when the price elasticity of demand is A) between 0 and 1. B) 1. C) greater than 1. D) 0. Answer: B Topic: Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

169) If hot dog vendors at baseball games want to maximize their total sales revenue, they will have to A) be willing to experience reduced hot dog expenditure by baseball fans. B) set the price of their hot dogs so that the demand is unit elastic. C) sell as many hot dogs as they can, even if it means lowering price. D) raise their price, even if it means selling fewer hot dogs. Answer: B Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

170) Sara's Strawberry Market maximizes its total revenue by selling strawberries for $1.25 a basket. At a price of $1.25, you predict that ________. A) the demand for strawberries is inelastic B) Sara's sells most of the strawberries that she grows C) the demand for strawberries is elastic D) the demand for strawberries is unit elastic Answer: D Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

Price (dollars per pound) 10 9 7 5 3 1 0

Quantity demanded (pounds) 0 2 6 10 14 18 20

171) The above table gives the demand schedule for Billy Bob's BBQ ribs. The price elasticity of demand for Billy Bob's ribs over the price range of $3 to $1 is equal to A) 4.00. B) 2.00. C) 0.50. D) 0.25. Answer: D Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

172) The above table gives the demand schedule for Billy Bob's BBQ ribs. If the price of a pound of ribs falls from $3 per pound to $1 per pound, what is the change in Billy Bob's total revenue? A) $42 B) $24 C) -$2 D) -$24 Answer: D Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

173) The above table gives the demand schedule for Billy Bob's BBQ ribs. The demand for Billy Bob's ribs over the price range of $1 per pound to $3 per pound is A) perfectly elastic. B) elastic. C) unit elastic. D) inelastic. Answer: D Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

174) The above table gives the demand schedule for Billy Bob's BBQ ribs. An increase in the price of a pound of ribs will lead to a decrease in total revenue when A) demand is inelastic. B) the demand curve is vertical. C) the price increase occurs over the price range of 0 to $5. D) the price increase occurs over the price range of $5 to $10. Answer: D Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

175) The above table gives the demand schedule for Billy Bob's BBQ ribs. The demand for Billy Bob's ribs is unit elastic at which of the following prices? A) $10 B) $7 C) $5 D) $1 Answer: C Topic: Elasticity Along a Straight-Line Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

176) The above figure shows the demand curve for movie rentals from Blockbuster. If Blockbuster raised its price from $2.50 to $3.00, between these two prices the price elasticity of demand equals A) 1.2. B) 0.8. C) 2.0. D) 0.5. Answer: A Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

177) The above figure shows the demand curve for movie rentals from Blockbuster. Which of the following is true? A) Consumer expenditure on movie rentals will always increase whenever Blockbuster lowers its price. B) Blockbuster will receive more total revenue if it charges $4.00 per movie rental rather than $3.00. C) The price elasticity of demand for movie rentals falls as Blockbuster raises its price. D) The demand for movie rentals is more price inelastic at $1.00 than it is at $1.50. Answer: D Topic: Elasticity Along a Straight-Line Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

178) The above figure shows the demand curve for movie rentals from Blockbuster. At which of the following prices is the demand unit elastic? A) $5.00 B) $3.50 C) $2.50 D) $0.00 Answer: C Topic: Elasticity Along a Straight-Line Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

179) The above figure shows the demand curve for movie rentals from Blockbuster. At which of the following prices does Blockbuster have the maximum total revenue? A) $5.00 B) $3.50 C) $2.50 D) $0.00 Answer: C Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

180) The above figure shows the demand curve for movie rentals from Blockbuster. If Blockbuster lowered its price from $4.00 to $3.50, then total revenue would ________ because demand is ________. A) decrease; elastic B) increase; elastic C) decrease; inelastic D) increase; inelastic Answer: B Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

181) The above figure shows the demand curve for movie rentals from Blockbuster. If Blockbuster lowered its price from $2.00 to $1.50, then total revenue would ________ because demand is ________. A) decrease; elastic B) increase; elastic C) decrease; inelastic D) increase; inelastic Answer: C Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

182) The above figure shows the demand curve for movie rentals from Blockbuster. If Blockbuster lowered its price from $1.50 to $1.00, then total revenue would ________ because demand is ________. A) decrease; elastic B) increase; elastic C) decrease; inelastic D) increase; inelastic Answer: C Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

183) The figure illustrates the demand for magazines. Newsagents will maximize their total revenue when they ________. A) sell 375 magazines a day B) sell as many magazines as they can C) charge $2.50 a magazine D) sell 750 magazines a day Answer: A Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

184) The figure illustrates the demand for peanuts. If the price falls from $12 to $9 a bag, total revenue will ________, and if the price rises from $3 to $6 a bag, total revenue will ________. A) increase; decrease B) increase; increase C) decrease; increase D) decrease; decrease Answer: B Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

185) In the above figure, at which point on the demand curve is the price elasticity of demand equal to 1? A) a B) b C) c D) It is impossible to say at which point the elasticity equals one. Answer: C Topic: Elasticity Along a Straight-Line Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

186) In the above figure, at point b on the demand curve, a price cut of one dollar will A) increase total revenue. B) decrease total revenue. C) leave total revenue unchanged. D) have an indeterminate effect on total revenue. Answer: A Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

187) Consider the straight-line demand curve illustrated in the figure above. At a price of $6, demand is A) inelastic. B) elastic. C) unit elastic. D) More information is needed to determine if the demand is elastic, unit elastic, or inelastic. Answer: B Topic: Elasticity Along a Straight-Line Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

188) Consider the straight-line demand curve illustrated in the above figure. At what price is total revenue maximized? A) at a price of $8 B) at a price of $6 C) at a price of $4 D) More information is needed to determine the price at which total revenue is maximized. Answer: C Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

189) The figure illustrates the demand for eggs. At what price will egg sellers maximize their total revenue? A) above $0.75 a dozen B) $0.75 a dozen C) less than $0.75 a dozen D) $1.50 a dozen Answer: B Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

190) The figure above represents the behavior of total revenue as price falls along a straight-line demand curve. What is the price elasticity of demand if total revenue is given by point f? A) Demand is inelastic. B) Demand is unit elastic. C) Demand is elastic. D) It is impossible to determine. Answer: C Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

191) The figure above represents the behavior of total revenue as price falls along a straight-line demand curve. Unit elasticity of demand occurs at A) point g. B) point h. C) point i. D) point j. Answer: B Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

192) As the price of cell phones fell during the last decade, consumers' total expenditures on cell phones increased. If the demand curve for cell phones did not shift, this fact means that the demand for cell phones A) must have shifted leftward. B) must be upward sloping. C) is elastic. D) is inelastic. Answer: C Topic: Your Expenditure and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

193) If your demand for gasoline is inelastic, when the price of gasoline falls, which of the following occurs? A) Your demand curve for gasoline will shift leftward. B) Your demand curve for gasoline will shift rightward. C) Your total expenditure on gasoline will increase. D) Your total expenditure on gasoline will decrease. Answer: D Topic: Your Expenditure and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

194) Starting at the top of a straight-line downward sloping demand curve, as the price falls, total expenditures will A) initially increase and then decrease. B) initially decrease and then increase. C) increase along the entire demand curve. D) decrease along the entire demand curve. Answer: A Topic: Your Expenditure and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

195) If a price decrease results in your expenditure on a good decreasing, your demand must be A) inelastic. B) unit. C) elastic. D) linear. Answer: A Topic: Your Expenditure and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

196) An increase in subway fares in New York City will boost your expenditures on subway rides if A) the supply of subway rides is elastic. B) the supply of subway rides is inelastic. C) your demand for subway rides is elastic. D) your demand for subway rides is inelastic. Answer: D Topic: Your Expenditure and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

197) If your demand for a good is ________, then a 1 percent fall in its price will lead you to ________ your expenditures on the good. A) inelastic; increase B) inelastic; decrease C) elastic; increase D) elastic; decrease Answer: D Topic: Your Expenditure and Elasticity Skill: Definition Status: Old AACSB: Analytical Skills

198) If the price of gasoline rose from $2.85 to $2.95 per gallon, your expenditure on gasoline would increase if your price elasticity of demand for gasoline equals A) 1.25. B) 1.00. C) 0.75. D) Total revenue would increase at all of the above elasticities. Answer: C Topic: Your Expenditure and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

199) If the price of gasoline fell from $2.95 to $2.85 per gallon, your expenditure on gasoline would increase if your price elasticity of demand for gasoline equals A) 1.1. B) 1.0. C) 0.9. D) Total revenue would increase at all of the above elasticities. Answer: A Topic: Your Expenditure and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

200) If students' expenditures on airline travel increase as a consequence of more heavily discounted fares, students' demand for airline travel must be A) income elastic. B) income inelastic. C) price elastic. D) price inelastic. Answer: C Topic: Your Expenditure and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

201) Which goods have more elastic demands? A) goods with many substitutes B) goods which are necessities C) goods with few substitutes D) goods whose purchase represents a small percentage of income Answer: A Topic: Factors That Influence the Price Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

202) The closer the substitutes for a good, the A) more elastic is the demand for the good. B) less elastic is the demand for the good. C) smaller the degree of substitutability between the goods. D) larger the proportion of income that is spent on the good. Answer: A Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

203) The more substitutes available for a product, the A) larger is its price elasticity of demand. B) smaller is its income elasticity of demand. C) smaller is its price elasticity of demand. D) larger is its income elasticity of demand. Answer: A Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

204) The demand for a good is more price elastic A) if closer substitutes are available. B) if the good is a necessity rather than a luxury. C) if the share of the good in the average consumer's budget is smaller. D) in the short run than in the long run. Answer: A Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

205) Most corn produced in the United States is used for animal feed. The demand for corn is inelastic. These facts mean that A) there are many substitutes for corn in feeding animals. B) there are few substitutes for corn in feeding animals. C) there are no substitutes for corn in feeding animals. D) animals are not buying the corn themselves, so we cannot learn anything from these facts. Answer: B Topic: Inelastic and Elastic Demand Skill: Conceptual Status: New AACSB: Reflective Thinking

206) For many goods, the price elasticity of demand increases over time because A) people's incomes tend to increase over time. B) inflation increases all prices and incomes over time. C) the ability to find substitutes for a good whose price has risen increases over time. D) None of the above answers is correct. Answer: C Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

207) The amount of time elapsed since a price change impacts the elasticity of demand because as more time passes, A) people can find more substitutes, and so the elasticity of demand decreases. B) people can find more substitutes, and so the elasticity of demand increases. C) people's incomes will increase, and so the elasticity of demand decreases. D) the good's price will have a chance to return to its previous level. Answer: B Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

208) For many goods, the price elasticity of demand increases over time after a price hike because A) consumer incomes tend to increase over time. B) inflation increases all prices and incomes over time. C) the ability to find good substitutes for the product whose price rose increases over time. D) All of the above answers are correct. Answer: C Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

209) The demand for Honda Accords is probably A) inelastic but more elastic than the demand for automobiles. B) elastic and more elastic than the demand for automobiles. C) inelastic and less elastic than the demand for automobiles. D) elastic but less elastic than the demand for automobiles. Answer: B Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

210) Which of the following statements is FALSE? A) Goods or services that have few close substitutes generally have a less elastic demand. B) Goods or services for which a greater proportion of income is spent on the item generally have a more elastic demand. C) A narrowly defined good or service generally has a less elastic demand. D) The longer the time that has elapsed since a price change, the more elastic the demand. Answer: C Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

211) Which of the following makes demand less elastic? A) the existence of many close substitutes for the good B) spending a large proportion of income on the good C) a short time elapsing since the product's price changed D) All of the above answers are correct. Answer: C Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

212) The price elasticity of demand depends on the A) proportion of consumers' budgets spent on the good. B) number of available substitutes. C) extent to which the commodity is a luxury. D) all of the above Answer: D Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

213) A determinant of the price elasticity of demand is A) whether the good is a durable or a nondurable. B) the availability of resources used in the production of the product. C) how well consumers like the good. D) the proportion of the consumer's total budget spent on the good. Answer: D Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

214) The ________ the portion of your income spent on a good, the ________ is your demand for the good. A) larger; more income elastic B) larger; more price elastic C) smaller; less price elastic D) smaller; more income elastic Answer: C Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

215) Of the following, demand is likely to be the least elastic for A) Ford automobiles. B) Toyota automobiles. C) compact disc players. D) toothpicks. Answer: D Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

216) If a product has very few substitutes, demand elasticity is likely to be A) 1. B) elastic. C) infinitely elastic. D) inelastic. Answer: D Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

217) Because there are numerous choices for fast food purchases, the price elasticity of demand for Taco Bell food is likely A) inelastic. B) unitary elastic. C) perfectly inelastic. D) elastic. Answer: D Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

218) The demand for ________ is more elastic than the demand for ________. A) chewing gum; cars B) all personal computers; Dell computers C) Pepsi; all soft beverages D) food; exotic vacations Answer: C Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

219) The price elasticity of demand for a specific model of a luxury car is likely to be A) elastic. B) inelastic. C) 0. D) infinite. Answer: A Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

220) Which of the following items has the largest price elasticity of demand? A) food B) fruit C) oranges D) oranges from a Wal-Mart SuperCenter Answer: D Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Revised AACSB: Analytical Skills

221) The price elasticity of demand for meat in general is inelastic while the price elasticity of demand for turkey or chicken is more elastic. Why? A) Turkey and chicken are not red meat. Because they are not the same as other meats, they should have different elasticities. B) Turkey and chicken have many substitutes, such as fish or beef, while meat in general has fewer substitutes. C) Turkey and chicken are inferior goods. D) Turkey and chicken are normal goods. Answer: B Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

222) The demand for ________ is more elastic than the demand for ________. A) chewing gum; cars B) gasoline; professional services C) all soft beverages; lemonade D) motor vehicles; food Answer: D Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

223) Of the following, demand is likely to be the most elastic for A) food. B) cars. C) Sony DVD players. D) personal computers. Answer: C Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

224) Pizza Hut pizza has more close substitutes than does food in general. The price elasticity of demand for Pizza Hut pizza is ________ the price elasticity of demand for food in general. A) not comparable to B) greater than C) less than D) the same as Answer: B Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

225) Suppose that accountants increase the price for calculating income taxes owed by 20 percent. The short-run demand for their service is less elastic than the long-run demand because in the long run consumers will ________. A) spend less on this service B) experience an increase in income C) try to avoid paying their income tax D) find other ways to calculate the income tax they must pay Answer: D Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

226) Which of the following goods would have the smallest elasticity of demand? A) Exxon brand premium unleaded gasoline B) insulin sold to diabetics C) an education at Harvard Law School sold to recent college graduates D) a bottle of Bayer Aspirin sold to someone without a headache Answer: B Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

227) For electricity, natural gas, or other forms of energy, it is very likely that the price elasticity of demand A) is zero. B) is infinite. C) will decrease in magnitude as more time passes after a price change. D) will increase in magnitude as more time passes after a price change. Answer: D Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

228) The price of gasoline rises by 33 percent to $3.50 a gallon and stays at that price for the next two years. The quantity of gasoline demanded two years from now will be A) the same as one month after the price hike. B) greater than one month after the price hike. C) less than one month after the price hike. D) the same as it would be if the price hike had never occurred. Answer: C Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

229) Which of the following factors will make the demand for a product more elastic? A) The product has no close substitutes. B) A very small proportion of income is spent on the good. C) A long time period has elapsed since the product's price changed. D) The change in the product's price was unexpected. Answer: C Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

230) Of the following, demand is likely to be the least elastic for A) diamonds. B) insulin for diabetics. C) iceberg lettuce. D) pink grapefruit. Answer: B Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

231) The demand for food is most elastic in countries A) with low income levels. B) with intermediate income levels. C) with high income levels. D) that are highly urbanized. Answer: A Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

232) The demand for a good is less price elastic A) if closer substitutes are available. B) if the good is a luxury rather than a necessity. C) if the share of the good in the average consumer's budget is smaller. D) in the long run than in the short run. Answer: C Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

233) The air route from Dallas to Mexico City is served by more than one airline. The demand for tickets from American Airlines for that route is probably A) inelastic but more elastic than the demand for all tickets for that route. B) elastic and more elastic than the demand for all tickets for that route. C) inelastic and less elastic than the demand for all tickets for that route. D) elastic but less elastic than the demand for all tickets for that route. Answer: B Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

234) The elasticity of demand for Gateway computers is probably A) inelastic and smaller than the elasticity of demand for computers overall. B) elastic and smaller than the elasticity of demand for computers overall. C) inelastic but larger than the elasticity of demand for computers overall. D) elastic and larger than the elasticity of demand for computers overall. Answer: D Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

235) Aglets are the metal or plastic tips on shoelaces that make it easier to lace your shoes. The demand for aglets is probably A) inelastic. B) unit elastic. C) elastic but not perfectly elastic. D) perfectly elastic. Answer: A Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

236) The demand for food in poor countries is A) inelastic and more inelastic than in rich countries. B) inelastic but more elastic than in rich countries. C) elastic but less elastic than in rich countries. D) elastic and more elastic than in rich countries. Answer: B Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

237) Suppose a 10 percent increase in the price of textbooks decreases the quantity demanded by 20 percent. The elasticity of demand for textbooks is A) 0.2. B) 2.0. C) 5.0. D) 10.0. Answer: B Topic: Study Guide Question, Calculating Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

238) The quantity of new cars increases by 10 percent. If the price elasticity of demand for new cars is 1.25, the price of new cars will fall by A) 2.5 percent. B) 8 percent. C) 10 percent. D) 12.5 percent. Answer: B Topic: Study Guide Question, Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

239) Along a perfectly vertical demand curve, the price elasticity of demand A) equals 0. B) is greater than 0 but less than 1.0. C) equals 1.0. D) is negative. Answer: A Topic: Study Guide Question, Inelastic and Elastic Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

240) Perfectly elastic demand is represented by a demand curve that A) is vertical. B) is horizontal. C) has a 45° slope. D) is a rectangular hyperbola. Answer: B Topic: Study Guide Question, Inelastic and Elastic Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

241) Business people often speak about price elasticity without actually using the term. Which statement describes a good with an elastic demand? A) "A price cut won't help me. It won't increase my sales, and I'll just get less money for each unit." B) "I don't think a price cut will help my bottom line any. Sure, I'll sell a bit more, but I'll more than lose because the price will be lower." C) "My customers are real shoppers. After I cut my prices just a few cents below those my competitors charge, customers have been flocking to my store and sales are booming." D) "The economic expansion has done wonders for my sales. With more people back at work, my sales are taking off!" Answer: C Topic: Study Guide Question, Elastic Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

242) A product is likely to have a price elasticity of demand that exceeds 1 when A) its price falls. B) the percentage of income spent on it decreases. C) it is a necessity. D) it has close substitutes. Answer: D Topic: Study Guide Q., Factors That Influence Demand Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

243) The demand for a good is more price inelastic if A) its price is higher. B) the percentage of income spent on it is larger. C) it is a luxury good. D) it has no close substitutes. Answer: D Topic: Study Guide Q., Factors That Influence Demand Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

244) Which of the following is likely to have the smallest price elasticity of demand? A) an automobile B) a new automobile C) a new Ford automobile D) a new Ford Mustang Answer: A Topic: Study Guide Q., Factors That Influence Demand Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

245) Moving up (to the left) along a linear demand curve, the price elasticity of demand A) decreases. B) does not change. C) increases. D) at first increases and then decreases. Answer: C Topic: Study Guide Q, Elasticity Along a Straight-Line Demand Curve Skill: Conceptual Status: Old AACSB: Analytical Skills

246) If the price elasticity of demand equals 1.0, then as the price falls, the A) quantity demanded decreases. B) total revenue falls. C) quantity demanded does not change. D) total revenue does not change. Answer: D Topic: Study Guide Question, Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

247) A rise in the price of a product lowers the total revenue from the product if the A) income elasticity of demand exceeds 1. B) good is an inferior product. C) demand for the product is inelastic. D) demand for the product is elastic. Answer: D Topic: Study Guide Question, Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

248) By reviewing its sales records, Dell economists discover that when Dell lowers the price of its personal computers, the total revenue Dell obtains from the sale of its personal computers rises. Hence A) supply of Dell personal computers is elastic. B) demand for Dell personal computers is elastic. C) supply of Dell personal computers is inelastic. D) demand for Dell personal computers is inelastic. Answer: B Topic: Study Guide Question, Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

249) If a 4 percent rise in the price of peanut butter lowers the total revenue received by the producers of peanut butter by 4 percent, the demand for peanut butter A) is elastic. B) is inelastic. C) is unit elastic. D) has an elasticity of 2.0. Answer: A Topic: Study Guide Question, Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

250) If the price elasticity of demand for a product equals 1, as its price rises the A) quantity demanded increases. B) total revenue increases. C) quantity demanded does not change. D) total revenue does not change. Answer: D Topic: Study Guide Question, Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

251) When the price of a hot dog rises 10 percent, your expenditure on hot dogs increases. Hence, it is certain that A) hot dogs are a normal good for you. B) hot dogs are an inferior good for you. C) your demand for hot dogs is elastic. D) your demand for hot dogs is inelastic. Answer: D Topic: Study Guide Question, Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

252) In the figure above, when the price of a disk is $B, total revenue is shown in the graph by area A) BCF0. B) AGF0. C) FCDE. D) ADE0. Answer: A Topic: Parallel MyEconLab Questions Skill: Analytical Status: Old AACSB: Analytical Skills

253) The above figure illustrates the demand curve for a good. The good has A) no substitutes. B) only one substitute. C) only a few substitutes. D) many substitutes. Answer: A Topic: Parallel MyEconLab Questions, Elastic and Inelastic Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

254) The elasticity of demand along the demand curve shown in the above figure is constant and equal to 1. Thus, A) area 0BCF equals area 0AGF. B) area 0BCF equals area FGDE. C) area 0BCF equals area 0ADE. D) area ABCG equals area 0AGF. Answer: C Topic: Parallel MyEconLab Questions, Elastic and Inelastic Demand Skill: Analytical Status: Old AACSB: Analytical Skills

255) The above figure shows a linear (straight-line) demand curve. Starting at point A and then moving to point B and then point C, the price elasticity of demand A) increases. B) decreases. C) increases and then decreases. D) decreases and then increases. Answer: B Topic: Parallel MyEconLab, Elasticity - Straight-Line Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

256) This summer the lobster catch in Maine has been especially large, but instead of celebrating the fisherman are suffering from a lower total revenue. (Source: New York Times, July 28, 2012) As the lobster catch increases, there is A) a movement along the demand curve, resulting in a higher price and a decreased quantity. B) a movement along the demand curve, resulting in a lower price and an increased quantity. C) no change in either the price or the quantity. D) a movement along the demand curve, resulting in a higher price and an increased quantity. Answer: B Topic: Total Revenue and Elasticity Skill: Conceptual Status: New AACSB: Analytical Skills

257) This summer the lobster catch in Maine has been especially large, but instead of celebrating the fisherman are suffering from a lower total revenue. (Source: New York Times, July 28, 2012) We learn from the article that despite the larger quantity of lobster caught, the total revenue of the fisherman has decreased. This fact means that the demand for lobster is A) unit elastic. B) elastic. C) inelastic. D) perfectly elastic. Answer: C Topic: Total Revenue and Elasticity Skill: Analytical Status: New AACSB: Analytical Skills

2 More Elasticities of Demand 1) The cross elasticity of demand measures the responsiveness of the quantity demanded of a particular good to changes in the prices of A) its substitutes and its complements. B) its substitutes but not its complements. C) its complements but not its substitutes. D) neither its substitutes nor its complements. Answer: A Topic: Cross Elasticity of Demand Skill: Definition Status: Old AACSB: Analytical Skills

2) The cross elasticity of demand is calculated as the percentage change in the A) quantity demanded of one good divided by the percentage change in the price of another good B) price of one good divided by the percentage change in the quantity demanded of another good. C) quantity demanded of one good divided by the percentage change in the quantity demanded of another good. D) price of one good divided by the percentage change in the price of another good. Answer: A Topic: Cross Elasticity of Demand Skill: Definition Status: Old AACSB: Analytical Skills

3) Toothpaste and toothbrushes are complements, so the ________ elasticity of demand is ________. A) cross; positive B) income; negative C) cross; negative D) income; positive Answer: C Topic: Cross Elasticity of Demand Skill: Definition Status: Old AACSB: Analytical Skills 81 Copyright © 2014 Pearson Education, Inc.

4) Blue pens and black pens are close substitutes. The cross elasticity of demand for black pens with respect to the price of blue pens is ________. A) positive B) negative C) equal to 1 D) zero Answer: A Topic: Cross Elasticity of Demand Skill: Definition Status: Old AACSB: Analytical Skills

5) If the cross elasticity of demand between goods X and Y is positive and between goods X and Z is negative, then X and Y are ________ and X and Z are ________. A) price inelastic; complements B) complements; substitutes C) substitutes; complements D) price inelastic; income elastic Answer: C Topic: Cross Elasticity of Demand Skill: Definition Status: Old AACSB: Analytical Skills

6) If goods are complements, then their A) cross elasticities are positive. B) income elasticities are positive. C) income elasticities are negative. D) cross elasticities are negative. Answer: D Topic: Cross Elasticity of Demand Skill: Definition Status: Revised AACSB: Analytical Skills

7) If a rise in the price of good 1 decreases the quantity of good 2 demanded, A) the cross elasticity of demand is negative. B) the cross elasticity of demand is positive. C) good 1 is an inferior good. D) good 2 is an inferior good. Answer: A Topic: Cross Elasticity of Demand Skill: Definition Status: Old AACSB: Analytical Skills

8) The cross elasticity of demand between apples and oranges is defined as the A) percentage change in the quantity of apples demanded divided by the percentage change in the price of oranges. B) price elasticity of demand for apples divided by the price elasticity of demand for oranges. C) percentage change in the quantity of apples demanded divided by the percentage change in the quantity of oranges demanded. D) change in the quantity of apples demanded divided by the change in the quantity of oranges demanded. Answer: A Topic: Cross Elasticity of Demand Skill: Definition Status: Old AACSB: Analytical Skills

9) If peanut butter and jelly are complements, then their cross elasticity of demand must be A) infinitely high. B) a positive number that might be greater than 1. C) a number between zero and one. D) a negative number. Answer: D Topic: Cross Elasticity of Demand Skill: Definition Status: Old AACSB: Analytical Skills

10) The cross elasticity of demand for pizza with respect to the price of a soda is A) positive because the goods are complements. B) negative because the goods are complements. C) positive because the goods are substitutes. D) negative because the goods are substitutes. Answer: B Topic: Cross Elasticity of Demand Skill: Definition Status: Old AACSB: Analytical Skills

11) In the above figure, if the price of good A falls from P0 to P1 and the demand for good B increases from D0 to D1, then goods A and B A) are substitute goods. B) are inferior goods. C) will have a negative cross elasticity of demand. D) are both price elastic but not perfectly price elastic. Answer: C Topic: Cross Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

12) In the above figure, if the two goods A and B, are complements, which of the following is true? A) The shift from D0 to D1 for good B leads to a shift from S0 to S1 for good A. B) The shift from S0 to S1 for good A leads to the shift from D0 to D1 for good B. C) The law of demand is violated in both markets. D) The cross elasticity of demand between them is positive. Answer: B Topic: Cross Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

13) A negative value for the cross elasticity of demand between two goods indicates that A) the goods are complements. B) the goods are substitutes. C) one of the goods is normal and the other is inferior. D) each good is price inelastic. Answer: A Topic: Cross Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

14) Donuts and coffee are complements. When the price of a donut increases, the demand for coffee ________ and the cross elasticity of demand for coffee with respect to the price of a donut is ________. A) decreases; negative B) increases; negative C) increases; positive D) decreases; positive Answer: A Topic: Cross Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

15) If tea and coffee are substitutes, the cross elasticity of coffee with respect to the price of tea will be ________ and an increase in the price of tea will ________ the demand for coffee. A) positive; increase B) negative; decrease C) negative; increase D) positive; decrease Answer: A Topic: Cross Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

16) If a 5 percent increase in the price of good A leads to a 4 percent decrease in the demand for good B, then ________. A) the goods are substitutes B) only one good is a normal good C) the goods are complements D) both goods are normal goods Answer: C Topic: Cross Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

17) Joe likes peanut butter and jelly sandwiches for lunch. We can conclude that for Joe the cross elasticity of demand for peanut butter with respect to jelly is A) positive because jelly and peanut butter are substitutes. B) positive because jelly and peanut butter are complements. C) negative because jelly and peanut butter are substitutes. D) negative because jelly and peanut butter are complements. Answer: D Topic: Cross Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

18) Many younger people eat peanut butter AND jelly, whereas many older people eat peanut butter OR jelly. This suggests that the cross elasticity of demand between peanut butter and jelly is A) negative for youngsters and positive for oldsters. B) positive for youngsters and negative for oldsters. C) negative for youngsters and zero for oldsters. D) positive for youngsters and zero for oldsters. Answer: A Topic: Cross Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

19) Suppose Target decided to lower the price on all shirts as part of its Back to School promotion. The cross elasticity of demand between pants and shirts is negative. Lowering the price on shirts will ________ the demand for pants because shirts and pants are ________. A) increase; substitutes B) decrease; substitutes C) increase; complements D) decrease; complements Answer: C Topic: Cross Elasticity of Demand Skill: Analytical Status: New AACSB: Analytical Skills

20) If the cross elasticity of demand for good x with respect to the price of good y is positive, then goods x and y are A) normal goods. B) inferior goods. C) complements. D) substitutes. Answer: D Topic: Cross Elasticity of Demand Skill: Definition Status: Old AACSB: Analytical Skills

21) You are the new vice president in charge of advertising at Taco Bell. In your upcoming advertising campaign, you plan to degrade the fast food competitor whose product is the closest substitute for Taco Bell's tacos. That would be the fast food chain whose cross elasticity of demand with your tacos is equal to A) negative 2.11. B) negative 1.75. C) positive 1.55. D) positive 1.00. Answer: C Topic: Cross Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills 86 Copyright © 2014 Pearson Education, Inc.

22) When the price of milk rose 50 percent, the quantity of milk sold fell 25 percent and the sale of breakfast cereals also fell 25 percent. This set of facts indicates that the A) demand for milk is price elastic. B) demand for breakfast cereals is price elastic. C) cross elasticity between milk and cereal is negative so the two are complements. D) cross elasticity between milk and cereal is positive so the two are complements. Answer: C Topic: Cross Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

23) If Pepsi decided to raise its price, you would expect the price of Coca Cola A) to fall. B) to raise. C) Their prices should have no relationship because Pepsi and Coca Cola are not related. D) None of the above answers are correct. Answer: B Topic: Cross Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

24) If the cross elasticity of demand between goods A and B is positive, A) the demands for A and B are both price elastic. B) the demands for A and B are both price inelastic. C) A and B are complements. D) A and B are substitutes. Answer: D Topic: Cross Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

25) If the cross elasticity of demand between coffee and tea is positive, an increase in the price of tea will shift the demand curve for A) tea rightward. B) tea leftward. C) coffee rightward. D) coffee leftward. Answer: C Topic: Cross Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

26) The cross-elasticity of demand between Homer's Holesome Doughnuts and Krusty's Krispy Crullers is 5.0, which indicates that Homer's doughnuts and Krusty's crullers are A) complements and the relationship between the two goods is strong (that is, the quantity demanded of doughnuts is very responsive to changes in the price of crullers). B) complements and the relationship between the two goods is weak (that is, the quantity demanded of doughnuts is not very responsive to changes in the price of crullers). C) substitutes and the relationship between the two goods is strong (that is, the quantity demanded of doughnuts is very responsive to changes in the price of crullers). D) substitutes and the relationship between the two goods is weak (that is, the quantity demanded of doughnuts is not very responsive to changes in the price of crullers). Answer: C Topic: Cross Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

27) If the cross elasticity of demand is -5 between french fries and orange drink, then french fries A) and orange drink are complements. B) and orange drink are substitutes. C) are a normal good and orange drink is an inferior good. D) are an inferior good and orange drink is a normal good. Answer: B Topic: Cross Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

28) Suppose inter-city bus travel is a substitute for transportation by train. Which of the following could then be true? A) The cross elasticity between bus and train travel could equal 0.65. B) The cross elasticity between bus and train travel could equal 1.0. C) The cross elasticity between bus and train travel could equal 1.25. D) All of the above could be true. Answer: D Topic: Cross Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

29) Suppose that the cross elasticity of demand for Dell computers with respect to Hewlett Packard computers is 2.1. If Hewlett-Packard lowers its price by 5 percent, other things being equal, what will be the percentage change in the quantity of Dell computers demanded? A) 2.4 percent B) -10.5 percent C) 10.5 percent D) -42 percent Answer: B Topic: Cross Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

30) Suppose Clyde always eats ice cream and chocolate syrup together. If the price of syrup increases by 10 percent, and the cross elasticity of demand is -2, the demand for ice cream A) increases by 5 percent. B) increases by 20 percent. C) decreases by 5 percent. D) decreases by 20 percent. Answer: D Topic: Cross Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

31) Dell lowers the price of their PCs by 10 percent. As a result, the quantity of Gateway computers demanded at the current price decreases by 12 percent. What is the cross elasticity of demand for Gateway computers with respect to the price of Dell computers? A) -1.20 B) -0.83 C) 1.20 D) 0.83 Answer: C Topic: Cross Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

32) Microsoft raises the price of its Office software by 10 percent. As a result, the quantity of personal computers demanded at the current price decreases by 5 percent. What is the cross elasticity of demand for personal computers with respect to the price of Microsoft Office software? A) -2.0 B) -0.5 C) 0.5 D) 2.0 Answer: B Topic: Cross Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills 89 Copyright © 2014 Pearson Education, Inc.

33) If a price hike of 5 percent increases the quantity demanded of another good by 2 percent, the goods must be ________ and the cross elasticity of demand equals ________. A) substitutes; 0.40 B) substitutes; 2.5 C) complements; 0.40 D) complements; 2.5 Answer: A Topic: Cross Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

34) Based on the following pieces of information, which fast food product do consumers see as the closest substitute for Wendy's Hamburgers? A) Kentucky Fried Chicken, which has a cross elasticity of 1.70 with Wendy's B) McDonald's hamburgers, which have a cross elasticity of 1.01 with Wendy's C) Pizza Hut pizza, which has a cross elasticity of zero with Wendy's D) Taco Bell tacos, which have a cross elasticity of -1.25 with Wendy's Answer: A Topic: Cross Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

35) If there is an increase in the price of broccoli because of disastrous weather that destroys about half of this year's spinach crop, which of the following could be true? A) The cross elasticity of demand between spinach and broccoli is negative 1.25. B) The demand curve for broccoli has shifted rightward and the cross elasticity of demand between spinach and broccoli is positive. C) The demand curve for spinach has shifted to the leftward and the cross elasticity of demand between spinach and broccoli is positive. D) The demand curves for spinach and broccoli have become more cross inelastic. Answer: B Topic: Cross Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

36) If the cross elasticity of demand between two goods is -0.56, then a fall in the price of one good leads to a ________ shift in the ________ of the other good. A) rightward; demand B) rightward; supply C) leftward; demand D) leftward; supply Answer: A Topic: Cross Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills 90 Copyright © 2014 Pearson Education, Inc.

37) If the cross elasticity of demand between goods A and B is negative, A) the demands for A and B are both price elastic. B) the demands for A and B are both price inelastic. C) A and B are complements. D) A and B are substitutes. Answer: C Topic: Cross Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

38) The greater the substitutability between Northwest timber and Southeast timber, the ________ is the cross elasticity of demand between timber from the two regions and the ________ is the elasticity of demand for Northwest timber. A) smaller; smaller B) smaller; larger C) larger; smaller D) larger; larger Answer: D Topic: Cross Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

39) If goods A and B are complements, then A) the cross elasticity of demand between A and B is negative. B) the cross elasticity of demand between A and B is positive. C) their income elasticities of demand are both greater than 1. D) their income elasticities of demand are both less than 1. Answer: A Topic: Cross Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

40) If a rise in the price of good B increases the quantity demanded of good A, A) A and B are substitutes. B) A and B are complements. C) A is a substitute for B, but B is a complement to A. D) B is a substitute for A, but A is a complement to B. Answer: A Topic: Cross Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

41) If a fall in the price of good A increases the quantity demanded of good B, A) A and B are substitutes. B) A and B are complements. C) A is a substitute for B, but B is a complement to A. D) B is a substitute for A, but A is a complement to B. Answer: B Topic: Cross Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

42) The cross elasticity of demand between Coca-Cola and Pepsi-Cola is ________ so that Coke and Pepsi are ________. A) positive; complements B) positive; substitutes C) negative; normal goods D) negative; substitutes Answer: B Topic: Cross Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

43) If the price of one good increases by 3 percent and the quantity demanded of another good increases by 2 percent, the cross elasticity is ________ and the two goods are ________. A) 2/3, substitutes B) 2/3, complements C) 3/2, complements D) 3/2, substitutes Answer: A Topic: Cross Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

44) A rise in the price of good A shifts the ________ good B rightward if the cross elasticity of demand between A and B is ________. A) demand curve for; negative B) demand curve for; positive C) supply curve of; negative D) supply curve of; positive Answer: B Topic: Cross Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

45) The income elasticity of demand is a measure of the responsiveness of the A) quantity of a good demanded to changes in income. B) consumer's income to a change in the price of the goods he or she consumes. C) quantity of a good demanded to changes in its price. D) quantity of a good demanded to changes in another good's price. Answer: A Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

46) The income elasticity of demand is the percentage change in ________ divided by the percentage change in ________. A) the price; income B) the quantity demanded; income C) income; the quantity demanded D) income; the price Answer: B Topic: Income Elasticity of Demand Skill: Definition Status: Old AACSB: Analytical Skills

47) The income elasticity of demand is defined as the percentage change in A) the quantity demanded resulting from a given percentage change in price. B) income divided by the percentage change in quantity demanded. C) the movement along the demand curve resulting from a change in income. D) the quantity demanded divided by the percentage change in income. Answer: D Topic: Income Elasticity of Demand Skill: Definition Status: Old AACSB: Analytical Skills

48) A normal good is defined as a good for which the demand curve A) shifts leftward as income increases. B) shifts rightward as income increases. C) slopes downward to the right. D) is perfectly price elastic. Answer: B Topic: Income Elasticity of Demand Skill: Definition Status: Old AACSB: Analytical Skills

49) When Sam's annual income was only $15,000, he purchased 50 pounds of bananas a year. When his income rose to $18,000, he purchased 55 pounds a year. Therefore, A) for Sam, bananas are an inferior good. B) his income elasticity of demand for bananas is negative. C) his income elasticity and price elasticity of demand for bananas are both greater than one. D) for Sam, bananas are a normal good. Answer: D Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

50) The income elasticity of demand is A) always positive. B) always negative. C) negative for a normal good and positive for an inferior good. D) positive for a normal good and negative for an inferior good. Answer: D Topic: Income Elasticity of Demand Skill: Definition Status: Old AACSB: Analytical Skills

51) Bus rides and canned soup are inferior goods, so the ________ elasticity of demand is ________. A) cross; positive B) income; positive C) income; negative D) cross; negative Answer: C Topic: Income Elasticity of Demand Skill: Definition Status: Old AACSB: Analytical Skills

52) The income elasticity of demand is ________ for a normal good and ________ for an inferior good. A) positive; positive B) positive; negative C) negative; positive D) negative; negative Answer: B Topic: Income Elasticity of Demand Skill: Definition Status: Old AACSB: Analytical Skills

53) To say that turnips are inferior goods means that the income elasticity A) is definitely greater than 1. B) is definitely between 0 and 1. C) is positive but could be greater than or less than (or equal to) 1. D) is negative. Answer: D Topic: Income Elasticity of Demand Skill: Definition Status: Old AACSB: Analytical Skills

54) If the income elasticity of demand for spaghetti is -1.3, then spaghetti A) is a normal good. B) is an inferior good. C) has an elastic demand. D) is income elastic. Answer: B Topic: Income Elasticity of Demand Skill: Definition Status: Old AACSB: Analytical Skills

55) If a good is inferior, its income elasticity will be A) 0. B) 1.0. C) negative. D) positive. Answer: C Topic: Income Elasticity of Demand Skill: Definition Status: Old AACSB: Analytical Skills

56) Goods whose income elasticities are negative are called A) normal goods. B) superior goods. C) inferior goods. D) complements. Answer: C Topic: Income Elasticity of Demand Skill: Definition Status: Old AACSB: Analytical Skills

57) For Product X, the income elasticity of demand is -2.56. Which of the following is therefore true? A) Product X is a necessity. B) Product X is a luxury. C) Product X is an inferior good. D) Product X is a normal good. Answer: C Topic: Income Elasticity of Demand Skill: Definition Status: Old AACSB: Analytical Skills

58) Demand is income elastic if A) a large percentage increase in income results in a small percentage increase in quantity demanded. B) a small percentage increase in income results in a large percentage increase in quantity demanded. C) an increase in income does not affect the quantity demanded. D) the good in question has close substitutes. Answer: B Topic: Income Elasticity of Demand Skill: Definition Status: Old AACSB: Analytical Skills

59) The income elasticity of demand is largest for A) food. B) clothing. C) shelter. D) luxuries. Answer: D Topic: Income Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

60) For Product X, the income elasticity of demand is 1.16. Which of the following is therefore definitely true? A) Product X is a necessity. B) Product X is income elastic. C) Product X is a substitute for some other good. D) Product X is something that mostly poor people will buy. Answer: B Topic: Income Elasticity of Demand Skill: Definition Status: Old AACSB: Analytical Skills

61) If the income elasticity for chocolate chip cookies is 1.84, then chocolate chip cookies are A) a normal good and income inelastic. B) a normal good and income elastic. C) an inferior good and income inelastic. D) an inferior good and income elastic. Answer: B Topic: Income Elasticity of Demand Skill: Definition Status: Old AACSB: Analytical Skills

62) When consumers' incomes increased 10 percent, the quantity of milk bought increased 5 percent. This result means A) the demand for milk is income elastic. B) milk is a necessity. C) milk is a luxury. D) milk is an inferior good. Answer: B Topic: Income Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

63) When consumers' incomes increased 6 percent, the quantity of wine bought increased 12 percent. This result means A) wine is a luxury. B) the demand for wine is income inelastic. C) wine is a necessity. D) wine is an inferior good. Answer: A Topic: Income Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

64) The income elasticity of demand for bicycles is +10, which implies that bicycles are A) an inferior good. B) a normal good. C) a substitute good for motorbikes. D) a complement good for motorbikes. Answer: B Topic: Income Elasticity of Demand Skill: Definition Status: Old AACSB: Analytical Skills

65) A recent report shows that sales at Target stores increased compared to the previous year. (Source: Business Wire, August 30, 2012) Incomes grew slightly between 2011 and 2012. Using that fact and the sales data given above means that Target definitely is selling goods and services that A) are normal. B) are inferior. C) have an income elasticity of zero. D) have an income elasticity of 1. Answer: A Topic: Income Elasticity of Demand Skill: Conceptual Status: New AACSB: Reflective Thinking

66) About six months ago, Pat lost the job as vice president of a local bank. Since losing the job, Pat still has the Sunday newspaper delivered every week. For Pat, the Sunday newspaper is A) income inelastic. B) price inelastic. C) an inferior good. D) a normal good because Pat still buys the paper even with a big loss of income. Answer: A Topic: Income Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

67) Because Product X has a large positive income elasticity, it is likely that the product A) has many good substitutes. B) has few good complements. C) is a necessity. D) is a luxury. Answer: D Topic: Income Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

68) Because Product X has a very small, positive income elasticity of demand, it is likely that product X is a A) luxury. B) necessity. C) product with many good substitutes. D) product with many good complements. Answer: B Topic: Income Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

69) The income elasticity of demand for food A) does not change when an individual's income changes. B) increases as an individual's income increases. C) decreases as an individual's income increases. D) is negative. Answer: C Topic: Income Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

70) An increase in Abigail's income decreases her demand for used cars. For her, used cars are A) a normal good. B) an inferior good. C) a complement to any good. D) a substitute good. Answer: B Topic: Income Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

71) If the income elasticity of demand for corn is 0.5, then as income increases A) the demand for corn will increase. B) the demand for corn will decrease. C) corn will prove to be an inferior good. D) the supply curve of corn will shift leftward. Answer: A Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

72) The greater the magnitude of the absolute value of the income elasticity of demand for a good, the more the A) demand for that good changes when income changes. B) total revenue for firms producing that good changes when income changes. C) price of the good changes when income changes. D) All of the above answers are correct. Answer: D Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

73) A 10 percent increase in income has caused a 5 percent decrease in the quantity demanded. The income elasticity is A) 0.5. B) -0.5. C) 2.0. D) -2.0. Answer: B Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

74) Deb's income has just risen from $950 per week to $1,050 per week. As a result, she decides to increase the number of movies she attends each month by 5 percent. Her demand for movies is A) represented by a vertical line. B) represented by a horizontal line. C) income elastic. D) income inelastic. Answer: D Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

75) Peter's monthly income increases from $1,500 to $1,600. As a result, he increases the number of DVDs he buys per month from 2 to 3. Peter's demand for DVDs is A) price elastic. B) price inelastic. C) income elastic. D) income inelastic. Answer: C Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

76) Paul's monthly income decreased from $2,500 to $2,300. As a result, he decreased the number of DVDs he rents per month from 5 to 4. Paul's demand for DVD rentals is A) price elastic. B) price inelastic. C) income elastic. D) income inelastic. Answer: C Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

77) Last year, Jack's income was $15,000 and he bought 50 bags of potato chips. This year his income is $18,000 and he buys 55 bags of potato chips. Therefore, Jack's A) income elasticity of demand for potato chips is 0.52. B) price elasticity of demand for potato chips is 0.52. C) income elasticity of demand for potato chips is 1.66. D) price elasticity of demand for potato chips is 1.66. Answer: A Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

78) If your annual income rose by 10 percent and you increased your purchases of shoes from 2 pairs to 3 pairs each year, then your demand for shoes is A) income inelastic and equal to 0.50. B) income elastic and equal to 1.50. C) income inelastic. D) income elastic. Answer: D Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

79) As Mary's income increases by 20 percent, her demand for tickets to National Hockey League games increases by 10 percent. Mary's demand for tickets is income ________; for Mary, hockey tickets are ________ good. A) elastic; a normal B) inelastic; a normal C) elastic; an inferior D) inelastic; an inferior Answer: B Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

80) If when income increases by 2 percent and the price does not change, the quantity of airplane travel demanded increases by 6 percent, then the income elasticity of demand of airplane travel is ________. A) 0.33 B) 0 C) negative D) 3.00 Answer: D Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

81) The income elasticity of demand for vacations is 5. If incomes increase by 3 percent next year, the quantity of vacations demanded at today's price will increase by ________ percent. A) 3 B) 5/3 C) 15 D) 5 Answer: C Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

82) Fred's income has just risen from $940 per week to $1,060 per week. As a result, he decides to purchase 9 percent more steak per week. The income elasticity of Fred's demand for steak is A) 0.75. B) 0.90. C) 1.00. D) 1.33. Answer: A Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

83) Joan's income has just risen from $940 per week to $1,060 per week. As a result, she decides to purchase 12 percent more lettuce per week. The income elasticity of Joan's demand for lettuce is A) 0.75. B) 0.90. C) 1.00. D) 1.33. Answer: C Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

84) A 10 percent increase in income increases the quantity of orange juice demanded from 19,200 to 20,800 gallons. The income elasticity of demand for orange juice is A) 0.5. B) 0.8. C) 1.0. D) 1.2. Answer: B Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

85) A 10 percent increase in income increases the quantity of apple juice demanded from 18,800 to 21,200 gallons. The income elasticity of demand for apple juice is A) 0.5. B) 0.8. C) 1.0. D) 1.2. Answer: D Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

86) In the nation of Transporta, the income elasticity of demand for used cars is -2.66. So when incomes in this nation increase by 10 percent, A) the quantity of used cars demanded will increase by 26.6 percent. B) used cars will be normal goods. C) the quantity of used cars demanded will decrease by 26.6 percent. D) the demand curve for used cars will shift rightward. Answer: C Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

87) Duke increased his spending on steak from $7 to $11 per week because of a 12 percent salary increase, so his A) income elasticity of demand for steak is 1.37. B) price elasticity of demand for steak is 1.37. C) income elasticity of demand for steak is 3.7. D) price elasticity of demand for steak is 3.7. Answer: C Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

88) Last year, after Shirley received a 14 percent pay increase, she increased the quantity of pork chops she purchased by 6 percent. Hence, her income elasticity of demand for pork chops equals A) 0.43. B) -0.43. C) 2.33. D) -2.33 Answer: A Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

89) If income increases by 2.0 percent, and quantity demanded of a good increases by 0.2 percent, the income elasticity for the good is A) 0.22. B) 0.002. C) 0.10. D) 1.00. Answer: C Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

90) The income elasticity of demand for restaurant meals is 1.61. So, A) if income increases by 16.1 percent, the quantity demanded of restaurant meals will increase by 10 percent. B) if income increases by 10 percent, the quantity demanded of restaurant meals will increase by 16.1 percent. C) restaurant meals are an income elastic normal good. D) Both answers B and C are correct. Answer: D Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

91) Last year when John graduated and received a 20 percent pay increase, the average number of restaurant meals he consumed rose from one a week to three a week. Hence his income elasticity for restaurant meals is A) 0.50. B) -0.50. C) 5.00. D) -5.00. Answer: C Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

92) If a 10 percent increase in income results in an 8 percent increase in the quantity demanded of a good, the income elasticity of demand equals ________ and the good is ________ good. A) 0.80; an inferior B) 1.2; a normal C) 0.80; a normal D) -1.2; an inferior Answer: D Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

93) The figure shows the relationship between Moira's income and the quantity of macaroni that she demands. When income is less than $350 per month, macaroni ________. A) is an inferior good B) is a normal good C) has many substitutes D) has negative income elasticity Answer: B Topic: Income Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

94) The increase in the demand for widgets, shown in the figure above, is the result of an increase in the price of McBoover devices. Therefore, A) widgets and McBoover devices are substitutes. B) widgets and McBoover devices are complements. C) widgets are a normal good. D) McBoover devices are a normal good. Answer: A Topic: Cross Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

95) The increase in the demand for widgets, shown in the figure above, is the result of a decrease in the price of McBoover devices. Therefore, A) widgets and McBoover devices are substitutes. B) widgets and McBoover devices are complements. C) widgets are a normal good. D) McBoover devices are a normal good. Answer: B Topic: Cross Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

96) The increase in the demand for widgets, shown in the figure above, is the result of an increase in the price of McBoover devices from $9 to $11. Therefore, the cross-price elasticity for these two products is A) -2.0. B) -0.5. C) 0.5. D) 2.0. Answer: D Topic: Cross Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

97) The increase in the demand for widgets, shown in the figure above, is the result of a decrease in the price of McBoover devices from $11 to $9. Therefore, the cross-price elasticity for these two products is A) -2.0. B) -0.5. C) 0.5. D) 2.0. Answer: A Topic: Cross Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

98) The increase in the demand for widgets, shown in the figure above, is the result of an increase in income. Therefore, widgets A) are a normal good. B) are an inferior good. C) are elastically demanded. D) are inelastically demanded. Answer: A Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

99) The increase in the demand for widgets, shown in the figure above, is the result of an increase in people's incomes from $28,500 per year to $31,500 per year. Therefore, the income elasticity of demand for widgets is A) 0.25. B) 0.75. C) 1.33. D) 4.00. Answer: D Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

100) As income rises, the share of income spent on food in the United States A) falls. B) remains constant at 15 percent. C) remains constant at 33 percent. D) rises. Answer: A Topic: Real-World Income Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

101) For which of the following pairs of goods is the cross elasticity of demand positive? A) tennis balls and tennis rackets B) videotapes and laundry detergent C) airline trips and textbooks D) beef and chicken Answer: D Topic: Study Guide Question, Cross Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

102) A 10 percent decrease in the price of a Pepsi decreases the demand for a Coca-Cola by 50 percent. The cross elasticity of demand between a Pepsi and Coca-Cola is A) 50. B) 10. C) 5. D) 0.20. Answer: C Topic: Study Guide Question, Cross Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

103) A fall in the price of X from $12 to $8 causes an increase in the quantity of Y demanded from 900 to 1,100 units. What is the cross elasticity of demand between X and Y? A) 0.5 B) -0.5 C) 2 D) -2 Answer: B Topic: Study Guide Question, Cross Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

104) A 10 percent decrease in income decreases the quantity demanded of pizza by 3 percent. The income elasticity of demand for pizza is A) -0.3. B) 0.3. C) 3.3. D) 10.0. Answer: B Topic: Study Guide Question, Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

105) All normal goods have A) income elasticities of demand greater than 1.0. B) price elasticities of demand greater than 1.0. C) negative price elasticities of demand. D) positive income elasticities of demand. Answer: D Topic: Study Guide Question, Income Elasticity of Demand Skill: Definition Status: Old AACSB: Analytical Skills

106) Suppose Target decided to lower the price on all shirts as part of its Back to School promotion. The cross elasticity of demand between pants and shirts is negative. Lowering the price on shirts will ________ the demand for pants because shirts and pants are ________. A) increase; substitutes B) decrease; substitutes C) increase; complements D) decrease; complements Answer: C Topic: Cross Elasticity of Demand Skill: Analytical Status: New AACSB: Analytical Skills

3 Elasticity of Supply 1) The concept of elasticity of supply measures the responsiveness of the A) quantity supplied to a change in the price. B) price to a change in the quantity supplied. C) quantity supplied to a change in the quantity demanded. D) quantity demanded to a change in the quantity supplied. Answer: A Topic: Elasticity of Supply Skill: Definition Status: Old AACSB: Analytical Skills

2) The elasticity of supply measures the sensitivity of A) supply to changes in costs. B) quantity supplied to quantity demanded. C) quantity supplied to a change in price. D) price to changes in supply. Answer: C Topic: Elasticity of Supply Skill: Definition Status: Old AACSB: Analytical Skills

3) The price elasticity of supply is calculated as the A) quantity supplied divided by the per unit cost of production. B) quantity supplied divided by the percentage change in quantity demanded. C) percentage change in quantity supplied divided by the percentage change in price. D) percentage change in price divided by the percentage change in quantity demanded. Answer: C Topic: Calculating the Elasticity of Supply Skill: Definition Status: Old AACSB: Analytical Skills

4) The demand for corn increases. As a result, the price of corn will ________, and the less elastic the supply of corn, the ________ will be the effect on the price. A) fall; smaller B) fall; greater C) rise; smaller D) rise; greater Answer: D Topic: Elasticity of Supply Skill: Conceptual Status: Old AACSB: Analytical Skills

5) On most days the price of a rose is $1 and 80 roses are purchased. On Valentine's Day the demand increases so that the price of a rose rises to $2 and 320 roses are purchased. Therefore, the price elasticity of A) demand for roses is about 1.8. B) demand for roses is about 0.55. C) supply of roses is about 1.8. D) supply of roses is about 0.55. Answer: C Topic: Calculating the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

6) Supply is elastic if A) a 1 percent change in price leads to a larger percentage change in quantity supplied. B) a 1 percent change in price leads to a smaller percentage change in quantity supplied. C) the slope of the supply curve is positive. D) the good in question is a normal good. Answer: A Topic: Calculating the Elasticity of Supply Skill: Definition Status: Old AACSB: Analytical Skills

7) If a 1 percent decrease in the price of a pound of oranges results in a smaller percentage decrease in the quantity supplied, A) demand is elastic. B) demand is inelastic. C) supply is elastic. D) supply is inelastic. Answer: D Topic: Calculating the Elasticity of Supply Skill: Definition Status: Old AACSB: Analytical Skills

8) If a 1 percent decrease in the price of a pound of squash results in a larger percentage decrease in the quantity supplied, A) demand is elastic. B) demand is inelastic. C) supply is elastic. D) supply is inelastic. Answer: C Topic: Calculating the Elasticity of Supply Skill: Definition Status: Old AACSB: Analytical Skills

9) If at a given moment, no matter what the price, producers cannot change the quantity supplied, the momentary supply A) has zero elasticity. B) has unit elasticity. C) has infinite elasticity. D) does not exist. Answer: A Topic: Calculating the Elasticity of Supply Skill: Conceptual Status: Old AACSB: Analytical Skills

10) If a rise in the price of oranges from $7 to $9 a bushel increases the quantity of bushels supplied from 4,500 to 5,500 bushels, the A) supply of oranges is elastic. B) supply of oranges is inelastic. C) demand for oranges is elastic. D) demand for oranges is inelastic. Answer: B Topic: Calculating the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

11) If the price of oil is $60 per barrel, the quantity of oil supplied is 70 million barrels per day. If the price is $40 per barrel, the quantity of oil supplied is 69 million barrels per day. This implies that the A) supply of oil is elastic. B) supply of oil is inelastic. C) demand for oil is inelastic. D) demand for oil is elastic. Answer: B Topic: Calculating the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

12) If a shift in the demand curve that raises the price of oranges from $7 to $9 a bushel increases the quantity of oranges supplied from 4,000 bushels to 6,000 bushels, the A) supply of oranges is elastic. B) supply of oranges is inelastic. C) demand for oranges is elastic. D) demand for oranges is inelastic. Answer: A Topic: Calculating the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

13) A rise in the price of cabbage from $14 to $18 per bushel increases the quantity supplied from 4,000 to 6,000 bushels. The elasticity of supply is A) 0.6. B) 0.8. C) 1.0. D) 1.6. Answer: D Topic: Calculating the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

14) If a 5 percent increase in the price results in a 9 percent increase in quantity supplied, the elasticity of supply is A) 0.30. B) 0.55. C) 1.20. D) 1.80. Answer: D Topic: Calculating the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

15) If a 5 percent increase in price results in a 3 percent increase in the quantity supplied, the elasticity of supply is A) 0.30. B) 0.60. C) 1.20. D) 1.66. Answer: B Topic: Calculating the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

16) If the elasticity of supply of TV sets is equal to 3, then a 10 percent increase in the price of a TV will A) increase the quantity supplied by 3.33 percent. B) increase the quantity supplied by 30.0 percent. C) increase the quantity supplied by 0.33 percent. D) decrease the quantity supplied by 30.0 percent. Answer: B Topic: Calculating the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

17) An 18 percent increase in the price of a small car results in a 10 percent increase in the quantity supplied. The price elasticity of supply is equal to A) 1.80. B) 0.55. C) 0.75. D) 0.40. Answer: B Topic: Calculating the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

18) The price elasticity of supply of laptop computers equals 1.5 if A) a rightward shift of the demand curve for laptops causes the quantity supplied to increase by 1.5 percent. B) a rightward shift of the demand curve for laptops causes a 1.5 percent increase in their price. C) for every 1 percent that laptop prices increase, computer makers produce another 1.5 percent laptops. D) for every $1.00 that laptops increase in price, computer makers produce another 150 laptops. Answer: C Topic: Calculating the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

19) When the price of perfume changes from $24 to $26, the quantity supplied increases from 100 jars to 150 jars. What is the elasticity of supply of perfume? A) 0.04 B) 25.0 C) 5.0 D) 0.2 Answer: C Topic: Calculating the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

20) If a 3 percent increase in the price of tennis shoes leads to a 7 percent increase in the number of tennis shoes supplied, A) the elasticity of supply equals 0.43. B) the elasticity of supply equals 2.33. C) income elasticity equals 2.33. D) supply is inelastic. Answer: B Topic: Calculating the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

21) Suppose tennis shoes cost $50 per pair and firms supply 50,000 pairs of shoes. If the price decreases to $45 and firms decide to supply 48,000, the elasticity of supply equals A) 0.0025. B) 0.04. C) 2.63. D) 0.39. Answer: D Topic: Calculating the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

22) If the elasticity of supply is 4, a 10 percent increase in the price of a good leads to a A) 40 percent increase in the quantity of supply. B) 4 percent decrease in the quantity demanded. C) 2.5 percent increase in the quantity supplied. D) 2.5 percent decrease in the quantity demanded. Answer: A Topic: Calculating the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

23) On December 10 the price of a Christmas tree is $50 and 100 trees are purchased. On December 20 the demand for Christmas trees decreases so that the price falls to $30 and 20 trees are purchased. From this set of facts, the A) demand for Christmas trees is price inelastic. B) demand for Christmas trees is price elastic. C) supply of Christmas trees is inelastic. D) supply of Christmas trees is elastic. Answer: D Topic: Calculating the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

Price (dollars per dozen) 30 50

Quantity supplied (dozens per day) 8 12

24) The table gives some data on the supply of roses in a small town. When the price rises from $15 a dozen to $25 a dozen, the elasticity of supply is ________. A) 1.25 B) 5.00 C) 0.20 D) 0.80 Answer: D Topic: Calculating the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

25) If a 5 percent change in the price of a good leads to a 10 percent change in the quantity supplied, then the supply of the good is ________ and the elasticity of supply is ________. A) inelastic; 0.5 B) inelastic; 2.0 C) elastic; 0.5 D) elastic; 2.0 Answer: D Topic: Calculating the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

26) The elasticity of supply equals ________ if the supply curve is vertical. A) 0 B) 1 C) infinity D) -1 Answer: A Topic: Inelastic and Elastic Supply Skill: Conceptual Status: Old AACSB: Analytical Skills

27) If the supply curve is vertical, then supply is A) relatively elastic. B) perfectly elastic. C) perfectly inelastic. D) relatively inelastic. Answer: C Topic: Inelastic and Elastic Supply Skill: Conceptual Status: Old AACSB: Analytical Skills

28) The elasticity of supply for paintings by Monet is A) perfectly elastic. B) perfectly inelastic. C) unit elastic. D) inelastic. Answer: B Topic: Elasticity of Supply Skill: Conceptual Status: Old AACSB: Analytical Skills

29) For baseball card collectors, Babe Ruth baseball cards from 1927 would most likely have a perfectly A) inelastic demand. B) inelastic supply. C) elastic demand. D) elastic supply. Answer: B Topic: Inelastic and Elastic Supply Skill: Conceptual Status: Revised AACSB: Analytical Skills

30) Which of the following goods has a perfectly inelastic supply? A) insulin B) Diet Pepsi C) the original portrait of "Whistler's Mother" D) compact discs by Bush Answer: C Topic: Inelastic and Elastic Supply Skill: Conceptual Status: Revised AACSB: Analytical Skills

31) If the elasticity of supply of a good is zero, then its A) supply curve is vertical. B) supply curve is horizontal. C) demand curve must be vertical. D) supply curve is positively sloped. Answer: A Topic: Elasticity of Supply Skill: Conceptual Status: Old AACSB: Analytical Skills

32) The elasticity of supply equals ________ if the supply curve is horizontal. A) 0 B) 1 C) infinity D) -1 Answer: C Topic: Inelastic and Elastic Supply Skill: Conceptual Status: Old AACSB: Analytical Skills

33) A supply curve that is horizontal reflects a supply that A) is elastic. B) is inelastic. C) is unit elastic. D) has a zero elasticity. Answer: A Topic: Elasticity of Supply Skill: Conceptual Status: Old AACSB: Analytical Skills

34) If the supply for a good is elastic, that means that when price increases, the A) supply will increase. B) quantity supplied will decrease. C) quantity supplied will increase by a smaller percentage than the price increased. D) quantity supplied will increase by a greater percentage than the price increased. Answer: D Topic: Inelastic and Elastic Supply Skill: Definition Status: Old AACSB: Analytical Skills

35) If a small percentage decrease in the price of chocolate causes a larger percentage decrease in the quantity supplied, the A) demand for chocolate is elastic. B) demand for chocolate is inelastic. C) supply of chocolate is elastic. D) supply of chocolate is inelastic. Answer: C Topic: Inelastic and Elastic Supply Skill: Conceptual Status: Old AACSB: Analytical Skills

36) Last year in the United States, the price of snowboards rose by 5 percent and the price rise resulted in a 15 percent increase in the quantity supplied. This outcome is an indication that A) the supply curve of snowboards shifted rightward. B) the supply of snowboards is price elastic. C) some firms entered into the snowboard industry. D) All of the above answers are correct. Answer: B Topic: Inelastic and Elastic Supply Skill: Definition Status: Old AACSB: Analytical Skills

37) In 2012, Canadian farmers did not suffer from drought conditions that affected the United States, but they did enjoy the higher corn prices. Canadian farmers reacted to the higher price by planting more corn. Suppose that the price of corn increased by 30 percent and the Canadian farmers increased the quantity of corn they supply by 20 percent. The supply of corn is A) perfectly inelastic. B) unit elastic. C) elastic. D) inelastic. Answer: D Topic: Inelastic and Elastic Supply Skill: Analytical Status: New AACSB: Analytical Skills

38) The supply of lettuce in the short run will be ________ than the supply in the long run and ________ than the supply today. A) more elastic; less elastic B) more elastic; more elastic C) less elastic; more elastic D) less elastic; less elastic Answer: C Topic: Inelastic and Elastic Supply Skill: Conceptual Status: Old AACSB: Analytical Skills

39) Which of the following represents a price elastic supply? A) The quantity demanded increases 18 percent as a result of a decrease in the price of 8 percent. B) The price rises by 8 percent causing the quantity demanded to fall by 10 percent. C) The quantity supplied increases by 21 percent as a result of an increase in the price of 12 percent. D) The price rises by 22 percent causing the quantity supplied to increase by 3 percent. Answer: C Topic: Inelastic and Elastic Supply Skill: Analytical Status: Old AACSB: Analytical Skills

40) When the price of milk goes up as a result of a rightward shift of the demand curve for milk, the total revenue collected by milk producers will A) increase only if milk is inelastic in supply. B) decrease only if milk is elastic in supply. C) remain constant only if milk has a unitary price elasticity of supply. D) none of the above Answer: D Topic: Inelastic and Elastic Supply Skill: Analytical Status: Old AACSB: Analytical Skills

41) If the price of milk increased by 5 percent because of an increase in the demand for milk, and the quantity of milk supplied increased by 7 percent, A) the supply curve of milk has shifted rightward. B) the price elasticity of supply of milk is greater than one. C) milk is more of a luxury than a necessity. D) milk is more of a necessity than a luxury. Answer: B Topic: Inelastic and Elastic Supply Skill: Analytical Status: Old AACSB: Analytical Skills

42) In the above figure, the price elasticity of supply at any given quantity is A) highest along S1, next highest along S2, and lowest along S3. B) highest along S3, next highest along S2, and lowest along S1. C) equal to zero on each of the three supply curves. D) equal to one on each of the three supply curves. Answer: D Topic: Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

43) Which of the following leads a good to have a high elasticity of supply? I. The good must be produced using unique resources. II. The good is produced using commonly available resources. A) I only B) II only C) I and II D) neither I nor II Answer: B Topic: Factors That Influence the Elasticity of Supply Skill: Conceptual Status: Old AACSB: Analytical Skills

44) If a good is produced using inputs for which there are no substitutes, the good's A) elasticity of supply is likely to be small. B) elasticity of supply is likely to be large. C) elasticity of demand will be small. D) elasticity of demand will be large. Answer: A Topic: Factors That Influence the Elasticity of Supply Skill: Conceptual Status: Old AACSB: Analytical Skills

45) Refining gasoline for our cars requires a very specialized resource, crude oil. As a result, the A) demand for gasoline is price elastic. B) demand for gasoline is price inelastic. C) supply of gasoline is price elastic. D) supply of gasoline is price inelastic. Answer: D Topic: Factors That Influence the Elasticity of Supply Skill: Conceptual Status: Old AACSB: Analytical Skills

46) A determinant of the price elasticity of supply is the extent to which A) consumers like the quality of the good. B) the demand for the good is relatively elastic. C) the good has many consumer substitutes. D) production of the good uses commonly available resources. Answer: D Topic: Factors That Influence the Elasticity of Supply Skill: Definition Status: Old AACSB: Analytical Skills

47) Goods and services that can be produced by using commonly available resources that could be allocated to a wide variety of alternative tasks have a supply that is A) elastic. B) inelastic. C) unit elastic. D) perfectly inelastic. Answer: A Topic: Factors That Influence the Elasticity of Supply Skill: Conceptual Status: Old AACSB: Analytical Skills

48) An important determinant of the price elasticity of supply is the extent to which A) the commodity is a luxury or a necessity. B) the demand for it is both price and income elastic. C) the product has many complements or substitutes. D) production requires the use of particularly scarce or specialized resources. Answer: D Topic: Factors That Influence the Elasticity of Supply Skill: Conceptual Status: Old AACSB: Analytical Skills

49) An important determinant of the price elasticity of supply is A) whether the good is a durable or a nondurable. B) the time period firms have to adjust to a new price. C) how well consumers like the commodity. D) the proportion of the consumer's total budget spent on the good. Answer: B Topic: Factors That Influence the Elasticity of Supply Skill: Conceptual Status: Old AACSB: Analytical Skills

50) As time passes after a change in the price, the supply of a good or service A) becomes more elastic. B) becomes less elastic. C) initially becomes more elastic and then becomes less elastic. D) initially becomes less elastic and then becomes more elastic. Answer: A Topic: Factors That Influence the Elasticity of Supply Skill: Conceptual Status: Old AACSB: Analytical Skills

51) The elasticity of the momentary supply curve for any good always equals A) zero. B) one. C) positive infinity. D) None of the above answers is correct. Answer: D Topic: Factors That Influence the Elasticity of Supply Skill: Definition Status: Old AACSB: Analytical Skills

52) Suppose that the price elasticity of supply for oil is 0.1. Then, if the price of oil rises by 20 percent, the quantity of oil supplied will increase A) by 200 percent. B) by 20 percent. C) by 2 percent. D) by 0.2 percent. Answer: C Topic: Study Guide Question, Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

53) When the price of a CD is $13 per CD, 39,000,000 CDs per year are supplied. When the price is $15 per CD, 41,000,000 CDs per year are supplied. What is the elasticity of supply for CDs? A) 2.86 B) 0.35 C) 0.14 D) 0.05 Answer: B Topic: Study Guide Question, Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

54) If the long-run supply of rice is perfectly elastic, then A) as people's incomes rise, the quantity of rice supplied decreases. B) as the price of corn falls, the quantity of rice demanded decreases. C) in the long run, a large rise in the price of rice causes no change in the quantity of rice supplied. D) in the long run, an increase in the demand for rice leaves the price of rice unchanged. Answer: D Topic: Study Guide Question, Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

55) The elasticity of supply does NOT depend on A) resource substitution possibilities. B) the fraction of income spent on the product. C) the time elapsed since the price change. D) none of the above because all of the factors listed affect the elasticity of supply. Answer: B Topic: Study Guide Question, Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

56) In 2012, Canadian farmers did not suffer from drought conditions that affected the United States, but they did enjoy the higher corn prices. Canadian farmers reacted to the higher price by planting more corn. Suppose that the price of corn increased by 30 percent and the Canadian farmers increased the quantity of corn they supply by 20 percent. The supply of corn is A) perfectly inelastic. B) unit elastic. C) elastic. D) inelastic. Answer: D Topic: Elasticity of Supply Skill: Analytical Status: New AACSB: Analytical Skills

4 News Based Questions 1) Specialty chocolate bars with a high cocoa content have been drawing a lot of attention in gourmet circles in 2008 but the price of cocoa beans has increased more than 44 percent in this time period. In response to the increase in the price of cocoa beans, Rogue Chocolatier has increased the price of their gourmet chocolate bars by 20 percent. Rogue observes the quantity of their bars sold decreased by 15 percent. Based on this news clip, what does the price elasticity of demand for gourmet chocolate bars equal? A) 0.75 B) 1.25 C) 1 D) 0.66 Answer: A Topic: Price Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

2) Specialty chocolate bars with a high cocoa content have been drawing a lot of attention in gourmet circles in 2008 but the price of cocoa beans has increased more than 44 percent in this time period. In response to the increase in the price of cocoa beans, Rogue Chocolatier has increased the price of their gourmet chocolate bars by 20 percent. Rogue observes the quantity of their bars sold decreased by 15 percent. This means the price elasticity of demand for gourmet chocolate bars is ________. A) elastic B) inelastic C) undefined D) unit elastic Answer: B Topic: Price Elasticity of Demand Skill: Analytical Status: Old AACSB: Communication

3) Specialty chocolate bars with a high cocoa content have been drawing a lot of attention in gourmet circles in 2008 but the price of cocoa beans has increased more than 44 percent in this time period. In response to the increase in the price of cocoa beans, Rogue Chocolatier has increased the price of their gourmet chocolate bars by 20 percent. Rogue notices their firm's total revenue increased after the price increase. We can determine that the demand for Rogue's bars is ________. A) inelastic B) elastic C) perfectly inelastic D) unit elastic Answer: A Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Communication

4) The cost of basics like milk, bread, potatoes and bananas has jumped in the past year, forcing families to nix luxuries, steer away from organic goods and buy more house brands. What does customer Elize Joseph mean when she said, "You can cut back on buying clothes and shoes, but you can't do that with food; you have to eat"? A) The price elasticity of demand for food is higher than for clothes. B) The price elasticity of demand for food is lower than for clothes. C) Income elasticity of demand for food is positive. D) Income elasticity of demand for food is negative. Answer: B Topic: Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Communication

5) "The Department of Agriculture came out today with its prediction for food price next year—4 to 5 percent increases on top of this year's already steep gains… Eggs, dairy products and cereals are up 10 percent... But the USDA says another big part of the American diet has seen only moderate price increases. Beef, poultry and pork will be up only 3 percent this year." Suppose the price elasticity of demand for beef is elastic. Consumption would then A) decrease by greater than 3 percent. B) increase by greater than 3 percent. C) decrease by less than 3 percent. D) increase by less than 3 percent. Answer: A Topic: Price Elasticity of Demand Skill: Analytical Status: Old AACSB: Communication

6) "The Department of Agriculture came out today with its prediction for food price next year—4 to 5 percent increases on top of this year's already steep gains… Eggs, dairy products and cereals are up 10 percent... But the USDA says another big part of the American diet has seen only moderate price increases. Beef, poultry and pork will be up only 3 percent this year." If Raul's demand for dairy products is unit elastic, his expenditure on dairy will A) not change. B) increase less than 10 percent. C) decrease by 10 percent. D) increase by 10 percent. Answer: A Topic: Total Expenditure and Elasticity Skill: Analytical Status: Old AACSB: Communication

7) "The Department of Agriculture came out today with its prediction for food price next year—4 to 5 percent increases on top of this year's already steep gains… Eggs, dairy products and cereals are up 10 percent... But the USDA says another big part of the American diet has seen only moderate price increases. Beef, poultry and pork will be up only 3 percent this year." Calculate Jennika's price elasticity of demand for pork if she decreases her consumption by 4 percent. A) 1.25 B) 1 C) 0.75 D) 0.66 Answer: A Topic: Price Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

8) "The Department of Agriculture came out today with its prediction for food price next year—4 to 5 percent increases on top of this year's already steep gains… Eggs, dairy products and cereals are up 10 percent... But the USDA says another big part of the American diet has seen only moderate price increases. Beef, poultry and pork will be up only 3 percent this year." Suppose a cattle producer increased the quantity of beef he supplies by 2 percent when the price of beef increased by 3 percent. His elasticity of supply is A) inelastic. B) elastic. C) perfectly elastic. D) perfectly inelastic. Answer: A Topic: Price Elasticity of Demand Skill: Analytical Status: Old AACSB: Communication

9) The price elasticity of demand for movies is approximately 1 and 500,000 tickets are sold per day. If the average price of a movie ticket increases by 20 percent, the number of tickets sold each day decreases to ________. A) 400,000 B) 300,000 C) 420,000 D) 475,000 Answer: A Topic: Price Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

10) Of the following items, which has the most inelastic demand? A) food B) fruit C) apples D) Gala apples Answer: A Topic: Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Communication

11) Apple, the consumer electronics giant, on Tuesday rolled out new versions of its popular iPod music player. CEO Steve Jobs also unveiled cheaper models of its Touch music player, a touchscreen-only device. An 8-gigabyte version now costs $230, down from $300. A 32-gigabyte model costs $400, down from $500. Calculate the price elasticity of demand for a 32 gigabyte Touch player if the quantity demanded increases from 850,000 to 950,000 the month after the price decrease. A) 0.5 B) 1.5 C) 1 D) 0.75 Answer: A Topic: Price Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

12) Apple, the consumer electronics giant, on Tuesday rolled out new versions of its popular iPod music player. CEO Steve Jobs also unveiled cheaper models of its Touch music player, a touchscreen-only device. An 8-gigabyte version now costs $229, down from $299. A 32-gigabyte model costs $399, down from $499. Suppose when the price of an iPod decreases by 20 percent, the number of songs downloaded on iTunes increases by 30 percent. Based on this information iTunes are A) a normal good. B) an inferior good. C) substitutes for iPods. D) complements to iPods. Answer: D Topic: Cross Elasticity of Demand Skill: Conceptual Status: Old AACSB: Communication

13) Apple, the consumer electronics giant, on Tuesday rolled out new versions of its popular iPod music player. CEO Steve Jobs also unveiled cheaper models of its Touch music player, a touchscreen-only device. An 8-gigabyte version now costs $229, down from $299. A 32-gigabyte model costs $399, down from $499. Steve Jobs decided to decrease the price of iPods in an attempt to increase total revenue from iPod sales. One of his employees, Jess, disagrees and suggests that an iPod price increase will increase total revenue. Who is correct? A) Steve is correct if demand is price elastic. B) Steve is correct if demand is price inelastic. C) Jess is correct if demand is price elastic. D) Jess is correct if demand is unit elastic. Answer: A Topic: Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Communication

14) In Brazil, the income elasticity of demand for dairy is 0.7 and for fruit and vegetables it is 0.5. These elasticities mean that if the income of Brazilians decreases, they will purchase ________ dairy and ________ fruits and vegetables. A) less; less B) more; more C) more; less D) less; more Answer: A Topic: Income Elasticity of Demand Skill: Conceptual Status: Old AACSB: Communication

15) Propecia was developed to treat mild to moderate male pattern hair loss in men. Marco has hair loss and he is willing to pay any amount of money to be able to buy this drug each month. Marco's price elasticity of demand is ________. A) perfectly inelastic B) perfectly elastic C) elastic D) inelastic Answer: A Topic: Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Communication

16) Netflix is the largest online DVD rental service offering flat rate online streaming to customers in the United States. Currently, there are approximately 8 million subscribers. Suppose Netflix increases their average flat rate by 10 percent and observe their total revenues increase. Based on this information, the A) price elasticity of demand for Netflix subscription is inelastic. B) price elasticity of demand for Netflix subscription is elastic. C) price elasticity of demand for Netflix subscription is unit elastic. D) income elasticity of demand for Netflix subscription is elastic. Answer: A Topic: Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Communication

17) Netflix is the largest online DVD rental service offering flat rate online streaming to customers in the United States. Currently, there are approximately 8 million subscribers. Suppose Netflix decreases its flat rate rental by 10 percent and an additional 1 million people subscribe. This information means that Netflix's demand is A) elastic. B) inelastic. C) unit elastic. D) perfectly elastic. Answer: A Topic: Price Elasticity of Demand Skill: Analytical Status: Old AACSB: Communication

18) Redbox rents DVDs for $1 per day via self-service kiosks located across the United States. In 2007, each kiosk averaged about 50 rentals per day. Suppose Redbox increases their daily price to $1.50. What is the price elasticity of demand if rentals decrease by 20 per day? A) 1.25 B) 1.33 C) 1 D) 0.8 Answer: A Topic: Price Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

19) Redbox rents DVDs for $1 per day via self-service kiosks located across the United States. The CFO of Redbox wants to identify how responsive consumers are to an increase or decrease in the daily price of a rental. The economic concept the CFO wants to understand is A) price elasticity of demand. B) elasticity of supply. C) changes in demand. D) changes in supply. Answer: A Topic: Price Elasticity of Demand Skill: Recognition Status: Old AACSB: Communication

20) Grape juice prices increased by 20 percent in 2007. Suppose in response grape growers did not increase or decrease their grape production. The elasticity of supply is best described as A) perfectly inelastic. B) perfectly elastic. C) inelastic. D) elastic. Answer: A Topic: Elasticity of Supply Skill: Conceptual Status: Old AACSB: Communication

21) California is the sole producer of almonds in the United States. Suppose the price for a pound of almonds has increased during the past year. It is also predicted that almond prices will remain high. Over time, we predict that the A) elasticity of supply will increase. B) elasticity of supply will decrease. C) elasticity of supply will remain constant. D) elasticity of supply will increase and then decrease. Answer: A Topic: Factors That Influence the Elasticity of Supply Skill: Conceptual Status: Old AACSB: Communication

22) Most college courses have a required textbook. Previously, textbooks were only available through the campus bookstore, but now, these texts can be purchased from online retailers, other bookstores, or students can buy an electronic version of the text. Because of this, we can predict the price elasticity of demand for textbooks from the campus bookstore is ________. A) increasing B) decreasing C) staying the same D) increasing and then decreasing Answer: A Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Communication

5 Essay Questions 1) "The price elasticity of demand is a measure of how sensitive demanders are to changes in the price of a product." Is this statement true or false? Answer: The assertion is true. All elasticities measure the sensitivity, or responsiveness, of some variable to a change in an influence. The price elasticity of demand measures how strongly demanders respond to a change in the price of the good or service. Topic: The Price Elasticity of Demand Skill: Recognition Status: Old AACSB: Reflective Thinking 131 Copyright © 2014 Pearson Education, Inc.

2) What is the price elasticity of demand and how is it measured? Answer: The price elasticity of demand is a unit-free measure of responsiveness of the quantity demanded of a good to a change in its price when all other influences on buyers plans remain the same. To calculate the price elasticity of demand we divide the percentage change in quantity demanded by the percentage change in price. Topic: The Price Elasticity of Demand Skill: Recognition Status: Old AACSB: Reflective Thinking

3) When does a decrease in supply raise the price more: When demand is elastic or when demand is inelastic? When OPEC decreases the supply of oil, the price of gasoline skyrockets. Hence is the demand for gasoline elastic or inelastic? Answer: A decrease in supply raises the price more when demand is inelastic. The skyrocketing price of gasoline indicates that the demand for gasoline is inelastic. Topic: The Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking

4) What are the three cases for the price elasticity of demand? Briefly define each. Answer: Demand can be elastic, inelastic, or unit elastic. Elastic demand occurs when the percentage change in quantity demanded exceeds the percentage change in price. Inelastic demand occurs when the percentage change in quantity demanded is less than the percentage change in price. Unit elasticity occurs when the percentage change in price equals the percentage change in demand. Topic: Inelastic and Elastic Demand Skill: Recognition Status: Old AACSB: Reflective Thinking

5) If the percentage change in quantity demanded is greater than the percentage change in price, can you determine if the demand is elastic, unit elastic, or inelastic? Explain your answer. Answer: The demand is elastic. The formula for the price elasticity of demand is the percentage change in the quantity demanded divided by the percentage change in the price. And, if the elasticity of demand exceeds one, then the demand is elastic. In this case, the percentage change in the quantity demanded is larger than the percentage change in the price, so the elasticity of demand will be greater than one. Hence the demand is elastic. Topic: Inelastic and Elastic Demand Skill: Recognition Status: Old AACSB: Reflective Thinking

6) Does the fact that the price elasticity for food is inelastic violate the law of demand? Answer: No, if the demand for a good is inelastic, when the price falls, the quantity demanded increases, but by a smaller percentage than the percentage fall in price. Thus the negative relationship between the price and the quantity demanded remains, and the demand curve still slopes downward, which is the law of demand. Topic: Inelastic and Elastic Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking

7) What does a horizontal demand curve indicate about the price elasticity of demand? Answer: If the demand curve for a good is horizontal, the demand for the good is perfectly elastic so that the price elasticity of demand is infinite. Topic: Perfectly Elastic Demand Skill: Recognition Status: Old AACSB: Reflective Thinking

8) What happens to the price elasticity of demand moving down along a downward-sloping, linear demand curve? Answer: Moving down along a downward-sloping, linear demand curve, the elasticity of demand falls in value. Demand changes from elastic to inelastic at the midpoint of the demand curve as the quantity demanded increases moving along demand curve. Topic: Elasticity Along a Straight-Line Demand Curve Skill: Recognition Status: Old AACSB: Reflective Thinking

9) "The price elasticity of demand is constant along a straight-line demand curve." Is this statement true or false? Answer: False. The price elasticity of demand decreases when moving downward along a straight-line demand curve. Topic: Elasticity Along a Straight-Line Demand Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking

10) What effect does a price increase have on producers' total revenue? Answer: The effect of a price increase in total revenue depends on the elasticity of demand. If the demand is elastic, then total revenue will decrease because the decrease in the quantity demanded will outweigh the effect of the higher price. If the demand is inelastic, then total revenue will increase. In this case, the decrease in the quantity demanded is proportionally less than the increase in price and so the higher price leads to increased total revenue. Finally, if the demand is unit elastic, then the higher price does not change the total revenue. The percentage decrease in the quantity demanded just equals the percentage increase in the price and so the two effects just offset each other. The total revenue does not change. Topic: Total Revenue and Elasticity Skill: Recognition Status: Old AACSB: Analytical Skills 133 Copyright © 2014 Pearson Education, Inc.

11) Explain the total revenue test. Answer: The total revenue test estimates whether demand for the good is elastic, unit elastic or inelastic based on what happens to total revenue when the price of a good changes. If price and total revenue move in opposite directions, demand is elastic. If price and revenue move in the same direction, demand is inelastic. If a price change does not change total revenue, demand is unit elastic. Topic: Total Revenue and Elasticity Skill: Recognition Status: Old AACSB: Reflective Thinking

12) A local pizzeria charges $10 for a pizza. The owner of the pizzeria wants to increase the company's total revenue. A recent market research shows that the price elasticity of demand for his pizza is about 1.5. Should the pizzeria lower or raise the price? Explain your answer. Answer: The pizzeria should lower the price. Since the demand is price elastic, the percentage decrease in price will be smaller than the percentage increase in the quantity of pizza demanded caused by this price decrease. Therefore, the total revenue will increase. Topic: Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

13) If a decrease in price increases total revenue, what can you determine about the elasticity of demand for the good? Answer: If a decrease in price increases total revenue, the demand for the good is elastic, that is, the elasticity of demand exceeds 1.00. Topic: Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Reflective Thinking

14) The demand for oil is inelastic. So, does an increase in the price of oil mean an increase in total revenue or a decrease in total revenue for oil producers? Answer: Because the demand is inelastic, an increase in price increases the total revenue of the oil producers. Topic: Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Reflective Thinking

15) If the owner of a local movie theater wanted to increase the theater's total revenue from movie admissions, what should the owner do with ticket prices? Answer: If moviegoers' demand is elastic, the owner should lower prices. If the demand is inelastic, the owner should raise prices. If the demand is unit elastic, price changes have no effect on total revenue. Topic: Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Reflective Thinking

16) If a college wanted to increase its revenues from tuition payments, should it increase the tuition of day and evening students alike? Answer: If the demand from each class of students is inelastic, then a tuition increase for each will increase the school's revenue. However, if either class had an elastic demand, then a tuition decrease would be needed to increase revenue. Topic: Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Reflective Thinking

17) Can electric utility companies always raise their total revenue by raising their rates? Answer: No. As electric companies continue to raise rates, customers move up along their demand curves for electricity, obeying the law of demand. As they do, they eventually enter an elastic portion of their demand curves, along which total revenue will decrease when rates increase further. Topic: Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Reflective Thinking

18) You are the brand manager of Crest toothpaste and you observe that when you increase the price of Crest, your total revenue increases. How is that possible? Answer: The demand for Crest toothpaste must be inelastic. If the demand is inelastic, the percentage increase in price is greater than the percentage decrease in quantity demanded, so the total revenue increases. Topic: Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Reflective Thinking

19) What factors determine the magnitude of the price elasticity of demand? Answer: There factors determine the magnitude of the elasticity of demand: the closeness of substitutes, the time elapsed since a price change, and the proportion of income spent on the good. The more substitutes for a good, the more elastic its demand. For instance, luxuries have more substitutes than necessities, and so the elasticity of demand for luxuries exceeds that for necessities; and, narrowly defined goods have more substitutes than broadly defined goods, and so the elasticity of demand for narrowly defined goods exceeds that for broadly defined goods. The more time that has elapsed since a price change, the more substitutes consumers can find, so the elasticity of demand is larger the more time passes. Finally, the larger the fraction of consumers' income spent on a good, the larger is its elasticity of demand. Topic: Factors That Influence the Price Elasticity of Demand Skill: Recognition Status: Old AACSB: Reflective Thinking

20) "The fewer the number of substitutes for a good, the more elastic the demand for that good." Is the previous statement true or false? Answer: The statement is false. The greater the number of substitutes, the more elastic the demand for that product. Conversely, the fewer the number of substitutes, the less elastic (the more inelastic) the demand for that product. Topic: Factors That Influence the Price Elasticity of Demand Skill: Recognition Status: Old AACSB: Reflective Thinking

21) Explain why the number of substitutes influences the price elasticity of demand. Answer: The price elasticity of demand is a measure of how responsive the quantity demanded is to a change in price. If a good has many substitutes, it is easy to switch away from it when its price rises. In this case, a rise in price substantially decreases the quantity demanded. Similarly, when the price falls, consumers can switch into the good and away from many other (substitute) products. So a fall in price substantially increases the quantity demanded. Because changes in price have major effects on the quantity demanded, the demand is elastic. Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking

22) Which demand is more price elastic: The demand for all personal computers or the demand for Dell computers? Explain your answer. Answer: The demand for Dell computers is more elastic than the demand for all personal computers. Dell computers have very close substitutes (Gateway or Hewlett Packard computers, for example), but it is difficult to find a good substitute for personal computers as a group. Plus, anything that substitutes for personal computers also substitutes for Dell computers. So Dell computers have more very close substitutes than do personal computers as a group. Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking

23) Water is considered a necessity. So, is the demand for water elastic or inelastic? Answer: The demand for necessities is inelastic, so the demand for water is inelastic. Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking

24) Studies have shown that the price elasticity of demand for necessities, such as food, are higher in developing countries and lower in developed countries. What is the reason for this difference in elasticity? Answer: One of the determinants of elasticity is the proportion of income spent on a good or service. The higher the proportion of income spent on a good, the larger the price elasticity of demand for that good. People in developing countries have low incomes and therefore spend a large part of it on food. For example, in Tanzania 62 percent of income is spent on food. On the other hand, in United States only 12 percent of income is spent on food. The price elasticity of demand for food therefore will be larger in developing countries as compared to developed countries. Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking

25) What kind of elasticity is relevant when you are trying to figure out how a price cut by the burger shop next door will affect the demand for your pizza? Explain. Answer: The cross elasticity of demand is the relevant elasticity. It is a measure of the responsiveness of the demand for a good to a change in the price of a related good. In the case in question, the required elasticity is the cross elasticity of demand for pizza with respect to the price of a burger. Topic: Cross Elasticity of Demand Skill: Recognition Status: Old AACSB: Reflective Thinking

26) The price elasticity of demand is always positive, as is the price elasticity of supply. Is the cross elasticity of demand always positive? Explain your answer. Answer: No, the cross elasticity of demand is not always positive. The cross elasticity of demand is positive for goods that are substitutes and negative for goods that are complements. Hence the sign of the cross elasticity of demand indicates whether the goods are substitutes or complements. Topic: Cross Elasticity of Demand Skill: Recognition Status: Old AACSB: Reflective Thinking

27) Explain why the cross elasticity of demand for substitute goods is positive and the cross elasticity of demand for complements is negative. Answer: The equation for the cross elasticity of demand is the percentage change in quantity demanded of product A divided by the percentage change in price of another product, B. Consider the case in which A and B are substitutes. In this case, when the price of B falls, the quantity of A demanded decreases and when the price of B rises, the quantity of A demanded increases. Because the quantity demanded of product A is in the numerator, then the decrease in the quantity of A demanded when the price of the other product falls means, that the cross elasticity will be positive. (There is a negative number in the numerator and also a negative number in the denominator, so the fraction, the cross elasticity, is positive.) For a price increase, there are positive numbers in both the numerator and denominator, so again the fraction is positive. In either case, the result will be a positive number, that is, the cross elasticity of demand is positive. Next, consider the case in which A and B are complements. In this case, an increase in the price of B decreases the quantity demanded of A and a decrease in the price of B increases the quantity demanded of A. Here, the change in quantity in the numerator always has the opposite sign from the change in the price in the denominator, so the resulting cross elasticity of demand will be negative. Topic: Cross Elasticity of Demand Skill: Recognition Status: Old AACSB: Analytical Skills

28) If cable TV subscriptions and movie rentals are substitutes for each other, what is the effect in each of these markets of an increase in wages for people who work for the cable TV company? Use your analysis to determine the sign of the cross elasticity of demand between the quantity of movie rentals and the price of cable TV. Answer: The supply curve of cable TV shifts leftward because wages are a cost of production, so the price of cable TV rises. Cable TV subscribers decrease the quantity of cable TV they demand (they move leftward along their demand curve for cable TV). Cable TV subscribers increase their demand for movie rentals (the demand curve for movie rentals shifts rightward) so that the equilibrium price and quantity of movie rentals both increase. Hence, when the price of cable TV goes up then the quantity of movie rentals increases, so their cross elasticity of demand is positive. Topic: Cross Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

29) "The number of substitutes available affects the price elasticity of demand for a good. So one way to know if apples and oranges are substitutes for each other is to look at the price elasticity of demand for each." Comment on this assertion. Answer: Their separate elasticities do not indicate whether apples and oranges are substitutes for each other. If apples and oranges are not substitutes but each had many other substitutes, then their separate price elasticities will be high. To conclude that apples and oranges are substitutes for each other, the cross elasticity of demand between them must be positive. Topic: Cross Elasticity of Demand Skill: Analytical Status: Old AACSB: Reflective Thinking

30) How are the cross elasticity of demand and income elasticity of demand similar and how are they different from the price elasticity of demand? Answer: The cross and income elasticities are similar to the price elasticity of demand because all examine how strongly demanders respond to a change in a relevant factor. The price elasticity of demand examines how strongly demanders respond to a change in the price of the product. The cross elasticity of demand studies how strongly demanders respond to a change in the price of a related product. And the income elasticity of demand examines how strongly demanders respond to a change in income. The formulas for all three elasticities also are similar. All three use percentage changes and all three divide the percentage change in the quantity demanded of the good by the percentage change in the relevant factor. The elasticities also differ. For instance, as outlined above, all three concentrate on a different factor: the good's price (for the price elasticity of demand); the price of a related good (for the cross elasticity of demand); and income (for the income elasticity of demand.) The price elasticity of demand is always positive (because we use the magnitudes of the percentage changes or, equivalently, we take the absolute value of the percentage changes) whereas the cross and income elasticities of demand can be either positive or negative. Topic: Income and Cross Elasticities of Demand Skill: Recognition Status: Old AACSB: Reflective Thinking

31) During a recession when people's incomes drop, grocery chains experience much smaller declines in sales than do upscale department stores. Explain this phenomenon using the concept of elasticity. Answer: During a recession, people's income decreases leading to a decrease in the quantity of normal goods they buy. The demand for necessities, however, is less income elastic, that is, less responsive to a change in income, than the demand for luxuries. So grocery stores, which sell mainly necessities, lose fewer sales than do upscale department stores, which sell luxury items. Topic: Income Elasticity of Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking

32) Joe's monthly income increases from $1,000 to $2,000. As a result, he decreases the number of his fast food meals from 20 to 5 per month. To Joe, are fast-food meals a normal or an inferior good? What kind of elasticity can tell the answer? Explain. Answer: Fast-food meals are an inferior good to Joe because his income elasticity of demand for fast-food meals is negative: as Joe's income increases, the quantity of fast-food meals he demands decreases. Topic: Income Elasticity of Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking

33) The income elasticity of demand for store brands of soda (that is, non-name brands) is negative. What does this fact indicate about consumers' perceptions about the store brands? Answer: The negative income elasticity indicates that the store brands of soda are considered by many consumers to be an inferior good. Hence as income increases, consumption of these sodas decreases as consumers opt for name sodas, such as Pepsi and Coke. Topic: Income Elasticity of Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking

34) What is the price elasticity of supply? List and briefly define three cases of the price elasticity of supply. Answer: The price elasticity of supply measures how responsive quantity supplied is to a change in the price of the good. Supply can be price elastic, if the percentage change in the quantity supplied exceeds the percentage change in the price; price inelastic, if the percentage change in the quantity supplied is less than the percentage change in the price; or unit elastic, if the percentage change in the quantity supplied equals the percentage change in the price. Topic: Elasticity of Supply Skill: Recognition Status: Old AACSB: Reflective Thinking

35) Explain why the availability of resources affects the elasticity of supply. Answer: A good that can be produced using commonly available resources has costs that increase only a little when its production increases. Its supply will be more elastic. If, however, the production of a good requires very specialized resources, an increase in production will be very costly. Its supply will be more inelastic. Topic: Factors That Influence the Elasticity of Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking

36) If addiction makes cigarettes such a necessity, is it correct to think that cigarettes are perfectly inelastic in both supply and demand. Answer: Cigarettes might be perfectly inelastic in demand over a small range of prices. However, at high enough prices there is some decrease in the quantity demanded. Some consumers would quit, others would cut down the quantity they smoke each day, and more kids would find it too costly to get started. On the supply side, a higher price will lead to more tobacco being planted, so that as time passes the quantity supplied would increase. So, as time passes the supply of tobacco is not perfectly inelastic. Topic: Inelastic and Elastic Supply Skill: Analytical Status: Old AACSB: Reflective Thinking

37) Is there any set of relationships between price elasticity of supply and total revenue similar to the relationships between price elasticity of demand and total revenue? Answer: No. When the price increases along an upward sloping supply curve, total revenue will increase whether supply is elastic or inelastic. When price decreases along an upward sloping supply curve, total revenue will decrease whether supply is elastic or inelastic. Topic: Elasticity of Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking

6 Numeric and Graphing Questions 1) Suppose the price of flour increases from $0.80 to $1.00 a pound and the quantity demanded decreases from 100 pounds to 95 pounds. Using the midpoint method, what is the price elasticity of demand for flour? Is the demand for flour elastic or inelastic? Answer: The price elasticity of demand is 0.23. (The price elasticity is calculated from [(100 pounds - 95 pounds) ÷ 97.5 pounds ÷ [($0.80 - $1.00) ÷ $0.90] = 0.23.) Because the elasticity is less than one, the demand is inelastic. Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

2) If the price of suntan lotion increases from $6 to $8 per bottle and quantity demanded decreases from 900,000 bottles to 845,000 bottles, using the midpoint method, what is the price elasticity of demand for suntan lotion? Answer: The price elasticity of demand = (percentage change in the quantity demanded) ÷ (percentage change in the price). Use the midpoint method to calculate the percentages. Thus the percentage change in the quantity demanded = (900,000 - 845,000) ÷ (872,500) = 6.3 percent and the percentage change in the price is ($8 - $6) ÷ ($7) = 28.6 percent. Therefore the elasticity of demand equals (6.3 percent) ÷ (28.6 percent) = 0.22. Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

3) When the price of a movie ticket falls from $14 to $10, the quantity of tickets demanded increases from 500 to 700 a day. What is the price elasticity of demand for movie tickets? (Use the midpoint method.) Answer: The price elasticity of demand = (percentage change in the quantity demanded) ÷ (percentage change in the price). Using the midpoint method to calculate the percentages, the percentage change in the quantity demanded = (700 - 500) ÷ (600) × 100 = 33.3 percent and the percentage change in the price is ($10 - $14) ÷ ($12) = -33.3 percent. We ignore the negative sign so that the price elasticity of demand equals (33.3 percent) ÷ (33.3 percent), or 1.00. Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

4) If the price of a magazine increases from $5 to $7 and the quantity demanded of the magazines decreases from 10 million per month to 8 million per month, using the midpoint method, what is the price elasticity of demand? Show your work. Is the demand elastic, inelastic, or unit elastic? Answer: The price elasticity of demand = (percentage change in the quantity demanded) ÷ (percentage change in the price). Use the midpoint method to calculate the percentages. So the percentage change in the quantity demanded is (10 million - 8 million) ÷ (9 million) = 22 percent and the percentage change in the price is ($7 - $5) ÷ ($6) = 33 percent. Therefore the elasticity of demand equals (22 percent) ÷ (33 percent) = 0.67. Demand is inelastic because the price elasticity of demand is less than 1. Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

5) Suppose the price elasticity of demand for bouquets of flowers is 4.0. You are charging $8 per bouquet. If you want to increase the quantity of bouquets you sell by 20 percent, what price should you charge? Answer: The price elasticity of demand = (percentage change in the quantity demanded) ÷ (percentage change in price). Using the numbers in the problem gives 4.0 = (20 percent) ÷ (percentage change in price), where 20 percent is the desired increase in the quantity of bouquets demanded. Therefore, rearranging the formula shows that (percentage change in price) = (20 percent) ÷ 4.0 = 5 percent. In order to increase the quantity demanded, the price needs to be decreased, so the price needs to be decreased by 5 percent. Next, 5 percent of $8 is ($8) × (5 percent) = 40¢. Thus the price needs to be decreased to $7.60 per bouquet. Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

6) The price elasticity of demand for adults for cigarettes is 0.4. If government wants to reduce smoking among adults by 15 percent, by what percentage should it raise the price of cigarettes? Teenagers have a higher price elasticity of demand for cigarettes than do adults. Suppose the price elasticity of teenagers' demand for cigarettes is 0.8. If the government imposes a tax on cigarettes that raises the price to reduce overall smoking by 15 percent, by what percentage will the government reduce teenage smoking? Answer: The government should raise the price of cigarettes by 37.5 percent. The price elasticity of demand = (percentage change in the quantity demanded) ÷ (percentage change in the price). So for the given elasticity, 0.4, and the desired percentage change in quantity, 15 percent, the formula shows that 0.4 = (15 percent) ÷ (percentage change in price). Solving for the percentage change in price gives (percentage change in price) = (15 percent) ÷ (0.4), which equals 37.5 percent. For teenagers, given their elasticity of demand for cigarettes, 0.8, and the price increase, 37.5 percent, the percentage change in the quantity demand equals (37.5 percent) × (0.8), which is 30.0 percent. So a 37.5 percent price hike in cigarettes will decrease the quantity of cigarettes demanded by teenagers by 30 percent. Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

A B C D E

Price (dollars) 100 80 60 40 20

Quantity demanded (units per week) 40 60 80 100 120

7) The table above gives the demand schedule for a good. Using the midpoint method, find the price elasticity of demand between points A and B, between B and C, between C and D, and between D and E. Answer: The price elasticity of demand between points A and B is 1.80. Between points B and C, the elasticity of demand is 1.00. Between points C and D, the elasticity of demand is 0.56. And, between points D and E, the elasticity of demand is 0.27. Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

8) The figure above shows the demand curve for pizza. Using the midpoint method and moving from point A to point B, calculate the a) percentage change in price. b) percentage change in quantity demanded. c) price elasticity of demand. Answer: a) Between points A and B, the price falls 40 percent. b) Between points A and B, the quantity increases 10 percent. c) The price elasticity of demand is 0.25. Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills 143 Copyright © 2014 Pearson Education, Inc.

9) In the figure above, at which point (a, b, or c) along the linear demand curve illustrated would demand be a) most elastic? b) most inelastic? Answer: a) The demand would be most elastic at point a. b) The demand would be most inelastic at point c. Topic: Elasticity Along a Straight-Line Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

A B C D E

Price (dollars) 100 80 60 40 20

Quantity demanded (units per week) 40 60 80 100 120

10) The table above gives the demand schedule for a good. What is the total revenue at point A? At point B? At point C? At point D? At point E? Answer: The total revenue is the price times the quantity demanded. Hence at point A, the total revenue is $4,000. At point B it is $4,800. At point C it is $4,800. At point D it is $4,000. And at point E it is $2,400. Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

Price (dollars per admission) 10 8 6 4 2

Quantity demanded (thousands of visits per week) 100 200 300 400 200

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

Price (dollars) 1.00 1.25 1.50 1.75

Total revenue (dollars) 110 125 125 100

12) Steve sells hotdogs from a vending cart downtown. The table above shows his total revenue per day at four different prices. Between which two prices is the demand for hotdogs a) elastic? b) unit elastic? c) inelastic? Answer: a) Steve's demand is elastic between $1.50 and $1.75. In this range, when Steve raises his price from $1.50 to $1.75 per hot dog, his total revenue falls, which means that the demand is elastic. b) Steve's demand is unit elastic between $1.25 and $1.50. In this range, when Steve raises his price from $1.25 to $1.50 per hot dog, his total revenue does not change, which means that the demand is unit elastic. c) Steve's demand is inelastic between $1.00 and $1.25. In this range, when Steve raises his price from $1.00 to $1.25 per hot dog, his total revenue rises, which means that the demand is inelastic. Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

13) Suppose bad weather decreases the wheat harvest by 12 percent. If the price elasticity of demand for wheat is 0.6, how would the crop failure affect the price of wheat? Would the crop failure benefit or harm wheat farmers? Answer: When the price elasticity of demand is 0.6, a 12 percent decrease in quantity brings about a 20 percent increase in the price. Wheat farmers' total revenue increases because the demand is inelastic. So, taken as a group, wheat farmers' total revenue increases. However, the benefit is distributed unequally. Those farmers whose crop was destroyed because of the bad weather are harmed, whereas those farmers whose crop was spared the bad weather benefited. Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

14) When the price of Ford pickup trucks rises from $18,000 to $19,000, the quantity of Chevy trucks demanded increases from 112,000 to 144,000. What is the cross elasticity of demand between Ford and Chevy trucks? Answer: In this case, the cross elasticity of demand = (percentage change in the quantity of Chevy trucks demanded) ÷ (percentage change in the price of a Ford truck). Use the midpoint method to calculate the percentages. Thus the percentage change in the quantity of Chevy trucks demanded = (144,000 - 112,000) ÷ (128,000) = 25 percent and the percentage change in the price of a Ford truck is ($19,000 - $18,000) ÷ ($18,500) = 5.4 percent. The cross elasticity of demand equals (25 percent) ÷ (5.4 percent) = 4.625. Topic: Cross Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

15) When the price of bananas rises 2 percent, the quantity demanded of peanut butter falls 4 percent. a) What is the cross elasticity of demand between these two goods? b) How are these goods related? c) If the price of bananas rises, how will that affect the demand curve for peanut butter? Answer: a) The cross elasticity of demand equals -2. b) Because the cross elasticity of demand is negative, the cross elasticity indicates that the two goods are complements. c) If the price of bananas rises, the demand for peanut butter decreases and the demand curve for peanut butter shifts leftward. Topic: Cross Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

16) Consider two goods: peanut butter and jelly. If the price of jelly increases from $2 a jar to $3 per jar and the quantity demanded of peanut butter decreases from 50 jars to 45 jars, what is the cross elasticity of demand? Are the goods substitutes or complements? Answer: The cross elasticity of demand equals -0.275. The value is negative so the goods are complements. Topic: Cross Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

17) A 10 percent increase in income brings about a 15 percent decrease in the demand for a good. What is the income elasticity of demand and is the good a normal good or an inferior good? Answer: The income elasticity of demand is -1.5. The good is an inferior good. Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

18) If income increases from $50,000 to $60,000 while the demand for a good increases from 100 units to 125 units, what is the income elasticity of demand? Is the good a normal good or an inferior good? Answer: The income elasticity equals 1.22. Because the income elasticity of demand is positive, the good is a normal good. Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

19) The income elasticity of demand for movies in the United States is 3.41. If people's incomes decrease by 1 percent, what is the decrease in the quantity of movies demanded? Answer: The income elasticity of demand = (percentage change in quantity demanded) ÷ (percentage change in income). Using the numbers in the problem gives 3.41 = (percentage change in quantity demanded) ÷ (1 percent). Rearranging the formula shows (percentage change in quantity demanded) = (1 percent) × 3.41 = 3.41 percent. Therefore the quantity of movies demanded decreases by 3.41 percent. Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

20) Jenny's weekly income increases from $500 to $650. As a result, she goes out for dinner one day a week instead of one day every other week. What is Jenny's income elasticity of demand for restaurant dinners? Answer: The income elasticity of demand = (percentage change in the quantity demanded) ÷ (percentage change in income). Using the midpoint method to calculate the percentages, the percentage change in the quantity of meals demanded = (1.0 - 0.5) ÷ (0.75) × 100 = 66.67 percent and the percentage change in income ($650 - $500) ÷ ($575) × 100 = 26.1 percent. Therefore the income elasticity of demand equals (66.67 percent) ÷ (26.1 percent) = 2.56. Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

Income (dollars) 18,000 22,000

Quantity demanded (pounds per year) 60 140

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

22) If the price increases by 20 percent and the quantity supplied increases by 40 percent, what does the elasticity of supply equal? Answer: The price elasticity of supply = (percentage change in the quantity supplied) ÷ (percentage change in price) = (40 percent) ÷ (20 percent) = 2.00. Topic: Calculating the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

23) Suppose the quantity supplied of computers increases from 2 million to 4 million units as the price of a computer increases from $600 to $700. What does the price elasticity of supply equal? Answer: The price elasticity of supply = (percentage change in the quantity supplied) ÷ (percentage change in the price). Use the midpoint method to calculate the percentages. Thus the percentage change in the quantity supplied = (4,000,000 - 2,000,000) ÷ (3,000,000) = 66.7 percent and the percentage change in the price is ($700 - $600) ÷ ($650) = 15.4 percent. Therefore the elasticity of supply equals (66.7 percent) ÷ (15.4 percent) = 4.33. Topic: Calculating the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

24) When the price of oil is $80 per barrel, the quantity of oil supplied is 74 million barrels per day. When the price of oil is $60 per barrel, the quantity of oil supplied is 71 million barrels per day. What is the elasticity of supply of oil? (Use the midpoint method.) Answer: The price elasticity of supply = (percentage change in the quantity supplied) ÷ (percentage change in the price). Using the midpoint method to calculate the percentages, the percentage change in the quantity supplied = (71 million - 74 million) ÷ (72.5 million) × 100 = -4.14 percent and the percentage change in the price is ($60 - $80) ÷ ($70) × 100 = -28.57 percent. Therefore the elasticity of supply equals (4.14 percent) ÷ (-28.57 percent) = 0.145. Topic: Calculating the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

A B C D E

Price (dollars) 100 80 60 40 20

Quantity demanded (units per week) 120 100 80 60 40

25) The table above gives the supply schedule for a product. Using the midpoint method, find the price elasticity of supply between points A and B, between B and C, between C and D, and between D and E. Answer: Between A and B, the elasticity of supply is 0.82. Between B and C, the elasticity of supply is 0.78. Between C and D, the elasticity of supply is 0.71. Between D and E, the elasticity of supply is 0.60. Topic: Calculating the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

26) June makes holiday wreaths and sells them during the holiday season. The figure above shows her supply curve of wreaths per week. Use the midpoint method in this problem. a) Calculate the percentage change in quantity between points A and B. b) Calculate the percentage change in price between points A and B. c) Calculate the price elasticity of supply between points A and B. Answer: a) The percentage change in quantity is 20 percent. b) The percentage change in price is 20 percent. c) The price elasticity of supply is 1.0. Topic: Calculating the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

7 True or False 1) The price elasticity of demand equals the slope of the demand curve. Answer: FALSE Topic: The Price Elasticity of Demand Skill: Recognition Status: Old AACSB: Reflective Thinking

2) Price elasticity of demand is a units-free measure. Answer: TRUE Topic: Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking

3) When we calculate the price elasticity of demand, we use percentages of the average price and the average quantity in order to get the same value for the elasticity regardless of whether the price falls or rises. Answer: TRUE Topic: Calculating Elasticity Skill: Conceptual Status: Old AACSB: Reflective Thinking

4) If the quantity demanded of a good decreases by 10 percent when the price of the good increases by 5 percent, the elasticity of demand is -2.00. Answer: FALSE Topic: Calculating Elasticity Skill: Analytical Status: Old AACSB: Reflective Thinking

5) If the demand for cigarettes decreases after the U.S. Surgeon General publicizes five new diseases associated with smoking, this is conclusive evidence that the demand for cigarettes is elastic. Answer: FALSE Topic: Inelastic and Elastic Demand Skill: Analytical Status: Old AACSB: Reflective Thinking

6) If the demand for a good is perfectly elastic, then the demand curve is horizontal. Answer: TRUE Topic: Inelastic and Elastic Demand Skill: Analytical Status: Old AACSB: Reflective Thinking

7) The elasticity of demand is constant along a downward sloping straight-line demand curve. Answer: FALSE Topic: Elasticity Along a Straight-Line Demand Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking

8) If the demand for KFC chicken is price elastic, a fall in the price of KFC chicken will raise the total revenue. Answer: TRUE Topic: Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Reflective Thinking

9) If the demand is unit elastic, a price cut will leave the quantity demanded unchanged. Answer: FALSE Topic: Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Reflective Thinking

10) If the demand for KFC chicken is price inelastic, a fall in the price of KFC chicken will raise the total revenue. Answer: FALSE Topic: Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Reflective Thinking

11) If Taco Bell determines that the demand for its food is elastic, Taco Bell should raise its price to increase its total revenue. Answer: FALSE Topic: Total Revenue and Elasticity Skill: Conceptual Status: Old AACSB: Reflective Thinking

12) If a hot dog vendor on a street corner experiences an increase in total revenue after lowering the price of a hot dog, then the demand for the hot dogs must be elastic. Answer: TRUE Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Reflective Thinking

13) The larger the portion of a person's total budget spent on a good, the more inelastic the demand for the good. Answer: FALSE Topic: Factors That Influence the Price Elasticity of Demand Skill: Analytical Status: Old AACSB: Reflective Thinking

14) A necessity (such as food and shelter) generally has an inelastic demand. Answer: TRUE Topic: Factors That Influence the Price Elasticity of Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking

15) If the price of a pumpkin rises and consumers' total expenditure on pumpkins increases, then the demand for pumpkins is inelastic. Answer: TRUE Topic: Total Revenue and Elasticity Skill: Analytical Status: Old AACSB: Reflective Thinking

16) The cross elasticity of demand for substitutes is always positive. Answer: TRUE Topic: Cross Elasticity of Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking

17) If the cross elasticity of demand between Jeep Cherokees and Chevy Lumina Vans is 1.55, then the two vehicles are not substitutes in the eyes of car buyers. Answer: FALSE Topic: Cross Elasticity of Demand Skill: Analytical Status: Old AACSB: Reflective Thinking

18) For inferior goods, the income elasticity of demand is negative. Answer: TRUE Topic: Income Elasticity of Demand Skill: Recognition Status: Old AACSB: Reflective Thinking

19) An inferior good is a good whose income elasticity of demand is less than 0. Answer: TRUE Topic: Income Elasticity of Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking

20) Studies show that smoking cigars is inversely related to income. Thus cigars are an inferior good. Answer: TRUE Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Reflective Thinking

21) If the demand for farm products is income elastic, that would mean that farm products were a necessity. Answer: FALSE Topic: Income Elasticity of Demand Skill: Analytical Status: Old AACSB: Reflective Thinking 154 Copyright © 2014 Pearson Education, Inc.

22) Damage from floods and hurricanes which destroy a large portion of this year's crop of oranges will definitely make oranges more price inelastic in supply. Answer: FALSE Topic: Elasticity of Supply Skill: Analytical Status: Old AACSB: Reflective Thinking

23) For baseball memorabilia fans, the baseball with which Hank Aaron hit his 735th career home run is perfectly inelastic in supply and in demand. Answer: FALSE Topic: Inelastic and Elastic Supply Skill: Recognition Status: Old AACSB: Reflective Thinking

24) Fantastic growing conditions that produce a bumper crop of oranges on each tree this year will definitely make the short run supply of oranges more price elastic. Answer: FALSE Topic: Inelastic and Elastic Supply Skill: Analytical Status: Old AACSB: Reflective Thinking

25) Goods or services that can be produced only by using unique or rare productive resources tend to have a low elasticity of supply. Answer: TRUE Topic: Inelastic and Elastic Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking

8 Extended Problems Price (dollars per ride) 3 4 5 6 7

Quantity demanded (rides per month) 160 120 80 40 0

1) The number of taxicabs in Motorville and the taxicab fares are regulated. The fare currently charged is $5 a ride. Motorville taxicab drivers want to obtain government's permission to raise the fare to increase their revenues and ask you to be their economic adviser. After studying the market, you come up with the following demand schedule for taxicab rides: a) Calculate the price elasticity of demand for taxicab rides as the fare rises from $5 to $6. (Use the midpoint method in your calculations.) Is the demand price elastic or inelastic for this fare rise? b) What happens to the taxicab drivers' total revenue if the fare rises from $5 to $6? How can you use your answers in part a to answer this question? Should the drivers try to obtain permission to raise the fare? c) Calculate the price elasticity of demand for taxicab rides as the fare falls from $5 to $4. (Use the midpoint method in your calculations.) Is the demand price elastic or inelastic for this fare decrease? d) What happens to the taxicab drivers' total revenue if the fare falls from $5 to $4? How can you use your answers in part c to answer this question? Should the drivers try to obtain permission to lower the fare? e) What fare will maximize the taxicab drivers' total revenue? Explain. Answer: a) When the fare rises from $5 to $6, the number of rides decreases from 80 to 40. The percentage change in the quantity demanded is the change in the number of rides, 40, divided by the average number of rides, 60, multiplied by 100 or (40/60) × 100, which is 66.7 percent. The percentage change in the price is the change in the price, $1, divided by the average price, $5.50, multiplied by 100, or ($1/$5.50) × 100, which is 18.2 percent. So the price elasticity of demand is 66.7%/18.2%, which equals 3.67. The demand is elastic because the elasticity, 3.67, exceeds 1. b) A direct calculation shows that the total revenue decreases from $400 ($5 × 80) to $240 ($6 × 40). In part a, we calculated that the demand is elastic. When the demand is elastic, the decrease in the number of rides decreases the total revenue by more than the rise in fare increases it and so, on net, total revenue falls. Therefore the drivers should not try to raise the fare. c) When the fare falls from $5 to $4, the number of rides increases from 80 to 120. The percentage change in the quantity demanded is the change in the number of rides, 40, divided by the average number of rides, 100, multiplied by 100 or (40/100) × 100, which is 40.0 percent. The percentage change in the price is the change in the price, $1, divided by the average price, $4.50, multiplied by 100, or ($1/$4.50) × 100, which is 22.2 percent. So the price elasticity of demand is 40.0%/22.2%, which equals 1.80. The demand is elastic because the elasticity, 1.80, exceeds 1. d) Once again a direct calculation show that in this case the total revenue increases from $400 ($5 × 80) to $480 ($4 × 120). In part c, we calculated that the demand is elastic. When the demand is elastic, the increase in the number of rides increases the total revenue by more than the fall in fare decreases it and so, on net, total revenue rises. Therefore the drivers should try to lower the fare. 156 Copyright © 2014 Pearson Education, Inc.

e) Total revenue is maximized at the point where the price elasticity of demand is 1. On a straight-line demand curve, demand is unit elastic at the midpoint. The demand curve intersects the price axis at $7, so the midpoint on the demand curve is where the price is $3.50. This fare will maximize the taxicab drivers' total revenue. Topic: Price Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

2) The cab fare in Horseville is regulated. Recently, the government decided to raise it from $2.00 to $2.50 per ride. After this rise in fare, cab ridership decreased by 10 percent. a) What is the price elasticity of demand for cab rides in Horseville? (Use the midpoint formula to calculate the percentage change in the price.) Is the demand for rides elastic or inelastic? b) According to your estimate, what happened to the cab drivers' revenue after the fare rose? Explain. c) Why might your estimate of elasticity be inaccurate? Answer: a) The percentage change in the price is the change in the price, $0.50, divided by the average price, $2.25, multiplied by 100, or ($0.50/$2.25) × 100, which is 22.2 percent. The percentage change in quantity is 10 percent. So the price elasticity of demand is 10%/22.2%, which equals 0.45. The demand for rides is inelastic because the elasticity, 0.45, is less than 1. b) The drivers' revenue increased. If the demand for rides is inelastic, the percentage change in price, which raises total revenue, is greater than the percentage change in quantity, which lowers total revenue. So, on net, total revenue increases. c) The estimate may be inaccurate because we are not sure that the decline in ridership resulted only from the rise in fare and not from other factors that could influence the quantity of rides demanded. Topic: Price Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

Quantity Quantity Price demanded, 2009 demanded, 2010 (dollars per CD) (CDs per year) (CDs per year) 4 40 70 8 30 50 12 20 30 16 10 10 18 5 0 20 0 0 3) Cory enjoys listening to all types of music. His demand schedules for CDs in 2009 and 2010 are shown in the table above. Cory's income was $30,000 in 2009 and $35,000 in 2010. In 2010, he bought an iPod so he started to download music files from the Internet. a) Draw Cory's demand curves for CDs in 2009 and 2010. How did Cory's demand for CDs change? Why? b) For each year, calculate Cory's price elasticity of demand as the price of CDs decreases from $16 to $12. (Use the midpoint method in your calculations.) c) Why might the price elasticity of Cory's demand for CDs in 2010 be different from that in 2009? d) If all CD buyers have the same demand as does Cory, what price should the record companies charge in 2010 to maximize their total revenue from CD sales? Answer:

a) The figure above shows Cory's two demand curves. Cory's demand for CDs increased for the prices below $16 and decreased for the prices above $16. There are two factors that affected Cory's demand for CDs. First, Cory's income changed. The increase in income increased Cory's demand and shifted the demand curve rightward. Second, a substitute for CDs, the new music service, arrived. The availability of the new music service decreased Cory's demand and shifted the demand curve leftward. Apparently, the effect of the increased income was greater at lower prices and the effect of the new music service was greater at higher prices.

b) The percentage change in price is the change in price, $4, divided by the average price, $14, multiplied by 100 or ($4/$14) × 100, which is 28.6 percent. In 2009, the percentage change in the quantity demanded is the change in quantity, 10, divided by the average quantity, 15, multiplied by 100 or (10/15) × 100, which is 66.7 percent. So in 2009 the price elasticity of demand is 66.7%/28.6% or 2.33. In 2010, the percentage change in the quantity demanded in the change in quantity, 20, divided by the average quantity, 20, multiplied by 100 or (20/20) × 100, which is 100 percent. So in 2010 the price elasticity of demand is 100%/28.6% or 3.50. These calculations show that Cory's demand for CDs became more elastic in 2010. c) The availability of substitutes is a factor that influences the price elasticity of demand. The new ability to download files is a substitute for pre-recorded CDs and when Cory started to use it, between the prices of $16 to $12, his demand for CDs became more price elastic. d) Total revenue is maximized at the point where the price elasticity of demand is 1. And on a straightline demand curve, demand is unit elastic at the midpoint. If the demand curve intersects the price axis at $18, the midpoint on the demand curve is where the price is $9. So to maximize their revenue, the record companies must charge $9 per CD. Topic: Price Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

Quantity Quantity Price demanded business demanded leisure (dollars per ticket) travelers travelers (tickets per week) (tickets per week) 0 1,800 1,600 100 1,600 1,200 200 1,400 800 300 1,200 400 400 1,000 0 500 800 0 4) Suppose that business travelers and leisure travelers have the demand schedules for airline tickets from Atlanta to Philadelphia given in the table above. a) Draw both demand curves. b) As the price of tickets rises from $200 to $300, what is the price elasticity of business travelers' demand? What is the price elasticity of leisure travelers' demand? (Use the midpoint method in your calculations.) c) Why do business travelers and leisure travelers have different price elasticities of demand for airline tickets? d) At what price is the price elasticity of demand equal to 1 for business travelers? For leisure travelers? Explain.

Answer:

a) The figure above shows the demand curves. b) The percentage change in price is the change in price, $100, divided by the average price, $250, multiplied by 100 or ($100/$250) × 100, which is 40.0 percent. For business travelers, the percentage change in the quantity of tickets demanded is the change in the quantity demanded, 200, divided by the average quantity, 1,300, multiplied by 100, or (200/1,300) × 100, which is 15.4 percent. So for business travelers the price elasticity of demand is 15.4 percent/40.0 percent, which equals 0.39. For leisure travelers, the percentage change in the quantity of tickets demanded is the change in the quantity demanded, 400, divided by the average quantity, 600, multiplied by 100, or (400/600) × 100, which is 66.7 percent. So for leisure travelers, the percentage change the price elasticity of demand is 66.7 percent/40.0 percent, which equals 1.67. c) Business travelers' schedules are usually less flexible than those of leisure travelers. Therefore, leisure travelers are more likely to choose driving or taking the train if the price of airline tickets rises, which means their demand for airline tickets is more elastic. Also, leisure travelers' demand is likely to be more elastic because the price of business travelers' tickets is often paid by the company. d) For business travelers the demand is unit elastic at $450. For leisure travelers it's unit elastic at $200. Both demand curves are straight lines. And on a straight-line demand curve, demand is unit elastic at the midpoint. The business travelers' demand curve intersects the quantity axis at 1,800, so the midpoint on the demand curve is 900 tickets, which are sold if the price is $450. The leisure travelers' demand curve intersects the quantity axis at 1,600, so the midpoint on the demand curve is where 800 tickets are sold at $200. Topic: Price Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

Economics, 11e, Global Edition (Parkin) Chapter 5 Efficiency and Equity 1 Resource Allocation Methods 1) In the United States, resources are most often allocated by A) market price. B) command system. C) lottery. D) contest. Answer: A Topic: Resource Allocation Methods Skill: Conceptual Status: Old AACSB: Analytical Skills

2) A contest is a good way to allocate scarce resources when A) the efforts of the players are hard to monitor directly. B) the lines of responsibility are clear. C) the decision being made affects a large number of people. D) there is no effective way to distinguish among potential users. Answer: A Topic: Resource Allocation Methods Skill: Conceptual Status: Old AACSB: Analytical Skills

3) The resource allocation method that is used to allocate scarce resources between private use and government use is A) first-come, first-served. B) personal characteristics. C) majority rule. D) lottery. Answer: C Topic: Resource Allocation Methods Skill: Conceptual Status: Old AACSB: Analytical Skills

4) Which of the following is true? A) Lotteries work best when a resource can serve just one user at a time in a sequence. B) A market price always allocates resources better than a command system. C) In the United States, how tax dollars are allocated among competing uses is an example of how resources are allocated by majority rule. D) Force has never played an important role in allocating scarce resources. Answer: C Topic: Resource Allocation Methods Skill: Conceptual Status: Revised AACSB: Analytical Skills

5) Which of the following is true? A) When resources are allocated on the basis of personal characteristics, all people who are willing and able to pay the price get the resource. B) When the range of activities to be monitored is large and complex, a command system allocates resources better than a market price. C) When a market price allocates resources, some people who are willing and able to pay that price don't get the resource. D) Force helps support the legal system on which markets function. Answer: D Topic: Resource Allocation Methods Skill: Conceptual Status: Old AACSB: Analytical Skills

6) As a method of resource allocation, force A) is not important. B) plays a crucial negative role. C) plays a crucial positive role. D) plays a crucial role for both good and ill. Answer: D Topic: Resource Allocation Methods Skill: Conceptual Status: Old AACSB: Analytical Skills

7) As a method of resource allocation, market price A) means those who are willing and able to pay get a particular good or service. B) works well when self-interest must be suppressed. C) works best inside firms and government departments. D) is efficient when there is no effective way to distinguish among potential users of a scarce resource. Answer: A Topic: Resource Allocation Methods Skill: Conceptual Status: Old AACSB: Analytical Skills

8) Which of the following is true? A) When a market price allocates resources, all people who are willing and able to pay that price get the resource. B) A command system works well when the range of activities to be monitored is large and complex. C) When the government decides how to allocate tax dollars among competing uses, resources are allocated by market prices. D) When a manager offers everyone in the company the opportunity to win a prize, resources are allocated by a lottery. Answer: A Topic: Resource Allocation Methods Skill: Conceptual Status: Old AACSB: Analytical Skills

9) When allocating resources using market price, A) everyone who is willing and able to pay for a good gets one. B) everyone who wants a good gets one. C) everyone who is willing to pay for a good gets one. D) everyone who is able to pay for a good gets one. Answer: A Topic: Resource Allocation Methods Skill: Conceptual Status: Old AACSB: Analytical Skills

10) When scarce resources can serve only one user at a time in sequence, which method works well for allocating the scarce resources? A) first come, first served B) lottery C) contest D) command system Answer: A Topic: Resource Allocation Methods Skill: Conceptual Status: Old AACSB: Analytical Skills

11) Currently kidneys are allocated based on the needs of each perspective recipient, their blood type, and the urgency of their case. An alternative way to allocate kidneys is to go by the order in which patients were placed on the waiting list. In that case, the allocation of resources is made using A) market price. B) auction. C) first-come, first-served. D) personal characteristics. Answer: C Topic: Resource Allocation Methods Skill: Conceptual Status: New AACSB: Reflective Thinking

12) The night before enrollment was to open for the University of Johannesburg a line of people more than a mile long formed outside the gates. When the gates opened, a stampede started, and a woman lost her life in her attempt to secure her son a spot at the university and a chance for a better life. (Source: New York Times, January 10, 2012) Based on the news clip above, the allocation of resources in made using A) market price. B) auction. C) first-come, first-served. D) lottery. Answer: C Topic: Resource Allocation Methods Skill: Conceptual Status: New AACSB: Reflective Thinking

13) Which of the following is true? A) When a market price allocates resources, everyone who is able to pay the price gets the resource. B) A command system works well when the lines of authority and responsibility are clear. C) When the government decides how to allocate tax dollars among competing uses, resources are allocated by command. D) When a manager offers everyone in the company the opportunity to win a prize, resources are allocated by a market price. Answer: B Topic: Resource Allocation Methods Skill: Conceptual Status: Old AACSB: Analytical Skills

14) Alvin Roth of Harvard won the 2012 Nobel Prize in Economics for designing systems that allocate resources in innovative ways. For example, he designed a system that matches donated kidneys to recipients waiting for such donations. This system takes into account the needs of each perspective recipient, their blood type, and the urgency of their case. (Source: Washington Post, October 16, 2012) Based on the news clip above, the allocation of resources is made using A) market price. B) auction. C) lottery. D) personal characteristics. Answer: D Topic: Resource Allocation Methods Skill: Conceptual Status: New AACSB: Reflective Thinking

15) Asian women lag far behind the West in their representation in management level positions. A recent report by the consulting company McKinsey suggests that there is an opportunity for companies to recruit under-utilized female talent and do well financially as a result. (Source: The Economist, July 7, 2012) The fact that Asian women are currently less likely to be hired as managers is a result of the allocation system using which of the following methods for hiring? A) Lottery B) Auction C) First-Come, First-Served D) Personal Characteristics Answer: D Topic: Resource Allocation Methods Skill: Conceptual Status: New AACSB: Reflective Thinking

16) Allocating resources by the order of someone in authority is a ________ allocation method. A) first-come, first-served B) market price C) majority rule D) command Answer: D Topic: Study Guide Question, Resource Allocation Method Skill: Conceptual Status: Old AACSB: Analytical Skills

17) Often people trying to withdraw money from their bank must wait in line, which reflects a ________ allocation method. A) first-come, first-served B) market price C) contest D) command Answer: A Topic: Study Guide Question, Resource Allocation Method Skill: Conceptual Status: Old AACSB: Analytical Skills

18) If a person will rent an apartment only to married couples over 30 years old, that person is allocating resources using a ________ allocation method. A) first-come, first-served B) market price C) personal characteristics D) command Answer: C Topic: Study Guide Question, Resource Allocation Method Skill: Conceptual Status: Old AACSB: Analytical Skills

2 Benefit, Cost, and Surplus 1) The value of one more unit of a good or service is the A) marginal benefit. B) minimum price that people are willing to pay for another unit of the good or service. C) marginal cost. D) opportunity cost of producing one more unit of a good or service. Answer: A Topic: Value, Willingness to Pay, and Demand Skill: Definition Status: Old AACSB: Analytical Skills

2) The value of a good is equal to the A) maximum price you are willing to pay for it. B) price that you actually pay for it. C) price you actually pay for it minus the maximum you are willing to pay for it. D) maximum you are willing to pay for it minus the price you actually pay for it. Answer: A Topic: Value, Willingness to Pay, and Demand Skill: Definition Status: Old AACSB: Analytical Skills

3) Marginal benefit is the benefit received from ________. A) consuming more goods or services B) producing the efficient quantity C) consuming the efficient quantity D) consuming one more unit of a good or service Answer: D Topic: Marginal Benefit Skill: Definition Status: Old AACSB: Analytical Skills

4) All of the following statements about marginal benefit are correct EXCEPT the marginal benefit of a good A) is the benefit a person receives from consuming one more unit of the good or service. B) is measured as the maximum amount that a person is willing to pay for one more unit of the good. C) is equal to zero when resource use is efficient. D) decreases as the quantity consumed of the good increases. Answer: C Topic: Marginal Benefit Skill: Definition Status: Old AACSB: Analytical Skills

5) Sal likes to eat pizza. The ________ is the maximum amount that Sal is willing to pay for one more piece of pizza. A) efficient price B) efficient amount C) marginal benefit D) marginal cost Answer: C Topic: Marginal Benefit Skill: Definition Status: Old AACSB: Analytical Skills

6) Marginal benefit A) is the same as the total benefit received from consuming a good. B) is the maximum amount a person is willing to pay for one more unit of a good. C) increases as consumption increases. D) is the difference between total benefit and total cost. Answer: B Topic: Marginal Benefit Skill: Definition Status: Old AACSB: Analytical Skills

7) Jane is willing to pay $50 for a pair of shoes. The actual price of the shoes is $30. Her marginal benefit is A) $50. B) $30. C) $20. D) $80. Answer: A Topic: Marginal Benefit Skill: Analytical Status: Old AACSB: Analytical Skills

The table below shows the demand schedules for pizza for Abby and Barry who are the only buyers in the market. Price (dollars per slice) 2.50 3.00 3.50 4.00 4.50 5.00

Abby's quantity Barry's quantity demanded demanded (slices per month) (slices per month) 25 50 20 40 15 30 10 20 5 10 0 0

8) Based on the table, what is Abby's marginal benefit from the 10th slice of pizza? A) $4 B) $13 C) $0.50 D) $40 Answer: A Topic: Marginal Benefit Skill: Analytical Status: Old AACSB: Analytical Skills

9) Based on the table, what is Barry's marginal benefit from the 40th slice of pizza? A) $3 B) $5.50 C) $0.50 D) $12 Answer: A Topic: Marginal Benefit Skill: Analytical Status: Old AACSB: Analytical Skills

10) Based on the table, what is the marginal social benefit from the 45th slice of pizza? A) $3.50 B) $3.25 C) $0.50 D) $9 Answer: A Topic: Marginal Social Benefit Skill: Analytical Status: Old AACSB: Analytical Skills

11) If you increase your consumption of soda by one additional can a week, your marginal benefit of this last can is $1.00. The ________ of this last can of soda is $1.00. A) value B) price C) opportunity cost D) marginal cost Answer: A Topic: Value, Willingness to Pay, and Demand Skill: Analytical Status: Old AACSB: Analytical Skills

12) A person will choose to buy a good as long as A) marginal benefit is at least as great as price. B) consumer surplus is positive. C) marginal benefit is positive. D) consumer surplus is at least as great as price. Answer: A Topic: Value, Willingness to Pay, and Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

13) Sam's demand curve for pizza A) lies above her marginal benefit curve for pizza. B) lies below her marginal benefit curve for pizza. C) is the same as her marginal benefit curve for pizza. D) has one point in common with her marginal benefit curve for pizza. Answer: C Topic: Value, Willingness to Pay, and Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

14) The market demand curve A) can also be the marginal social cost curve. B) shows the value of a good that consumers must give up to get another unit of a different good. C) by itself determines equilibrium prices. D) can also be the marginal social benefit curve. Answer: D Topic: Marginal Benefit and Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

15) The market demand curve also is A) a marginal social cost curve. B) a marginal social benefit curve. C) an opportunity cost curve. D) a consumer surplus curve. Answer: B Topic: Marginal Benefit and Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

16) The market demand curve for coffee is the same as the A) marginal social cost curve of coffee. B) marginal social benefit curve of coffee. C) opportunity cost curve of coffee. D) marginal social benefit curve minus the marginal social cost curve of coffee. Answer: B Topic: Marginal Benefit and Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

17) A market demand curve measures A) how much a consumer is willing to pay for an additional unit of the good. B) the marginal social benefit of an additional unit of the good. C) the marginal social cost of an additional unit of the good. D) Both answers A and B are correct. Answer: D Topic: Value, Willingness to Pay, and Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

18) Moving down along the market demand curve for hot dogs, the A) maximum price that people are willing to pay for hot dogs increases. B) marginal social benefit of hot dogs decreases. C) marginal social cost of hot dogs increases. D) consumer surplus of the last hot dog consumed increases. Answer: B Topic: Value, Willingness to Pay, and Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

19) The market demand curve is constructed by adding the A) quantities demanded by each individual at each price. B) prices that each individual is willing to pay at each quantity. C) Neither answer A nor answer B is correct. D) Both answer A and answer B are correct. Answer: A Topic: Individual Demand and Market Demand Skill: Definition Status: Old AACSB: Analytical Skills

20) A market demand curve is constructed by A) a horizontal summation of each individual demand curve. B) averaging each individual demand curve. C) dividing one individual demand curve by the number of consumers in the market. D) a vertical summation of each individual demand curve. Answer: A Topic: Individual Demand and Market Demand Skill: Definition Status: Old AACSB: Analytical Skills

21) A market demand curve can be constructed by A) adding the prices all consumers will pay for any given quantity. B) adding the quantities that all consumers buy at each price. C) adding the quantities that a consumer buys at the highest price. D) None of the above answers is correct. Answer: B Topic: Individual Demand and Market Demand Skill: Definition Status: Old AACSB: Analytical Skills

22) The market demand curve for iPads is the ________ of all the individual demand curves for iPads. A) horizontal product B) horizontal sum C) vertical sum D) vertical product Answer: B Topic: Individual Demand and Market Demand Skill: Definition Status: Old AACSB: Analytical Skills

Price (dollars) 6 5 4 3 2 1

Quantity of videos demanded Alex Lynn Liza 2 0 3 4 0 6 6 1 9 8 2 12 10 3 15 12 4 18

23) Given the individual demands for video downloads in the above table, and assuming that these three people are the only ones in the market, which of the following statements is NOT true about market demand for video downloads? A) The market quantity demanded at a price of $5 is 10. B) The height of the market demand curve at a quantity demanded of 22 is $3. C) The height of the market demand curve at a quantity demanded of 16 is $5. D) The market quantity demanded at a price of $2 is 28. Answer: C Topic: Individual Demand and Market Demand Skill: Analytical Status: Old AACSB: Analytical Skills

Price (dollars) 60 50 40 30 20

Quantity of tennis rackets demanded Jill Jed 1 0 2 0 2 1 3 2 4 3

24) Jill and Jed have individual demand curves for tennis rackets given in the table above and are the only two demanders in the market. What is the market quantity demanded at the price of $30? A) 2 B) 5 C) 11 D) 18 Answer: B Topic: Individual Demand and Market Demand Skill: Analytical Status: Old AACSB: Analytical Skills

Price dollars per pound)

Bart's quantity Lisa's quantity demanded demanded (pounds) (pounds)

2 3 4 5

9 7 4 1

5 4 2 0

Homer's quantity demanded (pounds) 7 6 5 3

25) Homer, Bart, and Lisa are the only consumers in the market. Using the information in the above table, what is the market demand for chocolate chip cookies at $4.00 per pound? A) 21 pounds B) 17 pounds C) 11 pounds D) 4 pounds Answer: C Topic: Individual Demand and Market Demand Skill: Analytical Status: Old AACSB: Analytical Skills

26) Consumer surplus is the ________ summed over the quantity bought. A) marginal social benefit minus the marginal social cost B) number of dollars' worth of other goods and services forgone to obtain one more unit of a good or service C) value of a good or service minus the price paid for the good or service D) value of a good or service plus the price paid for the good or service Answer: C Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

27) ________ is the value of a good minus the price paid for it summed over the quantity bought. A) Producer surplus B) Consumer surplus C) Surplus D) Shortage Answer: B Topic: Consumer Surplus Skill: Definition Status: Old AACSB: Analytical Skills

28) Consumer surplus is the A) value of a good expressed in dollars. B) price of a good expressed in dollars. C) value of a good minus the price paid for it summed over the quantity bought. D) value of a good plus the price paid for it summed over the quantity bought. Answer: C Topic: Consumer Surplus Skill: Definition Status: Old AACSB: Analytical Skills

29) Consider the market for hot dogs. As long as the marginal benefit of consuming hot dogs is greater than the price of hot dogs, A) people receive consumer surplus from eating hot dogs. B) the price of hot dogs will rise. C) the value of hot dogs will rise. D) there is no decreasing marginal benefit of eating hot dogs. Answer: A Topic: Consumer Surplus Skill: Conceptual Status: Old AACSB: Analytical Skills

30) If the price of a pizza increases and the demand curve for pizza does not shift, then the consumer surplus from pizza will ________. A) increase B) decrease C) equal the producer surplus if the market produces the efficient quantity of pizza D) remain the same Answer: B Topic: Consumer Surplus Skill: Conceptual Status: Old AACSB: Analytical Skills

31) The drought in the Midwest over the summer has decreased the supply of corn and, as a result, brought a sharp increase in the price of corn. (Source: The Economist, August 4, 2012) The increase in the price of corn A) always increases consumer surplus. B) always decreases consumer surplus. C) does not affect consumer surplus because this change reflects only a movement along the demand curve. D) increases consumer surplus if demand is elastic and decreases consumer surplus if demand is inelastic. Answer: B Topic: Consumer Surplus Skill: Analytical Status: New AACSB: Analytical Skills

32) For many years short wave radios were a way of getting news from faraway places and in difficult conditions. But as new technologies have spread, the people listening to these devices has decreased. (Source: The Economist, July 7, 2012) As new technology creates substitutes for short-wave radios, the demand for short-wave radios ________ and the consumer surplus from short-wave radios ________. A) increases; increases B) decreases; decreases C) does not change; decreases D) decreases; does not change Answer: B Topic: Consumer Surplus Skill: Analytical Status: New AACSB: Analytical Skills

33) Nick can purchase each milkshake for $2. For the first milkshake purchased Nick is willing to pay $4, for the second milkshake $3, for the third milkshake $2 and for the fourth milkshake $1. What is the value of Nick's consumer surplus for the milkshakes he buys? A) $2 B) $9 C) $3 D) $10 Answer: C Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

34) A used car was recently priced at $20,000.00. Seeing the car, Bobby thought, "It's nice, but if I have to pay more than $19,500 for this car, then I would rather do without it." After negotiations, Bobby purchased the car for $19,250.00. His consumer surplus was equal to A) $19,500.00. B) $1,750.00. C) $250.00. D) $0.00. Answer: C Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

35) When the Smiths were shopping for their present home, the asking price from the previous owner was $250,000.00. The Smiths had decided they would pay no more than $245,000.00 for the house. After negotiations, the Smiths actually purchased the house for $239,000.00. They, therefore, enjoyed a consumer surplus of A) $239,000.00. B) $5,000.00. C) $6,000.00. D) $11,000.00. Answer: C Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

36) The latest model car in the dealer's showroom has a sticker price of $35,000.00. Fred, the shopper, has decided that he would pay no more than $32,000.00 for the car. After two hours of bargaining with the saleswoman, Fred actually purchases the car for $31,000.00. Fred, therefore, has obtained a consumer surplus of A) $35,000.00. B) $32,000.00. C) $4,000.00. D) $1,000.00. Answer: D Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

37) Jane is willing to pay $50 for a pair of shoes. The actual price of the shoes is $30. Her consumer surplus on this pair of shoes is A) $20. B) $50. C) $30. D) $80. Answer: A Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

38) Charlene is willing to pay $5.00 for a sandwich. If Charlene must pay ________ for a sandwich, she ________. A) $4.00; does not receive consumer surplus B) $4.00; receives consumer surplus C) $6.00; receives consumer surplus D) $6.00; receives a marginal cost Answer: B Topic: Consumer Surplus Skill: Conceptual Status: Old AACSB: Analytical Skills

39) Joe is willing to pay $4 for his first slice of pizza and $3 for his second slice of pizza. If the price is $2, on his two slices of pizza Joe receives a total consumer surplus of A) $4. B) $3. C) $2. D) $1. Answer: B Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

40) Jane is willing to pay $4 for the first cup of coffee a day, $2.50 for the second cup, and $1 for the third cup, after which she won't buy any coffee. The price of a cup of coffee is $2.40. How many cups of coffee per day will Jane buy? A) 1 B) 2 C) 3 D) None Answer: B Topic: Demand and Marginal Benefit Skill: Analytical Status: Old AACSB: Analytical Skills

41) Jane is willing to pay $4 for the first cup of coffee a day, $2.50 for the second cup, and $1 for the third cup, after which she won't buy any coffee. The price of a cup of coffee is $2.40. Jane's consumer surplus from the coffee she buys is ________ per day. A) $1.60 B) $1.70 C) $4.80 D) $6.50 Answer: B Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

42) Consider a market that has linear supply and demand curves, and is in equilibrium. The area above the price line and below the demand curve is A) consumer surplus. B) producer surplus. C) marginal cost. D) marginal benefit. Answer: A Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

43) Four people each have a different willingness to pay for one unit of a good: George will pay $15, Glen will pay $12, Tom will pay $10, and Peter will pay $8. If price is equal to $9 per unit then the quantity demanded in the market will be ________ and the consumer surplus for this unit will be ________. A) 3; $10 B) 3; $37 C) 3; $36 D) 4; $8 Answer: A Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

44) Four people each have a different willingness to pay for one unit of a good: George will pay $15, Glen will pay $12, Tom will pay $10, and Peter will pay $8. If price decreases from $9 to $8 then the consumer surplus from this unit will increase by A) $3. B) $4. C) $2. D) $1. Answer: A Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

45) The figure above shows Clara's demand for CDs. If the price for a CD is $15, then Clara A) receives no consumer surplus on the 6th CD she buys. B) receives a total of $10 of consumer surplus. C) will buy no CDs. D) receives a total of $40 of consumer surplus. Answer: A Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

46) The figure above shows Clara's demand for CDs. The price for a CD is $15. Which statement is true? A) When Clara buys 6 CDs, she receives $15 of consumer surplus on her 6th CD. B) When Clara buys 6 CDs, she receives a total of $15 of consumer surplus. C) When Clara buys 6 CDs, she receives a total of $30 of consumer surplus. D) When Clara buys 6 CDs, she receives a total of $45 of consumer surplus. Answer: D Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

47) The figure above shows Clara's demand for CDs. At a price of $20 for a CD, the value of Clara's total consumer surplus for all the CDs she buys is A) $40. B) $30. C) $20. D) $4. Answer: C Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

48) The figure above shows Clara's demand for CDs. At a price of $5 for a CD, the value of Clara's total consumer surplus for all the CDs she buys is A) $5. B) $10. C) $25. D) $125. Answer: D Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

49) The figure above shows Clara's demand for CDs. If the price of a CD were to increase from $15 to $25, Clara's total consumer surplus for all the CDs she buys would A) decrease by $40. B) remain unchanged. C) decrease by $90. D) increase by $80. Answer: A Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

50) The above figure shows Dana's marginal benefit curve for ice cream. If the price of ice cream is $2 per gallon, then the maximum that Dana is willing to pay for the 8th gallon of ice cream is A) $1. B) $2. C) $3. D) $5. Answer: C Topic: Value, Willingness to Pay, and Demand Skill: Analytical Status: Old AACSB: Analytical Skills

51) In the above figure, the individual's consumer surplus will be highest if A) the price of ice cream is $5 per gallon. B) the price of ice cream is $3 per gallon. C) the price of ice cream is $2 per gallon. D) ice cream is free. Answer: D Topic: Consumer Surplus Skill: Conceptual Status: Old AACSB: Analytical Skills

52) The above figure shows Dana's marginal benefit curve for ice cream. If the market price is $2 per gallon, then Dana's consumer surplus from the 4th gallon of ice cream is A) $0. B) $2. C) $3. D) $10. Answer: B Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

53) The above figure shows Dana's marginal benefit curve for ice cream. If the price of ice cream is $2 per gallon, then Dana's consumer surplus from the 4th gallon A) is greater than her consumer surplus from the 8th gallon. B) is the same as her consumer surplus from the 8th gallon. C) is less than her consumer surplus from the 8th gallon. D) could be greater than, equal to, or less than the consumer surplus from the 8th gallon. Answer: A Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

54) The above figure shows Dana's marginal benefit curve for ice cream. If the price of ice cream is $2 per gallon, then the gallon that gives Dana exactly zero consumer surplus is A) the 8th gallon. B) the 12th gallon. C) the 16th gallon. D) the 20th gallon. Answer: B Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

55) The above figure shows Dana's marginal benefit curve for ice cream. If the price of ice cream is $2 per gallon and Dana is allowed to buy only 8 gallons of ice cream, then her consumer surplus on the 8th gallon is A) $1. B) $2. C) $3. D) $8. Answer: A Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

56) The figure tells us about the market for red roses. The consumer surplus is ________ a day. A) $800 B) $200 C) $1,000 D) $20 Answer: B Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

57) The figure illustrates the market for bagels. Initially the market is in equilibrium, Then the number of bagels produced is cut from 20 to 10 an hour and the price rises to $2.00 per bagel. Consumer surplus decreases by ________. A) $5.00 an hour B) $2.50 an hour C) $7.50 an hour D) $0.50 a bagel Answer: C Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

58) In the above figure, what is the total consumer surplus from all the milk bought if the price of milk is $3.00 per gallon? A) $16 million B) $12 million C) $4 million D) $2 million Answer: C Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

59) In the figure above, for each CD, the price a consumer is willing to pay is equal to the A) economy's marginal social cost of producing that CD. B) consumer's own marginal benefit from consuming that CD. C) consumer's total consumer surplus. D) Both answers A and B are correct. Answer: B Topic: Marginal Benefit Skill: Conceptual Status: Old AACSB: Analytical Skills

60) In the figure above, what is the marginal social benefit of the 3,000,000th CD per month? A) $11.00 per CD B) $8.00 per CD C) $6.00 per CD D) None of the above answers is correct. Answer: A Topic: Marginal Benefit Skill: Analytical Status: Old AACSB: Analytical Skills

61) In the figure above, when the market is in equilibrium, total consumer surplus on all the CDs bought will be A) greater than $30 million. B) less than at any other price. C) $20 million. D) less than $15 million. Answer: C Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills 26 Copyright © 2014 Pearson Education, Inc.

62) In the above figure, if the price is $2, then the total consumer surplus is A) triangle abc. B) triangle cef. C) trapezoid adec. D) trapezoid bdfc. Answer: A Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

63) In the figure above, when production is 3 units with a price of $3, the consumer surplus equals A) a + b. B) a + b + f + g. C) a + b + f + g + h + l. D) a + b + f + g + h + l + i + m. Answer: A Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

64) Marginal cost is A) the same as the marginal benefit because producers benefit from the money they receive when they sell the good. B) the opportunity cost of producing one more unit. C) the total opportunity cost of producing all the units of the good. D) zero at the efficient level of production. Answer: B Topic: Marginal Cost Skill: Definition Status: Old AACSB: Analytical Skills

65) Marginal cost is best defined as A) the extra cost of producing one more unit of output. B) the profit earned from selling one more unit of output. C) the price received from selling one more unit of output. D) equal to producer surplus. Answer: A Topic: Marginal Cost Skill: Definition Status: Old AACSB: Analytical Skills

66) Marginal cost is the A) extra benefit that people receive from producing one more unit of a good or service. B) maximum amount consumers are willing to pay for one more unit of a good or service. C) opportunity cost of producing one more unit of a good or service. D) None of the above answers is correct. Answer: C Topic: Marginal Cost Skill: Definition Status: Old AACSB: Analytical Skills

67) Which of the following represents the marginal cost of a soda? I. The opportunity cost of producing another soda. II. The minimum price someone is willing to pay for another soda. A) I only B) II only C) I and II D) Neither I nor II Answer: A Topic: Marginal Cost Skill: Definition Status: Old AACSB: Analytical Skills

68) The minimum supply-price is the same as A) marginal cost. B) market price. C) producer surplus. D) profit. Answer: A Topic: Cost, Minimum-Supply Price, and Supply Skill: Definition Status: Old AACSB: Analytical Skills

69) Currently tire producers must receive a price of $50 per tire to produce 5000 tires. If the supply curve of tires is upward sloping, then to produce one additional tire, tire producers will need to receive a price of A) $50. B) less than $50. C) more than $50. D) $0. Answer: C Topic: Cost, Minimum-Supply Price, and Supply Skill: Definition Status: Old AACSB: Analytical Skills

70) The marginal cost curve A) shows the maximum price that a producer must receive to induce it to produce a unit of a good or service. B) shows the minimum price sellers must receive to produce a unit of a good or service. C) is the same as the demand curve. D) shows what buyers are willing to give up to get one more unit of a good or service. Answer: B Topic: Cost, Minimum-Supply Price, and Supply Skill: Conceptual Status: Old AACSB: Analytical Skills

71) Which of the following statements about supply curves is correct? I. A supply curve also can be a marginal cost curve. II. A supply curve tells the quantity of other goods and services that sellers must give up to produce another unit of the good. A) I only B) II only C) both I and II D) neither I nor II Answer: C Topic: Supply Curve Skill: Conceptual Status: Old AACSB: Analytical Skills

72) The supply curve for CDs shows the A) minimum price that consumers are willing to pay if a given quantity of CDs is available. B) maximum price that consumers are willing to pay if a given quantity of CDs is available. C) maximum price that producers must be offered to get them to produce a given quantity of CDs. D) minimum price that producers must be offered to get them to produce a given quantity of CDs. Answer: D Topic: Supply Curve Skill: Conceptual Status: Old AACSB: Analytical Skills

73) Marginal social cost A) is the additional cost to the consumer of consuming another unit of a good. B) is equal to price times quantity sold. C) decreases as more of a good is produced and, hence, is depicted by a downward sloping curve. D) is the opportunity cost of producing one more unit of a good and, hence, is the same as the supply curve. Answer: D Topic: Marginal Cost and Supply Skill: Conceptual Status: Old AACSB: Analytical Skills

74) The market supply curve is also the A) marginal social cost curve. B) marginal value curve. C) marginal social benefit curve. D) maximum-supply-price curve. Answer: A Topic: Supply Curve Skill: Conceptual Status: Old AACSB: Analytical Skills

75) Suppose there are four firms that are each willing to sell one unit of a good. Each firm has a different minimum price that they are willing to sell for: Firm A $6, Firm B $7, Firm C $10, and Firm D $12. If the market price is $11 then the market supply for this good will be A) 3 units. B) 4 units. C) 1 unit. D) 2 units. Answer: A Topic: Market Supply Skill: Analytical Status: Old AACSB: Analytical Skills

The table below shows the supply schedules for Fred's Pizza and Johnny's Pizza, the only sellers of pizza in the market. Price (dollars per slice) 1.50 2.00 2.50 3.00 3.50 4.00

Fred's quantity Johnny's quantity supplied supplied (slices per month) (slices per month) 0 0 100 150 200 300 300 450 400 600 500 750

76) Using the table, Fred's marginal cost of the 200th slice of pizza is A) $2.50. B) $6. C) $0.50. D) $20. Answer: A Topic: Producer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

77) Using the table, Johnny's marginal cost of the 600th slice of pizza is A) $3.50. B) $12.50. C) Zero. D) $1.50. Answer: A Topic: Marginal Cost Skill: Analytical Status: Old AACSB: Analytical Skills

78) Using the table, what is the minimum price that Fred is willing to accept to supply 400 slices of pizza per month? A) $3.50 B) $2.50 C) $3 D) $4 Answer: A Topic: Minimum Supply Price Skill: Analytical Status: Old AACSB: Analytical Skills

79) Using the table, what is the marginal social cost when the market quantity supplied is 750 slices of pizza per month? A) $3 B) $7 C) $9 D) $3.50 Answer: A Topic: Marginal Social Cost Skill: Analytical Status: Old AACSB: Analytical Skills

80) The producer surplus on a unit of a good is the A) difference between the marginal social benefit and the marginal social cost. B) number of dollars' worth of other goods and services forgone to produce this unit of the good. C) difference between the price of the good and the marginal cost of producing the good. D) difference between the total cost of the good and the marginal cost. Answer: C Topic: Producer Surplus Skill: Definition Status: Old AACSB: Analytical Skills

81) Producer surplus is the ________ summed over the quantity sold. A) value of a good minus the price received for it B) price received for a good minus the value of the good C) price received for a good minus its marginal cost D) marginal cost of making a good minus the price received for it Answer: C Topic: Producer Surplus Skill: Definition Status: Old AACSB: Analytical Skills

82) Producer surplus is the price received ________ summed over the quantity sold. A) plus the consumer surplus B) multiplied by the quantity sold C) minus its marginal cost of production D) subtracted from the value of the good Answer: C Topic: Producer Surplus Skill: Definition Status: Old AACSB: Analytical Skills

83) Producer surplus is the A) cost of the good summed over the quantity sold. B) demand for a good minus the supply summed over the quantity sold. C) price of a good minus the marginal cost of producing it summed over the quantity sold. D) marginal cost of producing it summed over the quantity sold. Answer: C Topic: Producer Surplus Skill: Definition Status: Old AACSB: Analytical Skills

84) Producer surplus is the difference between the A) price and the willingness to pay for the good. B) price and the marginal cost of producing the good summed over the quantity sold. C) willingness to pay for the good and the marginal cost of producing the good summed over the quantity sold. D) marginal benefit of consuming the good and the marginal cost of producing the good summed over the quantity sold. Answer: B Topic: Producer Surplus Skill: Definition Status: Old AACSB: Analytical Skills

85) In the market for CDs, the producer surplus will decrease if ________. A) the supply of CDs increases B) the price of a CD decreases C) the marginal cost of a CD decreases D) the price of a CD increases Answer: B Topic: Producer Surplus Skill: Conceptual Status: Old AACSB: Analytical Skills

86) In 2012 a severe drought raised the price of corn. For a farmer in Canada who harvested a normal crop because the farm was not affected directly by the drought, the increase in the price of corn A) increases the farmer's producer surplus. B) decreases the farmer's producer surplus. C) does not affect the producer surplus because this change is a movement along the farmer's supply curve and not a shift of the farmer's supply curve. D) increases producer surplus only if the farmer's supply is completely inelastic. Answer: A Topic: Producer Surplus Skill: Analytical Status: New AACSB: Analytical Skills

87) When the Smiths were shopping for their present home, the asking price from the previous owner was $250,000.00. The Smiths had decided they would pay no more than $245,000.00 for the house. After negotiations, the Smiths actually purchased the house for $239,000.00. Therefore, the previous owner earned a producer surplus of A) $250,000.00. B) $11,000.00. C) $5,000.00. D) an amount unknown given the information in the question. Answer: D Topic: Producer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

88) Stefano has just completed an original oil painting. After considering the costs for brushes, paint, canvas, and the value of Stefano's labor time, the marginal cost of the painting is $1,000. Lucky Stefano. One art lover paid him $1,500. How much producer surplus did Stefano obtain? A) The amount of producer surplus cannot be determined from the information given. B) $1,500 C) $1,000 D) $500 Answer: D Topic: Producer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

89) Farmer Jones knows that the marginal cost to produce a bushel of tomatoes is $5 per bushel. He also knows that a consumer is willing to pay a maximum of $9 for the bushel. The price of the bushel is $6 and Farmer Jones sells his bushel for $6. On this bushel, Farmer Jones earns a producer surplus equal to A) $1. B) $3. C) $5. D) $6. Answer: A Topic: Producer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

90) Considering all costs of production, the marginal cost of producing a hot dog is $1.00. The price of a hot dog is $1.50. Thus, the producer surplus from this hot dog is A) $1.50. B) $1.00. C) $.50. D) Zero, because $1.50 is the most anyone would pay for a hot dog. Answer: C Topic: Producer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

91) Suppose there are four firms that are each willing to sell one unit of a good. Each firm has a different minimum price that they are willing to sell for: Firm A $6, Firm B $7, Firm C $10, and Firm D $12. If the market price is $11, then the total producer surplus is A) $10. B) $11. C) $33. D) $9. Answer: A Topic: Producer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

92) In the above figure, when the price of pretzels is $3.00 per pound, the total producer surplus from all the pretzels will be A) zero. B) greater than at any other price. C) less than at any other price. D) the sum of the difference between $3.00 and the marginal cost of all the pounds produced. Answer: D Topic: Producer Surplus Skill: Conceptual Status: Old AACSB: Analytical Skills

93) The figure illustrates the market for hot dogs on Big Foot Island. The producer surplus is ________. A) $240 an hour B) $180 an hour C) $1.20 a hot dog D) $60 an hour Answer: D Topic: Producer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

94) In the above figure, the lowest price for which the firm will sell its second ton of wheat is A) $25. B) $50. C) $75. D) $100. Answer: C Topic: Producer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

95) In the above figure, if the market price is $100 per ton, then the firm's producer surplus on the second ton of wheat is A) $25. B) $50. C) $75. D) $100. Answer: A Topic: Producer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

96) In the above figure, the second ton of wheat would be produced even though the producer surplus on it is zero if the price per ton of wheat was A) $25. B) $50. C) $75. D) $100. Answer: A Topic: Producer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

97) In the above figure, the marginal cost of the second ton of wheat is A) $25. B) $50. C) $75. D) none of the above Answer: C Topic: Producer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

98) In the above figure, if the market price rises from $100 to $125 per ton of wheat, then producer surplus A) decreases. B) does not change. C) increases. D) might increase, decrease, or not change depending on how the demand curve for wheat shifts. Answer: C Topic: Producer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

99) In the figure above, when production is 3 units with a price of $3, the producer surplus in this market equals A) b + g. B) f + g. C) a + b + f + g. D) a + b + f + g + h + i. Answer: B Topic: Producer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

100) In the figure above, when the price of a CD is $8.00, total producer surplus from all the CDs will be A) zero. B) greater than at $10.00 per CD. C) $20 million. D) $10 million. Answer: D Topic: Producer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

101) Which of the following statements is FALSE? A) The value of one more unit of a good is the good's marginal benefit. B) A good's marginal benefit is the maximum price people are willing to pay for another unit. C) The maximum price people are willing to pay for one more unit of a good is its value. D) None of the above because all the statements are true. Answer: D Topic: Study Guide Question, Marginal Benefit Skill: Conceptual Status: Old AACSB: Analytical Skills

102) The marginal social benefit curve for a product can be the same as the good's A) marginal cost curve. B) supply curve. C) demand curve. D) consumer surplus curve. Answer: C Topic: Study Guide Question, Marginal Benefit Skill: Definition Status: Old AACSB: Analytical Skills

103) Alice is willing to pay $3 for the second slice of pizza she eats. The price she pays is $2. Alice's consumer surplus for this slice of pizza equals A) $0. B) $1. C) $2. D) $3. Answer: B Topic: Study Guide Question, Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

104) Charlie's consumer surplus from the first slice of pizza he buys is greater than the consumer surplus from the second slice because of A) decreasing marginal benefits. B) increasing marginal benefits. C) decreasing marginal costs. D) increasing marginal cost. Answer: A Topic: Study Guide Question, Consumer Surplus Skill: Conceptual Status: Old AACSB: Analytical Skills

105) The cost of producing one more pizza is the A) price. B) marginal benefit. C) marginal cost. D) producer surplus. Answer: C Topic: Study Guide Question, Marginal Cost Skill: Definition Status: Old AACSB: Analytical Skills

106) The market supply curve shows the A) minimum price suppliers must receive in order to produce another unit of the good. B) maximum price suppliers must receive in order to produce another unit of the good. C) amount of producer surplus suppliers receive. D) profit that suppliers receive from producing another unit of the good. Answer: A Topic: Study Guide Question, Marginal Cost Skill: Definition Status: Old AACSB: Analytical Skills

107) The producer surplus from a good is equal to the A) maximum amount a consumer is willing to pay for the good minus the price that actually must be paid summed over the quantity sold. B) actual price of the good minus the maximum amount a consumer is willing to pay for the good. C) opportunity cost of producing the good minus its price summed over the quantity sold. D) price of the good minus its opportunity cost of production summed over the quantity sold. Answer: D Topic: Study Guide Question, Producer Surplus Skill: Definition Status: Old AACSB: Analytical Skills

3 Is the Competitive Market Efficient? 1) Total surplus is defined as A) consumer surplus + producer surplus. B) consumer surplus - producer surplus. C) another word for profit. D) another word for total revenue. Answer: A Topic: Efficiency and Inefficiency Skill: Definition Status: Old AACSB: Analytical Skills

2) A market is allocatively efficient if A) the sum of the consumer surplus and the producer surplus has been maximized. B) consumer surplus has been maximized. C) producer surplus has been maximized. D) profit has been maximized. Answer: A Topic: Efficiency and Inefficiency Skill: Definition Status: Old AACSB: Analytical Skills

3) If resources are used efficiently, then ________. A) marginal social cost is minimized B) consumer surplus plus producer surplus is maximized C) consumer surplus equals producer surplus D) producer surplus is maximized Answer: B Topic: Efficiency and Inefficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

4) Suppose a country produces only bikes and clothing. The country achieves an efficient allocation of resources when A) it can't produce any more bikes unless it gives up clothing. B) it produces equal amount of bikes and clothes. C) the marginal social benefit of producing a bike equals the marginal social cost of producing a bike. D) the prices charged for the goods are as low as possible. Answer: C Topic: Efficiency and Inefficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

5) Resource use is efficient when A) marginal social benefit exceeds marginal social cost. B) marginal social cost is decreasing. C) marginal social benefit equals marginal social cost. D) marginal social benefit is increasing. Answer: C Topic: Efficiency and Inefficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

6) Allocative efficiency occurs when A) marginal social cost exceeds marginal social benefit. B) marginal social benefit exceeds marginal social cost. C) marginal social benefit equals marginal social cost. D) total social benefit exceeds total social cost. Answer: C Topic: Efficiency and Inefficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

7) Which of the following statements is true? A) At the efficient quantity, marginal social benefit equals marginal social cost. B) Marginal social cost increases as the quantity produced decreases. C) Marginal social benefit decreases as the quantity consumed decreases. D) If marginal social benefit exceeds marginal social cost by as much as possible, production is efficient. Answer: A Topic: Efficiency and Inefficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

8) Resource use is efficient when production is such that marginal social benefit is A) greater than marginal social cost. B) equal to marginal social cost. C) less than marginal social cost. D) at its maximum value. Answer: B Topic: Efficiency and Inefficiency Skill: Definition Status: Old AACSB: Analytical Skills

9) In the competitive market for balloon rides, marginal social cost equals marginal social benefit when 3,000 balloon rides a day are taken and the price of a ride is $130. Which of the following statements is true? A) There is a free-rider problem. B) Too many rides are available. C) Too few rides are available and the price of a balloon ride is too high. D) The efficient quantity of balloon rides is 3,000 a day. Answer: D Topic: Efficiency and Inefficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

10) It is efficient to produce an additional shirt if the A) marginal social benefit of producing the shirt is greater than zero. B) marginal social benefit of producing the shirt is zero. C) marginal social benefit of producing the shirt is greater than the marginal social cost of producing it. D) total social benefit from producing shirts is maximized. Answer: C Topic: Efficiency and Inefficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

11) When 2,000 hamburgers per day are produced, the marginal social benefit is $1.50 and the marginal social cost is $1.00. And when 7,500 hamburgers per day are produced, the marginal social benefit is $1.00 and the marginal social cost is $1.50. The efficient production quantity of hamburgers is ________ a day. A) more than 7,500 B) 7,500 C) between 2,000 and 7,500 D) 2,000 Answer: C Topic: Efficiency and Inefficiency Skill: Analytical Status: Old AACSB: Analytical Skills

12) In the market for DVDs, 500,000 DVDs a month are available. The value people place on the 500,000th DVD a month is less than the marginal social cost of producing it. Resource use ________. A) is efficient B) is inefficient C) would be more efficient if people firms would produce more DVDs D) would be more efficient if people would buy more DVDs Answer: B Topic: Efficiency and Inefficiency Skill: Analytical Status: Old AACSB: Analytical Skills

13) At the current level of output, the marginal social benefit from a slice of pizza is less than the marginal social cost of producing a slice of pizza. Resources will be used more efficiently if ________ slices of pizza are produced and ________ other goods are produced. A) fewer; fewer B) more; fewer C) more; more D) fewer; more Answer: D Topic: Efficiency and Inefficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

14) At the current level of output, the marginal social benefit of pizza exceeds the marginal social cost of pizza. Compared to the allocatively efficient quantity, we are producing too ________ pizza and too ________ of other goods. A) much; little B) much; much C) little; little D) little; much Answer: D Topic: Efficiency and Inefficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

15) At the current level of output, the marginal social cost of sandwiches exceeds the marginal social benefit of sandwiches. Compared to the allocatively efficient quantity we are producing too ________ sandwiches and too ________ of other goods. A) many; little B) many; much C) few; little D) few; much Answer: A Topic: Efficiency and Inefficiency Skill: Conceptual Status: Old AACSB: Analytical Skills 47 Copyright © 2014 Pearson Education, Inc.

16) At the current level of output, the marginal social cost of tennis balls is greater than the marginal social benefit. Then A) more than the efficient quantity of tennis balls is being produced. B) there is excess demand for tennis balls. C) firms producing tennis balls must be earning negative profit. D) too few tennis balls are being produced. Answer: A Topic: Efficiency and Inefficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

17) When the amount of output is such that marginal social benefit exceeds marginal social cost, then to reach the efficient quantity, A) production should be increased. B) production should be decreased. C) production should remain constant. D) More information is needed to determine if production should be increased, decreased, or not changed. Answer: A Topic: Efficiency and Inefficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

18) At the quantity of 200 bushels of apples, the marginal social benefit of a bushel of apples is $100 and the marginal social cost is $50. To produce the efficient quantity of apples, A) more apples should be produced. B) fewer apples should be produced. C) there should be no change in the amount of apples produced. D) More information on the willingness of consumers to purchase apples is needed to determine the efficient level of apples. Answer: A Topic: Efficiency and Inefficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

19) At the current quantity of pizza, the marginal social benefit is greater than the marginal social cost. Then A) the number of pizzas produced is efficient. B) more pizzas must be produced to reach the efficient level. C) fewer pizzas must be produced to reach the efficient level. D) revenue for pizza producers is maximized. Answer: B Topic: Efficiency and Inefficiency Skill: Conceptual Status: Old AACSB: Analytical Skills 48 Copyright © 2014 Pearson Education, Inc.

20) At the current quantity of table saws, the marginal social cost is more than the marginal social benefit. Then A) production of table saws should be decreased to reach the efficient level. B) production of table saws should be increased to reach the efficient level. C) production of table saws is currently at the efficient level. D) producer surplus will be larger than consumer surplus. Answer: A Topic: Efficiency and Inefficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

21) At the quantity of 1000 tacos, the marginal social benefit of a taco is $.50 and the marginal social cost is $.60. To produce the efficient quantity of tacos, A) more tacos should be produced. B) fewer tacos should be produced C) there should be no change in the amount of tacos produced. D) More information on production costs is needed to determine the efficient level of tacos. Answer: B Topic: Efficiency and Inefficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

22) If the marginal cost of producing hair styling decreases, then the efficient quantity of hair stylings to produce ________. A) depends on the marginal benefit B) remains the same C) decreases D) increases Answer: D Topic: Efficiency and Inefficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

Quantity (DVDs per week) 1 2 3 4 5

Marginal social benefit (dollars per DVD) 24 22 20 18 16

Marginal social cost (dollars per DVD) 16 18 20 22 24

23) The schedules in the table give the marginal social benefit and marginal social cost of a DVD. If there are no external benefits or external costs, the efficient number of DVDs to produce is ________ a week. A) 1 B) 3 C) 5 D) any number less than 3 Answer: B Topic: Efficiency and Inefficiency Skill: Analytical Status: Old AACSB: Analytical Skills

24) The schedules in the table give the marginal social benefit and marginal social cost of a DVD. At the efficient quantity, the minimum supply-price of a DVD is ________ and the value of a DVD is ________. A) $16; $24 B) $16; $20 C) $20; $16 D) $20; $20 Answer: D Topic: Efficiency and Inefficiency Skill: Analytical Status: Old AACSB: Analytical Skills

25) The schedules in the table give the marginal social benefit and marginal social cost of a DVD. If the marginal cost of producing a DVD increases by $4, then the efficient number of DVDs is ________ a week. A) 1 B) 2 C) 5 D) 4 Answer: B Topic: Efficiency and Inefficiency Skill: Analytical Status: Old AACSB: Analytical Skills

26) The schedules in the table give the marginal social benefit and marginal social cost of a DVD. If the number of DVD produced is cut to 2 a week, then the ________. A) minimum supply-price of the second DVD is $18 B) price is $18 a DVD C) opportunity cost of the second DVD is $22 D) value of the second DVD is $20 Answer: A Topic: Efficiency and Inefficiency Skill: Analytical Status: Old AACSB: Analytical Skills

27) When the competitive market is using its resources efficiently, the A) total amount of consumer surplus is maximized. B) total amount of producer surplus is maximized. C) sum of the total amount of consumer surplus plus the total amount of producer surplus is maximized. D) sum of the total amount of consumer surplus plus the total amount of producer surplus equals zero. Answer: C Topic: Efficiency of Competitive Markets Skill: Analytical Status: Old AACSB: Analytical Skills

28) When a market is in equilibrium, the total amount of consumer surplus must be ________ the total amount of producer surplus. A) larger than B) equal to C) less than D) None of the above answers are correct. Answer: D Topic: Efficiency of Competitive Markets Skill: Analytical Status: Old AACSB: Analytical Skills

29) When the efficient quantity of output is produced, A) the marginal social benefit of the last unit produced is equal to the marginal social cost of the last unit produced. B) the sum of consumer surplus and producer surplus is maximized. C) resources are used in the activities in which they are most highly valued. D) All of the above answers are correct. Answer: D Topic: Efficiency and Inefficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

30) If the market for roller blades is at a competitive equilibrium, and there are no external costs or benefits, then A) marginal social benefit is equal to marginal social cost. B) the sum of consumer surplus and producer surplus is maximized. C) resources are being used efficiently. D) All of the above answers are correct. Answer: D Topic: Efficiency of Competitive Markets Skill: Conceptual Status: Old AACSB: Analytical Skills

31) If the marginal cost of producing every quantity decreases, all the following occur EXCEPT ________. A) minimum supply price does not change B) the marginal social benefit of the last unit bought changes C) the consumer surplus increases D) the efficient quantity increases Answer: A Topic: Efficiency of Competitive Markets Skill: Conceptual Status: Old AACSB: Analytical Skills

Price (cents per brownie) 0 10 20 30 40 50 60 70 80 90

Quantity demanded (per day) 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0

Quantity supplied (per day) 0 100 200 300 400 500 600 700 800 900

32) In the above table, what is the maximum price that consumers are willing to pay for the 200th brownie? A) 0 B) 20¢ C) 60¢ D) 80¢ Answer: D Topic: Value, Willingness to Pay, and Demand Skill: Conceptual Status: Old AACSB: Analytical Skills 52 Copyright © 2014 Pearson Education, Inc.

33) In the above table, what is the minimum price that producers must be offered to produce the 200th brownie? A) 0 B) 20¢ C) 60¢ D) 80¢ Answer: B Topic: Cost, Minimum-Supply Price, and Supply Skill: Conceptual Status: Old AACSB: Analytical Skills

34) In the above table, when 200 brownies are produced, A) marginal social benefit is greater than marginal social cost, and resource use is efficient. B) marginal social benefit is greater than marginal social cost, and there is a deadweight loss. C) marginal social benefit equals marginal social cost, and resource use is efficient. D) marginal social benefit is less than marginal social cost, and there is a deadweight loss. Answer: B Topic: Deadweight Loss Skill: Conceptual Status: Old AACSB: Analytical Skills

35) In the above table, the efficient quantity of brownies is produced when the price of a brownie is equal to A) 0. B) 40¢. C) 60¢. D) 80¢. Answer: C Topic: Efficiency of Competitive Markets Skill: Conceptual Status: Old AACSB: Analytical Skills

Price (dollars) 0 1 2 3 4 5 6 7 8

Quantity Quantity supplied demanded (marginal social (marginal social cost) benefit) 0 31 4 28 8 24 12 20 16 16 20 12 24 8 28 4 32 0

36) Based on the above table, which of the following is the efficient quantity of output? A) 31 B) 16 C) 32 D) None of the above answers is correct. Answer: B Topic: Efficiency of Competitive Markets Skill: Analytical Status: Old AACSB: Analytical Skills

Price (dollars per can) 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00

Quantity demanded

Quantity supplied

1000 900 750 600 400 200 100 50

100 300 400 600 800 1000 1200 1400

37) The above table gives the market demand and market supply schedules for soda. What is the maximum price consumers are willing to pay for the 400th can of soda? A) $0.80 per can B) $0.70 per can C) $0.60 per can D) $0.50 per can Answer: B Topic: Value, Willingness to Pay, and Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

38) The above table gives the market demand and market supply schedules for soda. What is the minimum price that producers are willing to accept for the 400th can of soda? A) $0.40 per can B) $0.50 per can C) $0.60 per can D) $0.70 per can Answer: B Topic: Cost, Minimum-Supply Price, and Supply Skill: Conceptual Status: Old AACSB: Analytical Skills

39) The above table gives the market demand and market supply schedules for soda. There are no external benefits or external costs. What is the efficient quantity of soda? A) 1400 B) 1000 C) 600 D) It is impossible to determine the efficient quantity without more information. Answer: C Topic: Efficiency of Competitive Markets Skill: Conceptual Status: Old AACSB: Analytical Skills

40) The figure illustrates the market for haircuts. Curve A is the ________ curve, and curve B is the ________ curve. A) marginal social cost; marginal social benefit B) total social cost; total social benefit C) opportunity cost; opportunity benefit D) marginal social benefit; marginal social cost Answer: A Topic: Marginal Benefit and Marginal Cost Skill: Definition Status: Old AACSB: Analytical Skills

41) In the above figure, when the quantity equals 400 pretzels, A) consumers are willing to pay $2 for the 400th pretzel. B) producers are willing to supply 400 pretzels for $3. C) producers are willing to supply 400 pretzels for $2. D) the marginal benefit is greater than the marginal cost. Answer: A Topic: Marginal Benefit Skill: Conceptual Status: Old AACSB: Analytical Skills

42) The above figure shows that the maximum amount a person is willing to pay for the 400th pretzel A) is greater than the marginal social cost of the 400th pretzel. B) is less than the marginal social benefit of the 400th pretzel. C) and the marginal social benefit of the 400th pretzel are both $2. D) is greater than the marginal social benefit of the 200th pretzel. Answer: C Topic: Marginal Benefit Skill: Conceptual Status: Old AACSB: Analytical Skills

43) In the above figure, what is the marginal social benefit of the four-hundredth pretzel? A) $0 B) $2.00 C) $3.00 D) $4.00 Answer: B Topic: Marginal Benefit Skill: Conceptual Status: Old AACSB: Analytical Skills

44) In the above figure, what is the marginal social cost to the economy of producing the four-hundredth pretzel? A) $0 B) $2.00 C) $4.00 D) None of the above answers are correct. Answer: C Topic: Marginal Cost Skill: Conceptual Status: Old AACSB: Analytical Skills

45) In the above figure, what is the efficient quantity of pretzels to produce each day? A) one hundred B) two hundred C) three hundred D) four hundred Answer: C Topic: Efficiency and Inefficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

46) In the above figure, what is the efficient quantity of hot dogs to produce? A) 2 thousand per day B) 4 thousand per day C) 6 thousand per day D) The efficient quantity cannot be determined without knowing the PPF for this economy. Answer: B Topic: Efficiency and Inefficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

47) In the above figure, A) marginal social cost equals marginal social benefit when 300,000 purses are produced. B) 500,000 purses should be sold for $50 each for an efficient outcome. C) it is impossible to determine the efficient quantity of purses. D) None of the above answers is correct. Answer: A Topic: An Efficient Market Skill: Conceptual Status: Old AACSB: Analytical Skills

48) In the above figure, if the market produces the efficient amount of purses, then consumer surplus equals triangle A) abc. B) bcd. C) adc. D) cgf. Answer: A Topic: Consumer Surplus Skill: Conceptual Status: Old AACSB: Analytical Skills

49) In the above figure, the total consumer surplus at the efficient level of output is ________. A) $4.5 million B) $9.0 million C) $2.5 million D) $8.5 million Answer: A Topic: Consumer Surplus Skill: Conceptual Status: Old AACSB: Analytical Skills

50) In the above figure, if the market produces the efficient amount of purses then producer surplus equals triangle A) abc. B) bcd. C) adc. D) dce. Answer: B Topic: An Efficient Market Skill: Conceptual Status: Old AACSB: Analytical Skills

51) In the above figure, if the market produces the efficient amount of purses then producer surplus equals A) triangle bcd. B) triangle adc. C) rectangle bcde. D) trapezoid adec. Answer: A Topic: Producer Surplus Skill: Conceptual Status: Old AACSB: Analytical Skills

52) In the above figure, the total producer surplus at the efficient level of output is ________. A) $4.5 million B) $9.0 million C) $2.5 million D) $3.0 million Answer: D Topic: Producer Surplus Skill: Conceptual Status: Old AACSB: Analytical Skills

53) In the above figure, 300,000 purses per month is A) the efficient amount to produce because consumer surplus is maximized. B) the efficient amount to produce because the sum of consumer surplus and producer surplus is maximized. C) an inefficient amount to produce because consumer surplus is not maximized. D) an inefficient amount to produce because the sum of consumer surplus and producer surplus is not maximized. Answer: B Topic: Efficiency of Competitive Markets Skill: Conceptual Status: Old AACSB: Analytical Skills

54) In the above figure, 300,000 purses per month is A) the efficient amount to produce because at 300,000 purses marginal social benefit equals marginal social cost. B) the efficient amount to produce because at 300,000 purses marginal social benefit is greater than marginal social cost. C) an inefficient amount to produce because at 300,000 purses marginal social benefit equals marginal social cost. D) an inefficient amount to produce because producing 500,000 purses sets the marginal social benefit equal to zero. Answer: A Topic: Efficiency of Competitive Markets Skill: Analytical Status: Old AACSB: Analytical Skills

55) The above figure illustrates the marginal social benefit and marginal social cost for chicken sandwiches. If the quantity is decreased from 6 to 3 and the price increases from $3 to $4, consumer surplus will decrease by A) $1.50. B) $2.00. C) $3.00. D) $4.50. Answer: D Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

56) In the above figure, suppose the quantity produced is 40. Then A) the marginal social cost of the 40th unit is $1. B) the willingness to pay for the 40th unit is $2, the equilibrium price. C) production is not efficient because MSB > MSC. D) production is not efficient because MSC>MSB. Answer: D Topic: Efficiency of Competitive Markets Skill: Conceptual Status: Old AACSB: Analytical Skills

57) In the above figure, at the equilibrium price and quantity, consumer surplus is ________. A) $90 B) $60 C) $45 D) $30 Answer: C Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

58) In the above figure, at the equilibrium price and quantity, producer surplus is ________. A) $90 B) $60 C) $45 D) $30 Answer: D Topic: Producer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills 64 Copyright © 2014 Pearson Education, Inc.

59) Adam Smith argued that each person in a competitive market is led to promote the A) efficient use of society's resources, because each person's intention is to make society better off. B) efficient use of society's resources, even though it is no person's intention to make society better off. C) inefficient use of society's resources, even though each person's intention is to make society better off. D) inefficient use of society's resources, because it is no person's intention to make society better off. Answer: B Topic: The Invisible Hand Skill: Definition Status: Old AACSB: Analytical Skills

60) At the efficient level of production, ________. A) producer surplus must be greater than consumer surplus B) consumer surplus must be greater than producer surplus C) there is no deadweight loss D) the market price is greater than the monopoly price Answer: C Topic: Deadweight Loss Skill: Conceptual Status: Old AACSB: Analytical Skills

61) Underproduction of good ________ create a deadweight loss and overproduction of a good ________ create a deadweight loss. A) will; will B) will; will not C) will not; will D) will not; will not Answer: A Topic: Deadweight Loss Skill: Conceptual Status: Old AACSB: Analytical Skills

62) If there are no external costs or benefits, no price or quantity regulations , no taxes or subsidies, and the good is not a public good or a common resource, then efficiency is A) achieved when a monopoly produces the good. B) achieved when the good is produced in a competitive market. C) achieved when the amount of output exceeds the amount produced in a competitive market. D) unrelated to the amount produced in a competitive market. Answer: B Topic: Obstacles to Efficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

63) A firm that is the only seller of a product and is in sole control of a market has a A) monopoly. B) quantity regulations. C) subsidy. D) public good. Answer: A Topic: Obstacles to Efficiency Skill: Definition Status: Old AACSB: Analytical Skills

64) A public good can be consumed by A) only one person who does not have to pay for it. B) only one person who has to pay for it. C) everyone simultaneously, as long as they pay for it. D) everyone simultaneously, even if they do not pay for it. Answer: D Topic: Obstacles to Efficiency Skill: Definition Status: Old AACSB: Analytical Skills

65) Among the sources of economic inefficiency are all of the following EXCEPT A) price regulations. B) rapid technological change. C) monopoly. D) taxes and subsidies. Answer: B Topic: Obstacles to Efficiency Skill: Definition Status: Old AACSB: Analytical Skills

66) Among the sources of economic inefficiency are all of the following EXCEPT A) subsidies. B) taxes. C) competition. D) external costs. Answer: C Topic: Obstacles to Efficiency Skill: Definition Status: Old AACSB: Analytical Skills

67) Which of the following can prevent markets from reaching efficiency? I. decreasing marginal benefit II. taxes III. quantity regulations that limit the quantity that may be produced A) I and II B) I and III C) II and III D) I, II and III Answer: C Topic: Obstacles to Efficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

68) Which of the following can prevent markets from reaching the efficient level of production? I. a monopoly II. taxes III. the product is a public good A) I and II B) II C) II and III D) I, II and III Answer: D Topic: Obstacles to Efficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

69) Which of the following can prevent markets from reaching efficiency? I. price regulations that cap the price that may be charged II. increasing marginal cost III. monopoly A) I only B) I and II C) II and III D) I and III Answer: D Topic: Obstacles to Efficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

70) Suppose a tax is imposed on a good. This will A) increase the price paid by the buyer and decrease the price received by the seller. B) increase the price paid by the buyer but leave the price received by the seller unchanged. C) decrease the price received by the seller but leave the price received by the buyer unchanged. D) increase the price received by the seller and decrease the price paid by the buyer. Answer: A Topic: Obstacles to Efficiency Skill: Definition Status: Old AACSB: Analytical Skills

71) Which of the following is a correct statement? A) Producer surplus is an external benefit. B) Consumer surplus is an external benefit. C) A government subsidy paid to a producer is an external benefit. D) None of the above statements are correct. Answer: D Topic: Obstacles to Efficiency, Externalities Skill: Definition Status: Old AACSB: Analytical Skills

72) A cost borne not by the producer but by other people is called ________ cost. A) an unregulated B) an external C) a consumer D) a non-production Answer: B Topic: Obstacles to Efficiency, Externalities Skill: Definition Status: Old AACSB: Analytical Skills

73) If there is an external cost from making paper, an unregulated competitive market produces A) less than the efficient quantity. B) the efficient quantity. C) more than the efficient quantity. D) a quantity that could be greater than, the same as, or less than the efficient amount. Answer: C Topic: Obstacles to Efficiency, Externalities Skill: Conceptual Status: Old AACSB: Analytical Skills

74) An external benefit is a benefit that ________. A) is enjoyed by someone other than the buyer of a good B) always equals external cost C) experiences increasing marginal returns D) is greatest at the equilibrium point Answer: A Topic: Obstacles to Efficiency, Externalities Skill: Definition Status: Old AACSB: Analytical Skills

75) The pollution created when coal is burned by utilities to generate electricity is an example of ________. A) a marginal benefit to coal producers B) a welfare cost C) an external cost D) a cost paid by the utilities Answer: C Topic: Obstacles to Efficiency, Externalities Skill: Conceptual Status: Old AACSB: Analytical Skills

76) The supplier of your ________ is most likely a monopoly. A) shoes B) toothpaste C) textbooks D) home electricity Answer: D Topic: Obstacles to Efficiency, Monopoly Skill: Conceptual Status: Revised AACSB: Analytical Skills

77) Which of the following conditions could lead to an inefficient quantity of pretzels being produced? A) the existence of many producers of pretzels B) the existence of many consumers of pretzels C) the existence of a single producer and seller of pretzels D) All of the above conditions could cause the actual quantity of pretzels to be an inefficient quantity. Answer: C Topic: Obstacles to Efficiency, Monopoly Skill: Conceptual Status: Old AACSB: Analytical Skills

78) If the market for diamonds is a monopoly, then A) there is an inefficient amount of resources allocated to the diamond market. B) the prices of diamonds are too low. C) diamond production is at the amount where the marginal social benefit equals the marginal social cost. D) the diamond market is efficient. Answer: A Topic: Obstacles to Efficiency, Monopoly Skill: Conceptual Status: Old AACSB: Analytical Skills

79) If the government subsidizes the production of a good, A) an efficient outcome for producers occurs. B) overproduction relative to the efficient quantity occurs. C) a deadweight loss is created. D) Both answers B and C are correct. Answer: D Topic: Obstacles to Efficiency, Subsidy Skill: Definition Status: Old AACSB: Analytical Skills

80) Competitive markets will generally produce A) too much of a public good. B) too little of a public good. C) the efficient amount of a public good. D) the efficient amount of a public good in the short run, but not in the long run. Answer: B Topic: Obstacles to Efficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

81) Underproduction compared to the efficient amount implies that for the last unit produced, A) marginal social benefit exceeds marginal social cost. B) marginal social benefit equals marginal social cost. C) marginal social cost exceeds marginal social benefit. D) the deadweight loss is zero. Answer: A Topic: Underproduction Skill: Conceptual Status: Old AACSB: Analytical Skills

82) If the government restricts the selling of corn so that the quantity is less than the equilibrium quantity, then the policy I. creates a deadweight loss. II. decreases total surplus. A) Only I is correct. B) Only II is correct. C) Both I and II are correct. D) Neither I nor II is correct. Answer: C Topic: Underproduction Skill: Analytical Status: New AACSB: Analytical Skills

83) Overproduction compared to the efficient amount implies that for the last unit produced A) marginal social benefit exceeds marginal social cost. B) marginal social benefit equals marginal social cost. C) marginal social cost exceeds marginal social benefit. D) the deadweight loss is zero. Answer: C Topic: Overproduction Skill: Conceptual Status: Old AACSB: Analytical Skills

84) If the quantity of corn is such that the marginal cost of corn is greater than the marginal benefit of corn, then I. there is a deadweight loss. II. more than the efficient quantity of corn is produced. A) Only I is correct. B) Only II is correct. C) Both I and II are correct. D) Neither I nor II is correct. Answer: C Topic: Overproduction Skill: Analytical Status: New AACSB: Analytical Skills

85) The decrease in consumer surplus and producer surplus that results from an inefficient level of production is called the A) external cost. B) external benefit. C) deadweight loss. D) big tradeoff. Answer: C Topic: Deadweight Loss Skill: Definition Status: Old AACSB: Analytical Skills 71 Copyright © 2014 Pearson Education, Inc.

86) Deadweight loss is A) not a social loss. B) made up of a loss of only consumer surplus. C) made up of a loss of only producer surplus. D) made up of a loss of both consumer surplus and producer surplus. Answer: D Topic: Deadweight Loss Skill: Definition Status: Old AACSB: Analytical Skills

87) Deadweight loss can be the result of A) overproduction, but not underproduction. B) underproduction, but not overproduction. C) both overproduction and underproduction. D) neither overproduction, nor underproduction. Answer: C Topic: Deadweight Loss Skill: Conceptual Status: Old AACSB: Analytical Skills

88) Deadweight loss is the decrease in ________ from producing an inefficient amount of a product. A) only consumer surplus B) only producer surplus C) consumer surplus and producer surplus D) profit Answer: C Topic: Deadweight Loss Skill: Definition Status: Old AACSB: Analytical Skills

89) When a deadweight loss occurs in a market, we can be certain that A) taxes have been imposed in a market. B) the market is a monopoly. C) there underproduction in the market. D) the entire society experiences a loss. Answer: D Topic: Deadweight Loss Skill: Conceptual Status: Old AACSB: Analytical Skills

-90) By reducing its output compared to a competitive market, a monopoly leads to A) a more efficient use of resources. B) external benefits. C) external costs. D) a deadweight loss. Answer: D Topic: Deadweight Loss Skill: Conceptual Status: Old AACSB: Analytical Skills

91) The reduction in consumer and producer surplus that results from underproduction is called A) an internal cost. B) a deadweight loss. C) a quantity loss. D) None of the above answers is correct. Answer: B Topic: Deadweight Loss Skill: Definition Status: Old AACSB: Analytical Skills

92) The figure illustrates the market for bagels. If the number of bagels is cut from 20 to 10 an hour, the deadweight loss is ________. A) $0.50 a bagel B) -$5.00 an hour C) $0 an hour D) $5.00 an hour Answer: D Topic: Deadweight Loss Skill: Analytical Status: Old AACSB: Analytical Skills

93) The figure illustrates the market for bagels. If the number of bagels is increased from 20 to 30 an hour, consumer surplus plus producer surplus ________ and deadweight loss is ________. A) decreases; negative B) decreases; positive C) increases; positive D) increases; negative Answer: B Topic: Deadweight Loss Skill: Analytical Status: Old AACSB: Analytical Skills

94) In the above figure, the efficient quantity of magazines to produce per day is A) 0, because that is where the marginal social benefit exceeds the marginal social cost by as much as possible. B) more than 0 and less than 300,000 magazines. C) 300,000 magazines. D) more than 300,000 magazines. Answer: C Topic: Efficiency and Inefficiency Skill: Analytical Status: Old AACSB: Analytical Skills

95) In the above figure, when the efficient quantity is produced the marginal social cost of the last magazine is A) $1. B) $3. C) $5. D) some amount not given in the above three answers. Answer: B Topic: Efficiency and Inefficiency Skill: Analytical Status: Old AACSB: Analytical Skills

96) In the above figure, when the efficient quantity is produced the marginal social benefit of the last magazine is A) $1. B) $3. C) $5. D) some amount not given in the above three answers. Answer: B Topic: Efficiency and Inefficiency Skill: Analytical Status: Old AACSB: Analytical Skills

97) The above figure shows the marginal social benefit and marginal social cost curves of chocolate in the nation of Kaffenia. What is the marginal social benefit from the 100th pound of chocolate each day? A) $1.50 per pound B) $1.00 per pound C) $0.50 per pound D) None of the above answers is correct. Answer: A Topic: Marginal Benefit Skill: Conceptual Status: Old AACSB: Analytical Skills

98) The above figure shows the marginal social benefit and marginal social cost curves of chocolate in the nation of Kaffenia. What is the marginal social cost of producing the 250th pound of chocolate each day? A) $625.00 per pound B) $2.50 per pound C) $1.00 per pound D) $0.50 per pound Answer: B Topic: Marginal Cost Skill: Conceptual Status: Old AACSB: Analytical Skills

99) The above figure shows the marginal social benefit and marginal social cost curves of chocolate in the nation of Kaffenia. What is the efficient quantity of chocolate to produce each day? A) zero B) 100 pounds C) 150 pounds D) 250 pounds Answer: C Topic: Efficiency and Inefficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

100) The above figure shows the marginal social benefit and marginal social cost curves of chocolate in the nation of Kaffenia. When the marginal social benefit is equal to the marginal social cost of chocolate in Kaffenia, A) either 100 pounds or 250 pounds can be produced each day. B) no chocolate is produced. C) 150 pounds will be produced each day. D) any quantity up to 150 pounds will be efficient. Answer: C Topic: Efficiency and Inefficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

101) The above figure shows the marginal social benefit and marginal social cost curves of chocolate in the nation of Kaffenia. There is no external benefit nor external cost. The demand curve for chocolate is the same as the A) marginal social cost curve of chocolate. B) marginal social benefit curve of chocolate. C) opportunity cost curve of chocolate. D) marginal social benefit curve minus the marginal social cost curve of chocolate. Answer: B Topic: Value, Price, and Consumer Surplus Skill: Conceptual Status: Old AACSB: Analytical Skills

102) The above figure shows the marginal social benefit and marginal social cost curves of chocolate in the nation of Kaffenia. At Kaffenia's efficient quantity of chocolate A) total consumer surplus is zero. B) total producer surplus is zero. C) the sum of consumer surplus and producer surplus is zero. D) the sum of consumer surplus and producer surplus is maximized. Answer: D Topic: Efficiency of Competitive Markets Skill: Conceptual Status: Old AACSB: Analytical Skills

103) The above figure shows the competitive market for turkey. The consumer surplus for the 300 millionth pound of turkey is A) $2.00 per pound. B) $225 million. C) $0.80 per pound. D) $0.50 per pound. Answer: D Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

104) The above figure shows the competitive market for turkey. The producer surplus for the 300 millionth pound of turkey is A) $1.20 per pound. B) $135 million. C) $0.30 per pound. D) $0.80 per pound. Answer: C Topic: Producer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

105) At the competitive market outcome in the above figure, the A) consumer surplus on the last pound of turkey consumed is equal to zero. B) total consumer surplus from turkey consumption is $400 million. C) deadweight loss from turkey consumption is equal to zero. D) All of the above answers are correct. Answer: D Topic: Efficiency of Competitive Markets Skill: Analytical Status: Old AACSB: Analytical Skills

106) At the competitive market outcome in the above figure, the A) producer surplus is equal to $480 million. B) total producer surplus from turkey sales is zero. C) sum of consumer and producer surpluses from turkey is $640 million. D) All of the above answers are correct. Answer: C Topic: Efficiency of Competitive Markets Skill: Analytical Status: Old AACSB: Analytical Skills

107) In the above figure, if output were restricted to 300 million pounds of turkey, then A) the marginal social benefit would exceed the marginal social cost on the last pound of turkey traded by $0.80. B) there would be a deadweight loss of $40 million. C) there would be inefficient underproduction of turkey. D) All of the above answers are correct. Answer: D Topic: Underproduction Skill: Analytical Status: Old AACSB: Analytical Skills

108) In the above figure, the deadweight loss is zero if output is A) 0 units. B) 10 units. C) 20 units. D) 30 units. Answer: C Topic: Deadweight Loss Skill: Analytical Status: Old AACSB: Analytical Skills

109) In the above figure, of the quantities listed below, for which is the total deadweight loss the largest? A) 0 units B) 10 units C) 20 units D) 30 units Answer: A Topic: Deadweight Loss Skill: Analytical Status: Old AACSB: Analytical Skills

110) In the above figure, as output increases from 0 units to 10 units to 20 units to 30 units, the deadweight loss A) falls. B) falls at first, then rises. C) rises. D) rises at first, then falls. Answer: B Topic: Deadweight Loss Skill: Analytical Status: Old AACSB: Analytical Skills

111) In the above figure, if output is 30 units, then the total deadweight loss is A) $5. B) $10. C) $20. D) $60. Answer: B Topic: Deadweight Loss Skill: Analytical Status: Old AACSB: Analytical Skills

112) In the above figure, if output is 10 units, then the total deadweight loss is A) $5. B) $10. C) $20. D) $60. Answer: B Topic: Deadweight Loss Skill: Analytical Status: Old AACSB: Analytical Skills

113) In the above figure, suppose that the government sets a limit to production at 10 units of output and the price rises to $4. In comparison to a competitive market the consumer surplus would fall by A) $0. B) $10. C) $15. D) $20. Answer: C Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

114) In the above figure, suppose that the government sets a limit that may be produced of 10 units of output and the price rises to $4. In comparison to a competitive market the producer surplus would rise by A) $0. B) $5. C) $15. D) $20. Answer: B Topic: Producer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

115) In the above figure, suppose that the government sets a limit that may be produced of 10 units of output and the price rises to $4. The total deadweight loss would be A) $0. B) $10. C) $15. D) $20. Answer: B Topic: Deadweight Loss Skill: Analytical Status: Old AACSB: Analytical Skills

116) In the above figure, at the efficient quantity of CDs, A) total consumer surplus is zero. B) total producer surplus is zero. C) the sum of consumer surplus and producer surplus is maximized. D) Both answers A and B are correct. Answer: C Topic: Efficiency of Competitive Markets Skill: Conceptual Status: Old AACSB: Analytical Skills

117) In the above figure, if five million CDs per month are produced and consumed, that is A) better than producing and consuming four million CDs because more is always better than less. B) more than the efficient quantity because the marginal social benefit exceeds the marginal social cost. C) more than the efficient quantity because the marginal social cost exceeds the marginal social benefit. D) less than the efficient quantity because the opportunity cost exceeds the marginal social benefit. Answer: C Topic: Overproduction Skill: Definition Status: Old AACSB: Analytical Skills

118) Using the above figure, which of the following quantities of CDs has the largest deadweight loss? A) 3 million CDs B) 4 million CDs C) 7 million CDs D) The deadweight losses associated with the three quantities given above are all equal. Answer: C Topic: Deadweight Loss Skill: Definition Status: Old AACSB: Analytical Skills 83 Copyright © 2014 Pearson Education, Inc.

119) The figure above shows the market for coffee. If 10 million pounds of coffee a month are available, the ________ price that consumers are willing to pay for the last pound is ________. A) maximum; $2.00 B) maximum; $3.50 C) minimum; $2.00 D) minimum; $3.50 Answer: B Topic: Value, Price, and Consumer Surplus Skill: Definition Status: Old AACSB: Analytical Skills

120) The figure above shows the market for coffee. If 30 pound of coffee a month are available, the ________ price that consumers are willing to pay for the last pound is ________. A) maximum; $4.00 B) minimum; $4.00 C) maximum; $2.50 D) minimum; $2.50 Answer: C Topic: Value, Price, and Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

121) The figure above shows the market for coffee. The ________ price that producers must be offered to get them to produce 10 million pounds of coffee per month is ________. A) maximum; $2.00 B) maximum; $3.50 C) minimum; $2.00 D) minimum; $3.50 Answer: C Topic: Marginal Cost Skill: Analytical Status: Old AACSB: Analytical Skills

122) The figure above shows the market for coffee. The ________ price that producers must be offered to get them to produce 30 million pounds of coffee per month is ________. A) maximum; $2.50 B) minimum; $2.50 C) maximum; $4.00 D) minimum; $4.00 Answer: D Topic: Marginal Cost Skill: Analytical Status: Old AACSB: Analytical Skills

123) The figure above shows the market for coffee. When the efficient quantity of coffee is produced, the marginal social benefit from the last pound is A) $1.00. B) $2.50. C) $3.00. D) $4.00. Answer: C Topic: Efficiency and Inefficiency Skill: Analytical Status: Old AACSB: Analytical Skills

124) The figure above shows the market for coffee. When the efficient quantity of coffee is produced, the marginal social cost of the last pound is A) $2.50. B) $3.50. C) $3.00. D) $2.00. Answer: C Topic: Efficiency and Inefficiency Skill: Analytical Status: Old AACSB: Analytical Skills

125) The figure above shows the market for coffee. If the efficient quantity of coffee is produced, the consumer surplus is A) $10 million. B) $20 million. C) $60 million. D) zero. Answer: A Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

126) The figure above shows the market for coffee. If more coffee plantations are planted in Brazil and Vietnam so that the supply of coffee increases, the efficient quantity of coffee will ________ and the consumer surplus will ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: A Topic: Consumer Surplus Skill: Conceptual Status: Old AACSB: Analytical Skills

127) The figure above shows the market for coffee. If the efficient quantity of coffee is produced, the producer surplus is A) $10 million. B) $20 million. C) $60 million. D) zero. Answer: B Topic: Producer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

128) The figure above shows the market for coffee. Coffee is a normal good. If consumers' incomes fall, the efficient quantity of coffee will ________ and the producer surplus will ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: C Topic: Producer Surplus Skill: Conceptual Status: Old AACSB: Analytical Skills

129) The figure above shows the market for coffee. If one firm owns all the coffee outlets and sells 10 million pounds of coffee a month, A) the market is efficient because the marginal social benefit from coffee exceeds its marginal social cost. B) the market is efficient because the total social benefit from coffee exceed the total social cost. C) there is a deadweight loss because the marginal social benefit from the last pound of coffee exceeds its marginal social cost. D) there is a deadweight loss because the marginal social cost of the last pound of coffee exceeds its marginal social benefit. Answer: C Topic: Deadweight Loss Skill: Conceptual Status: Old AACSB: Analytical Skills

130) The figure above shows the market for coffee. If one firm owns all the coffee outlets and sells 10 million pounds of coffee a month, the deadweight loss is A) zero. B) $7.5 million. C) $15 million. D) $10 million Answer: B Topic: Deadweight Loss Skill: Analytical Status: Old AACSB: Analytical Skills

131) The figure above shows the market for coffee. If the government pays the coffee producers a subsidy and production increases to 30 million pounds per day, the market is A) efficient because the marginal social benefit from the last pound of coffee exceeds its marginal social cost. B) efficient because the total social benefit from coffee exceed the total social cost. C) inefficient because the marginal social benefit from the last pound of coffee exceeds its marginal social cost. D) inefficient because the marginal social cost of the last pound of coffee exceeds its marginal social benefit. Answer: D Topic: Efficiency and Inefficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

132) The figure above shows the market for coffee If the government pays the coffee producers a subsidy and production increases to 30 million pounds per day, the deadweight loss is A) zero. B) $7.5 million. C) $15 million. D) $10 million Answer: B Topic: Deadweight Loss Skill: Analytical Status: Old AACSB: Analytical Skills

133) The above figure shows the marginal social benefit and marginal social cost curves of doughnuts in the nation of Kaffenia. There is no external benefit. What is the marginal benefit to the citizen of Kaffenia who consumes the 100th dozen doughnuts each day? A) $10.00 per dozen B) $8.00 per dozen C) $6.00 per dozen D) $4.00 per dozen Answer: A Topic: Marginal Benefit Skill: Conceptual Status: Old AACSB: Analytical Skills

134) The above figure shows the marginal social benefit and marginal social cost curves of doughnuts in the nation of Kaffenia. What is the marginal social cost to the economy of Kaffenia of producing the 100th dozen doughnuts each day? A) $10.00 per dozen B) $8.00 per dozen C) $6.00 per dozen D) $4.00 per dozen Answer: D Topic: Marginal Cost Skill: Conceptual Status: Old AACSB: Analytical Skills

135) The above figure shows the marginal social benefit and marginal social cost curves of doughnuts in the nation of Kaffenia. What is the marginal social benefit from the 300th dozen doughnuts each day? A) $10.00 per dozen B) $8.00 per dozen C) $6.00 per dozen D) $4.00 per dozen Answer: D Topic: Marginal Benefit Skill: Conceptual Status: Old AACSB: Analytical Skills

136) The above figure shows the marginal social benefit and marginal social cost curves of doughnuts in the nation of Kaffenia. What is the marginal social cost to the economy of Kaffenia of producing the 300th dozen doughnuts each day? A) $10.00 per dozen B) $8.00 per dozen C) $6.00 per dozen D) $4.00 per dozen Answer: B Topic: Marginal Cost Skill: Conceptual Status: Old AACSB: Analytical Skills

137) The above figure shows the marginal social benefit and marginal social cost curves of doughnuts in the nation of Kaffenia. What is the marginal social cost of producing the 200th dozen doughnuts each day? A) $10.00 per dozen B) $8.00 per dozen C) $6.00 per dozen D) $4.00 per dozen Answer: C Topic: Marginal Cost Skill: Conceptual Status: Old AACSB: Analytical Skills 89 Copyright © 2014 Pearson Education, Inc.

138) The above figure shows the marginal social benefit and marginal social cost curves of doughnuts in the nation of Kaffenia. What is the efficient quantity of doughnuts to produce each day? A) 100 dozen B) 200 dozen C) 300 dozen D) 500 dozen Answer: B Topic: Efficiency and Inefficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

139) The above figure shows the marginal social benefit and marginal social cost curves of doughnuts in the nation of Kaffenia. When the marginal social benefit of the last dozen doughnuts is equal to the marginal social cost, A) the efficient quantity is being produced and consumed. B) 200 dozen doughnuts are produced and consumed each day. C) an increase in production and consumption would increase efficiency. D) Both answers A and B are correct. Answer: D Topic: Efficiency and Inefficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

140) The above figure shows the marginal social benefit and marginal social cost curves of doughnuts in the nation of Kaffenia. At Kaffenia's efficient quantity of doughnuts, A) total consumer surplus is zero. B) total producer surplus is zero. C) consumer surplus exceeds producer surplus by the greatest possible amount. D) the sum of consumer surplus and producer surplus is maximized. Answer: D Topic: Efficiency of Competitive Markets Skill: Conceptual Status: Old AACSB: Analytical Skills

141) The above figure shows the marginal social benefit and marginal social cost curves of doughnuts in the nation of Kaffenia. Which of the following would lead the quantity of doughnuts in Kaffenia to differ from the efficient quantity? A) The existence of many producers and sellers of doughnuts. B) The existence of just one producer and seller of doughnuts. C) Damage to the environment from the disposal of oil used to cook the doughnuts. D) Both answers B and C are correct. Answer: D Topic: Obstacles to Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills 90 Copyright © 2014 Pearson Education, Inc.

142) The figure above shows the market for milk. If 100 gallons of milk a day are available, the ________ price that consumers are willing to pay for the last gallon is ________. A) maximum; $2.50 B) minimum; $3.00 C) maximum; $4.00 D) minimum; $4.00 Answer: C Topic: Value, Price, and Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

143) The figure above shows the market for milk. If 250 gallons of milk a day are available, the ________ price that consumers are willing to pay for the last gallon is ________. A) maximum; $2.50 B) minimum; $2.50 C) maximum; $3.25 D) minimum; $3.25 Answer: A Topic: Value, Price, and Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

144) The figure above shows the market for milk. The ________ price that producers must be offered to get them to produce 100 gallons of milk per day is ________. A) maximum; $2.50 B) minimum; $3.00 C) maximum; $4.00 D) minimum; $2.50 Answer: D Topic: Marginal Cost Skill: Analytical Status: Old AACSB: Analytical Skills

145) The figure above shows the market for milk. The ________ price that producers must be offered to get them to produce 250 gallons of milk per day is ________. A) maximum; $3.25 B) minimum; $3.25 C) maximum; $2.50 D) minimum; $2.50 Answer: B Topic: Marginal Cost Skill: Analytical Status: Old AACSB: Analytical Skills

146) The figure above shows the market for milk. When the efficient quantity of milk is produced, the marginal social benefit from the last gallon is A) $2.00. B) $2.50. C) $3.00. D) $3.50. Answer: C Topic: Efficiency and Inefficiency Skill: Analytical Status: Old AACSB: Analytical Skills

147) The figure above shows the market for milk. When the efficient quantity of milk is produced, the marginal social cost of the last gallon is A) $3.50. B) $3.00. C) $2.50. D) $2.00. Answer: B Topic: Efficiency and Inefficiency Skill: Analytical Status: Old AACSB: Analytical Skills

148) The figure above shows the market for milk. If the efficient quantity of milk is produced, the consumer surplus is A) $100. B) $400. C) $200. D) $600. Answer: C Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

149) The figure above shows the market for milk. If a drought lowers the productivity of dairy cows so that they give less milk, then the efficient quantity of milk ________ and the consumer surplus ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: D Topic: Consumer Surplus Skill: Conceptual Status: Old AACSB: Analytical Skills

150) The figure above shows the market for milk. If the efficient quantity of milk is produced, the producer surplus is A) $100. B) $400. C) $200. D) $600. Answer: A Topic: Producer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

151) The figure above shows the market for milk. If the population increases, then the efficient quantity of milk ________ and the producer surplus ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: A Topic: Producer Surplus Skill: Conceptual Status: Old AACSB: Analytical Skills

152) The figure above shows the market for milk. If the government pays the milk producers a subsidy and production increases to 300 gallons per day, A) the market is efficient because the marginal social benefit from the last gallon of milk exceeds its marginal social cost. B) the market is efficient because the total social benefit from milk exceed the total social cost. C) there is a deadweight loss because the marginal social benefit from the last gallon of milk exceeds its marginal social cost. D) there is a deadweight loss because the marginal social cost of the last gallon of milk exceeds its marginal social benefit. Answer: D Topic: Deadweight Loss Skill: Conceptual Status: Old AACSB: Analytical Skills

153) The figure above shows the market for milk. If one firm owns all the milk outlets in the city and sells 100 gallons of milk, A) the market is efficient because the marginal social benefit from the last gallon of milk exceeds its marginal social cost. B) the market is efficient because the total social benefit from milk exceed the total social cost. C) there is a deadweight loss because the marginal social benefit from the last gallon of milk exceeds its marginal social cost. D) there is a deadweight loss because the marginal social cost of the last gallon of milk exceeds its marginal social benefit. Answer: C Topic: Deadweight Loss Skill: Conceptual Status: Old AACSB: Analytical Skills

154) The figure above shows the market for milk. If the government pays the milk producers a subsidy and production increases to 300 gallons per day, A) the deadweight loss is $100. B) the deadweight loss is $75. C) the deadweight loss is $50. D) there is no deadweight loss. Answer: B Topic: Deadweight Loss Skill: Analytical Status: Old AACSB: Analytical Skills

155) The figure above shows the market for milk. If one firm owns all the milk outlets in the city and sells 100 gallons of milk, A) the deadweight loss is $100. B) the deadweight loss is $75. C) the deadweight loss is $50. D) there is no deadweight loss. Answer: B Topic: Deadweight Loss Skill: Analytical Status: Old AACSB: Analytical Skills

156) The above figure shows the marginal social benefit and marginal social cost curves of coffee in the nation of Kaffenia. Producing and consuming the efficient quantity of coffee in Kaffenia means that A) the marginal social cost of the last pound of coffee is at the lowest possible value. B) the marginal social benefit of the last pound of coffee is at its highest possible value. C) to produce more coffee, the marginal social benefit of an additional pound of coffee is less than its marginal social cost. D) All of the above are correct. Answer: C Topic: Efficiency and Inefficiency Skill: Analytical Status: Old AACSB: Analytical Skills

157) The above figure shows the marginal social benefit and marginal social cost curves of coffee in the nation of Kaffenia. When marginal social benefit is equal to the marginal social cost of coffee in Kaffenia, A) three hundred pounds per day will be produced and consumed. B) the efficient quantity of coffee is being produced and consumed. C) any decrease in coffee consumption or production would result in a deadweight loss. D) All of the above are correct. Answer: D Topic: Efficiency and Inefficiency Skill: Analytical Status: Old AACSB: Analytical Skills

158) The above figure shows the marginal social benefit and marginal social cost curves of coffee in the nation of Kaffenia. There is no external benefit. What is the marginal benefit to the citizen of Kaffenia who consumes the four hundredth pound of coffee each day? A) $1.00 per pound B) $2.00 per pound C) $3.00 per pound D) $4.00 per pound Answer: B Topic: Marginal Benefit Skill: Conceptual Status: Old AACSB: Analytical Skills

159) The above figure shows the marginal social benefit and marginal social cost curves of coffee in the nation of Kaffenia. There is no external cost. What is the marginal cost to the economy of Kaffenia of producing the four hundredth pound of coffee each day? A) $.50 per pound B) $1.00 per pound C) $2.00 per pound D) $4.00 per pound Answer: D Topic: Marginal Cost Skill: Conceptual Status: Old AACSB: Analytical Skills

160) The above figure shows the marginal social benefit and marginal social cost curves of coffee in the nation of Kaffenia. What is the efficient quantity of coffee to produce each day? A) one hundred pounds B) two hundred pounds C) three hundred pounds D) four hundred pounds Answer: C Topic: Efficiency and Inefficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

161) The above figure shows the marginal social benefit and marginal social cost curves of coffee in the nation of Kaffenia. When 400 pounds of coffee are produced and consumed in Kaffenia each day, that is A) more efficient than when 300 pounds are produced and consumed because more is always better than less. B) inefficient because the marginal social benefit exceeds the marginal social cost. C) inefficient because the marginal social cost of the 400th pound exceeds its marginal social benefit. D) inefficient because the opportunity cost of producing more coffee exceeds its marginal social benefit. Answer: C Topic: Efficiency and Inefficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

162) The above figure shows the marginal social benefit and marginal social cost curves of coffee in the nation of Kaffenia. For a consumer, the price they are willing to pay for each additional pound of coffee is A) always less than the economy's marginal social cost of producing that additional pound. B) equal to their own marginal benefit from consuming that additional pound. C) equal to their consumer surplus. D) Both answers B and C are correct. Answer: B Topic: Value, Price, and Consumer Surplus Skill: Conceptual Status: Old AACSB: Analytical Skills

163) The above figure shows the marginal social benefit and marginal social cost curves of coffee in the nation of Kaffenia. Which of the following would result in the quantity of coffee in Kaffenia differing from the efficient quantity? A) The existence of a single producer and seller of coffee. B) The existence of many producers and sellers of coffee. C) Damage to the environment from fumes emitted by coffee beans. D) Both answers A and C are correct. Answer: D Topic: Obstacles to Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills

164) In the above figure, when the efficient quantity of gloves is produced, the total consumer surplus is A) $3,000. B) $15,000. C) $22,500. D) $45,000. Answer: C Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

165) In the above figure, when the efficient quantity of gloves is produced, the total producer surplus is A) $3,000. B) $15,000. C) $22,500. D) $45,000. Answer: C Topic: Producer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

166) In the above figure, if the production of gloves was restricted to 2,000 a day, then the deadweight loss would equal A) $0, because 2,000 gloves per day is an efficient quantity of gloves to produce. B) $2,000. C) $5,000. D) $10,000. Answer: C Topic: Deadweight Loss Skill: Analytical Status: Old AACSB: Analytical Skills

167) What is the efficient quantity of snowboards in the above figure? A) 0 B) 100 C) 200 D) 500 Answer: B Topic: Efficiency of Competitive Markets Skill: Conceptual Status: Old AACSB: Analytical Skills

168) What area in the above figure is the consumer surplus at the efficient quantity? A) A. B) A + B + C. C) F. D) D + E + F. Answer: B Topic: Consumer Surplus Skill: Conceptual Status: Old AACSB: Analytical Skills

169) In the above figure, what is the amount of consumer surplus at the efficient quantity? A) $0 B) $1,000 C) $2,000 D) $4,000 Answer: C Topic: Consumer Surplus Skill: Conceptual Status: Old AACSB: Analytical Skills

170) What area in the above figure is the producer surplus at the efficient quantity? A) A B) A + B + C C) F D) D + E + F Answer: D Topic: Producer Surplus Skill: Conceptual Status: Old AACSB: Analytical Skills

171) In the above figure, what is the amount of producer surplus at the efficient quantity? A) $0 B) $1,000 C) $2,000 D) $4,000 Answer: C Topic: Producer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

172) Which area in the above figure is the deadweight loss if 100 snowboards are produced? A) A + B + C B) D + E + F C) C + E D) There is no deadweight loss when 100 snowboards are produced. Answer: C Topic: Underproduction Skill: Conceptual Status: Old AACSB: Analytical Skills

173) In the above figure, a price of $1.25 and a quantity of 5 million gallons of milk per day maximizes the A) amount of consumer surplus. B) amount of producer surplus. C) sum of consumer surplus and producer surplus. D) All of the above answers are correct. Answer: C Topic: Efficiency of Competitive Markets Skill: Analytical Status: Old AACSB: Analytical Skills

174) In the above figure, the efficient quantity of milk is A) 10 million gallons per day. B) 5 million gallons per day. C) zero gallons per day. D) None of the above because all of the quantities are efficient. Answer: B Topic: Efficiency of Competitive Markets Skill: Analytical Status: Old AACSB: Analytical Skills 101 Copyright © 2014 Pearson Education, Inc.

175) In the above figure, if the price is $1.25 per gallon of milk and 5 million gallons are produced and consumed, then the consumer surplus is ________ and the producer surplus is ________. A) $3.125 million; $3.125 million B) $12.5 million; $12.5 million C) $6.25 million; $6.25 million D) None of the above answers are correct. Answer: A Topic: Efficiency of Competitive Markets Skill: Analytical Status: Old AACSB: Analytical Skills

176) In the above figure suppose there is only one milk producer who chooses to restrict milk production to two million gallons per day. What is the size of the deadweight loss? (Hint: It is equal to the triangular area of consumer and producer surplus that is lost because of the reduction in output.) A) $12.5 million B) $6.25 million C) $2.25 million D) none of the above Answer: C Topic: Underproduction Skill: Analytical Status: Old AACSB: Analytical Skills

177) In the above figure, suppose the government subsidizes the production of milk so that milk production increases to 8 million gallons per day. What is the size of the deadweight loss? (Hint: It is equal to the triangular area of negative consumer and producer surplus that results when output exceeds the efficient level.) A) $12.5 million B) $6.25 million C) $4.50 million D) $2.25 million Answer: D Topic: Overproduction Skill: Analytical Status: Old AACSB: Analytical Skills

The figure shows the competitive market for milk. 178) In the figure above, when the market is in equilibrium, what is the total surplus? A) $1,000 B) $800 C) $200 D) $1,600 Answer: A Topic: Efficiency of Competitive Markets Skill: Analytical Status: Old AACSB: Analytical Skills

179) In the figure above, when the quantity of milk produced is 300 gallons per day, what is the deadweight loss? A) $62.50 B) $125 C) $200 D) $937.50 Answer: A Topic: Deadweight Loss Skill: Analytical Status: Old AACSB: Analytical Skills

180) In the figure above, when the quantity of milk produced is 600 gallons per day, what is the deadweight loss? A) $250 B) $125 C) $500 D) $50 Answer: A Topic: Deadweight Loss Skill: Analytical Status: Old AACSB: Analytical Skills

181) The figure above shows the market for umbrellas in Sunville. What is the marginal social benefit that Sunville consumers receive from the 200th umbrella bought? A) $23.33 B) $30.00 C) $26.67 D) $50.00 Answer: D Topic: Marginal Benefit Skill: Analytical Status: Old AACSB: Analytical Skills

182) The figure above shows the market for umbrellas in Sunville. When the market for umbrellas in Sunville is in equilibrium, what is the consumer surplus? A) $30 B) $9,000 C) $18,000 D) $16,000 Answer: B Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

183) The figure above shows the market for umbrellas in Sunville. When the market for umbrellas in Sunville is in equilibrium, what is the total deadweight loss? A) $2,000 B) $800 C) $0 D) 600 umbrellas Answer: C Topic: Deadweight Loss Skill: Analytical Status: Old AACSB: Analytical Skills

184) The figure above shows the market for umbrellas in Sunville. When the market for umbrellas in Sunville is in equilibrium, what is the producer surplus? A) $3,000 B) $1,000 C) $10 D) $600 Answer: A Topic: Producer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

185) The figure above shows the market for umbrellas in Sunville. When the market for umbrellas in Sunville is in equilibrium, what is the total surplus? A) $0 B) $12,000 C) $24,000 D) $16,000 Answer: B Topic: Efficiency of Perfect Competition Skill: Analytical Status: Old AACSB: Analytical Skills

186) The figure above shows the market for umbrellas in Sunville. Suppose the quantity of umbrellas currently traded in Sunville is 199 per day. If one more umbrella is sold, the total surplus in Sunville will A) decrease by $26.67. B) increase by $26.67. C) increase by $50.00. D) not change. Answer: B Topic: Efficiency of Perfect Competition Skill: Analytical Status: Old AACSB: Analytical Skills

187) The figure above shows the market for umbrellas in Sunville. Suppose one firm owns all umbrella stores in Sunville and charges $40 per umbrella. In this situation, the market for umbrellas is A) efficient, with no deadweight loss but also no surplus. B) inefficient, with a deadweight loss of $2,666.67. C) inefficient, with a deadweight loss of $1,333.33. D) efficient, generating a total surplus of more than $10,000. Answer: C Topic: Deadweight Loss Skill: Analytical Status: Old AACSB: Analytical Skills

188) A deadweight loss is created A) only if the last unit produced has a marginal social benefit greater than its marginal social cost. B) only if the last unit produced has a marginal social cost greater than its marginal social benefit. C) only if the last unit produced has a marginal social benefit equal to its marginal social cost. D) if for the last unit produced, marginal social cost is greater than its marginal social benefit or if its marginal social benefit is greater than its marginal social cost. Answer: D Topic: Deadweight Loss Skill: Conceptual Status: Old AACSB: Analytical Skills

Price (dollars per umbrella) 0 10 20 30 40

Quantity demanded

Quantity supplied

90 80 40 20 0

0 0 40 80 120

189) In the table above, if there are 80 umbrellas produced, the deadweight loss from the 80th umbrella is A) $10. B) $20. C) $30. D) $40. Answer: B Topic: Deadweight Loss Skill: Analytical Status: Old AACSB: Analytical Skills

190) In the table above, the deadweight loss is zero when ________ umbrellas are produced and sold. A) 20 B) 40 C) 60 D) 80 Answer: B Topic: Deadweight Loss Skill: Analytical Status: Old AACSB: Analytical Skills

191) Suppose the marginal cost of producing a good falls so that the marginal social cost curve shifts downward. Then the efficient quantity to produce of that product A) increases. B) does not change. C) decreases. D) could increase, stay the same, or decrease. Answer: A Topic: Study Guide Question, Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills

192) Suppose consumers decide they value a product more highly than before. Then the efficient quantity to produce of that product ________. A) increases B) does not change C) decreases D) perhaps changes, but without more information the direction of the change cannot be told Answer: A Topic: Study Guide Question, Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills

193) In the figure above, if the quantity is restricted to 2, then the deadweight loss in this market equals A) b + g. B) c + d. C) e + k. D) h + i. Answer: A Topic: Study Guide Question, Deadweight Loss Skill: Analytical Status: Old AACSB: Analytical Skills

194) A deadweight loss A) is possible only if the good is underproduced but is not possible if the good is overproduced. B) subtracts only from producer surplus. C) is a loss to consumers and a gain to producers. D) is a loss inflicted on the entire society. Answer: D Topic: Study Guide Question, Deadweight Loss Skill: Conceptual Status: Old AACSB: Analytical Skills

195) Which of these is NOT a potential source of inefficiency? A) external benefits B) increasing marginal costs C) monopoly D) subsidies Answer: B Topic: Study Guide Question, Obstacles to Efficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

4 Is the Competitive Market Fair? 1) Using the "It's not fair if the result isn't fair" principle of fairness, an income tax designed to transfer wealth from the rich to the poor A) increases efficiency and equity. B) increases efficiency and does not affect equity. C) decreases efficiency and increases equity. D) decreases efficiency and equity. Answer: C Topic: Fairness and Efficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

2) The principle that states that we should strive to achieve the greatest happiness for the greatest number is called A) the big tradeoff. B) the symmetry principle. C) utilitarianism. D) efficiency. Answer: C Topic: Utilitarianism Skill: Definition Status: Old AACSB: Analytical Skills

3) According to Utilitarian principles first discussed in the nineteenth century, fairness implies A) equality of income. B) equality of opportunity. C) winner takes all. D) maximizing consumption. Answer: A Topic: Utilitarianism Skill: Recognition Status: Revised AACSB: Analytical Skills

4) Utilitarianism is a principle whose goal is ________. A) the greatest happiness for the greatest number B) the greatest pay for the greatest number C) equal pay for equal work D) equal happiness for all workers Answer: A Topic: Utilitarianism Skill: Definition Status: Old AACSB: Analytical Skills

5) Which of the following correctly defines utilitarianism? A) Cost will increase if production increases. B) The difference between what a consumer is willing to pay and what actually has to be paid. C) Society should strive to achieve the greatest good for the greatest number. D) Equality will not result in efficient outcomes. Answer: C Topic: Utilitarianism Skill: Definition Status: Old AACSB: Analytical Skills

6) Utilitarianism is the idea that only A) competition brings efficiency. B) efficiency brings equality. C) income equality is fair. D) efficiency is fair. Answer: C Topic: Utilitarianism Skill: Definition Status: Old AACSB: Analytical Skills

7) Utilitarianism argues that: A) Only equality brings efficiency. B) There is a tradeoff between equality and efficiency. C) The result is fair if the rules are fair. D) The competitive market is fair. Answer: A Topic: Utilitarianism Skill: Definition Status: Old AACSB: Analytical Skills

8) Which of the following ideas describes the concept of "utilitarianism"? I. Utilitarianism gained popularity in the 1930s. II. Utilitarians believed that a society should use only competitive markets to allocate resources. III. Utilitarians claimed that taking money from rich people and giving it to poorer people would make the economy more fair. A) III only B) II only C) I and II D) I, II and III Answer: A Topic: Utilitarianism Skill: Definition Status: Old AACSB: Analytical Skills

9) Adam makes $25,000 per year and Bob makes $45,000 a year, and they both have the same marginal benefit curve. According to the utilitarian view, if a dollar is transferred from Bob to Adam, then A) the change in Adam's marginal benefit plus the change in Bob's marginal benefit is negative. B) Adam's marginal benefit increases by more than Bob's marginal benefit decreases. C) the change in Adam's marginal benefit plus the change in Bob's marginal benefit equals zero. D) Adam's marginal benefit decreases by more than Bob's marginal benefit increases. Answer: B Topic: Utilitarianism Skill: Analytical Status: Old AACSB: Analytical Skills

10) Utilitarianism is based on the argument that A) the greater a person's income, the smaller is the marginal benefit of a dollar. B) by transferring a dollar from a millionaire to a poor person, more is lost than gained. C) taxing people's income from employment makes them work less. D) a dollar taken from a rich person does not end up as a dollar in the hands of a poorer person. Answer: A Topic: Utilitarianism Skill: Conceptual Status: Old AACSB: Analytical Skills

11) One of the problems associated with the utilitarianism is that it does not recognize that A) taxing those with higher incomes results in less work effort. B) each individual receives a different marginal benefit from a dollar's worth of income. C) equity is achieved when there is no poor and no rich. D) similar individuals should be treated the same. Answer: A Topic: Utilitarianism Skill: Conceptual Status: Old AACSB: Analytical Skills

12) One problem with the concept of utilitarianism is that A) there is a cost to transferring income from the rich to the poor. B) there are increasing marginal costs. C) there are decreasing marginal benefits. D) markets cannot adjust to income redistribution. Answer: A Topic: Utilitarianism Skill: Conceptual Status: Old AACSB: Analytical Skills

13) One problem with the utilitarian principle is that it ignores A) increasing marginal costs. B) decreasing marginal benefits. C) the costs of making income transfers. D) poor people. Answer: C Topic: Utilitarianism Skill: Conceptual Status: Old AACSB: Analytical Skills

14) The big tradeoff is a tradeoff between A) efficiency and fairness. B) consumer surplus and producer surplus. C) taxes and subsidies. D) price ceilings and price floors. Answer: A Topic: The Big Tradeoff Skill: Definition Status: Old AACSB: Analytical Skills

15) Which of the following arguments support the proposition that society should accept at least some income inequality? A) Income redistribution will require taxation, causing inefficiently low levels of labor supply and saving, thus decreasing the size of the economic pie. B) Administrative costs associated with income redistribution imply that low-income people receive less than $1 for each dollar taken from high-income people. C) Income redistribution programs divert skilled labor and capital to tax compliance activities and away from production of goods and services that people value. D) All of the above answers are correct because all support the proposition that society should accept some income inequality. Answer: D Topic: The Big Tradeoff Skill: Conceptual Status: Old AACSB: Analytical Skills

16) Suppose the government considers placing a tax on business profits o that businesses decrease their production and generate a deadweight loss. Revenues from the tax would be used to boost the incomes of the poor. The decision to levy the tax implies that in this case, the government A) values people but not business. B) values efficiency more than its view of fairness. C) profits from taxes. D) values its view of fairness more than efficiency. Answer: D Topic: The Big Tradeoff Skill: Conceptual Status: Old AACSB: Analytical Skills

17) A modified version of utilitarianism proposed by John Rawls states that A) the distribution of the economic pie is fair if the rules are fair. B) the distribution of the economic pie is fair if it achieves the greatest happiness for the greatest number of people. C) the fair distribution of the economic pie is the one that makes the poorest person as well off as possible. D) goods may be transferred from one person to another only by voluntary exchange. Answer: C Topic: Utilitarianism Skill: Conceptual Status: Old AACSB: Analytical Skills

18) According to John Rawls, the fair distribution of income is the one that A) makes the poorest person as well off as possible. B) makes the average person as well off as possible. C) results in equal income for all society members. D) is based on fair rules. Answer: A Topic: John Rawls Skill: Conceptual Status: Old AACSB: Analytical Skills

19) The requirement that people in similar situations be treated similarly is called A) the big tradeoff. B) the symmetry principle. C) utilitarianism. D) efficiency. Answer: B Topic: Symmetry Principle Skill: Definition Status: Old AACSB: Analytical Skills

20) The symmetry principle states that A) the poorest person must be made as well off as possible. B) income should be transferred from the rich to the poor up to the point of complete equality. C) resources should be common property. D) people in similar situations must be treated similarly. Answer: D Topic: Symmetry Principle Skill: Definition Status: Old AACSB: Analytical Skills

21) The symmetry principle is the requirement that: A) people in similar situations be treated similarly. B) Society's income be distributed symmetrically among its members. C) the poorest 20 percent of households should receive the same total income as the richest 10 percent of households. D) the average person be made as well off as possible. Answer: A Topic: Symmetry Principle Skill: Conceptual Status: Old AACSB: Analytical Skills

22) The symmetry principle in economics means that A) all individuals must have similar outcomes. B) all similar individuals must be treated similarly. C) individuals must have opposite outcomes. D) similar individuals must have similar outcomes. Answer: B Topic: Symmetry Principle Skill: Definition Status: Old AACSB: Analytical Skills

23) Which of the following is inconsistent with Robert Nozick's view of fairness as expressed in his book Anarchy, State, and Utopia? A) Everything that is valuable must be owned by individuals and that the state must ensure that theft is prevented. B) The only legitimate way a person can acquire property is to buy it. C) The requirement that all people should have equal outcomes. D) None of the above answers is correct because all the answers express thoughts consistent with Nozick's view. Answer: C Topic: It's Not Fair If the Rules Aren't Fair Skill: Conceptual Status: Old AACSB: Analytical Skills

24) Robert Nozick asserts that fairness and efficiency result if A) there are price ceilings in the market. B) there are external benefits and external costs in the market. C) voluntary exchange occurs. D) public goods are provided by government. Answer: C Topic: It's Not Fair If the Rules Aren't Fair Skill: Definition Status: Old AACSB: Analytical Skills

25) Competitive markets with no external costs or benefits and no government price ceilings, floors, taxes or subsidies ________ efficient. According to the "It's not fair if the rules aren't fair" idea of fairness, competitive markets ________ fair. A) are; are B) are; are not C) are not; are D) are not; are not Answer: A Topic: It's Not Fair If the Rules Aren't Fair Skill: Analytical Status: Old AACSB: Analytical Skills

26) Susan thinks the only fair outcome is one in which she has three slices of pizza a week. Susan is using a(n) ________ concept of fairness. A) "it's not fair if the result isn't fair" B) "it's not fair if the rules aren't fair" C) "big tradeoff" D) "Novak principle" Answer: A Topic: Study Guide Question, Fair Results Skill: Conceptual Status: Old AACSB: Analytical Skills

27) The assertion that if resources are allocated efficiently, they also are allocated fairly is made by A) all utilitarians. B) John Rawls, who proposed making the poorest as well off as possible. C) Robert Nozick, who believes that equality of opportunity is fair. D) all economists who understand the big tradeoff. Answer: C Topic: Study Guide Question, Fair Rules Skill: Conceptual Status: Old AACSB: Analytical Skills

5 News Based Questions 1) American Idol is a popular television program where contestants compete to win a $1 million record deal. To determine the winner, fans either dial the number or send a text message indicating their favorite contestant. The contestant with the highest number of texts and phone calls wins. What is the scarce resource in this example? A) $1 million record deal B) television ratings C) phone calls and text messages D) fans Answer: A Topic: Resource Allocation Methods Skill: Conceptual Status: Old AACSB: Communication

2) American Idol is a popular television program where contestants compete to win a $1 million record deal. To determine the winner, fans either dial the number or send a text message indicating their favorite contestant. The contestant with the highest number of texts and phone calls wins. How is the scarce resource in this example allocated? A) majority rule B) command C) contest D) personal characteristics Answer: A Topic: Resource Allocation Methods Skill: Conceptual Status: Old AACSB: Communication

3) Colorado State University allocates 10,000 tickets for each home game to students at no cost. Students are required to stand in line and prove they are a full time student to receive a free ticket. How is the scarce resource in this example allocated? A) first-come, first-served B) market price C) contest D) lottery Answer: A Topic: Resource Allocation Methods Skill: Conceptual Status: Old AACSB: Communication

4) Colorado State University allocates 10,000 tickets for each home game to students at no cost. Students are required to stand in line and prove they are a full time student to receive a free ticket. Community members can purchase season tickets or tickets to an individual game. How are football tickets allocated to community members? A) market price B) command C) first-come, first-served D) personal characteristics Answer: A Topic: Resource Allocation Methods Skill: Conceptual Status: Old AACSB: Communication

5) At the beginning of World War II, a rationing system was established in the United States. Ration stamps or cards were issued for a variety of commodities such as canned milk and gasoline. Canned milk was only available to babies and small children. In this example, canned milk was allocated through: A) Personal characteristics B) Market price C) Majority rule D) First-come, first-served Answer: A Topic: Resource Allocation Methods Skill: Conceptual Status: Old AACSB: Communication

6) At the beginning of World War II, a rationing system was established in the United States. Ration stamps or cards were issued for a variety of commodities such as canned milk and gasoline. To receive a gasoline ration card, a person had to certify a need for gas. The ration cards ranged from the most limited A card which only allowed 3 to 4 gallons per week to the most generous X card, which allowed the carrier to buy an unlimited amount of gasoline. A government entity, the War Price and Rationing Board, decided who received and A or an X card. Gasoline cards were allocated through: A) Command B) Market price C) Majority rule D) Force Answer: A Topic: Resource Allocation Methods Skill: Conceptual Status: Old AACSB: Communication

7) The Wii is a wildly popular home video game console released by Nintendo. The Wii system was first available in the U.S. in November, 2006 and has sold more than 30 million units as of August 2010. The Wii retails for $199. Suppose Ahmed is willing to pay $230, Lana is willing to pay $175, and Bodie is willing to pay $300 for a Wii. Who will purchase a Wii? A) Ahmed and Bodie B) Ahmed C) Lana D) Ahmed, Bodie, and Lana Answer: A Topic: Marginal Benefit and Demand Skill: Conceptual Status: Old AACSB: Communication

8) The Wii is a wildly popular home video game console released by Nintendo. The Wii system was first available in the U.S. in November, 2006 and has sold more than 30 million units as of August 2010. The Wii retails for $199. Suppose Ahmed is willing to pay $230, Lana is willing to pay $175, and Bodie is willing to pay $300 for a Wii. What is the value of Ahmed's consumer surplus? A) $31 B) $280 C) $249 D) No consumer surplus is generated because Ahmed will not buy the Wii. Answer: A Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Communication

9) The Wii is a wildly popular home video game console released by Nintendo. The Wii system was first available in the U.S. in November, 2006 and has sold more than 30 million units as of August 2010. The Wii retails for $199. Suppose Ahmed is willing to pay $230, Lana is willing to pay $175, and Bodie is willing to pay $300 for a Wii. What is the value of Lana's consumer surplus? A) No consumer surplus is generated because Lana will not buy the Wii. B) $249 C) $225 D) $24 Answer: A Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Communication

10) The Wii is a wildly popular home video game console released by Nintendo. The Wii system was first available in the U.S. in November, 2006 and has sold more than 30 million units as of August 2010. The Wii retails for $199. Suppose Ahmed is willing to pay $230, Lana is willing to pay $175, and Bodie is willing to pay $300 for a Wii. If these three are the only consumers in the market, what is the value of the market consumer surplus? A) $132 B) $855 C) $630 D) $498 Answer: A Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Communication

11) Fitness is a magazine for women about health and exercise. Fitness offers year subscriptions for $12 on their website. Jess, Ania, Mandy, and Chloe exercise together and each enjoy reading Fitness. Jess is willing to pay $10, Ania is willing to pay $16, Mandy is willing to pay $24, and Chloe is willing to pay $12 for a subscription to the magazine. Who will subscribe to the magazine? A) Ania, Mandy, and Chloe B) Jess, Ania, Mandy, and Chloe C) Jess, Ania, and Chloe D) Mandy and Chloe Answer: A Topic: Marginal Benefit and Demand Skill: Conceptual Status: Old AACSB: Communication

12) Fitness is a magazine for women about health and exercise. Fitness offers year subscriptions for $12 on their website. Jess, Ania, Mandy, and Chloe exercise together and each enjoy reading Fitness. Jess is willing to pay $10, Ania is willing to pay $16, Mandy is willing to pay $24, and Chloe is willing to pay $12 for a subscription to the magazine. What is the value of Ania's consumer surplus? A) $4 B) $16 C) $12 D) $6 Answer: A Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Communication

13) Fitness is a magazine for women about health and exercise. Fitness offers year subscriptions for $12 on their website. Jess, Ania, Mandy, and Chloe exercise together and each enjoy reading Fitness. Jess is willing to pay $10, Ania is willing to pay $16, Mandy is willing to pay $24, and Chloe is willing to pay $12 for a subscription to the magazine. What is the value of Chloe's consumer surplus? A) $0 B) $12 C) $10 D) Chloe will not purchase the magazine Answer: A Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Communication

14) Fitness is a magazine for women about health and exercise. Fitness offers year subscriptions for $12 on their website. Jess, Ania, Mandy, and Chloe exercise together and each enjoy reading Fitness. Jess is willing to pay $10, Ania is willing to pay $16, Mandy is willing to pay $24, and Chloe is willing to pay $12 for a subscription to the magazine. What is the value of market consumer surplus? A) $16 B) $52 C) $40 D) $12 Answer: A Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Communication

15) The annual Great Sofa Round-up is a collaborative event between Colorado State University and the City of Fort Collins aims to help students and neighbors get rid of unwanted furniture, while giving people in need access to inexpensive sofas. Suppose on the day of the Round-up, your friends take their couches to the main parking lot on campus where the Round-up is held. Raj will not sell his couch for less than $30, Emily will not sell her couch for less than $50, Nara will not sell her couch for less than $20, Sergio just wants to get rid of his couch and he is willing to give it away for free. At the Round-up, potential buyers think that all the couches available are basically the same and they are willing to buy a couch for $50. Who will sell their couch? A) Raj, Emily, Nara, and Sergio B) Raj, Nara, and Sergio C) Emily, Nara, and Sergio D) Emily Answer: A Topic: Marginal Cost and Supply Skill: Conceptual Status: Old AACSB: Communication

16) The annual Great Sofa Round-up is a collaborative event between Colorado State University and the City of Fort Collins aims to help students and neighbors get rid of unwanted furniture, while giving people in need access to inexpensive sofas. Suppose on the day of the Round-up, your friends take their couches to the main parking lot on campus where the Round-up is held. Raj will not sell his couch for less than $30, Emily will not sell her couch for less than $50, Nara will not sell her couch for less than $20, Sergio just wants to get rid of his couch and he is willing to give it away for free. At the Round-up, potential buyers think that all the couches available are basically the same and they are willing to buy a couch for $50. What is the value of Nara's producer surplus? A) $30 B) $50 C) $20 D) $10 Answer: A Topic: Producer Surplus Skill: Analytical Status: Old AACSB: Communication 121 Copyright © 2014 Pearson Education, Inc.

17) The annual Great Sofa Round-up is a collaborative event between Colorado State University and the City of Fort Collins aims to help students and neighbors get rid of unwanted furniture, while giving people in need access to inexpensive sofas. Suppose on the day of the Round-up, your friends take their couches to the main parking lot on campus where the Round-up is held. Raj will not sell his couch for less than $30, Emily will not sell her couch for less than $50, Nara will not sell her couch for less than $20, Sergio just wants to get rid of his couch and he is willing to give it away for free. At the Round-up, potential buyers think that all the couches available are basically the same and they are willing to buy a couch for $50. What is the value of the market producer surplus? A) $100 B) $200 C) $120 D) $50 Answer: A Topic: Producer Surplus Skill: Analytical Status: Old AACSB: Communication

18) The annual Great Sofa Round-up is a collaborative event between Colorado State University and the City of Fort Collins aims to help students and neighbors get rid of unwanted furniture, while giving people in need access to inexpensive sofas. Suppose on the day of the Round-up, your friends take their couches to the main parking lot on campus where the Round-up is held. Raj will not sell his couch for less than $30, Emily will not sell her couch for less than $50, Nara will not sell her couch for less than $20, Sergio just wants to get rid of his couch and he is willing to give it away for free. At the Round-up, potential buyers think that all the couches available are basically the same and they are willing to buy a couch for $25. Who will sell their couch and what is the value of the market producer surplus? A) Nara and Sergio; $30 B) Nara and Sergio; $5 C) Raj and Emily; $30 D) Emily, Nara, and Sergio; $25 Answer: A Topic: Producer Surplus Skill: Analytical Status: Old AACSB: Communication

19) Hummel is a line of figurines based on the artistic style of German nun Maria Innocentia Hummel and have become a collector's item. The Hummel figurines are almost uniformly "cute." Lukas, Felix, Anya, and Hannah sell Hummel figurines through the internet. Their willingness to sell price for one figurine is: Lukas $240, Felix $180, Anya $150, Hannah $130. Suppose the price of a Hummel figurine is $150, what is Felix's producer surplus? A) Felix would not sell his figurine. B) $180 C) $150 D) $30 Answer: A Topic: Producer Surplus Skill: Analytical Status: Old AACSB: Communication 122 Copyright © 2014 Pearson Education, Inc.

20) Hummel is a line of figurines based on the artistic style of German nun Maria Innocentia Hummel and have become a collector's item. The Hummel figurines are almost uniformly "cute." Lukas, Felix, Anya, and Hannah sell Hummel figurines through the internet. Their willingness to sell price for one figurine is: Lukas $240, Felix $180, Anya $150, Hannah $130. Suppose the price of a Hummel figurine is $150, who will sell their figurine? A) Anya and Hannah B) Lukas, Felix, and Anya C) Felix, Anya, and Hannah D) Hannah Answer: A Topic: Marginal Cost and Supply Skill: Conceptual Status: Old AACSB: Communication

21) In May 2008, Switzerland co-hosted the international soccer tournament Euro 2008. At that time, the Swiss potato industry association had been warning there could be a fry shortage because there was a potato shortage. The shortage meant that in the French fry market A) the price for French fries would be higher. B) the price for French fries would be lower. C) if the efficient quantity of fries is produced, total surplus would be minimized. D) if the inefficient quantity of fries is produced, total surplus would be maximized. Answer: A Topic: Allocatively Efficient Use of Resources Skill: Conceptual Status: Old AACSB: Communication

22) Bill Gates is the world's second richest person whose net worth is estimated at $54 billion. The idea that Bill Gates marginal utility for his 54 billionth dollar is less than someone else's 1000 th dollar is the A) "Utilitarian" principle. B) "Big Tradeoff" principle. C) "Make the Poorest as Well Off as Possible" principle. D) "Equity" principle. Answer: A Topic: Utilitarianism Skill: Conceptual Status: Old AACSB: Communication

23) Meat at the supermarket has contributed to increase in food prices in 2010, and high feed and fuel prices mean that steak will likely cost a lot more this fall. The price of feed has increased 50 percent and hay has doubled from two years ago. Based on this information, which of the following is true in the market for beef? A) Consumer surplus will decrease. B) Producer surplus will increase. C) Equilibrium price will decrease. D) Equilibrium quantity will increase. Answer: A Topic: Consumer Surplus Skill: Conceptual Status: Old AACSB: Communication

24) Meat at the supermarket has contributed to increase in food prices in 2010, and high feed and fuel prices mean that steak will likely cost a lot more this fall. The price of feed has increased 50 percent and hay has doubled from two years ago. Based on this information, which of the following is NOT true in the market for beef? A) The consumer surplus will decrease. B) The equilibrium quantity will increase. C) The total surplus will decrease. D) The equilibrium price will increase. Answer: B Topic: Consumer Surplus Skill: Conceptual Status: Old AACSB: Communication

6 Essay Questions 1) What is allocative efficiency? Answer: Allocative efficiency is a situation when it is not possible to produce more of one good without giving up the production of some other good that is valued more highly. Topic: Allocative Efficiency Skill: Recognition Status: Old AACSB: Communication

2) What is the relationship between the marginal social benefit of milk and marginal social cost of milk when the efficient quantity of milk is produced? Answer: The marginal social benefit of milk equals its marginal social cost. Topic: Allocative Efficiency Skill: Conceptual Status: Old AACSB: Communication

3) Is the marginal benefit someone receives from a good or service the same as the price the person pays? Explain your answer. Answer: Generally the marginal benefit of a good or service is different than the price that is paid. The marginal benefit is the maximum amount a consumer is willing to pay for a good or service. Typically the consumer can buy the good or service for a price less than the maximum. (Indeed, the difference between the maximum price the consumer is willing to pay and the price actually paid is the consumer surplus.) However, it might be the case that the price precisely equals the maximum the consumer is willing to pay. In this case alone, the marginal benefit equals the price. (And in this case, the amount of the consumer surplus equals zero.) Topic: Marginal Benefit Skill: Conceptual Status: Old AACSB: Communication

4) "A demand curve is the same as a marginal cost curve." Is this statement correct or incorrect? Explain your answer. Answer: The statement is incorrect. A demand curve is a marginal benefit curve not a marginal cost curve. A demand curve is a marginal benefit curve because it can be used to find the maximum price people are willing to pay for a given quantity, that is, the marginal benefit of the given quantity. Topic: Marginal Benefit Curve Skill: Recognition Status: Old AACSB: Communication

5) What is the relationship between the marginal social benefit curve and the market demand curve. Explain. Answer: The market demand curve is also the marginal social benefit curve. The market demand curve shows the maximum price that consumers are willing to pay to buy another unit of the good. Marginal social benefit is the value of one more unit of a good, which equals the maximum price that people are willing to pay to get it. So the market demand curve is the marginal social benefit curve. Topic: Value, Willingness to Pay, and Demand Skill: Conceptual Status: Old AACSB: Communication

6) Which curve is the same as the market demand curve? Why are the curves the same? Answer: The market demand curve is the same as the marginal social benefit curve. For any quantity, the demand curve shows the dollar value of other goods and services a consumer is willing to forgo to get another unit of the good. (This amount is the maximum price the consumer is willing to pay and equals the price from the demand curve vertically above each quantity.) But the amount of other goods and services the consumer is willing to forgo is the marginal social benefit of the good. Hence along the market demand curve the price associated with each quantity of the good is the same as the marginal social benefit of that quantity. (So that, for instance, the price associated with the 3rd quantity is the same as the marginal social benefit of the 3rd unit.) Therefore the market demand curve is the same as the marginal social benefit curve. Topic: Marginal Benefit Curve Skill: Conceptual Status: Old AACSB: Communication

7) What is consumer surplus? Answer: Consumer surplus equals the difference between the marginal benefit of a unit of a good and the price paid for it, summed over the quantity purchased. The total consumer surplus in a market equals the area under the market demand curve and above the price. Topic: Consumer Surplus Skill: Recognition Status: Old AACSB: Communication

8) A new car in the dealer's showroom had a sticker price of $35,900. Sally liked the car but decided she would pay no more than $32,000 for it, otherwise she would do without it. After haggling with the dealer, she purchased the car for $31,500. Did she gain any consumers surplus? If so, how much? If not, why not? Answer: Yes. Consumer surplus is the difference between the highest price a consumer is willing to pay (that is, the value of the good) minus the actual price paid. Sally gained a consumer surplus of $500.00. Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Communication

9) If the demand for a good does not change, how will an increase in the price of that good affect the consumer surplus from it? Answer: The consumer surplus equals the difference between the value of the good and its price. If the demand for a good does not change, then the value of that good does not change. Hence an increase in the price decreases the consumer surplus from that good. Topic: Consumer Surplus Skill: Conceptual Status: Old AACSB: Communication

10) What is the marginal cost of a good? Answer: The marginal cost of a good is the opportunity cost of producing one more unit of it. The key is that the marginal cost refers to the cost of one additional unit, not to the total cost of producing all the units. Topic: Marginal Cost Skill: Conceptual Status: Old AACSB: Communication

11) What other curve is the same as the market supply curve? Why are the curves the same? Answer: The market supply curve is the same as the marginal social cost curve. The marginal social cost is the cost of producing one more unit of a good. For any quantity, the market supply curve shows the minimum price for which a producer is willing to produce another unit of the good. (This price is equal to the price on the supply curve that is vertically above each quantity.) A producer is willing to produce a unit of the good if the price covers all costs of the producing that unit, that is, if the price equals the cost of producing the unit. The cost of producing the unit is the marginal social cost. Hence along the market supply curve, the price associated with each quantity is equal to the marginal social cost of each quantity. Therefore the market supply curve is the same as the marginal social cost curve. Topic: Marginal Cost Curve Skill: Conceptual Status: Old AACSB: Communication 126 Copyright © 2014 Pearson Education, Inc.

12) What is producer surplus? Answer: Producer surplus is the price of a good received minus the marginal cost of producing it, summed over the quantity sold. Topic: Producer Surplus Skill: Recognition Status: Old AACSB: Communication

13) "If the price of a ticket to Sea World exceeds the marginal cost of the ticket by $13, a producer surplus exists for Sea World." Is this statement true or false? Answer: The statement is true. Anytime the price exceeds the marginal cost, there is a producer surplus. In this case, the producer surplus is $13. Topic: Producer Surplus Skill: Conceptual Status: Old AACSB: Communication

14) What is the significance of the concepts "consumer surplus" and "producer surplus"? Answer: Each is a measure of economic welfare or well-being. The more consumer surplus a buyer can gain from a transaction, the greater is consumer welfare. The more producer surplus a seller can gain from a transaction, the greater is producer welfare. Total surplus is equal to the sum of consumer and producer surplus. Topic: Consumer and Producer Surplus Skill: Conceptual Status: Old AACSB: Communication

15) Can both producer surplus and consumer surplus exist at the same time in a particular market? Answer: Yes. The actual price can be above the seller's marginal cost and below the buyer's maximum purchase price. So, buyer and seller can both earn a surplus on the same transaction. Topic: Consumer and Producer Surplus Skill: Analytical Status: Old AACSB: Communication

16) "If the marginal social benefit of a car exceeds the marginal social cost of a car, we are producing too many cars." True or false? Explain. Answer: False. If the marginal social benefit of a car exceeds the marginal social cost of a car, we can gain value by producing another car and we are losing value by not producing it. If the marginal social benefit exceeds the marginal social cost, producing another car yields a benefit that exceeds the cost of producing the car. So we are producing too few cars. Topic: Allocative Efficiency Skill: Conceptual Status: Old AACSB: Communication

17) When less than the efficient amount of a good is produced, how does the marginal social benefit of the last unit produced compare to its marginal social cost? Answer: When less than the efficient amount of a good is produced, the marginal social benefit of the last unit produced exceeds its marginal social cost. The fact that the marginal social benefit exceeds the marginal social cost indicates that producing additional units of the good will move the amount of production closer to the efficient quantity. Topic: Efficiency of Competitive Markets Skill: Conceptual Status: Old AACSB: Communication

18) Why is a competitive market efficient? Answer: Efficiency is attained when production is such that the marginal social benefit equals the marginal social cost. When a competitive market is at equilibrium, the quantity demanded equals the quantity supplied, that is, the demand and supply curves cross. But the marginal social benefit curve is the same as the demand curve and the marginal social cost curve is the same as the supply curve. Thus equilibrium occurs at the point where the marginal social benefit curve crosses the marginal social cost curve. As a result, so the marginal social benefit equals the marginal social cost and hence the market is efficient. Topic: Efficiency of Competitive Markets Skill: Conceptual Status: Old AACSB: Communication

19) When economists refer to "the invisible hand," what do they mean? Answer: In his book, Wealth of Nations, Adam Smith wrote that a participant in a competitive market is "led by an invisible hand to promote an end which was no part of his intention." Market participants act in their own self-interest, attempting to maximize their own well-being, yet, in the process, the result is an efficient use of resources. This result occurs because the market forces of supply and demand invisibly guide resources to their highest valued uses. Topic: Invisible Hand Skill: Recognition Status: Old AACSB: Communication

20) Explain how the invisible hand delivers an efficient market outcome. Answer: The invisible hand concepts claims that people, acting in their own self interest, send resources to be used at their highest value. As a result, resources are efficiently used to produce the output of goods and services that people most highly value. With this outcome, producer and consumer surplus are maximized. Topic: Invisible Hand Skill: Conceptual Status: Old AACSB: Communication

21) "If there is an inefficient level of nursing care in South America, a deadweight loss exists." Is this statement true or false? Answer: The statement is true. Anytime there is an inefficient level of production, a deadweight loss exists. Topic: Deadweight Loss Skill: Conceptual Status: Old AACSB: Communication

22) What are some of the potential obstacles that can prevent a market from reaching the efficient outcome? Briefly define each obstacle. Answer: With one exception, the obstacles basically fall into two camps: Obstacles that occur because the government does not intervene in the market and obstacles that occur because the government does intervene in the market. In the first group are the issues of externalities, public goods, common resources, and monopoly. An external cost or benefit occurs when a cost or benefit from production falls upon someone other than the producer or when a cost or benefit from consumption falls upon someone other than the demander. A public good is a good or service that can be consumed simultaneously by everyone even if they didn't pay for the good or service. Public goods create the free rider problem, in which people consume the good without paying for it. A common resource is a resource that no one owns and that everyone can use. Finally, a monopoly occurs when a single producer controls the market by being the only producer. In the case of an externality, public good, or monopoly, government intervention has the possibility of increasing the market's efficiency. A second set of obstacles occur when a market is otherwise efficient but nonetheless the government intervenes in the market. The second group is comprised of price and quantity regulations as well as taxes and subsidies. Price regulations might prevent the market from reaching its equilibrium. Quantity regulations, such as quotas, are direct limits on the amount of a good that a firm can produce. Because this quantity will usually be less than the quantity the market would produce, the quota is inefficient. Taxes increase the price paid by the buyer and decrease the price received by the seller. Subsidies have the opposite effect, decreasing the price paid by the buyer and increasing the price received by the seller. The last obstacle that can prevent a market from reaching efficiency is high transactions costs. If the costs of using a market are too high, then a market will not exist. Topic: Obstacles to Efficiency Skill: Conceptual Status: Old AACSB: Communication

23) Explain the difference between the "fair rules" and the "fair results" guidelines for competitive market fairness. Answer: Economists do not agree on how to judge whether an outcome is fair. Some believe that an outcome is not fair if the results are not fair. Consider how incomes are distributed by the labor market. Because income is not distributed equally, one group of economists believes that the labor market is not a fair market. To make the outcome (and results) fair, these economists believe that income should be redistributed by the government. Other economists are not concerned with fair results. They aren't concerned with the unequal distribution of income as long as the rules to earn income are fair. As long as there is voluntary exchange and property rights are enforced, this group of economists believes the market outcome is fair. Topic: Is the Competitive Market Fair? Skill: Conceptual Status: Old AACSB: Ethical Reasoning 129 Copyright © 2014 Pearson Education, Inc.

24) What are the two views of fairness? How does each view redistribution of income from the rich to the poor? Answer: One view is that "it's not fair if the result isn't fair." This view requires that income should be redistributed from the rich to the poor in order to create a fair result. Another view is that "it's not fair if the rules aren't fair." This view requires that private property may be transferred only under voluntary exchange, so redistribution of income is not fair unless it is voluntary. Topic: Is the Competitive Market Fair? Skill: Conceptual Status: Old AACSB: Ethical Reasoning

25) How can a person argue that health care services in America are provided efficiently, but not fairly? Answer: The assertion that the health market is efficient implies that competitive market forces determine the level and quality of health care. Where the demand for and supply of health care intersects, the marginal social benefit and marginal social cost of health care are equal. This equality means that the people who are demanding health care are willing and able to pay the price, and the price itself is equal to the marginal social cost of providing health care. However, at that market price there are many people who cannot afford health care. These people, probably the poor and uninsured, are left to go to clinics, crowd emergency rooms, or else do without basic health care needs because of their lack of ability to pay the market price. This outcome could easily violate the "it's not fair if the result isn't fair" view of fairness. Thus observers who assert that the U.S. health care system might be efficient but isn't fair are using the "results" view of fairness. Topic: Fair Results Skill: Conceptual Status: Old AACSB: Ethical Reasoning

26) Often politicians assert that a price, such as the price of gasoline or the rent for an apartment, is too high and that it is unfair for these prices to be so high. If these products are traded in competitive markets, what fairness rule are politicians using? Why? Answer: The fairness rule is one of "It's not fair if the results aren't fair." The claim that the prices are too high to be fair is a claim that buyers are being unfairly harmed by having to pay such high prices. The assertion that people are harmed because the price is too high is looking at the results of the process because if the price had been lower, the assertion of unfairness would not have been made. Topic: Fair Results Skill: Conceptual Status: Old AACSB: Ethical Reasoning

27) What approach to fairness argues in favor of government policies that redistribute income so that there is more equality of income? Answer: The general approach to fairness that argues in favor of government redistribution is a "fair results approach," that is, an approach that argues "it isn't fair unless the results are fair." Utilitarianism is the principle that states that a society should strive for "the greatest happiness for the greatest number of people." Utilitarians argued that complete equality of income was the only income distribution that met their requirement so Utilitarians asserted that government policies to redistribute income are necessary for fairness. Topic: Utilitarianism Skill: Conceptual Status: Old AACSB: Ethical Reasoning

28) Explain the utilitarianism principle. How is it deficient? Answer: Utilitarianism is a principle that states that we should strive to achieve the greatest happiness for the greatest number. In order to do this, income must be redistributed from the rich to the poor until there is complete equality between all people. The rationale is that everyone has the same basic wants and a similar capacity to enjoy life. Also, the greater a person's income, the smaller is the marginal benefit of a dollar. By transferring money from the rich to the poor, more is gained than is lost and the two people added together are better off. The deficiency is that the principle ignores the costs of making income transfers. Income can be redistributed through taxation. However, taxing people's income from employment makes them work less which results in the quantity of labor being less than the efficient quantity. Taxing people's income from capital induces them to save less. It results in the quantity of capital being less than the efficient quantity. With smaller quantities of both labor and capital, the quantity of goods and services produced is less than the efficient quantity. In addition, not all of the increase in taxes collected would be transferred to the poor. Some of the tax collection would be used to cover administrative costs. Topic: Utilitarianism Skill: Conceptual Status: Old AACSB: Ethical Reasoning

29) What is the "big tradeoff"? Answer: The "big tradeoff" is the tradeoff between efficiency and fairness. The idea is that if the government redistributes income so that it is more equally shared, output decreases so that it is less than the efficient amount. Output shrinks because such redistribution blunts people's incentives to work. Hence redistributing income so that everyone has the same amount of income might end up insuring that everyone's incomes are smaller than if less redistribution is pursued. Topic: Big Tradeoff Skill: Recognition Status: Old AACSB: Communication

30) Why do societies face a tradeoff between the size of the economic pie and the degree of equality with which it is shared? Answer: A person's share of the economic pie is determined by his or her income. To increase the degree of equality, income must be redistributed away from richer people and towards poorer people. Income is transferred from the rich to the poor by means of taxes. Taxes discourage work and saving. Because people work less, the nation's output decreases When saving decreases, so does investment in capital, which also decreases the nation's output. Thus taxes that redistribute income in order to make for a more equal income distribution decrease the nation's output, that is, shrink the economic pie. Topic: Big Tradeoff Skill: Conceptual Status: Old AACSB: Communication

31) Why does the problem of the big tradeoff arise when the government engages in the process of redistributing income using taxes and transfers? Answer: There are two reasons why the big tradeoff problem arises. First, in the process of transferring income from the people who have to those who do not have, an administrative cost is incurred by society. The result is that $1 taxed is not $1 transferred. Hence the effort to make incomes more equal decreases the average income. Second, taxing people's income is a disincentive to work, while taxing people's savings is a disincentive to accumulate capital. As a result, people work less and save less, both of which decrease the amount of goods and services produced and decrease people's income. Hence once again the effort to make incomes more equal decreases the average income. Topic: Big Tradeoff Skill: Conceptual Status: Old AACSB: Communication

32) Explain the modified version of utilitarianism proposed in the book entitled "A Theory of Justice," by the philosopher John Rawls and its relationship to the "big tradeoff." Answer: Rawls was aware that extensive redistribution of income could decrease the average income, which is the tradeoff captured by the "big tradeoff." Thus perfect equality of income might result in everyone having lower income than would otherwise be the case. To overcome this issue, according to John Rawls, the fairest distribution of the economic pie is the one that provides the poorest person the largest income possible. Hence less redistribution will take place than if perfect equality was the goal. As a result, average income will decrease less and the poorest person would be better off. Topic: John Rawls Skill: Conceptual Status: Old AACSB: Ethical Reasoning

33) Explain the principle "Make the poorest as well off as possible." Who proposed it? Answer: This principle was proposed by John Rawls. According to this principle, taking all the costs of income transfer into account, the fair distribution of the economic pie is one that makes the poorest person as well off as possible. The incomes of rich people should be taxed, and after paying the costs of administering the tax and transfer system, what is left should be transferred to the poor. But the taxes must not be so high that they make the economic pie shrink to the point at which the poorest person ends up with a smaller piece. The goal is to make the piece enjoyed by the poorest person as big as possible. Topic: John Rawls Skill: Conceptual Status: Old AACSB: Ethical Reasoning

34) Bill Gates is a founder of Microsoft and the world's richest individual. Suppose Microsoft sells more software and Mr. Gates acquires another billion dollars in wealth. Simultaneously, suppose a burglar whose income is well below average broke into Bill Gates' house and stole a million dollars' worth of antiques. Using the "it's not fair if the rules aren't fair" approach to fairness, is Mr. Gates' acquisition of additional wealth fair? Is the (poor) thief's acquisition fair? Answer: In order for Mr. Gates to become richer, Microsoft had to convince consumers to buy their products. The consumers' choices were voluntary. That is, the consumer engaged in a voluntary transaction with Microsoft and, as a result, Mr. Gates gained wealth. (And the consumers gained the software.) Because the exchange was voluntary, it is a fair exchange according to the "it's not fair if the rules aren't fair" approach. The burglar, however, did not engage in a voluntary transaction with Mr. Gates. Mr. Gates suffered an involuntary transaction with the burglar. Involuntary transactions violate the symmetry principle and hence the thievery is not fair according to the "rules" approach. Notice that the fairness has nothing to do with the incomes of Mr. Gates and the burglar; instead, fairness hinges on whether the transaction was voluntary. Topic: Fair Rule Skill: Conceptual Status: Old AACSB: Ethical Reasoning

35) According to the "fair rules" view of fairness, are taxes fair? Explain. Answer: Taxes are unfair according to the fair rules view because they are an involuntary transfer of private property. While most economists and most people support fair taxation, there is little agreement on what constitutes a fair tax. Topic: Fair Rule Skill: Conceptual Status: Old AACSB: Ethical Reasoning

7 Numeric and Graphing Questions

1) The figure shows the demand curve for hotel rooms at a local resort. a) If the hotel charges $120 per night, how many rooms will they rent? b) If there are only 40 rooms available, how much are customers willing to pay for a room? c) If 60 rooms are available, how much are customers willing to pay? d) What do the dollars in your answer to part (c) represent? Answer: a) At $120 a night, the hotel will rent 20 rooms. b) If 40 rooms are available, customers are willing to pay $90 per room. c) If 60 rooms are available, customers are willing to pay $60 per room. d) The $60 represents the dollars' worth of other goods and services that customers are willing to forgo to get one more night in a hotel room. Topic: Willingness To Pay Skill: Analytical Status: Old AACSB: Analytical Skills

2) Jenn is willing to pay $75 for a purse and the purse's price is $60. What is Jenn's consumer surplus? Answer: The consumer surplus equals the difference between the marginal benefit of the good and the price actually paid. Jenn is willing to pay $75 for the purse, so its marginal benefit to her is $75. However, she only must pay $60, so Jenn has a consumer surplus of $75 - $60 = $15. Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

3) Jason needs help getting ready for the next test in his economics course and would like to hire Maria, an economics tutor to help him. Jason is willing to pay $30 for the first hour of tutoring, $25 for the second, $20 for the third, $15 for the fourth, and $10 for the fifth. The equilibrium price for tutoring is $15 per hour. For how many hours of tutoring will Jason hire Maria? Why this amount of hours? What is Jason's consumer surplus, if any, from the tutoring? What is Maria's consumer surplus from the tutoring? Answer: Jason will hire Maria for 4 hours of tutoring. At $15 per hour, the marginal benefit to Jason of the first 4 hours exceeds the price. But the marginal benefit from the fifth hour is less than the price and so Jason will not hire Maria for 5 hours. Jason's total consumer surplus is $30, the sum of $15 from the first hour plus $10 from the second plus $5 from the third plus $0 from the fourth. Maria has no consumer surplus in this market because she is the producer not the consumer. Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

4) The figure above shows the demand curve for DVDs. Use it to illustrate the consumer surplus if the price of a DVD is $15. Answer:

The consumer surplus is the area under the marginal benefit curve and above the price and is illustrated in the figure above. Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

5) The figure above shows the market demand curve for pizza. a) What is the marginal social benefit of the 20th pizza? b) What is the maximum price a consumer is willing to pay for the 20th pizza? c) If the price of a pizza is $6, what is the consumer surplus of the 20th pizza? d) If the price of a pizza is $10, what is the consumer surplus? e) If the price of a pizza is $6, what is the consumer surplus? Answer: a) The marginal social benefit of the 20th pizza is $10. b) The maximum price a consumer is willing to pay for the 20th pizza is $10. c) If the price of a pizza is $6, the consumer surplus of the 20th pizza is $4. d) If the price of a pizza is $10, the consumer surplus is $40. e) If the price of a pizza is $6, the consumer surplus is $160. Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

6) The figure above shows Cindy's demand for CDs per year. a) What is Cindy's total consumer surplus if the price of a CD is $12? b) What is Cindy's total consumer surplus if the price of a CD is $9? c) What happens to Cindy's consumer surplus when the price of a CD falls? Answer: a) Her consumer surplus when the price of a CD is $12 equals $15, the area of the triangle under the demand curve and above the price. b) Her consumer surplus when the price of a CD is $9 equals $60, the area of the triangle under the demand curve and above the price. c) As the price of a CD falls, Cindy's consumer surplus increases. This result reflects the observation that consumers are better off when prices are lower. Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

7) The diagram above depicts the market demand for, and market price of, buckets of raw oysters in Orlando. a) What is the consumer surplus of the person who buys the 100th bucket of oysters? b) What is the consumer surplus of the person who buys the 200th bucket of oysters? c) What is the consumer surplus of the person who buys the 300th bucket of oysters? d) What is the consumer surplus in the market? Answer: a) The consumer surplus of the person who buys the 100th bucket of oysters is $6. b) The consumer surplus of the person who buys the 200th bucket of oysters is $3. c) The consumer surplus of the person who buys the 300th bucket of oysters is $0. d) The consumer surplus in the market is $1,350. Topic: Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

8) Maria helps tutor students taking economics. The equilibrium price for tutoring is $15 per hour. Maria has determined her opportunity cost per hour to be $6 for the first, $9 for the second, $12 for the third, $15 for the fourth, and $18 for the fifth. How many hours will Maria tutor? Why this amount of hours? What, if any, is Maria's producer surplus? Answer: Maria will tutor for 4 hours. For all of the first 4 hours of tutoring, Maria's marginal cost of tutoring is less than or equal to the price she receives from tutoring. Maria will not tutor the fifth hour because for this hour her marginal cost exceeds the price. Maria makes a producer of surplus of $18, the sum of $9 on the first hour plus $6 on the second hour plus $3 on the third hour plus $0 on the fourth hour. Topic: Producer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

9) The figure above shows the market supply curve for pizzas. a) What is the marginal social cost of the 20th pizza? b) What is the minimum supply price of the 20th pizza? c) If the price is $6 per pizza, what is the producer surplus for the 20th pizza? d) If the price is $6 per pizza, what is the total producer surplus? e) If the price is $8 per pizza, what is the total producer surplus? f) If the price is $10 per pizza, what is the total producer surplus? Answer: a) The marginal cost of the 20th pizza is $6. b) The minimum supply price of the 20th pizza is $6. c) If the price is $6 per pizza, the producer surplus for the 20th pizza is zero. d) If the price is $6 per pizza, the total producer surplus is $20. e) If the price is $8 per pizza, the total producer surplus is $80. f) If the price is $10 per pizza, the total producer surplus is $180. Topic: Producer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

10) Jason hires Maria to tutor him in economics. Jason is willing to pay $30 for the first hour of tutoring, $25 for the second, $20 for the third, $15 for the fourth, and $10 for the fifth. Maria has an opportunity cost per hour of $6 for the first, $9 for the second, $12 for the third, $15 for the fourth, and $18 for the fifth. What will be the equilibrium quantity of hours tutored and the equilibrium price? Explain why this quantity and price is the equilibrium. What is Jason's consumer surplus and what is Maria's producer surplus? Answer: The equilibrium quantity will be 4 hours of tutoring and the equilibrium price will be $15 per hour. The equilibrium quantity will be 4 hours of tutoring because for any of these first 4 hours, the marginal social benefit (to Jason) exceeds or is equal to the marginal social cost (to Maria). The price will be $15 per hour because that is the maximum price Jason is willing to pay for the fourth hour of tutoring and $15 is the minimum price Maria will accept for the fourth hour of tutoring. Jason's total consumer surplus is $30, the sum of $15 from the first hour plus $10 from the second plus $5 from the third plus $0 from the fourth. Maria makes a producer surplus of $18, the sum of $9 on the first hour plus $6 on the second hour plus $3 on the third hour plus $0 on the fourth hour. Topic: Efficiency of Competitive Markets Skill: Analytical Status: Old AACSB: Analytical Skills

Price (dollars per loaf) 0.60 0.80 1.00 1.20 1.40 1.60 1.80

Quantity demanded (loaves per day) 240 200 160 120 80 40 0

Quantity supplied (loaves per day) 0 80 160 240 320 400 480

11) The table above gives the demand and supply schedules for bread. Assume that the only people who benefit from bread are the people who consume it and the only people who bear the cost of bread are the people who produce it. a) What is the maximum price that consumers are willing to pay for the 80th loaf of bread? b) What is the minimum price that producers are willing to accept to produce 200 loaves of bread? c) What is the efficient quantity of bread? d) If the market is efficient, what is the consumer surplus? e) If the market is efficient, what is the producer surplus? f) If one firm owns all the bread outlets and sells 120 loaves per day, what is the deadweight loss (if any)? Answer: a) The demand curve shows consumers' willingness to pay. If 80 loaves of bread are available, consumers are willing to pay $1.40 for the last loaf. b) The supply curve shows the minimum supply price. The minimum price that will get producers to produce 200 loaves of bread is $1.10 per loaf. c) The efficient quantity of bread is 160 loaves per day. When 160 loaves per day are produced, the marginal social benefit ($1.00) equals the marginal social cost.

d) The figure above will help answer the question. If the market is efficient, 160 loaves of bread are sold and bought at $1.00 per loaf. Consumer surplus is the value that consumers receive minus the price they pay summed over the quantity bought. Thus consumer surplus is the area of the indicated triangle, which equals 1/2 × ($1.80 - $1.00) × 160 = $64. e) Producer surplus is the price of bread minus the marginal cost of producing it, summed over the quantity sold. Thus producer surplus is the area of the indicated triangle, which equals 1/2 × ($1.00 $0.60) × 160 = $32.

f) The efficient quantity of bread is 160 loaves per day because when 160 loaves per day are produced, the marginal social benefit, $1.00, equals the marginal social cost, $1.00. If 120 loaves per day are sold, the marginal benefit exceeds the marginal cost and therefore this level of output is not efficient. As the figure above shows, the deadweight loss is the area of the triangle and equals 1/2 × ($1.20 - $0.90) × (160 - 120), which is $6. Topic: Efficiency of Competitive Markets Skill: Analytical Status: Old AACSB: Analytical Skills

12) The figure above shows the market for pizza. a) If the price of a slice of pizza is $3, what is the consumer surplus of the 50th slice? b) If the price of a slice of pizza is $3, what is the producer surplus of the 50th slice? c) What is the efficient quantity? What is the equilibrium quantity? What is the deadweight loss when the equilibrium quantity is produced? Answer: a) Consumer surplus is the distance between the demand curve and the price of $3 when 50 slices are consumed. That difference is $4, the marginal social benefit, minus $3 or $1. b) Producer surplus is the distance between the supply curve and the market price when 50 slices are produced. That difference is $3 minus $2, the marginal social cost, or $1. c) The efficient quantity is 100 slices because that is the quantity for which the marginal social benefit equals the marginal social cost. The equilibrium quantity is 100 slices, because that is the quantity for which the quantity demanded equals the quantity supplied. There is no deadweight loss at the equilibrium quantity because it is the same as the efficient quantity. Topic: Efficiency of Competitive Markets Skill: Analytical Status: Old AACSB: Analytical Skills

13) The figure above shows the market for hot dogs. a) What is the maximum price consumers are willing to pay for the 25th hot dog? b) What is the efficient quantity? c) Suppose that the production was limited to 25 hot dogs. In the figure, indicate the amount of the deadweight loss. Answer: a) Consumers are willing to pay a maximum of $4 for the 25th hot dog. b) The efficient quantity of hot dogs is 75 hot dogs because that is the quantity for which the marginal social benefit equals the marginal social cost.

The deadweight loss is indicated in the figure above.

Topic: Efficiency of Competitive Markets Skill: Analytical Status: Old AACSB: Analytical Skills

14) The figure above shows the market supply and market demand curves for pizza. If the market is at its equilibrium, what area in the graph above represents: a) consumer surplus? b) producer surplus? Answer: a) AFB b) BFC Topic: Efficiency of Competitive Markets Skill: Analytical Status: Old AACSB: Analytical Skills

15) Jason wants to hire Maria to tutor him in economics. Jason is willing to pay $30 for the first hour of tutoring, $25 for the second, $20 for the third, $15 for the fourth, and $10 for the fifth. Maria has an opportunity cost per hour of $6 for the first, $9 for the second, $12 for the third, $15 for the fourth, and $18 for the fifth. The initial equilibrium price for tutoring is $15 an hour and hence Maria tutors Jason for 4 hours. Now, Maria realizes that she is the only economics tutor because all the other tutors have graduated. Because she is the only tutor, she has a monopoly and, as a monopolist, Maria decides to charge a price of $25 instead of $15 an hour. a) At the price of $25 an hour, how many hours will Maria tutor Jason? b) At the initial equilibrium price of $15 an hour, what was Jason's total consumer surplus and Maria's total producer surplus? c) At the price of $25 an hour, what is Jason's total consumer surplus and Maria's total producer surplus? d) How does the sum of Jason's consumer surplus plus Maria's producer surplus compare at the initial equilibrium price of $15 an hour (part b) and at the new price of $25 an hour (part c)? Comment on any difference. Answer: a) Maria will tutor Jason for 2 hours. b) At the initial price of $15, Jason's total consumer surplus was $30, the sum of $15 from the first hour plus $10 from the second plus $5 from the third plus $0 from the fourth. Maria made a producer surplus of $18, the sum of $9 on the first hour plus $6 on the second hour plus $3 on the third hour plus $0 on the fourth hour. c) At the new price of $25 an hour, Jason's total consumer surplus is $5, the consumer surplus from the first hour. Maria makes a producer surplus of $35, the sum of $19 on the first hour plus $16 on the second hour. d) When the price was $15 an hour, the sum of the consumer and producer surpluses was $48. When the price is $25, the sum of the consumer and producer surpluses is $40. The $8 difference between the initial situation and the situation in which Maria is a monopolist is the deadweight loss. Topic: Deadweight Loss Skill: Analytical Status: Old AACSB: Analytical Skills

16) The figure above shows the market supply and market demand for pizza. a) What is the efficient quantity of pizzas? b) If 70,000 pizzas are produced, what area represents the deadweight loss? c) Why does the deadweight loss in part (b) occur? d) If 20,000 pizzas are produced, what area represents the deadweight loss? e) Why does the deadweight loss in part (d) occur? Answer: a) 40,000 pizzas is the efficient quantity. b) If 70,000 pizzas are produced, the deadweight loss is area C. c) The deadweight loss occurs because we are producing some pizzas, specifically pizzas 40,001 through 70,000, for which the marginal social cost is greater than the marginal social benefit. d) If 20,000 pizzas are produced, the deadweight loss is area B. e) The deadweight loss occurs because we are not producing some pizzas, namely pizzas 20,001 through 40,000, for which the marginal social benefit is greater than the marginal social cost. Topic: Deadweight Loss Skill: Analytical Status: Old AACSB: Analytical Skills

8 True or False 1) Command system allocates resources by the order of someone in authority. Answer: TRUE Topic: Resource Allocation Methods Skill: Conceptual Status: Old AACSB: Reflective Thinking

2) The value of one more unit of a good or service is its marginal benefit. Answer: TRUE Topic: Marginal Benefit Skill: Recognition Status: Old AACSB: Reflective Thinking

3) The opportunity cost to the consumer of purchasing and consuming one more unit of a good is called the marginal benefit. Answer: FALSE Topic: Marginal Benefit Skill: Conceptual Status: Old AACSB: Reflective Thinking

4) The opportunity cost to the firm of producing one more unit of output is also called marginal cost. Answer: TRUE Topic: Marginal Cost Skill: Conceptual Status: Old AACSB: Reflective Thinking

5) If the marginal social benefit of pizza exceeds the marginal social cost of pizza, the economy is producing the efficient quantity of pizza. Answer: FALSE Topic: Efficiency and Inefficiency Skill: Analytical Status: Old AACSB: Reflective Thinking

6) If the marginal social cost exceeds the marginal social benefit for the last pair of shoes produced, then the economy is producing more than the efficient amount. Answer: TRUE Topic: Efficiency and Inefficiency Skill: Analytical Status: Old AACSB: Reflective Thinking

7) If the marginal social benefit exceeds the marginal social cost of producing the next kilowatt hour of electricity, then it is efficient to produce as many kilowatt hours as possible. Answer: FALSE Topic: Efficiency and Inefficiency Skill: Analytical Status: Old AACSB: Reflective Thinking

8) If the marginal social cost of a television exceeds the marginal social benefit of a television, it would increase society's total surplus to decrease production of televisions. Answer: TRUE Topic: Efficiency and Inefficiency Skill: Analytical Status: Old AACSB: Reflective Thinking

9) As long as production is such that marginal social benefit is greater than marginal social cost, an efficient outcome occurs. Answer: FALSE Topic: Efficiency and Inefficiency Skill: Conceptual Status: Old AACSB: Reflective Thinking

10) Consumer surplus is the value of a good minus the cost of producing it, summed over the quantity bought. Answer: FALSE Topic: Consumer Surplus Skill: Recognition Status: Old AACSB: Reflective Thinking

11) Buyers receive a consumer surplus when the price exceeds the marginal benefit. Answer: FALSE Topic: Consumer Surplus Skill: Recognition Status: Old AACSB: Reflective Thinking

12) Consumers don't always have to pay the maximum price they are willing to pay. Answer: TRUE Topic: Consumer Surplus Skill: Conceptual Status: Old AACSB: Reflective Thinking

13) Marginal cost is the minimum price that producers must receive to induce them to produce another unit of a good or service. Answer: TRUE Topic: Marginal Cost Skill: Recognition Status: Old AACSB: Reflective Thinking

14) The producer surplus on a unit of output is the difference between the market price and the opportunity cost of producing it. Answer: TRUE Topic: Producer Surplus Skill: Recognition Status: Old AACSB: Reflective Thinking

15) Producer surplus is the price of a good minus the opportunity cost of producing it, summed over the quantity produced. Answer: TRUE Topic: Producer Surplus Skill: Recognition Status: Old AACSB: Reflective Thinking

16) If the hot dog vendors at Yankee Stadium are earning a producer surplus on each hot dog they sell, then baseball fans cannot be gaining any consumer surplus on the hot dogs they buy. Answer: FALSE Topic: Producer Surplus Skill: Analytical Status: Old AACSB: Reflective Thinking

17) Although the efficient quantity to produce of any good is located where marginal social benefit and marginal social cost are equal, there will usually be other quantities where the sum of consumer and producer surplus are greater. Answer: FALSE Topic: An Efficient Market Skill: Conceptual Status: Old AACSB: Reflective Thinking

18) In a competitive equilibrium, the total consumer surplus must equal the total producer surplus. Answer: FALSE Topic: An Efficient Market Skill: Conceptual Status: Old AACSB: Reflective Thinking

19) When the efficient quantity of output is being produced and sold, the deadweight loss is maximized. Answer: FALSE Topic: Deadweight Loss Skill: Conceptual Status: Old AACSB: Reflective Thinking

20) If the marginal social benefit of ice cream curve shifts rightward because people now like ice cream better than before, the marginal social cost curve of ice cream will shift leftward. Answer: FALSE Topic: Is the Competitive Market Efficient? Skill: Analytical Status: Old AACSB: Reflective Thinking

21) Market failure is the situation in which a market delivers an inefficient outcome. Answer: TRUE Topic: Is the Competitive Market Efficient? Skill: Definition Status: Old AACSB: Reflective Thinking

22) A competitive market is always efficient. Answer: FALSE Topic: Is the Competitive Market Efficient? Skill: Recognition Status: Old AACSB: Reflective Thinking

23) One of the obstacles to efficiency is monopoly. Answer: TRUE Topic: Obstacles to Efficiency, Externalities Skill: Recognition Status: Old AACSB: Reflective Thinking

24) When there are external costs of production, such as when electric utilities burn coal, a competitive market will produce an inefficient level of output. Answer: TRUE Topic: Obstacles to Efficiency, Externalities Skill: Conceptual Status: Old AACSB: Reflective Thinking

9 Extended Problems

1) The figure above shows the market for ink-jet printers. a) What are the equilibrium price and equilibrium quantity of printers? Is this equilibrium efficient? Explain. b) Calculate the total amount consumers paid for printers bought. c) Calculate the consumer surplus. d) Calculate the producer surplus. Answer: a) The equilibrium price is $100 and the equilibrium quantity is 80 printers per week. The equilibrium is efficient if the only people who benefit from printers are the people who buy them, so that the demand curve is the marginal social benefit (MSB) curve, and if the only people who bear the cost of printers are the people who produce them, so that the supply curve is the marginal social cost (MSC) curve. In this case, when the market is in equilibrium, MSB = MSC, which means the equilibrium is efficient. b) Because consumers buy 80 printers and pay the market price, $100 per printer, the total amount they pay is $100 × 80 = $8,000.

c) The consumer surplus is the value of the printers buy minus the price paid summed over the quantity bought. The consumer surplus is the area labeled in the figure above. Recalling that the area of a triangle is 1/2 multiplied by the base multiplied by the height, the consumer surplus equals 1/2 × (80 × $20), or $800. d) The producer surplus is the price of a printer minus the marginal cost of producing it, summed over the quantity sold. The producer surplus is the area labeled in the figure above. The area of a triangle is 1/2 multiplied by the base multiplied by the height, so the producer surplus equals 1/2 × (80 × $10) = $400. Topic: Consumer Surplus and Producer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

Price (cents per bottle) 40 80 120 160 200 240 280

Quantity Quantity demanded supplied (bottles per day) (bottles per day) 1,200 0 1,000 200 800 400 600 600 400 800 200 1,000 0 1,200

2) The table above gives the demand and supply schedules for bottled spring water in Springsboro. Assume that the only people who benefit from spring water are the people who drink it and the only people who bear the cost of bottled spring water are the people who produce it. a) Draw the market demand and market supply curves. What are the equilibrium price and equilibrium quantity of spring water? Is this equilibrium efficient? Explain. b) What is the maximum price that consumers are willing to pay for the 400th bottle? What is the minimum price that producers are willing to accept for the 400th bottle? Explain. c) Are 400 bottles a day less than or greater than the efficient quantity? Explain your answer. d) If the market for spring water is efficient, what is the consumer surplus? Show it on your graph. What is the producer surplus? Show it on your graph. e) If spring water bottlers produce 400 bottles a day, is there a deadweight loss? If yes, what is it? Explain your answer using your graph. Answer:

a) The figure above shows the supply and demand curves. The equilibrium price is $1.60 and the equilibrium quantity is 600 bottles a day. The equilibrium is efficient. Because the demand curve is the same as the marginal social benefit (MSB) curve and the supply curve is the same as the marginal social cost (MSC) curve, when the market is in equilibrium, MSB = MSC, which is the efficiency condition.

b) The demand curve shows consumers' willingness to pay. If 400 bottles are produced, the maximum price that consumers are willing to pay for the last bottle is $2.00. The supply curve shows the minimum price that producers are willing to accept to produce a certain quantity. The minimum price they are willing to accept to produce the 400th bottle is $1.20. c) The efficient quantity is 600, so 400 is less than the efficient quantity. There is underproduction compared to the efficient quantity. When 400 bottles of water are produced, the marginal social benefit from an additional bottle is $2.00 while the marginal social cost of this bottle is only $1.20. So society can get more value from its resources if more water is produced.

d) If the market for spring water is efficient, 600 bottles are produced. The consumer surplus is the value of water that consumers buy minus the amount they pay summed over the quantity purchased, so the consumer surplus is the area of the triangle labeled in the figure above. The area of a triangle is 1/2 multiplied by the base multiplied by the height, so the consumer surplus equals 1/2 × (600 × $1.20), which is $360. The producer surplus is the price of water minus the marginal cost of producing it, summed over the quantity sold, so the producer surplus is the area of the triangle labeled in the figure above. This area is equal to 1/2 × (600 × $1.20), which is $360.

e) If 400 bottles are produced, the economy produces 200 bottles less than the efficient quantity. For each of the bottles between 400 and 600, society loses the value equal to the difference between the marginal social benefit and the marginal social cost, which is the same as the distance between the demand curve and the supply curve. This loss is the deadweight loss, illustrated in the figure above. The deadweight loss is the area of the triangle, which equals 1/2 × (200 × $0.80) = $80. Topic: Deadweight Loss Skill: Analytical Status: Old AACSB: Analytical Skills

Price (dollars per gallon) 1.00 1.50 2.00 2.50 3.00 3.50 4.00

Quantity Quantity supplied demanded (gallons per day) (gallons per day) 600 0 500 200 400 400 300 600 200 800 100 1,000 0 1,200

3) The table gives the demand and supply schedules for milk in Cowburg. Assume that the only people who benefit from milk are the people who consume it and the only people who bear the cost of milk are the people who produce it. a) Draw the market demand and market supply curves. What are the equilibrium price and equilibrium quantity of milk? Is this equilibrium efficient? Explain. b) What is the maximum price that consumers are willing to pay for the 500th gallon? What is the minimum price that producers are willing to accept for the 500th gallon? Explain. c) Are 500 gallons a day less than or greater than the efficient quantity? Explain your answer. d) If the market for milk is efficient, what is the consumer surplus? Show it on your graph. What is the producer surplus? Show it on your graph. e) If farmers produce 500 gallons a day, is there a deadweight loss? If yes, what is it? Explain your answer using your graph. Answer:

a) The figure above shows the demand and supply curves. The equilibrium price is $2.00 and the equilibrium quantity is 400 gallons a day. The equilibrium is efficient. The demand curve is the same as the marginal social benefit (MSB) curve and the supply curve is the same as the marginal social cost (MSC) curve, so when the market is in equilibrium, MSB = MSC, which is the efficiency condition.

b) The demand curve shows consumers' willingness to pay. If 500 gallons are produced, the maximum price that consumers are willing to pay for the last gallon is $1.50. The supply curve shows the minimum price that producers are willing to accept to produce a certain quantity. The minimum price they are willing to accept to produce the 500th gallon of milk is $2.25. c) The efficient quantity is 400 gallons per day, so 500 gallons is greater than the efficient quantity. There is overproduction compared to the efficient quantity. When 500 gallons of milk are produced, the marginal benefit from an additional gallon is $1.50 while the marginal cost of this gallon is $2.25. In this case, MSB < MSC, which means that society loses value if 500 gallons of milk are produced.

d) If the market for milk is efficient, 400 gallons of milk are sold and bought. The consumer surplus is the value of water that consumers buy minus the amount they pay summed over the quantity purchased, so the consumer surplus is the area of the triangle labeled in the figure above. The area of a triangle is 1/2 multiplied by the base multiplied by the height, so the consumer surplus equals 1/2 × (200 × $2.00), which is $400. The producer surplus is the price of water minus the marginal cost of producing it, summed over the quantity sold, so the producer surplus is the area of the triangle labeled in the figure above. This area is equal to 1/2 × (400 × $1.00), which is $200.

e) If 500 gallons of milk are produced, the economy produces 100 gallons more than the efficient quantity. Each of the additional 100 gallons of milk has a marginal cost that exceeds the marginal benefit. So each imposes a loss on society equal to the marginal social cost minus the marginal social benefit, which is the distance between the supply curve and the demand curve. This loss is the deadweight loss, illustrated in the figure above. The deadweight loss is the area of the triangle, which equals 1/2 × (100 × $0.75) = $37.50. Topic: Deadweight Loss Skill: Analytical Status: Old AACSB: Analytical Skills

Quantity Price demanded in July (dollars per gallon) (gallons per day) 2.00 2.50 3.00 3.50 4.00 4.50 5.00

300 250 200 150 100 50 0

Quantity demanded in Quantity supplied November (gallons per day) (gallons per day) 150 0 100 100 50 200 0 300 0 400 0 500 0 600

4) The table gives the demand and supply schedules for ice cream in Sweetsville in July and November. Assume that the only people who benefit from ice cream are the people who consume it and the only people who bear the cost of ice cream are the people who produce it. a) Draw the market demand and market supply curves. What are the equilibrium price and equilibrium quantity of ice cream in July and November? Is the allocation of resources efficient in July? Is it efficient in November? Explain. b) What is the maximum price that consumers are willing to pay for the 100th gallon of ice cream in July? In November? What is the minimum price that producers are willing to accept for the 100th gallon in July and November? Explain. c) What happens to consumer surplus and producer surplus in November compared to July? Why? Answer:

a) The figure is shown above. In July, the equilibrium price is $3.00 and the equilibrium quantity is 200 gallons of ice cream a day. In November, the equilibrium price is $2.50 and the equilibrium quantity is 100 gallons a day. The allocation of resources is efficient in both July and November because the demand curve is the marginal social benefit (MSB) curve and the supply curve is the marginal social cost (MSC) curve, so at equilibrium MSB = MSC, which is the efficiency condition.

b) The demand curve shows consumers' willingness to pay. If 100 gallons of ice cream are produced, the maximum price that consumers are willing to pay for the last gallon is $4.00 in July and $2.50 in November. The supply curve shows the minimum price that producers are willing to accept to produce a certain quantity. Because the supply curve remains the same, the minimum price that producers are willing to accept to produce the 100th gallon of ice cream is $2.50 in both July and November. c) Consumer surplus is the value that consumers receive minus the price they pay summed over the quantity bought. Both the surplus received from each gallon of ice cream bought and the quantity bought decreased in November compared to July. Therefore, consumer surplus decreased from $200 in July to $50 in November. Producer surplus is the price of ice cream minus the marginal cost of producing it, summed over the quantity sold. Because the market price of ice cream fell while the marginal costs remained the same, both the surplus received from each gallon of ice cream sold and the quantity sold decreased in November compared to July. Therefore, producer surplus decreased from $100 in July to $25 in November. Topic: Consumer Surplus and Producer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

Economics, 11e, Global Edition (Parkin) Chapter 6 Government Actions in Markets 1 A Housing Market With a Rent Ceiling 1) A price ceiling is a price A) below which a seller cannot legally sell. B) above which a seller cannot legally sell. C) that creates a surplus of the good. D) Both answers A and C are correct. Answer: B Topic: Price Ceiling Skill: Definition Status: Old AACSB: Analytical Skills

2) A price ceiling ________. A) makes it illegal to charge a higher price than the specified price B) is more effective when it is higher C) is necessary to maintain market equilibrium D) occurs in housing markets only Answer: A Topic: Price Ceiling Skill: Definition Status: Old AACSB: Analytical Skills

3) A price ________ is a regulated ________ that must be set below the equilibrium price to have an effect. A) floor; price B) floor; quantity C) ceiling; price D) ceiling; quantity Answer: C Topic: Rent Ceiling Skill: Definition Status: Old AACSB: Analytical Skills

4) In order to have an effect, a price ceiling must be set ________. A) above the equilibrium price B) equal to the equilibrium price C) below the equilibrium price D) by suppliers Answer: C Topic: Rent Ceiling Skill: Definition Status: Old AACSB: Analytical Skills

5) A rent ceiling below the equilibrium rent will create A) a more efficient allocation of housing. B) a larger number of apartments rented. C) no change in the number of apartments rented. D) increased search time and black markets. Answer: D Topic: Rent Ceiling Skill: Definition Status: Old AACSB: Analytical Skills

6) A rent ceiling ________. A) increases the quantity of rental units supplied B) cannot change the market price C) set above equilibrium price has no effect D) generally aims at insuring that landlords receive a higher rent than would otherwise be the case Answer: C Topic: Rent Ceiling Skill: Conceptual Status: Old AACSB: Analytical Skills

7) A rent ceiling set above the equilibrium rent A) decreases the quantity demanded but not the quantity supplied. B) decreases the quantity supplied but not the quantity demanded. C) decreases both the quantity demanded and the quantity supplied. D) has no effect on the market outcome. Answer: D Topic: Rent Ceiling Skill: Conceptual Status: Revised AACSB: Analytical Skills

8) A price ceiling, such as a rent ceiling, A) always results in a surplus. B) always results in a shortage. C) results in a surplus if the ceiling price is less than the equilibrium price. D) results in a shortage if the ceiling price is less than the equilibrium price. Answer: D Topic: Price Ceiling Skill: Conceptual Status: Old AACSB: Analytical Skills

9) Which of the following is an effect of a price ceiling set below the equilibrium price? A) Less of the good is produced with the ceiling than would be produced without the ceiling. B) The price ceiling has no effect on the market equilibrium. C) Consumers can buy more than they can at the equilibrium price because the ceiling price is lower. D) None of the above answers is correct. Answer: A Topic: Price Ceiling Skill: Conceptual Status: Old AACSB: Analytical Skills

10) Suppose the government imposes a price ceiling on gasoline that is less than the equilibrium price. As a result, A) the price of gasoline rises to the equilibrium price. B) there is incentive for buyers to undertake search activity. C) the supply of gasoline will increase and the supply curve will shift rightward. D) the demand for gasoline will decrease and the demand curve will shift leftward. Answer: B Topic: Price Ceiling Skill: Conceptual Status: Old AACSB: Analytical Skills

11) Which of the following is NOT a potential impact of a rent ceiling set below the equilibrium rent? A) a surplus B) an increase in search C) a deadweight loss D) None of the above because they are all impacts of a rent ceiling set below the equilibrium rent. Answer: A Topic: Price Ceiling Skill: Conceptual Status: Old AACSB: Analytical Skills

12) A price ceiling can result in which of the following? A) inefficiency B) black markets C) increased search activities D) All of the above answers are correct. Answer: D Topic: Price Ceiling Skill: Conceptual Status: Old AACSB: Analytical Skills

13) Sherry wants to rent an apartment. Although rents are below what she is willing to pay, she cannot find an apartment. Then after a month of searching, she finds an apartment but she has to pay an additional $1,000 to have the locks changed. Sherry has just experienced the effects of ________. A) a rent floor with a black market B) inelastic demand C) a market working efficiently D) a rent ceiling Answer: D Topic: Rent Ceiling Skill: Conceptual Status: Old AACSB: Analytical Skills

14) Price ceilings, such as rent ceilings, set below the equilibrium price A) increase producer surplus. B) decrease producer surplus. C) do not affect producer surplus. D) might increase or decrease producer surplus. Answer: B Topic: Price Ceiling Skill: Conceptual Status: Old AACSB: Analytical Skills

15) Which of the following is an economic policy that promotes the efficient quantity of apartments? A) a rent floor above the equilibrium rent B) a rent ceiling below the equilibrium rent C) a sales tax imposed on renting an apartment D) none of the above Answer: D Topic: A Regulated Housing Market Skill: Conceptual Status: Old AACSB: Analytical Skills

16) A rent ceiling results in a shortage. As a result, which of the following do you expect? A) The shortage will persist as long as the ceiling is in effect. B) Discrimination as landlords choose their tenants, possibly based on race, age, or gender. C) A black market for apartments whereby higher rents are obtained through various other charges. D) All of the above would be expected. Answer: D Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

17) A price ceiling set below the equilibrium price ________ search activity and ________ the use of black markets. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: A Topic: A Regulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

18) The opportunity cost of buying a good includes I. the price of the good. II. the value of time spent searching for the good. A) only I B) only II C) both I and II D) neither I nor II Answer: C Topic: Search Activity Skill: Analytical Status: Old AACSB: Analytical Skills

19) When a rent ceiling is imposed in a housing market, the opportunity cost of housing equals the A) rent. B) market equilibrium rent that would prevail in the absence of a rent ceiling. C) value of the time and resources spent searching plus the rent. D) consumer surplus. Answer: C Topic: Search Activity Skill: Conceptual Status: Old AACSB: Analytical Skills

20) Search activity ________. A) occurs when there is a surplus of the good B) is unnecessary when a black market exists C) increases when an effective price ceiling is set on a good D) decreases when an effective price ceiling is set on a good Answer: C Topic: Search Activity Skill: Definition Status: Old AACSB: Analytical Skills

21) A rent ceiling set below the equilibrium rent will A) increase search activity. B) decrease search activity. C) have no effect on search activity. D) shift the housing supply curve rightward. Answer: A Topic: Search Activity Skill: Conceptual Status: Old AACSB: Analytical Skills

22) One consequence of rent ceilings set below the equilibrium rent is that A) a surplus of housing units develops. B) renters are no longer exploited by landlords. C) it makes the long-run housing supply more elastic. D) search costs for housing increase. Answer: D Topic: Search Activity Skill: Conceptual Status: Old AACSB: Analytical Skills

23) With rent controls, which of the following is most likely to occur? A) decreased search activity B) black market activity C) a building boom D) a housing surplus Answer: B Topic: Black Markets Skill: Conceptual Status: Old AACSB: Analytical Skills

24) ________ is an illegal activity between buyers and sellers sometimes used to evade a price ceiling. A) Increased search activity B) A price floor C) Creating a shortage D) A black market Answer: D Topic: Black Markets Skill: Conceptual Status: Old AACSB: Analytical Skills

25) A rent ceiling results in a shortage. As a result, which of the following do you expect? A) A shortage of applicants for the apartments available. B) Discrimination as tenants choose their landlords, possibly based on race, age, or gender. C) A black market for apartments whereby higher rents are obtained through various other charges. D) In the long-run, more and more people will want to become landlords. Answer: C Topic: Black Markets Skill: Conceptual Status: Old AACSB: Analytical Skills

26) With rent controls set below the equilibrium rent, what mechanism might arise that moves the market closer to the efficient equilibrium? A) decreased search costs B) black market activity C) increased advertising by landlords D) more favorable leases offered to tenants Answer: B Topic: Black Markets Skill: Analytical Status: Revised AACSB: Analytical Skills

27) One common effect of rent ceilings in big cities is A) that landlords build more apartments. B) that landlords charge "key money," high payments charged to new tenants for new locks and keys. C) to equalize the quantity of apartments demanded and the quantity supplied in neighborhoods. D) to reduce the search activity by those seeking shelter. Answer: B Topic: Black Markets Skill: Conceptual Status: Old AACSB: Analytical Skills

28) The stricter the enforcement of a price ceiling, the A) smaller is the difference between the black market price and the legal market price of the good. B) larger is the difference between the black market price and the legal market price of the good. C) greater is the amount of the good available in total, from either the legal market or the black market. D) Both answers B and C are correct. Answer: B Topic: Black Markets Skill: Analytical Status: Old AACSB: Analytical Skills

29) Which of the following is a result of a rent ceiling set below the equilibrium rent? I. equity in the housing market II. efficient allocation of resources III. a shortage of housing units. A) I and II B) I and III C) II only D) III only Answer: D Topic: Inefficiency of Rent Ceilings Skill: Conceptual Status: Old AACSB: Analytical Skills

30) A rent ceiling creates a shortage. As a result, which of the following occurs? A) only a loss of consumer surplus for tenants B) only a loss of producer surplus for landlords C) a loss of both consumer and producer surplus D) a gain of both consumer and producer surplus Answer: C Topic: Inefficiency of Rent Ceilings Skill: Analytical Status: Old AACSB: Analytical Skills

31) A rent ceiling creates a shortage. As a result, there is A) an efficient allocation of housing. B) a surplus of housing. C) an increase in the producer surplus in the housing market. D) a decrease in the producer surplus in the housing market. Answer: D Topic: Inefficiency of Rent Ceilings Skill: Analytical Status: Old AACSB: Analytical Skills

32) A rent ceiling results in a shortage of apartments. As a result, there is A) only a loss of consumer surplus for tenants. B) only a loss of producer surplus for landlords. C) a loss of both consumer and producer surplus. D) a gain of both consumer and producer surplus. Answer: C Topic: Inefficiency of Rent Ceilings Skill: Analytical Status: Old AACSB: Analytical Skills

33) Assume that your state government has placed a price ceiling of $.20 per kilowatt hour on electricity. The equilibrium price per kilowatt hour for electricity is $.25. The government's action will result in A) a surplus of electricity in the electricity market. B) an increase in the price of electricity to $.25 per kilowatt hour. C) an increase in producer surplus. D) a deadweight loss. Answer: D Topic: Price Ceiling Skill: Conceptual Status: Old AACSB: Analytical Skills

In the recent years, prices of basic food commodities such as corn, rice, and wheat have increased sharply. A recent article in the Wall Street Journal states that Chinese authorities are concerned that escalating prices will cause inflation and be followed by civil unrest. (Source: Wall Street Journal, February 20, 2011) 34) Suppose the Chinese government regulates the price of food and forbids firms from setting a higher price. In this case the government is setting a A) price floor. B) price ceiling. C) quota. D) tax. Answer: B Topic: Price Ceiling Skill: Conceptual Status: New AACSB: Reflective Thinking

35) If the Chinese government sets a price ceiling below the equilibrium price, the result will be I. an increase in the quantity demanded. II. a decrease in the quantity supplied. III. a shortage. A) I only B) I and II only C) III only D) I, II, and III Answer: D Topic: Price Ceiling Skill: Analytical Status: New AACSB: Analytical Skills

36) If the Chinese government sets a price ceiling below the equilibrium price, the result will be to A) increase total surplus. B) create deadweight loss. C) increase surplus and create deadweight loss. D) eliminate deadweight loss. Answer: B Topic: Price Ceiling Skill: Analytical Status: New AACSB: Analytical Skills

Rent (dollars per month) 200 300 400 500 600

Quantity of apartments supplied (per month) 20 40 60 80 100

Quantity of apartments demanded (per month) 100 80 60 40 20

37) The above table gives the demand schedule and the supply schedule for housing in Anytown, U.S.A. If a rent ceiling of $300 is imposed in the housing market, then A) there would be a surplus of apartments. B) there would be a shortage of apartments. C) the market would reach equilibrium at the quantity of 60 housing units. D) the supply of housing would increase. Answer: B Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

38) The above table gives the demand schedule and the supply schedule for housing in Anytown, U.S.A. If a rent ceiling of $600 was imposed in the housing market, then A) there would be a surplus of apartments. B) there would be a shortage of apartments. C) the market would reach equilibrium at the quantity of 60 housing units. D) the supply of housing would increase. Answer: C Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

39) In the figure above, the initial demand curve is D0. There are no rent ceilings nor rent floors. The equilibrium monthly rent is A) $100 per month. B) $200 per month. C) $300 per month. D) $400 per month. Answer: C Topic: A Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

40) In the figure above, the demand curve shifts rightward from D0 to D1. There are no rent controls. In the short run, the increase in demand results in A) higher rents and a decrease in the equilibrium quantity. B) lower rents and a decrease in the equilibrium quantity. C) higher rents and an increase in the equilibrium quantity. D) lower rents and an increase in the equilibrium quantity. Answer: C Topic: A Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

41) In the figure above, the demand curve shifts rightward from D0 to D1 so that D1 is the relevant demand curve. Suppose the government imposes a rent ceiling of $300 per month. In the short run there will be A) a shortage of 500,000 apartments. B) a shortage of 400,000 apartments. C) a shortage of 200,000 apartments. D) no shortage nor a surplus of apartments. Answer: C Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

42) In the figure above, the demand curve shifts rightward from D0 to D1 so that D1 is the relevant demand curve. Suppose the government imposes a rent ceiling of $300 per month. In the short run there will be A) a deadweight loss created. B) a reduction in renters' search activities. C) an elimination of a black market. D) an increased number apartments rented. Answer: A Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

43) In the figure above, the demand curve shifts rightward from D0 to D1 so that D1 is the relevant demand curve. Suppose the government imposes a rent ceiling of $300 per month. In the short run there will be A) a shortage and an increase in search costs. B) a shortage and a decrease in search costs. C) a surplus and an increase in search costs. D) a surplus and a decrease in search costs. Answer: A Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

44) In the figure above, the demand curve shifts rightward from D0 to D1 so that D1 is the relevant demand curve. Suppose the government imposes a rent ceiling of $500 per month. In the short run there will be A) a surplus of apartments. B) a shortage of 200,000 apartments. C) a shortage of 300,000 apartments. D) neither a shortage nor a surplus of apartments. Answer: D Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

45) The above figure shows the apartment rental market in Bigtown. At what rent will there be neither a shortage nor a surplus of apartments? A) $1250 per month B) $1000 per month C) $750 per month D) $500 per month Answer: C Topic: A Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

46) The above figure shows the apartment rental market in Bigtown. If severe flooding resulted in the destruction of many of the city's apartment buildings, then the A) supply curve of apartments would shift leftward and rent would rise above $750.00. B) demand curve for apartments would shift rightward and rent would rise above $750.00. C) equilibrium quantity of apartments rented would increase beyond 3,000. D) equilibrium market price of apartments rented would fall below $750.00. Answer: A Topic: The Market Response to a Decrease in Supply Skill: Analytical Status: Old AACSB: Analytical Skills

47) The above figure shows the apartment rental market in Bigtown. If the Bigtown Housing Authority imposes a rent ceiling of $500 per month, the rent ceiling will help A) all renters. B) some renters and hurt other renters. C) all landlords. D) some landlords and hurt other landlords. Answer: B Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

48) The above figure shows the apartment rental market in Bigtown. If the Bigtown Housing Authority imposes a rent ceiling of $1,000 per month, the ceiling will A) help all renters. B) help some renters and hurt other renters. C) help all landlords. D) have no effect at all on the Bigtown rental market. Answer: D Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

49) The above figure shows the apartment rental market in Bigtown. If there is a shortage of 200,000 apartments in the Bigtown rental market, it might be because the Bigtown Housing Authority has imposed a rent A) ceiling of $750.00 monthly. B) ceiling of $500.00 monthly. C) floor of $750.00 monthly. D) floor of $500.00 monthly. Answer: B Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

50) The above figure shows the apartment rental market in Bigtown. If the market is in equilibrium and then the Bigtown Housing Authority imposes a rent ceiling of $500 per apartment, which of the following would occur? A) a decrease in the search time and expense of finding an apartment B) an increase in the search time and expense of finding an apartment C) an increase in producer surplus but a decrease in consumer surplus D) an increase in efficiency Answer: B Topic: Search Activity Skill: Analytical Status: Old AACSB: Analytical Skills

51) The above figure shows the apartment rental market in Bigtown. If the Bigtown Housing Authority imposes a rent ceiling of $500 per apartment, the deadweight loss will be A) $1,000,000. B) $500,000. C) $250,000. D) $125,000. Answer: C Topic: Inefficiency of Rent Ceilings Skill: Analytical Status: Old AACSB: Analytical Skills

52) In the figure above, originally the apartment rental market is in short-run and long-run equilibrium with a rent of $600 per month. Then the government imposes a rent ceiling of $500 per month. The rent ceiling leads to a A) shortage of 1000 apartments. B) shortage of 2000 apartments. C) surplus of 1000 apartments. D) surplus of 2000 apartments. Answer: B Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

53) In the figure above, originally the apartment rental market is in short-run and long-run equilibrium with a rent of $600 per month. Then the government imposes a rent ceiling of $500 per month, which causes a shortage. Suppose that apartments are a normal good and incomes rise. The increase in income A) decreases the shortage. B) has no effect on the shortage. C) increases the shortage. D) raises the rent. Answer: C Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

54) In the figure above, originally the apartment rental market is in short-run and long-run equilibrium with a rent of $600 per month. Then the government imposes a rent ceiling of $500 per month, which causes a shortage. Suppose that apartments are an inferior good and incomes rise. The increase in income A) decreases the shortage. B) has no effect on the shortage. C) increases the shortage. D) raises the rent. Answer: A Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

55) In the figure above, originally the apartment rental market is in short-run and long-run equilibrium with a rent of $600 per month. Then the government imposes a rent ceiling of $500 per month. Now suppose that demand increases. The increase in demand results in the quantity supplied A) increasing. B) staying the same. C) decreasing. D) increasing, staying the same, or decreasing depending on how much demand increases. Answer: B Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

56) In the figure above, originally the apartment rental market is in short-run and long-run equilibrium with a rent of $600 per month. Then the government imposes a rent ceiling of $500 per month. If the law is strictly enforced, the maximum for which an apartment will rent on the black market is A) less than $600 per month. B) $600 per month. C) $700 per month. D) more than $700 per month. Answer: C Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

57) In the figure above, originally the apartment rental market is in short-run and long-run equilibrium with a rent of $600 per month. Then the government imposes a rent ceiling of $500 per month. The loss of producer surplus as a result of the price ceiling is A) $50,000 per month. B) $250,000 per month. C) $500,000 per month. D) more than $500,000 per month. Answer: B Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

58) In the figure above, originally the apartment rental market is in short-run and long-run equilibrium with a rent of $600 per month. Then the government imposes a rent ceiling of $500 per month. The loss of producer surplus A) is smaller than the gain in consumer surplus. B) is larger than the gain in consumer surplus. C) is the same size as the gain in consumer surplus. D) could be smaller than, larger than, or the same size as the gain in consumer surplus. Answer: B Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

59) In the figure above, originally the apartment rental market is in short-run and long-run equilibrium with a rent of $600 per month. Then the government imposes a rent ceiling of $500 per month. The deadweight loss is borne by A) the producers only. B) the consumers only. C) all producers and some consumers. D) all consumers and some producers. Answer: C Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

60) The figure shows the market for rental units in Gladstone. The market is in equilibrium. The government now introduces a rent ceiling of $500 a month. The price of a rental unit ________ and the number of units rented ________. A) increases by $500 per month; decreases B) increases by $100 per month; increases C) decreases by $100 per month; decreases D) remains the same; remains the same Answer: C Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

61) In the above figure, a rent ceiling of $300 per month would A) not affect the equilibrium quantity. B) result in a surplus of 7000 units. C) result in a shortage of 7000 units. D) result in a shortage of 2000 units. Answer: C Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

62) In the above figure, a rent ceiling of $500 per month would A) not affect the equilibrium quantity. B) create a shortage. C) raise the rent and cause a surplus. D) reduce the rent and create a surplus. Answer: A Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

63) The figure above shows the demand for and supply of rental housing in Smallton. If a rent ceiling is set at $800, how many apartment units are rented? A) 2,000 B) 3,000 C) 4,000 D) None of the above answers is correct. Answer: B Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

64) The figure above shows the demand for and supply of rental housing in Smallton. If a rent ceiling is set at $800, what is the rent? A) $800 B) $600 C) $400 D) None of the above answers is correct. Answer: B Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

65) The figure above shows the demand for and supply of rental housing in Smallton. If a rent ceiling is set at $800, there is A) a shortage of 3,000 units of rental housing. B) a shortage of 6,000 units of rental housing. C) a surplus of 3,000 units of rental housing. D) neither a shortage nor a surplus of rental housing. Answer: D Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

66) The figure above shows the demand for and supply of rental housing in Smallton. If a rent ceiling is set at $400, how many apartment units are rented? A) 2,000 B) 3,000 C) 4,000 D) None of the above answers is correct. Answer: A Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

67) The figure above shows the demand for and supply of rental housing in Smallton. If a rent ceiling is set at $400, what is the rent? A) $800 B) $600 C) $400 D) None of the above answers is correct. Answer: C Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

68) The figure above shows the demand for and supply of rental housing in Smallton. If a rent ceiling is set at $400, there is A) a shortage of 4,000 units of rental housing. B) a shortage of 2,000 units of rental housing. C) a surplus of 3,000 units of rental housing. D) neither a shortage nor a surplus of rental housing. Answer: B Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

69) The figure above shows the housing market in the city of Appleville. A rent ceiling of $650 per month is imposed. With the rent ceiling, the quantity of housing rented in Appleville is A) 200 units below the efficient level. B) 100 units above the efficient level. C) 300 units below the efficient level. D) efficient. Answer: A Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

70) The figure above shows the housing market in the city of Appleville. A rent ceiling of $650 per month is imposed. With the rent ceiling, the deadweight loss in the Appleville housing market is A) zero. B) at least $15,000 per month. C) at most $7,500 per month. D) 300 units per month. Answer: B Topic: Inefficiency of Rent Ceilings Skill: Analytical Status: Old AACSB: Analytical Skills

71) The figure above shows the housing market in the city of Appleville. A rent ceiling of $650 per month is imposed. With the rent ceiling, what is the maximum black market rent in Appleville? A) $650 per month B) $700 per month C) $750 per month D) $800 per month Answer: D Topic: Black Markets Skill: Analytical Status: Old AACSB: Analytical Skills

72) The above figure shows the demand and supply curves for housing. What would be the effects of a rent ceiling equal to $500 per month? A) a surplus equal to 3,000 apartments B) a shortage equal to 3,000 apartments C) a shortage equal to 250 apartments D) nothing because the rent ceiling has no effect on the equilibrium price and quantity Answer: B Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

73) The above figure shows the demand and supply curves for housing As a result of a rent ceiling at $500, the deadweight loss is represented by the area A) rectangle feag. B) triangle gfe. C) triangle eca. D) triangle acb. Answer: C Topic: Inefficiency of Rent Ceilings Skill: Analytical Status: Old AACSB: Analytical Skills

74) The above figure shows the demand and supply curves for housing in City B. What would be the effects of a rent ceiling equal to $1000 per month? A) a surplus equal to 3000 apartments B) a surplus equal to 250 apartments C) a shortage equal to 3000 apartments D) nothing because the rent ceiling has no effect on the equilibrium price and quantity Answer: D Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

75) The above figure shows the apartment market in Big City. What is the equilibrium rent in Big City? A) $1500 B) $1350 C) $1250 D) $1125 Answer: B Topic: An Unregulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

76) The above figure shows the apartment market in Big City. What could the Big City Housing Authority do if it wants to reduce the rents paid by its citizens? A) impose a rent floor above $1350 B) impose a rent floor below $1350 C) impose a rent ceiling above $1350 D) impose a rent ceiling below $1350 Answer: D Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

77) The above figure shows the apartment market in Big City. If a government policy results in a shortage of 1,500 apartments in the Big City rental market, it is most likely that the Housing Authority has imposed A) a rent ceiling of $1500.00 monthly. B) a rent ceiling of $1000.00 monthly. C) a rent floor of $1500.00 monthly. D) a rent floor of $1000.00 monthly. Answer: B Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

78) The above figure shows the apartment market in Big City. A rent ceiling of $1400 per month would A) create a black market. B) increase search activity. C) not affect the market. D) create a surplus of apartments. Answer: C Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

79) The above figure shows the apartment market in Big City. A rent ceiling of $1100 would A) not create a black market. B) create a shortage of apartments. C) decrease search activity. D) shift the supply curve rightward. Answer: B Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

80) The price ceiling depicted in the above figure results in A) consumer surplus increasing from $30 thousand to $34.5 thousand. B) producer surplus decreasing from $24 thousand to $6 thousand. C) a deadweight loss of $16 thousand. D) Both answers A and B are correct. Answer: D Topic: Price Ceiling Skill: Analytical Status: Old AACSB: Analytical Skills

81) Which of the following is a likely outcome of rent ceilings? A) a surplus of rent-controlled housing B) waiting lists of potential renters of rent-controlled housing C) construction of more rental housing D) black market rents below the ceiling rent Answer: B Topic: Study Guide Question, A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

82) In the above figure, the equilibrium price of a paperback book is $6 per book and the equilibrium quantity is 3 million books. The National Literature Board convinces the government to impose a price ceiling of $3 per book. At this price, the quantity of books supplied to the market will be A) 3 million a month and will equal the quantity demanded. B) less than 3 million a month and will exceed the quantity demanded. C) less than 3 million a month and will be less than the quantity demanded. D) more than 3 million a month and will exceed the quantity demanded. Answer: C Topic: Parallel MyEconLab Questions Skill: Analytical Status: Old AACSB: Analytical Skills

83) In the above figure, the equilibrium price of a paperback book is $6 per book and the equilibrium quantity is 3 million books. The National Literature Board convinces the government to impose a price ceiling of $6 per book. At this price, the quantity of books supplied to the market will be A) 3 million a month and will equal the quantity demanded. B) less than 3 million a month and will exceed the quantity demanded. C) less than 3 million a month and will be less than the quantity demanded. D) more than 3 million a month and will exceed the quantity demanded. Answer: A Topic: Parallel MyEconLab Questions Skill: Analytical Status: Old AACSB: Analytical Skills

84) The figure above illustrates a rental housing market in which there is a rent ceiling of $400 a month. The rent ceiling is strictly enforced. The number of apartments rented is A) less than 2 thousand. B) 2 thousand. C) 3 thousand. D) 4 thousand. Answer: B Topic: Parallel MyEconLab Questions Skill: Analytical Status: Old AACSB: Analytical Skills

2 A Labor Market With a Minimum Wage 1) A price floor is a price A) below which a seller cannot legally sell. B) above which a seller cannot legally sell. C) that creates a surplus of the good if it is set above the equilibrium price. D) Both answers A and C are correct. Answer: D Topic: Price Floor Skill: Definition Status: Old AACSB: Analytical Skills

2) A price floor A) always results in a surplus. B) always results in a shortage. C) results in a surplus if the floor price is higher than the equilibrium price. D) results in a shortage if the floor price is higher than the equilibrium price. Answer: C Topic: Price Floor Skill: Definition Status: Old AACSB: Analytical Skills

3) An example of a price floor is a A) rent control. B) minimum wage. C) subsidy. D) quota. Answer: B Topic: Price Floor Skill: Definition Status: Old AACSB: Analytical Skills

4) A minimum wage ________. A) is a price ceiling in the labor market B) changes the demand for labor. C) is an effective way of increasing employment D) is a price floor in the labor market Answer: D Topic: The Minimum Wage Skill: Definition Status: Old AACSB: Analytical Skills

5) A recent article by CBS news correspondent Bill Whitaker discussed the high level of unemployment among teens, especially during the summer months. Unemployment among the population as a whole was 9.1 percent, but among teens it was close to 24 percent. Many of these teens were hoping to get entry level jobs as small businesses. (Source: CBS news, June 4, 2011) A minimum wage set above the equilibrium wage rate is called A) a price floor. B) a price ceiling. C) quota. D) subsidy. Answer: A Topic: Price Floor Skill: Conceptual Status: New AACSB: Reflective Thinking

6) The minimum wage A) is type of price ceiling. B) is a type of price floor. C) can create a surplus of labor. D) Both answers A and C are correct. Answer: D Topic: The Minimum Wage Skill: Definition Status: Old AACSB: Analytical Skills

7) If policy makers believe that the equilibrium wage rate is too low, policy makers can raise wages by legislating a minimum wage, that is, a wage A) ceiling above the equilibrium wage. B) ceiling below the equilibrium wage. C) floor above the equilibrium wage. D) floor below the equilibrium wage. Answer: C Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

8) A minimum wage set above the equilibrium wage rate is a price A) ceiling that results in a shortage of low-skilled labor. B) ceiling that results in a surplus of low-skilled labor. C) floor that results in a shortage of low-skilled labor. D) floor that results in a surplus of low-skilled labor. Answer: D Topic: The Minimum Wage Skill: Conceptual Status: Old AACSB: Analytical Skills

9) A minimum wage is a government-imposed price ________ that is designed to be ________ the equilibrium wage rate. A) ceiling; above B) ceiling; below C) floor; above D) floor; below Answer: C Topic: The Minimum Wage Skill: Conceptual Status: Old AACSB: Analytical Skills

10) A minimum wage set above the equilibrium wage will A) create a shortage of labor. B) create a surplus of labor. C) have no effect because the equilibrium level of employment is not affected by a minimum wage above the equilibrium wage. D) create a lower wage rate for skilled workers than for unskilled workers. Answer: B Topic: The Minimum Wage Skill: Conceptual Status: Old AACSB: Analytical Skills

11) When a minimum wage is set above the equilibrium wage rate, ________. A) the supply of low-skilled workers decreases and the supply curve shifts rightward B) unemployment increases C) search activity decreases D) the supply of low-skilled workers increases and the supply curve shifts leftward Answer: B Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

12) A minimum wage set above the equilibrium wage rate for low-skilled workers ________. A) creates more employment opportunities for low-skilled workers B) creates more prosperity among younger people C) creates unemployment among low-skilled workers D) increases the number of good paying jobs available to young people Answer: C Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

13) A minimum wage set above the equilibrium wage I. increases the supply of labor. II. increases the quantity of labor supplied. III. decreases the demand for labor. A) I only B) II only C) I and II only D) I, II, and III Answer: B Topic: Price Floor Skill: Analytical Status: New AACSB: Analytical Skills

14) A minimum wage set above the equilibrium wage rate is a price ________ that ________ the quantity of low-skilled labor demanded. A) ceiling; decreases B) ceiling; increases C) floor; decreases D) floor; increases Answer: C Topic: The Minimum Wage Skill: Conceptual Status: Old AACSB: Analytical Skills

15) When the minimum wage is set above the equilibrium wage rate, the number of hours of labor employed is determined by the ________ and the ________. A) supply of labor; minimum wage B) demand for labor; supply of labor C) supply of and demand for labor; the minimum wage D) demand for labor; minimum wage Answer: D Topic: Minimum Wage and Unemployment Skill: Conceptual Status: Old AACSB: Analytical Skills

16) The government sets a price floor for corn which is above the equilibrium price of corn. As a result, ________. A) the corn market will be efficient B) a deadweight loss will be created C) a shortage of corn will be created D) None of the above answers is correct Answer: B Topic: Price Floor Skill: Conceptual Status: Old AACSB: Analytical Skills

17) Suppose that the equilibrium wage in the low-skilled labor market is $9.25. Further, suppose the federal government raises the minimum wage to $9.00 an hour from its present level of $8.15. The government's action of increasing the minimum wage will result in A) a decrease in unemployment. B) an increase in unemployment. C) a shortage of low-skilled labor. D) neither a shortage nor a surplus of labor in the low-skilled labor market. Answer: D Topic: The Minimum Wage Skill: Conceptual Status: Old AACSB: Analytical Skills

18) Suppose the equilibrium wage is $10 per hour. A minimum wage is a ________ and affects employment if it is set at ________. A) price floor; $12 per hour B) price floor; $8 per hour C) price ceiling; $10 per hour D) price ceiling; $12 per hour Answer: A Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

19) If a minimum wage is set above the equilibrium wage rate, employment A) will increase. B) will not change. C) will decrease. D) may increase, decrease or not change depending on how the supply of labor is affected by the minimum wage. Answer: C Topic: The Minimum Wage Skill: Conceptual Status: Old AACSB: Analytical Skills

20) Imposing a minimum wage that is above the equilibrium wage rate results in A) higher job search costs. B) lower unemployment. C) the labor market becoming more efficient. D) equilibrium in the labor market. Answer: A Topic: The Minimum Wage Skill: Conceptual Status: Old AACSB: Analytical Skills

21) If the minimum wage is set above the equilibrium wage, a supply and demand diagram of the lowskilled labor market will show unemployment as A) a vertical distance. B) a horizontal distance. C) the area of a rectangle. D) the area of a triangle. Answer: B Topic: The Labor Market and the Minimum Wage Skill: Conceptual Status: Old AACSB: Analytical Skills

Wage rate (dollars per hour) 11 10 9 8 7

Labor supplied (millions of Labor demanded workers) (millions of workers 6 4 5 5 4 6 3 7 2 8

22) In the table above, what is the equilibrium wage rate in an unregulated market? A) $8.00 per hour B) $9.00 per hour C) $10.00 per hour D) $11.00 per hour Answer: C Topic: The Labor Market and the Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

23) In the table above, what is the level of unemployment (in millions of workers) if the minimum wage is set at $8 per hour? A) 0 B) 1 C) 3 D) 4 Answer: A Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

24) In the table above, the market is in equilibrium. Then a minimum wage is set at $11 per hour. The number of unemployed workers will be A) 0. B) 2 million. C) 4 million. D) 6 million. Answer: B Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

25) In the table above, the market is in equilibrium. Then a minimum wage is set at $11 per hour. The number of workers who lose their jobs will be A) 0. B) 1 million. C) 3 million. D) 5 million. Answer: B Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

26) The above figure shows the labor market in an undeveloped nation. A minimum wage has an effect on the market for low-skilled labor if it is set at A) $2.00. B) $3.00. C) $4.00. D) all of the above Answer: C Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

27) The above figure shows the labor market in an undeveloped nation. If the minimum wage is set at $5.00 per hour, what effect will it have on the market for low-skilled labor? A) The minimum wage will have no effect when set above the equilibrium wage rate. B) The minimum wage will create a surplus of low-skilled labor. C) The minimum wage will create a shortage of low-skilled labor. D) The minimum wage will attract more labor to the low-skilled labor market and cause the wage rate to fall. Answer: B Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

28) In the above figure, a minimum wage of ________ would result in employment of ________. A) W2; L1 B) W2; L2 C) W1; L1 D) W1; L2 Answer: D Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

29) The figure above shows the demand for and supply of labor of students in Smallville. If the minimum wage is set at $4 per hour, how many hours do students work? A) 12,000 hours B) 9,000 hours C) 6,000 hours D) None of the above answers is correct. Answer: B Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

30) The figure above shows the demand for and supply of labor of students in Smallville. If the minimum wage is set at $4 per hour, how many hours of students' labor are unemployed? A) 12,000 hours B) 9,000 hours C) 6,000 hours D) 0 hours Answer: D Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

31) The figure above shows the demand for and supply of labor of students in Smallville. If the minimum wage is set at $6 per hour, how many hours do students work? A) 12,000 hours B) 9,000 hours C) 6,000 hours D) None of the above answers is correct. Answer: B Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

32) The figure above shows the demand for and supply of labor of students in Smallville. If the minimum wage is set at $6 per hour, how many hours of students' labor are unemployed? A) 12,000 hours B) 9,000 hours C) 6,000 hours D) 0 hours Answer: D Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

33) The figure above shows the demand for and supply of labor of students in Smallville. If the minimum wage is set at $8 per hour, how many hours do students work? A) 12,000 hours B) 9,000 hours C) 6,000 hours D) None of the above answers is correct. Answer: C Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

34) The figure above shows the demand for and supply of labor of students in Smallville. If the minimum wage is set at $8 per hour, how many hours of students' labor are unemployed? A) 12,000 hours B) 9,000 hours C) 6,000 hours D) 0 hours Answer: C Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

35) The figure above shows the market for low-skilled labor in Midland city. The government sets a minimum wage at $6 per hour. The minimum wage ________ the employers' surplus by ________ million per year. A) decreases; $60 B) decreases; $120 C) increases; $40 D) increases; $100 Answer: A Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

36) The figure above shows the market for low-skilled labor in Midland city. The government sets a minimum wage at $6 per hour. With the minimum wage law enacted, at the quantity of labor employed, the value to the firm of last worker hired is ________ the wage rate for which that person is willing to work. A) the same as B) $3 per hour less than C) $3 per hour greater than D) $1 per hour greater Answer: C Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

37) The figure above shows the market for low-skilled labor in Midland city. The government sets a minimum wage at $6 per hour. With the minimum wage law enacted, the potential loss from job search in Midland city is A) $60 million. B) $120 million. C) $40 million. D) zero. Answer: B Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

38) In the figure above, if a minimum wage of $6 per hour has been imposed and the labor demand curve then shifts from D0 to D1 the wage rate ________ and the amount of employment ________. A) falls; decreases B) does not change; increases C) does not change; decreases D) falls; increases Answer: C Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

39) In the figure above, D0 is the demand for labor curve. Imposing a minimum wage of $6 per hour will initially A) increase employment from 20 to 40 million hours per year. B) increase employment from 30 to 40 million hours per year. C) decrease employment from 40 to 20 million hours per year. D) decrease employment from 30 to 20 million hours per year. Answer: D Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

40) In the figure above, D0 is the demand for labor curve. Imposing a minimum wage of $3 per hour will A) have no effect on the market. B) result in unemployment. C) result in a labor shortage. D) immediately shift the demand curve to D1. Answer: A Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

41) The market for unskilled labor is illustrated in the figure above. The market is in equilibrium and then a minimum wage of $5 per hour is imposed. Employment will fall by A) 0 hours. B) 10 million hours per year. C) 20 million hours per year. D) 30 million hours per year. Answer: C Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

42) The market for unskilled labor is illustrated in the figure above. The market is in equilibrium and then a minimum wage of $3 per hour is imposed. Employment will decrease by A) 0 hours. B) 10 million hours per year. C) 20 million hours per year. D) 30 million hours per year. Answer: A Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

43) The market for unskilled labor is illustrated in the figure above. The market is in equilibrium and then a minimum wage of $5 per hour is imposed. Unemployment will equal A) 0 hours. B) 10 million hours per year. C) 20 million hours per year. D) 30 million hours per year. Answer: D Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

44) The market for unskilled labor is illustrated in the figure above. The market is in equilibrium and then a minimum wage of $3 per hour is imposed. Unemployment will equal A) 0 hours. B) 10 million hours per year. C) 20 million hours per year. D) 30 million hours per year. Answer: A Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

45) The market for unskilled labor is illustrated in the figure above. If a minimum wage of $5 per hour is imposed, an employer who breaks the law will be able to find a worker who is willing to work for A) less than or equal to $4 per hour. B) between $4 and $5 per hour. C) more than or equal to $5 per hour. D) None of the above because workers are not willing to supply labor for wage rates less than $5 per hour. Answer: A Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

46) In the above figure, if the minimum wage is equal to ________, there would be ________ hours of labor employed. A) $8 per hour; 4,000 B) $8 per hour; 2,000 C) $6 per hour; 3,000 D) $4 per hour; 2,000 Answer: B Topic: Minimum Wage and Unemployment Skill: Analytical Status: Old AACSB: Analytical Skills

47) In the above figure suppose a minimum wage of $8 per hour is imposed. As a result, the quantity of labor supplied is ________ hours and the quantity of labor demanded is ________ hours. A) 3,000; 4,000 B) 4,000; 4,000 C) 2,000; 4,000 D) 4,000; 2,000 Answer: D Topic: Minimum Wage and Unemployment Skill: Analytical Status: Old AACSB: Analytical Skills

48) In the above figure, if there is no minimum wage, the equilibrium employment is ________; if the government imposed a minimum wage of $8 per hour, employment is ________. A) 4,000 hours; 2,000 hours B) 3,000 hours; 4,000 hours C) 3,000 hours; 2,000 hours D) 4,000 hours; 3,000 hours Answer: C Topic: Minimum Wage and Unemployment Skill: Analytical Status: Old AACSB: Analytical Skills

49) In the above figure, if the government imposed a minimum wage of $8 per hour in this labor market, the increase in the hourly wage for those who are able to keep their jobs is A) $2 per hour. B) $4 per hour. C) $6 per hour. D) $8 per hour. Answer: A Topic: Minimum Wage and Unemployment Skill: Analytical Status: Old AACSB: Analytical Skills

50) In the above figure, without a minimum wage, the equilibrium quantity of labor employed ________ million hours, and the equilibrium wage rate is ________ per hour. A) 100; $2 B) 200; $4 C) 300; $6 D) 400; $8 Answer: B Topic: The Labor Market Skill: Analytical Status: Old AACSB: Analytical Skills

51) In the above figure, if the minimum wage is set at $6 per hour, what quantity of labor is employed? A) 100 million hours B) 200 million hours C) 300 million hours D) 400 million hours Answer: A Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

52) In the above figure, if the minimum wage is set at $2 per hour, what quantity of labor is employed? A) 100 million hours B) 200 million hours C) 300 million hours D) 400 million hours Answer: B Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

53) In the above figure, at what minimum wage is the unemployment level equal to 200 million hours? A) $2 per hour B) $4 per hour C) $6 per hour D) $8 per hour Answer: C Topic: The Minimum Wage and Unemployment Skill: Analytical Status: Old AACSB: Analytical Skills

54) In the figure above, if the minimum wage is $4 per hour, then A) the quantity of labor supplied is less than the quantity of labor demanded. B) the quantity of labor supplied is 4 million hours and the quantity of labor demanded is 2 million hours. C) unemployment is 1 million hours. D) the quantity of labor supplied is 3 million hours and the quantity of labor demanded is 3 million hours. Answer: B Topic: Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

55) In the figure above, if the minimum wage is $2 per hour, then A) the quantity of labor supplied is 4 million hours and the quantity of labor demanded is 2 million hours. B) the quantity of labor demanded is 4 million hours and the quantity of labor supplied is 2 million hours. C) unemployment is 1 million hours. D) the quantity of labor supplied is 3 million hours and the quantity of labor demanded is 3 million hours. Answer: D Topic: Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

56) The above figure illustrates the labor market for fast food restaurants in a small city in Peru. What would be the effects of a minimum wage imposed at $5.50 per hour? A) unemployment equal to 400 hours B) unemployment equal to 200 hours C) a shortage of 400 hours D) nothing because the minimum wage has no effect on the equilibrium price and quantity Answer: A Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

57) The above figure illustrates the labor market for fast food restaurants in a small city in Peru. What would be the effects of a minimum wage imposed at $4 per hour? A) a shortage of 200 hours B) a shortage of 100 hours C) a surplus of 200 hours D) nothing because the minimum wage has no effect on the equilibrium price and quantity Answer: D Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

58) In the above figure, a price ceiling of $4 would A) result in a shortage in the long run. B) result in a surplus in the long run. C) have no effect. D) result in a surplus in the short run but have no effect in the long run. Answer: C Topic: Market Intervention Skill: Analytical Status: Old AACSB: Analytical Skills

59) In the above figure, a price ceiling of $2 would A) create a shortage. B) create a surplus. C) have no effect. D) cause the demand curve to shift leftward. Answer: A Topic: Market Intervention Skill: Analytical Status: Old AACSB: Analytical Skills

60) In the above figure, a price floor of $4 A) leads to a shortage. B) leads to a surplus. C) has no effect. D) shifts the demand curve leftward. Answer: B Topic: Market Intervention Skill: Analytical Status: Old AACSB: Analytical Skills 53 Copyright © 2014 Pearson Education, Inc.

61) In the above figure, a black market emerges with a A) price ceiling of $4. B) price floor of $2. C) price floor of $4. D) a rationed quantity 30. Answer: C Topic: Market Intervention Skill: Analytical Status: Old AACSB: Analytical Skills

62) In the above figure, if the minimum wage is set at $8 per hour, the level of unemployment is ________ hours per week is A) 40 million B) 30 million C) 20 million D) 0 Answer: C Topic: Study Guide Question, The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

63) In the above figure, if the minimum wage is set at $6 per hour, the level of unemployment is ________ hours per week is A) 40 million B) 30 million C) 20 million D) 0 Answer: D Topic: Study Guide Question, The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

3 Taxes 1) A sales tax is imposed on the sellers of gasoline. This tax shifts A) the supply of gasoline curve leftward. B) the supply of gasoline curve rightward. C) the demand for gasoline curve leftward. D) both the supply curve of gasoline and demand curve for gasoline leftward. Answer: A Topic: Who Pays the Sales Tax? Skill: Conceptual Status: Old AACSB: Analytical Skills

2) A sales tax imposed on sellers shifts the supply curve leftward for the taxed good because the A) tax is paid by the seller to the government and is, therefore, like a cost of production. B) tax is actually shifted entirely onto the buyer who can afford only a smaller supply. C) higher price causes entry into the market. D) tax shifts the demand curve leftward. Answer: A Topic: Who Pays the Sales Tax? Skill: Conceptual Status: Old AACSB: Analytical Skills

3) When a sales tax is imposed on sellers, the supply curve shifts so that the vertical distance between the old and the new supply curve equals the A) sales tax multiplied by the price elasticity of demand. B) sales tax multiplied by the price elasticity of supply. C) amount of the sales tax. D) sales tax divided by the price elasticity of demand. Answer: C Topic: Who Pays the Sales Tax? Skill: Conceptual Status: Old AACSB: Analytical Skills

4) The government raises the sales tax on shirts. The tax is imposed on sellers. As a result, the ________. A) supply curve of shirts shifts leftward B) supply curve of shirts shifts rightward C) demand curve for shirts becomes vertical D) demand curve for shirts becomes horizontal Answer: A Topic: Who Pays the Sales Tax? Skill: Conceptual Status: Old AACSB: Analytical Skills

5) As long as the supply curve for a good is upward sloping and the demand curve is downward sloping, a sales tax imposed on sellers shifts the supply curve A) leftward and definitely raises the equilibrium price. B) leftward and possibly raises the equilibrium price. C) rightward and possibly increases the equilibrium quantity. D) rightward and definitely decreases the equilibrium quantity. Answer: A Topic: Who Pays the Sales Tax? Skill: Analytical Status: Old AACSB: Analytical Skills

6) In the above figure, a sales tax of $1 per unit imposed on sellers ________ the price buyers pay and ________ the price that suppliers keep for themselves. A) affects; does not affect B) does not affect; affects C) does not affect; does not affect D) affects; affects Answer: D Topic: Who Pays the Sales Tax? Skill: Analytical Status: Old AACSB: Analytical Skills

7) In the above figure, a sales tax of $1 per unit imposed on sellers shifts the A) demand curve rightward. B) supply curve leftward. C) demand curve leftward. D) supply curve rightward. Answer: B Topic: Who Pays the Sales Tax? Skill: Analytical Status: Old AACSB: Analytical Skills

8) Suppose the demand for wine is elastic and that initially 5 million bottles of wine are produced and consumed in the United States. If the government imposes a tax of $2 per bottle of wine, the government will collect A) more than $10 million in tax revenues. B) $10 million in tax revenues. C) less than $10 million in tax revenues. D) an amount that may be more than, equal to, or less than $10 million in tax revenues depending on the precise elasticity of demand. Answer: C Topic: Tax Revenues Skill: Analytical Status: Old AACSB: Analytical Skills

9) How a sales tax is divided between buyers and sellers is determined by A) the government's choice of whom to tax. B) who the law says must pay the tax. C) the elasticities of supply and demand. D) the revenue needs of government. Answer: C Topic: Who Pays the Sales Tax? Skill: Conceptual Status: Old AACSB: Analytical Skills

10) When a tax is imposed on a good or service, buyers respond only to the price that ________ the tax, and sellers respond to the price that ________ the tax. A) excludes; includes B) includes; excludes C) excludes; excludes D) includes; includes Answer: B Topic: Who Pays the Sales Tax? Skill: Conceptual Status: Old AACSB: Analytical Skills

11) The demand and the supply for a good are each neither perfectly elastic nor perfectly inelastic. If a sales tax on sellers of the good is imposed, the tax is paid by A) only buyers. B) only sellers. C) both buyers and sellers. D) neither buyers nor sellers. Answer: C Topic: Who Pays the Sales Tax? Skill: Conceptual Status: Old AACSB: Analytical Skills

12) A tax is imposed on the sale of a product. As long as neither the supply nor the demand is perfectly elastic or inelastic, A) there is no change in the price paid by the consumers. B) the price paid by the consumers increases by the full amount of the tax. C) the price paid by the consumers increases by less than the amount of the tax. D) the price paid by the consumers increases by more than the amount of the tax. Answer: C Topic: Who Pays the Sales Tax? Skill: Conceptual Status: Old AACSB: Analytical Skills

13) In the above figure, the price paid by the buyer before the tax is ________ per compact disc, and the price paid by the buyer after the tax is ________ per compact disc. A) $20; $20 B) $20; $30 C) $30; $20 D) $30; $30 Answer: B Topic: Who Pays the Sales Tax? Skill: Analytical Status: Old AACSB: Analytical Skills

14) In the above figure, the price received by the seller before the tax is ________ per compact disc, and the price received and kept by the seller after the tax is ________ per compact disc. A) $20; $20 B) $20; $10 C) $30; $20 D) $30; $10 Answer: B Topic: Who Pays the Sales Tax? Skill: Analytical Status: Old AACSB: Analytical Skills

15) In the above figure, what is the amount of the tax per compact disc? A) $10 B) $20 C) $30 D) $40 Answer: B Topic: Who Pays the Sales Tax? Skill: Analytical Status: Old AACSB: Analytical Skills

16) In the above figure, what is the total tax revenue collected by the government? A) $20 million B) $40 million C) $200 million D) $400 million Answer: D Topic: Government Revenue Skill: Analytical Status: Old AACSB: Analytical Skills

17) In the above figure, who pays the larger share of the tax? A) buyers B) sellers C) Buyers and sellers each pay the same amount of the tax and each pays $10 per compact disc. D) Buyers and sellers each pay the same amount of the tax, but the amount each pays is different than $10 per compact disc. Answer: C Topic: Tax Incidence Skill: Analytical Status: Old AACSB: Analytical Skills

18) In the figure above, if a tax of $2 per widget is imposed on sellers, then the price of widgets paid by the buyer will be A) more than or equal to $8. B) between $8 and $6. C) $6. D) less than $6. Answer: B Topic: Who Pays the Sales Tax? Skill: Analytical Status: Old AACSB: Analytical Skills

19) In the figure above, if a tax of $2 per widget is imposed on sellers, then the after-tax amount per widget received by the seller will be A) more than or equal to $8. B) between $8 and $6. C) $6. D) less than $6. Answer: D Topic: Who Pays the Sales Tax? Skill: Analytical Status: Old AACSB: Analytical Skills

20) In the above figure, the amount of the tax per unit imposed on the sellers is A) $0.50. B) $1.00. C) $1.50. D) $2.00. Answer: D Topic: Who Pays the Sales Tax? Skill: Analytical Status: Old AACSB: Analytical Skills

21) In the above figure, the amount of tax revenue is A) $2,000. B) $4,000. C) $6,000. D) $8,000. Answer: B Topic: Who Pays the Sales Tax? Skill: Analytical Status: Old AACSB: Analytical Skills

22) In the above figure, the tax incidence is A) that most of it is paid by the buyers. B) that most of it is paid by the sellers. C) split equally so that the buyers and sellers pay the same amount. D) that neither the buyers nor the sellers pay it. Answer: C Topic: Who Pays the Sales Tax? Skill: Analytical Status: Old AACSB: Analytical Skills 62 Copyright © 2014 Pearson Education, Inc.

23) In the above figure, the deadweight loss due to the tax is A) $1,000. B) $2,000. C) $4,000. D) $8,000. Answer: A Topic: Taxes and Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills

24) The figure shows the market for books before and after a sales tax is introduced. The tax on books is ________ a book, buyers pay ________ of tax per book, and the government's tax revenue is ________ a week. A) $1.20; $0.80; $128 B) $0.80; $1.20; $12 C) $0.40; $0.40; $4 D) $1.20; $0.80; $12 Answer: D Topic: Taxes Skill: Analytical Status: Old AACSB: Analytical Skills

25) The figure shows the market for books before and after a sales tax is introduced. Each week, the tax creates a deadweight loss of ________, decreases consumer surplus by ________ , and decreases producer surplus by ________. A) $15; $10; $5 B) $12; $8; $4 C) $3; $10; $5 D) $3; $2; $1 Answer: C Topic: Tax Incidence Skill: Analytical Status: Old AACSB: Analytical Skills

26) The incidence of sales tax is determined by the A) level of government (for example, local, state, or federal) which imposes the tax. B) federal government in all cases. C) greed of the sellers. D) price elasticities of supply and demand. Answer: D Topic: Tax Incidence and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

27) The supply of oil is more elastic than the demand for oil. If oil is taxed $10 per barrel, how will the tax be divided between the buyers and sellers? A) The sellers will pay more of the tax than the buyers. B) The buyers will pay more of the tax than the sellers. C) The sellers and buyers will split the tax evenly. D) The sellers will pay the entire tax. Answer: B Topic: Tax Incidence and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

28) The amount of a tax paid by the buyers will be larger the A) more elastic the demand and the more inelastic the supply. B) more inelastic the demand and the more elastic the supply. C) more inelastic are both the supply and demand. D) more elastic are both the supply and demand. Answer: B Topic: Tax Incidence and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

29) The amount of a tax paid by the buyers will be smaller the A) more elastic the demand and the more inelastic the supply. B) more inelastic the demand and the more elastic the supply. C) more inelastic are both the supply and demand. D) more elastic are both the supply and demand. Answer: A Topic: Tax Incidence and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

30) Suppose a $1 tax is placed on a good. The more elastic the supply of the good, the A) larger the increase in the after-tax price. B) smaller the decrease in the quantity sold. C) less of the tax will be paid by the buyers. D) more of the tax will be paid by the sellers. Answer: A Topic: Tax Incidence and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

31) The amount of a tax paid by the sellers will be larger the more ________ the demand and the more ________ the supply. A) elastic; inelastic B) inelastic; elastic C) inelastic; inelastic D) elastic; elastic Answer: A Topic: Tax Incidence and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

32) The amount of a tax paid by the sellers will be smaller the more ________ the demand and the more ________ the supply. A) elastic; inelastic B) inelastic; elastic C) inelastic; inelastic D) elastic; elastic Answer: B Topic: Tax Incidence and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

33) The buyers pay the entire sales tax levied on a good when demand is perfectly ________ or supply is perfectly ________. A) elastic; inelastic B) elastic; elastic C) inelastic; inelastic D) inelastic; elastic Answer: D Topic: Tax Incidence and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

34) The sellers pay the entire sales tax levied on a good when demand is perfectly ________ or supply is perfectly ________. A) elastic; inelastic B) elastic; elastic C) inelastic; inelastic D) inelastic; elastic Answer: A Topic: Tax Incidence and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

35) Suppose the local government places a sales tax on hotel rooms and that the demand for these rooms is elastic while the supply is perfectly inelastic. The tax incidence is such that the tax will be paid by A) only the consumers. B) equally by the consumers and the producers. C) only the producers. D) the taxpayers. Answer: C Topic: Tax Incidence and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

36) The government imposes a sales tax on hot dogs. The tax would be paid entirely by hot dog sellers if the A) supply is perfectly elastic. B) supply is perfectly inelastic. C) demand is perfectly inelastic. D) none of the above Answer: B Topic: Tax Incidence and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

37) The government imposes a sales tax on hot dogs. The tax would be paid entirely by the hot dog buyers if the A) supply is perfectly elastic. B) supply is perfectly inelastic. C) demand is perfectly elastic. D) None of the above answers is correct. Answer: A Topic: Tax Incidence and Elasticity Skill: Conceptual Status: Old AACSB: Analytical Skills

38) Good A has a perfectly inelastic demand and an upward-sloping supply curve. Good B has a perfectly inelastic supply and a downward-sloping demand curve. If the same sales tax is imposed on the sellers of both good A and good B, the price paid by A) buyers of good A rises by more than the price paid by buyers of good B. B) buyers of good B rises by more than the price paid by buyers of good A. C) buyers of good A rises by the same amount as the price paid by buyers of good B. D) More information is needed to determine whether the price paid by buyers of good A rises by more than, less than, or the same amount as the price paid by buyers of good B. Answer: A Topic: Tax Incidence and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

Hamburgers French fries Pizza Ice cream

Price elasticity Price elasticity of supply of demand 1.2 1.8 1.7 1.4 2.0 1.2 1.5 1.6

39) You are in the business of producing and selling hamburgers, french fries, pizza, and ice cream. The mayor plans to impose a tax on one of these products. Based on the elasticities in the above table, as a profit-minded business person who seeks to avoid taxes whenever possible, which good would you most prefer to have taxed? A) hamburgers B) pizza C) French fries D) ice cream Answer: B Topic: Tax Incidence and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

40) You are in the business of producing and selling hamburgers, french fries, pizza, and ice cream. The mayor plans to impose a tax on one of these products. Based on the elasticities in the above table, as a profit-minded business person who seeks to avoid taxes whenever possible, which good would you least like to have taxed? A) hamburgers B) pizza C) French fries D) ice cream Answer: A Topic: Tax Incidence and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

41) You are in the business of producing and selling hamburgers, french fries, pizza, and ice cream. The mayor plans to impose a tax on one of these products. Based on the elasticities in the above table, on which of these goods would your customers least like to be taxed? A) hamburgers B) pizza C) French fries D) ice cream Answer: B Topic: Tax Incidence and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

42) You are in the business of producing and selling hamburgers, french fries, pizza, and ice cream. The mayor plans to impose a tax on one of these products. Based on the elasticities in the above table, on which of these goods would your customers most prefer to be taxed? A) hamburgers B) pizza C) French fries D) ice cream Answer: A Topic: Tax Incidence and Elasticity Skill: Analytical Status: Old AACSB: Analytical Skills

43) The more elastic the demand for a good, the A) less a sales tax lowers the price paid by buyers. B) more a sales tax lowers the price paid by buyers. C) less a sales tax raises the price paid by buyers. D) more a sales tax raises the price paid by buyers. Answer: C Topic: Tax Incidence and the Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

44) The elasticity of demand for chocolate chip cookies is 0.6 and the elasticity of supply for these cookies is 1.9. If a tax is imposed on purchases of chocolate chip cookies, then the A) consumers would pay more of the tax. B) producers would pay more of the tax. C) tax would be equally shared by the consumers and the producers. D) consumers would pay the entire tax because their demand is less elastic than the producers' supply. Answer: A Topic: Tax Incidence and the Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

45) A sales tax is divided so that the A) buyers pay the full amount if demand is perfectly elastic. B) buyers pay the full amount if supply is perfectly inelastic. C) sellers pay the full amount if supply is perfectly elastic. D) sellers pay the full amount if demand is perfectly elastic. Answer: D Topic: Tax Incidence and the Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

46) A sales tax is divided so that buyers pay the full amount if A) demand has unitary elasticity. B) supply has unitary elasticity. C) demand is perfectly inelastic. D) supply is perfectly inelastic. Answer: C Topic: Tax Incidence and the Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

47) When a tax is imposed on the suppliers of a good or service, then A) in general, the producers pay all the tax. B) in general, the consumers pay all the tax. C) the consumers pay a larger part of the tax as the elasticity of demand for the product becomes smaller. D) the consumers pay a larger part of the tax as the elasticity of demand for the product becomes larger. Answer: C Topic: Tax Incidence and the Elasticity of Demand Skill: Analytical Status: Revised AACSB: Analytical Skills

48) The more ________, the larger is the amount of the tax on the good that the ________ pays. A) elastic the demand for a good; buyers B) inelastic the demand for a good; buyers C) inelastic the supply of a good; buyers D) elastic the supply of a good; sellers Answer: B Topic: Tax Incidence and the Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

49) Which of the following leads to the demanders paying all of a tax? A) The supply is unit elastic. B) The supply is perfectly inelastic. C) The demand is perfectly elastic. D) The demand is perfectly inelastic. Answer: D Topic: Tax Incidence and the Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

50) If salt has a ________, then ________ pay most of any tax levied on salt. A) high elasticity of supply; sellers B) low elasticity of demand; buyers C) high elasticity of demand; buyers D) low elasticity of supply; buyers Answer: B Topic: Tax Incidence and the Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

51) If demand is perfectly elastic, a sales tax is paid by A) only the buyers. B) only the sellers. C) both the buyers and sellers. D) None of the above answers is correct. Answer: B Topic: Tax Incidence and the Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

52) If a tax is imposed in a market in which demand is perfectly inelastic, A) the buyers pay the entire tax. B) the sellers pay the entire tax. C) the buyers and the sellers both pay a portion of the tax. D) neither the buyer nor the seller pays the tax. Answer: A Topic: Tax Incidence and the Elasticity of Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

53) Consider the market for heart transplants. The demand for a heart transplant is perfectly inelastic and the supply curve is upward sloping. If a $1,000 tax per transplant tax is imposed on buyers (the recipients), how will the tax be divided between the buyer and seller? A) The sellers will pay the entire tax. B) The buyers will pay the entire tax. C) The tax will be evenly divided between the sellers and buyers. D) More information is needed to determine how the tax is split. Answer: B Topic: Tax Incidence and the Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

54) Consider the market for purple magic markers. The demand for purple magic markers is perfectly elastic and the supply curve is upward sloping. If sellers of purple magic markers are taxed $1 per marker, how will the tax be divided between the buyer and seller? A) The sellers will pay the entire tax. B) The buyers will pay the entire tax. C) The tax will be evenly divided between the sellers and buyers. D) More information is needed to determine how the tax is split. Answer: A Topic: Tax Incidence and the Elasticity of Demand Skill: Conceptual Status: Revised AACSB: Analytical Skills

55) If demand for good is very inelastic and supply for the good is very elastic a sales tax imposed on sellers will cause the price received by sellers A) would not change very much. B) would rise by more than the amount of the tax. C) would fall by an amount of the tax. D) would fall by more than the amount of the tax. Answer: A Topic: Tax Incidence and the Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

56) The government of Healthyland imposes a tax on sellers of salt. The tax is $0.10 per pound. With no tax, the price of salt is $0.40 per pound. The demand for salt is perfectly inelastic and the elasticity of supply is 1.5. With the tax, the price of salt paid by buyers in Healthyland is A) $0.40 per pound. B) $0.45 per pound. C) $0.35 per pound. D) $0.50 per pound. Answer: D Topic: Tax Incidence and the Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

57) The government of Healthyland imposes a tax on sellers of salt. The tax is $0.10 per pound. With no tax, the market price of salt is $0.40 per pound. The demand for salt is perfectly inelastic, and the elasticity of supply is 1.5. With the tax, the price that sellers of salt in Healthyland receive and keep is A) $0.40 per pound. B) $0.35 per pound. C) $0.45 per pound. D) $0.50 per pound. Answer: A Topic: Tax Incidence and the Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills 72 Copyright © 2014 Pearson Education, Inc.

58) The government of Healthyland imposes a tax on sellers of salt. The tax is $0.10 per pound. With no tax, the price of salt is $0.40 per pound. The demand for salt is perfectly inelastic and the elasticity of supply is 1.5. How is the salt tax burden shared between buyers and sellers in Healthyland? A) Sellers pay the whole tax. B) Buyers pay the whole tax. C) Most of the tax is paid by buyers. D) Most of the tax is paid by sellers. Answer: B Topic: Tax Incidence and the Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

59) In the figure above, imposing a tax on the sellers of the product results in a division in which A) all of the tax is paid by the buyers. B) all of the tax is paid by the sellers. C) the buyers and sellers pay the same amount. D) neither the buyers nor the sellers pay the tax. Answer: B Topic: Tax Incidence and the Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

60) In the above figure, the imposition of a $0.25 sales tax on sellers will A) raise the market price paid by buyers of hotdogs by $0.25. B) lower the market price paid by buyers of hotdogs by $0.25. C) raise the market price paid by buyers of hotdogs by $0.125. D) have no effect on the market price of hot dogs. Answer: D Topic: Tax Incidence and the Elasticity of Demand Skill: Analytical Status: Revised AACSB: Analytical Skills

61) Which of the following leads to the suppliers paying all of a tax? A) The supply is perfectly elastic. B) The supply is perfectly inelastic. C) The demand is unit elastic. D) The demand is perfectly inelastic. Answer: B Topic: Tax Incidence and the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

62) A good has a downward-sloping demand curve and a perfectly elastic supply. Imposing a sales tax of $1 per unit on the sellers of the good A) raises the price paid by demanders by more than $1.00. B) raises the price paid by demanders by $1.00. C) raises the price paid by demanders by less than $1.00. D) does not change the price paid by demanders. Answer: B Topic: Tax Incidence and the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

63) A good has a perfectly inelastic supply and a downward sloping demand curve. Imposing a sales tax of $1 per unit on the sellers of the good A) raises the price paid by demanders by more than $1.00. B) raises the price paid by demanders by $1.00. C) raises the price paid by demanders by less than $1.00. D) does not change the price paid by demanders. Answer: D Topic: Tax Incidence and the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

64) A sales tax will be divided so that A) the buyers pay the full amount if supply is perfectly inelastic. B) the sellers pay the full amount if supply is perfectly inelastic. C) the sellers pay the full amount if supply is perfectly elastic. D) both buyers and sellers pay some of the tax if supply is perfectly elastic. Answer: B Topic: Tax Incidence and the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

65) On Green Island, the demand for pencils is perfectly elastic and the supply of pencils is perfectly inelastic. If a sales tax on pencils is introduced, A) the tax is split evenly between the buyers and sellers. B) the buyers pay the entire tax. C) no one pays the tax. D) the sellers pay the entire tax. Answer: D Topic: Tax Incidence and the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

66) If a tax is imposed on buyers in a market in which supply is perfectly inelastic, the A) buyers pay the entire tax. B) sellers pay the entire tax. C) buyers and the sellers both pay a portion of the tax. D) neither the buyers nor the sellers pay the tax. Answer: B Topic: Tax Incidence and the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

67) If supply is perfectly elastic, a sales tax imposed on sellers is paid by A) only the buyers. B) only the sellers. C) both the buyers and sellers. D) None of the above answers is correct. Answer: A Topic: Tax Incidence and the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

68) If supply is perfectly inelastic, a sales tax imposed on sellers is paid by A) only the buyers. B) only the sellers. C) both the buyers and sellers. D) None of the above answers is correct. Answer: A Topic: Tax Incidence and the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

Two small California cities, Richmond and El Monte, are planning to impose a penny per ounce tax on sugary drinks. They are being opposed by the soda industry that is vehemently against this new legislation. (Source: Reuters, September 6, 2012) 69) Assuming the market of soda has a regular downward sloping demand curve and upward sloping supply curve, the tax will ________ the price paid by buyers and ________ the price received by sellers. A) decrease; increase B) decrease; decrease C) increase; increase D) increase; decrease Answer: D Topic: Tax Incidence Skill: Analytical Status: New AACSB: Analytical Skills

70) One reason why soda companies are so fervently against this tax might be because they assume sellers will pay the entire tax. Sellers will pay the entire tax if A) demand is perfectly inelastic. B) the price elasticity of demand is between zero and 1. C) demand is unit elastic. D) demand is perfectly elastic. Answer: D Topic: Tax Incidence and the Elasticity of Demand Skill: Analytical Status: New AACSB: Analytical Skills

71) One reason why soda companies are so fervently against this tax might be because they assume sellers will pay the entire tax. Sellers will pay the entire tax if A) supply is perfectly inelastic. B) the price elasticity of supply is between zero and 1. C) supply is unit elastic. D) supply is perfectly elastic. Answer: A Topic: Tax Incidence and the Elasticity of Supply Skill: Analytical Status: New AACSB: Analytical Skills

72) In the figure above, imposing a tax on the product results in a division in which A) all of the tax is paid by the buyers. B) all of the tax is paid by the sellers. C) the buyers and sellers pay the same amount. D) neither the buyers nor the sellers pay the tax. Answer: A Topic: Tax Incidence and the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

73) The above figure shows the market for neckties. Based on the graph, how much tax per necktie has been imposed by the government? A) $1.25 per tie B) $1.00 per tie C) $0.75 per tie D) More information is needed to determine the tax that the government has imposed. Answer: B Topic: Taxes Skill: Conceptual Status: Old AACSB: Analytical Skills

74) The above figure shows the market for neckties after the government has imposed a tax. How much government revenue is generated by the tax? A) $1,000.00 per month B) $800.00 per month C) $500.00 per month D) $400.00 per month Answer: D Topic: Taxes, Government Revenue Skill: Analytical Status: Old AACSB: Analytical Skills

75) The above figure shows the market for neckties after the government has imposed a tax. How much deadweight loss results from this tax? A) $250.00 B) $200.00 C) $150.00 D) $50.00 Answer: D Topic: Taxes, Deadweight Loss Skill: Analytical Status: Old AACSB: Analytical Skills

76) The above figure shows the market for blouses. The government decides to impose the sales tax on sellers, as shown in the figure. Using the figure, what is the tax per blouse? A) $10 per blouse B) $20 per blouse C) $30 per blouse D) $40 per blouse Answer: B Topic: Who Pays the Sales Tax? Skill: Analytical Status: Old AACSB: Analytical Skills

77) The above figure shows the market for blouses. The government decides to impose the sales tax on sellers, as shown in the figure. Using the figure, how much tax revenue does the government raise? A) $20,000 B) $40,000 C) $60,000 D) $80,000 Answer: B Topic: Who Pays the Sales Tax? Skill: Analytical Status: Old AACSB: Analytical Skills

78) The above figure shows the market for blouses. The government decides to impose the sales tax on sellers, as shown in the figure. The tax decreases consumption by A) 1,000 blouses. B) 2,000 blouses. C) 3,000 blouses. D) 4,000 blouses. Answer: A Topic: Who Pays the Sales Tax? Skill: Analytical Status: Old AACSB: Analytical Skills

79) The above figure shows the market for blouses. The government decides to impose the sales tax on sellers, as shown in the figure. The amount of the tax paid by the buyers would be greater than shown in the figure A) only if the demand was more elastic. B) only if the demand was more inelastic. C) only if the supply was more elastic. D) if either the demand was more inelastic or the supply more elastic. Answer: D Topic: Tax Incidence Skill: Analytical Status: Old AACSB: Analytical Skills

80) The above figure shows the market for blouses. The government decides to impose the sales tax on sellers, as shown in the figure. The amount of the tax paid by the sellers would be greater than shown in the figure if A) the demand was more elastic. B) the demand was more inelastic. C) the supply was more elastic. D) Both answers A and C are correct. Answer: A Topic: Tax Incidence Skill: Analytical Status: Old AACSB: Analytical Skills

81) The above figure shows the market for blouses. The government decides to impose the sales tax on sellers, as shown in the figure. The government would raise more tax revenue from this excise tax if A) the demand was more inelastic. B) it places a price ceiling on blouses in addition to the tax. C) it places a price floor on blouses in addition to the tax. D) all of the above Answer: A Topic: Sales Tax in Practice Skill: Analytical Status: Old AACSB: Analytical Skills

82) The above figure shows the market for blouses. The government decides to impose the sales tax on sellers, as shown in the figure. What is the deadweight loss? A) $10,000 B) $20,000 C) $30,000 D) $40,000 Answer: A Topic: Taxes, Deadweight Loss Skill: Analytical Status: Old AACSB: Analytical Skills

83) The above figure shows the market for blouses. The government decides to impose the sales tax on sellers, as shown in the figure. How much consumer surplus is lost? A) $10,000 B) $20,000 C) $25,000 D) $40,000 Answer: C Topic: Taxes and Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills

84) The above figure shows the market for blouses. The government decides to impose the sales tax on sellers, as shown in the figure. How much producer surplus is lost? A) $10,000 B) $20,000 C) $25,000 D) $40,000 Answer: C Topic: Taxes and Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills

85) The above figure shows the market for anti-freeze. The government imposes the sales tax shown in the figure on sellers. What is the amount of the tax? A) $1 per gallon B) $2 per gallon C) $3 per gallon D) $4 per gallon Answer: C Topic: Who Pays the Sales Tax? Skill: Analytical Status: Old AACSB: Analytical Skills

86) The above figure shows the market for anti-freeze. The government imposes the sales tax shown in the figure on sellers. How much tax revenue does the government raise from this tax? A) $2,000 B) $3,000 C) $4,000 D) $6,000 Answer: B Topic: Who Pays the Sales Tax? Skill: Analytical Status: Old AACSB: Analytical Skills

87) The above figure shows the market for anti-freeze. The government imposes the sales tax shown in the figure on sellers. The sales tax on anti-freeze decreases the quantity of anti-freeze that automobile owners purchase by A) 0 gallons. B) 1000 gallons. C) 2000 gallons. D) 3000 gallons. Answer: B Topic: Who Pays the Sales Tax? Skill: Analytical Status: Old AACSB: Analytical Skills

88) The above figure shows the market for anti-freeze. The government imposes the sales tax shown in the figure on sellers. Automobile owners would pay a larger part of this tax than what is shown in the figure if the A) demand were more elastic. B) demand were more inelastic. C) supply were more inelastic. D) None of the above because the buyers always pay the entire amount of the tax. Answer: B Topic: Tax Incidence Skill: Analytical Status: Old AACSB: Analytical Skills

89) The above figure shows the market for anti-freeze. The government imposes the sales tax shown in the figure on sellers. Anti-freeze sellers would pay a larger part of this tax than what is shown in the figure if the A) demand were more inelastic. B) demand curve were steeper. C) supply were more inelastic. D) supply were more elastic. Answer: C Topic: Tax Incidence Skill: Analytical Status: Old AACSB: Analytical Skills

90) The above figure shows the market for anti-freeze. The government imposes the sales tax shown in the figure on sellers. What is the deadweight loss from this tax? A) $1,500 B) $3,000 C) $4,500 D) $6,000 Answer: A Topic: Taxes, Deadweight Loss Skill: Analytical Status: Old AACSB: Analytical Skills 84 Copyright © 2014 Pearson Education, Inc.

91) The above figure depicts the market for video games. If the government imposed a $3 per game tax on sellers, what would be the new equilibrium price paid by consumers after the tax? A) less than $27 per game B) $27 per game C) more than $27 per game. D) More information is needed to determine if the price is more than, less than, or equal to $27 per game. Answer: C Topic: Who Pays the Sales Tax? Skill: Analytical Status: Old AACSB: Analytical Skills

92) The above figure depicts the market for video games. If the government imposed a $3 per game tax on sellers, what would be tax revenue? A) less than $18 B) $18 C) more than $18 D) More information is needed to determine if the tax revenue is more than, less than, or equal to $18. Answer: A Topic: Taxes, Government Revenue Skill: Analytical Status: Old AACSB: Analytical Skills

93) Of the $3 per pizza tax illustrated in the above figure, the A) consumers pay $2 of the $3 per pizza tax. B) sellers pay $1 of the $3 per pizza tax. C) government collects $120 thousand in revenue from the pizza tax. D) All of the above answers are correct. Answer: D Topic: Who Pays the Sales Tax? Skill: Analytical Status: Old AACSB: Analytical Skills

94) Which of the following is NOT true about the $3 per pizza tax illustrated in the above figure? A) It decreases consumer surplus by $90 thousand. B) It decreases producer surplus by $45 thousand. C) It creates a deadweight loss of $135 thousand. D) None of the above because they are all true. Answer: C Topic: Taxes, Deadweight Loss Skill: Analytical Status: Old AACSB: Analytical Skills

95) To help pay for the cost of sport related injuries, the government imposes a tax on sellers of all sports equipment. Referring to the above figure, how much tax per unit has the government imposed? A) cb B) db C) ab D) ca Answer: D Topic: Taxes Skill: Analytical Status: Old AACSB: Analytical Skills

96) To help pay for the cost of sport related injuries, the government imposes a tax on sellers of all sports equipment. The sport equipment producers' share of this tax would be greater than shown in the above figure if A) the demand was more elastic. B) the demand was more inelastic. C) the supply was more elastic. D) Both answers A and C are correct. Answer: A Topic: Who Pays the Sales Tax? Skill: Conceptual Status: Old AACSB: Analytical Skills

97) To help pay for the cost of sport related injuries, the government imposes a tax on sellers of all sports equipment. The sports equipment consumers' share of this tax would be greater than that shown in the above figure A) only if the demand was more elastic. B) only if the demand was more inelastic. C) only if the supply was more elastic. D) if either the demand was more inelastic or the supply more elastic. Answer: D Topic: Who Pays the Sales Tax? Skill: Analytical Status: Old AACSB: Analytical Skills

98) To help pay for the cost of sport related injuries, the government imposes a tax on sellers of all sports equipment. Using the above figure, how much producer surplus is lost from this tax on sports equipment? A) abd B) acd C) P0P1ba D) P0P1da Answer: D Topic: Taxes and Producer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

99) To help pay for the cost of sport related injuries, the government imposes a tax on sellers of all sports equipment. Using the above figure, the area that equals the lost consumer surplus from this tax on sports equipment is A) bcd. B) P1P2cd. C) P2P3ec. D) ced. Answer: B Topic: Taxes and Consumer Surplus Skill: Analytical Status: Old AACSB: Analytical Skills

100) To help pay for the cost of sport related injuries, the government imposes a tax on sellers of all sports equipment. Using the above figure, how much deadweight loss results from this tax on sports equipment? A) cbd B) ced C) abd D) acd Answer: D Topic: Taxes, Deadweight Loss Skill: Analytical Status: Old AACSB: Analytical Skills

101) To help pay for the cost of sport related injuries, the government imposes a tax on sellers of all sports equipment. The deadweight loss created by this tax would be greater than shown in the figure above if A) the demand were more elastic. B) the supply were more elastic. C) neither of the above D) both A and B above Answer: D Topic: Taxes, Deadweight Loss Skill: Analytical Status: Old AACSB: Analytical Skills

102) To help pay for the cost of sport related injuries, the government imposes a tax on sellers of all sports equipment. Referring to the above figure, the area that equals the tax revenue the government raises from this tax on sports equipment is A) P1P3ed. B) ecd. C) P0P2ca. D) P1P2cb. Answer: C Topic: Taxes, Government Revenue Skill: Analytical Status: Old AACSB: Analytical Skills

103) Which of the following statements is true about taxes? A) Taxes always create more deadweight loss than do price ceilings and price floors. B) Taxes decrease both consumer surplus and producer surplus while creating a deadweight loss. C) Government revenue from a tax is always greater than the loss of producer surplus and consumer surplus. D) Both answers A and C are correct. Answer: B Topic: Taxes, Deadweight Loss Skill: Conceptual Status: Old AACSB: Analytical Skills 89 Copyright © 2014 Pearson Education, Inc.

104) Suppose a tax is imposed on sellers. The more inelastic the demand for the taxed item, the A) greater the share of the tax paid by sellers. B) smaller the deadweight loss from the tax. C) larger the decrease in consumption because of the tax. D) All of the above answers are correct. Answer: B Topic: Taxes, Deadweight Loss Skill: Analytical Status: Old AACSB: Analytical Skills

105) Which of the following outcomes is NOT a result of a tax imposed on sellers of gasoline? A) Supply decreases, a deadweight loss is created, and the price rises. B) The market becomes less efficient and the government collects the tax revenue. C) Demand does not change, the price rises, and consumer surplus decreases. D) Demand decreases, the market becomes more efficient, and the price rises. Answer: D Topic: Taxes, Deadweight Loss Skill: Conceptual Status: Old AACSB: Analytical Skills

106) If the government decreases the tax on cell phones, ________. A) the deadweight loss decreases B) the consumer surplus does not change because sellers will not lower the price of a cell phone C) the number of cell phones purchased does not change D) the market becomes less efficient because the government collects less tax revenue Answer: A Topic: Taxes, Deadweight Loss Skill: Conceptual Status: Revised AACSB: Analytical Skills

107) The government wants to increase its tax revenue and plans to implement an additional sales tax. The government will raise more tax revenue if it taxes a good with an ________ rather than a good with an ________. A) inelastic demand; elastic demand B) elastic demand; inelastic demand C) elastic supply; inelastic supply D) None of the above answers is correct. Answer: A Topic: Taxes, Government Revenue Skill: Analytical Status: Old AACSB: Analytical Skills

108) After a $3 per-unit tax on seeing movies in theaters is imposed, attendance falls from 4,000 a week to 3,000 a week. The revenue from the tax is A) less than $9,000 a week. B) $9,000 a week. C) between $9,000 a week and $12,000 a week. D) some amount that cannot be calculated without more information. Answer: B Topic: Taxes, Government Revenue Skill: Analytical Status: Old AACSB: Analytical Skills

109) A $10 per-unit tax on cell phones raises the equilibrium price paid by consumers by $5. Before the tax, 5,000 cell phones were sold per year. The revenue from the tax is A) zero. B) positive but less than $50,000 per year. C) $50,000 per year. D) more than $50,000 per year. Answer: B Topic: Taxes, Government Revenue Skill: Analytical Status: Old AACSB: Analytical Skills

Price (dollars per packet) 4.00 4.10 4.20 4.30 4.40 4.50 4.60 4.70 4.80 4.90 5.00

Quantity demanded (packets per week) 140 130 120 110 100 90 80 70 60 50 40

Quantity supplied (packets per week) 20 40 60 80 100 120 140 160 180 200 220

110) The table gives the demand and supply schedules for cookies. The government now levies a $0.30 tax on cookies. As a result, the price of a packet of cookies increases by ________ and the tax revenue collected is ________ a week. A) $0.20; $24 B) $0.10; $9 C) $0.20; $20 D) $0.30; $30 Answer: A Topic: Taxes, Government Revenue Skill: Analytical Status: Old AACSB: Analytical Skills

111) The figure illustrates the market for posters. The tax on a poster is ________ and the government's tax revenue from the sale of posters is ________ a month. A) $0.50; $150 B) $0.35; $105 C) $0.35; $200 D) $0.35; $140 Answer: A Topic: Taxes, Government Revenue Skill: Analytical Status: Old AACSB: Analytical Skills

112) Suppose the government wants to discourage the use of cigarettes. If it imposes a tax on cigarettes, the equilibrium quantity falls the most when the elasticity of demand equals A) 2.00. B) 1.00. C) 0.50. D) 0. Answer: A Topic: Study Guide Question, Tax Incidence and the Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

113) Suppose the government imposes a $1 tax on frisbees, and the price of a frisbee paid by demanders rises by $1. A) The price rise is consistent with a perfectly elastic supply for frisbees. B) The price rise is consistent with a perfectly elastic demand for frisbees. C) The price rise is consistent with a downward-sloping supply curve for frisbees. D) The price could never rise this much, so this situation cannot happen. Answer: A Topic: Study Guide Question, Tax Incidence and the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

114) The less elastic the supply, the A) less likely the government is to tax the product. B) less likely the government is to impose a price ceiling. C) larger the fraction of any tax imposed on the product that is paid by the suppliers. D) less elastic the demand. Answer: C Topic: Study Guide Question, Tax Incidence and the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

115) Among the factors that create a deadweight loss and inefficiency are A) minimum wages, but not taxes. B) rent ceilings, but not taxes. C) taxes, but not minimum wages or rent ceilings. D) minimum wages, rent ceilings, and taxes. Answer: D Topic: Study Guide Question, Efficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

116) In the market for books, initially there are no taxes on books. Books are normal goods. The government introduces a tax of $4 a book and, at the same time, people's income fall by $4,000 a year. Following these two changes, the equilibrium quantity of books A) decreases. B) increases. C) remains unchanged. D) either increases or decreases. We cannot say which. Answer: A Topic: Parallel MyEconLab Questions Skill: Analytical Status: Old AACSB: Analytical Skills

4 Production Quotas and Subsidies 1) Governments often intervene in agricultural markets by A) granting subsidies. B) setting production quotas that will increase production. C) setting price floors that reduce prices for buyers. D) imposing heavy taxes on farm products. Answer: A Topic: Subsidies Skill: Conceptual Status: Old AACSB: Analytical Skills

2) To try to help farmers, governments I. set production quotas. II. set price ceilings. A) I and II B) only II C) only I D) neither I nor II Answer: A Topic: Production Quotas Skill: Conceptual Status: Old AACSB: Analytical Skills

3) If a production quota is set below the equilibrium quantity, at the quota quantity, marginal benefit is ________ marginal cost and the level of production is ________. A) greater than; inefficient B) greater than; efficient C) less than; inefficient D) equal to; efficient Answer: A Topic: Production Quota and Efficiency Skill: Conceptual Status: Old AACSB: Analytical Skills

4) The figure above shows the market for cotton in Georgestan. The government regulates the market with a production quota set at 8 million pounds per year. The price of cotton in Georgestan is A) 30 cents per pound. B) 40 cents per pound. C) 60 cents per pound. D) 50 cents per pound. Answer: C Topic: Production Quotas Skill: Conceptual Status: Old AACSB: Analytical Skills

5) The figure above shows the market for cotton in Georgestan. The government regulates the market with a production quota set at 8 million pounds per year. The introduction of the quota has A) not affected the level of cotton production in Georgestan. B) increased the production of cotton in Georgestan by 8 million pounds. C) decreased the production of cotton in Georgestan by 4 million pounds. D) decreased the production of cotton in Georgestan by 8 million pounds. Answer: D Topic: Production Quotas Skill: Analytical Status: Old AACSB: Analytical Skills

6) The figure above shows the market for cotton in Georgestan. The government regulates the market with a production quota set at 8 million pounds per year. With the quota in place, the amount of cotton produced in Georgestan is ________ because the marginal social cost of a pound of cotton is ________ the marginal social benefit of a pound of cotton. A) inefficient; less than B) inefficient; greater than C) efficient; less than D) efficient; equal to Answer: A Topic: Production Quota and Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills

7) The figure above shows the market for milk in Cowland. If a subsidy paid to producers of $1 per gallon of milk is introduced, what is the price that consumers pay? A) $3.00 a gallon B) between $3.00 and $4.00 per gallon C) $4.00 a gallon D) between $4.00 and $5.00 per gallon Answer: B Topic: Subsidies Skill: Analytical Status: Revised AACSB: Analytical Skills

8) The figure above shows the market for milk in Cowland. If a subsidy paid to producers of $1 per gallon of milk is introduced, what is the amount, including the subsidy, that suppliers keep per gallon? A) $3.00 a gallon B) between $3.00 and $4.00 per gallon C) $4.00 a gallon D) between $4.00 and $5.00 per gallon Answer: D Topic: Subsidies Skill: Analytical Status: Revised AACSB: Analytical Skills

9) The figure above shows the market for milk in Cowland. If a subsidy paid to producers of $1 per gallon of milk is introduced, how many gallons are sold per year? A) 200 million B) 400 million C) 300 million D) more than 300 million but less than 400 million Answer: D Topic: Subsidies Skill: Analytical Status: Revised AACSB: Analytical Skills

10) The figure above shows the market for milk in Cowland. A subsidy paid to producers of $1 per gallon of milk is introduced. If there are no external costs and no external benefits, the quantity of milk sold is A) greater than the efficient level of output. B) less than the efficient level of output. C) 100 million gallons greater than the efficient level of output. D) the efficient level of output. Answer: A Topic: Subsidies and Efficiency Skill: Analytical Status: Revised AACSB: Analytical Skills

11) The figure above shows the market for milk in Cowland. A subsidy paid to producers of $1 per gallon of milk is introduced. If there are no external costs and no external benefits, the marginal cost of the last gallon of milk produced is A) $3.00 a gallon. B) $3.50 a gallon. C) $4.00 a gallon. D) $4.50 a gallon. Answer: D Topic: Subsidies and Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills

12) The figure above shows the market for milk in Cowland. A subsidy paid to producers of $1 per gallon of milk is introduced. If there are no external costs and no external benefits, the marginal benefit of the last gallon of milk consumed is A) $3.50 a gallon. B) $4.00 a gallon. C) $4.50 a gallon. D) $5.00 a gallon. Answer: A Topic: Subsidies and Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills

5 Markets for Illegal Goods 1) In general, a fine on selling a product leads to the A) supply curve shifting rightward. B) supply curve shifting leftward. C) demand curve shifting rightward. D) demand curve shifting leftward. Answer: B Topic: A Market for Illegal Goods, Penalties on Sellers Skill: Conceptual Status: Old AACSB: Analytical Skills

2) If buyers of illegal goods are punished but sellers are not, then the price ________ and the equilibrium quantity ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases Answer: D Topic: A Market for Illegal Goods, Penalties on Sellers Skill: Conceptual Status: Old AACSB: Analytical Skills

3) If penalties are imposed on the sellers of illegal goods or services, then the equilibrium price ________ and the equilibrium quantity ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases Answer: B Topic: A Market for Illegal Goods, Penalties on Sellers Skill: Conceptual Status: Old AACSB: Analytical Skills 99 Copyright © 2014 Pearson Education, Inc.

4) When a government fines and/or imprisons convicted drug dealers, it is attempting to reduce the illegal drug trade by shifting the ________ curve for illegal drugs ________. A) demand; rightward B) demand; leftward C) supply; rightward D) supply; leftward Answer: D Topic: Markets For Illegal Goods, Penalties on Sellers Skill: Conceptual Status: Old AACSB: Analytical Skills

5) Outlawing the sale of a good shifts the supply curve A) leftward and lowers the price. B) leftward and raises the price. C) rightward and lowers the price. D) rightward and raises the price. Answer: B Topic: Markets For Illegal Goods, Penalties on Sellers Skill: Conceptual Status: Old AACSB: Analytical Skills

6) If enforcement is aimed at sellers of an illegal good, its equilibrium price will ________ and its equilibrium quantity will ________. A) rise; increase B) rise; decrease C) fall; increase D) fall; decrease Answer: B Topic: Markets For Illegal Goods, Penalties on Sellers Skill: Conceptual Status: Old AACSB: Analytical Skills

7) When a government fines and/or imprisons persons convicted of using illegal drugs, the government is attempting to decrease the illegal drug trade by shifting the ________ curve for illegal drugs ________. A) demand; rightward B) demand; leftward C) supply; rightward D) supply; leftward Answer: B Topic: Markets For Illegal Goods, Penalties on Buyers Skill: Conceptual Status: Old AACSB: Analytical Skills

8) In general, a fine on buying a product leads to the A) supply curve shifting rightward. B) supply curve shifting leftward. C) demand curve shifting rightward. D) demand curve shifting leftward. Answer: D Topic: A Market for Illegal Goods, Penalties on Buyers Skill: Conceptual Status: Old AACSB: Analytical Skills

9) In general, a fine on smoking cigarettes shifts the ________ curve of cigarettes ________. A) supply; rightward B) supply; leftward C) demand; rightward D) demand; leftward Answer: D Topic: Markets For Illegal Goods, Penalties on Buyers Skill: Conceptual Status: Old AACSB: Analytical Skills

10) If enforcement is aimed at buyers of an illegal good, the result will be A) an increase in the short-run supply of the good. B) a decrease in the short-run supply of the good. C) a decrease in demand for the good. D) an increase in the price of the good. Answer: C Topic: Markets For Illegal Goods, Penalties on Buyers Skill: Conceptual Status: Old AACSB: Analytical Skills

11) If penalties are imposed only on the buyers of illegal drugs, the equilibrium price of illegal drugs will ________ and the equilibrium quantity will ________. A) rise; increase B) rise; decrease C) fall; increase D) fall; decrease Answer: D Topic: Markets For Illegal Goods, Penalties on Buyers Skill: Conceptual Status: Old AACSB: Analytical Skills

12) If penalties are imposed only on buyers (but not on sellers) of marijuana, the equilibrium price of marijuana ________, and the equilibrium quantity of marijuana sold ________. A) rise; increase B) rise; decrease C) fall; increase D) fall; decrease Answer: D Topic: A Market for Illegal Goods, Penalties on Buyers Skill: Analytical Status: Old AACSB: Analytical Skills

13) Making the buying and selling of a good illegal shifts the demand curve ________ and shifts the supply curve ________. A) rightward; rightward B) rightward; leftward C) leftward; rightward D) leftward; leftward Answer: D Topic: Markets For Illegal Goods, Penalties on Buyers and Sellers Skill: Conceptual Status: Old AACSB: Analytical Skills

14) If the penalty on sellers of an illegal good is less than the penalty on buyers of an illegal good, then supply of the good will ________ by ________ demand and the price of the good will ________. A) increase; more than; increase B) decrease; more than; decrease C) decrease; less than; decrease D) decrease; the same amount as; remain the same Answer: C Topic: A Market for Illegal Goods, Penalties on Both Sellers and Buyers Skill: Analytical Status: Old AACSB: Analytical Skills

15) If the same fine is imposed on buyers and sellers of an illegal good so that the cost of breaking the law is the same for both, then A) there is more government revenue collected than with an excise tax on the good. B) there is no deadweight loss in this market because the extra producer surplus will exactly offset the lost consumer surplus. C) the supply and demand curves both shift leftward by equal amounts. D) the equilibrium price of the good definitely increases. Answer: C Topic: A Market for Illegal Goods, Penalties on Both Sellers and Buyers Skill: Analytical Status: Old AACSB: Analytical Skills

16) When a government imposes penalties on both sellers and buyers of an illegal good, the price of the good ________ and the quantity ________. A) falls; decreases B) falls; might increase, decrease, or not change C) rises; might increase, decrease, or not change D) might rise, fall, or not change; decreases Answer: D Topic: A Market for Illegal Goods, Penalties on Both Sellers and Buyers Skill: Analytical Status: Old AACSB: Analytical Skills

17) If penalties for trading illegal drugs are instituted on both buyers and sellers, the A) quantity might increase or decrease but the price will rise. B) price might rise or fall, but the quantity will decrease. C) price and the quantity will both decrease. D) price and the quantity will both increase. Answer: B Topic: A Market for Illegal Goods, Penalties on Both Sellers and Buyers Skill: Analytical Status: Old AACSB: Analytical Skills

18) When a good is made illegal, which of the following definitely results in the price rising? A) a much higher fine on sellers than on buyers B) a much higher fine on buyers than on sellers C) any fine imposed on both buyers or sellers D) any fine imposed on buyers Answer: A Topic: A Market for Illegal Goods, Penalties on Both Sellers and Buyers Skill: Analytical Status: Old AACSB: Analytical Skills

19) Compared to the situation in which a good is legal, making the good illegal and imposing ________ results in less being sold. A) a much higher fine on sellers than on buyers B) a much higher fine on buyers than on sellers C) any fine on either the buyer or the seller D) all of the above Answer: D Topic: A Market for Illegal Goods, Penalties on Both Sellers and Buyers Skill: Analytical Status: Old AACSB: Analytical Skills

20) If penalties are imposed on both the buyers and the sellers of illegal goods or services, then an effect in the market for the illegal good or service would definitely be A) an increase in the equilibrium price. B) a decrease in the equilibrium price. C) a decrease in the equilibrium quantity. D) an increase in the equilibrium quantity. Answer: C Topic: A Market for Illegal Goods, Penalties on Both Sellers and Buyers Skill: Analytical Status: Old AACSB: Analytical Skills

21) If the government makes a good illegal and then imposes stiffer penalties on illegal drug buyers than on sellers, the price of the good ________ and the quantity ________. A) falls; increases B) rises; decreases C) falls; decreases D) does not change; decreases Answer: C Topic: A Market for Illegal Goods, Penalties on Both Sellers and Buyers Skill: Analytical Status: Old AACSB: Analytical Skills

22) Suppose penalties are imposed on both buyers and sellers of marijuana, but the cost of breaking the law to sellers is greater than that to buyers. This measure will ________ the equilibrium price of marijuana and ________ the equilibrium quantity of marijuana sold. A) lower; increase B) raise; increase C) raise; decrease D) not change; will decrease Answer: C Topic: A Market for Illegal Goods, Penalties on Both Sellers and Buyers Skill: Analytical Status: Old AACSB: Analytical Skills

23) In the above figure, CBL is the cost of breaking the law. If it is illegal to buy, but not illegal to sell, then the price per unit will be A) $500. B) $400. C) $300. D) $200. Answer: D Topic: Markets For Illegal Goods, Penalties on Buyers Skill: Analytical Status: Old AACSB: Analytical Skills

24) In the above figure, CBL is the cost of breaking the law. If it is illegal to sell, but not illegal to buy, then the price per unit will be A) $500. B) $400. C) $300. D) $200. Answer: A Topic: Markets For Illegal Goods, Penalties on Sellers Skill: Analytical Status: Old AACSB: Analytical Skills

25) In the above figure, CBL is the cost of breaking the law. If the good in the figure is made illegal and penalties are imposed on both buyers and sellers, then its price per unit A) will be higher than if it was not illegal. B) will be lower than if it was not illegal. C) will be the same as when it was not illegal. D) cannot be compared with its price when it was legal. Answer: B Topic: Markets For Illegal Goods, Penalties on Buyers and Sellers Skill: Analytical Status: Old AACSB: Analytical Skills

26) In the above figure, CBL is the cost of breaking the law. If it is illegal to buy and sell, then the price per unit will be A) $500. B) $400. C) $300. D) $200. Answer: C Topic: Markets For Illegal Goods, Penalties on Buyers and Sellers Skill: Analytical Status: Old AACSB: Analytical Skills

27) In the above figure, CBL is the cost of breaking the law. If it is illegal to buy and sell, then the quantity of the good bought and sold will be A) 100. B) 200. C) 300. D) 400. Answer: A Topic: Markets For Illegal Goods, Penalties on Buyers and Sellers Skill: Analytical Status: Old AACSB: Analytical Skills

Price (dollars per firework) 4 5 6 7 8 9 10 11 12 13 14

Quantity Quantity demanded supplied (fireworks per (fireworks per week) week) 220 40 200 80 180 120 160 160 140 200 120 240 100 280 80 320 60 360 40 400 20 440

28) The table gives the demand and supply schedules for fireworks on the Island of Big Bang. In the past, because many deaths have resulted from accidents involving fireworks, the government has banned fireworks and is enforcing the ban. A $6 a firework penalty on sellers of fireworks and no penalty on buyers will reduce the number of fireworks bought to ________ a week and increase the price paid by buyers to ________ a firework. A) 40; $13 B) 140; $8 C) 80; $11 D) 0; an unknown amount Answer: C Topic: A Market for Illegal Goods, Penalties on Buyers Skill: Analytical Status: Old AACSB: Analytical Skills

29) The table gives the demand and supply schedules for fireworks on the Island of Big Bang. In the past, because many deaths have resulted from accidents involving fireworks, the government has banned fireworks and is enforcing the ban. A $6 a firework penalty on buyers of fireworks and no penalty on sellers will reduce the number of fireworks bought to ________ a week and decrease the price kept by suppliers to ________ a firework. A) 80; $5 B) 40; $8 C) 0; an unknown amount D) 140; $3 Answer: A Topic: A Market for Illegal Goods, Penalties on Sellers Skill: Analytical Status: Old AACSB: Analytical Skills

30) The table gives the demand and supply schedules for fireworks on the Island of Big Bang. In the past, because many deaths have resulted from accidents involving fireworks, the government has banned fireworks and is enforcing the ban. A $5 a firework penalty on buyers of fireworks and a $4 a firework penalty on sellers will reduce the number of fireworks bought to ________ a week and the price paid by buyers will be ________ a firework. A) 80; $7 B) 40; $13 C) 0; an unknown amount D) 160; $11 Answer: B Topic: A Market for Illegal Goods, Penalties on Buyers and Sellers Skill: Analytical Status: Old AACSB: Analytical Skills

31) Using the above figure, CBL is the cost of breaking the law. What is the equilibrium price and quantity if beer is legal? A) $5 per quart and 300 quarts of beer B) $3 per quart and 500 quarts of beer C) $3 per quart and 100 quarts of beer D) $1 per quart and 300 quarts of beer Answer: B Topic: A Market for Illegal Goods Skill: Analytical Status: Old AACSB: Analytical Skills

32) Suppose the government has declared beer to be an illegal substance and imposes a fine on any person caught selling a beer. Buying beer, however, remains legal. Using the above figure, in which CBL is the cost of breaking the law, what is the equilibrium price and quantity with this new law in effect? A) $5 per quart and 300 quarts of beer B) $3 per quart and 500 quarts of beer C) $3 per quart and 100 quarts of beer D) $1 per quart and 300 quarts of beer Answer: A Topic: A Market for Illegal Goods, Penalties on Sellers Skill: Analytical Status: Old AACSB: Analytical Skills

33) Suppose the government has declared beer to be an illegal substance and has imposed penalties on any person caught selling a beer. Buying a beer, however, remains legal. Using the above figure, in which CBL is the cost of breaking the law, beer consumption is decreased by A) 200 quarts. B) 300 quarts. C) 400 quarts. D) 500 quarts. Answer: A Topic: A Market for Illegal Goods, Penalties on Sellers Skill: Analytical Status: Old AACSB: Analytical Skills

34) Suppose the government has declared beer to be an illegal substance and imposes a fine on anyone caught buying a beer. Selling beer, however, remains legal. Using the above figure, in which CBL is the cost of breaking the law, what is the equilibrium price and quantity with this new law in effect? A) $5 per quart and 300 quarts of beer B) $3 per quart and 500 quarts of beer C) $3 per quart and 100 quarts of beer D) $1 per quart and 300 quarts of beer Answer: D Topic: A Market for Illegal Goods, Penalties on Buyers Skill: Analytical Status: Old AACSB: Analytical Skills

35) Suppose the government has declared beer to be an illegal substance and has imposed penalties on any person caught buying a beer. Selling a beer, however, remains legal. Using the above figure, in which CBL is the cost of breaking the law, beer consumption is decreased by A) 200 quarts. B) 300 quarts. C) 400 quarts. D) 500 quarts. Answer: A Topic: A Market for Illegal Goods, Penalties on Buyers Skill: Analytical Status: Old AACSB: Analytical Skills

36) Suppose the government has declared beer to be an illegal substance and has imposed equal penalties on any person caught buying a beer and on any person caught selling a beer. Using the above figure, in which CBL is the cost of breaking the law, what is the equilibrium price and quantity with this new law in effect? A) $5 per quart and 300 quarts of beer B) $3 per quart and 500 quarts of beer C) $3 per quart and 100 quarts of beer D) $1 per quart and 300 quarts of beer Answer: C Topic: A Market for Illegal Goods, Penalties on Both Sellers and Buyers Skill: Analytical Status: Old AACSB: Analytical Skills

37) Suppose the government has declared beer to be an illegal substance and has imposed equal penalties on any person caught buying a beer and on any person caught selling a beer. Using the above figure, in which CBL is the cost of breaking the law, beer consumption is decreased by A) 200 quarts. B) 300 quarts. C) 400 quarts. D) 500 quarts. Answer: C Topic: A Market for Illegal Goods, Penalties on Both Sellers and Buyers Skill: Analytical Status: Old AACSB: Analytical Skills

38) Which of the following is a correct statement about markets for prohibited goods? A) Penalizing sellers of an illegal good decreases supply and penalizing buyers decreases demand. B) Penalizing either buyers or sellers of an illegal good decreases the quantity bought. C) Taxing a good at a sufficiently high rate can achieve the same consumption level as prohibition. D) All of the above are correct statements. Answer: D Topic: Markets For Illegal Goods Skill: Analytical Status: Old AACSB: Analytical Skills 110 Copyright © 2014 Pearson Education, Inc.

39) Rather than prohibiting a good or service, the government might tax it. Imposing such a tax on a good or service ________ the equilibrium price and ________ the equilibrium quantity. A) raises; increases B) raises; decreases C) lowers; increases D) lowers; decreases Answer: B Topic: Markets For Illegal Goods Skill: Analytical Status: Old AACSB: Analytical Skills

40) If sanctions are imposed on buyers but NOT on sellers of an illegal good, then the equilibrium price ________ and the equilibrium quantity ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases Answer: D Topic: Study Guide Q, Markets For Illegal Goods, Penalties on Buyer Skill: Analytical Status: Old AACSB: Analytical Skills

6 News Based Questions 1) The federal government pays airlines to service small cities in the United States through a subsidy program called Essential Air Service which was established in 1978 when the airline industry was deregulated. Most subsidies can't exceed $200 per passenger. What is NOT an effect of this subsidy? A) an increase in price and an increase in quantity produced B) an increase in supply C) an increase in marginal cost D) inefficient overproduction Answer: A Topic: Subsidies Skill: Analytical Status: Old AACSB: Communication

2) The federal government pays airlines to service small cities in the United States through a subsidy program called Essential Air Service which was established in 1978 when the airline industry was deregulated. Most subsidies can't exceed $200 per passenger. Without this subsidy, what is true? A) There would be higher prices and fewer flights. B) There would be lower prices and fewer flights. C) There would be an increase in supply. D) There would be a decrease in demand. Answer: A Topic: Subsidies Skill: Analytical Status: Old AACSB: Communication

3) The federal government pays airlines to service small cities in the United States through a subsidy program called Essential Air Service which was established in 1978 when the airline industry was deregulated. Most subsidies can't exceed $200 per passenger. What would happen if the government increased the subsidy to $400 per passenger? A) There would be a fall in price and increase in quantity produced. B) Government payments to airlines would decrease. C) Consumer surplus would decrease. D) Supply would shift to the left. Answer: A Topic: Subsidies Skill: Analytical Status: Old AACSB: Communication

4) The Volumetric Ethanol Excise Tax Credit (VEETC) is a tax credit for registered ethanol-gasoline blenders. Qualified blenders receive $0.51 for each gallon of pure ethanol they blend into gasoline. VEETC is an example of a A) subsidy. B) price floor. C) price ceiling. D) quota. Answer: A Topic: Subsidies Skill: Conceptual Status: Old AACSB: Communication

5) The Volumetric Ethanol Excise Tax Credit (VEETC) is a tax credit (which acts like a subsidy) for registered ethanol-gasoline blenders. Qualified blenders receive $0.51 for each gallon of pure ethanol they blend into gasoline. What statement is true? A) With a subsidy, the price paid by consumers will be lower than without a subsidy. B) Without a subsidy, the quantity produced by blenders will be greater than the quantity demanded. C) With a subsidy, the equilibrium quantity produced will be lower than without a subsidy. D) With a subsidy, production will be efficient. Answer: A Topic: Subsidies Skill: Conceptual Status: Old AACSB: Communication

6) Most of us are dependent on crude oil in some shape or way, whether it's to power our cars or to heat our homes in some parts of the country. More than 80 percent of the home heating oil used in the United States goes to the Northeast. It is suggested that there needs to be government regulation to make it illegal to charge a very high price for oil. This type of regulation would be a ________. A) price ceiling B) price floor C) shortage regulation D) tax incidence Answer: A Topic: Price Ceiling Skill: Conceptual Status: Old AACSB: Communication

7) More than 80 percent of the home heating oil used in the United States goes to the Northeast. In Vermont, the vast majority of people there use oil to stay warm when it's cold outside. Richard Izor heats his home with oil and inquires, "I'd like to see them come in and put a ceiling on the oil price now before it gets any higher. Why they haven't done this is more than I can understand." Which of the following is NOT likely to occur if such a price ceiling was imposed? A) There would be a surplus of heating oil. B) A heating oil shortage may occur. C) A black market for heating oil may be created. D) There would be an increase in inefficiency in the heating oil market. Answer: A Topic: Price Ceiling Skill: Conceptual Status: Old AACSB: Communication

8) One of the best defenses we have against malaria these days comes from a fern-like weed called wormwood. Fluctuating supply and demand have pushed the plant's price from $155 per kilo one year, to over $1000 the next. There is a push to set a price ceiling for the plant. Which of the following would NOT occur if there was a price ceiling set below the equilibrium price on wormwood? A) The wormwood market would be allocatively efficient because its price would not fluctuate. B) A wormwood shortage might occur. C) A black market for wormwood may be created. D) There would be an increase in inefficiency in the wormwood market. Answer: A Topic: Price Ceiling Skill: Conceptual Status: Old AACSB: Communication

9) The federal minimum wage in 2010 was $7.25. If this wage rate was less than the equilibrium wage, what is the effect? A) The minimum wage does not create unemployment. B) The number of people who want to work at the minimum wage is the same as the number of available jobs. C) The number of people who want to work at the minimum wage is greater than the number of available jobs. D) Deadweight loss exists. Answer: A Topic: Minimum Wage Skill: Conceptual Status: Old AACSB: Communication

10) The minimum wage in 2008 was $6.55 cents until July 2008 when it was raised to $7.25. If the minimum wage in June was below the equilibrium wage and the increased wage in July was above the equilibrium wage, then A) firms' producer surplus was greater in June than in July. B) unemployment was unaffected by the increase. C) the deadweight loss was greater in June than in July. D) employment of low-skilled workers increased in July. Answer: A Topic: Minimum Wage Skill: Conceptual Status: Old AACSB: Communication

11) "The tax on insulin in the Philippines is anywhere between 10 and 20 percent. If you are rich and living in the Philippines, this is not a problem, but if you are poor, then insulin becomes something that you cannot afford." Why do buyers care so much about a tax on insulin, a vital daily medicine for those with diabetes? A) Because buyers pay virtually the entire tax on insulin because the demand is almost perfectly inelastic B) Because sellers increase their profit when there is a tax C) Because more insulin can be provided to those in need D) Because the tax incidence is equal between the buyers and sellers Answer: A Topic: Tax Incidence and the Elasticity of Demand Skill: Conceptual Status: Old AACSB: Communication

12) "The tax on insulin in the Philippines is anywhere between 10 and 20 percent. If you are rich and living in the Philippines, this is not a problem, but if you are poor, then insulin becomes something that you cannot afford." If the government places the tax on sellers, what is the most likely tax incidence? A) The vast majority of the tax is paid by buyers. B) The vast majority of the tax is paid by sellers. C) The tax is split equally between buyers and sellers. D) Sellers pay all the tax. Answer: A Topic: Taxes Skill: Conceptual Status: Old AACSB: Communication

13) "The tax on insulin in the Philippines is anywhere between 10 and 20 percent. If you are rich and living in the Philippines, this is not a problem, but if you are poor, then insulin becomes something that you cannot afford." If the government places the tax on sellers, what is the effect on the supply and demand curves? A) The demand curve stays the same and the supply curve shifts leftward. B) The demand curve shifts rightward and the supply curve stays the same. C) Both the demand and supply curves shift leftward. D) The demand curve shifts leftward and the supply curve stays the same. Answer: A Topic: Taxes Skill: Analytical Status: Old AACSB: Communication

7 Essay Questions 1) In the 1980s, one of the most common sights in the socialist countries, such as the former Soviet Union and North Korea, were long lines for bread, sugar, and other necessities. These countries had price ceilings on these necessities. Some of the socialist nations, such as the former Soviet Union, have moved to a market economy by lifting the price ceilings, while others, such as North Korea, have retained their price ceilings. What prediction do you make about the presence (or absence) of long lines today in the former Soviet Union and North Korea? Explain your answer. Answer: The long lines have disappeared in the former Soviet Union but are still present in North Korea. The socialist countries had price ceilings on necessities that were below the equilibrium price. These ceilings created shortages, thus the long lines. In the countries that have lifted the price ceilings, the price has risen toward the equilibrium price, thereby eliminating the shortages and long lines. In the nations that have retained the price ceilings, the shortages and hence the long lines have persisted. Topic: Price Ceiling Skill: Conceptual Status: Old AACSB: Communication

2) In order for a price ceiling to have an effect on the market, must it be set above or below the equilibrium price? Why? Answer: In order to have an effect, the price ceiling must make the equilibrium price illegal and so it must be set below the equilibrium price. A price ceiling is the highest price that can legally be charged for the product. If it is set above the equilibrium price, the equilibrium price is less than the ceiling price and hence is legal. Therefore the price and the quantity are not affected. However if the ceiling price is less than the equilibrium price, the equilibrium price becomes illegal. As a result, the price ceiling will have an impact on the market by lowering the price. With the lower price, the quantity demanded increases while the quantity supplied decreases so that a shortage of the product emerges. Topic: Price Ceiling Skill: Conceptual Status: Old AACSB: Communication

3) Suppose the government imposes a price ceiling that is lower than the equilibrium price. Discuss the effect, if any, on the price and quantity if the government later removes the price ceiling. Answer: If the price ceiling is lower than the equilibrium price, the price ceiling has an effect on the market. When the price ceiling is imposed, it increases the quantity demanded and decreases the quantity supplied, thereby creating a shortage of the good. When the government removes the price ceiling, the reverse effects occur. The price rises back to the equilibrium price. With the higher price, the quantity demanded decreases and the quantity supplied increases. The shortage is eliminated because the quantity produced equals the quantity consumed and both are equal to the equilibrium quantity. Topic: Price Ceiling Skill: Conceptual Status: Old AACSB: Communication

4) What are the effects of a rent ceiling set below the equilibrium rent? Answer: A rent ceiling is the maximum legal rent. If the rent ceiling is set below the equilibrium rent, the rent ceiling creates a shortage of apartments. Consumer and producer surplus are both reduced. Hopeful renters face must engage in increased search activity. In order to rent an apartment, renters and landlords might engage in black market activity that effectively raises the rent. Topic: Housing Markets and Rent Ceilings Skill: Conceptual Status: Old AACSB: Communication

5) In the housing market, if a rent ceiling of $600.00 is imposed when the equilibrium rent is $500.00, why will nothing change? Answer: A rent ceiling is the maximum legal rent. Generally, the government imposes the ceiling when the equilibrium rent is considered too high. If, however, the rent ceiling ($600.00) is above the equilibrium rent ($500.00), people are already paying a rent lower than legal maximum. As a result, nothing changes and so this price ceiling is ineffective. Topic: Housing Markets and Rent Ceilings Skill: Conceptual Status: Old AACSB: Communication

6) What is the difference between a rent ceiling set below the equilibrium rent and a rent ceiling set above the equilibrium rent? Answer: Suppose the equilibrium rent without any rent ceiling is $1,000 per month. If the rent ceiling is set below $1,000, say at $800 per month, the ceiling then makes it unlawful to rent for more than $800. An apartment shortage results because the quantity demanded exceeds the quantity supplied at $800. A rent ceiling above the equilibrium rent $1,000, say $1,200 per month, has no effect. Why? Because no apartments would be rented at this price, with or without a law, so the ceiling has no effect. Topic: Housing Markets and Rent Ceilings Skill: Conceptual Status: Old AACSB: Communication

7) Explain why in cities such as New York City that have rent ceiling laws, so many people who work in the city commute from outside the city. Answer: Rent ceilings decrease the quantity supplied of housing. So many people who work in the city and would like to live in the city cannot find housing. As a result, they must live outside the city and commute to work. Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Communication

8) Suppose that apartments rent for $1,300 a month in San Francisco, California and $850 a month in Los Angeles, California. If the state of California passes a state-wide rent ceiling for apartments of $1,100 a month, what occurs in the two cities? Answer: The rent ceiling is below the equilibrium rent in San Francisco. A shortage of apartments occurs as the quantity of apartments demanded increases and the quantity supplied decreases. The shortage becomes even larger as time passes because, with the rent ceiling, landlords have no incentive to maintain existing apartments or to build new ones. A black market for apartments will emerge, with bribery and "key money" becoming common. In Los Angeles, the outcome differs. The rent ceiling is above the equilibrium rent and has no impact on the quantity demanded or the quantity supplied. If, however, Los Angeles grows so that the demand for housing increases enough, the time may come when the rent ceiling is below the equilibrium rent in Los Angeles, in which case the Los Angeles apartment market also would be marked by a shortage and black market. Topic: Rent Ceiling Skill: Analytical Status: Old AACSB: Communication

9) Why do rent ceilings lead to shortages and black markets? Answer: Rent ceilings that are set below the market equilibrium price for apartments lead to shortages for two reasons. First, the lower price increase the quantity of apartments demanded. Second, the quantity of apartments supplied decreases and, over time, the supply decreases even more because of the lower rent. When the quantity demanded exceeds the quantity supplied, a shortage is created. Faced with the inability to obtain the product they want, in this case, housing, people use bribes and other inducements in the black market to increase their chances of moving up the waiting list that emerges in the rent-controlled apartment market. Not everyone participates in the black market, but rent ceilings will favor those people willing to engage in illegal transactions. Topic: A Regulated Housing Market Skill: Conceptual Status: Old AACSB: Communication

10) What are the major economic effects of rent ceilings? Answer: Rent ceilings reduce the rental payments of those tenants able to find apartments at the controlled price and decrease the rental income received by landlords. They lead to a shortage of apartments, preventing some tenants from finding a suitable place to live. Another effect can be increased discrimination as landlords can choose tenants based on race, age, gender, or other criteria. Finally, rent ceilings result in black markets emerging and also increase the cost of searching for an apartment. Topic: A Regulated Housing Market Skill: Conceptual Status: Old AACSB: Communication

11) Do rent ceilings result in any deadweight loss? Answer: Yes. Because the number of apartments rented is decreased, some consumer surplus is lost and some producer surplus is lost. Part of these loses are gained by the tenants in the form of reduced rental payments. But the sum of the losses not gained by the tenants is the deadweight loss. Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Communication

12) What is a black market and how does it influence the market for rental housing if a rent ceiling creates a housing shortage? What determines the level of the black market rent? Answer: A black market is an illegal market in which the price exceeds the legally imposed price ceiling. When a rent ceiling creates a housing shortage, frustrated renters offer a rent above the legal level in order to get an apartment. The level of the black market rent depends on how tightly the rent ceiling is enforced. With loose enforcement, the black market rent is close to the unregulated rent. With strict enforcement, it is close to the maximum price that renters are willing to pay given the rent-ceiling quantity of housing supplied. Topic: Price Ceiling Skill: Conceptual Status: Old AACSB: Communication

13) What is search activity and how does it influence consumer surplus when a rent ceiling creates a housing shortage? Answer: Search activity is the time spent looking for someone with whom to do business. When a rent ceiling creates a shortage of housing, search activity increases. As people spend more time searching for rental housing, the opportunity cost of housing, which is the rent plus the value of the search time, increases and therefore consumer surplus shrinks. Topic: Search Skill: Recognition Status: Old AACSB: Communication

14) What is a minimum wage? What are the effects of a minimum wage set below the equilibrium wage rate? Answer: A minimum wage is a regulation that makes it illegal to pay or receive a wage rate lower than a specified level. If a minimum wage is set below the equilibrium wage, the minimum wage has no effect because it does not make the equilibrium wage rate illegal. Topic: The Minimum Wage Skill: Recognition Status: Old AACSB: Communication

15) Is the minimum wage an example of a price floor or a price ceiling? Why? Answer: The minimum wage is an example of a price floor. A price floor sets the lowest price at which it is legal to trade a particular good, service, or factor of production. The minimum wage is a price floor imposed in the labor market. The minimum wage sets the lowest price for which labor can be traded. It is illegal to buy (or to sell) labor for less than the minimum wage. Topic: The Minimum Wage Skill: Recognition Status: Old AACSB: Communication

16) What happens to the quantity of labor supplied, the quantity of labor demanded, and the number of unemployed workers if the minimum wage rate set above the equilibrium wage is increased still higher? Answer: An increase in the minimum wage increases the quantity of labor supplied because more people are willing to work at the higher wage rate. It decreases the quantity of labor demanded because firms hire fewer workers since the cost of the workers (their wage rate) has increased. The increase in the quantity supplied combined with the decrease in quantity demanded leads to an increase in the number of unemployed workers. Topic: The Minimum Wage Skill: Conceptual Status: Old AACSB: Communication

17) Will an increase in the minimum wage create more unemployment if the supply and demand for labor are highly elastic or highly inelastic? Answer: An increase in the minimum wage creates less unemployment when the supply and demand for labor are highly inelastic. If the supply and demand for labor are highly elastic, an increase in the minimum wage leads to more unemployment because the quantity of labor supplied increases significantly and the quantity of labor demanded decreases significantly. If they are inelastic, an increase in the minimum wage leads to only a small decrease in the quantity of labor demanded and only a small increase in the quantity of labor supplied, so that the resulting unemployment is not very large. Topic: The Minimum Wage Skill: Conceptual Status: Old AACSB: Communication

18) Why would an increase in the minimum wage to $15 per hour lead to more unemployment for teenage and low-skilled workers? Answer: Many teenage and low-skilled workers earn far less than $15 per hour. Hence a price floor in the labor market that "guaranteed" a wage of $15 per hour, that is, a minimum wage of $15 per hour, would have a double-edged effect. First, the quantity of labor supplied would increase because more people would be willing and able to work for the higher wage. Indeed, some high school students would drop out of school in order to obtain work if they thought they would be paid $15 an hour. Second, many businesses would be unwilling and unable to pay $15 per hour and would therefore lay off many teenage and low-skilled workers. In other words, the quantity of labor supplied increases and the quantity of labor demanded decreases. The resulting surplus of labor means a higher unemployment rate for the very people the minimum wage is designed to help. Topic: The Minimum Wage Skill: Conceptual Status: Old AACSB: Communication 120 Copyright © 2014 Pearson Education, Inc.

19) We know that the minimum wage causes unemployment. So, why does the government impose a minimum wage? Answer: The main reason for the minimum wage is because its supporters outnumber its opponents. Some supporters, such as labor unions, have a self-interested motivation for seeing a high minimum wage. A high minimum wage increases the cost of low-skilled labor, which is a substitute for high-skilled union labor. Hence firms decrease the quantity of low-skilled labor they demand and increase their demand for union labor, thereby increasing the employment and wages of union labor. Other supporters point to the fact that the minimum wage helps raise the incomes of low-skilled workers who retain jobs. Also, if the demand and supply of low-skilled workers is inelastic, the resulting unemployment will be low and so supporters might believe that helping some low-skilled workers is worth harming others. Topic: The Minimum Wage in Practice Skill: Conceptual Status: Old AACSB: Communication

20) How does the elasticity of demand for labor affect the deadweight loss from an increase in the minimum wage? Why? Answer: The more elastic the demand for labor, the greater the deadweight loss from increasing the minimum wage. Essentially, the more elastic the demand for labor, the larger the decrease in the quantity of labor demanded when the minimum wage rate rises. As a result, the larger the decrease in employment and hence the greater is the deadweight loss. Topic: The Minimum Wage Skill: Conceptual Status: Old AACSB: Communication

21) Discuss the inefficiencies created by a price floor. Answer: A price floor prevents the efficient allocation of resources. If a price floor is set above the equilibrium price, the quantity of the good or service supplied increases and the quantity demanded decreases, so that a surplus results. The minimum wage is a price floor. If the minimum wage is set above the equilibrium wage rate, the surplus of labor means increased unemployment. Similar to all price floors, the minimum wage creates inefficiency. The minimum wage leads to inefficiency because at the minimum wage, the marginal benefit to a firm from hiring another worker exceeds the marginal cost to a worker from working. Topic: Inefficiency of Price Floors Skill: Conceptual Status: Old AACSB: Communication

22) Explain why a price floor set below the equilibrium price is ineffective. Answer: Price floors are legal minimums; it is legal to charge the floor price, or higher. If the equilibrium price is legal, that is, the equilibrium price is above the price floor so that the price floor is below the equilibrium price, then the price floor has no effect on the market because the market price does not change. Topic: Price Floor Skill: Recognition Status: Old AACSB: Communication

23) Explain how a price floor set above the equilibrium market price for a good can cause a surplus of that good. Answer: At the market equilibrium price, the quantity demanded equals the quantity supplied. If a price floor is set above the equilibrium price, the price floor has two separate effects and both help create a surplus of the good. First, the higher price increases the quantity supplied. Second, the higher price decreases the quantity demanded. On both counts—the increase in the quantity supplied and the decrease in the quantity supplied—a surplus is created. Topic: Price Floor Skill: Conceptual Status: Old AACSB: Communication

24) "A price floor that is less than the equilibrium price leads to a shortage of the good." Is this assertion true or false? Explain your answer. Answer: The assertion is false. A price floor is the minimum price that can legally be charged. If the price floor is less than the equilibrium price, it has no effect because the equilibrium price is already in compliance with the law. Hence a price floor set below the equilibrium price has no effect. However, a price floor set above the equilibrium price will have an effect and will create a surplus of the good. Topic: Price Floor Skill: Conceptual Status: Old AACSB: Communication

25) What occurs if a price floor is set above the equilibrium price? What occurs if a price ceiling is set below the equilibrium price? Answer: A price floor set above the equilibrium price will result in a surplus of the product. Because the price floor is above the equilibrium price, the price rises above the equilibrium value. With the higher price, the quantity supplied increases and the quantity demanded decreases. At the floor price, the quantity supplied exceeds the quantity demanded and hence a surplus is the outcome. A price ceiling set below the equilibrium price also affects the market. The price ceiling is below the equilibrium price, so the price falls, from what it was at its equilibrium, to the ceiling amount. The fall in price increases the quantity demanded and decreases the quantity supplied. As a result, at the price equal to the ceiling floor, the quantity demanded exceeds the quantity supplied and hence there is a shortage. Topic: Price Ceiling and Price Floor Skill: Conceptual Status: Old AACSB: Communication

26) Compare and contrast a price ceiling and a price floor. Answer: A price ceiling is the maximum legal price that can be charged. A price floor is the minimum legal price that can be charged. For a price ceiling or a price floor to have an effect, they must make the equilibrium price illegal. So, an effective price ceiling is set below the equilibrium price while an effective price floor is set above the equilibrium price. A price ceiling creates a shortage of the good while a price floor creates a surplus. Both create an inefficient market outcome because the marginal benefit of the last unit consumed no longer equals the marginal cost of the last unit produced. Topic: Price Ceiling and Price Floor Skill: Conceptual Status: Old AACSB: Communication

27) How is the incidence of a sales tax between the buyer and the seller determined? Answer: The tax incidence depends on the price elasticities of supply and demand. Buyers pay more of the tax the more inelastic the demand and the more elastic the supply. Sellers pay more of the tax the more elastic the demand and the more inelastic the supply. Topic: Tax Incidence Skill: Conceptual Status: Old AACSB: Communication

28) When a tax is imposed on sellers of a good, the resulting rise in the equilibrium price is usually less than the amount of the tax itself. Why doesn't the equilibrium price rise by the full amount of the tax? Answer: Because firms collect taxes from consumers and send them to the government, the taxes drive a wedge between the price or dollar amount firms receive from consumers and the price or dollar amount they get to keep for selling the good. Firms would like to raise the price by the full amount of the tax. In this case, the price firms receive would stay the same and so the firms would continue to supply the same amount of the product. But as the price rises, the quantity demanded decreases. Hence, if the price rose by the full amount of the tax, the quantity supplied would not change and the quantity demanded would decrease. There would be a surplus of the product. The surplus forces the price downward, thereby making the rise in price less than the full amount of the tax. As a result, in the equilibrium the price generally does not rise by the full amount of the tax. Topic: Tax Incidence Skill: Conceptual Status: Old AACSB: Communication

29) The Social Security tax is a tax that Congress imposes equally on both employers and employees. Does this mean that the burden of this tax is shared equally between firms and workers? Explain. Answer: No. A tax has the same effect regardless of whether it's imposed on buyers (employers) or sellers (employees). The division of the burden of a tax between firms and workers depends on the elasticities of labor demand and labor supply, not on the tax law. That is, the market for labor, not Congress, decides how the burden of the Social Security tax is divided by firms and workers. Topic: Tax Incidence Skill: Conceptual Status: Old AACSB: Communication

30) Suppose that the government wants the burden of the cigarette tax to fall equally on buyers and sellers and declares that a $1.00 tax be imposed on each. Is the burden of the tax shared equally? Why or why not? Answer: Not necessarily. A tax has the same effect regardless of whether it's imposed on buyers or sellers. The division of the burden of a tax between buyers and sellers depends on the elasticities of demand and supply, not on the tax law. Topic: Tax Incidence Skill: Conceptual Status: Old AACSB: Communication

31) Explain the relationship between the incidence of a tax and elasticity. Answer: It does not matter whether a tax is imposed on the buyers or the sellers. Once the tax is imposed in the market, the buyers and the sellers generally will both pay a share of the tax because the buyers will pay a higher price and the sellers will receive a lower price. The incidence of the tax between the buyers and the sellers depends in the elasticities of demand and supply. Because elasticity is a measure of sensitivity to a change in price, the side of the market--buyers or suppliers--that is less sensitive to price changes will end up paying a larger proportion of the tax. Topic: Tax Incidence and Elasticity Skill: Conceptual Status: Old AACSB: Communication

32) Can the incidence of a sales tax ever be so that buyers pay all of the tax or so that sellers pay all of the tax? Answer: Yes, each is possible. If demand is perfectly price inelastic, for example in the case of an extreme necessity, the tax will be paid entirely by the buyer. If supply is perfectly inelastic, for example in the case of the momentary supply curve, the tax will be paid entirely by the seller. Topic: Taxes Skill: Conceptual Status: Old AACSB: Communication

33) Suppose the demand for saline solution is perfectly inelastic for contact lens wearers. If the government imposes a tax on saline solution, what occurs? Be sure to tell what happens to the price paid by the buyers and discuss the incidence of the tax. Answer: If demand is perfectly inelastic, then no matter what the price, buyers will not decrease their quantity demanded when the price rises. Hence the tax will be passed along entirely to the consumers. So, in the case of saline solution, the price paid by the buyers will rise by the full amount of the tax and so buyers pay the entire amount of the tax. Topic: Tax Incidence and the Elasticity of Demand Skill: Conceptual Status: Old AACSB: Communication

34) Which would be a better source of tax revenue for the government, a good with elastic or a good with an inelastic demand? Explain your reasoning. Answer: Inelastic goods are better sources of tax revenue because, as price rises, the equilibrium quantity does not decrease by as much as that of a good with elastic demand. The government's tax revenue, which depends on the equilibrium quantity of the good, is larger when a good with an inelastic demand is taxed. Topic: Tax Incidence and the Elasticity of Demand Skill: Analytical Status: Old AACSB: Communication

35) Suppose the price elasticity of demand for Mexican food is 1.23 and the price elasticity of supply is 0.47. If the government imposes a tax on Mexican food, do buyers or sellers pay most of the tax? Why? Answer: Sellers pay most of the tax because supply is inelastic while demand is elastic. There are many substitutes for the good, so unless sellers are willing to pay most of the tax, buyers spend their money on other types of food. Topic: Tax Incidence and the Elasticity of Supply Skill: Analytical Status: Old AACSB: Communication

36) A student wrote: "A subsidy raises marginal social benefit above marginal social cost and eliminates the deadweight loss from underproduction." If you were the instructor, how would you correct this statement? Answer: The student errs in several important respects. Here is a corrected statement: "A subsidy raises marginal social benefit cost above marginal social cost benefit and eliminates the creates a deadweight loss from underproduction overproduction." Topic: Subsidies Skill: Recognition Status: Old AACSB: Communication

37) "Farm subsidies in the European Union spill over to the rest of the world." Explain this assertion. Answer: Farm subsidies in the European Union lower the price at which European farmers can offer their output for sale on the world market, which lowers the price in the rest of the world. Faced with lower prices, farmers in other countries decrease production and receive smaller revenues. Topic: Subsidies Skill: Recognition Status: Old AACSB: Communication

38) How does a production quota influence farm prices and output? Answer: If a production quota is set above the equilibrium quantity, it has no effect. If a production quota is set less than the equilibrium quantity, it decreases output and raises the price. Topic: Production Quotas Skill: Recognition Status: Old AACSB: Communication

39) A student wrote: "A production quota is inefficient because it results in overproduction. At the quota quantity, marginal social cost is equal to the market price and marginal social benefit is less than the market price, so marginal social cost exceeds marginal social benefit." If you were the instructor, how would you correct this statement? Answer: The student errs in several important respects. There are errors of omission and commission. Here is a corrected statement: "A production quota is inefficient because (if set below the equilibrium quantity) it results in overproduction underproduction. At the quota quantity, marginal social cost benefit is equal to the market price and marginal social benefit cost is less than the market price, so marginal social cost benefit exceeds marginal social benefit cost." Topic: Production Quotas Skill: Recognition Status: Old AACSB: Communication 125 Copyright © 2014 Pearson Education, Inc.

40) When the government passes a law making a particular good illegal, does it matter for the black market price and quantity if the penalties for breaking the law are imposed on the buyers or on the sellers? Answer: Yes, it matters. Imposing penalties on the buyers shifts the demand curve leftward. Imposing penalties on the sellers shifts the supply curve leftward. Either penalty decreases the quantity, but the black market price will exceed the legal market price if only the seller is penalized and will be below the legal market price if only the buyer is penalized. Topic: Markets For Illegal Goods Skill: Conceptual Status: Old AACSB: Communication

41) In 1920 a constitutional amendment was passed that outlawed the production, sale, purchase, and consumption of alcoholic beverages. "Prohibition" encouraged bootlegging and black markets for whiskey, wine, and beer. The amendment was eventually repealed in 1933. In 1920, what alternative economic policy was available to the government as a means of reducing alcohol consumption nationwide? Answer: The government could have kept alcoholic beverages legal and then placed a heavy tax on them. This policy would have shifted the supply curve leftward, increased the (legal) price, and decreased the (legal) quantity. Unfortunately, the higher the tax, the more likely it would have been that black markets would have developed (as with outright prohibition) to avoid the tax. Topic: Markets For Illegal Goods Skill: Analytical Status: Old AACSB: Analytical Skills

8 Numeric and Graphing Questions

Rent (dollars per month) 1,000 800 600 400 200

Quantity Quantity demanded supplied (housing units) (housing units) 150 350 200 300 250 250 300 200 350 150

1) The table above gives the demand and supply schedules for the housing market in a small town. If a rent ceiling of $200 a month is imposed, what is the quantity demanded, the quantity supplied, and the shortage of housing? Answer: The quantity demanded is 350 units, the quantity supplied is 150 units, and the shortage is 200 units. Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

2) The figure above illustrates the current market for apartments in Washington, D.C. a) If the local government imposes a price ceiling of $1,500 per month, is there a shortage? If so, how much, if not, why not? b) If the local government imposes a price ceiling of $900 per month, is there a shortage? If so, how much, if not, why not? Answer: a) There is not a shortage. The equilibrium rent is $1,200 a month. Because the rent ceiling is above the equilibrium rent, it has no effect. b) There is a shortage. At a rent of $900 per month, the quantity of units demanded is 100,000 and the quantity of units supplied is 60,000. Hence there is a shortage of 40,000 units. Topic: A Regulated Housing Market Skill: Analytical Status: Old AACSB: Analytical Skills

3) The above figure shows the market for a prescription drug. What is the equilibrium price of the drug? How many doses are purchased? Suppose the government imposes a price ceiling of $1.50 a dose. How many doses are purchased after the price ceiling is imposed? Answer: The equilibrium price is $2.50 per dose. The number of doses purchased is the equilibrium quantity, 8,000 doses per day. After the price ceiling is imposed, the number of doses purchased is 4,000 per day, which is equal to the quantity of doses supplied at the price of $1.50 per dose. Topic: Price Ceiling Skill: Analytical Status: Old AACSB: Analytical Skills

4) In a diagram, illustrate the case of a price ceiling that affects the market's price and quantity. Answer:

The figure above has a price ceiling, Pc , that is set below the equilibrium price, P. As a result, a shortage equal to Qd - Qs emerges. Topic: Price Ceiling Skill: Analytical Status: Old AACSB: Analytical Skills

5) The figure above illustrates the current market for workers in Lima, Peru. a) Without any government intervention, what is the equilibrium wage rate and amount of employment? b) If the city government imposes a minimum wage of $3 an hour, what is the amount of employment? Does the minimum wage create any unemployment? Why or why not? c) If the city government imposes a minimum wage of $6 an hour, what is the amount of employment? Does the minimum wage create any unemployment? Why or why not? Answer: a) The equilibrium wage rate is $4 an hour and the equilibrium amount of employment is 8,000 workers. b) Employment remains 8,000 workers. The minimum wage does not create any unemployment. The $3 per hour minimum wage does not bring about any unemployment because it is below the equilibrium wage rate. c) Employment decreases to 4,000 workers, the quantity of labor demanded at a wage rate of $6 per hour. At the wage rate of $6 per hour, the quantity of labor supplied is 12,000 workers and the quantity of labor demanded is 4,000 workers. Hence there are 8,000 workers unemployed. The minimum wage of $6 an hour creates unemployment because it is higher than the equilibrium wage rate. As a result, the quantity of labor supplied increases and the quantity of labor demanded decreases, leading to a situation of excess supply, or unemployment. Topic: The Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

Price (dollars per scooter) 70 80 90 100 110

Quantity Quantity supplied demanded (scooters per week) (scooters per week) 120 60 110 80 100 100 90 120 80 140

6) The table above gives the supply and demand schedules for scooters. Because of increased injuries sustained by children riding scooters, Citizens Against Scooter Accidents successfully lobbies the government to impose a price floor of $80.00 on scooters. a) What is the quantity demanded and supplied after the price floor has been imposed? b) Is there any shortage or surplus at this price floor? If so, how much? c) If the price floor is raised to $110.00, what is the quantity demanded and supplied? d) At a price floor of $110.00, is there any shortage or surplus? If so, how much? Answer: a) The quantity demanded and supplied is 100 scooters at $90, the equilibrium price. Because the price floor, which is the legal minimum price, is below the equilibrium price, it has no effect. The price stays at the equilibrium price of $90 per scooter and the quantity remains at the equilibrium quantity of 100 scooters. b) There is no surplus or shortage at a price floor of $90 per scooter. c) The quantity demanded at $110 is 80 scooters and quantity supplied is 140. d) There is a surplus. The surplus equals the quantity supplied, 140 scooters, minus the quantity demanded, 80 scooters, or a 60 scooters per week surplus. Topic: Price Floor Skill: Analytical Status: Old AACSB: Analytical Skills

7) In a supply and demand diagram, illustrate a price floor that affects the market's price and quantity and a price floor that has no effect on the price and quantity. Answer:

The figure above shows a price floor that affects the price and quantity, labeled "effective" and a price floor that has no effect on the price or quantity, labeled "ineffective." The effective price floor is greater than the equilibrium price, P, and hence keeps the price from falling to the equilibrium. The ineffective price floor is below the equilibrium price and so changes nothing. Topic: Price Floor Skill: Analytical Status: Old AACSB: Analytical Skills

Price (dollars per CD) 20 18 16 14 12 10 8 6

Quantity Quantity supplied demanded (millions of CDs per (millions of CDs per month) month) 4 25 8 22 12 19 16 16 20 13 24 10 28 7 32 4

8) The table above gives the demand and supply schedules for CDs. a) According to the table, what is the equilibrium price? b) Suppose the government imposes a price floor of $16 for a CD. What is the result? c) Suppose the government imposes a price ceiling of $8 for a CD. What is the result? Answer: a) The equilibrium price is $14 for a CD and the equilibrium quantity is 16 million CDs per month. b) If the government imposes a price floor of $16 per CD, the price cannot fall to its equilibrium of $14 per CD. At the floor price of $16 for a CD, there is a surplus of CDs. The quantity supplied is 19 million and the quantity demanded is only 12 million, so there is a surplus of 7 million CDs. c) If the government imposes a price ceiling of $8 for a CD, the price cannot rise to its equilibrium level of $14 per CD. At the price of $8, there is a shortage of CDs. The quantity demanded is 28 million CDs but the quantity supplied is only 7 million CDs. Hence there is a 21 million CD shortage. Topic: Price Ceiling and Price Floor Skill: Analytical Status: Old AACSB: Analytical Skills

9) In a supply and demand diagram, illustrate an effective price ceiling, that is, a price ceiling that changes the price and quantity. In the same diagram, also illustrate an effective price floor, that is, a price floor that changes the price and quantity. Answer:

As illustrated, an effective price ceiling is set below the equilibrium price, P in the figure. When a price ceiling is set below the equilibrium price, a shortage results. An effective price floor is set above the equilibrium price, as illustrated. This sort of price floor causes a surplus. Topic: Price Ceiling and Price Floor Skill: Analytical Status: Old AACSB: Analytical Skills

10) The figure above illustrates the market for antifreeze. Suppose the government decides to implement an $8 sales tax on the sellers for every gallon of antifreeze sold. a) In the figure, illustrate the effect the tax has on the market for antifreeze. b) What is the equilibrium price of a gallon of antifreeze before the tax? What is the price paid by buyers after the tax? c) What is the equilibrium quantity of antifreeze before the tax? What is the equilibrium quantity after the tax? d) What is the revenue collected by the government from this tax? e) Do buyers or sellers bear the largest incidence of the tax? f) Illustrate the deadweight loss created by the tax.

Answer:

a) The tax shifts the supply curve, as illustrated above. b) Before the tax, the price was $4 per gallon. After the tax, buyers pay $10 per gallon. c) Before the tax the equilibrium quantity was 8,000 gallons of antifreeze. After the tax, the quantity is 4,000 gallons of antifreeze. d) The government collects $32,000 in tax revenue per week. e) Buyers bear the largest incidence of the tax because the price they pay rises by $6, from $4 per gallon to $10 per gallon. f) The deadweight loss is equal to the area of the darkened triangle in the figure. Topic: Tax Incidence Skill: Analytical Status: Old AACSB: Analytical Skills

11) The figure above shows the market for gasoline. The government has imposed a tax on gasoline. a) What is the amount of the tax per gallon of gasoline? b) How much of the tax is paid by consumers? How much is paid by producers? Which is more elastic, the supply or demand for gasoline? Answer: a) The tax is $1.50 per gallon, the amount by which the supply curve has been shifted upward. b) Consumers pay $1 of the tax, as the price they pay rises from $1.50 to $2.50 per gallon. Producers pay $0.50 of the tax, as the price they receive falls from $1.50 to $1.00 per gallon. The supply is more elastic because suppliers pay a smaller fraction of the tax than do buyers. Topic: Tax Incidence Skill: Analytical Status: Old AACSB: Analytical Skills

12) The figure above shows the market for a life-saving drug. Suppose the government imposes a $150 tax per dose on sellers of the drug. Show and describe the impact on the market. Who pays this tax? Answer:

The tax decreases the supply and shifts the supply curve leftward. As shown in the figure, the vertical difference between the old supply curve and the new one is the amount of the tax, $150 per dose. The price of the drug rises from $150 per dose before the tax to $300 per dose after the tax. The quantity remains constant, at 8,000 does per month. Because demand is perfectly inelastic, the price rose by the full amount of the tax so buyers pay the entire tax Topic: Tax Incidence and the Elasticity of Demand Skill: Analytical Status: Old AACSB: Analytical Skills

13) The figure above shows the market for tickets to the Super Bowl the day of the game. Suppose the government imposes an entertainment tax of $100 per ticket. a) What is the equilibrium price of a Super Bowl ticket before the tax? What is the price paid by buyers after the tax? What is the price received by sellers after the tax? b) What is the equilibrium quantity of tickets before the tax? What is the equilibrium quantity after the tax? c) Do buyers or sellers bear the largest incidence of the tax? Answer: a) The equilibrium price before the tax is $200 for a ticket. After the tax, buyers still pay $200 per ticket. Sellers, however, receive only $100 (= $200 price paid by a buyer minus the $100 tax) per ticket. b) Before the tax, the equilibrium quantity was 80,000 tickets. After the tax the quantity is still 80,000 tickets. c) Sellers pay all the tax and buyers pay none of the tax. In other words, the price that a buyer pays does not change—it remains equal to $200. Hence buyers pay none of the tax. However, the price received by sellers falls from $200 per ticket to $100. Hence sellers pay the full amount of the $100 tax, which was to be expected because the supply of tickets is perfectly inelastic. Topic: Tax Incidence and the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

14) In the Village of Punjab, Sheryl owns a well, which is the only source of drinking water. The supply of water is perfectly inelastic at a quantity of 1,000 gallons of water per day. At a price of $2.00 per gallon, the quantity demanded per day is 1,000 gallons. The government imposes a $0.50 per gallon tax. a) After the tax is imposed, what is the price paid by the villagers? What is the price received by Sheryl? b) How much revenue does the government collect? c) What fraction of the tax does Sheryl pay? What fraction is paid by the villagers? Answer: a) Because the supply is perfectly inelastic, no matter what price Sheryl receives, she supplies 1,000 gallons of water per day. Because she supplied 1,000 gallons of water per day, the price paid by the villagers remains equal to $2.00, the price at which 1,000 gallons per day is the quantity demanded. Sheryl receives $1.50, the $2.00 paid by the villagers minus the $0.50 sent to the government as the tax. b) The government receives $500 in tax revenue. c) Sheryl pays 100 percent of the tax because the price she receives falls by the full amount of the tax. The villagers pay none of the tax because the price they pay does not change. Topic: Tax Incidence and the Elasticity of Supply Skill: Analytical Status: Old AACSB: Analytical Skills

Price (dollars per loaf) 1.00 1.50 2.00 2.50

Quantity demanded (loaves per day)

Quantity supplied (loaves per day)

1,200 800 400 0

0 400 800 1,200

15) The table above gives the demand and supply schedules for bread in Bakerville. Draw the demand and supply curves. Suppose a subsidy on bread of $1 per loaf is given to bread producers. a) How will the subsidy affect the price paid by buyers for a loaf of bread and the quantity of bread sold? Show your work on your graph. b) How will the subsidy affect the amount sellers receive for a loaf of bread? c) After the subsidy is granted, what is the marginal social cost of the last loaf of bread produced? What is its marginal social benefit? If there are no external costs or external benefits, is the bread market efficient once the subsidy is granted? Answer:

a) The figure above shows the bread market. Before the subsidy was granted, the equilibrium price was $1.75 a loaf and the equilibrium quantity was 600 loaves per day. After the subsidy is granted, supply increases and the supply shifts downward by $1 per loaf, as shown in the figure. The equilibrium price paid by buyers is $1.25 and the equilibrium quantity is 10,000 loaves of bread. b) After the subsidy is granted, the price buyers pay for a loaf of bread is $1.25. The sellers receive this amount and also receive the $1.00 per loaf subsidy, so the sellers receive $2.25 per loaf. c) With no externalities, the supply curve is also the marginal social cost (MSC) curve and the demand curve is also the marginal social benefit (MSB) curve. With the subsidy, 1,000 loaves are produced. The marginal social cost of the 1,000th loaf is $2.25. The marginal social benefit of the 1,000th loaf is $1.25. Because MSC > MSB, the quantity of bread produced is not efficient. Topic: Subsidies Skill: Analytical Status: Old 141 Copyright © 2014 Pearson Education, Inc.

AACSB: Analytical Skills

9 True or False 1) A rent ceiling set above the equilibrium rent has no effect. Answer: TRUE Topic: A Regulated Housing Market Skill: Conceptual Status: Old AACSB: Reflective Thinking

2) A rent ceiling set above the equilibrium rent efficiently allocates resources in the housing market. Answer: FALSE Topic: Inefficiency of Rent Ceilings Skill: Conceptual Status: Old AACSB: Reflective Thinking

3) One positive aspect of rent ceilings is that they help reduce the time and expense associated with apartment hunting. Answer: FALSE Topic: Search Activity Skill: Conceptual Status: Old AACSB: Reflective Thinking

4) Discrimination based on age, race, gender, or family status very likely increases as a result of rent ceilings. Answer: TRUE Topic: Discrimination Skill: Conceptual Status: Old AACSB: Reflective Thinking

5) One way to assure that poor people will have a plentiful supply of affordable housing available to them is by imposing rent ceilings. Answer: FALSE Topic: Housing Markets and Rent Ceilings Skill: Conceptual Status: Old AACSB: Reflective Thinking

6) Rent controls and the minimum wage are both examples of price ceilings. Answer: FALSE Topic: Price Ceiling Skill: Conceptual Status: Old AACSB: Reflective Thinking

7) The supply curve of low-skilled labor is upward sloping because those workers know that government will protect them with minimum wage legislation. Answer: FALSE Topic: The Labor Market Skill: Conceptual Status: Old AACSB: Reflective Thinking

8) A minimum wage set above the equilibrium wage rate has no effect. Answer: FALSE Topic: The Labor Market and the Minimum Wage Skill: Conceptual Status: Old AACSB: Reflective Thinking

9) Most economists believe that raising the minimum wage decreases the employment opportunities for low-skilled workers. Answer: TRUE Topic: The Labor Market and the Minimum Wage Skill: Conceptual Status: Old AACSB: Reflective Thinking

10) Economists generally agree that increases in the minimum wage increase employment. Answer: FALSE Topic: The Labor Market and the Minimum Wage Skill: Conceptual Status: Old AACSB: Reflective Thinking

11) A policy of raising the minimum wage is beneficial to all low-skilled workers. Answer: FALSE Topic: The Minimum Wage in Practice Skill: Conceptual Status: Old AACSB: Reflective Thinking

12) A sales tax on sellers of a good shifts the demand curve leftward because the tax raises the price that consumers must pay. Answer: FALSE Topic: Who Pays the Sales Tax? Skill: Conceptual Status: Old AACSB: Reflective Thinking

13) A sales tax on sellers of a good shifts the supply curve leftward because the tax is like a cost of production. Answer: TRUE Topic: Who Pays the Sales Tax? Skill: Conceptual Status: Old AACSB: Reflective Thinking 143 Copyright © 2014 Pearson Education, Inc.

14) A tax imposed on buyers raises the price of the good more than would the same tax if it was imposed on sellers. Answer: FALSE Topic: Who Pays the Sales Tax? Skill: Conceptual Status: Old AACSB: Reflective Thinking

15) A sales tax on sellers a good leads to a loss of consumer surplus, but a price ceiling or a price floor on that same product will not. Answer: FALSE Topic: Taxes and Deadweight Loss Skill: Conceptual Status: Old AACSB: Reflective Thinking

16) If the demand is perfectly elastic, buyers pay the entire tax. Answer: FALSE Topic: Tax Incidence and the Elasticity of Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking

17) The incidence of the tax between buyers and sellers depends only on the elasticity of demand. Answer: FALSE Topic: Tax Incidence and the Elasticity of Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking

18) If the elasticity of supply of labor is low and the elasticity of demand for labor is high, then workers pay most of the Social Security tax levied on labor. Answer: TRUE Topic: Tax Incidence and Elasticity Skill: Conceptual Status: Old AACSB: Reflective Thinking

19) If the elasticities of demand for alcohol, tobacco and gasoline are low and the elasticities of supply are high, then the burden of these taxes (excise taxes) falls more heavily on buyers than on sellers. Answer: TRUE Topic: Tax Incidence and Elasticity Skill: Conceptual Status: Old AACSB: Reflective Thinking

20) Because a subsidy raises marginal benefit, it can be used to eliminate the deadweight loss from overproduction. Answer: FALSE Topic: Subsidies Skill: Analytical Status: Old AACSB: Reflective Thinking

21) A production quota on tobacco lowers the price of tobacco and the marginal cost of producing it. Answer: FALSE Topic: Production Quotas Skill: Conceptual Status: Old AACSB: Reflective Thinking

22) The black market price for a legally prohibited good will be the same whether a $1,000 fine is placed on the buyer or the seller. Answer: FALSE Topic: Markets For Illegal Goods Skill: Analytical Status: Old AACSB: Reflective Thinking

10 Extended Problems

Rent (dollars per month) 500 600 700 800 900 1,000 1,100

Quantity Quantity supplied demanded (units per month) (units per month) 1,200 0 1,000 100 800 200 600 300 400 400 200 500 0 600

1) The table above shows the demand for and supply of rental housing in Crainsboro. The city government is considering imposing a rent ceiling of $700 a month. Help the government to analyze the effects of the proposed rent ceiling. a) Draw the demand and supply curves. With no rent ceiling, what is the rent and how many apartments are rented? b) With the rent ceiling, what is the rent and how many apartments are rented? What is the shortage of housing? Explain. c) If the rent ceiling is strictly enforced, what is the maximum price that someone is willing to pay for the last unit of housing available? Is the housing market efficient? Explain. d) If a black market develops, how high could the black market rent be? Explain your answer. Answer:

a) The figure above shows the housing market. With no rent ceiling, the equilibrium rent is $900 per month and 400 units are rented. b) Because the rent ceiling is below the equilibrium rent, the rent equals the rent ceiling, $700. At this rent, landlords are willing to supply only 200 apartment units while consumers want to rent 800. So the quantity of housing rented is 200 units per month and there is a shortage of 600 units. 146 Copyright © 2014 Pearson Education, Inc.

c) The demand curve shows consumers' willingness to pay. The maximum price that someone is willing to pay for the last unit of housing available is $1,000. The housing market is not efficient. With 200 apartments rented, the marginal benefit of the last apartment ($1,000) exceeds the marginal cost ($700), so there is a deadweight loss. d) The black market rent could be as high as $1,000. With strict enforcement of the rent ceiling, the black market rent is close to the maximum price that renters are willing to pay. Topic: Rent Ceiling Skill: Analytical Status: Old AACSB: Analytical Skills

Wage rate (dollars per hour) 3 4 5 6 7

Quantity Quantity supplied demanded (hours per month) (hours per month) 800 400 700 500 600 600 500 700 400 800

2) The table above shows the demand for and supply of labor in a small less developed country. a) Draw the demand and supply curves. What are the equilibrium wage and the level of employment? b) Currently, the minimum wage is set at $4.50 per hour. How many hours are worked? How many hours of labor are unemployed? c) If the minimum wage is raised to $6 per hour, what are employment and unemployment? Answer:

a) The figure above shows the labor market. The equilibrium wage rate is $5 and the equilibrium level of employment is 600 hours a month. b) The minimum wage of $4.50 an hour is below the equilibrium wage rate, so the actual wage is the equilibrium wage, at which 600 hours of labor are employed and no one is unemployed. c) The minimum wage of $6 an hour is above the equilibrium wage rate, so the actual wage is the minimum wage, at which 500 hours of labor per month are employed. At this wage rate, the quantity of labor supplied (700 hours) is greater than the quantity demanded (500 hours), so the surplus of labor, or unemployment, is 200 hours. Topic: Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

Price (dollars per pound) 1 2 3 4 5

Quantity demanded (pounds per day) 480 360 240 120 0

Quantity supplied (pounds per day) 0 0 240 480 720

3) The table above shows the demand and supply schedules for the market for coffee in Roastville. A tax on coffee of 75 cents per pound is proposed and the local government asks you to examine the effects of the tax. a) Draw the demand and supply curves. If there is no tax on coffee, what is the price and how many pounds are sold? b) With the tax, what is the price that consumers pay? What is the price that sellers receive? How many pounds of coffee are sold? c) What is the government's total tax revenue? How much of the 75¢ per pound tax is paid by buyers? How much is paid by sellers? d) If there are no external costs and benefits, what is the efficient level of coffee production? e) If the tax is imposed, will the level of production be efficient? Why or why not? Answer:

a) The figure is above. With no tax, the equilibrium price is $3 and 240 pounds of coffee per day are sold. b) The tax shifts the supply curve upward by $0.75. The new equilibrium price that consumers pay is $3.50. Sellers receive the price that consumers pay minus the tax, or $3.50 - $0.75 = $2.75. With the tax, 180 pounds of coffee per day are sold.

c) The government's tax revenue is the tax per pound, 75¢, multiplied by the number of pounds sold, 180. So the government's total tax revenue is 75¢ × 180, which is $135 per day. With the tax, the price that buyers pay is 50¢ higher than with no tax, so the buyers pay 50¢ of the tax. Sellers pay the rest of the tax, 25¢. d) The efficient level of production is 240 pounds of coffee per day. At this level, the marginal social benefit ($3.00) equals the marginal social cost. e) If the tax is imposed, the level of production is not efficient. The marginal benefit from the last pound of coffee ($3.50) is greater than the marginal cost ($2.75). The underproduction is 60 pounds of coffee per day. Topic: Taxes Skill: Analytical Status: Old AACSB: Analytical Skills

Quantity demanded Quantity supplied Price (millions of gallons per (millions of gallons per (dollars per gallon) year) year) 1 320 0 2 240 0 3 160 80 4 80 160 5 0 240 4) The table above shows the demand and supply schedules for milk in Cowland. A subsidy on milk of $1 per gallon is proposed and the government asks you to examine the effects of the subsidy. a) Draw the demand and supply curves. If there is no subsidy, what is the price of milk and how many gallons are sold? b) With the subsidy, what is the price that consumers pay? What is the price that sellers receive? How many gallons of milk are sold? c) Assuming no external costs and benefits, what is the efficient level of milk production? Explain. d) With the subsidy, what is the marginal social benefit from milk? What is the marginal social cost of milk? If the subsidy is introduced, will the level of production be efficient? Why or why not? Answer:

a) The figure above shows that with no subsidy, the equilibrium price is $3.50 and 120 million gallons of milk per year are sold. b) The subsidy increases the supply and shifts the supply curve downward by $1. The new equilibrium price paid by consumers is $3.00. Sellers receive the price that consumers pay plus the subsidy, or $3 + $1 = $4. With the subsidy, 160 million gallons of milk per year are sold. c) The efficient level of production is 120 million gallons per year. At this level, the marginal social benefit, $3.50, equals the marginal social cost.

d) With the subsidy, 160 million gallons per year are produced. At this level of output, the marginal social benefit of the last gallon of milk is $3.00 while the marginal social cost of this gallon is $4.00, so the level of output is not efficient. The overproduction is 40 million gallons of milk and a deadweight loss arises. Topic: Subsidies Skill: Analytical Status: Old AACSB: Analytical Skills

Economics, 11e, Global Edition (Parkin) Chapter 7 Global Markets in Action 1 How Global Markets Work 1) Which of the following is correct? A) Both imports and exports include goods and services. B) Imports includes both goods and services but exports includes only goods. C) Imports includes only goods but exports includes both goods and services. D) Both exports and imports include goods and neither includes services. Answer: A Topic: International Trade Today Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

2) International trade arises from A) absolute advantage. B) comparative advantage. C) importation duties. D) the advantage of execution. Answer: B Topic: Comparative Advantage Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

3) The fundamental force that drives international trade is A) absolute advantage. B) importation duties and tariffs. C) export licenses. D) comparative advantage. Answer: D Topic: Comparative Advantage Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

4) Comparative advantage implies that a country will A) import those goods in which the country has a comparative advantage. B) export those goods in which the country has a comparative advantage. C) find it difficult to conclude free trade agreements with other nations. D) export goods produced by domestic industries with low wages relative to its trading partners. Answer: B Topic: Comparative Advantage Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

5) The United States has a comparative advantage in producing airplanes if A) it can produce them at a lower opportunity cost than can other nations. B) it can produce them at a lower dollar cost than can other nations. C) it can produce a larger quantity than can other nations. D) it has a larger quantity of skilled workers than do other nations. Answer: A Topic: Comparative Advantage Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

6) Prior to international trade, the price of good X is lower in country A than in country B. This means that we know that A) country B has an absolute advantage in the production of product X. B) country B has a comparative advantage in the production of product X. C) country A has an absolute advantage in the production of product X. D) country A has a comparative advantage in the production of product X. Answer: D Topic: Comparative Advantage Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

7) When the principle of comparative advantage is used to guide trade, then a country specializes in producing only A) goods with the highest opportunity cost. B) goods with the lowest opportunity costs. C) goods for which production takes fewer worker-hour than another country. D) goods for which production costs are more than average total costs. Answer: B Topic: Comparative Advantage Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

8) With international trade, a country will export tires. Prior to international trade, the quantity of tires produced in the country ________ the quantity of tires consumed in the country. A) must be more than B) must be less than C) might be more than, less than, or equal to D) must equal Answer: D Topic: Comparative Advantage Skill: Conceptual Status: New 10th edition AACSB: Reflective Thinking

9) Which of the following statements about U.S. international trade in 2011 is correct? A) The value of U.S. exports exceeded the value of U.S. imports. B) The value of U.S. exports was about 33 percent of the value of total U.S. production. C) The United States imported only goods. D) The United States was the world's largest trader. Answer: D Topic: Study Guide Question, International Trade Today Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

10) The United States has a comparative advantage in producing cotton if the U.S. price of cotton before international trade is ________ the world price A) less than B) equal to C) greater than D) not comparable to Answer: A Topic: Study Guide Question, Comparative Advantage Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

11) Compared to the situation before international trade, after the United States exports a good production in the United States ________ and consumption in the United States ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: B Topic: Study Guide Question, Comparative Advantage Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Analytical Skills

12) Compared to the situation before international trade, after the United States imports a good production in the United States ________ and consumption in the United States ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: C Topic: Study Guide Question, Comparative Advantage Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Analytical Skills

2 Winners, Losers, and the Net Gain from Trade 1) The gains from trade that are possible when two countries have different opportunity costs for wheat and coffee are realized when A) trade occurs and resources are reallocated within the two countries. B) the two countries continue to produce the same quantities of wheat and coffee. C) each country has an absolute advantage in one of the two commodities. D) the demand curves in both countries shift inward. Answer: A Topic: Gains from Trade, Changes in Production Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Communication

2) The United States has a comparative advantage and specialize in the production of airplanes. Compared to the situation with no trade, which of the following will occur? A) More airplanes will be produced in the United States. B) There will be no change in the price of airplanes in the United States. C) The world price of airplanes will increase. D) The quantity of airplanes demanded in the United States will increase. Answer: A Topic: Gains from Trade, Changes in Production Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

3) A country specializes in the production of goods for which it has a comparative advantage, so A) some producers and consumers win, some lose, but overall the gains exceed the losses. B) all producers win. C) all consumers win. D) producers win, consumers lose, but overall the gains exceed the losses. Answer: A Topic: Gains from Trade Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Analytical Skills

4) Suppose sugar is exported from a nation. In the sugar market who does NOT benefit from the exports? A) domestic consumers B) domestic producers C) workers in the industry D) foreign consumers Answer: A Topic: Gains from Trade Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

5) Who benefits from imports? A) domestic consumers B) domestic producers C) foreign consumers D) Both answers A and B are correct. Answer: A Topic: Gains from Trade, Imports Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Analytical Skills

6) A country opens up to trade and becomes an importer of a sugar. In the sugar market, consumer surplus will ________, producer surplus will ________, and total surplus will ________. A) increase; decrease; increase B) increase; decrease; decrease C) decrease; decrease; decrease D) decrease ; increase; increase Answer: A Topic: Gains from Trade, Imports Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

7) Consider a market that is initially in equilibrium with quantity demanded equal to quantity supplied at a price of $20. If the world price of the good is $10 and the country opens up to international trade then in this market then A) imports will increase, price will fall, and quantity supplied will fall B) exports will increase, price will be unchanged, and quantity supplied will increase C) imports will increase, price will decrease, and the supply curve will shift to the left D) quantity demanded will decrease, quantity supplied will decrease, and price will decrease Answer: A Topic: Gains from Trade, Imports Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Analytical Skills

8) A country opens up to trade and imports clothing. In the clothing market, surplus has been redistributed from A) producers to consumers B) consumers to producers C) government to consumers D) producers to government Answer: A Topic: Gains from Trade, Imports Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

9) Based on the table below, at what world price would the country import the good? Price 2 4 6 8 10 12

Q Demanded 100 95 90 85 80 75

Q Supplied 70 75 80 85 90 95

A) a price below $8 B) at exactly $8 C) a price above $8 D) It is impossible to say. Answer: A Topic: Imports Skill: Analytical Status: Previous edition, Chapter 7 AACSB: Analytical Skills

10) Suppose the world price of a good is $4. Based on the table below, the country would Price 2 4 6 8 10 12

Q Demanded 100 95 90 85 80 75

Q Supplied 70 75 80 85 90 95

A) import 20 units. B) export 20 units. C) import 10 units. D) export 10 units. Answer: A Topic: Imports Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

11) In a market open to international trade, at the world price the quantity demanded is 150 and quantity supplied is 200. This country will A) export 50 units. B) import 50 units. C) export 200 units. D) import 150 units. Answer: A Topic: Gains from Trade, Exports Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Analytical Skills

12) A country opens up to trade and becomes an exporter of wheat. In the wheat market, consumer surplus will ________, producer surplus will ________, and total surplus will ________. A) decrease; increase; increase B) increase; decrease; increase C) decrease; increase; decrease D) remain unchanged; increase; increase Answer: A Topic: Gains from Trade, Exports Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

13) A country opens up to trade and exports computer chips. In the computer chip market, surplus has been redistributed from A) consumers to producers. B) producers to consumers. C) producers to government. D) government to consumers. Answer: A Topic: Gains from Trade, Exports Skill: Conceptual Status: Modified 10th edition AACSB: Communication

14) Based on the table below, at what world price would the country export the good? Price 2 4 6 8 10 12

Q Demanded 100 95 90 85 80 75

Q Supplied 70 75 80 85 90 95

A) a price above $8 B) at only $8 C) a price below $8 D) It is impossible to say. Answer: A Topic: Exports Skill: Analytical Status: Previous edition, Chapter 7 AACSB: Analytical Skills

The figure shows the market for shirts in the United States, where D is the domestic demand curve and S is the domestic supply curve. The world price is $20 per shirt. 15) In the figure above, with international trade American consumers buy ________ million shirts per year. A) 48 B) 32 C) 16 D) 24 Answer: A Topic: Gains from Trade Skill: Analytical Status: Previous edition, Chapter 7 AACSB: Analytical Skills

16) In the figure above, with international trade ________ million shirts per year are produced in the United States. A) 48 B) 32 C) 16 D) 20 Answer: C Topic: Gains from Trade Skill: Analytical Status: Previous edition, Chapter 7 AACSB: Analytical Skills

17) In the figure above, with international trade the United States ________ million shirts per year. A) imports 32 B) imports 48 C) exports 16 D) exports 32 Answer: A Topic: Imports Skill: Analytical Status: Previous edition, Chapter 7 AACSB: Analytical Skills

18) In the figure above, international trade ________ consumer surplus in the United States by ________. A) increases; $320 million B) decreases; $192 million C) increases; $192 million D) decreases; $320 million Answer: A Topic: Gains from Trade Skill: Analytical Status: Previous edition, Chapter 7 AACSB: Analytical Skills

19) In the figure above, international trade ________ producer surplus in the United States by ________ . A) increases; $320 million B) decreases; $192 million C) increases; $192 million D) decreases; $320 million Answer: B Topic: Gains from Trade Skill: Analytical Status: Previous edition, Chapter 7 AACSB: Analytical Skills

20) In the figure above, international trade ________ total surplus in the United States by ________. A) increases; $128 million B) decreases; $192 million C) increases; $320 million D) decreases; $256 million Answer: A Topic: Gains from Trade Skill: Analytical Status: Previous edition, Chapter 7 AACSB: Analytical Skills

The figure shows the market for helicopters in the United States, where D is the domestic demand curve and S is the domestic supply curve. The United States trades helicopters with the rest of the world at a price of $36 million per helicopter. 21) In the figure above, with international trade U.S. companies buy ________ helicopters per year. A) 240 B) 480 C) 720 D) 360 Answer: A Topic: Gains from Trade Skill: Analytical Status: Previous edition, Chapter 7 AACSB: Analytical Skills

22) In the figure above, with international trade ________ helicopters per year are produced in the United States. A) 360 B) 480 C) 720 D) 240 Answer: C Topic: Gains from Trade Skill: Analytical Status: Previous edition, Chapter 7 AACSB: Analytical Skills

23) In the figure above, the United States ________ helicopters per year. A) exports 480 B) exports 720 C) imports 480 D) imports 240 Answer: A Topic: Exports Skill: Analytical Status: Previous edition, Chapter 7 AACSB: Analytical Skills

24) In the figure above, international trade ________ consumer surplus in the United States by ________. A) decreases; $2.88 billion B) decreases; $1.92 billion C) increases; $2.88 billion D) increases; $4.8 billion Answer: A Topic: Gains from Trade Skill: Analytical Status: Previous edition, Chapter 7 AACSB: Analytical Skills

25) In the figure above, international trade ________ producer surplus in the United States by ________. A) decreases; $2.88 billion B) decreases; $1.92 billion C) increases; $4.8 billion D) increases; $3.6 billion Answer: C Topic: Gains from Trade Skill: Analytical Status: Previous edition, Chapter 7 AACSB: Analytical Skills

26) In the figure above, international trade ________ total surplus in the United States by ________. A) increases; $1.92 billion B) decreases; $2.56 billion C) increases; $4.8 billion D) decreases; $3.6 billion Answer: A Topic: Gains from Trade Skill: Analytical Status: Previous edition, Chapter 7 AACSB: Analytical Skills

27) U.S. producer surplus ________ when the United States imports a good and U.S. producer surplus ________ when the United States exports a good. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: C Topic: Study Guide Question, Gains From Trade Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Analytical Skills

28) When the United States exports a good, U.S. consumer surplus ________ and U.S. total surplus ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: C Topic: Study Guide Question, Gains From Trade Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Analytical Skills

29) When the United States exports a good, the amount of the ________ in U.S. consumer surplus is ________ the amount of the ________ in U.S. producer surplus. A) increase; smaller than; increase B) increase; larger than; decrease C) decrease; smaller than; increase D) decrease; equal to; decrease Answer: C Topic: Study Guide Question, Gains From Trade Skill: Analytical Status: Previous edition, Chapter 7 AACSB: Analytical Skills

3 International Trade Restrictions 1) A tariff is a A) tax on an exported good or service. B) tax on an imported good or service. C) subsidy on an exported good. D) subsidy on an imported good. Answer: B Topic: Trade Restrictions Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

2) A tariff is a tax that is imposed by the ________ country when an ________ good crosses its international boundary. A) exporting; imported B) importing; exported C) exporting; exported D) importing; imported Answer: D Topic: Trade Restrictions Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

3) A tariff A) is a tax imposed on imported goods. B) is a tax imposed on exported goods. C) encourages worldwide specialization according to the principle of comparative advantage. D) has no effect on prices paid by domestic consumers, even though it increases the revenue collected by domestic producers. Answer: A Topic: Trade Restrictions Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

4) A tariff is A) a licensing regulation that limits imports. B) a quantitative restriction of imports. C) a tax on an imported good. D) an agreement to restrict the volume of exports. Answer: C Topic: Trade Restrictions Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

5) A tax that is imposed by the importing country when an imported good crosses its international boundary is called A) an import quota. B) dumping. C) a voluntary export restraint. D) a tariff. Answer: D Topic: Trade Restrictions Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

6) A major purpose of tariffs is to A) encourage imports. B) encourage exports. C) discourage imports. D) discourage exports. Answer: C Topic: Trade Restrictions Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

7) Tariffs and import quotas differ in that A) one is a form of trade restriction, while the other is not. B) one is a tax, while the other is a limit. C) one is imposed by the government, while the other is imposed by the private sector. D) one is legal, while the other is not. Answer: B Topic: Trade Restrictions Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

8) Tariffs and import quotas both result in A) lower levels of domestic production. B) the domestic government gaining revenue. C) lower levels of imports. D) higher levels of domestic consumption. Answer: C Topic: Trade Restrictions Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Analytical Skills

9) If the United States imposes a tariff on imported cars, the A) U.S. demand curve shifts rightward. B) U.S. demand curve shifts leftward. C) U.S. supply curve shifts rightward. D) the price in the United States rises but neither the U.S. demand curve nor the U.S. supply curve shift. Answer: D Topic: Effects of a Tariff Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Analytical Skills

10) Which of the following statements concerning tariffs is NOT true? A) A tariff results in a deadweight loss. B) A tariff creates revenue for the government. C) A tariff decreases international trade. D) A tariff leaves the price of imports unchanged. Answer: D Topic: Effects of a Tariff Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Communication

11) If a country imposes a tariff on an imported good, the tariff ________ the price in the importing country and ________ the quantity of imports. A) raises; decreases B) raises; increases C) raises; does not change D) lowers; does not change Answer: A Topic: Effects of a Tariff Skill: Analytical Status: Previous edition, Chapter 7 AACSB: Analytical Skills

12) A tariff on imported peanuts ________ the quantity of peanuts imported and ________ the domestic price of peanuts. A) decreases; decreases B) decreases; increases C) increases; lowers D) does not change; increases Answer: B Topic: Effects of a Tariff Skill: Recognition Status: Modified 10th edition AACSB: Analytical Skills

13) A tariff imposed by the United States on Japanese cars ________ the price of cars in the United States and ________ the quantity of Japanese cars imported into the United States. A) raises; increases B) raises; decreases C) lowers; increases D) lowers; decreases Answer: B Topic: Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Analytical Skills

14) If the United States imposes a tariff on $1 per imported shirt, the tariff will A) raise the price of a shirt to U.S. consumers. B) benefit U.S. shirt producers. C) decrease imports of shirts into the United States. D) all of the above Answer: D Topic: Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Communication

15) If the United States imposes a tariff on imported steel, the tariff will A) raise the U.S. price of imported steel. B) decrease the U.S. production of steel. C) increase the total U.S. consumption of steel. D) decrease employment in the U.S. steel industry. Answer: A Topic: Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Analytical Skills

16) Suppose the country of Mooland imposes a tariff on imported beef from the country of Aqualand. As a result of the tariff, the A) price of beef in Mooland falls. B) quantity of beef exported by Mooland increases. C) quantity of beef imported by Mooland decreases. D) quantity of beef imported by Mooland increases. Answer: C Topic: Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Analytical Skills

17) Lowering the tariff on imported ethanol A) increases domestic employment in the ethanol industry. B) increases the imports of ethanol. C) increases the domestic price of ethanol. D) has no effect unless the nation's trading partner also lowers its tariff on ethanol. Answer: B Topic: Effects of a Tariff Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

18) Reducing a tariff will ________ the domestic production of the good and ________ the total domestic consumption of the good. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: C Topic: Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Analytical Skills

19) Increasing a tariff will ________ the domestic quantity consumed of the good, while ________ the domestic production of the good. A) increase; increasing B) increase; decreasing C) decrease; increasing D) decrease; decreasing Answer: C Topic: Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Analytical Skills

20) A U.S. tariff on textiles would ________ U.S. clothing prices and ________ jobs in the U.S. textile industry. A) reduce; decrease B) reduce; increase C) raise; decrease D) raise; increase Answer: D Topic: Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Analytical Skills

21) Tariffs A) generate revenue for consumers. B) generate revenue for the government. C) encourage domestic consumers to buy more imports. D) encourage domestic producers to produce less. Answer: B Topic: Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

22) The United States imports cars from Japan. If the United States imposes a tariff on cars imported from Japan, A) U.S. consumers lose and Japanese producers gain. B) U.S. tariff revenue equals the loss of U.S. consumer surplus. C) U.S. consumers lose and U.S. producers gain. D) U.S. car manufacturers gain revenue equal to the revenue lost by Japanese car manufacturers. Answer: C Topic: Effects of a Tariff Skill: Analytical Status: Previous edition, Chapter 7 AACSB: Analytical Skills

23) A U.S. tariff imposed on items that can be produced more cheaply abroad A) benefits Americans by making these goods cheaper. B) makes the goods more expensive in foreign markets. C) creates a deadweight loss. D) makes the world market more efficient. Answer: C Topic: Effects of a Tariff Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

24) Japan imposes a tariff on imported rice. In Japan, surplus will be redistributed from A) consumers to producers and government. B) consumers to producers. C) consumers to government. D) government to producers. Answer: A Topic: Effects of a Tariff Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

25) The winners from a Japanese tariff on imported cars are I. Japanese car producers. II. Japanese car consumers. III. the Japanese government. A) only I and III B) only I C) only II D) I, II, and III Answer: A Topic: Effects of a Tariff Skill: Conceptual Status: Modified 10th edition AACSB: Ethical Reasoning

26) A tariff is imposed on a good. The tariff will ________ the domestic quantity supplied, ________ the domestic quantity demanded, and ________ price in the home country. A) increase; decrease; increase B) increase; remain unchanged; remain unchanged C) increase; increase; increase D) increase; decrease; decrease Answer: A Topic: Effects of a Tariff Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

27) A tariff is imposed on a good. This will ________ the domestic producer surplus, ________ the domestic consumer surplus, and ________ total surplus in the home country. A) increase; decrease; decrease B) increase; decrease; increase C) increase; remain unchanged; increase D) increase; increase; increase Answer: A Topic: Effects of a Tariff Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

28) Consider a market in which there is an import tariff. Which of the following is true? A) The lost consumer surplus equals the gain in producer surplus plus the government revenue plus the deadweight loss. B) The lost consumer surplus equals the gain in producer surplus. C) The lost consumer surplus equals the gain in producer surplus plus the government revenue. D) The lost consumer surplus plus the deadweight loss equal the gain in producer surplus plus the government revenue. Answer: A Topic: Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

The figure shows the market for shirts in the United States, where D is the U.S demand curve and S is the U.S. supply curve. The world price is $20 per shirt. The United States imposes a tariff on imported shirts, $4 per shirt. 29) In the figure above, with the tariff American consumers ________ million shirts per year. A) 40 B) 48 C) 32 D) 16 Answer: A Topic: Effects of a Tariff Skill: Analytical Status: Previous edition, Chapter 7 AACSB: Analytical Skills

30) In the figure above, with the tariff the United States imports ________ million shirts per year. A) 24 B) 8 C) 32 D) 16 Answer: D Topic: Effects of a Tariff Skill: Analytical Status: Previous edition, Chapter 7 AACSB: Analytical Skills

31) In the figure above, the tariff ________ U.S. imports of shirts by ________ million shirts per year. A) decreases; 16 B) decreases; 8 C) increases; 8 D) increases; 4 Answer: A Topic: Effects of a Tariff Skill: Analytical Status: Previous edition, Chapter 7 AACSB: Analytical Skills

32) In the figure above, the tariff ________ the domestic production of shirts in the United States by ________ per year. A) increases; 8 million B) decreases; 16 million C) increases; 4 million D) decreases; 8 million Answer: A Topic: Effects of a Tariff Skill: Analytical Status: Previous edition, Chapter 7 AACSB: Analytical Skills

33) In the figure above, the U.S. government's revenue from the tariff is ________. A) $64 million B) $32 million C) $128 million D) $48 million Answer: A Topic: Effects of a Tariff Skill: Analytical Status: Previous edition, Chapter 7 AACSB: Analytical Skills

34) In the figure above, U.S. consumers' ________ from the tariff is ________. A) loss; $176 million B) gain; $64 million C) loss; $80 million D) gain; $128 million Answer: A Topic: Effects of a Tariff Skill: Analytical Status: Previous edition, Chapter 7 AACSB: Analytical Skills

35) In the figure above, U.S. producers' ________ from the tariff is ________. A) loss; $32 million B) loss; $64 million C) gain; $80 million D) gain; $128 million Answer: C Topic: Effects of a Tariff Skill: Analytical Status: Previous edition, Chapter 7 AACSB: Analytical Skills

36) In the figure above, the deadweight loss from the tariff is ________. A) $32 million B) $80 million C) $16 million D) zero Answer: A Topic: Effects of a Tariff Skill: Analytical Status: Previous edition, Chapter 7 AACSB: Analytical Skills

37) During the Great Depression in the 1930s, the average tariff level in the United States peaked at about A) zero. B) 6 percent. C) 20 percent. D) 100 percent. Answer: C Topic: History of Tariffs Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

38) Average tariff levels in the United States in the last decade are A) about equal to the average since 1930. B) above the average since 1930. C) positive, but below the average since 1930. D) zero, as there are no longer any tariffs in the United States. Answer: C Topic: History of Tariffs Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

39) The Smoot-Hawley Act was enacted in A) 1980. B) 2000. C) 1930. D) 2010. Answer: C Topic: Smoot-Hawley Act Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

40) The Smoot-Hawley Act introduced A) opportunities for expanding U.S. foreign trade. B) the highest tariffs set by the United States in the last 80 years. C) a framework promoting international free trade. D) revenue tariffs as a major source of U.S. government revenues. Answer: B Topic: The History of Tariffs Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

41) The average tariff rate imposed by the United States on imported goods A) has generally increased over the past 60 years. B) has generally decreased over the past 60 years. C) peaked in 1990. D) peaked in 1980. Answer: B Topic: The History of Tariffs Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

42) The current U.S. average tariff rate is A) less than 5 percent. B) greater than 10 percent. C) approximately 20 percent. D) over 50 percent. Answer: A Topic: The History of Tariffs Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

43) An import quota is A) a tariff that is a fixed percentage of the price of a good. B) a tariff that is a fixed dollar amount per unit of a good. C) an agreed upon price for a good to be imported at a specified future date. D) a restriction that specifies the maximum amount of a good that may be imported. Answer: D Topic: Import Quota Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

44) Import quotas A) are the same as tariffs. B) set the maximum quantity of a good that can be imported. C) are not used by the United States. D) set the minimum percentage of the value of a product that must consist of imported components. Answer: B Topic: Import Quota Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

45) An import quota is a A) tariff imposed on goods that are dumped in the country. B) law that prevents ecologically damaging goods from being imported into a country. C) market-imposed balancing factor that keeps prices of imports and exports in equilibrium. D) government-imposed restriction on the quantity of a specific good that can be imported. Answer: D Topic: Import Quota Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

46) An import quota specifies the A) price that can be charged for any imported good. B) amount of taxes that must be paid on any imported good. C) maximum amount of a good that may be imported during a specified period. D) minimum amount of a good that may be imported during a specified period. Answer: C Topic: Import Quota Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

47) An import quota protects domestic producers by A) setting a limit on the amount of imports. B) placing a prohibitive tax on imports. C) encouraging competition among domestic producers. D) increasing the total supply of the product. Answer: A Topic: Import Quota Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

48) An import quota on sugar A) increases the imports of sugar and lowers its price. B) increases the imports of sugar and raises its price. C) increases the demand for sugar and raises its price. D) decreases the imports of sugar and raises its price. Answer: D Topic: Effects of an Import Quota Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

49) An import quota restricts ________ and is designed to protect domestic ________. A) exports; consumers B) exports; producers C) imports; consumers D) imports; producers Answer: D Topic: Effects of an Import Quota Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Analytical Skills

50) Import quotas ________ the price of imported goods and ________ the quantity consumed in the nation imposing the quota. A) raise; increase B) raise; decrease C) lower; increase D) lower; decrease Answer: B Topic: Effects of an Import Quota Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Analytical Skills

51) If a government imposes a quota on imports of a popular doll, the price of the doll in the country will ________ and the quantity purchased in the country will ________. A) rise; increase B) rise; decrease C) fall; increase D) fall; decrease Answer: B Topic: Effects of an Import Quota Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Analytical Skills

52) A key difference between tariffs and quotas is that A) consumers are hurt with quotas but not with tariffs. B) consumers are hurt with tariffs but not with quotas. C) the government receives revenue with tariffs, but the importer receives added profit with quotas. D) the government receives revenue with quotas, but the importer receives added profit with tariffs. Answer: C Topic: Tariffs and Import Quotas Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

53) A difference between a quota and a tariff is that A) a tariff generates a higher price than does a quota. B) a tariff generates a greater reduction in exports than does a quota. C) a quota increases profits of domestic producers more than does a tariff. D) the government collects revenue from a tariff but does not collect revenue from a quota. Answer: D Topic: Tariffs and Import Quotas Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

54) Quotas and tariffs both A) decrease deadweight loss. B) restrict foreign trade. C) cause a loss of revenue to domestic producers. D) lower prices on imported goods. Answer: B Topic: Tariffs and Import Quotas Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

55) Voluntary export restraints (VERs) A) do not protect domestic producers. B) raise revenue for the governments involved. C) raise the prices paid by domestic consumers. D) Both answers B and C are correct. Answer: C Topic: Voluntary Export Restraints Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

56) A tariff is A) a government imposed limit on the amount of a good that can be exported from a nation. B) a government imposed barrier that sets a fixed limit on the amount of a good that can be imported into a nation. C) a tax on a good imported into a nation. D) an agreement between governments to limit exports from a nation. Answer: C Topic: Study Guide Question, How Tariffs Work Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

57) When the United States imposes a tariff on a good, the amount of the ________ in U.S. consumer surplus is ________ the amount of the ________ in U.S. producer surplus . A) increase; smaller than; increase B) decrease; larger than; decrease C) decrease; larger than; increase D) decrease; equal to; increase Answer: C Topic: Study Guide Question, How Tariffs Work Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Analytical Skills

58) Who benefits from a tariff on a good? A) Domestic consumers of the good B) Foreign governments C) Domestic producers of the good D) Foreign producers of the good Answer: C Topic: Study Guide Question, How Tariffs Work Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Analytical Skills

59) When the United States imposes an import quota on a good, the amount of the ________ in U.S. consumer surplus is ________ the amount of the ________ in U.S. producer surplus. A) increase; smaller than; increase B) decrease; larger than; decrease C) decrease; larger than; increase D) decrease; equal to; increase Answer: C Topic: Study Guide Question, How Import Quotas Work Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Analytical Skills

60) Who benefits from an import quota on a good? A) Domestic consumers of the good B) Foreign governments C) Domestic producers of the good D) Foreign producers of the good Answer: C Topic: Study Guide Question, How Import Quotas Work Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Analytical Skills

61) Tariffs ________ consumer surplus and import quotas ________ consumer surplus. A) decrease; decrease B) increase; increase C) decrease; increase D) increase; decrease Answer: A Topic: Study Guide Question, Effects of Tariffs and Import Quotas Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Analytical Skills

62) Tariffs ________ the domestic price of the good and import quotas ________ the domestic price of the good. A) lower; lower B) lower; raise C) raise; lower D) raise; raise Answer: D Topic: Study Guide Question, Effects of Tariffs and Import Quotas Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Analytical Skills

63) Tariffs ________ a deadweight loss and import quotas ________ a deadweight loss . A) create; create B) do not create; create C) create; do not create D) do not create; do not create Answer: A Topic: Study Guide Question, Effects of Tariffs and Import Quotas Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Analytical Skills

64) When does the domestic government gain the MOST revenue? A) when it imposes a tariff B) when it imposes an import quota C) when it negotiates a voluntary export restraint D) The amount of revenue it gains is the same with a tariff and a voluntary export restraint. Answer: A Topic: Study Guide Question, How Tariffs Work Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

4 The Case Against Protection 1) Most economists agree that valid reasons for protecting trade include which of the following? I. The economies of scale argument II. The saving jobs argument III. The protection of high wages argument A) I only B) I and II C) I and III D) None of the reasons are valid. Answer: D Topic: The Case Against Protection Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Ethical Reasoning

2) Almost all economists support protectionist policies because protection A) saves jobs. B) prevents rich countries from exploiting poorer countries. C) is a good way for governments in developed nations to raise revenue. D) Economists would not support any of the above reasons. Answer: D Topic: The Case Against Protection Skill: Recognition Status: Modified 10th edition AACSB: Ethical Reasoning

3) Which of the following are reasons economists consider valid for trade protection? I. Protection penalizes countries that have weak environmental standards. II. Protection limits dumping of low-wage jobs into the domestic economy. III. Protection prevents low-wage jobs in foreign countries from lowering wages in the United States. A) I and II B) II and III C) I, II, and III D) none of the above Answer: D Topic: The Case Against Protection Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Ethical Reasoning

4) The most efficient way to encourage the growth of an infant industry is through A) a voluntary export restraint. B) a tariff. C) a subsidy. D) an import quota. Answer: C Topic: The Case Against Protection; Infant Industry Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

5) The infant industry argument is based on the idea of A) learning-by-doing. B) absolute productivity advantage. C) global monopoly. D) countervailing duties. Answer: A Topic: The Case Against Protection; Infant Industry Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

6) Which of the following statements is true? A) The infant-industry argument is valid only if the benefits of learning-by-doing in the infant industry spill over to other parts of the economy. B) A subsidy to an infant industry is a more efficient way to protect it from foreign competition than a tariff on the competing foreign goods. C) Both statements are true. D) Neither of the statements is true. Answer: C Topic: The Case Against Protection; Infant Industry Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

7) An assumption behind the infant-industry argument for tariff protection is that A) foreign competitors are selling output below average cost. B) the domestic industry will be facing an upward adjustment in its average cost. C) the domestic industry will eventually gain a comparative advantage in producing the good. D) the market needs additional competition to satisfy consumer demand. Answer: C Topic: The Case Against Protection; Infant Industry Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

8) Dumping occurs when a foreign firm ________. A) pollutes international waters B) disposes of waste materials in other countries C) sells inferior output to foreigners D) sells its exports at a lower price than its cost of production Answer: D Topic: The Case Against Protection; Dumping Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

9) ________ occurs when a foreign firm sells its exports at a lower price than it costs to produce the goods. A) Dumping B) Comparative advantage C) Learning-by-doing D) A tariff Answer: A Topic: The Case Against Protection; Dumping Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

10) When a foreign firm sells its exports at a lower price than its cost of production, the firm is A) imposing an economies of scale cost. B) dumping. C) avoiding a tariff. D) competing in an infant industry. Answer: B Topic: The Case Against Protection; Dumping Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

11) Which of the following statements is true? A) Dumping is illegal under the rules of the WTO. B) Dumping occurs when a foreign firm sells its exports at a higher price than its cost of production. C) Both statements are true. D) Neither of the statements is true. Answer: A Topic: The Case Against Protection; Dumping Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

12) Suppose that the country of Pacifica sold its cars in Atlantica for less than it costs to produce the cars. Pacifica could be accused of A) avoiding import quotas. B) increasing its gains from trade. C) dumping. D) engaging in learning-by-doing. Answer: C Topic: The Case Against Protection; Dumping Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

13) When a firms "dumps" some of its products in another country, it A) creates an environmental hazard in the receiving country. B) sells its goods abroad at a price lower than it costs to produce the goods. C) increases the total level of employment in the receiving country. D) is specializing according to comparative advantage. Answer: B Topic: The Case Against Protection; Dumping Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

14) Japan was accused of dumping in the steel industry within the United States when it A) negotiated an illegal agreement to raise prices with U.S. steel industries. B) prohibited imports of U.S. steel into Japan. C) sold steel in the United States at a price below its cost of production. D) negotiated an illegal trade deal with Canada. Answer: C Topic: The Case Against Protection; Dumping Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

15) Some observers opposing free trade argue that when we buy shoes from Brazil, U.S. workers lose their jobs. The fact of the matter is that A) no U.S. worker has actually lost a job because of free trade. B) most jobs lost because of free trade pay less than the poverty level. C) free trade creates jobs in export industries. D) the jobs lost are really in Brazil. Answer: C Topic: The Case Against Protection; Saves Jobs Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

16) Using calculations of the cost to Americans per job saved in protected industries, it can be concluded that A) import quotas are an efficient way to redistribute income. B) each job saved is worth more than the cost imposed on consumers per job saved. C) each job saved is worth less than the cost imposed on consumers per job saved. D) tariffs are an efficient way to redistribute income to disadvantaged groups. Answer: C Topic: The Case Against Protection; Saves Jobs Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

17) It is possible for the United States to compete against cheap foreign labor because expensive domestic workers A) pay U.S. taxes. B) receive subsidies. C) are more productive. D) belong to unions. Answer: C Topic: The Case Against Protection; Cheap Foreign Labor Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

18) Which of the following is an effective counter argument to the claim that protectionism saves domestic jobs? A) Protectionism eliminates domestic jobs in export industries. B) Imports create jobs in this country for people selling and servicing imported items. C) The cost of saving domestic jobs through protectionism may be high. D) all of the above Answer: D Topic: The Case Against Protection; Saves Jobs Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

19) The reason that average labor costs are higher in the United States than in Haiti is that A) workers are more productive in the United States. B) U.S. workers have a comparative advantage. C) Haitian workers have a comparative advantage. D) Haitian workers do not have union representation. Answer: A Topic: The Case Against Protection; Cheap Foreign Labor Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

20) Which of the following are TRUE regarding the argument that trade barriers protect U.S. workers from cheap foreign labor? I. Low-wage foreigners are just as productive as U.S. workers. II. U.S. workers have a comparative advantage in low-wage jobs. A) I only B) II only C) I and II D) Neither I nor II is correct. Answer: D Topic: The Case Against Protection; Cheap Foreign Labor Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Communication

21) The activities in which U.S. workers are relatively more productive A) pay higher wages. B) are those in which the United States has a comparative advantage. C) are at risk of disappearing from the United States when NAFTA is completed. D) Both answers A and B are correct. Answer: D Topic: The Case Against Protection; Cheap Foreign Labor Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

22) The argument that protection ________. A) penalizes poor environmental standards is true B) allows us to compete with cheap foreign wages is true C) is necessary for infant industries is true D) saves jobs is flawed Answer: D Topic: The Case Against Protection Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

23) In poorer countries, free trade ________ the demand for labor in these countries and ________ the wages paid in these countries. A) decreases; lowers B) decreases; raises C) increases; lowers D) increases; raises Answer: D Topic: The Case Against Protection, Exploits Poor Countries Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

24) Which of the following statements is true? A) International trade raises wages in developing countries. B) International trade with rich industrial countries forces people in the developing countries to work for lower wages. C) International trade leads to job losses in both import competing industries and exporting industries. D) Unlike other types of international trade, offshoring does not bring any gains from trade. Answer: A Topic: The Case Against Protection, Exploits Poor Countries Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

25) Which of the following is an explanation for the existence of trade restrictions? A) Tariffs generate revenue for the government. B) rent seeking C) inefficient quotas D) Both answers A and B are key explanations. Answer: D Topic: Why Is International Trade Restricted? Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

26) International trade is restricted because A) there is an uneven distribution of benefits and costs of free trade. B) free trade creates an inefficient use of resources. C) free trade leads to higher costs. D) free trade stifles diversity and stability. Answer: A Topic: Why Is International Trade Restricted? Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Ethical Reasoning

27) In developing countries, there is more reliance on ________ as opposed to ________ for government revenue. A) tariffs; tax collection B) quotas; tariffs C) tax collection; tariffs D) tariffs; quotas Answer: A Topic: Tariff Revenues Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

28) Which of the following is a TRUE statement? A) Everyone benefits from free trade. B) Only exporters benefit from trade. C) All producers benefit from trade and but not all consumers benefit. D) Free trade harms domestic producers of goods that face import competition. Answer: D Topic: Rent Seeking Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Ethical Reasoning

29) Suppose that the country of Pacifica imposes a quota on bananas. The reason that the government imposed this trade restriction could be A) that the government of Pacifica needs to increase its revenue. B) lobbying from banana farmers in Pacifica. C) comparative advantage. D) Both answers A and B are correct. Answer: B Topic: Rent Seeking Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Ethical Reasoning

30) Of the groups listed below, which is most likely to lobby for protection? A) workers in importing industries B) workers in exporting industries C) consumers of imported goods D) producers in exporting industries Answer: A Topic: Rent Seeking Skill: Recognition Status: Modified 10th edition AACSB: Ethical Reasoning

31) Rent seeking is one reason why countries choose to A) restrict trade. B) export and import the same goods. C) work for freer trade. D) follow the theory of comparative advantage. Answer: A Topic: Rent Seeking Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

32) When a group lobbies for the prevention of free trade, the most likely reason is A) rent seeking. B) tariff revenue. C) defense against expensive domestic labor. D) preservation of the environment. Answer: A Topic: Rent Seeking Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

33) When considering rent seeking, which of the following is TRUE? A) The anti-free trade group generally will lobby more than the pro-free trade group. B) The pro-free trade group generally will lobby more than the anti-free trade group. C) Usually only the anti-free trade group is concerned about what is best for society at large. D) Only the pro-free trade group is concerned about the government's revenue from tariffs. Answer: A Topic: Rent Seeking Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

34) A tariff will benefit A) domestic producers by maintaining a higher than free-trade price. B) foreign producers by allowing them to sell at a higher price in markets with tariffs. C) consumers who are able to better afford domestically produced goods. D) All of the above answers are correct. Answer: A Topic: Rent Seeking Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

35) A tariff hurts A) the government by decreasing its revenue. B) domestic producers who can't compete with cheaper imports. C) consumers who pay more for the imported good. D) All of the above answers are correct. Answer: C Topic: Rent Seeking Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Ethical Reasoning

36) A reason tariffs and quotas are imposed is that A) their costs are spread among many people and their benefits are concentrated. B) their costs are concentrated and their benefits are spread among many people. C) they create net benefits in the long run. D) they reduce import dependence. Answer: A Topic: Rent Seeking Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Ethical Reasoning

37) One reason that international trade is restricted is that A) the individual gain to parties who benefit from the protection is much larger than the individual loss to parties who lose. B) the government completely pays the losers from international trade for their losses. C) protectionism benefits consumers. D) the government cannot measure the cost of protectionism. Answer: A Topic: Rent Seeking Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Ethical Reasoning

38) Usually the removal of trade barriers affecting a particular good benefits ________ people domestically, each of whom gains a ________. A) a few; little B) a few; lot C) many; little D) many; lot Answer: C Topic: Rent Seeking Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Ethical Reasoning

39) Usually the imposition of trade barriers affecting a particular good benefits ________ people domestically, each of whom gains a ________. A) a few; little B) a few; lot C) many; little D) many; lot Answer: B Topic: Rent Seeking Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Ethical Reasoning

40) The gains from free trade are enjoyed by a ________ number of people and the costs of free trade are imposed by ________ number of people. A) small; large B) large; small C) small; small D) large; large Answer: B Topic: Rent Seeking Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

41) Trade barriers are politically popular because A) they are a way to avoid trade wars and still protect domestic producers. B) people recognize their use as a negotiating tool in international relations. C) their benefits are widespread, while their costs are highly concentrated. D) their benefits are concentrated, while their costs are widespread. Answer: D Topic: Rent Seeking Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Ethical Reasoning

42) Which of the following reasons explains why rich countries persistently restrict textile imports from poor countries? A) The trade restrictions make textile consumers better off. B) The trade restrictions make workers in poor countries better off. C) The trade restrictions benefit an organized visible special interest in rich countries. D) Rich countries have a strong need for the revenue from these trade restrictions. Answer: C Topic: Rent Seeking Skill: Analytical Status: Previous edition, Chapter 7 AACSB: Ethical Reasoning

43) When NAFTA was approved, Congress attempted to soften the losses suffered by some industries by A) creating new jobs to hire workers who lost their jobs because of NAFTA. B) setting aside funds to support and retrain workers who lost their jobs because of NAFTA. C) reducing tariffs. D) imposing quotas. Answer: B Topic: Compensating Losers Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

44) Which of the following is a reason why only limited attempts are made to compensate those who lose from free international trade? A) Free trade advocates consistently lobby to eliminate compensation. B) It would be difficult to determine the extent to which someone's sufferings were because of free trade and not due to reasons under their own control. C) No one loses in the from free trade in the long run. D) None of the above answers are correct. Answer: B Topic: Compensating Losers Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

45) Selling a product in a foreign nation at a price less than its cost of production is called A) infant-industry exploitation. B) absolute advantage. C) dumping. D) net exporting. Answer: C Topic: Study Guide Question, Dumping Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

46) The (false) idea that an industry should be protected because of learning-by-doing until it is large enough to compete successfully in world markets is the ________ argument for protection. A) cheap foreign labor B) infant industry C) dumping D) comparative advantage Answer: B Topic: Study Guide Question, Infant Industry Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

47) When a rich nation buys a product made in a poor nation, in the poor nation the demand for labor ________ and the wage rate ________. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls Answer: A Topic: Study Guide Question, Exploiting Poor Nations Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Analytical Skills

48) Which of the following is a valid reason for protecting an industry? A) The industry is unable to compete with low-wage foreign competitors. B) Protection penalizes lax environmental standards. C) Protection keeps richer nations from exploiting the workers of poorer countries. D) None of the above reasons is a valid reason for protection. Answer: D Topic: Study Guide Question, The Case Against Protection Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Communication

49) Which of the statements about the gains from international trade is correct? A) Everyone gains from international trade. B) Some people gain from international trade and some lose, though overall the gains exceed the losses. C) Some people gain from international trade and some lose; overall the gains exceed the losses. D) Everyone loses from international trade. Answer: B Topic: Study Guide Question, Rent Seeking Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Ethical Reasoning

5 News Based Questions 1) Between August 2007 and July 2008, Brazil exported more than 3.5 billion pounds of coffee to the rest of the world. These exports mean that A) Brazil has comparative advantage in coffee production. B) the rest of the world has comparative advantage in coffee production. C) the rest of the world has absolute advantage in coffee production. D) Brazil has absolute advantage in coffee production. Answer: A Topic: Comparative Advantage Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Communication

2) Between August 2007 and July 2008, Brazil exported more than 3.5 billion pounds of coffee to the rest of the world. This fact means that A) Brazilian coffee workers "gain" from this trade. B) Brazilian producers "lose" from this trade. C) Brazilian consumers "gain" from this trade. D) Brazilian car manufacturers "lose" from this trade. Answer: A Topic: Gains from Trade, Exports Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Communication

3) Between August 2007 and July 2008, Brazil exported more than 3.5 billion pounds of coffee to the rest of the world. Suppose the Brazilian government subsidizes the export of coffee by $0.42 per pound. Which of the following would be an outcome of this subsidy? A) Brazilian producers experience an increase in producer surplus. B) Brazilian consumers experience an increase in consumer surplus. C) Producers from the rest of the world experience a gain in producer surplus. D) Brazilian coffee exports would decrease. Answer: A Topic: Subsidies Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Communication

4) During 2005-2006 Europe imported more than $70 million worth of U.S. long-grain rice. Who gains from this trade? A) European rice consumers gain from trade. B) There is no gain from trade. C) European rice producers gain from trade. D) American rice consumers gain from trade. Answer: A Topic: Gains from Trade, Imports Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Communication

5) During 2005-2006 Europe imported more than $70 million worth of U.S. long-grain rice. In 2006, the European Union threatened to restrict imports of long-grain rice because traces of genetically modified rice were found mixed in to commercial supplies. What would NOT be an effect in the European rice market if U.S. imports were banned? A) There would be an increase in long-grain rice consumption. B) There would be an increase European in rice production. C) The price of long-grain rice would increase. D) The quantity of long-grain rice imports would decrease. Answer: A Topic: Effects of an Import Quota Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Communication 43 Copyright © 2014 Pearson Education, Inc.

6) In 2006, the European Union (EU) threatened to ban imports of long-grain rice because traces of genetically modified rice were found mixed in to commercial supplies. Instead of a ban, suppose the EU placed a tariff on the import of long-grain rice. Which of the following would be an outcome of this tariff? A) The EU would gain tariff revenue. B) Deadweight loss would decrease. C) European rice producers would decrease production. D) The price of long-grain rice in the EU would not change. Answer: A Topic: Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Communication

7) In 2007, European Union (EU) negotiators have offered to cut tariffs for Latin American bananas to avoid "banana wars". What are the effects of a cut in tariffs? A) The quantity of bananas imported into the EU will increase. B) The price of bananas for consumers will increase. C) The quantity of bananas produced in the EU (such as in France and Spain) will increase. D) Europe will start to export bananas. Answer: A Topic: Effects of a Tariff Skill: Conceptual Status: Modified 10th edition AACSB: Communication

8) In 2006, European Union tariff on imported bananas from Latin America was €176 a ton. Suppose 2.5 million tons of bananas were imported in 2006 but then the tariff decreased to €152 a ton in 2007 and as a result, 3 million tons were imported in 2007. What is the change in tariff revenue between 2006 and 2007? A) €1,000,000 B) €440,000,000 C) €445,000,000 D) - €1,000,000 Answer: A Topic: Effects of a Tariff Skill: Analytical Status: Previous edition, Chapter 7 AACSB: Communication

9) In 2006, European Union tariff on imported bananas from Latin America was €176 a ton. Suppose 2.5 million tons of bananas were imported in 2006 but then the tariff decreased to €152 a ton in 2007 and as a result, 3 million tons were imported in 2007. What is the tariff revenue in 2007? A) €445,000,000 B) €528,000,000 C) €440,000,000 D) €375,000,000 Answer: A Topic: Effects of a Tariff Skill: Analytical Status: Previous edition, Chapter 7 AACSB: Communication 44 Copyright © 2014 Pearson Education, Inc.

10) During the first 6 months of 2008, the United States imported more than 1.6 billion pounds of coffee. Suppose the United States is considering placing trade restrictions on the importation of coffee. What would be a potential consequence of such a trade restriction? A) The U.S. price of coffee would increase. B) U.S. consumers would drink more coffee. C) The quantity of coffee imported into the United States would increase. D) U.S. consumer surplus from coffee would increase. Answer: A Topic: Effects of a Tariff Skill: Conceptual Status: Modified 10th edition AACSB: Communication

11) During the first 6 months of 2008, the United States imported from Africa, Asia, and Latin America more than 1.6 billion pounds of coffee and did not export any coffee. Based on this, we know definitively that A) Africa, Asia, and Latin America have comparative advantage in coffee production. B) the United States has absolute advantage in coffee production. C) Africa, Asia, and Latin America have absolute advantage in coffee production. D) the United States has comparative advantage in coffee production. Answer: A Topic: Comparative Advantage Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Communication

12) During the first 6 months of 2008, the United States imported from Africa, Asia, and Latin America more than 1.6 billion pounds of coffee and did not export any coffee. How is the gain from imports distributed between consumers and domestic producers? A) U.S. producer surplus shrinks. B) U.S. consumer surplus increases. C) Total U.S. surplus increases. D) All the above answers are correct. Answer: D Topic: Gains from Trade, Imports Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Communication

13) Currently Belize, a country in Central America, has a small coffee industry but does not export any coffee. Suppose the government of Belize, in order to protect the new coffee industry to enable it to grow into a mature industry that can compete in world markets, places a tariff on the importation of coffee. What is the argument that has been used to support the tariff on coffee? A) the infant-industry argument B) the dumping argument C) protection of Belize coffee workers D) to prevent rich countries from exploiting developing countries Answer: A Topic: The Case Against Protection; Infant Industry Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Communication

14) Belize, a country in Central America, has a small coffee industry. Suppose Belize does not have free trade but it has comparative advantage in coffee production. If Belize allowed international trade, what would be the gains from trade? A) Belize coffee producers would gain from trade. B) Belize coffee consumers would gain from trade. C) Belize would gain tariff revenue from trade. D) All of these answers are gains from trade. Answer: A Topic: Gains from Trade, Exports Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Communication

15) During the first 6 months of 2008, the European Union (EU) initiated an anti-dumping case against China for imports of taper candles. What is dumping? A) when China sells its candles to the EU at a lower price than China's cost of production B) when China does not pay the tariff on the candles C) when China sells its candles to the EU at a lower price than other producers D) when China tries to sell more candles to the EU than is allowed by the import quota Answer: A Topic: The Case Against Protection; Dumping Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Communication

16) The U.S.-Colombia Trade Promotion Agreement was signed on November 22, 2006, in Washington, D.C. This comprehensive trade agreement eliminated tariffs and other barriers to goods and services. Colombia will immediately eliminate tariffs on wheat, barley, peanuts, and many other products in which Columbia does not have a comparative advantage. This policy means that the price of peanuts in Columbia will become A) equal to the free trade price. B) lower than the free trade price. C) higher than the price when a tariff was in place. D) higher than the free trade price. Answer: A Topic: Gains from Trade Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Communication

17) Agriculture Secretary Ed Schafer today announced that Chile's Livestock and Agricultural Service approved the U.S. inspection, control and certification systems for poultry, allowing these products to enter the Chilean market effective immediately. The effect of this change in Chilean policy in the Chilean poultry market is to A) increase Chilean consumer surplus. B) increase Chilean producer surplus. C) decrease Chilean total surplus. D) have no effect in the Chilean poultry market. Answer: A Topic: Gains from Trade, Imports Skill: Conceptual Status: Modified 10th edition AACSB: Communication

18) Agriculture Secretary Ed Schafer today announced that Chile's Livestock and Agricultural Service approved the U.S. inspection, control and certification systems for poultry, allowing these products to enter the Chilean market effective immediately. What is NOT an effect of this change in Chilean policy on the Chilean poultry market? A) Chile's tariff revenue will increase. B) The quantity of poultry consumed in Chile will increase. C) The quantity of Chilean imports will increase. D) The price for poultry in Chile will decrease. Answer: A Topic: Gains from Trade, Imports Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Communication

6 Essay Questions 1) Define comparative advantage and discuss its role in international trade. Answer: Comparative advantage is the factor that drives international trade. A country has a comparative advantage in the production of a good if the country can produce it at a lower opportunity cost than any other country. Because the cost of production of a good is lower in the nation with the comparative advantage in the good, that country will export the good. The country will then gain by buying the goods from other nations that those nations produce at the lowest opportunity cost, that is, those goods in which the other nations have a comparative advantage. Topic: Comparative Advantage Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Communication

2) "When countries specialize in producing the good in which they have a comparative advantage and then trade with each other, only the country with the absolute advantage gains." Is the previous statement correct or incorrect? Briefly explain your answer. Answer: The statement is incorrect. Absolute advantage, which is essentially the ability to produce more of a good than another country, has nothing to do with the gains from trade. All nations gain from free international trade regardless of whether they possess an absolute advantage or not. Topic: Gains from Trade Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Communication

3) Give a brief description of the history of tariffs in the United States. Answer: Today, U.S. tariffs are low compared to their historical levels. The average U.S. tariff was highest in the early 1930s when the Smoot-Hawley tariff was passed. The average tariff at that time was about 20 percent. Since then there has been a general downward trend so that today the average tariff is less than 5 percent. The downward trend was fairly rapid until 1950 and has slowed since then. Topic: History of Tariffs Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Communication

4) How does a tariff affect the domestic price of the import, the domestic consumption, the domestic production, and the quantity imported? Answer: A tariff raises the price of the good. As a result, domestic consumption decreases as domestic consumers decrease the quantity they demand. And, also as a result, domestic production increases as domestic producers increase the quantity they supply. Because domestic consumption decreases and domestic production increases, the quantity imported decreases. Topic: Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Communication

5) How does an import quota affect the domestic price of the import, the domestic consumption, the domestic production, and the quantity imported? Answer: An import quota raises the price of the good because it decreases the amount that can be imported. As a result, domestic consumption decreases as domestic consumers decrease the quantity they demand. And, also as a result, domestic production increases as domestic producers increase the quantity they supply. Topic: Quotas Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Communication

6) Currently, the United States has an import quota on the amount of sugar that is allowed to be imported into the United States. What would happen to the price of sugar in the United States if the import quota was removed? What would happen to U.S. consumption and U.S. production of sugar? Answer: If the import quota is removed, the price of sugar in the United States would fall, U.S. consumption of sugar would increase, and U.S. production of sugar would decrease. Topic: Quotas Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Communication

7) How does a tariff affect the government's revenue? How does an import quota affect the government's revenue? Answer: A tariff is a tax on an imported good. Like all taxes, a tariff increases the government's revenue. However, an import quota is quantitative restriction on the amount of a good that can be imported. As such, an import quota has no effect on the government's revenue. Topic: Quotas Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Communication

8) Discuss reasons why we see trade restrictions. Are any of these reasons valid? Answer: There are several reasons advanced to restrict trade. These include: the infant-industry argument (that the nation should protect a young industry that will reap learning-by-doing gains in productivity and eventually be able to compete successfully in the world market); dumping (the nation should protect an industry from foreign competitors who sell goods below cost); protection saves jobs (the claim that imports cost U.S. jobs); cheap foreign labor (the assertion that tariffs are necessary to compete with cheap foreign labor); lax environmental standards (the claim that protection is needed to compete against nations with weak environmental standards); and, rich nations exploit developing countries (the suggestion that protection prevents developed nations from forcing people in poor nations to work for slave wages). Economists reject all of these claims as valid reasons for protection. Topic: Why Is International Trade Restricted? Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Communication

9) Two arguments used to promote trade barriers are the infant-industry argument, and the dumping argument. Explain each of these arguments and evaluate whether each one has any flaws. Answer: The infant-industry argument is that it is necessary to protect a new industry to enable it to grow into a mature industry that can compete in world markets. The problem with this argument is that if an industry can eventually compete, then its backers should be willing to fund it until that time. In addition, if the industry has benefits that spill over to other industries, then the more efficient government policy is to subsidize the industry rather than protect it from competition. The dumping argument asserts that protection is needed to protect domestic industries from foreign dumping practices designed to eliminate competition. (Dumping is selling a good for a price that is less than its cost of production.) The problems with this argument are two-fold. First, it is extremely difficult to determine if a firm is dumping because determining the cost of production is difficult. Second, even if a firm is dumping, its success in establishing a monopoly is in doubt and its success in maintaining its global (!) monopoly is even more doubtful. Hence dumping to obtain a monopoly is likely a very uncommon practice. Topic: Why Is International Trade Restricted? Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Communication

10) Because wage rates are so low in Africa, why don't Microsoft, Cisco and other major corporations close down their American operations and move to Africa? Answer: Wage rates must be weighed against productivity. It is not just wages that influence where production occurs. Wages divided by the productivity of the workers gives the average cost of production. In Africa, workers have low levels of skill, education, and training so their productivity is much less than in the United States. Therefore the cost of production would be far higher in Africa than in America. So even though U.S. wage rates are high, industries stay here because the cost of production is lower because U.S. productivity is so high. Topic: The Case Against Protection; Cheap Foreign Labor Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Communication

11) Some people assert that protection from foreign competition prevents rich countries from exploiting developing countries. What is this argument in more detail and what is its flaw? Answer: The argument claims that rich nations will exploit poor nations by importing goods from the poor nations and that the workers in the poor nations are paid slave wages to produce these goods. This argument has a truly fatal flaw. Free trade increases the demand for the goods produced by workers in developing countries. Thus in order to produce more of these goods, the firms must hire more workers. Hence the demand for the labor used to produce the goods increases, which means that the wage rates paid the workers in the developing countries rises. Thus rather than exploiting the workers in the poor nations, free international trade is one of their few hopes for better lives! Topic: The Case Against Protection, Exploits Poor Countries Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Communication

12) Explain how governments restrict international trade and who benefits as well as who loses from the restrictions. Answer: Governments use tariffs and nontariff barriers, such as import quotas, to restrict trade. Tariffs and import quotas both boost the domestic price of the protected good. Consumers in that country lose because of the higher price. The domestic suppliers, however, gain from the higher price. Tariffs are source of revenue for the government that imposes it on imported goods, so the domestic government gains from a tariff. An import quotas, on the other hand, do not create revenue for government so the government does not gain from an import quota. Topic: Rent Seeking Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Communication

13) What is "rent seeking?" How does it apply to restricting imports? Answer: Rent seeking is lobbying and other political activity that seeks to capture the gains from trade. When imports are restricted, some people gain from the restrictions. Rent seekers, such as domestic producers of import-competing goods or services, lobby the government to impose import restrictions because restrictions allow the rent seekers to gain revenue and/or profit. Topic: Rent Seeking Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Communication

14) Economics demonstrates that opening up unrestricted free international trade is beneficial to all nations. However, are there any losers from such a policy change? Answer: Yes, there are losers from opening up to free trade. Domestic suppliers of imported goods lose from allowing free trade. Owners of the businesses lose as do workers who had jobs in the importcompeting industries. However, it is important to realize that although there are losers from free trade, there also are substantial gains and the gains exceed the loses so that the nation as a whole is made better off with free trade. Topic: Compensating Losers Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Communication

15) How does the United States attempt to compensate losers from lower trade restrictions? Answer: The U.S. government attempts to compensate workers who lose from lowering U.S. trade restrictions. For instance, the U.S. government set up a fund to support and retrain workers who lost their jobs because of NAFTA. Job losers can also collect unemployment compensation benefits. Topic: Compensating Losers Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Communication

7 Numeric and Graphing Questions

Price (dollars per pound)

Quantity supplied (thousands of pounds per year)

21 18 15 12 9

120 100 80 60 40

Quantity demanded (thousands of pounds per year) 60 100 140 180 220

1) The United States imports cheese from a variety of countries. The table above gives the domestic supply of, and demand for, cheese in the United States. The world price of cheese is $12 per pound, and trade is unrestricted. a) How many pounds of cheese are consumed in the United States? b) How many pounds of cheese are produced in the United States? c) How many pounds of cheese are imported into the United States? If a $3 per pound tariff is imposed, d) How many pounds of cheese are consumed in the United States? e) How many pounds of cheese are produced in the United States? f) How many pounds of cheese are imported into the United States? g) How much will the U.S. government collect in tariff revenue? h) Who benefits from the tariff? Who loses? Answer: a) 180,000 pounds of cheese are consumed. b) 60,000 pounds of cheese are produced. c) 120,000 pounds of cheese are imported. d) 140,000 pounds of cheese are consumed. e) 80,000 pounds of cheese are produced. f) 60,000 pounds of cheese are imported. g) The government collects $3 per pound × 60,000 pounds = $180,000. h) U.S. producers and the U.S. government gain while U.S. consumers and foreign producers lose. Topic: Effects of a Tariff Skill: Analytical Status: Previous edition, Chapter 7 AACSB: Analytical Skills

2) The above figure shows the domestic supply of and domestic demand for an imported good. The world price is $15 per unit. a) At the world price of $15 per unit, what is the domestic consumption and domestic production? b) At the world price of $15 per unit, what is the quantity imported? c) If the government imposes a tariff of $5 per unit, what is the domestic consumption and domestic production? d) With the $5 per unit tariff, what is the quantity imported? e) How much revenue does the government collect with a tariff of $5 per unit? Answer: a) Domestic consumption is 8 million units per year and domestic production is 0. b) The quantity imported is 8 million units per year. c) Domestic consumption is 6 million units per year and domestic production is 2 million units per year. d) The quantity imported is 4 million units per year. e) The government collects $5 per unit imported and 4 million units are imported, so the government's revenue from the tariff is $5 × 4 million = $20 million per year. Topic: Effects of a Tariff Skill: Analytical Status: Previous edition, Chapter 7 AACSB: Analytical Skills

3) Suppose that elimination of tariffs on agricultural products means that 1,000 farm workers lose jobs that pay an average of $20,000 per year. At the same time, because of the importation of relatively cheaper foreign vegetables, 150 million consumers save $2 per year on their grocery bills. a) What is the total income lost by farm workers because of the free trade? b) What is the total dollar amount saved by all consumers combined? c) Which is greater, the lost income or the consumer savings? Do the benefits of free trade out-weigh the costs in this simple example? d) Which group is most likely to become politically involved over the issue of removing the tariffs, the farm workers or the consumers? Why? Answer: a) The total income lost by farm workers is 1,000 × $20,000 = $20,000,000. b) The total saving by all consumers is 150,000,000 × $2 = $300,000,000. c) The consumer savings is much larger than the lost income, so the benefits of free trade outweigh the costs. d) The farm workers are more likely to become involved, because their individual loss is much greater than an individual consumer's gain. Topic: Rent Seeking Skill: Analytical Status: Previous edition, Chapter 7 AACSB: Analytical Skills

8 True or False 1) Over the past 70 years, the United States has reduced its average tariff rate so today it is less than 5 percent. Answer: TRUE Topic: Patterns and Trends in International Trade; Balance of Trade Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

2) As a result of an increase in tariffs, imports decrease and government revenue increases. Answer: TRUE Topic: Trade Restrictions; Effects of a Tariff Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

3) Tariffs and import quotas both decrease the amount of a good consumed and raise the price paid by domestic residents for the good. Answer: TRUE Topic: Trade Restrictions; Effects of a Tariff and a Quota Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

4) Import quotas are less damaging to an economy than are tariffs. Answer: FALSE Topic: Trade Restrictions; Quota Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

5) Dumping occurs when a foreign firm sells its exports at a lower price than it costs to produce them. Answer: TRUE Topic: The Case Against Protection; Dumping Skill: Recognition Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

6) Most economists would agree that "saving jobs" is a valid reason for restricting trade. Answer: FALSE Topic: The Case Against Protection; Saving Jobs Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

7) The infant-industry argument is the only perfectly valid argument for protection. Answer: FALSE Topic: The Case Against Protection; Infant Industry Skill: Conceptual Status: Previous edition, Chapter 7 AACSB: Reflective Thinking

8) Hiring foreign labor and producing in other countries is an example of offshoring. Answer: TRUE Topic: The Case Against Protection Skill: Conceptual Status: New 10th edition AACSB: Reflective Thinking

9) Trade war occurs when, after a tariff is imposed, other countries retaliate with their own tariff. Answer: TRUE Topic: Trade Restrictions Skill: Definition Status: New 10th edition AACSB: Reflective Thinking

10) The Smoot-Hawley tariff triggered a trade war during the Great Depression of the 1930s. Answer: TRUE Topic: Trade Restrictions Skill: Conceptual Status: New 10th edition AACSB: Reflective Thinking

Economics, 11e, Global Edition (Parkin) Chapter 8 Utility and Demand 1 Consumption Choices 1) Suppose Jill's consumption bundle is made up of 2 goods, apples and bottles of juice. If the price of an apple increases, then Jill's budget line would A) not change. B) shift towards the origin on the apples axis only. C) shift towards the origin on both the apples and bottles of juice axes. D) shift away from the origin on the bottles of juice axis only. Answer: B Topic: Budget Line Skill: Analytical Status: New 10th edition AACSB: Analytical Skills

2) A person's consumption possibilities is defined by the budget line because A) it marks the boundary between what is affordable and unaffordable. B) it represents the individual's preference for different combinations of goods. C) it marks the boundary between what can be produced and what is unattainable given the current state of technology and resources. D) all consumers must consume on their budget line. Answer: A Topic: Consumption Possibilities, Budget Line Skill: Conceptual Status: New 10th edition AACSB: Reflective Thinking

3) Tom's consumption possibilities is defined by A) his income and the prices of the goods that he consumes. B) his preferences for consumption of the goods that he consumes. C) the prices of the goods that he consumes only. D) his income only. Answer: A Topic: Consumption Possibilities, Budget Line Skill: Conceptual Status: New 10th edition AACSB: Reflective Thinking

4) Utility is best defined as A) the amount one is willing to pay for a good. B) the price of a good. C) the satisfaction from consuming a good. D) the practical usefulness of a good. Answer: C Topic: Preferences Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

5) Total utility describes A) the benefit gained from all consumption. B) an increase in consumption multiplied by the gain in utility. C) total consumption multiplied by marginal utility. D) total consumption divided by marginal utility. Answer: A Topic: Total Utility Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

6) The total benefit that a person receives from the consumption of goods and services is called A) total utility. B) marginal utility. C) marginal cost. D) opportunity cost. Answer: A Topic: Total Utility Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

7) A measure of all the satisfaction you receive from all the coffee that you consume is your A) marginal utility of coffee. B) marginal utility per dollar spent on coffee. C) total utility from coffee. D) marginal utility per dollar spent on coffee when you are in your consumer equilibrium. Answer: C Topic: Total Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

8) Which of the following statements is true? A) As more of a good is consumed, its total utility increases, unless the good is subject to diminishing marginal utility. B) As more of a good is consumed, its total utility increases, even if the good is subject to diminishing marginal utility. C) No two people have identical utility functions, just as no two people have identical fingerprints. D) Both A and C above. Answer: B Topic: Total Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

9) Which of the following is NOT an assumption of marginal utility theory? A) A consumer derives utility from the goods consumed. B) Each additional unit of consumption yields additional utility. C) Consumers maximize their total utility. D) As more of a good is consumed, the decrease in the marginal utility from the good means that the total utility from the good decreases also. Answer: D Topic: Total Utility Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

10) As Sean's consumption of rice goes up, his A) average utility from consuming rice increases. B) total utility from consuming rice increases. C) marginal utility from consuming rice increases. D) elasticity of utility from consuming rice increases. Answer: B Topic: Total Utility Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

11) As an individual's consumption of a good increases, A) his or her total utility increases. B) his or her marginal utility increases. C) the price of the good increases. D) All of the above answers are correct. Answer: A Topic: Total Utility Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

12) Mark's marginal utility from reading books is the ________ when he reads ________. A) change in his total utility; one additional book B) total utility he gets; one more book C) change in his total utility; more books D) consumer surplus he gets; books Answer: A Topic: Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

13) Marginal utility is the A) total satisfaction that a person gets from the consumption of all of the units of a good consumed. B) change in satisfaction that results from a one-unit increase in the quantity of a good consumed. C) maximum price that a consumer is willing to pay for an additional unit of a good. D) additional cost to a consumer when an additional unit of a good is consumed. Answer: B Topic: Marginal Utility Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

14) ________ is the additional satisfaction a person receives from consuming an extra unit of a good. A) Total utility B) Marginal utility C) Diminishing marginal utility D) Preferences Answer: B Topic: Marginal Utility Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

15) The measure of the benefit you get from consuming the next cup of coffee is your A) marginal utility of coffee. B) total utility from coffee. C) total utility per dollar spent on coffee. D) total utility from coffee when you are at your consumer equilibrium. Answer: A Topic: Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

16) Liz's marginal utility for two different goods is determined by A) her average utility for the two goods. B) how much benefit she gets from another unit of each of those goods. C) summing her total utility from consumption of each good and then dividing by two. D) All of the above answers are correct. Answer: B Topic: Marginal Utility Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

17) The marginal utility from the consumption of a good is equal to the A) total utility divided by the quantity consumed. B) total utility divided by the price. C) change in total utility divided by the change in the quantity consumed. D) change in total utility divided by the change in price. Answer: C Topic: Marginal Utility Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

18) Marginal utility measures the A) total utility from consumption. B) additional utility from an additional unit of consumption. C) average utility from an additional unit of consumption. D) additional cost of an additional unit of consumption. Answer: B Topic: Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

19) Marginal utility is the A) usefulness of a product. B) utility that a person receives from the consumption of goods and services. C) change in utility that results from a one-unit change in the quantity of a good consumed. D) change in utility that results from a one-unit change in the price of a good consumed. Answer: C Topic: Marginal Utility Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

20) The total utility from three skirts is A) three times the marginal utility of the third skirt. B) three times the price of a skirt. C) three skirts divided by total income. D) the sum of the marginal utility of the first skirt plus the marginal utility of the second skirt plus the marginal utility of the third skirt. Answer: D Topic: Total Utility and Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

21) The total utility you get from eating slices of pizza on a given night is the A) marginal utility of the last slice times the total number of slices eaten. B) sum of the differences in marginal utility as you increase the number of slices eaten. C) sum of the marginal utilities of all slices eaten. D) sum of the marginal utilities per dollar spent on all slices eaten. Answer: C Topic: Total Utility and Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

22) Marginal utility theory assumes that when Sally consume less of a good that she was previously consuming more than one unit of, her ________. A) total utility increases B) marginal utility increases C) income increases D) total utility is maximized Answer: B Topic: Total Utility and Marginal Utility Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

23) Marginal utility A) characterizes things of little use. B) is the additional utility derived from the last unit of a good consumed. C) is an implication of the law of demand. D) is always negative when total utility is positive and positive when total utility is negative. Answer: B Topic: Diminishing Marginal Utility Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

24) The principle of diminishing marginal utility says that A) marginal utility is negative as the quantity of the good consumed increases. B) total utility decreases as the quantity of the good consumed increases. C) total utility increases by smaller and smaller amounts as the quantity of the good consumed increases. D) total utility increases by larger and larger amounts as the quantity of the good consumed increases. Answer: C Topic: Diminishing Marginal Utility Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

25) Diminishing marginal utility means that A) Ralph will enjoy his second hamburger less than the first. B) the total utility from one hamburger exceeds the total utility from two hamburgers. C) the price of two hamburgers is twice the price of one. D) beyond a certain point, total utility decreases as income rises. Answer: A Topic: Diminishing Marginal Utility Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

26) Which of the following is consistent with the assumptions of marginal utility theory? A) As Jose consumes more of one good, his marginal utility from consuming more of that good decreases. B) As Jose consumes more of one good, his marginal utility from consuming more of that good increases. C) As Jose consumes more of one good, his marginal utility from consuming more of all goods decreases. D) As Jose consumes more of one good, his marginal utility from consuming more of all good increases. Answer: A Topic: Diminishing Marginal Utility Skill: Recognition Status: New 10th edition AACSB: Reflective Thinking

27) The fact that the fourth plate from the "All You Can Eat Country Buffet" generated more satisfaction than the fifth plate is an example of A) increasing marginal utility. B) diminishing marginal utility. C) diminishing total utility. D) the "paradox of value." Answer: B Topic: Diminishing Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

28) If Pete enjoys his first pancake of the morning much more than his fifth pancake of the morning, he is exhibiting A) utility maximizing behavior. B) diminishing marginal utility. C) irrational behavior. D) diminishing total utility. Answer: B Topic: Diminishing Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

29) According to the principle of diminishing marginal utility, as the quantity of a good or service consumed increases, total utility A) increases. B) decreases. C) is unchanging. D) is zero. Answer: A Topic: Diminishing Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

30) As you consume more and more of any good, you experience ________ utility. A) diminishing marginal B) diminishing total C) negative marginal D) increasing marginal Answer: A Topic: Diminishing Marginal Utility Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

31) The principle of diminishing marginal utility means that as you eat fewer slices of pizza, your total utility from pizza will ________ and your marginal utility from each additional slice of pizza will ________. A) increase; decrease B) decrease; increase C) increase; increase D) decrease; decrease Answer: B Topic: Diminishing Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

32) Liz loves to eat popcorn. Still, the more she eats, the less she wants each additional bite. Her marginal utility from popcorn is A) diminishing. B) negative. C) increasing. D) zero. Answer: A Topic: Diminishing Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

33) "I really enjoy watching movies. The first one is best. After that I still enjoy movies but the last one is not as much fun to watch as the one before it." This statement reflects the A) principle of diminishing total utility. B) principle of diminishing marginal utility. C) principle of increasing marginal utility. D) law of supply. Answer: B Topic: Diminishing Marginal Utility Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

34) The principle of diminishing marginal utility can be used to explain why A) Bob's second soda is less enjoyable than his first soda. B) Bob's first soda is less enjoyable than his second soda. C) Charlie enjoys his fourth soda less than Bob enjoys his first. D) Bob enjoys his first soda more than Charlie enjoys his fourth. Answer: A Topic: Diminishing Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

35) The marginal utility of a third skirt is A) three times the average utility of the three skirts. B) three skirts times the price of a skirt. C) the total utility of three skirts divided by three. D) the change in total utility from the third skirt. Answer: D Topic: Diminishing Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

36) Your marginal utility from a hamburger A) is always greater than your total utility from hamburgers. B) is always greater than your average utility from a hamburger. C) is always greater than the price of a hamburger. D) depends on how many hamburgers you've already eaten. Answer: D Topic: Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

Cookies Homer's total (pounds per week) utility 0 0 1 5 2 3 3 12 4 14 5 15 37) The above table gives the total utility that Homer obtains from consuming various quantities of chocolate chip cookies. The marginal utility from the fifth pound of cookies is A) 1. B) 2. C) 3. D) 15. Answer: A Topic: Marginal Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

38) The above table gives the total utility that Homer obtains from consuming various quantities of chocolate chip cookies. The marginal utility from the third pound of cookies is A) 3. B) 4. C) 9. D) 12. Answer: A Topic: Marginal Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Units consumed 1 2 3 4

Jim's total utility 12 22 30 36

Sally's total utility 16 26 34 35

39) In the table above, which of the following is true? A) Jim and Sally have increasing marginal utility. B) Jim has increasing marginal utility and Sally has diminishing marginal utility. C) Jim has diminishing marginal utility and Sally has increasing marginal utility. D) Jim and Sally have diminishing marginal utility. Answer: D Topic: Marginal Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

40) In the figure above, diminishing marginal utility is shown by A) total utility curve A. B) total utility curve B. C) total utility curve C. D) all three curves. Answer: C Topic: Total Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills

41) In the figure above, the curve that shows the diminishing marginal utility is A) total utility curve A because it gets steeper as consumption of tomatoes increases. B) total utility curve A because it is higher than total utility curves B or C. C) total utility curve C because it gets flatter as consumption of tomatoes increases. D) total utility curve C because it is lower than total utility curves B and C. Answer: C Topic: Total Utility and Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills

42) In the figure above, the marginal utility of the third crate of tomatoes for the person with total utility curve C is A) 13 units of utility. B) 16 units of utility. C) 32 units of utility. D) 45 units of utility. Answer: A Topic: Total Utility and Marginal Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

43) As the quantity of a good consumed increases, its marginal utility ________ and its total utility ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: C Topic: Total Utility and Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

44) As Goldilocks consumes more gummy bears, her total utility ________ and her marginal utility from gummy bears ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: B Topic: Total Utility and Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

45) As Sally increases her consumption of a good, she experiences diminishing marginal utility if her total utility A) increases at a constant rate. B) increases at a decreasing rate. C) increases at an increasing rate. D) decreases. Answer: B Topic: Total Utility and Marginal Utility Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

46) The principle of diminishing marginal utility implies that the A) marginal utility of a product is negative. B) total utility from a product is also diminishing as more units are consumed. C) rate of change of total utility is diminishing as more units are consumed. D) rate of change of marginal utility is very low as more units are consumed. Answer: C Topic: Total Utility and Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

47) If marginal utility is positive but diminishing, as more units of a good are consumed, then the total utility from the good must be A) falling. B) positive and rising at an increasing rate. C) positive and rising at a decreasing rate. D) positive and rising at any rate. Answer: C Topic: Total Utility and Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

48) As you consume additional hamburgers, the relationship between total and marginal utility is that A) both total and marginal utility increase continuously. B) both total and marginal utility decrease continuously. C) total utility increases, but marginal utility decreases. D) total utility decreases, but marginal utility increases. Answer: C Topic: Total Utility and Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

49) As Shana's consumption of tacos decreases, her A) marginal utility from tacos increases. B) marginal utility from tacos decreases. C) total utility from tacos increases. D) both total and marginal utility from tacos decrease. Answer: A Topic: Total Utility and Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

50) A decrease in consumption will result in A) both total utility and marginal utility decreasing. B) total utility increasing, but marginal utility decreasing. C) total utility decreasing, but marginal utility increasing. D) both total utility and marginal utility increasing. Answer: C Topic: Total Utility and Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

51) As consumption increases, total utility increases A) at an increasing rate. B) at a decreasing rate. C) at a constant rate. D) and marginal utility increases. Answer: B Topic: Total Utility and Marginal Utility Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

52) If marginal utility is positive but diminishing, then total utility must be ________ as consumption of the good increases. A) decreasing B) positive and rising at an increasing rate C) positive and rising at a decreasing rate D) positive and rising at any rate Answer: C Topic: Total Utility and Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

Pizza

Pepsi

Slices per week

Total utility

0 1 2 3 4 5

0 100 150 175 190 195

Quantity per week 0 1 2 3 4 5

Total utility 0 70 130 180 220 250

53) The table shows Elaine's utility from pizza and Pepsi. If Elaine consumes 2 slices of pizza and 3 Pepsis, her marginal utility from the fourth Pepsi is ________ units. A) 60 B) 54 C) 40 D) 220 Answer: C Topic: Marginal Utility Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

Quantity 0 1 2 3 4 5

Total utility 0 250

Marginal utility

180 580 700 100

54) The above table gives some of Tammy's total and marginal utilities from comedy videos. Which of the following statements is true? A) Tammy's marginal utility from the third comedy video is equal to 580/3. B) Tammy's total utility from five comedy videos is 800. C) Tammy's marginal utility from the first comedy video is less than her marginal utility from the third comedy video. D) None of the above answers are correct. Answer: B Topic: Total Utility and Marginal Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Box of doughnuts 1 2 3 4 5 6

Homer's total utility 30 55 75 90 100 103

55) The above table shows Homer's total utility from boxes of doughnuts. As Homer's consumption of doughnuts increases, A) both his total utility and his marginal utility increase. B) his total utility increases, but his marginal utility decreases. C) his total utility decreases, but his marginal utility increases. D) both his total utility and his marginal utility decrease. Answer: B Topic: Total Utility and Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills

56) The above table shows Homer's utility from boxes of doughnuts. If Homer decreases his consumption of doughnuts from 4 boxes to 3 boxes, his A) total utility and marginal utility will both decrease. B) total utility will decrease, but his marginal utility will increase. C) total utility will increase, but his marginal utility will decrease. D) total utility and marginal utility will both increase. Answer: B Topic: Total Utility and Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills

57) The above table shows Homer's utility from boxes of doughnuts. The marginal utility that Homer receives from the third box of doughnuts is equal to A) 75. B) 25. C) 20. D) 3. Answer: C Topic: Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills

58) The above table shows Homer's utility from boxes of doughnuts. As Homer's consumption of doughnuts increases, his A) marginal utility is positive and increasing. B) marginal utility is positive but decreasing. C) marginal utility is negative but increasing. D) marginal utility is negative and decreasing. Answer: B Topic: Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Quantity of cheeseburgers 1 2 3 4 5

Total utility from cheeseburgers 36 66 86 100 110

59) Julie's total utility from cheeseburgers is given in the table above. What is the marginal utility of the third cheeseburger? A) 86 B) 28.7 C) 20 D) 14 Answer: C Topic: Total Utility and Marginal Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Quarts of ice cream 0 1 2 3 4

Total utility from ice cream 0 80 150 210 260

60) From the information in the above table, what is the marginal utility of the third quart of ice cream? A) 80 B) 70 C) 60 D) 230 Answer: C Topic: Total Utility and Marginal Utility Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

Quantity 0 1 2 3 4 5 6

Fritos Total utility 0 40 75 105 130 150 165

Quantity 0 1 2 3 4 5 6

Fruit drinks Total utility 0 50 95 135 170 200 225

61) The table above shows the total utility from the two goods Freddy likes to consume. The marginal utility Freddy receives from consuming an extra bag of Fritos A) depends on the quantity of fruit drinks consumed. B) decreases as he consumes more bags of Fritos. C) decreases as he consumes more fruit drinks. D) equals 75 when he consumes 2 bags of Fritos. Answer: B Topic: Marginal Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

62) The table above shows the total utility from the two goods Freddy likes to consume. Suppose that Freddy has already eaten 5 bags of Fritos. If he consumes one more bag, his marginal utility will A) equal 40. B) equal 35. C) equal 15. D) depend on the price of the extra bag. Answer: C Topic: Marginal Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

63) The table above shows the total utility from the two goods Freddy likes to consume. If Freddy has consumed 4 fruit drinks and then decides to drink another, A) his total utility will increase. B) the marginal utility from the 5th drink equals 30. C) the marginal utility from the 5th drinks equals 50. D) Both answers A and B are correct. Answer: D Topic: Total Utility and Marginal Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Quantity of magazines 0 1 2 3 4 5

Marginal utility from magazines 100 75 50 25 5

Quantity of gummy Marginal utility bears from gummy bears 0 1 200 2 180 3 160 4 140 5 120

64) Kelly's marginal utilities for magazines and packages of gummy bears are listed in the table above. For Kelly, what is the total utility received from consuming 5 magazines? A) 5 B) 20 C) 25 D) 255 Answer: D Topic: Total Utility and Marginal Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

65) Kelly's marginal utilities for magazines and packages of gummy bears are listed in the table above. What is the extra utility received by Kelly when she decides to consume 3 packages of gummy bears instead of 2 packages? A) 20 B) 160 C) 180 D) 540 Answer: B Topic: Marginal Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Quantity of magazines 0 1 2 3 4 5 6 7 8

Total utility from magazines 0 240 400 520 620 680 716 736 740

Quantity of CDs 0 1 2 3 4 5 6 7 8

Total utility from CDs 0 500 950 1350 1650 1800 1850 1870 1875

66) The table above gives Jane's total utility from magazines and CDs. What is the marginal utility of Jane's sixth magazine? A) 80 units B) 60 units C) 36 units D) 15 units Answer: C Topic: Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills

67) The table above gives Jane's total utility from magazines and CDs. What is the marginal utility of the sixth CD? A) 150 units B) 100 units C) 50 units D) 5 units Answer: C Topic: Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills 20 Copyright © 2014 Pearson Education, Inc.

68) The table above gives Jane's total utility from magazines and CDs. The price of a magazine is $4 and the price of a CD is $10. Which of the following correctly illustrates the principle of diminishing marginal utility? The fact that A) the sixth magazine has less marginal utility than the sixth CD. B) Jane's marginal utility per dollar from the second magazine is the same as her marginal utility per dollar from the third CD. C) the marginal utility per dollar from the sixth magazine is less than the total utility from six magazines. D) the marginal utility of the third CD is less than the marginal utility of second CD. Answer: D Topic: Diminishing Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills

69) Economists using marginal utility theory assume that consumers' objectives are to A) maximize their total utility. B) maximize their marginal utility. C) maximize their income. D) none of the above Answer: A Topic: Study Guide Question, Marginal Utility Theory Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

70) Which of the following is NOT an assumption of marginal utility theory? A) People derive utility from their consumption. B) More consumption yields more total utility. C) Marginal utility diminishes with more consumption. D) Utility can be measured and the units of utility are precisely defined. Answer: D Topic: Study Guide Question, Marginal Utility Theory Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

71) As more of a good is consumed, its marginal utility ________ and its total utility ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls Answer: C Topic: Study Guide Question, Diminishing Marginal Utility Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

72) Jeannie's marginal utility from her 4th book in a month is 50. Her marginal utility from her 5th book A) is greater than 50. B) equals 50. C) is less than 50. D) might be more than, less than, or equal to 50 but more information is needed. Answer: C Topic: Study Guide Question, Diminishing Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

73) When Alex eats 1 slice of pizza, his total utility is 80; when Alex eats 2 slices of pizza, his total utility is 120. Alex's marginal utility from the second pizza is A) 200. B) 80. C) 60. D) 40. Answer: D Topic: Study Guide Question, Marginal Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Quantity (boxes) 0 1 2 3 4

Total utility 0 30 50 66 ?

Marginal utility X 30 20 16 12

74) The table above gives Andy's utility from popcorn. Andy's total utility from four boxes of popcorn is A) 66. B) 70. C) 78. D) 82. Answer: C Topic: Parallel MyEconLab Questions Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

2 Utility-Maximizing Choice 1) When Ramona is in consumer equilibrium, A) her total utilities of all goods are equal. B) she is maximizing her utility, given her income and the prices of goods and services. C) her total utility per dollar spent is equal for all goods. D) any change in prices would make her worse off. Answer: B Topic: Utility-Maximizing Choice Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

2) With a given income and prices of goods, Marcus will be in a consumer equilibrium if ________. A) his marginal utility from all goods is the same B) he purchases the same amounts of all goods C) he maximizes his total utility D) his marginal utility from all goods is at its maximum Answer: C Topic: Utility-Maximizing Choice Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

3) When a consumer spends all of his or her income and consumes a bundle of goods such that the marginal utility per dollar from all goods is equal, then the A) consumer's total utility is maximized. B) consumer is in his or her consumption equilibrium. C) marginal utilities for each good are maximized. D) Both answers A and B are correct. Answer: D Topic: Utility-Maximizing Choice Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

4) Ricky is in a consumer equilibrium. Given the prices of goods, Ricky has allocated all his income such that his marginal utility per dollar spent is ________ for ________ goods. A) as small as possible; all B) equal; all C) equal; normal D) maximized; all Answer: B Topic: Utility-Maximizing Choice Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

5) If the price of a good increases, all else the same, then the consumer's total utility will A) increase. B) decrease. C) remain the same as consumption shifts to cheaper goods. D) decrease if there are no substitutes for the good and remain the same if there are substitutes for the good. Answer: B Topic: Utility-Maximizing Choice Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

6) Which of the following occur when a person maximizes utility? I. The marginal utility of each good bought is equal. II. The highest level of utility is attained. III. All of a person's budget is spent. A) I and II B) I and III C) II and III D) I, II and III Answer: C Topic: Utility-Maximizing Choice Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

7) Total utility is maximized when a consumer has spent all of his or her income and A) spent equal amounts on all goods. B) marginal utility is maximized. C) the total utility per dollar from all goods is equal. D) the marginal utility per dollar from all goods is equal. Answer: D Topic: Equalizing Marginal Utility per Dollar Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

8) At the utility maximizing equilibrium for two goods, X and Y, which of the following must be true? A) The marginal utility per dollar spent on X will exceed the marginal utility per dollar spent on Y. B) The total expenditure will be the same for each good. C) The marginal utility per dollar from X equals the marginal utility per dollar from Y. D) The marginal utility will be the same for each good. Answer: C Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

9) Liane maximizes her total utility when she allocates all of her available income such that the marginal utility per dollar spent on each good ________. A) is diminishing B) is maximized C) is the same D) is increasing Answer: C Topic: Equalizing Marginal Utility per Dollar Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

10) Danny has $12 to spend on two goods: pies and soda. The price of a pie is $4, and the price of a can of soda is $2. To maximize his utility, Danny buys ________. A) the combination that gives him equal total utility from pies and soda B) 2 pies and 2 cans of soda C) only sodas because they are less expensive D) the combination that gives him the same marginal utility per dollar spent on pies as on soda Answer: D Topic: Equalizing Marginal Utility per Dollar Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Quantity of coffee (cups per day) 1 2 3 4

Total utility 50 80 90 92

11) Betsy's utility depending from her consumption of coffee is shown in the table above. Betsy's marginal utility from the 3rd cup of coffee per day is A) 30. B) 85. C) 90. D) 10. Answer: D Topic: Total Utility and Marginal Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

12) As Betsy's consumption of coffee increases, her marginal utility from coffee A) increases. B) decreases. C) remains unchanged. D) increases first and then decreases. Answer: B Topic: Diminishing Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills

13) Betsy's utility depending from her consumption of coffee is shown in the table above. If the price of a cup of coffee is $2, Betsy's marginal utility per dollar from the 2nd cup of coffee per day is A) 15. B) 40. C) 20. D) 32.5. Answer: A Topic: Marginal Utility Per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Quantity of DVDs 1 2 3 4 5 6

Marginal utility from DVDs 150 120 100 90 60 40

Quantity of pizza 1 2 3 4 5 6

Marginal utility from pizza 200 180 150 120 100 60

14) Lisa spends all her income on pizzas and DVDs. The above table shows Lisa's marginal utility for pizza and marginal utility for DVDs. If the price of a pizza is $10, the price of a DVD is $5, and Lisa has $40 to spend on the two goods, what combination of pizza and DVDs will maximize her utility? A) 6 DVDs and 1 pizza B) 4 DVDs and 2 pizzas C) 2 DVDs and 3 pizzas D) 5 DVDs and 4 pizzas Answer: B Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

15) Lisa spends all her income on pizzas and DVDs. The above table shows Lisa's marginal utility for pizza and marginal utility for DVDs. If the price of a pizza is $10 and the price of a DVD is $10 and Lisa has $40 to spend on the two goods, what combination of pizza and DVDs will maximize her utility? A) 1 DVD and 3 pizzas B) 2 DVDs and 2 pizzas C) 2 DVDs and 4 pizzas D) 3 DVDs and 5 pizzas Answer: A Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

16) Lisa spends all her income on pizzas and DVDs. The above table shows Lisa's marginal utility for pizza and marginal utility for DVDs. If the price of a pizza is $10 and the price of a DVD is $10 and Lisa has $60 to spend on the two goods, what combination of pizza and DVDs will maximize her utility? A) 2 DVDs and 4 pizzas B) 3 DVDs and 5 pizzas C) 4 DVDs and 2 pizzas D) 3 DVDs and 3 pizzas Answer: A Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

17) Lisa spends all her income on pizzas and DVDs. The above table shows Lisa's marginal utility for pizza and marginal utility for DVDs. Suppose the price of a pizza is $10 and the price of a DVD is $10 and Lisa initially has $40 to spend on the two goods. Lisa gets a raise at work and so she now has $60 to spend on DVDs and pizza. With her increase in income, her consumption of DVDs ________ and hence DVDs are ________ good for Lisa. A) rises; a normal B) rises; an inferior C) falls; a normal D) falls; an inferior Answer: A Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

Quantity of steak 1 2 3 4 5 6

Marginal utility from steak 100 80 35 25 10 5

Quantity of chicken 1 2 3 4 5 6

Marginal utility from chicken 40 35 25 20 15 10

18) John either buys a steak or chicken when dining out. John's marginal utility for steak and chicken is given in the above table. If the price of a steak is $10 and the price of a chicken is $5 and John has $25 to spend on the two goods, what combination of steak and chicken will John consume to maximize his utility? A) 0 steak and 5 chickens B) 1 steak and 3 chickens C) 2 steaks and 1 chicken D) 3 steaks and 2 chickens Answer: C Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

19) John either buys a steak or chicken when dining out. John's marginal utility for steak and chicken is given in the above table. If the price of a steak is $5 and the price of a chicken is $5 and John has $25 to spend on the two goods, what combination of steak and chicken will John consume to maximize his utility? A) 1 steak and 4 chickens B) 3 steaks and 2 chickens C) 4 steaks and 3 chickens D) 5 steaks and 6 chickens Answer: B Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Marginal Utility Servings per week 1 2 3 4 5

Chicken 70 60 50 40 30

Fish 45 40 35 30 25

20) Lily has $10 to spend each week on fish and chicken. Fish costs $2 a serving and chicken costs $3 a serving. The table shows Lily's marginal utilities of fish and chicken. Lily will consume ________ servings of chicken and ________ of fish each week. A) 4; 0 B) 1; 3 C) 0; 5 D) 2; 2 Answer: D Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Pizza Slices per week

Total utility

0 1 2 3 4 5

0 100 150 175 190 195

Pepsi Quantity per week 0 1 2 3 4 5

Total utility 0 70 130 180 220 250

21) Elaine spends $10 a week on pizza and Pepsi. The price of pizza is $2 a slice and the price of a Pepsi is $2. The table shows Elaine's total utility from pizza and hamburgers. Elaine maximizes her total utility by buying ________ slices of pizza and ________ hamburgers a week. A) 5; 0 B) 0; 5 C) 3; 2 D) 2; 3 Answer: D Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Quantity of skiing 0 1 2 3 4 5

Marginal utility from skiing 50 40 30 20 10

Quantity of skating 0 1 2 3 4 5

Marginal utility from skating 70 40 30 20 5

22) Steve has two goods he can spend his income on, skiing and skating, and his marginal utilities from each are in the table above. The price of each unit of skiing is $10 and the price of each unit of skating is $5. Steve has $40 to spend. What quantities of skiing and skating should Steve consume to maximize his utility? A) 4 units of skiing and 4 units of skating B) 2 units of skiing and 4 units of skating C) 1 unit of skiing and 2 units of skating D) 5 units of skiing and 5 units of skating Answer: B Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

23) Steve has two goods he can spend his income on, skiing and skating, and his marginal utilities from each are in the table above. The price of each unit of skiing is $10 and the price of each unit of skating is $5. Steve has $40 to spend. If Steve consumes the quantities of skiing and skating to maximize his utility, what is his total utility? A) 40 B) 60 C) 250 D) 300 Answer: C Topic: Maximizing Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

24) Steve has two goods he can spend his income on, skiing and skating, and his marginal utilities from each are in the table above. The price of each unit of skiing is $10 and the price of each unit of skating is $10. Steve has $40 to spend. What quantities of skiing and ice skating will Steve consume to maximize his utility? A) 0 units of skiing and 4 units of skating B) 2 units of skiing and 2 units of skating C) 4 units of skiing and 0 units of skating D) 2 units of skiing and 4 units of skating Answer: B Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Quantity 0 1 2 3 4 5 6 7 8

Chips Total utility 0 60 100 120 135 145 150 153 155

Quantity 0 1 2 3 4 5 6 7 8

Sodas Total utility 0 200 300 390 470 530 580 620 650

25) The table above shows Mary's utility from chips and soda. Mary receives ________ units of utility from the third chip. A) 30 B) 20 C) 55 D) 40 Answer: B Topic: Marginal Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

26) The table above shows Mary's utility from chips and soda. The table shows that A) Mary prefers sodas to chips. B) Mary will consume no soda and only chips. C) Mary's marginal utility decreases as she consumes more chips. D) Mary's total utility decreases as she consumes more chips. Answer: C Topic: Marginal Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills 31 Copyright © 2014 Pearson Education, Inc.

27) The table above shows Mary's utility from chips and soda. The table shows that Mary has diminishing marginal utility for A) both chips and soda. B) neither chips nor soda. C) soda, but not chips. D) chips, but not soda. Answer: A Topic: Diminishing Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills

28) The table above shows Mary's utility from chips and soda. Mary buys only chips and soda. Chips cost $2 per bag and soda costs $4 per six-pack. She has $20 to spend per week. To maximize her utility, Mary will buy A) 5 sodas and 5 bags of chips. B) 3 sodas and 3 bags of chips. C) 8 sodas and 8 bags of chips. D) 6 sodas and 2 bags of chips. Answer: D Topic: The Utility-Maximizing Choice Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Quantity of Mt. Dew (per day) 1 2 3 4 5

Total utility (units) 30 55 75 90 100

29) The table above gives Cathy's total utility from Mt. Dew. Cathy's marginal utility from the 4th Mt. Dew is ________ units. A) 75 B) 90 C) 15 D) 82.5 Answer: C Topic: Marginal Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

30) The table above gives Cathy's total utility from Mt. Dew. Cathy's marginal utility from the 3rd Mt. Dew is ________ units. A) 75 B) 65 C) 25 D) 20 Answer: D Topic: Marginal Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

31) The table above gives Cathy's total utility from Mt. Dew. Cathy's marginal utility from additional Mt. Dews is A) diminishing. B) increasing. C) constant. D) negative. Answer: A Topic: Diminishing Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills

32) The table above gives Cathy's total utility from Mt. Dew. If the price of a Mt. Dew is $2, Cathy's marginal utility per dollar from the 3rd Mt. Dew is ________ units per dollar A) 20 B) 10 C) 32.5 D) 40 Answer: B Topic: Marginal Utility Per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

33) The table above gives Cathy's total utility from Mt. Dew. If the price of a Mt. Dew is $1.50, Cathy's marginal utility per dollar from the 4th Mt. Dew is ________ units per dollar. A) 15 B) 10 C) 82.5 D) 22.5 Answer: B Topic: Marginal Utility Per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Quantity 1 2 3 4 5

Apples Total utility 5 9 12 15 16

Quantity 1 2 3 4 5

Tacos Total utility 10 18 24 28 30

34) Sally derives utility from consuming apples and tacos as shown in the table above. Apples cost $1 each and tacos cost $2 each. If Sally's income is $9, she will consume A) 5 apples and 2 tacos. B) 3 apples and 3 tacos. C) 1 apple and 4 tacos. D) no apples and 4 1/2 tacos. Answer: B Topic: Utility-Maximizing Choice Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

35) Sasha derives utility from consuming apples and tacos as shown in the table above. Apples cost $1 each and tacos cost $2 each. If Sasha's income is $8, he will consume A) 4 apples and 2 tacos. B) 2 apples and 3 tacos. C) 0 apples and 4 tacos. D) 3 apples and 3 tacos. Answer: A Topic: Utility-Maximizing Choice Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

36) A consumer has maximized his or her utility by consuming A) at the midpoint of the budget constraint line. B) at the midpoint of the demand curve. C) so that the total utility of all goods consumed is the same. D) so that the ratio of marginal utility to price is the same for all goods consumed. Answer: D Topic: Equalizing Marginal Utility per Dollar Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

37) Total utility is maximized when the ________ for all goods. A) marginal utility per dollar spent is equal B) marginal utilities are zero C) marginal utilities are maximized D) marginal utilities are negative Answer: A Topic: Equalizing Marginal Utility per Dollar Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

38) As long as the marginal utility per dollar from pizza is greater than the marginal utility per dollar from soda, then to maximize utility a consumer will buy A) more soda to equalize the marginal utility per dollar between soda and pizza. B) less pizza and less soda. C) more pizza and less soda. D) equal amounts of pizza and soda. Answer: C Topic: Equalizing Marginal Utility per Dollar Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

39) To maximize her utility, Pat should spend all of her money and buy goods in a way that A) the marginal utility of the last unit of each good is the same. B) the marginal utility per dollar from each good is the same. C) her total expenditure on each good is the same. D) her price elasticity of demand for each good is the same. Answer: B Topic: Equalizing Marginal Utility per Dollar Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

40) When Frankie spends all his money in such a way that the marginal utility per dollar is the same for all final purchases of products he consumes, Frankie has maximized A) his marginal utility. B) his total utility. C) the number of products he consumes. D) his total expenditure on all products. Answer: B Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

41) When you chose to buy the second cup of coffee instead of the third bagel, which of the following is necessarily correct? A) The second coffee will give you higher marginal utility. B) The second coffee is cheaper than the third bagel. C) The marginal utility per dollar from the third bagel is less than the marginal utility per dollar from the second coffee. D) Both answers A and C are correct. Answer: C Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

42) If the price of a good falls, before the amount consumed changes the marginal utility per dollar from that good A) decreases. B) increases. C) might either increase or decrease depending on whether the good is a substitute or a complement. D) More information is needed to determine the answer. Answer: B Topic: Equalizing Marginal Utility per Dollar Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

43) Keesha consumes only milkshakes and burgers. At her consumer equilibrium, which of the following is true when Keesha can buy any portion of a unit of a milkshake or burger? A) The marginal utility per dollar from a milkshake will exceed the marginal utility per dollar from a burger if she likes burgers more than milkshakes. B) The marginal utility per dollar from a burger will exceed the marginal utility per dollar from a milkshake if she likes burgers more than milkshakes. C) The marginal utility per dollar will be the same for each good. D) The marginal utility will be the same for each good. Answer: C Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Modified 10th edition AACSB: Reflective Thinking

44) Keesha consumes only milkshakes and burgers. Once at her consumer equilibrium, what would happen if she changed her consumption by purchasing one more milkshake and one fewer burger? A) The marginal utility of a burger would decrease. B) The marginal utility of a milkshake would increase. C) The total utility from the consumption of both goods would decrease. D) all of the above Answer: C Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Reflective Thinking 36 Copyright © 2014 Pearson Education, Inc.

45) If Katie purchases two slices of pizza and six breadsticks to maximize her total utility, then A) a slice of pizza costs three times as much as a breadstick. B) a breadstick costs three times as much as a slice of pizza. C) her marginal utility from the second slice of pizza divided by the price of a slice of pizza is equal to her marginal utility from the sixth breadstick divided by the price of a breadstick. D) Both answers A and C are correct. Answer: C Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

46) Emma consumes only hot dogs and hamburgers. She is at her consumer equilibrium. Hot dogs and hamburgers have the same marginal utility. Thus A) her total utility from all the hot dogs eaten must be the same as her total utility from all the hamburgers eaten. B) the price of a hot dog and the price of a hamburger must be the same. C) she must be eating the same number of hot dogs and hamburgers. D) Both answers B and C are correct. Answer: B Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Modified 10th edition AACSB: Reflective Thinking

47) Suppose the price of a soda is $2 each, the price of a hot dog is $3 each and the budget is $20. If the marginal utility of the fourth soda is 100 and the marginal utility of the fourth hot dog is 150, to maximize utility, a person will buy A) 4 sodas and 4 hot dogs. B) more hotdogs than 4 and fewer sodas than 4 because hot dogs provide more utility. C) more sodas than 4 to increase their utility. D) fewer sodas than 4 and more hot dogs than 4. Answer: A Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

48) If a consumer spends all of his or her income and the marginal utility per dollar is equal for all goods, then A) marginal utility is maximized. B) total utility is maximized. C) a consumer could not be better off even with greater income. D) the proportion of income spent on each good must be equal. Answer: B Topic: Equalizing Marginal Utility per Dollar Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking 37 Copyright © 2014 Pearson Education, Inc.

49) A consumer maximizes total utility when all available income is spent and the A) marginal utility from each good is equal for all goods. B) marginal utility per dollar from each good is equal for all goods. C) dollars spent on the last unit of each good are equal for all goods. D) total utility from all goods purchased is equal. Answer: B Topic: Equalizing Marginal Utility per Dollar Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

50) George spends all his income on sandwiches and juice. George's utility is maximized when he is consuming sandwiches and juice so that the A) marginal utility from sandwiches equals the marginal utility from juice. B) total utility from sandwiches equals the total utility from juice. C) marginal utility per dollar spent on sandwiches equals the marginal utility per dollar spent on juice. D) marginal utility from sandwiches is at a maximum. Answer: C Topic: Equalizing Marginal Utility per Dollar Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

51) Let MUa and MUb stand for the marginal utilities of apples and bagels. Let Pa and Pb stand for their prices. The general necessary condition for consumer equilibrium is A) MUa = MUb. B) MUa = MUb and Pa = Pb. C) MUa/Pa = MUb/Pb. D) MUa/MUb = Pb/Pa. Answer: C Topic: Equalizing Marginal Utility per Dollar Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Analytical Skills

52) Jennifer consumes both apples and bread. Let Pa be the price of an apple and Pb the price of a loaf of bread. TUa is her total utility from apples and TUb is her total utility from bread. MUa is her marginal utility from apples and MUb is her marginal utility from bread. When Jennifer is in consumer equilibrium, A) MUa/TUa = MUb/TUb. B) MUa/Pb = MUb/Pa. C) MUa/Pa = MUb/Pb. D) TUa/Pb = TUb/Pb. Answer: C Topic: Equalizing Marginal Utility per Dollar Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Analytical Skills

53) Pam buys only thread and fabric, and she buys the quantities that maximize her utility. Her marginal utility from a spool of thread is 30 units and her marginal utility from a yard of fabric is 60 units. If the price of a spool of thread is $4, then you are sure that the price of a yard of fabric is ________. A) $4 B) $2 C) $8 D) $12 Answer: C Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

54) Bobby consumes only chocolate ice cream and vanilla ice cream. He is spending all of his income. His marginal utility of chocolate is 100 and his marginal utility of vanilla is 200, and the price of chocolate is $1.00 per scoop and the price of vanilla is $2.00 per scoop. To maximize his utility, Bobby should A) buy more chocolate ice cream and less vanilla ice cream. B) buy more vanilla ice cream and less chocolate ice cream. C) not change his purchases between chocolate ice cream and vanilla ice cream. D) buy no chocolate ice cream. Answer: C Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

55) Bobby consumes only chocolate ice cream and vanilla ice cream. He is spending all of his income. His marginal utility of chocolate is 200 and his marginal utility of vanilla is 200, and the price of chocolate is $1.00 per scoop and the price of vanilla is $2.00 per scoop. To maximize his utility, Bobby should A) buy more chocolate ice cream and less vanilla ice cream. B) buy more vanilla ice cream and less chocolate ice cream. C) not change his purchases between chocolate ice cream and vanilla ice cream. D) buy no vanilla ice cream. Answer: A Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

56) Bobby consumes only chocolate ice cream and vanilla ice cream. He is spending all of his income. His marginal utility of chocolate is 200 and his marginal utility of vanilla is 100, and the price of chocolate is $2.00 per scoop and the price of vanilla is $1.00 per scoop. Bobby has maximized his A) marginal utility of chocolate ice cream. B) marginal utility of vanilla ice cream. C) marginal utilities of chocolate ice cream and vanilla ice cream. D) maximized his total utility. Answer: D Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

57) Fred spends all of his income on two goods: DVDs and downloaded music. If Fred's marginal utility per dollar from DVDs is greater than his marginal utility per dollar from downloaded music, Fred can ________ his total utility by buying ________. A) maximize; more DVDs and more downloaded music B) increase; more downloaded music and fewer DVDs C) increase; more DVDs and less downloaded music D) maximize; fewer DVDs and less downloaded music Answer: C Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

58) Robinson spends all his income on mangos and bananas. Mangos cost $3 per pound and bananas cost $1 per pound. The marginal utility is 30 for the last pound of mangos purchased and 10 for the last pound of bananas. To maximize his utility, Robinson should buy A) more mangos and fewer bananas. B) more bananas and fewer mangos. C) the present combination of goods. D) only mangos. Answer: C Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

59) Robinson spends all his income on mangos and bananas. Mangos cost $3 per pound and bananas cost $1 per pound. The marginal utility is 24 for the last pound of mangos purchased and 10 for the last pound of bananas. To maximize his utility, Robinson should buy A) more mangos and fewer bananas. B) more bananas and fewer mangos. C) the present combination of goods. D) only mangos. Answer: B Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

60) Robinson spends all his income on mangos and bananas. Mangos cost $3 per pound and bananas cost $1 per pound. The marginal utility is 30 for the last pound of mangos purchased and 8 for the last pound of bananas. To maximize his utility, Robinson should buy A) more mangos and fewer bananas. B) more bananas and fewer mangos. C) the present combination of goods. D) only bananas. Answer: A Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

61) Robinson spends all his income on mangos and bananas. Mangos cost $3 per pound. Robinson's marginal utility is 30 for the last pound of mangos purchased and 10 for the last pound of bananas. If Robinson maximizes his utility from consuming these goods, the price of bananas is A) $0.50 per pound. B) $1 per pound. C) $2 per pound. D) $3 per pound. Answer: B Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

62) Michelle spends all of her income on mangos and rice. Mangos cost $2 per pound and rice costs $1.50 per pound. If Michelle is spending all of her income and the marginal utility per dollar spent is 20 for the last pound of mangos purchased and 10 for the last pound of rice purchased, then A) Michelle is maximizing utility from her present consumption bundle. B) Michelle should buy more rice and fewer mangos in order to maximize utility. C) Michelle should buy more mangos and less rice to maximize utility. D) None of the above answers is correct. Answer: C Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

63) Joe consumes pizza and movies. He is currently spending his entire income and his marginal utility of pizza is 10 and his marginal utility of movies is 5. If the price of a pizza is $10 and the price of a movie is $5, then to maximize his utility Joe should A) increase consumption of pizza and decrease consumption of movies. B) increase consumption of movies and decrease consumption of pizza. C) not change his current bundle of movies and pizza. D) increase consumption of both goods. Answer: C Topic: Equalizing Marginal Utility per Dollar Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills

64) Joe consumes pizza and movies. He is currently spending his entire income and his marginal utility of pizza is 15 and his marginal utility of movies is 10. If the price of a pizza is $10 and the price of a movie is $5, then to maximize his utility Joe should A) increase consumption of pizza and decrease consumption of movies. B) increase consumption of movies and decrease consumption of pizza. C) not change his current bundle of movies and pizza. D) increase consumption of both goods. Answer: B Topic: Equalizing Marginal Utility per Dollar Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills

65) Lisa is spending all of her income on compact discs and downloadable games for her smart phone. She finds that the marginal utility from the last compact disc she buys is 30 and the marginal utility from the last downloadable game is 10. The price of a compact disc is $15 and the price of a downloadable game is $5. Lisa should A) increase her consumption of compact discs. B) increase her consumption of downloadable games. C) not change her consumption of downloadable games and compact discs. D) decrease the price of downloadable games. Answer: C Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Modified 10th edition AACSB: Reflective Thinking

66) Gil can consume either pens or milkshakes. Both pens and milkshakes sell for $1. Gil finds that when his income is spent, his marginal utility of pens will be 10 while his marginal utility of milkshakes will be 8. Gil could increase his utility without violating his budget by consuming A) more pens and fewer milkshakes. B) more pens and more milkshakes. C) fewer pens and fewer milkshakes. D) fewer pens and more milkshakes. Answer: A Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

67) Sam spends all of his income on textbooks and hot dogs. The price of a textbook is $40 and the price of a hot dog is $0.50. If Sam is maximizing his utility and the marginal utility he derives from the last textbook he purchases is 400, then the marginal utility he derives from his last hot dog purchased must be A) 400. B) 10. C) 5. D) 20. Answer: C Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

68) Brian consumes only pizza and soda. When the price of a soda is $2 and the price of a slice of pizza is $4, Brian maximizes his utility by buying 5 sodas and 10 slices of pizza. If the marginal utility of the 5th soda is 100, then the marginal utility from the 10th slice of pizza must be ________. A) 200 B) 100 C) 50 D) More information is needed to determine the marginal utility of the 10th slice of pizza. Answer: A Topic: Equalizing Marginal Utility per Dollar Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills

69) Suppose the price of soda is $2 each and the price of a pizza slice is $4 each. Jean maximizes utility and buys only sodas and slices of pizza. If the price of a soda increases to $3 each, Jean's marginal utility per soda A) will increase and she'll buy more soda. B) will decrease and she'll buy fewer sodas. C) will decrease and she'll buy more pizza. D) Both B and C are correct. Answer: D Topic: Equalizing Marginal Utility per Dollar Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Quantity 1 2 3 4

Bags of Popcorn Marginal utility Quantity 100 1 80 2 60 3 50 4

Bottles of soda Marginal utility 60 50 30 20

70) In the table above, if Brent maximizes his utility by consuming 3 bags of popcorn and 3 bottles of soda, then the ratio of the price of popcorn to the price of soda is expected to be A) 1/2. B) 5/6. C) 6/5. D) 2. Answer: D Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

71) Jenny buys sodas and popcorn. Sodas sell for $1 and popcorn sells for $2 a bag. Currently she is in consumer equilibrium, with the marginal utility from her last dollar spent on popcorn equal to 100 units of utility. The marginal utility from her last dollar spent on sodas is A) 20 units of utility. B) 30 units of utility. C) 50 units of utility. D) 100 units of utility. Answer: C Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

72) Usharani consumes 35 apples a week and 14 loaves of bread. Apples cost $1 each and bread costs $2 per loaf. Usharani is maximizing his utility and finds that the marginal utility from his 35th apple A) equals his marginal utility from his 14th loaf of bread. B) is twice his marginal utility from his 14th loaf of bread. C) is half his marginal utility from his 14th loaf of bread. D) is such that his total utility from apples equals his total utility from bread. Answer: C Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

73) Shaniq has seen two movies this week and two baseball games. Her marginal utility of one more movie is 20 and her marginal utility of one more baseball game is 30. Shaniq will go to a baseball game tonight, rather than to another movie, A) no matter how much more the baseball game costs compared to the movie. B) if the baseball game costs $10.00 and the movie costs $7.00. C) if the baseball game costs $10.00 and the movie costs $5.00. D) Both answers B and C are correct. Answer: B Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

74) Suppose Hank spends his entire budget buying 2 bagels and 3 cups of coffee each day. Also, suppose the marginal utility of the second bagel is 100 and the marginal utility of the third cup of coffee is 200. Which of the following statements is true? A) Hank is not maximizing his utility. B) Hank will be maximizing his utility as long as the price of a cup of coffee is twice the price of a bagel. C) Hank might be maximizing utility only if the price of a cup of coffee is less than the price of a bagel. D) Hank is not maximizing utility because he is not buying equal amounts of each good. Answer: B Topic: Equalizing Marginal Utility per Dollar Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills

75) Suppose Hanna spends her entire budget buying bagels and cups of coffee each day. Also, suppose the marginal utility of her last bagel is 100 and the marginal utility of her last cup of coffee is 200. If the price of a bagel is $4 and the price of a cup of coffee is $2, then A) Hanna needs to decrease her consumption of bagels to maximize her utility. B) Hanna needs to increase her consumption of bagels to maximize her utility. C) Hanna should buy half as many bagels as coffee in order to maximize her utility. D) bagels must provide more total utility than coffee. Answer: A Topic: Equalizing Marginal Utility per Dollar Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills

76) Sarah consumes pizzas and hamburgers. The price of a hamburger is $1 and the marginal utility from her last hamburger is 5. Let Pp be the price of a pizza and MUp be the marginal utility of pizzas. In consumer equilibrium, the ratio MUp/Pp for Sarah's last pizza must equal A) 0.2. B) 1.0. C) 5.0. D) infinity. Answer: C Topic: Equalizing Marginal Utility per Dollar Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills

77) Sarah consumes only strawberries and cream, and she is spending all of her income. Her marginal utility of her last dish of strawberries is 200 and her marginal utility of her last pint of cream is 200. The price of strawberries is $1.00 per dish and the price of cream is $2.00 per pint. To maximize her utility, Sarah should A) buy more strawberries and less cream. B) buy more cream and less strawberries. C) not change her purchases of strawberries and cream. D) definitely buy no cream at her consumer equilibrium. Answer: A Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Quantity of pizza 0 1 2 3 4 5 6 7

Total utility from pizza 0 24 44 60 72 76 79 80

Quantity of Diet Pepsi 0 1 2 3 4 5 6 7

Total utility from Diet Pepsi 0 14 26 36 44 50 54 56

78) Suppose that you consume only pizza and Diet Pepsi. The table above gives your utility from consuming these two goods. What is the marginal utility you get from the fourth slice of pizza? A) 36 B) 18 C) 12 D) 4 Answer: C Topic: Marginal Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

79) Suppose that you consume only pizza, which costs $4 per slice, and Diet Pepsi, which costs $2 each. The table above gives your utility from consuming these two goods. If your income is $14, which of the following consumption combinations will you choose? A) 3 slices of pizza and 1 Diet Pepsi B) 2 slices of pizza and 3 Diet Pepsis C) 1 slice of pizza and 5 Diet Pepsis D) 0 slices of pizza and 7 Diet Pepsis Answer: B Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

80) Suppose that you consume only pizza, which costs $4 per slice, and Diet Pepsi, which costs $2 each. The table above gives your utility from consuming these two goods. If your income is $20, which of the following consumption combinations will you choose? A) 5 slices of pizza and no Diet Pepsi B) 4 slices of pizza and 2 Diet Pepsis C) 3 slices of pizza and 4 Diet Pepsis D) 2 slice of pizza and 6 Diet Pepsis Answer: C Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills 48 Copyright © 2014 Pearson Education, Inc.

Quantity of bottled water 1 2 3 4 5 6

Marginal utility from bottled water 35 25 16 10 5 4

Quantity of hamburgers 1 2 3 4 5 6

Marginal utility from hamburgers 20 18 17 10 8 7

81) Given the data in the above table, income of $13, a price of $1 for a bottle of water and $2.00 for a hamburger, what is the marginal utility per dollar spent on the fifth hamburger? A) 10 units of utility B) 8 units of utility C) 6 units of utility D) 4 units of utility Answer: D Topic: Marginal Utility Per Dollar Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

82) Given the data in the above table, income of $13, a price of $1 for a bottle of water and $2 for a hamburger, what is the quantity of water and the quantity of hamburgers that will maximize the consumer's total utility? A) 5 bottles of water and 4 hamburgers B) 4 bottles of water and 4 hamburgers C) 1 bottle of water and 6 hamburgers D) 6 bottles of water and 6 hamburgers Answer: A Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

83) Given the data in the above table, income of $13, a price of $1 for a bottle of water and $2 for a hamburger, what is the marginal utility per dollar spent on water and on hamburgers when the consumer is in consumer equilibrium? A) 20 units of utility per dollar spent B) 10 units of utility per dollar spent C) 5 units of utility per dollar spent D) 1 unit of utility per dollar spent Answer: C Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

84) Given the data in the above table, if income is $16, and the price is $1 for a bottle of water and $2 for a hamburger, what is the quantity of water and the quantity of hamburgers that will maximize the consumer's total utility? A) 5 bottles of water and 5 hamburgers B) 4 bottles of water and 6 hamburgers C) 6 bottles of water and 5 hamburgers D) 6 bottles of water and 6 hamburgers Answer: C Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

Quantity of pens 0 1 2 3 4 5 6

Total utility from pens 0 90 155 200 225 240 246

Quantity of pencils 0 1 2 3 4 5 6

Total utility from pencils 0 70 120 150 165 174 176

85) The table above gives the utility from pens and pencils. The marginal utility derived from the third pen is A) 200. B) 155. C) 445. D) 45. Answer: D Topic: Marginal Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

86) The table above gives the utility from pens and pencils. If pens and pencils both cost $.25 each and the consumer has an income of $2.25, which of the following combinations maximizes the consumer's utility? A) 3 pens and 6 pencils B) 4 pens and 5 pencils C) 5 pens and 4 pencils D) 6 pens and 3 pencils Answer: C Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

87) The table above gives the utility from pens and pencils. If the consumer has an income of $4, pens cost $1, and pencils cost $.20, which of the following combinations maximizes the consumer's utility? A) 4 pens and 0 pencils B) 3 pens and 5 pencils C) 3 pens and 6 pencils D) no combination shown Answer: B Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

88) The table above gives the utility from pens and pencils. If the consumer has an income of $4, pens cost $1, and pencils cost $.20, what is the consumer's total utility when he or she maximizes utility? A) 374 B) 225 C) 405 D) 365 Answer: A Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Hours spent 1 2 3 4

Total utility from sailing 50 90 120 140

Total utility from skiing 50 90 120 140

89) As shown in the above table, Sam enjoys sailing and skiing equally well. Which of the following is true? A) Sam will not consume the same number of hours of sailing and skiing if the price per hour of sailing is more than that of skiing. B) If the prices per hour of sailing and skiing are the same, Sam will not spend the same number of hours at each activity. C) The marginal utility of the 3rd hour of either sailing or skiing is 120. D) None of the above is true. Answer: A Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Quantity of videos 0 1 2 3 4 5

Total utility from videos 0 250 430 580 700 800

Quantity of CDs 0 1 2 3 4 5

Total utility from CDs 0 400 700 900 1000 1060

90) The above table shows Tammy's total utility from videos and CDs. If Tammy has $70 to spend on videos and CDs and if the price of a video is $10 and the price of a CD is $20, then Tammy maximizes her utility by purchasing A) 3 CDs and 1 video. B) 1 CD and 5 videos. C) 2 CDs and 3 videos. D) none of the above Answer: C Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

91) The above table shows Tammy's total utility from videos and CDs. If Tammy has $70 to spend on videos and CDs and if the price of a video is $10 and the price of a CD is $20, then the maximum utility Tammy can attain is A) 450. B) 1280. C) 1150. D) 1200. Answer: B Topic: Maximizing Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

92) The above table shows Tammy's total utility from videos and CDs. If Tammy has $110 to spend on videos and CDs and if the price of a video is $10 and the price of a CD is $20, then Tammy maximizes her utility by purchasing A) 3 CDs and 5 videos. B) 5 CDs and 1 video. C) 4 CDs and 3 videos. D) none of the above Answer: A Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

93) The above table shows Tammy's total utility from videos and CDs. If Tammy has $110 to spend on videos and CDs and if the price of a video is $10 and the price of a CD is $20, then the maximum utility Tammy can attain is A) 1700. B) 300. C) 1580. D) 250. Answer: A Topic: Maximizing Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Quantity 0 1 2 3 4 5 6 7 8 9 10

Milkshakes Total utility 0 600 1000 1300 1540 1590 1636 1676 1708 1728 1738

Sodas Total utility 0 240 360 460 520 570 590 602 610 616 620

Quantity 0 1 2 3 4 5 6 7 8 9 10

94) The table above shows Tom's total utility from milkshakes and sodas. What is the marginal utility of Tom's eighth milkshake? A) 32 units B) 20 units C) 16 units D) 10 units Answer: A Topic: Marginal Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

95) The table above shows Tom's total utility from milkshakes and sodas. What is the marginal utility of the eighth soda? A) 32 units B) 20 units C) 10 units D) 8 units Answer: D Topic: Marginal Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

96) The table above shows Tom's total utility from milkshakes and sodas. A milkshake costs $2.00. What is the marginal utility per dollar spent when the eighth milkshake is purchased? A) 32 units per dollar B) 20 units per dollar C) 16 units per dollar D) 10 units per dollar Answer: C Topic: Marginal Utility Per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

97) The table above shows Tom's total utility from milkshakes and sodas. A soda costs $1.00. What is the marginal utility per dollar spent when the eighth soda is purchased? A) 32 units per dollar B) 20 units per dollar C) 10 units per dollar D) 8 units per dollar Answer: D Topic: Marginal Utility Per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

98) The table above shows Tom's total utility from milkshakes and sodas. A milkshake costs $2.00. How much marginal utility per dollar would Tom get if he purchased the ninth milkshake? A) 1728 units per dollar B) 20 units per dollar C) 10 units per dollar D) none of the above Answer: C Topic: Marginal Utility Per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

99) The table above shows Tom's total utility from milkshakes and sodas. Tom's total budget for milkshakes and sodas is $10.00 per week. Milkshakes cost $2.00 each and sodas cost $1.00 each. What combination of milkshakes and sodas maximizes Tom's utility? A) 5 milkshakes and 0 sodas B) 4 milkshakes and 2 sodas C) 3 milkshakes and 4 sodas D) 2 milkshakes and 6 sodas Answer: B Topic: The Utility-Maximizing Choice Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

100) The table above shows Tom's total utility from milkshakes and sodas. Tom's total budget for milkshakes and sodas is $10.00 per week. Milkshakes cost $2.00 each and sodas cost $1.00 each. What quantity of milkshakes does Tom purchase at his consumer equilibrium? A) one B) two C) three D) four Answer: D Topic: The Utility-Maximizing Choice Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

101) The table above shows Tom's total utility from milkshakes and sodas. Tom's total budget for milkshakes and sodas is $10.00 per week. Milkshakes cost $2.00 each and sodas cost $1.00 each. What quantity of sodas does Tom purchase at his consumer equilibrium? A) one B) two C) three D) four Answer: B Topic: The Utility-Maximizing Choice Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

102) The table above shows Tom's total utility from milkshakes and sodas. Tom's total budget for milkshakes and sodas is $20.00 per week. Milkshakes cost $2.00 each and sodas cost $1.00 each. What quantity of milkshakes does Tom purchase at his consumer equilibrium? A) five B) six C) seven D) eight Answer: C Topic: The Utility-Maximizing Choice Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

103) The table above shows Tom's total utility from milkshakes and sodas. Tom's total budget for milkshakes and sodas is $20.00 per week. Milkshakes cost $2.00 each and sodas cost $1.00 each. What quantity of sodas does Tom purchase at his consumer equilibrium? A) five B) six C) seven D) eight Answer: B Topic: The Utility-Maximizing Choice Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

104) The table above shows Tom's total utility from milkshakes and sodas. Tom's total budget for milkshakes and sodas is $20.00 per week. Milkshakes cost $2.00 each and sodas cost $1.00 each. What is Tom's total utility at his consumer equilibrium? A) 1900 units B) 2155 units C) 2266 units D) 2278 units Answer: C Topic: The Utility-Maximizing Choice Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

105) The table above shows Tom's total utility from milkshakes and sodas. Tom's total budget for milkshakes and sodas is $20.00 per week. Milkshakes cost $2.00 each and sodas cost $.50 each. What quantity of milkshakes does Tom purchase at his consumer equilibrium? A) five B) six C) seven D) eight Answer: D Topic: The Utility-Maximizing Choice Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

106) The table above shows Tom's total utility from milkshakes and sodas. Tom's total budget for milkshakes and sodas is $20.00 per week. Milkshakes cost $2.00 each and sodas cost $.50 each. What quantity of sodas does Tom purchase at his consumer equilibrium? A) five B) six C) seven D) eight Answer: D Topic: The Utility-Maximizing Choice Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Quantity 1 2 3 4 5

Pizza Total utility 95 180 255 320 375

CDs Total utility 170 320 450 560 650

Quantity 1 2 3 4 5

107) Bobby spends $100 per month on pizza and CDs. His utility from these goods is shown in the table above. The price of a pizza is $10 and the price of a CD is $20. Which of the following combinations of the two goods maximizes Bobby's utility? A) 2 pizzas and 4 CDs B) 6 pizzas and 2 CDs C) 4 pizzas and 3 CDs D) 8 pizzas and 1 CDs Answer: C Topic: The Utility-Maximizing Choice Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

108) Bobby spends $100 per month on pizza and CDs. His utility from these goods is shown in the table above. The price of a pizza is $10 and the price of a CD is $20. If Bobby maximizes utility from these goods, his total utility is ________ units. A) 705 B) 750 C) 770 D) 880 Answer: C Topic: The Utility-Maximizing Choice Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

109) Bobby spends $100 per month on pizza and CDs. His utility from these goods is shown in the table above. The price of a pizza is $10 and the price of a CD is $20. Bobby currently buys 6 pizzas and 2 CDs. To maximize his utility, he should A) buy more pizza and fewer CDs. B) buy more CDs and fewer pizza. C) buy more of both goods. D) stay with the current combination of goods. Answer: B Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

110) Bobby spends $100 per month on pizza and CDs. His utility from these goods is shown in the table above. The price of a pizza is $10 and the price of a CD is $20. Bobby currently buys 2 pizzas and 6 CDs. To maximize his utility in the next period, he should A) buy more pizza and fewer CDs. B) buy more CDs and fewer pizza. C) buy more of both goods. D) stay with the current combination of goods. Answer: A Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Quantity 1 2 3 4 5 6

Cookies Marginal utility 32 28 24 20 16 12

Quantity 1 2 3 4 5 6

Cake Marginal utility 40 32 24 16 8 0

111) The above table shows Homer's marginal utility from consuming various quantities of chocolate chip cookies and cake. The price of cookies is $2 per pound, the price of cake is $2 per slice and Homer has $12 to spend on cookies and cake. Homer will consume ________ of cookies and ________ of cake. A) 1 pound; 5 slices B) 2 pounds; 4 slices C) 3 pounds; 3 slices D) 5 pounds; 2 slices Answer: C Topic: The Utility-Maximizing Choice Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

112) The above table shows Homer's marginal utility from consuming various quantities of chocolate chip cookies and cake. The price of cookies is $2 per pound, the price of cake is $2 per slice and Homer has $18 to spend on cookies and cake. Homer will consume ________ pounds of cookies and ________ slices of cake. A) 5; 4 B) 4; 5 C) 6; 3 D) None of the above answers is correct. Answer: A Topic: The Utility-Maximizing Choice Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

113) The above table shows Homer's marginal utility from consuming various quantities of chocolate chip cookies and cake. The price of cookies is $1 per pound, the price of cake is $2 per slice and Homer has $9 to spend on cookies and cake. Homer will consume ________ pounds of cookies and ________ slices of cake. A) 5; 2 B) 2; 5 C) 3; 3 D) None of the above answers is correct. Answer: A Topic: The Utility-Maximizing Choice Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

Quantity of magazines 0 1 2 3 4 5 6 7 8

Total utility from magazines 0 240 400 520 620 680 716 736 740

Quantity of CDs 0 1 2 3 4 5 6 7 8

Total utility from CDs 0 500 950 1350 1650 1800 1850 1870 1875

114) The table above gives Jane's total utility from magazines and CDs. The price of a magazine is $4 and the price of a CD is $10. What is the marginal utility per dollar from magazines when the sixth magazine is purchased? A) 36 units B) 15 units C) 9 units D) 5 units Answer: C Topic: Marginal Utility Per Dollar Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills

115) The table above gives Jane's total utility from magazines and CDs. The price of a magazine is $4 and the price of a CD is $10. What is the marginal utility per dollar from CDs when the sixth CD is purchased? A) 40 units B) 30 units C) 15 units D) 5 units Answer: D Topic: Marginal Utility Per Dollar Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills

116) The table above gives Jane's total utility from magazines and CDs. The price of a magazine is $4 and the price of a CD is $10. If Jane's total budget for magazines and CDs is $70.00 per week, what is her total utility at her utility maximizing consumer equilibrium? A) 2480 units B) 1870 units C) 210 units D) 30 units Answer: A Topic: Maximizing Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills

117) The table above gives Jane's total utility from magazines and CDs. The price of a magazine is $4 and the price of a CD is $10. If Jane's budget increases from $70 to $88, how many magazines does Jane purchase at her consumer equilibrium? A) five B) six C) seven D) eight Answer: C Topic: Maximizing Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills

118) The table above gives Jane's total utility from magazines and CDs. The price of a magazine is $4 and the price of a CD is $10 and Jane's budget is $88. What is Jane's marginal utility per dollar spent on magazines at her consumer equilibrium? A) 36 units B) 15 units C) 9 units D) 5 units Answer: D Topic: Marginal Utility Per Dollar Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills

119) The table above gives Jane's total utility from magazines and CDs. The price of a magazine is $4 and the price of a CD is $10 and Jane's budget is $88. What is Jane's total utility when she maximizes her utility? A) 70 units B) 1516 units C) 2536 units D) 2586 units Answer: D Topic: Maximizing Utility Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

Quantity 0 1 2 3

Pizza Marginal utility 0 20 16 10

Quantity 0 1 2 3

Pepsi Marginal utility 0 30 8 7

120) The above table shows Priscilla's marginal utility from the two goods she consumes, pizza and Pepsi. The price of a slice of pizza is $2 and of a can of Pepsi is $1. Suppose Priscilla has $6 to spend. Which combination of pizza and Pepsi will maximize Priscilla's utility? A) 3 slices of pizza B) 2 slices of pizza and 2 cans of Pepsi C) 3 cans of Pepsi and 1 slice of pizza D) 1 slice of pizza and 3 cans of Pepsi Answer: B Topic: Equalizing Marginal Utility per Dollar Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills

121) The above table shows Priscilla's marginal utility from the two goods she consumes, pizza and Pepsi. The price of a slice of pizza is $2 and of a can of Pepsi is $1. Suppose Priscilla has $6 to spend. If Priscilla chooses to eat 3 slices of pizza, A) she is maximizing her total utility. B) she is not equating marginal utility per dollar for pizza and Pepsi. C) she is not at a consumer equilibrium. D) Both answers B and C are correct. Answer: D Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

122) The above table shows Priscilla's marginal utility from the two goods she consumes, pizza and Pepsi. The price of a slice of pizza is $2 and of a can of Pepsi is $1. Suppose Priscilla has $6 to spend. If Priscilla is consuming 1 slice of pizza and 2 cans of Pepsi, which of the following is correct? A) Priscilla is maximizing her utility. B) Priscilla should increase her consumption of Pepsi to maximize her utility. C) Priscilla should increase her consumption of pizza to maximize her utility. D) None of the above answers is correct. Answer: C Topic: Maximizing Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Quantity 1 2 3 4 5 6 7

Magazines Marginal utility 50 42 34 26 18 10 4

Quantity 8 10 12 14 16 18 20

Chocolate bars Marginal utility 26 23 20 17 14 11 8

123) Sonya's budget for magazines and chocolate bars is $50. Her marginal utility from these goods is shown in the table above. If the price of a magazine is $5 and the price of a chocolate bar is $2.50, which of the following combinations maximizes Sonya's utility? A) 1 magazine and 18 chocolate bars B) 2 magazines and 20 chocolate bars C) 3 magazines and 14 chocolate bars D) 5 magazines and 10 chocolate bars Answer: C Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills 63 Copyright © 2014 Pearson Education, Inc.

124) Sonya's budget for magazines and chocolate bars is $50. Her marginal utility from these goods is shown in the table above. The price of a magazine is $5 and the price of a chocolate bar is $2.50. Sonya currently buys 3 magazines and 14 chocolate bars. To maximize her utility, she should A) buy more chocolate bars and fewer magazines. B) buy more magazines and fewer chocolate bars. C) buy more of both goods. D) stay with the current combination of goods. Answer: D Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

125) Sonya's budget for magazines and chocolate bars is $50. Her marginal utility from these goods is shown in the table above. The price of a magazine is $5 and the price of a chocolate bar is $2.50. Sonya currently buys 2 magazines and 16 chocolate bars. To maximize her utility, she should A) buy more chocolate bars and fewer magazines. B) buy more magazines and fewer chocolate bars. C) buy more of both goods. D) stay with the current combination of goods. Answer: B Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

126) Sonya's budget for magazines and chocolate bars is $50. Her marginal utility from these goods is shown in the table above. The price of a magazine is $5 and the price of a chocolate bar is $2.50. Sonya currently buys 4 magazines and 12 chocolate bars. To maximize her utility, she should A) buy more chocolate bars and fewer magazines. B) buy more magazines and fewer chocolate bars. C) buy more of both goods. D) stay with the current combination of goods. Answer: A Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

127) Sonya's budget for magazines and chocolate bars is $50. Her marginal utility from these goods is shown in the table above. The price of a magazine is $5 and the price of a chocolate bar is $2.50. Sonya currently buys 2 magazines and 12 chocolate bars. To maximize her utility, she should A) buy more chocolate bars and fewer magazines. B) buy more magazines and fewer chocolate bars. C) buy more of both goods. D) stay with the current combination of goods. Answer: C Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

128) If Bobby decides that his marginal utility per dollar spent on vanilla ice cream exceeds his marginal utility per dollar spent on chocolate ice cream, he should then A) buy more chocolate ice cream and less vanilla ice cream. B) buy more vanilla ice cream and less chocolate ice cream. C) buy all the vanilla ice cream he can. D) never buy chocolate ice cream. Answer: B Topic: Marginal Analysis Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

129) Katie has a choice of spending $6.00 for another hamburger, which has a marginal utility of 30, or $9.00 for another pizza. For her to choose the pizza, it would have to have a marginal utility of at least A) 9. B) 30. C) 31. D) 46. Answer: D Topic: Marginal Analysis Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

130) Kumiko is not at her consumer equilibrium because she sees too many movies and buys too few books. As she moves toward her consumer equilibrium, her marginal utility from movies will ________ and her marginal utility from books will ________. A) decrease; decrease B) increase; decrease C) decrease; increase D) increase; increase Answer: B Topic: Marginal Analysis Skill: Analytical Status: Modified 10th edition AACSB: Reflective Thinking

131) Kumiko is not at her consumer equilibrium because she sees too many movies and buys too few books. As she moves toward her consumer equilibrium, her total utility from movies will ________ and her total utility from books will ________. A) decrease; decrease B) increase; decrease C) decrease; increase D) increase; increase Answer: C Topic: Marginal Analysis Skill: Analytical Status: Modified 10th edition AACSB: Reflective Thinking

132) Teddy buys only chocolate chip cookies and hot chocolate and spends all of his income on the two items. Suppose that Teddy's marginal utility per dollar from cookies exceeds that from hot chocolate. Teddy can make himself better off if he buys A) more cookies and less hot chocolate. B) fewer cookies and more hot chocolate. C) an equal amount of cookies and hot chocolate. D) only hot chocolate. Answer: A Topic: Marginal Analysis Skill: Analytical Status: Modified 10th edition AACSB: Reflective Thinking

133) Joshua consumes only apples and bread and is in consumer equilibrium. Joshua reads that eating bread is healthy, so his total utility from each loaf of bread increases. At his new consumer equilibrium Joshua would consume A) more apples and less bread. B) fewer apples and more bread. C) some combination of apples and bread corresponding to a lower ratio of the marginal utility of bread to the marginal utility of apples. D) the same quantity of apples and the same quantity of bread. Answer: B Topic: Marginal Analysis Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

Quantity 3 4 5 6 7 8 9

Marginal utility of DVD rentals 100 90 80 70 60 50 40

Marginal utility of movies 152 150 147 143 140 135 128

134) Becky decides to spend $50 per month on DVD rentals and movie tickets. Her marginal utility schedules from these two goods are shown in the table above. The price of a DVD rental is $2.50, and the price of a movie ticket is $5. Suppose Becky rents 8 DVDs and buys 6 movie tickets per month. She A) cannot increase her total utility because she already gets the maximum possible utility from DVD rentals and movies within her budget. B) can increase her total utility if she rents more DVDs and buys more movie tickets. C) can increase her total utility if she rents more DVDs and buys fewer movie tickets. D) can increase her total utility if she rents fewer DVDs and buys more movie tickets. Answer: D Topic: Marginal Analysis Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

135) Becky decides to spend $50 per month on DVD rentals and movie tickets. Her marginal utility schedules from these two goods are shown in the table above. The price of a DVD rental is $2.50, and the price of a movie ticket is $5. Becky maximizes her utility if she rents ________ DVDs per month and buys ________ movie tickets per month. A) 6; 7 B) 4; 8 C) 8; 6 D) 5; 7 Answer: A Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

136) Tom spends $20 a month on CDs and magazines. The price of a CD is $6 and the price of a magazine is $4. When Tom maximizes his utility, the marginal utility from CDs is ________ the marginal utility from newspapers. A) the same as B) 1/2 C) 20 times D) 1 1/2 times Answer: D Topic: Revealing Preferences Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

137) Tom spends all his income on comics and cola and maximizes his total utility. If the price of a comic is $4 and the price of a can of cola is $1, then the ratio of the ________ is 4. A) marginal utility from cola to the marginal utility from comics B) marginal utility from comics to the marginal utility from cola C) number of comics Tom buys to the number of cola Tom buys D) total utility from comics to the total utility from cola Answer: B Topic: Revealing Preferences Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

138) John and Sally have identical preferences except that Sally's utility is exactly 10 times John's for each basket of goods. If they have the same income and face the same prices, A) Sally will consume 10 times the amount that John consumes. B) Sally will receive 1/10 the satisfaction of John. C) both will consume the same amount of all goods. D) John and Sally will have equal total utility. Answer: C Topic: Units of Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

139) Economists using marginal utility theory assume that consumers' objectives are to A) maximize their total utility. B) maximize their marginal utility. C) maximize their income. D) none of the above Answer: A Topic: Study Guide Question, Marginal Utility Theory Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

140) Which of the following is NOT an assumption of marginal utility theory? A) People derive utility from their consumption. B) More consumption yields more total utility. C) Marginal utility diminishes with more consumption. D) Utility can be measured and the units of utility are precisely defined. Answer: D Topic: Study Guide Question, Marginal Utility Theory Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

141) As more of a good is consumed, its marginal utility ________ and its total utility ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls Answer: C Topic: Study Guide Question, Diminishing Marginal Utility Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

142) Jeannie's marginal utility from her 4th book in a month is 50. Her marginal utility from her 5th book A) is greater than 50. B) equals 50. C) is less than 50. D) might be more than, less than, or equal to 50 but more information is needed. Answer: C Topic: Study Guide Question, Diminishing Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

143) When Alex eats 1 slice of pizza, his total utility is 80; when Alex eats 2 slices of pizza, his total utility is 120. Alex's marginal utility from the second pizza is A) 200. B) 80. C) 60. D) 40. Answer: D Topic: Study Guide Question, Marginal Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

144) The marginal utility from the first burrito Bobby consumes is larger than the marginal utility from the first taco Bobby consumes. As a result, A) tacos are an inferior good for Bobby. B) Bobby will never consume tacos. C) Bobby will consume a taco only if the price of a taco is less than the price of a burrito. D) burritos and tacos are substitute goods for Bobby. Answer: C Topic: Study Guide Question, Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

145) Sergio consumes only beef and snails and is maximizing his utility. If the price of beef is less than the price of snails, then we definitely know that A) Sergio buys more beef than snails. B) Sergio buys more snails than beef. C) the marginal utility from the last pound of beef purchased is greater than the marginal utility from the last pound of snails purchased. D) the marginal utility from the last pound of snails purchased is greater than the marginal utility from the last pound of beef purchased. Answer: D Topic: Study Guide Question, Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

146) Tommy buys only soda and pizza and is buying the amounts that maximize his utility. The marginal utility from a soda is 5 and the price of a soda is $1. The marginal utility from a slice of pizza is 10. The price of a slice of pizza must be A) $10. B) $2. C) $1. D) some amount that cannot be calculated without more information. Answer: B Topic: Study Guide Question, Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

147) Shaniq buys only soda and pizza and is buying the amounts that maximize her utility. The marginal utility from a soda is 30 and the price of a soda is $2. The marginal utility from a slice of pizza is also 30. The price of a slice of pizza must be A) $30. B) $2. C) $1. D) some amount that cannot be calculated without more information. Answer: B Topic: Study Guide Question, Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

148) Katie finds that the marginal utility from a compact disc is 30 and the marginal utility from a pizza is 10. The price of a compact disc is $15 and the price of a pizza is $10. In order to increase her utility, Katie should A) consume more compact discs and fewer pizzas. B) consume fewer compact discs and more pizzas. C) not change her consumption of pizza and compact discs. D) consume fewer compact discs and fewer pizzas. Answer: A Topic: Study Guide Question, Equalizing Marginal Utility per Dollar Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

149) Bianca consumes apples and bananas and is in consumer equilibrium. The marginal utility of the last apple is 10 and the marginal utility of the last banana is 20. If the price of an apple is $0.50, then what is the price of a banana? A) $0.10 B) $0.25 C) $0.50 D) $1.00 Answer: D Topic: Study Guide Question, Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Total utility from Quantity (hours) 1 2 3 4

Golf

Tennis

40 70 90 100

150) The above table shows Sue's total utility from golf and tennis. If the price of each hour of golf is twice the price of each hour of tennis, and Sue plays four hours of tennis, then Sue plays A) one hour of golf. B) two hours of golf. C) three hours of golf. D) four hours of golf. Answer: C Topic: Parallel MyEconLab Questions Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

3 Predictions of Marginal Utility Theory 1) Marginal utility theory is used in the derivation of the A) negative slope of demand curves. B) negative slope of supply curves. C) positive slope of demand curves. D) positive slope of supply curves. Answer: A Topic: Predictions of Marginal Utility Theory, Demand Curve Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Communication

2) The predictions of marginal utility theory A) contradict the idea that the demand curve slopes downward. B) support the idea that the demand curve slopes downward. C) support the idea that the supply curve slopes upward. D) contradict the idea that the supply curve slopes upward. Answer: B Topic: Predictions of Marginal Utility Theory, Demand Curve Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

3) In consumer equilibrium, Harold consumes pizza, sodas, and other goods. Pizza and soda are complements for Harold. The price of a pizza rises while his income remains the same. Harold then consumes A) more pizza and less soda. B) more pizza and more soda. C) less pizza and less soda. D) less pizza and more soda. Answer: C Topic: Predictions of Marginal Utility Theory, Change in Price Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

4) Teddy buys only chocolate chip cookies and hot chocolate and spends all of his income on the two items. Suppose the price of a cookie rises. According to marginal utility theory, Teddy buys A) more cookies. B) fewer cookies. C) more hot chocolate. D) an equal amount of cookies and hot chocolate. Answer: B Topic: Predictions of Marginal Utility Theory, Change in Price Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

5) Teddy buys only chocolate chip cookies and hot chocolate and spends all of his income on the two items. Suppose the price of a cookie rises. According to marginal utility theory, Teddy will buy A) more cookies and less hot chocolate, which decreases his marginal utility from cookies and increases his marginal utility from hot chocolate. B) more cookies and less hot chocolate, which increases his marginal utility from cookies and decrease his marginal utility from hot chocolate. C) fewer cookies and more hot chocolate, which decreases his marginal utility from cookies and increases his marginal utility from hot chocolate. D) fewer cookies and more hot chocolate, which increases his marginal utility from cookies and decreases his marginal utility from hot chocolate. Answer: D Topic: Predictions of Marginal Utility Theory, Change in Price Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

6) Bianca consumes pizza. Marginal utility theory predicts that when the price of pizza increases, A) Bianca's total utility from pizza will increase. B) Bianca will buy less pizza. C) Bianca's marginal utility from pizza will increase. D) Bianca's demand curve for pizza will shift leftward. Answer: B Topic: Predictions of Marginal Utility Theory, Change in Price Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

7) The only goods you consume are pizza and soda. Both are normal goods. You consider pizza and soda to be substitutes. Which of the following will lead you to eat more pizza? A) The price of a pizza falls. B) The price of a soda falls. C) The price of a soda rises. D) Both answers A and C are correct. Answer: D Topic: Predictions of Marginal Utility Theory, Change in Price Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

8) Using marginal utility theory, when the price of a gallon of milk falls, a consumer will buy A) the same amount of milk as before and buy more of all other goods. B) more milk. C) more milk only if its marginal utility is increasing. D) more milk only if its marginal utility is constant. Answer: B Topic: Predictions of Marginal Utility Theory, Change in Price Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

9) When the price of popcorn falls, before there is any change in consumption, the A) marginal utility of popcorn definitely increases. B) marginal utility per dollar from popcorn definitely increases. C) total expenditure on popcorn definitely rises. D) entire total utility of popcorn curve definitely shifts rightward. Answer: B Topic: Predictions of Marginal Utility Theory, Change in Price Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

10) Suppose the price of soda is $2 each and the price of a pizza slice is $4 each. David maximizes his utility by buying only sodas and pizza. He buys 5 sodas and 10 slices of pizza. If the price of a soda increases to $3 each, David will A) decrease the number of sodas bought and the demand curve for sodas will shift leftward. B) decrease the number of sodas bought and move along the demand curve for soda. C) buy more pizza and move along the demand curve for pizza. D) buy less pizza and the demand curve for pizza will shift leftward. Answer: B Topic: Predictions of Marginal Utility Theory, Change in Price Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills

11) Ricardo buys cola and popcorn. Cola sells for $0.50 a can and popcorn sells for $1 per bag. He is in consumer equilibrium. The price of a cola jumps to $1 per can. In his new consumer equilibrium, Ricardo's A) marginal utility of cola will be equal to his marginal utility of popcorn. B) marginal utility per dollar spent will be 2. C) total utility will be higher. D) marginal utility of cola will decrease. Answer: A Topic: Predictions of Marginal Utility Theory, Change in Price Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

12) Marginal utility theory concludes that a decrease in the price of a good increases the quantity demanded and A) increases the demand for substitutes. B) decreases the demand for complements. C) increases the total expenditure on the good. D) increases total utility. Answer: D Topic: Predictions of Marginal Utility Theory, Change in Price Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

13) Marginal utility theory predicts that when the price of one good rises, the demand for another good is a substitute increases. This change occurs because of A) an increase in the marginal utility per dollar from the substitute good. B) an increase in the marginal utility of the substitute good. C) a decrease in the marginal utility per dollar from the good whose price has risen. D) a decrease in the marginal utility of the good whose price has risen. Answer: C Topic: Predictions of Marginal Utility Theory, Change in Price Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

14) Marginal utility theory predicts that as the price of coffee rises, the ________ a substitute for coffee ________ and the ________ coffee ________. A) supply of; increases; demand for; decreases B) supply of; decreases; supply of; increases C) demand for; increases; quantity demanded of; decreases D) demand for; decreases; demand for; increases Answer: C Topic: Predictions of Marginal Utility Theory, Change in Price Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

15) Roberta spends all of her income on two items, staplers and paper clips. If the price of a stapler increases, there will be a ________ Roberta's demand curve for staplers and a ________ Roberta's demand curve for paper clips. A) rightward shift of; leftward shift of B) leftward shift of; movement along C) movement along; rightward shift of D) movement along; leftward shift of Answer: C Topic: Predictions of Marginal Utility Theory, Change in Price Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

16) Joe consumes pizza and movies. Pizza and movies are substitutes. According to marginal utility theory, if the price of a pizza rises then A) the demand curve for pizza shifts leftward. B) the demand curve for pizza shifts leftward and the demand curve for movies shifts rightward. C) there is an upward movement along the demand curve for pizza. D) there is an upward movement along the demand curve for pizza and the demand curve for movies shifts rightward. Answer: D Topic: Predictions of Marginal Utility Theory, Change in Price Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

17) Gunther rents Nintendo games and videos. The marginal utility from his last Nintendo game is 10 and that from his last video is 5. Nintendo games rent for $2 each. Gunther's demand curve for games is shown in the figure above. How many videos a week does Gunther rent? A) 1 B) 2 C) 3 D) 4 Answer: D Topic: Predictions of Marginal Utility Theory, Demand Curve Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

18) When economists speak of normal goods they mean goods for which A) the demand curve slopes downward. B) marginal utility is positive. C) marginal utility decreases as consumption increases. D) demand decreases when incomes fall. Answer: D Topic: Predictions of Marginal Utility Theory, Change in Income Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

19) Renee consumes pizza and rice. An increase in her income causes her to consume fewer pizzas and more rice. The change in pizzas consumed means that A) her total utility from consuming pizzas had been negative. B) her marginal utility from consuming pizzas had been negative. C) her marginal utility from consuming pizzas had been zero. D) pizza is an inferior good for Renee. Answer: D Topic: Predictions of Marginal Utility Theory, Change in Income Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

20) Marginal utility theory predicts that when income increases a A) person's total utility will not change. B) person might increase the consumption of some normal goods and decrease the consumption of other normal goods. C) person's consumption of normal goods will increase. D) None of the above answers is correct because marginal utility theory does not address how demand changes in response to changes in income. Answer: C Topic: Predictions of Marginal Utility Theory, Change in Income Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

21) The only goods you consume are pizza and soda. Both are normal goods. For you, pizza and soda are substitutes. Which of the following leads you to buy more of both goods? A) The price of a pizza falls. B) The price of a soda falls. C) Your income increases. D) Both answers A and B are correct. Answer: C Topic: Predictions of Marginal Utility Theory, Change in Income Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

22) Marginal utility theory predicts that if a consumer's income decreases, the consumer A) buys fewer normal goods. B) buys fewer inferior goods. C) buys more of all goods. D) might either increase or decrease purchases of normal goods. Answer: A Topic: Predictions of Marginal Utility Theory, Change in Income Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

23) Marginal utility theory predicts that an increase in income means that the consumption of A) all goods will increase. B) normal goods will increase and consumption of inferior goods will decrease. C) inferior goods will increase and consumption of normal goods will decrease. D) None of the above answers is correct. Answer: B Topic: Predictions of Marginal Utility Theory, Change in Income Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

24) According to marginal utility theory, a rise in income will A) increase a consumer's total utility. B) increase consumption of all goods. C) increase the marginal utility of all goods. D) None of the above answers is correct. Answer: A Topic: Predictions of Marginal Utility Theory, Change in Income Skill: Analytical Status: Modified 10th edition AACSB: Reflective Thinking

25) Marginal utility theory predicts that A) when the price of a good rises, the quantity demanded of that good decreases. B) if the price of one good rises, the demand for a substitute good increases. C) if income increases, the demand for a normal good increases. D) All of the above answers are correct because all are predictions of marginal utility theory. Answer: D Topic: Predictions of Marginal Utility Theory Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

26) Emma consumes only tacos and pizza . They are substitute goods for her. The price of a taco falls. Emma will buy ________ tacos and her marginal utility from the last slice of pizza she eats ________. A) more; does not change B) more; decreases C) the same quantity; does not change D) less; increases Answer: B Topic: Predictions of Marginal Utility Theory Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

27) Lucy buys only magazines and CDs. Both are normal goods. Lucy's income decreases, but the prices of magazines and CDs do not change. Marginal utility theory predicts that Lucy will ________. A) buy fewer magazines and fewer CDs B) substitute magazines for CDs C) increase her marginal utility from both magazines and CDs by buying more magazines and CDs D) buy more magazines and more CDs Answer: A Topic: Predictions of Marginal Utility Theory, Change in Income Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

28) Jeremiah spends all of his income on oranges and cookies, which are normal goods. If Jeremiah's income decreases, he will buy ________ oranges and ________ cookies. His marginal utility from oranges will ________ and his marginal utility from cookies will ________. A) fewer; fewer; decrease; increase B) more; more; decrease; decrease C) the same quantity of; fewer; remain constant; decrease D) fewer; fewer; increase; increase Answer: B Topic: Predictions of Marginal Utility Theory, Change in Income Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

29) Steve is in a consumer equilibrium. Then, the price of steak increases from $6 a pound to $8 a pound. Steve decreases the number of pounds of steaks he buys each week ________. A) and decreases his total utility B) only if his income also decreases C) so that the marginal utility per dollar spent on steaks is the same as it was when the price was $6 a pound D) so that both his total utility and his marginal utility from steak fall Answer: A Topic: Predictions of Marginal Utility Theory Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

30) Which of the following statements is true? A) Utility units are observable. B) Total utility is equal to marginal utility. C) Utility is gained whenever someone wants a good. D) Marginal utility theory assumes that marginal utility diminishes as more of any good is consumed. Answer: D Topic: Predictions of Marginal Utility Theory Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

31) Kirk consumes normal goods. If Kirk's income decreases and the prices of all goods remain unchanged, in his new consumer equilibrium, his marginal utility from each good will ________ and his total utility will ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Topic: Predictions of Marginal Utility Theory, Change in Income Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

32) Patty spends $10 a week on bagels and soda. The price of a bagel is $2 and the price of soda is $1 a can. Patty buys 2 bagels and 6 cans of soda. Her marginal utility from bagels is 20 units. The price of a bagel rises to $3 and the price of a can of soda rises to $1.50. Patty now buys ________ bagels and her marginal utility from bagels ________. She buys ________ cans of soda and her marginal utility from soda ________. A) fewer than 2; increases; fewer than 6; increases B) 2; is 20 units; 6; is 10 units C) fewer than 2; is 20 units; fewer than 6; is 10 units D) fewer than 2; decreases; fewer than 6; decreases Answer: A Topic: Predictions of Marginal Utility Theory Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Quantity 0 1 2 3

Pizza Marginal utility 0 20 16 10

Quantity 0 1 2 3

Pepsi Marginal utility 0 30 8 7

33) The above table shows Priscilla's marginal utility from the two goods she consumes, pizza and Pepsi. A slice of pizza costs $4 and a can of Pepsi $2. Suppose Priscilla has $12 to spend. Which of the following leads Priscilla to switch her choices of pizza and Pepsi? A) an increase in the price of pizza to $6 per slice B) a decrease in the price of Pepsi to $1 per can C) an increase in Priscilla's income D) All of the above will cause Priscilla to change her choices. Answer: D Topic: Predictions of Marginal Utility Theory Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills 81 Copyright © 2014 Pearson Education, Inc.

34) The above table shows Priscilla's marginal utility from the two goods she consumes, pizza and Pepsi. A slice of pizza costs $4 and a can of Pepsi $2. Suppose Priscilla has $12 to spend. If the price of pizza decreases, Priscilla's preferences (her marginal utility schedule) for pizza A) will increase. B) will decrease. C) will not change. D) may increase or decrease depending on what happens to the price of Pepsi. Answer: C Topic: Predictions of Marginal Utility Theory Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills

35) The above table shows Priscilla's marginal utility from the two goods she consumes, pizza and Pepsi. Initially, a slice of pizza costs $4 and a can of Pepsi $2. Suppose Priscilla has $12 to spend. If the price of pizza falls to $2, Priscilla will choose to A) consume more pizza. B) consume more Pepsi. C) consume less pizza. D) Both answers A and B are correct. Answer: D Topic: Predictions of Marginal Utility Theory Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Quantity 0 1 2 3 4 5

Sub sandwiches Marginal utility 0 54 44 24 20 12

Quantity 0 1 2 3 4 5

Mountain Dew Marginal utility 0 30 22 18 12 6

36) The above table gives Sue's marginal utility schedules for sub sandwiches and Mountain Dew, the only products Sue consumes. Suppose the price of a sub sandwich is $4 each and the price of a Mountain Dew is $2 each. Sue's income is $12. If Sue is at a consumer equilibrium, she eats ________ sub sandwich(es) and drinks ________ Mountain Dews. A) 0; 6 B) 1; 4 C) 2; 2 D) 3; 0 Answer: C Topic: Equalizing Marginal Utility per Dollar Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills 82 Copyright © 2014 Pearson Education, Inc.

37) The above table gives Sue's marginal utility schedules for sub sandwiches and Mountain Dew, the only products Sue consumes. Suppose initially the price of a sub sandwich is $4 each and the price of a Mountain Dew is $2 each. Sue's income is $12. If the price of subs rises to $6 each, Sue will consume A) more Mountain Dews. B) fewer subs. C) fewer Mountain Dews so that she can still afford to buy two subs. D) Both answers A and B are correct. Answer: D Topic: Predictions of Marginal Utility Theory Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills

38) Sue consumes only sub sandwiches and Mountain Dew. Subs and Mountain Dew are complements. If the price of a sub sandwiches increases, A) Sue will move upward along her demand curve for subs. B) Sue will move downward along her demand curve for subs. C) Sue's demand curve for subs will shift leftward. D) Sue's demand curve for subs will shift rightward. Answer: A Topic: Predictions of Marginal Utility Theory Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

39) Sue consumes only sub sandwiches and Mountain Dew. Subs and Mountain Dew are complements. If the price of a Mountain Dew increases, A) Sue's demand curve for sub sandwiches will shift rightward. B) Sue will move downward along her demand curve for Mountain Dews. C) Sue will move upward along her demand curve for Mountain Dews. D) Both answers A and C are correct. Answer: C Topic: Predictions of Marginal Utility Theory Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

40) Betty consumes only milkshakes and sandwiches and maximizes her total utility. Suppose that the prices of a milkshakes and sandwiches both double and at the same time Betty's income doubles. Betty buys ________ sandwiches and her marginal utility from sandwiches ________. A) more; increases B) fewer; decreases C) more; decreases D) the same number of; remains the same Answer: D Topic: Predictions of Marginal Utility Theory Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

41) Andy spends $30 a week on movies and magazines. The price of a movie is $8, the price of a magazine is $2, and Andy sees 3 movies a week and buys 3 magazines. The price of a magazine increases to $4 and Andy's brother gives him $6 a week so that he can still see 3 movies a week and buy 3 magazines. In this situation, Andy will see ________ movies a week and buy ________ magazines. A) fewer than 3; fewer than 3 B) 3; 3 C) fewer than 3; more than 3 D) more than 3; fewer than 3 Answer: D Topic: Predictions of Marginal Utility Theory Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

42) Sam consumes only sandwiches and soda and maximizes his total utility. Suppose that the price of a sandwich falls. At the new consumer equilibrium, Sam substitutes ________ for ________. Sam's marginal utility from soda ________ and his marginal utility per dollar spent on sandwiches ________. A) sandwiches; soda; increases; increases B) soda; sandwiches; decreases; increases C) sandwiches; soda; increases; decreases D) soda; sandwiches; stays the same; stays the same Answer: A Topic: Predictions of Marginal Utility Theory Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

43) The paradox of value is illustrated by the fact that A) a pound of bread is cheaper than a pound of gold. B) teens buy designer jeans. C) if diamonds were free they would no longer be useful for engagement rings. D) gold and diamonds occupy little space. Answer: A Topic: Paradox of Value Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

44) The paradox of value refers to the fact that A) different consumers value the same items differently. B) the value of a good depends on its total utility. C) water costs little, while diamonds cost a lot. D) water brings little consumer surplus. Answer: C Topic: The Paradox of Value Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

45) The water and diamonds paradox of value A) is that water is essential for life and yet is cheap, whereas diamonds are totally nonessential and yet are expensive. B) points out that we generally have a low total utility of water and a high total utility of diamonds. C) is resolved by the principle that market price is determined by total utility, not marginal utility. D) None of the above Answer: A Topic: The Paradox of Value Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

46) The diamond-water paradox of value can be explained by A) distinguishing between total utility and marginal utility. B) water's high level of utility relative to diamonds. C) water's low price relative to diamonds. D) the fact that utility cannot be measured. Answer: A Topic: Paradox of Value Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

47) The paradox of value can be resolved by distinguishing between A) quantity demanded and quantity supplied. B) supply and quantity supplied. C) normative and positive statements. D) total utility and marginal utility. Answer: D Topic: Paradox of Value Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

48) The paradox of value between diamonds and water is explained by the fact that the A) total utility of diamonds exceeds the total utility of water. B) marginal utility of diamonds exceeds the marginal utility of water. C) total utility of diamonds exceeds the marginal utility of water. D) marginal utility of diamonds exceeds the total utility of water. Answer: B Topic: Paradox of Value Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

49) With respect to water and diamonds, water A) has a higher marginal utility than diamonds. B) has a lower marginal utility than diamonds. C) is cheaper than diamonds because it has a lower total utility. D) is cheaper than diamonds because it has a higher total utility. Answer: B Topic: The Paradox of Value Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

50) According to the paradox of value, expensive goods, such as gemstones, provide consumers with A) high total utility and low marginal utility. B) low total utility and low marginal utility. C) low total utility and high marginal utility. D) high marginal utility and high total utility. Answer: C Topic: Paradox of Value Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

51) The water and diamonds paradox of value results from A) the concept of deadweight loss. B) the "law of demand." C) diminishing marginal utility. D) the elasticity of demand. Answer: C Topic: The Paradox of Value Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

52) Water is cheap and diamonds are expensive because water has a ________, and diamonds have a ________. A) low total utility; high total utility B) low marginal utility; high marginal utility C) high marginal utility; low marginal utility D) low marginal utility and a low total utility; high marginal utility and a high total utility Answer: B Topic: Paradox of Value Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

53) Water has a ________ marginal utility and brings a ________ consumer surplus; diamonds have a ________ marginal utility and bring a ________ consumer surplus. A) small; small; large; large B) large; large; small; small C) small; large; large; small D) large; small; small; large Answer: C Topic: Paradox of Value Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

54) Michael consumes only steak and lobster. Suppose that the price of steak rises. After Michael is back at equilibrium, compared to the situation when steak was cheaper, the marginal utility from the last steak will A) have increased. B) not have changed. C) have decreased. D) not be comparable with the marginal utility before the price hike. Answer: A Topic: Study Guide Question, Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

55) Marginal utility theory predicts that a rise in the price of a banana results in A) the demand curve for bananas shifting rightward. B) the demand curve for bananas shifting leftward. C) a movement upward along the demand curve for bananas. D) a movement downward along the demand curve for bananas. Answer: C Topic: Study Guide Question, Marginal Utility Theory Predictions, Change in Price Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

56) Which of the following statements is true? A) Marginal utility theory predicts that an increase in a consumer's income increases consumption of all goods. B) It is possible to derive the law of demand – that a higher price decreases the quantity demanded – using marginal utility theory. C) Marginal utility theory makes no prediction about a consumer's responses to hikes in the prices of the goods and services he or she consumes. D) Marginal utility theory predicts that all goods are normal goods and that all goods are substitutes for each other. Answer: B Topic: Study Guide Question, Marginal Utility Theory Predictions, Change in Price Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking 87 Copyright © 2014 Pearson Education, Inc.

57) Because we cannot observe or measure utility A) the predictions of marginal utility theory cannot be verified. B) marginal utility theory is incomplete and so its predictions might not be valid. C) marginal utility theory must be derived from assumptions about demand curves because demand curves can be measured. D) None of the above answers are correct. Answer: D Topic: Study Guide Question, Marginal Utility Theory Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

58) The fact that rubies are more expensive than milk reflects the fact that for most consumers, A) the total utility from rubies exceeds that from milk. B) the marginal utility from rubies equals that from milk. C) more milk is consumed than rubies. D) a quart of rubies is considered to be prettier than a quart of milk. Answer: C Topic: Study Guide Question, Paradox of Value Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

59) Marginal utility theory shows us that water, which is very common, has a ________ marginal utility and a ________ total utility. A) small; large B) large; small C) large; large D) small; small Answer: A Topic: Paradox of Value Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

60) Rembrandt paintings are expensive and not as vital for life as milk, which is cheap. Marginal utility theory explains this paradox of value: The total utility from a Rembrandt painting is ________ than the total utility from milk, and the marginal utility from a Rembrandt painting is ________ than the marginal utility from milk. A) smaller; smaller B) smaller; larger C) larger; smaller D) larger; larger Answer: B Topic: Paradox of Value Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

61) We can explain the paradox of value as follows: The consumer surplus from water, which is cheap, is ________ than the consumer surplus from gold, which is expensive; the total utility from gold is ________ than the total utility from water; and the marginal utility per dollar spent on water ________ the marginal utility per dollar spent on gold. A) greater; less; equals B) smaller; less; equals C) greater; greater; greater than D) less; greater; greater than Answer: A Topic: Paradox of Value Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

4 New Ways of Explaining Consumer Choices 1) A behavioral economist will explain Tom's donation to charity by saying that Tom is displaying ________. A) the endowment effect B) bounded rationality C) bounded self-interest D) bounded will power Answer: C Topic: Bounded Self Interest Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

2) Suppose that Richard has just told you that he would not pay more than $100 dollars for one of his favorite baseball cards. You offer to give him $110 dollars for his card and he refuses. What consumer choice theory or effect explains this result? A) the endowment effect B) bounded rationality C) bounded self-interest D) bounded will power Answer: A Topic: Endowment Effect Skill: Conceptual Status: Previous edition, Chapter 1 AACSB: Reflective Thinking

3) According to a behavioral economist, people who are unwilling to sell the last pound of rice they purchased for the same price that they paid for it are displaying ________. A) the endowment effect B) bounded rationality C) bounded self-interest D) bounded will power Answer: A Topic: Endowment Effect Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

4) The tendency of people to value something more highly when they own it is called the A) wealth effect. B) endowment effect. C) path dependent effect. D) endorsement effect. Answer: B Topic: Endowment Effect Skill: Definition Status: New A-level heading: New Ways of Explaining Consumer Choices AACSB: Reflective Thinking

5) If you exhibit endowment effect, then you A) decide rationally when making decisions about selling but not when making decisions about buying. B) have a strong attachment to things you already own. C) buy something you cannot afford. D) decide rationally when making decisions about buying but not when making decisions about selling. Answer: B Topic: Endowment Effect Skill: Conceptual Status: New A-level heading: New Ways of Explaining Consumer Choices AACSB: Reflective Thinking

6) If Sean thinks that the choice between going to Olive Garden or Red Lobster is simply too confusing, a behavioral economist will explain that Sean is showing ________. A) the endowment effect B) bounded rationality C) bounded self-interest D) bounded will power Answer: B Topic: Bounded Rationality Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

7) Neuroeconomics is A) the study of the activity of a human brain when the person makes economic decision. B) the study of how people behave when they face scarcity. C) the study of situations in which people act economically irrationally. D) the study of how people make decisions at the margin. Answer: A Topic: Neuroeconomics Skill: Definition Status: New A-level heading: New Ways of Explaining Consumer Choices AACSB: Reflective Thinking

8) Gene plays another hour of computer games rather than study for the hour even though he knows that the next day, when he takes his test, he will regret his decision. Gene is showing ________. A) the endowment effect B) bounded rationality C) bounded self-interest D) bounded will power Answer: D Topic: Study Guide Question, Bounded Will Power Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

9) Lucky buys hats for $20 but Lucky will not sell one of her hats for less than $35. Lucky is ________. A) displaying the endowment effect B) making decisions using her prefrontal cortex C) exhibiting bounded self-interest D) showing unbounded will power Answer: A Topic: Study Guide Question, Endowment Effect Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

10) Neuroeconomics is A) the study of the activity of a human brain when the person makes economic decision. B) the study of how people behave when they face scarcity. C) the study of situations in which people act economically irrationally. D) the study of how people make decisions at the margin. Answer: A Topic: Neuroeconomics Skill: Definition Status: New A-level heading: New Ways of Explaining Consumer Choices AACSB: Reflective Thinking

5 News Based Questions 1) The cost of basics like milk, bread, potatoes and bananas has jumped in the past year, forcing families to nix luxuries, steer away from organic goods and buy more house brands. "I think it's affecting everybody," said Elize Joseph 48, a nursing attendant. "To spend $40 on groceries is nothing. It doesn't go a long way." When food prices increase, what will happen to Elize's total utility? A) It increases. B) It stays the same. C) It decreases. D) It cannot be determined without knowing her total income. Answer: C Topic: Total Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

2) At Revolution Doughnuts in Fort Collins, Colorado, a cup of coffee or a doughnut is $1. Suppose Hannah loves going to Revolution Doughnuts. She spends $5 a day at the shop on 3 doughnuts and 2 cups of coffee. Is Hannah maximizing her total utility? A) No. B) Maybe, but I need to know more about Hannah's income. C) Yes. D) Maybe, but I need to know more about Hannah's marginal utility per dollar for each of the two goods. Answer: D Topic: Maximizing Utility Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

3) At Revolution Doughnuts in Fort Collins, Colorado, a cup of coffee or a doughnut is $1. Suppose Hannah loves going to Revolution Doughnuts. Currently, her marginal utility per dollar from doughnuts is 14 and her marginal utility per dollar from coffee is 10. Is Hannah maximizing her total utility? A) No, she needs to buy more doughnuts and less coffee. B) No, she needs to buy more coffee and fewer doughnuts. C) Yes, she is maximizing utility. D) No, she needs to buy fewer doughnuts and less coffee. Answer: A Topic: Maximizing Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Communication

4) At Revolution Doughnuts in Fort Collins, Colorado, a cup of coffee or a doughnut is $1. Suppose Hannah loves going to Revolution Doughnuts. Currently, her marginal utility per dollar from doughnuts is 14 and her marginal utility per dollar from coffee is 14. Is Hannah maximizing her total utility? A) No, she needs to buy more doughnuts and less coffee. B) Yes, she is maximizing utility. C) No, she needs to buy more coffee and fewer doughnuts. D) No, she needs to buy fewer doughnuts and less coffee. Answer: B Topic: Maximizing Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Communication

5) At Revolution Doughnuts in Fort Collins, Colorado, a cup of coffee or a doughnut is $1. Suppose Hannah loves going to Revolution Doughnuts and usually buys 2 doughnuts and 1 cup of coffee. On the way to the shop, Hannah finds an extra $2 dollars in change in her car and buys an extra doughnut and cup of coffee. This means: A) Doughnuts are an inferior good and coffee is a normal good for Hannah. B) Doughnuts are a normal good and coffee is an inferior good for Hannah. C) Doughnuts and coffee are normal goods for Hannah. D) Doughnuts and coffee are inferior goods for Hannah. Answer: C Topic: Maximizing Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

6) The Denver Broncos is a football team in the NFL, the Colorado Crush is an arena football team, and the Highlands Ranch Falcons is a local High School team. Broncos tickets cost about $415, the Crush cost between $30 and $85 and Falcons tickets are $6. What do the prices per unit tell you about the marginal utility from each of these football games? A) The marginal utility will be equal from each game. B) The marginal utility will be greatest from a Crush game. C) The marginal utility will be greatest from a Falcons game. D) The marginal utility will be greatest from a Broncos game. Answer: D Topic: Marginal Utility Per Dollar Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Communication

7) The Denver Broncos is a football team in the NFL, the Colorado Crush was an arena football team, and the Highlands Ranch Falcons is a local High School team. Broncos tickets cost about $415, Crush tickets cost between $30 and $85 and Falcons tickets are $6. What does marginal utility theory predict about the marginal utility per dollar from each of these football games? A) The marginal utility per dollar will be greatest for the Broncos. B) The marginal utility per dollar will be equal for all games. C) The marginal utility per dollar will be greatest for the Crush. D) The marginal utility per dollar will be greatest for the Falcons. Answer: B Topic: Marginal Utility Per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Communication

8) The state Department of Agriculture raised the minimum price for a gallon of milk in the city on Tuesday to $4.37. "If you've got two or three kids and you're living on a fixed income and you're paying half your income on rent," Gioia said, "then you're really in a bind and you're making choices you should never have to make." If even after this price increase Gioia's marginal utility per dollar is higher for milk than for other goods, what should Gioia do? A) increase her consumption of milk B) decrease her consumption of milk C) not change her consumption of milk D) increase her consumption of milk only if her income increases Answer: A Topic: Marginal Analysis Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Communication

Hours per day

1 2 3 4 5

Total utility Total utility from friends from breaking a and family sweat 10 14 19 22 24 28 28 33 30 34

At 37, actor Matthew McConaughey says he only needs "friends and family" to keep him happy and that he avoids "false drama" at all costs. How do you maintain that bod? "I don't really have a workout regimen I follow. I just live my life. My goal is to break a sweat each day." People June 25, 2007 Mr. McConaughey says he only needs friends and family and to break a sweat each day to keep him happy. The table above shows the total utility he gets from spending time with friends and family and breaking a sweat.

9) Mr. McConaughey has the afternoon, 5 hours, to spend doing whatever he wants. How much time does Mr. McConaughey spend with his friends and family and how much time does he spend breaking a sweat to maximize his total utility? A) 3 hours with friends and family and 2 hours breaking a sweat B) 2 hours with friends and family and 3 hours breaking a sweat C) 0 hours with friends and family and 5 hours breaking a sweat D) 3 hours with friends and family and 4 hours breaking a sweat Answer: B Topic: Maximizing Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

10) Which statement is true about Mr. McConaughey's marginal utility from spending time with family and friends and breaking a sweat? A) The marginal utility Mr. McConaughey gets from the first hour of spending time with his family is less than the marginal utility from the first hour of breaking a sweat. B) The marginal utility Mr. McConaughey gets from the third hour of spending time with his family is less than the marginal utility from the fourth hour of breaking a sweat. C) The marginal utility Mr. McConaughey gets from the fourth hour of spending time with his family is greater than the marginal utility from the fourth hour of breaking a sweat. D) The marginal utility Mr. McConaughey gets from the second hour of spending time with his family is greater than the marginal utility from the first hour of breaking a sweat. Answer: A Topic: Marginal Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

11) Does Mr. McConaughey's marginal utility from spending time with family and friends and from breaking a sweat obey the principle of diminishing marginal utility? A) No, neither obeys the principle of diminishing marginal utility. B) Only breaking a sweat obeys the principle of diminishing marginal utility. C) Yes, they both obey the principle of diminishing marginal utility. D) Only spending time with friends and family obeys the principle of diminishing marginal utility. Answer: C Topic: Diminishing Marginal Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

12) If Mr. McConaughey has 7 hours to spend with friends and family and breaking a sweat, he will maximize his utility if he spends: A) 2 hours with family and friends and 5 hours breaking a sweat. B) 5 hours with family and friends and 5 hours breaking a sweat. C) 4 hours with family and friends and 3 hours breaking a sweat. D) 3 hours with family and friends and 4 hours breaking a sweat. Answer: D Topic: Maximizing Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

13) Jake has already bought his hockey gear for the season, but when he is in the sports store, he falls in love with a different hockey stick and buys it even though it means he can't go out to dinner later with his friends which he would have preferred. This example illustrates the ________ aspect of behavioral economics. A) bounded rationality B) bounded self-interest C) empowerment effect D) bounded will-power Answer: D Topic: Bounded Will-Power Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

14) Janae donates $50 to the local Humane Society. This means she can't buy that new pair of shoes, which according to her utility schedule, would have maximized her utility. This example illustrates the ________ aspect of behavioral economics. A) bounded self-interest B) bounded rationality C) bounded will-power D) empowerment effect Answer: A Topic: Bounded Self Interest Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

6 Essay Questions 1) Is "utility" another word for the cost we give up when we consume a good? Answer: No, utility does not mean the opportunity cost of consuming a good. Utility is the benefit or satisfaction a person gets from consumption of a good or service. Topic: Total Utility Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Communication

2) How can you compute the total utility derived from consuming five hamburgers using marginal utilities? Answer: The total utility from consuming any product is the sum of the marginal utilities of each unit of the product. So, if the five hamburgers yielded marginal utilities of 12, 8, 7, 5, and 3, respectively, the total utility from hamburgers would equal 35. Topic: Total Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Analytical Skills

3) How are total and marginal utility related? Answer: Marginal utility is the change in total utility from consuming one more unit of a good. Topic: Total Utility and Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Communication

4) Are your total and marginal utility of ice cream schedules determined by the price of ice cream? Answer: No. Your total and marginal utility are determined purely by how much or how little you like ice cream. If you like it a lot, your marginal utility will be higher than otherwise for each additional ice cream scoop you consume and that will cause your total utility to be higher. Topic: Total Utility and Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Communication

5) "Diminishing marginal utility means a downward sloping total utility curve." True or false? Explain. Answer: False. Diminishing marginal utility means a downward sloping marginal utility curve. A total utility curve stays upward-sloping as long as marginal utility is positive. Topic: Total Utility and Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Communication

6) What does "diminishing marginal utility" mean? Answer: As the consumption of a good or service increases, the marginal utility decreases. For example, the first cup of coffee you drink in the morning will give you great satisfaction. As you keep on drinking more and more cups of coffee, the satisfaction from additional cups will diminish. Topic: Diminishing Marginal Utility Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Communication

7) "As Rob consumes more dates over the course of a day, it is likely that his marginal utility from date consumption will rise." Is the previous statement likely correct or incorrect? Answer: The statement is incorrect. The principle of diminishing marginal utility means that Rob marginal utility from eating dates decreases as he eats more dates. Topic: Diminishing Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Communication 97 Copyright © 2014 Pearson Education, Inc.

8) Explain the concept of consumer equilibrium. Answer: A consumer equilibrium is a situation in which a consumer has allocated all his or her available income in the way that, given the prices of goods and services, the combination of goods and services maximizes the consumer's total utility. Topic: Maximizing Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Communication

9) If a consumer is consuming a combination of goods and services on his budget line, has the consumer allocated his or her entire budget? Answer: Yes, the consumer has allocated his or her entire budget because the consumer is spending his or her entire budget. Topic: Maximizing Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Communication

10) What are the two conditions that are met if a consumer is maximizing utility? Answer: There are two conditions: (1) The consumer spends all his or her income. (2) The consumer equalizes the marginal utility per dollar from all goods. Topic: Equalizing Marginal Utility per Dollar Skill: Recognition Status: Modified 10th edition AACSB: Communication

11) You are studying with a friend, and your friend says "To maximize utility, a consumer must consume the combination of goods so that the marginal utility of good X equals the marginal utility of good Y." Explain whether your friend's statement is correct or incorrect. Answer: Your friend's statement is incorrect. To maximize utility, a consumer spends his or her entire budget and consumes the combination of goods and services so that the marginal utility per dollar from the goods is equal. Topic: Equalizing Marginal Utility per Dollar Skill: Recognition Status: Modified 10th edition AACSB: Communication

12) What is the utility-maximizing rule? Answer: The utility-maximizing rule states that for a person to maximize utility, the person must allocate (spend) his or her entire budget and consume the quantities of goods and services so that the marginal utility per dollar from each good or service is equal to the marginal utility per dollar from all the other goods and services. Topic: Equalizing Marginal Utility per Dollar Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Communication

13) Explain why total utility is maximized when the marginal utility per dollar on all goods is equal. Answer: It is easiest to prove that total utility is maximized when the marginal utility per dollar is equal across goods by looking at a situation in which the marginal utility per dollar is NOT equal across goods. If the marginal utility per dollar is 5 for good X and 8 for good Y, then the consumer could reallocate one dollar away from good X (losing 5 units of utility) and towards good Y (gaining 8 units of utility). The net result is a gain of 3 units of utility, for an increase in total utility. Hence whenever the marginal utility per dollar is not equal, the consumer can always rearrange his or her consumption and increase his or her total utility. Therefore the total utility cannot be at its maximum when the marginal utility per dollar differs for different goods. Only when all goods have the same marginal utility per dollar is it impossible for the consumer to reallocate funds and become better off. Hence at this point the consumer must have the maximum total utility. Topic: Equalizing Marginal Utility per Dollar Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Communication

14) To maximize utility, why does a consumer consume the combination of goods that equates marginal utility per dollar on the different goods rather than just equating the marginal utility of the different goods? Answer: The consumer equates the marginal utility per dollar on the goods because goods have different prices. For instance, the marginal utility of a Porsche might be 120,000 units and the marginal utility of a Hyundai might be 60,000 units. The consumer certainly prefers the Porsche to the Hyundai because the former has a greater marginal utility than the latter. However, we did not consider the prices. If the Porsche costs $120,000 and the Hyundai costs $10,000, the marginal utility per dollar on the Porsche is 1 and the marginal utility per dollar on the Hyundai is 6. A Hyundai gives the consumer more utility per dollar. Thus, when maximizing total utility, the consumer compares the marginal utility per dollar, not the marginal utility. Topic: Equalizing Marginal Utility per Dollar Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Communication

15) Suppose that Arnold spends all his income on bratwursts and piano lessons and his marginal utility per dollar on bratwursts is lower than that on piano lessons. Is Arnold maximizing his utility? Why or why not? Answer: No. If Arnold spends a dollar less on bratwursts and a dollar more on piano lessons, his utility gain from more piano lessons will be greater than his utility loss from the decreased consumption of bratwursts and so his total utility will increase. Topic: Equalizing Marginal Utility per Dollar Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Communication

16) Suppose that Alyssa spends all her income on video games and DVDs and her marginal utility per dollar from video games equals that from DVDs. Is Alyssa maximizing her utility? Now, suppose that the price of a DVD falls. Should Alyssa change the combination of goods she consumes? If yes, how? Explain. Answer: If Alyssa spends all her income on video games and DVDs and her marginal utility per dollar from video games equals that from DVDs, both utility maximization conditions are met and therefore Alyssa maximizes her utility. If the price of a DVD falls, Alyssa's marginal utility per dollar from DVDs becomes greater than that from video games. Therefore, if she spends a dollar more on DVDs and a dollar less on video games, her utility gain from the increased consumption of DVDs will be greater than her utility loss from the decreased consumption of video games and hence her total utility increases. So, to maximize her utility, Alyssa should increase her consumption of DVDs and decrease her consumption of video games. Topic: Equalizing Marginal Utility per Dollar Skill: Conceptual Status: Modified 10th edition AACSB: Communication

17) If Jack is a utility maximizer, shouldn't a fall in the price of popcorn cause an increase in his marginal utility of popcorn? Answer: No. If the price of popcorn drops, Jack will buy more popcorn. With diminishing marginal utility, his total utility from popcorn will increase but his marginal utility from popcorn will fall. Topic: Predictions of Marginal Utility Theory Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Communication

18) What is the water and diamonds paradox of value and what is its resolution? Answer: The paradox is that water is critical to life—has high total utility—but sells for a low price. Diamonds, in contrast, are nonessential—have low total utility—but sell for a high price. The paradox is resolved by realizing that the price we are willing to pay is linked to the marginal utility from the next glass of water or diamond, not the total utility of all units of each previously obtained. We already have much water, so the marginal utility of the next water is low. But most people have few diamonds, so the marginal utility of the next diamond is high. Topic: Paradox of Value Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Communication

19) Explain the paradox of value. Answer: The paradox of value questions why water, which is essential for life, costs less than diamonds, which are not. This puzzle can be resolved by realizing the difference between marginal utility and total utility. Water has high total utility, but because we consume so much water, the last unit has little value, that is, the water has low marginal utility. Diamonds have little total utility, but because we consume few diamonds, the last unit of diamonds has high marginal utility. Topic: Paradox of Value Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Communication

20) "Water is very inexpensive. Thus the marginal and total utility of water is small." Analyze the previous statements. Answer: Parts of the statement are true but a key part is false. Water is, indeed, very inexpensive and so its marginal utility is small. Because water is so inexpensive, the quantity people buy is large, which is why its marginal utility is small. However, water is essential to life. Hence the total utility of water is immense. Topic: Paradox of Value Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Communication

21) Does the fact that diamonds, which we do not need to survive, are more expensive than water, which is a necessity, constitute a violation of utility maximization? Answer: No, the fact that diamonds are less useful but more expensive than water reflects the paradox of value. The resolution to this paradox comes from the observation that utility maximization involves marginal utility (specifically, marginal utility per dollar) not total utility. Water has a low marginal utility, because people have a lot of it, but a very high total utility, because it is essential to life. Diamonds have a high marginal utility, because people have fewer diamonds, but a relatively low total utility because diamonds are not necessary to life. Hence the low marginal utility of water is reflected in the low price of water, while the high marginal utility of diamonds is reflected in the high price of a diamond. Topic: Paradox of Value Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Communication

22) Why does gold, which is a relatively nonessential item, have a higher price than water, which is essential to life? Answer: Gold has a high price and a high marginal utility, while water has a low price and a low marginal utility. Water is relatively abundant in supply, while gold is relatively scarce. Hence people consume a lot of water and only a little gold. As a result, the marginal utility of water is low and the marginal utility of gold is high. The utility maximizing rule, that the marginal utility per dollar on gold must equal that of water, in combination with the high marginal utility of gold and low marginal utility of water, implies that the price of gold must be higher than that of water. Topic: Paradox of Value Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Communication

23) A consumer allocates his budget according to rules of utility maximization. What are the rules of utility maximization and how do they explain the paradox of value, which is that diamonds are expensive but useless, while water is inexpensive but essential? Answer: The rules of utility maximization are to allocate the entire available budget and consume the combination of goods and services that make the marginal utility per dollar equal for all goods and services. Equating the marginal utility per dollar is what explains the paradox of value. People consume a great deal of water. Because they consume a lot of water, the marginal utility of water is quite low. However, people have only a few diamonds. Hence the marginal utility of a diamond is quite high. Thus for the marginal utility per dollar of water to equal that of diamonds requires that the price of water be low and the price of diamonds high. Note, however, that this condition says nothing about the total utility from water or the total utility from diamonds. Because water is essential to life, its total utility is tremendous. Because diamonds are not essential, their total utility is much smaller. Topic: Paradox of Value Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Communication

24) "Because the price of a diamond is much greater than the price of a gallon of water, the consumer surplus from diamonds is greater than the consumer surplus from water." Is the previous analysis correct? Explain your answer. Answer: No, the analysis is incorrect. The paradox of value points out the error. Diamonds are scarce, so they have a high price and a high marginal utility. Water is abundant, so it has a low price and a low marginal utility. But the total utility from water (vastly) exceeds that from diamonds and so the consumer surplus from water (vastly) exceeds that from diamonds. Topic: Paradox of Value Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Communication

25) Does the fact that diamonds are so expensive imply that the demand curve for diamonds has a positive slope? Use marginal utility theory to answer the question. Answer: No. In order for the demand curve for diamonds to have a positive slope, the marginal utility of each diamond consumed would have to increase as more diamonds are consumed. Diamonds are no different than any other good. As more diamonds are consumed, the marginal utility of a diamond decreases. Therefore in order to increase the quantity of diamonds people demand, the price of diamonds must fall, which indicates a downward-sloping demand curve for diamonds. Topic: Paradox of Value Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Communication

7 Numeric and Graphing Questions

Quantity (rentals per week) 0 1 2 3 4 5 6 7

Total utility

Marginal utility

0 28 54 78 100 120 138 154

X ____ ____ ____ ____ ____ ____ ____

1) Amy has the total utility values given above for DVD rentals a week. Complete the table by calculating her marginal utilities. Answer: Quantity (rentals per Total utility Marginal utility week) 0 0 X 1 28 28 2 54 26 3 78 24 4 100 22 5 120 20 6 138 18 7 154 16 The completed table is above. Topic: Marginal Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Quantity (cones per week) 0 1 2 3 4 5 6 7

Total utility

Marginal utility

0 22 38 ____ 56 ____ 62 63

X ____ ____ 11 ____ 4 ____ ____

2) The table above gives the utility Andy receives from different quantities of vanilla ice cream cones. Complete the table. Answer: Quantity (cones per Total utility Marginal utility week) 0 0 X 1 22 22 2 38 16 3 49 11 4 56 7 5 60 4 6 62 2 7 63 1 The completed table is above. Topic: Total Utility and Marginal Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Quantity (tacos per week) 0 1 2 3 4 5

Total utility

Marginal utility

0 ____ 35 45 52 57

X 20 ____ ____ ____ ____

3) The table above gives Jessie's marginal utility and total utility from tacos. Complete the table. Answer: Quantity (tacos per Total utility Marginal utility week) 0 0 X 1 20 20 2 35 15 3 45 10 4 52 7 5 57 5 The completed table is above. Topic: Total Utility and Marginal Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Quantity 0 1 2 3 4 5

Eclairs Total utility 0 126 243 342 414 441

Quantity 0 1 2 3 4 5

Cream puffs Total utility 0 54.0 103.5 145.5 177.0 196.5

4) The table gives the total utility Jamal derives from the consumption of eclairs and cream puffs. Jamal has $12 to spend on these two confectionery goods. The price of an eclair is $3 and the price of a cream puff is $1.50. a) Jamal's budget is $12. In order for Jamal to maximize his utility, how many eclairs and cream puffs should he buy? b) Suppose the price of an eclair increase to $6. Jamal's income does not change and neither does the price of a cream puff. What combination of eclairs and cream puffs will Jamal buy now? c) Using your answers to parts (a) and (b), derive two points on Jamal's demand curve for eclairs. Answer: a) Jamal's utility maximizing combination will allocate (spend) his budget and be such that the marginal utility per dollar from the last eclair equals the marginal utility per dollar from the last cream puff. Jamal's utility maximizing combination is 3 eclairs and 2 cream puffs. At this combination, Jamal spends $9 on eclairs (3 eclairs × $3) and $3 on cream puffs (2 cream puffs × $1.50) for a total of $12. The marginal utility of the third eclair is 99 (= 342 - 243), so the marginal utility per dollar from eclairs is 99 ÷ 3 = 33. The marginal utility of the second cream puff is 49.50 (= 103.5 - 54.0), so the marginal utility per dollar from cream puffs is 49.5 ÷ $1.50 = 33. Hence the marginal utilities per dollar are equal, so the combination of 3 eclairs and 2 cream puffs maximizes Jamal's utility. b) Jamal's new utility maximizing combination is 1 eclair and 4 cream puffs. As in part (a), this combination allocates all of Jamal's income and equalizes the marginal utility per dollar from the two goods. (Both are equal to 21.) c) When the price of an eclair is $3, Jamal buys 3 eclairs, so one point on Jamal's demand curve is the price of $3 and the quantity demanded of 3 eclairs. When the price of an eclair increases to $6, Jamal buys only 1 eclair. So another point on Jamal's demand curve is the price of $6 and quantity demanded of 1 eclair. Topic: Utility-Maximizing Choice Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Quantity 1 2 3 4 5

Pants Marginal utility 220 180 140 100 60

Quantity 1 2 3 4 5

Belts Marginal utility 85 65 45 25 15

5) Tris is shopping for pants and belts. He has a budget of $100. The price of a pair of pants is $20 and the price of a belt is $5. His marginal utility schedules are above. What combination of pants and belts does Tris buy? Explain your answer. Answer: Tris buys 4 pairs of pants and 4 belts because this is the combination that allocates (spends) all of his budget and has the marginal utility per dollar from a pair of pants equal to the marginal utility per dollar from a belt. For the first requirement, that Tris allocate his entire budget, the combination of 4 pants and 4 belts spends (4 pairs of pants) × ($20 per pair of pants) = $80 on pants and (4 belts) × ($5 per belt) = $20 on belts, for a total spent of $100. For the second requirement, the equality of the marginal utilities per dollar, the marginal utility per dollar from a pair of pants is (100 units) ÷ ($20) = 5 units per dollar and the marginal utility per dollar from a belt is (25 units) ÷ ($5) = 5 units per dollar. Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Quantity 1 2 3 4 5 6

Ice cream Total utility 95 180 255 320 375 420

Quantity 1 2 3 4 5 6

Romance novels Total utility 170 320 450 560 650 720

6) The table above shows Danielle's utility from ice cream and romance novels. a) What is Danielle's marginal utility from the 4th novel? b) The price of ice cream is $5 per gallon and a novel is $10. If Danielle's budget for these two goods is $50 and she buys 2 gallons of ice cream, how many novels can she buy? If she buys 6 gallons of ice cream, what is her marginal utility per dollar spent on novels? c) Which combination of the two goods is better: 4 gallons of ice cream and 3 novels or 6 gallons of ice cream and 2 novels? Answer: a) Danielle's marginal utility from the 4th novel is 560 - 450 = 110. b) When Danielle buys 2 gallons of ice cream, she spends $5 × 2 = $10 on ice cream. So Danielle spends the rest of her budget, which is $50 - $10 = $40, on novels. Because the price of a novel is $10, she buys $40 ÷ $10 = 4 novels. When Danielle buys 6 gallons of ice cream, she spends $5 × 6 = $30 on ice cream. So Danielle spends the rest of her budget, which is $50 - $30 = $20, on novels. Because the price of a novel is $10, she buys $20 ÷ $10 = 2 novels. So her marginal utility from the second novel is 320 - 170 = 150 and, since the price of a novel is $10, the marginal utility per dollar is 150 ÷ $10 = 15. c) 4 gallons of ice cream and 3 novels is better. In both cases Danielle spends all her budget. But if she buys 4 gallons of ice cream and 3 novels, her total utility is 320 + 450 = 770, while if she buys 6 gallons of ice cream and 2 novels, her total utility is 420 + 320 = 740. Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

7) Ricardo likes to rent DVDs and attend concerts. The DVDs cost $4 and the concerts cost $40. Ricardo's marginal utility from the last DVD is 20 units. Ricardo is maximizing his utility. What is his marginal utility from the last concert he attended? Answer: The marginal utility from his last concert is 200 units. In order for Ricardo to maximize his utility, the marginal utility per dollar must be equal for all goods. The marginal utility per dollar from the last DVD is (20 units) ÷ ($4) = 5. So the marginal utility per dollar from the last concert also must equal 5, which, given its price of $40, means that concert has a marginal utility of 200, because (200 units) ÷ ($40) = 5. Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

8) Suppose Abe is allocating his entire income and he receives 100 units of utility per dollar from the tenth slice of pizza and 200 units of utility per dollar from his second soda. Is Abe maximizing his utility? Should Abe change his consumption of pizza and soda? Answer: Abe is not maximizing his utility because his marginal utility per dollar from pizza does not equal his marginal utility per dollar from soda. Abe should consume more soda (because it provides more satisfaction per dollar) and less pizza. Topic: Equalizing Marginal Utility per Dollar Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

9) For a consumer, the marginal utility of good A is 25 and its price is $5. The marginal utility of good B is 60 and its price is $12. The consumer has allocated his entire budget. Is this consumer maximizing his total utility? Explain your answer. Answer: Yes, the consumer is maximizing his utility. He has allocated his entire budget and he is consuming the combination of goods A and B such that the marginal utility per dollar from each is the same. Topic: Marginal Analysis Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

10) If Mark's marginal utility per dollar spent on the last taco is 15 and his marginal utility per dollar spent on the last burrito is 20 units, what should Mark do to increase his total utility? Answer: Mark should buy more burritos and fewer tacos. If Mark decreases his purchases of tacos by $1, he loses 15 units of utility. But if he then spends the dollar on burritos, he gains 20 units of utility. Because his gain in utility exceeds his loss, Mark's total utility increases as he buys more burritos and fewer tacos. Topic: Marginal Analysis Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

11) Suppose Jenny's marginal utility of fish is 40 and her marginal utility from chips is 20. The price of fish is $10 and the price of chips is $1. What should Jenny do to maximize her utility? Explain your answer. Answer: Jenny should buy more chips and fewer fish. Her marginal utility per dollar from chips is 20 and her marginal utility per dollar from fish is 4. If Jenny decreases her purchases of fish by $1, she loses 4 units of utility. But if she spends the dollar on chips, she gains 20 units of utility. Because her gain in utility exceeds her loss, Jenny's total utility increases as she buys more chips and fewer fish. Topic: Marginal Analysis Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Quantity (pounds) 1 2 3 4 5 6

Bananas Marginal utility per dollar 30 24 18 12 6 0

Quantity (pounds) 1 2 3 4 5 6

Apples Marginal utility per dollar 40 34 24 16 8 0

12) The table above gives Sam's marginal utility schedule for bananas and apples. Sam's fruit budget is $10. a) If bananas cost $1 per pound and apples cost $2 per bag, what is Sam's marginal utility per dollar for all quantities of both goods? b) What is the utility maximizing combination of bananas and apples for Sam? c) If the price of bananas increases to $2 per pound, how does Sam's marginal utility per dollar for bananas change? d) At the banana price of $2 per pound, what is the new utility maximizing combination of bananas and apples for Sam? e) List two points on Sam's demand curve for bananas. Answer: Bananas Apples Quantity Quantity (pounds) Marginal utility (pounds) Marginal utility 1 30 1 20 2 24 2 17 3 18 3 12 4 12 4 8 5 6 5 4 6 0 6 0 a) The table above has Sam's marginal utility per dollar for bananas and apples. b) Sam's utility maximizing combination of bananas and apples is 4 pounds of bananas and 3 bags of apples. This quantity allocates (spends) his budget and equates the marginal utility per dollar from bananas and apples.

Bananas Quantity (pounds) Marginal utility 1 15 2 12 3 9 4 6 5 3 6 0 c) The table with Sam's new marginal utility per dollar for bananas is above. d) Sam's new utility maximizing combination of bananas and apples is 2 pounds of bananas and 3 bags of apples. e) When the price of a pound of bananas is $1, the quantity demanded is 4 pounds and when the price rises to $2, the quantity demanded decreases to 2 pounds. Topic: Predictions of Marginal Utility Theory, Demand Curve Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

8 True or False 1) Total utility is the benefit received from consuming an extra unit of a good. Answer: FALSE Topic: Marginal Utility Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

2) According to the principle of diminishing marginal utility, as an individual consumes more and more of a good or service, the total utility increases while the marginal utility decreases. Answer: TRUE Topic: Total Utility and Marginal Utility Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

3) Tom's marginal utility from a Sobe exceeds his marginal utility of crackers. Therefore, his total utility of Sobe must exceed his total utility of crackers. Answer: FALSE Topic: Total Utility and Marginal Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

4) Marginal utility diminishes as consumption of a good decreases. Answer: FALSE Topic: Diminishing Marginal Utility Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

5) If Tom's total utility from watching one more minute of television increases but the increase for each additional minute is smaller than the previous minute, he has diminishing marginal utility. Answer: TRUE Topic: Diminishing Marginal Utility Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

6) As a person consumes more and more slices of pizza, the marginal utility of each extra slice diminishes. Answer: TRUE Topic: Diminishing Marginal Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

7) A consumer will maximize utility when all income is spent and the marginal utility is equal for all goods. Answer: FALSE Topic: Maximizing Utility Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

8) When Kathryn spends her entire budget and equates marginal utility per dollar across all goods' Kathryn's total utility is maximized. Answer: TRUE Topic: Maximizing Utility Skill: Conceptual Status: New 10th edition AACSB: Reflective Thinking

9) If it costs $6.00 to go to the movies and $25.00 to go to a hockey game, Tom is maximizing his utility between movies and hockey if his marginal utility of movies is 12 units and his marginal utility from hockey is 25. Answer: FALSE Topic: Maximizing Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

10) If it costs $6.00 to go to the movies and $25.00 to go to a hockey game, Tom is maximizing his utility between movies and hockey if his marginal utility of movies is 12 units and his marginal utility from hockey is 50. Answer: TRUE Topic: Maximizing Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

11) A consumer's total utility is maximized when the total utility per dollar from all goods is equalized. Answer: FALSE Topic: Equalizing Marginal Utility per Dollar Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

12) If Dana spends all her income on ice cream and Mountain Dew and her marginal utility per dollar from ice cream is greater than her marginal utility per dollar from Mountain Dew, she should buy more ice cream and less Mountain Dew. Answer: TRUE Topic: Marginal Analysis Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

13) If the price of a good increases, a consumer will substitute away from the relatively more expensive good, which will increase the marginal utility for that good and bring the consumer back to equilibrium. Answer: TRUE Topic: Predictions of Marginal Utility Theory, Change in Price Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

14) When Tom's income increases, his demand curve for Mountain Dew shifts rightward because the higher income increases his marginal utility of Mountain Dew. Answer: FALSE Topic: Predictions of Marginal Utility Theory, Change in Income Skill: Conceptual Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

15) The Paradox of Value is resolved by the willingness for an individual to pay a high price for a good or service that has a high marginal utility per dollar. Answer: FALSE Topic: Paradox of Value Skill: Recognition Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

16) Tom's marginal utility of Mountain Dew exceeds his marginal utility of crackers at his consumer equilibrium. Therefore, his consumer surplus from Mountain Dew must exceed his consumer surplus from crackers. Answer: FALSE Topic: Paradox of Value Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Reflective Thinking

9 Extended Problems

Quantity (per year)

Utility from CDs (units)

0 1 2 3 4 5

0 50 92 126 152 170

Utility from DVDs (units) 0 70 130 180 220 250

1) Margo buys music CDs and movies on DVDs. The table above shows her total utility from each good. a) Draw graphs showing Margo's utility from music CDs and from movies on DVDs. b) Compare the two utility graphs. Describe Margo's preferences. c) Draw graphs that show Margo's marginal utility from music CDs and from movies on DVDs. d) What do the two marginal utility graphs tell you about Margo's preferences? Answer:

a) The figure with the total utilities is above. b) Margo gets more utility from any number of movies on DVDs than she does from the same number of music CDs.

c) The figure with the marginal utilities is above. d) Margo's marginal utility from an additional DVD is greater than that from an additional music CD when she has the same number of each. Topic: Total Utility and Marginal Utility Skill: Analytical Status: Previous edition, Chapter 8 AACSB: Analytical Skills

Quantity (magazines per year) 0 4 8 12 16 20

Utility from magazines (units) 0 80 152 216 272 320

Quantity (gallons of ice cream per year) 0 4 8 12 16 20

Utility from ice cream (units) 0 120 224 312 384 440

2) Sarah spends $100 a year on magazines and ice cream. The table above shows her utility from each good. If the price of a magazine is $5 and the price of ice cream is $5 per gallon, how does Sarah spend the $100? Answer: Sarah buys 6 magazines and 14 gallons of ice cream. She spends $100 and her marginal utility per dollar from magazines and ice cream is the same, 3.6 units per dollar. Topic: Utility-Maximizing Choice Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

Economics, 11e, Global Edition (Parkin) Chapter 9 Possibilities, Preferences, and Choices 1 Consumption Possibilities 1) Goods that can be bought in any quantity desired are called A) divisible goods. B) indivisible goods. C) invisible goods. D) inferior goods. Answer: A Topic: Consumption Possibilities Skill: Definition Status: Old AACSB: Analytical Skills

2) Which of the following is NOT a divisible good? A) gasoline B) tap water C) electricity D) movies Answer: D Topic: Consumption Possibilities Skill: Definition Status: Old AACSB: Analytical Skills

3) Budget lines are drawn on a diagram with the A) price of the good on the vertical axis and its quantity on the horizontal axis. B) price of one good on the vertical axis and the price of another good on the horizontal axis. C) quantity of the good on the vertical axis and its price on the horizontal axis. D) quantity of one good on the vertical axis and the quantity of another good on the horizontal axis. Answer: D Topic: Consumption Possibilities, Budget Line Skill: Definition Status: Old AACSB: Analytical Skills

4) The variables that determine a household's budget line are A) its preferences and income. B) its preferences and prices. C) prices and income. D) None of the above are correct. Answer: C Topic: Consumption Possibilities, Budget Line Skill: Definition Status: Old AACSB: Analytical Skills

5) A budget line shows the A) consumption possibilities of a consumer at a given level of income and prices. B) complete set of preferences for a household at various incomes. C) consumption possibilities for several sets of relative prices at a level of income. D) rate at which consumers wish to substitute one good for another. Answer: A Topic: Consumption Possibilities, Budget Line Skill: Definition Status: Old AACSB: Analytical Skills

6) The budget line ________. A) shows the limits to a household's consumption choices B) illustrates a household's preferences C) defines a household's consumption when prices change D) shows the income a household needs to be able to buy goods and services Answer: A Topic: Consumption Possibilities, Budget Line Skill: Definition Status: Old AACSB: Analytical Skills

7) For a consumer, a budget line shows the boundary between A) what is desired and what is not desired. B) what is needed and what is not needed. C) what is affordable and what is not affordable. D) what is available and what is not available. Answer: C Topic: Consumption Possibilities, Budget Line Skill: Definition Status: Old AACSB: Analytical Skills

8) A household's consumption choices cannot exceed limits created by A) only the household's income. B) only the prices of the goods and services that it buys. C) both the household's income and the prices of the goods and services that it buys. D) neither the household's income nor the prices of the goods and services that it buys. Answer: C Topic: Consumption Possibilities, Budget Line Skill: Conceptual Status: Old AACSB: Analytical Skills

9) In order to determine a household's budget line, you must know the A) prices of the goods bought and the household's income. B) prices of the goods bought, but not the household's income. C) household's income, but not the prices of goods bought. D) household's income, prices of the goods bought, and the household's preferences. Answer: A Topic: Consumption Possibilities, Budget Line Skill: Definition Status: Old AACSB: Analytical Skills

10) Sam buys gasoline and coffee each week. In order to draw his budget line between gasoline and coffee, Sam would have to know A) only how much income he has available to spend on gasoline and coffee. B) only the prices of one gallon of gasoline and one pound of coffee. C) only how much gasoline he wants to buy and how much coffee he wants to drink. D) both how much income he has to spend and the prices of one gallon of gasoline and one pound of coffee. Answer: D Topic: Consumption Possibilities, Budget Line Skill: Definition Status: Old AACSB: Analytical Skills

11) In order to draw an individual's budget line, we must know A) prices and preferences. B) prices and income. C) income and preferences. D) prices, income, and preferences. Answer: B Topic: Consumption Possibilities, Budget Line Skill: Definition Status: Old AACSB: Analytical Skills

12) Lily is a college student who likes to buy only two goods: Cheetos and Pepsi. To determine Lily's budget line, you need to know I. Lily's preferences for Cheetos and Pepsi. II. The prices of Cheetos and Pepsi. III. Lily's income. A) II only B) I and II C) II and III D) I, II and III Answer: C Topic: Consumption Possibilities, Budget Line Skill: Definition Status: Old AACSB: Analytical Skills

13) All points below the budget line are A) inferior to every point on the budget line. B) preferred to every point on the budget line. C) affordable. D) Answers A and C are correct. Answer: C Topic: Consumption Possibilities, Budget Line Skill: Definition Status: Old AACSB: Analytical Skills

14) All points above the budget line are A) inferior to every point on the budget line. B) preferred to every point on the budget line. C) unaffordable. D) Both answers B and C are correct. Answer: C Topic: Consumption Possibilities, Budget Line Skill: Definition Status: Old AACSB: Analytical Skills

15) Moving along a given budget line, A) prices and real income both decrease. B) prices fall and real income is constant. C) real income decreases and prices are constant. D) prices and real income are constant. Answer: D Topic: Consumption Possibilities, Budget Line Skill: Definition Status: Old AACSB: Analytical Skills

16) Tonya, who is rich, and Jerome, who is poorer, both buy orange juice and croissants for lunch at the student cafeteria. Their budget constraints on a diagram with orange juice on the vertical axis and croissants on the horizontal have the same A) horizontal intercepts. B) vertical intercepts. C) slopes. D) midpoints. Answer: C Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

17) Ernie has an income of $40 which he plans to spend on cookies and milk. The price of milk is $1 per gallon, and the price of cookies is $2 per dozen. If Ernie buys 12 gallons of milk, how many dozens of cookies will he buy if he spends all of his income? A) 28 B) 20 C) 14 D) 12 Answer: C Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

18) Jake plans to spend $100 on fried chicken and Pepsi. The price of a fried chicken is $5 and Pepsi is $2 per bottle. If Jake buys 10 fried chickens how many bottles of Pepsi can he buy? A) 50 B) 10 C) 25 D) 75 Answer: C Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

19) Bob plans to spend $60 per month on DVD movie rentals and CDs. The price of a movie rental is $3 and the price of a CD is $15. If Bob rents 5 DVDs per month, how many CDs can he buy? A) 1 B) 2 C) 3 D) 4 Answer: C Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

20) Larry spends all his $800 monthly income on pizza and gasoline. The price of pizza is $4 a slice, and the price of gasoline is $2 per gallon. If Larry buys 150 slices of pizza per month, his budget constraint will allow him to buy ________ gallons of gas per month. A) 100 B) 80 C) 120 D) 200 Answer: A Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

21) Joe has $50 to spend on pizza and movies. If movies are $5 each and a pizza is $10 then, assuming he spends all his money, he can buy which of the following bundle of goods? A) 6 movies and 2 pizzas B) 8 movies and 4 pizzas C) 2 movies and 6 pizzas D) 6 movies and 4 pizzas Answer: A Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

22) Suppose that Dave has $200 to spend per week and he buys only magazines and pizza. The price of a pizza is $10 and the price of a magazine is $5. What is the maximum amount of pizza Dave can buy each week? A) 40 B) 20 C) 200 D) 60 Answer: B Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

23) Suppose that Dave has $200 to spend per week and he buys only magazines and pizza. The price of a pizza is $10 and the price of a magazine is $5. If Dave buys 15 pizza each week, what is the maximum number of magazines can he buy? A) 40 B) 20 C) 10 D) 200 Answer: C Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

24) Suppose that Dave has $200 to spend per week and he buys only magazines and pizza. The price of a pizza is $10 and the price of a magazine is $5. If Dave buys 20 magazines per week, which of the following amount of pizza is not affordable to him? A) 10 B) 20 C) 9 D) All of the above answers are correct because none of the listed amounts of pizza are affordable. Answer: B Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills 6 Copyright © 2014 Pearson Education, Inc.

25) Junkfood Jill spends all of her income on jellybeans and Jolt cola. Suppose that Jill's income is $30, the price of a bag of jellybeans is $6, and the price of a bottle of Jolt cola is $2. Which of the following combinations of jellybeans and Jolt cola lies inside of Jill's budget line? A) 5 bags of jellybeans and 0 bottles of Jolt B) 4 bags of jellybeans and 4 bottles of Jolt C) 3 bags of jellybeans and 6 bottles of Jolt D) 2 bags of jellybeans and 8 bottles of Jolt Answer: D Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

Consumption possibility A B C D E F

Video games (quantity) 10 8 6 4 2 0

Baseball cards (quantity) 0 1 2 3 4 5

26) Jordan has two goods that he consumes this week. He can choose to go to the arcade and play video games or he can purchase baseball cards. The price of each video game is $.50 and each pack of baseball cards is $1. Jordan will spend all his allowance this week on these two goods. Jordan's consumption possibilities are listed in the table above. What is the amount of Jordan's allowance? A) $10 B) $5 C) $15 D) $50 Answer: B Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

27) Jordan has two goods that he consumes this week. He can choose to go to the arcade and play video games or he can purchase baseball cards. The price of each video game is $.50 and each pack of baseball cards is $1. Jordan will spend all his allowance this week on these two goods. Jordan's consumption possibilities are listed in the table above. For Jordan, what is the opportunity cost of moving from consumption possibility D to E? A) one set of baseball cards B) three sets of baseball cards C) four video games D) two video games Answer: D Topic: Consumption Possibilities, Budget Equation Skill: Analytical Status: Old AACSB: Analytical Skills

28) Jordan has two goods that he consumes this week. He can choose to go to the arcade and play video games or he can purchase baseball cards. The price of each video game is $.50 and each pack of baseball cards is $1. Jordan will spend all his allowance this week on these two goods. Jordan's consumption possibilities are listed in the table above. Which of the following combinations of video games and baseball cards is not attainable for Jordan? A) 10 video games and 3 sets of baseball cards B) 8 video games and 1 set of baseball cards C) 0 video games and 5 sets of baseball cards D) 3 video games and 3 sets of baseball cards Answer: A Topic: Consumption Possibilities, Budget Equation Skill: Analytical Status: Old AACSB: Analytical Skills

29) Consider the budget line in the above figure. If the consumer's income is $120, then the price of a book is A) $10 per book. B) $12 per book. C) $6 per book. D) More information is needed to determine the price of a book. Answer: B Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

30) Consider the budget line in the above figure. If the consumer's income is $120, then the price of a movie is A) $24 per movie. B) $12 per movie. C) $5 per movie. D) More information is needed to determine the price of a movie. Answer: C Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

31) Consider the budget line in the above figure. If the consumer's income is $240, then the price of a book is A) $20 per book. B) $24 per book. C) $12 per book. D) More information is needed to determine the price of a book. Answer: B Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

32) Consider the budget line in the above figure. If the consumer's income is $240, then the price of a movie is A) $24 per movie. B) $12 per movie. C) $10 per movie. D) More information is needed to determine the price of a movie. Answer: C Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

33) Consider the budget line in the above figure. If the consumer has income of $240, what is the relative price of movies? A) .42 books B) 2.4 books C) $10 per movie D) $24 per movie Answer: A Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

34) Suppose that Dave has $200 to spend per week and he buys only magazines and pizza. The price of a pizza is $10 and the price of a magazine is $5. What is Dave's real income in terms of magazines? A) 20 B) 40 C) 200 D) 10 Answer: B Topic: Consumption Possibilities, Real Income Skill: Analytical Status: Old AACSB: Analytical Skills

35) Given the budget line in the above figure, if income is $60, then the price of a pizza is ________ and the price of a CD is ________. A) $5; $20 B) $6; $4 C) $15; 15 D) $10; $15 Answer: D Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

36) According to the budget line in the above figure, which of the following combinations is unaffordable? A) 1 pizza and 3 CDs B) 3 pizzas and 2 CDs C) 2 pizzas and 4 CDs D) All of the above are affordable. Answer: C Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

37) The figure above shows Tanya's consumption possibilities. Tanya spends $100 per month on movies and restaurant meals. The price of a movie ticket is ________ and the price of a restaurant meal is ________. A) $7; $15 B) $10; $10 C) $20; $5 D) $5; $20 Answer: D Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

38) The figure above shows Tanya's consumption possibilities. Which of the following combinations of goods is not affordable? A) 8 movie tickets and 3 restaurant meals. B) 12 movie tickets and 2 restaurant meals. C) 10 movie tickets and 3 restaurant meals. D) 6 movie tickets and 3 restaurant meals. Answer: C Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

39) The figure above shows Tanya's consumption possibilities when the price of a restaurant meal is $20. If the price of a restaurant meal falls to $10 and Tanya buys 12 movie tickets, how many restaurant meals can she buy? A) 2 B) 3 C) 4 D) 5 Answer: C Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

40) Based on the above figure showing a budget line, which of the following combinations of soda and bottled water are not affordable? A) 3 bottles of water and 4 cans of soda. B) 4 bottles of water and 2 cans of soda. C) 2 bottles of water and 6 cans of soda. D) None of the above, that is, all the combinations listed are affordable. Answer: C Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

41) The above figure gives your budget line between CDs and magazines. Which combination of CDs and magazines is not affordable? A) combination a B) combination b C) combination c D) both combinations b and d Answer: A Topic: Consumption Possibilities Skill: Analytical Status: Old AACSB: Analytical Skills

42) The figure above gives your budget line for magazine and CDs per month. Given that your income equals $60 per month, what is the price of a magazine and the price of a CD? A) The price of a magazine is $12 per magazine and the price of a CD is $6 per CD. B) The price of a magazine is $5 per magazine and the price of a CD is $10 per CD. C) The price of a magazine is $4 per magazine and the price of a CD is $12 per CD. D) It is impossible to tell from the information given. Answer: B Topic: Consumption Possibilities Skill: Analytical Status: Old AACSB: Analytical Skills

43) The figure above gives your budget line for magazine and CDs per month. Given that your income equals $60 per month, what is your real income in terms of CDs? A) 3 CDs B) 5 CDs C) 6 CDs D) $60/month Answer: C Topic: Consumption Possibilities, Real Income Skill: Analytical Status: Old AACSB: Analytical Skills

44) The figure above gives your budget line for magazine and CDs per month. Given that your income equals $60 per month, what is your real income in terms of magazines? A) 12 magazines B) 6 magazines C) 2 magazines D) $60/month Answer: A Topic: Consumption Possibilities, Real Income Skill: Analytical Status: Old AACSB: Analytical Skills

45) The above figure gives your budget line between CDs and magazines. What would allow you to buy more CDs? A) a decrease in the relative price of CDs B) an increase in income C) a decrease in the price of magazines with no change in the price of CDs. D) All of the above changes would allow you to buy more CDs. Answer: D Topic: Consumption Possibilities Skill: Analytical Status: Old AACSB: Analytical Skills

46) The above figure gives your budget line between CDs and magazines. If the price of a magazine falls, then the budget line A) shifts outward and the slope does not change. B) rotates inward with no change in the horizontal intercept. C) rotates inward with no change in the vertical intercept. D) rotates outward with no change in the vertical axis. Answer: D Topic: Consumption Possibilities, Change in Price Skill: Conceptual Status: Old AACSB: Analytical Skills

47) The above figure gives your budget line between CDs and magazines. The slope of the budget line is ________ CD per magazine. A) 1/2 B) -1/2 C) -1 D) -2 Answer: B Topic: The Budget Equation Skill: Analytical Status: Old AACSB: Analytical Skills

48) Which of the following factors is NOT part of the budget equation? A) relative prices B) real income C) quantities of goods D) preferences Answer: D Topic: The Budget Equation Skill: Analytical Status: Old AACSB: Analytical Skills

49) Shaniq consumes only magazine and CDs. Her income equals $60 per month. CDs are $12 each and magazines are $5 each. What is the equation for her budget line? A) $60 = Qm + QCD B) $60 = $12Qm + $5QCD C) 12 = -2Qm + 6 D) $60 = 12QCD + 5Qm Answer: D Topic: The Budget Equation Skill: Definition Status: Old AACSB: Analytical Skills

50) If units of pizza are plotted on the horizontal axis, and units of hot dogs plotted on the vertical axis, and the price of a hot dog increases the A) x-intercept and the slope of the budget line will increase. B) y-intercept and the slope of the budget line will increase. C) x-intercept and the slope of the budget line will decrease. D) y-intercept and the slope of the budget line will decrease. Answer: D Topic: The Budget Equation Skill: Conceptual Status: Old AACSB: Analytical Skills

51) If Sam has $60.00 each week to spend on gasoline and coffee, and their respective prices are $1.50 per gallon and $3.00 per pound, which of the following equations represents his budget line? A) $60.00 = $1.50/Qg + $3.00/Qc B) $60.00 = Qg /$1.50 + Qc /$3.00 C) $60.00 = $1.50(Qg) + $3.00(Qc ) D) $60.00 = $1.50(Qg) - $3.00(Qc ) Answer: C Topic: The Budget Equation Skill: Definition Status: Old AACSB: Analytical Skills

52) If Sam has $80.00 each week to spend on tacos and magazines, and their respective prices are $.50 per taco and $4.00 per magazine, which of the following equations represents his budget line? A) $80.00 = $.50/Qt + $4.00/Qm B) $80.00 = Qt/Qm + $.50 /$4.00 C) $80.00 = $.50(Qm) + $4.00(Qt) D) $80.00 = $.50(Qt) + $4.00(Qm) Answer: D Topic: The Budget Equation Skill: Definition Status: Old AACSB: Analytical Skills

53) Suppose the price of coffee is $3, the price of a bagel is $2 and a person's budget is $40. The budget line's equation is A) $2/Qbagel + $3/Qcoffee = $40. B) $2(Qbagel ) + $3(Qcoffee ) = $40. C) Qbagel /$2 + Qcoffee /$3 = $40. D) Qbagel + Qcoffee = $40/($3 + $2). Answer: B Topic: The Budget Equation Skill: Definition Status: Old AACSB: Analytical Skills

54) Mary has $10 to spend each week on coffee, Qc and magazines, Qm. The price of a coffee is $1, and the price of a magazine is $2. Mary's budget equation is ________. A) Qm = 10 - Qc B) Qm + Qc = 20 C) $1 × Qc + $2 × Qm = $10 D) Qm = 10 - 2 × Qc Answer: C Topic: The Budget Equation Skill: Definition Status: Old AACSB: Analytical Skills 18 Copyright © 2014 Pearson Education, Inc.

55) Hilda buys only cauliflower, Qc, and geraniums, Qg. The equation for Hilda's initial budget line is $40 = $2 × Qc + $4 × Qg. If Hilda's income increases by $20, the price of cauliflower decreases by $1, and the price of geraniums increases by $1, the equation of her new budget line is ________. A) $60 = $1 × Qc + $5 × Qg B) $60 + $1 × Qc = $5 × Qg C) $0 = $60 + $1 × Qc + $5 × Qg D) $60 = $5 × Qc - $1 × Qg Answer: A Topic: The Budget Equation Skill: Definition Status: Old AACSB: Analytical Skills

56) Given the budget line in the above figure, which of the following combinations of pizza and milk are affordable? A) 0 pizzas, 12 gallons of milk B) 2 pizzas, 2 gallons of milk C) 4 pizzas, 4 gallons of milk D) All of the above combinations are affordable. Answer: B Topic: Consumption Possibilities Skill: Conceptual Status: Old AACSB: Analytical Skills

57) Given the budget line in the above figure, what is the household's real income in terms of pizzas per month? A) 5 pizzas per month B) 4 pizzas per month C) 3 pizzas per month D) All of above represent the household's real income. Answer: A Topic: Consumption Possibilities, Real Income Skill: Conceptual Status: Old AACSB: Analytical Skills

58) Given the budget line in the above figure, what is the relative price of pizza? A) 10 gallons of milk per pizza B) 6 gallons of milk per pizza C) 4 gallons of milk per pizza D) 2 gallons of milk per pizza Answer: D Topic: Consumption Possibilities, Relative Price Skill: Analytical Status: Old AACSB: Analytical Skills

59) Larry spends all his $800 monthly income on pizza and milk. The price of pizza is $4 a slice, and the price of milk is $2 per quart. Larry's real monthly income in terms of pizza is A) 400 slices. B) $800 C) 200 slices. D) $400 Answer: C Topic: Consumption Possibilities, Real Income Skill: Analytical Status: Old AACSB: Analytical Skills

60) Real income can be measured by A) the slope of the budget line. B) the area under the budget line. C) the length of the budget line. D) an intercept of the budget line. Answer: D Topic: Consumption Possibilities, Real Income Skill: Definition Status: Old AACSB: Analytical Skills

61) Real income measures the A) slope of the budget line. B) purchasing power of a given income. C) slope of the preference map. D) area under the indifference curve. Answer: B Topic: Consumption Possibilities, Real Income Skill: Definition Status: Old AACSB: Analytical Skills

62) Real income is ________. A) equal to money income minus taxes B) equal to the income earned legally C) equal to money income plus benefits minus taxes D) the maximum amount of goods and services that a household can afford Answer: D Topic: Consumption Possibilities, Real Income Skill: Definition Status: Old AACSB: Analytical Skills

63) Real income equals a household's income A) in terms of the quantity of goods the household can buy. B) multiplied by the prices of the goods it buys. C) divided by the prices of the goods it buys. D) multiplied by the relative prices of the goods it buys. Answer: A Topic: Consumption Possibilities, Real Income Skill: Conceptual Status: Old AACSB: Analytical Skills

64) Suppose you are graphing the quantity of bagels on the vertical axis and the quantity of coffee on the horizontal axis. A household's real income in terms of bagels is the A) relative price of coffee. B) relative price of bagels. C) point at which the budget line intersects the x-axis. D) point at which the budget line intersects the y-axis. Answer: D Topic: Consumption Possibilities, Real Income Skill: Conceptual Status: Old AACSB: Analytical Skills

65) Suppose that Dave has $200 to spend per week and he buys only magazines and pizza. The price of a pizza is $10 and the price of a magazine is $5. What is Dave's real income in terms of magazines? A) 20 B) 40 C) 200 D) 10 Answer: B Topic: Consumption Possibilities, Real Income Skill: Conceptual Status: Old AACSB: Analytical Skills

66) John has $40 to spend on pizza and tacos. Pizza costs $10 each and tacos are $1 per taco. John's real income ________. A) is $40 B) is 4 pizzas or 40 tacos C) is 4 pizzas plus 40 tacos D) depends only on his money wage Answer: B Topic: Consumption Possibilities, Real Income Skill: Conceptual Status: Old AACSB: Analytical Skills

67) Suppose the price of coffee is $3 each, the price of bagels is $2 each and a person's budget is $40. The person's real income is A) $40. B) $13.33 in terms of bagels. C) $13.33 in terms of coffee. D) $8. Answer: C Topic: Consumption Possibilities, Real Income Skill: Conceptual Status: Old AACSB: Analytical Skills

68) The ________ is the price of one good ________ the price of another good. A) relative price; times B) relative price; divided by C) budget; times D) budget; divided by Answer: B Topic: Consumption Possibilities, Relative Price Skill: Definition Status: Old AACSB: Analytical Skills

A recent article by the Associated Press examined the effect higher gas prices have on the consumption of other goods. It said that the increase in the price of gasoline has decreased the quantity of other goods, such as food, that people consume. (Source: Associated Press, September 28, 2012) 69) If consumers spend their income either on gasoline or food, then an increase in the price of gasoline rotates the budget line A) inward along the "food" axis. B) outward along the "food" axis. C) inward along the "gasoline" axis. D) outward along the "gasoline" axis. Answer: A Topic: Consumption Possibilities, Real Income Skill: Analytical Status: New AACSB: Analytical Skills

70) If the price of gasoline increases and the price of food remains the same, then real income measured in terms of A) gasoline increases. B) gasoline decreases. C) food increases. D) food decreases. Answer: A Topic: Consumption Possibilities, Real Income Skill: Analytical Status: New AACSB: Analytical Skills

71) The price of one good divided by the price of another good is a A) money price. B) relative price. C) budget constraint. D) divisible good. Answer: B Topic: Consumption Possibilities, Relative Price Skill: Definition Status: Old AACSB: Analytical Skills

72) A relative price is the A) price of one good divided by the price of another good. B) same as opportunity cost. C) price of a given good divided by income. D) Both answers A and B are correct. Answer: D Topic: Consumption Possibilities, Relative Price Skill: Definition Status: Old AACSB: Analytical Skills

73) If the relative price of pizza in terms of movies is 3, this means that A) the opportunity cost of a pizza is 3 movies. B) 3 pizzas can be traded for 9 movies. C) in terms of the dollars that must be spent to buy the product, pizza is more expensive than movies. D) All of the above answers are correct. Answer: D Topic: Consumption Possibilities, Relative Price Skill: Analytical Status: Old AACSB: Analytical Skills

74) Suppose the price of coffee is $3 each, the price of bagels is $2 each and a person's budget is $40. The relative price of coffee is A) 1.5 bagels. B) 2/3 of a bagel. C) 13.33 bagels. D) 20 bagels. Answer: A Topic: Consumption Possibilities, Relative Price Skill: Analytical Status: Old AACSB: Analytical Skills

75) Suppose the price of chocolate chip cookies is $4.00 per pound and the price of a slice of cake is $2.00 per slice. The relative price of cookies in terms of cake is A) $2.00 per cookie. B) $4.00 per cookie. C) 1/2 slice of cake per cookie. D) 2 slices of cake per cookie. Answer: D Topic: Consumption Possibilities, Relative Price Skill: Analytical Status: Old AACSB: Analytical Skills

76) Suppose the price of chocolate chip cookies is $4.00 per pound and the price of a slice of cake is $2.00 per slice. The relative price of cake in terms of cookies is A) 1/2 pound of cookies per cake. B) 2 pounds of cookies per cake. C) 1/2 slice of cake per cookie. D) 2 slices of cake per cookie. Answer: A Topic: Consumption Possibilities, Relative Price Skill: Analytical Status: Old AACSB: Analytical Skills

77) Larry spends all his $800 monthly income on pizza and milk. The price of pizza is $4 a slice, and the price of milk is $2 per quart. The relative price of milk is A) 2 slices of pizza per quart. B) 0.5 slices of pizza per quart. C) $2 per quart. D) 0.5 quarts per slice of pizza. Answer: B Topic: Consumption Possibilities, Relative Price Skill: Analytical Status: Old AACSB: Analytical Skills

78) Suppose that the price of a bag of jellybeans is $6, and the price of a bottle of Jolt cola is $2. The relative price of Jolt cola is A) 3 bags of jellybeans per bottle of Jolt cola. B) 2 bags of jellybeans per bottle of Jolt cola. C) 1/3 bag of jellybeans per bottle of Jolt cola. D) $2. Answer: C Topic: Consumption Possibilities, Relative Price Skill: Analytical Status: Old AACSB: Analytical Skills

79) When the price of only one good rises, the relative price of that good A) falls. B) rises. C) does not change. D) rises if it is a normal good and falls if it is an inferior good. Answer: B Topic: Consumption Possibilities, Relative Price Skill: Analytical Status: Old AACSB: Analytical Skills

80) Suppose that initially the price of a bag of jellybeans is $6, and the price of a bottle of Jolt cola is $2. If the price of a bottle of Jolt cola increases, then the relative price of jellybeans A) increases. B) decreases. C) stays the same, but the relative price of Jolt cola increases. D) stays the same, but the relative price of Jolt cola decreases. Answer: B Topic: Consumption Possibilities, Relative Price Skill: Analytical Status: Old AACSB: Analytical Skills

81) If the price of peanuts increases by 10 percent and the price of potato chips does not change, then the relative price of peanuts with respect to potato chips will ________ and the relative price of potato chips with respect to peanuts will ________. A) rise; rise B) rise; fall C) fall; rise D) fall; fall Answer: B Topic: Consumption Possibilities, Relative Price Skill: Analytical Status: Old AACSB: Analytical Skills

82) Real income is equal to ________ and a relative price is given by ________. A) the dollar amount of income divided by the dollar price of a good; the dollar price of one good divided by the dollar price of the good whose relative price is being calculated B) the dollar price of one good divided by the dollar price of the good whose relative price is being calculated; the dollar amount of income divided by the dollar price of a good C) The dollar price of one good divided by the dollar price of another good; the dollar price of one good divided by the dollar price of the good whose relative price is being calculated D) the dollar amount of income; real income divided by the dollar amount of income Answer: A Topic: Consumption Possibilities, Relative Price Skill: Definition Status: Old AACSB: Analytical Skills

83) The magnitude of the slope of the budget line is determined by A) the marginal rate of substitution. B) the level of income. C) the consumer's preferences for the goods. D) relative prices. Answer: D Topic: Consumption Possibilities, Relative Price Skill: Definition Status: Old AACSB: Analytical Skills

84) The magnitude of the slope of the budget line is the ratio of A) a price to its quantity. B) a quantity to its price. C) two prices. D) two marginal rates of substitution. Answer: C Topic: Consumption Possibilities, Relative Price Skill: Definition Status: Old AACSB: Analytical Skills

85) The magnitude of the slope of the budget line measures the A) opportunity cost of the good on the horizontal axis in terms of the good on the vertical axis. B) opportunity cost of the good on the vertical axis in terms of the good on the horizontal axis. C) price elasticity of demand. D) price elasticity of supply. Answer: A Topic: Consumption Possibilities, Relative Price Skill: Definition Status: Old AACSB: Analytical Skills

86) The magnitude of the slope of the budget line is equal to the ________ or ________ of the good plotted on the ________ in terms of the other good. A) relative price; marginal cost; y-axis B) relative price; total cost; y-axis C) relative price; opportunity cost; x-axis D) price; opportunity cost; x-axis Answer: C Topic: Consumption Possibilities, Relative Price Skill: Definition Status: Old AACSB: Analytical Skills

87) Nick consumes two goods, chips and lemonade. Located on the x-axis is the quantity of chips and on the y-axis is the quantity of lemonade. The magnitude of the slope of the budget line equals the A) price of lemonade. B) price of chips. C) price of chips/price of lemonade. D) price of lemonade/price of chips. Answer: C Topic: Consumption Possibilities, Relative Price Skill: Definition Status: Old AACSB: Analytical Skills

88) Movies are $10 a ticket, and DVD rentals are $5 a DVD. With movies on the vertical axis, the magnitude of the slope of the budget line is A) 1/2. B) 2. C) 5. D) 10. Answer: A Topic: Consumption Possibilities, Relative Price Skill: Conceptual Status: Old AACSB: Analytical Skills

89) If all prices rise by 5 percent and money income remains constant, the new budget line will have A) a steeper slope. B) a flatter slope. C) a positive slope. D) the same slope. Answer: D Topic: Consumption Possibilities, Relative Price Skill: Conceptual Status: Old AACSB: Analytical Skills

90) If all prices fall by 5 percent and money income remains constant, the new budget line will have A) a positive slope. B) the same slope. C) a steeper slope. D) a flatter slope. Answer: B Topic: Consumption Possibilities, Relative Price Skill: Conceptual Status: Old AACSB: Analytical Skills

91) Jake spends $200 on fried chickens and Pepsi. The price of a fried chicken is $5 and Pepsi is $2.50 per bottle. With the quantity of Pepsi being measured along the vertical axis, the slope of Jake's budget line is ________ per fried chicken. A) 0.5 of a Pepsi B) -0.5 of a Pepsi C) 2 Pepsis D) -2 Pepsis Answer: D Topic: Consumption Possibilities, Relative Price Skill: Analytical Status: Old AACSB: Analytical Skills

92) Ron spends $150 on movie tickets and pizza. The price of a pizza is $10 and a movie ticket is $7.50. With the quantity of movies measured along the vertical axis, the slope of Ron's budget line (with movies on the vertical axis) is ________ per pizza A) 1.33 movies B) -1.33 movies C) 0.75 of a movie D) -0.75 of a movie Answer: B Topic: Consumption Possibilities, Relative Price Skill: Analytical Status: Old AACSB: Analytical Skills

93) If the price of the good measured on the horizontal axis falls, a consumer's budget line A) becomes flatter. B) becomes steeper. C) shifts rightward and its slope does not change. D) shifts leftward and its slope does not change. Answer: A Topic: Consumption Possibilities, Relative Price Skill: Analytical Status: Old AACSB: Analytical Skills

94) Junkfood Jill spends all of her income on jellybeans and Jolt cola. Suppose that Jill's income is $30, the price of a bag of jellybeans is $6, and the price of a bottle of Jolt cola is $2. If bags of jellybeans are graphed along the vertical axis and bottles of Jolt cola are graphed along the horizontal axis, what is the slope of the budget line? A) 3 B) -3 C) 1/3 D) -1/3 Answer: D Topic: Consumption Possibilities, Relative Price Skill: Analytical Status: Old AACSB: Analytical Skills

Case A B C

Money income Price of a pizza (dollars) (dollars) 100 50 25

20 10 5

Price of a hamburger (dollars) 2 5 4

95) In the table above, in terms of units of pizza, real income is A) lower in case A than in cases B and C. B) lower in case B than in cases A and C. C) lower in case C than in cases A and B. D) equal in all three cases. Answer: D Topic: Consumption Possibilities, Real Income Skill: Analytical Status: Old AACSB: Analytical Skills

96) In the table above, in terms of units of hamburgers, real income is A) lower in case A than in cases B and C. B) lower in case B than in cases A and C. C) lower in case C than in cases A and B. D) equal in all three cases. Answer: C Topic: Consumption Possibilities, Real Income Skill: Analytical Status: Old AACSB: Analytical Skills

97) In the table above, which case has the lowest relative price for a hamburger? A) case A B) case B C) case C D) All three cases have an equal relative price for a hamburger. Answer: A Topic: Consumption Possibilities, Relative Price Skill: Analytical Status: Old AACSB: Analytical Skills

98) The above figure gives your budget line between CDs and magazines. Which combination of CDs and magazines are affordable? A) combination a B) combinations a, b, c, and d C) combination c only D) combinations b, c, and d Answer: D Topic: Consumption Possibilities Skill: Conceptual Status: Revised AACSB: Analytical Skills

99) The above figure gives your budget line between CDs and magazines. Which of the following changes would NOT allow you to buy more CDs? A) A decrease in the relative price of CDs. B) An increase in income. C) A decrease in the price of magazines with no change in the price of CDs. D) None of the above answers is correct because all of the above changes allow you to buy more CDs. Answer: D Topic: Consumption Possibilities Skill: Analytical Status: Old AACSB: Analytical Skills

100) The above figure gives your budget line between CDs and magazines. If the price of a magazine increased, then the budget line A) shifts outward and the slope does not change. B) rotates inward with no change in the horizontal intercept. C) rotates inward with no change in the vertical intercept. D) rotates outward with no change in the vertical axis. Answer: C Topic: Consumption Possibilities, Change in Price Skill: Conceptual Status: Old AACSB: Analytical Skills

101) Given the budget line in the above figure, which of the following combinations of pizza and milk are affordable? A) 0 pizzas, 10 gallons of milk B) 2 pizzas, 6 gallons of milk C) 4 pizzas, 1 gallon of milk D) All of the above combinations are affordable. Answer: D Topic: Consumption Possibilities Skill: Analytical Status: Old AACSB: Analytical Skills

102) Given the budget line in the above figure, what is the household's real income in terms of pizzas per month? A) 5 pizzas per month B) 4 pizzas per month C) 3 pizzas per month D) All of above represent the household's real income. Answer: A Topic: Consumption Possibilities, Real Income Skill: Analytical Status: Old AACSB: Analytical Skills

103) Given the budget line in the above figure, what is the relative price of pizza? A) 10 gallons of milk per pizza B) 6 gallons of milk per pizza C) 4 gallons of milk per pizza D) 2 gallons of milk per pizza Answer: D Topic: Consumption Possibilities, Relative Price Skill: Analytical Status: Old AACSB: Analytical Skills

104) The above figure shows Katie's consumption possibilities. The relative price of a movie ticket is A) 1 restaurant meal. B) 0.25 restaurant meals. C) 4 restaurant meals. D) 2 restaurant meals. Answer: B Topic: Consumption Possibilities, Relative Price Skill: Analytical Status: Old AACSB: Analytical Skills

105) The above figure shows Katie's consumption possibilities. The relative price of a restaurant meal is A) 1 movie ticket. B) 0.25 movie tickets. C) 4 movie tickets. D) 2 movie tickets. Answer: C Topic: Consumption Possibilities, Relative Price Skill: Analytical Status: Old AACSB: Analytical Skills

106) The figure above shows Ronald's budget line. He has a weekly income of $20 and he spends it on hot dogs and hamburgers. The relative price of a hamburger is ________. A) 1/2 hot dog B) 5 hot dogs C) $20 D) 2 hot dogs Answer: A Topic: Consumption Possibilities, Relative Price Skill: Analytical Status: Old AACSB: Analytical Skills

107) The figure above shows Ronald's budget line. He has a weekly income of $20, which he spends on hotdogs and hamburgers. Ronald's real income in terms of hamburgers ________. A) depends on the quantity of hamburgers consumed B) depends on the quantity of hotdogs consumed C) is $20 D) is 10 hamburgers Answer: D Topic: Consumption Possibilities, Real Income Skill: Analytical Status: Old AACSB: Analytical Skills

108) The figure above shows Ronald's budget line. He has a weekly income of $20, which he spends on hotdogs and hamburgers. Now Ronald's income decreases to $10 per week and the price of a hotdog doubles. Ronald's budget line becomes ________ and ________. A) flatter; shifts rightward B) flatter; does not shift C) steeper; shifts rightward D) steeper; shifts leftward Answer: D Topic: Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

109) Suppose Sam plans to buy only popcorn and soda. He has $40 to spend per week. A change in which of the following variables will change Sam's consumption possibilities? I. price of popcorn II. income III. preferences IV. utility A) II only B) I and II C) I, II and III D) III and IV Answer: B Topic: Consumption Possibilities, Change in Price Skill: Conceptual Status: Old AACSB: Analytical Skills

110) Joe has $50, which he spends on movies and pizza. If the price of a pizza falls, Joe can A) consume more of both goods. B) consume more pizza only if he gives up some movies. C) consume more movies only if he gives up some pizza. D) consume more pizza only. Answer: A Topic: Consumption Possibilities, Change in Price Skill: Conceptual Status: Old AACSB: Analytical Skills

111) Given the budget line in the figure above, the combination of chips that is NOT affordable is A) a. B) b. C) c. D) d. Answer: C Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

112) In the figure above, real income in terms of bags of corn chips is shown by point A) a. B) b. C) c. D) d. Answer: D Topic: Consumption Possibilities, Real Income Skill: Analytical Status: Old AACSB: Analytical Skills

113) In the figure above, a decrease in the price of a bag of potato chips would result in the budget line A) making a parallel shift toward point a. B) making a parallel shift toward point c. C) becoming flatter. D) becoming steeper. Answer: C Topic: Consumption Possibilities, Change in Price Skill: Analytical Status: Old AACSB: Analytical Skills 37 Copyright © 2014 Pearson Education, Inc.

114) In the figure above, an increase in the price of a bag of potato chips would result in the budget line A) making a parallel shift toward point a. B) making a parallel shift toward point c. C) becoming flatter. D) becoming steeper. Answer: D Topic: Consumption Possibilities, Change in Price Skill: Analytical Status: Old AACSB: Analytical Skills

115) In the figure above, an increase in income would result in the budget line A) making a parallel shift toward point a. B) making a parallel shift toward point c. C) becoming flatter. D) becoming steeper. Answer: B Topic: Consumption Possibilities, Change in Income Skill: Analytical Status: Old AACSB: Analytical Skills

116) Sharmila has a budget line for DVDs and books. DVDs are on the vertical axis and books on the horizontal. Her budget line becomes steeper as A) the price of a DVD falls. B) the price of a DVD rises. C) her income decreases. D) her income increases. Answer: A Topic: Consumption Possibilities, Change in Price Skill: Analytical Status: Old AACSB: Analytical Skills

117) Inga's graph of her budget line has apples per week on the vertical axis and loaves of bread per week on the horizontal. A fall in the price of an apple shifts the A) horizontal intercept leftward. B) horizontal intercept rightward. C) vertical intercept downward. D) vertical intercept upward. Answer: D Topic: Consumption Possibilities, Change in Price Skill: Analytical Status: Old AACSB: Analytical Skills

118) A budget line is drawn with automobiles on the vertical axis and boats on the horizontal. Imposing a tax on boats that boosts the price of a boat makes the A) indifference curves flatter. B) indifference curves steeper. C) budget line flatter. D) budget line steeper. Answer: D Topic: Consumption Possibilities, Change in Price Skill: Analytical Status: Old AACSB: Analytical Skills

119) In the above figure, the budget line would rotate in the direction indicated as a result of a A) rise in the price of a book. B) fall in the price of a book. C) rise in the price of a movie. D) decrease in income. Answer: B Topic: Consumption Possibilities, Change in Price Skill: Analytical Status: Old AACSB: Analytical Skills

120) When your income increases, A) your budget line shifts rightward and its slope does not change. B) your budget line shifts leftward and its slope does not change. C) the slope of your budget line increases. D) the slope of your budget line decreases. Answer: A Topic: Consumption Possibilities, Change in Income Skill: Analytical Status: Old AACSB: Analytical Skills

121) An increase in a consumer's income creates a A) rightward parallel shift of the budget line. B) leftward parallel shift of the budget line. C) rightward rotation of the budget line, so that the budget line becomes steeper. D) leftward rotation of the budget line, so that the budget line becomes steeper. Answer: A Topic: Consumption Possibilities, Change in Income Skill: Analytical Status: Old AACSB: Analytical Skills

122) If an individual's income increases, A) the person's indifference curves shift outward in a parallel manner. B) the person's budget line shifts outward in a parallel manner. C) there will be no impact on the individual's budget line or indifference curves. D) None of the above answers is correct. Answer: B Topic: Consumption Possibilities, Change in Income Skill: Analytical Status: Old AACSB: Analytical Skills

123) In the above figure, a shift in the budget line in the direction indicated would occur as a result of A) a decrease in money income. B) an increase in money income. C) a fall in the price of a movie. D) a rise in the price of movie. Answer: B Topic: Consumption Possibilities, Change in Income Skill: Analytical Status: Old AACSB: Analytical Skills

124) In the above figure, if the price of milk rises, the budget line A) rotates outward and the slope becomes steeper. B) shifts inward and its slope does not change. C) rotates inward and the slope becomes steeper. D) rotates inward and the slope becomes more shallow. Answer: C Topic: Consumption Possibilities, Change in Price Skill: Analytical Status: Old AACSB: Analytical Skills

125) In the above figure, if the price of pizza falls, the budget line A) rotates outward and becomes steeper. B) shifts leftward and its slope does not change. C) shifts rightward and its slope does not change. D) rotates inward and becomes flatter. Answer: A Topic: Consumption Possibilities, Change in Price Skill: Analytical Status: Old AACSB: Analytical Skills

126) In the above figure if money income increases, the budget line A) shifts outward and its slope does not change. B) shifts inward and its slope does not change. C) rotates outward and becomes steeper. D) rotates outward and becomes more shallow. Answer: A Topic: Consumption Possibilities, Change in Income Skill: Analytical Status: Old AACSB: Analytical Skills 42 Copyright © 2014 Pearson Education, Inc.

127) In the above figure, the budget line would rotate in the direction indicated as a result of a A) rise in the price of a book. B) decrease in income. C) rise in the price of a movie. D) fall in the price of a movie. Answer: C Topic: Consumption Possibilities, Change in Price Skill: Analytical Status: Old AACSB: Analytical Skills

128) If money income increases, a consumer's budget line A) becomes flatter. B) becomes steeper. C) shifts rightward and its slope does not change. D) shifts leftward and its slope does not change. Answer: C Topic: Consumption Possibilities, Change in Income Skill: Analytical Status: Old AACSB: Analytical Skills

129) In the figure above, which budget line results in the most real income in terms of compact discs? A) AD B) BD C) CD D) Real income is equal for all three budget lines. Answer: C Topic: Consumption Possibilities, Real Income Skill: Analytical Status: Old AACSB: Analytical Skills

130) In the figure above, which budget line results in the most real income in terms of carrots? A) AD B) BD C) CD D) Real income is equal for all three budget lines. Answer: D Topic: Consumption Possibilities, Real Income Skill: Analytical Status: Old AACSB: Analytical Skills

131) In the figure above, which budget line has the lowest relative price of compact discs? A) AD B) BD C) CD D) The relative price is equal for all three budget lines. Answer: C Topic: Consumption Possibilities, Relative Price Skill: Analytical Status: Old AACSB: Analytical Skills 44 Copyright © 2014 Pearson Education, Inc.

132) In the figure above, which budget line has the lowest relative price of carrots? A) AD B) BD C) CD D) The relative price is equal for all three budget lines. Answer: A Topic: Consumption Possibilities, Relative Price Skill: Analytical Status: Old AACSB: Analytical Skills

133) In the figure above, suppose the original budget line is BD. A rise in the price of a compact disc will A) rotate the budget line to AD. B) rotate the budget line to CD. C) not move the budget line. D) result in a parallel leftward shift of the budget line. Answer: A Topic: Consumption Possibilities, Change in Price Skill: Analytical Status: Old AACSB: Analytical Skills

134) In the figure above, suppose the original budget line is BD. A fall in the price of a compact disc will A) rotate the budget line to AD. B) rotate the budget line to CD. C) not move the budget line. D) result in a parallel leftward shift of the budget line. Answer: B Topic: Consumption Possibilities, Change in Price Skill: Analytical Status: Old AACSB: Analytical Skills

135) The figure above shows Ilene's budget line. The price of a can of cat food is $2. Ilene's income per week is A) $10. B) $40. C) $56. D) $160. Answer: B Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

136) The figure above shows Ilene's budget line. The price of a can of cat food is $2. The price of a can of dog food A) is $1.60. B) is $4.00. C) is $5.00. D) cannot be determined without more information. Answer: C Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

137) The figure above shows Ilene's budget line. If her dog, Muffin, runs away and she adopts another cat, named Sphynx, the budget line shown in the figure will A) become flatter. B) become steeper. C) shift outward (because cats eat less). D) not move. Answer: D Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

138) The figure above shows Ilene's budget line. The price of a can of cat food is $2. If the price of a can of cat food rises, her budget line will A) rotate inward toward the origin. B) rotate outward away from the origin. C) shift leftward in a parallel manner. D) shift rightward in a parallel manner. Answer: A Topic: Consumption Possibilities, Change in Price Skill: Analytical Status: Old AACSB: Analytical Skills

139) The figure above shows Ilene's budget line. If the price of a can of cat food rises, her budget line rotates so that the vertical intercept is A) unchanged, but the horizontal intercept is closer to the origin. B) unchanged, but the horizontal intercept is farther away from the origin. C) farther away from the origin, but the horizontal intercept is closer to the origin. D) closer to the origin, but the horizontal intercept is farther away from the origin. Answer: A Topic: Consumption Possibilities, Change in Price Skill: Analytical Status: Old AACSB: Analytical Skills

140) The figure above shows Ilene's budget line. If Ilene's income rises, her budget line will A) rotate and become flatter. B) rotate and become steeper. C) shift rightward and its slope will not change. D) shift leftward and its slope will not change. Answer: C Topic: Consumption Possibilities, Change in Income Skill: Analytical Status: Old AACSB: Analytical Skills

141) In the above figure, Sheryl's monthly budget line for movies and plays shifted, as shown. The shift in the budget line is parallel, so the shift might be because A) the price of a movie fell and nothing else changed. B) the price of a play fell and nothing else changed. C) Sheryl's income decreased and nothing else changed. D) Sheryl's income increased and nothing else changed. Answer: D Topic: Consumption Possibilities, Change in Income Skill: Analytical Status: Old AACSB: Analytical Skills

142) As Judy moves down along her budget line, ________. A) the opportunity cost of the good measured along the x-axis increases B) the opportunity cost of the good measured along the y-axis increases C) her income decreases D) her income does not change and neither does the relative price of the goods Answer: D Topic: Consumption Possibilities, Budget Line Skill: Conceptual Status: Old AACSB: Analytical Skills

143) Waldo buys only two items, pretzels and ham sandwiches. Waldo has $24 in income, pretzels cost $0.60 per bag and ham sandwiches cost $2.40 each. Which of the following statements is true for the information given above? A) Waldo's real income expressed in terms of pretzels is 40 bags of pretzels. B) Waldo's real income expressed in terms of ham sandwiches is 10 ham sandwiches. C) The relative price of a ham sandwich in terms of pretzels is 4 bags of pretzels per ham sandwich. D) All of the above answers are correct. Answer: D Topic: Consumption Possibilities, Budget Equation Skill: Analytical Status: Old AACSB: Analytical Skills

144) Waldo buys only two items, pretzels and ham sandwiches. Waldo has $24 in income, pretzels cost $0.60 per bag and ham sandwiches cost $2.40 each. If Waldo's budget line is constructed with ham sandwiches along the horizontal axis and bags of pretzels along the vertical axis, then A) the horizontal intercept of the budget line will be 40 ham sandwiches. B) the vertical intercept of the budget line will be 10 bags of pretzels. C) the slope of the budget line will be -4 bags of pretzels per ham sandwich. D) All of the above answers are correct. Answer: C Topic: Consumption Possibilities, Budget Equation Skill: Analytical Status: Old AACSB: Analytical Skills

145) Melissa has an income of $240 a month to spend on tennis lessons and concert tickets. The price of a tennis lesson is $20, and the price of a concert ticket is $40. If the quantity of tennis lessons is QT, and the quantity of concert tickets is QC, Melissa's budget line equation is A) QC = 6 - 0.5QT B) QC = 12 - 2QT C) QC = 240 - 40QT D) QC = 20 + 40QT Answer: A Topic: Consumption Possibilities, Budget Equation Skill: Definition Status: Old AACSB: Analytical Skills

146) Melissa has an income of $240 a month to spend on tennis lessons and concert tickets. The price of a tennis lesson is $20, and the price of a concert ticket is $40. The slope of Melissa's budget line, with tennis lessons on the horizontal axis, is A) -2. B) -0.5. C) -6. D) -12. Answer: B Topic: Consumption Possibilities, Budget Equation Skill: Definition Status: Old AACSB: Analytical Skills

147) Melissa has an income of $240 a month to spend on tennis lessons and concert tickets. The price of a tennis lesson is $20, and the price of a concert ticket is $40. Melissa's real monthly income in terms of concerts is A) 40. B) 20. C) 6. D) 12. Answer: C Topic: Consumption Possibilities, Real Income Skill: Analytical Status: Old AACSB: Analytical Skills

148) Melissa has an income of $240 a month to spend on tennis lessons and concert tickets. The price of a tennis lesson is $20, and the price of a concert ticket is $40. If the price of a tennis lesson rises to $30, Melissa's budget line, with tennis lessons on the horizontal axis, A) shifts rightward with no change in its slope. B) shifts leftward with no change in its slope. C) becomes flatter. D) becomes steeper. Answer: D Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

149) The figure above shows Sam's budget line. Which of the following combinations of gasoline and coffee are not available to Sam? A) 40 gallons of gasoline and 0 pounds of coffee B) 32 gallons of gasoline and 4 pounds of coffee C) 8 gallons of gasoline and 8 pounds of coffee D) 16 gallons of gasoline and 16 pounds of coffee Answer: D Topic: Consumption Possibilities, Budget Line Skill: Conceptual Status: Old AACSB: Analytical Skills

150) The figure above shows Sam's budget line. Which of the following combinations of gasoline and coffee are available to Sam? A) 40 gallons of gasoline and 1 pound of coffee B) 1 gallon of gasoline and 20 pounds of coffee C) 16 gallons of gasoline and 12 pounds of coffee D) 12 gallons of gasoline and 16 pounds of coffee Answer: C Topic: Consumption Possibilities, Budget Line Skill: Conceptual Status: Old AACSB: Analytical Skills

151) The figure above shows Sam's budget line. Sam's budget line shows A) which combinations of gasoline and coffee Sam can afford. B) which combinations of gasoline and coffee Sam is planning to purchase. C) whether or not Sam thinks gasoline and coffee are worth their prices. D) whether or not Sam currently has enough gasoline and enough coffee. Answer: A Topic: Consumption Possibilities, Budget Line Skill: Conceptual Status: Old AACSB: Analytical Skills

152) The figure above shows Sam's budget line. Why will Sam not purchase 36 gallons of gasoline and 4 pounds of coffee? A) because he does not like this combination B) because this combination does not contain enough coffee to satisfy him C) because this combination contains more gasoline than his gasoline tank will hold D) because he cannot afford this combination Answer: D Topic: Consumption Possibilities, Budget Line Skill: Conceptual Status: Old AACSB: Analytical Skills

153) The figure above shows Sam's budget line. Which of the following formulas represents Sam's budget equation? A) $60.00 = $1.50/Qg + $3.00/Qc B) $60.00 = Qg /$1.50 + Qc /$3.00 C) $60.00 = $1.50(Qg) + $3.00(Qc) D) $60.00 = $1.50(Qg) - $3.00(Qc) Answer: C Topic: Consumption Possibilities, Budget Equation Skill: Definition Status: Old AACSB: Analytical Skills

154) The figure above shows Sam's budget line. Which of the following equals the vertical intercept of Sam's budget line? A) Y/Pc B) Y/Pg C) -(Pc/Pg) D) -(Pg/Pc ) Answer: B Topic: Consumption Possibilities, Real Income Skill: Definition Status: Old AACSB: Analytical Skills

155) The figure above shows Sam's budget line. The vertical intercept of Sam's budget line is equal to A) the quantity of coffee purchased if zero gasoline is purchased. B) Pc/Y. C) the quantity of gasoline purchased if zero coffee is purchased. D) Pg/Y. Answer: C Topic: Consumption Possibilities, Real Income Skill: Definition Status: Old AACSB: Analytical Skills

156) The figure above shows Sam's budget line. Which of the following equals the slope of Sam's budget line? A) Y/Pc B) Y/Pg C) (Pc/Pg) D) (Pg/Pc) Answer: C Topic: Consumption Possibilities, Relative Price Skill: Definition Status: Old AACSB: Analytical Skills

157) The figure above shows Sam's budget line. The magnitude of the slope of Sam's budget line is equal to the A) quantity of coffee purchased divided by the quantity of gasoline purchased. B) price of coffee divided by the price of gasoline. C) quantity of gasoline purchased divided by the quantity of coffee purchased. D) price of gasoline divided by the price of coffee. Answer: B Topic: Consumption Possibilities, Relative Price Skill: Definition Status: Old AACSB: Analytical Skills

158) The figure above shows Sam's budget line. Which of the following would result in Sam's budget line rotating inward and not changing its vertical intercept? A) a decline in his preference for coffee B) a fall in the price of a gallon of gasoline C) a decrease in Sam's income D) an increase in the price of a pound of coffee Answer: D Topic: Consumption Possibilities, Change in Price Skill: Conceptual Status: Old AACSB: Analytical Skills

159) The figure above shows Sam's budget line. Which of the following would result in Sam's budget line rotating outward and not changing its horizontal intercept? A) a fall in the price of a pound of coffee B) a rise in the price of a pound of coffee C) a fall in the price of a gallon of gasoline D) a rise in the price of a gallon of gasoline Answer: C Topic: Consumption Possibilities, Change in Price Skill: Conceptual Status: Old AACSB: Analytical Skills

160) The figure above shows Sam's budget line. Which of the following would result in Sam's budget line shifting leftward and not changing its slope? A) a decline in his preferences for both gasoline and coffee B) an equal percentage reduction in the prices of both a gallon of gasoline and a pound of coffee C) a decrease in Sam's income D) a fall in the ratio of the price of a gallon of gasoline to the price of a pound of coffee Answer: C Topic: Consumption Possibilities, Change in Income Skill: Conceptual Status: Old AACSB: Analytical Skills

161) Lizzie's budget line is shown in the figure above. If Lizzie's income is $20, which of the following formulas represents her budget equation? A) QC = 20 + QM B) QC = 20 - QM C) QC = -20 + 2 QM D) QC = 20 - 2QM Answer: D Topic: Consumption Possibilities, Budget Equation Skill: Definition Status: Old AACSB: Analytical Skills

162) Lizzie's budget line is shown in the figure above. If Lizzie's income is $20, which of the following formulas represents her budget equation? A) QM = 20 - 2QC B) 20 = QC + QM C) 20 = QC + 2QM D) QM = 20 + QC Answer: C Topic: Consumption Possibilities, Budget Equation Skill: Definition Status: Old AACSB: Analytical Skills

163) Lizzie's budget line is shown in the figure above. The slope of the budget line is ________ cookies per magazine. A) 2 B) -2 C) 0.5 D) -0.5 Answer: B Topic: Consumption Possibilities, Relative Price Skill: Definition Status: Old AACSB: Analytical Skills

164) Lizzie's budget line is shown in the figure above. The relative price of a magazine is ________ per magazine. A) 2 cookies B) 0.5 of a cookie C) $1 D) $2 Answer: A Topic: Consumption Possibilities, Relative Price Skill: Definition Status: Old AACSB: Analytical Skills

165) Lizzie's budget line is shown in the figure above. The relative price of a cookie is ________ per cookie. A) 2 magazines B) 0.5 of a magazine C) $1 D) $2 Answer: B Topic: Consumption Possibilities, Relative Price Skill: Definition Status: Old AACSB: Analytical Skills

166) Lizzie's budget line is shown in the figure above. Lizzie's real income in terms of magazines is ________ magazines A) 5 B) 10 C) 15 D) 20 Answer: B Topic: Consumption Possibilities, Real Income Skill: Definition Status: Old AACSB: Analytical Skills

167) Lizzie's budget line is shown in the figure above. Lizzie's real income in terms of cookies is ________ cookies. A) 5 B) 10 C) 15 D) 20 Answer: D Topic: Consumption Possibilities, Real Income Skill: Definition Status: Old AACSB: Analytical Skills

168) Lizzie's budget line is shown in the figure above. If the price of a cookie rises, Lizzie's real income in terms of cookies ________ and her real income in terms of magazines ________. A) decreases; increases B) increases; decreases C) decreases; does not change D) increases; does not change Answer: C Topic: Consumption Possibilities, Real Income Skill: Conceptual Status: Old AACSB: Analytical Skills

169) Lizzie's budget line is shown in the figure above. If the price of a magazine rises, Lizzie's real income in terms of magazines books ________ and her real income in terms of cookies ________. A) increases; does not change B) decreases; does not change C) decreases; increases D) increases; decreases Answer: B Topic: Consumption Possibilities, Real Income Skill: Conceptual Status: Old AACSB: Analytical Skills

170) Lizzie's budget line is shown in the figure above. If the price of a magazine falls, the budget line A) shifts rightward and its slope does not change. B) shifts leftward and its slope does not change. C) becomes flatter. D) becomes steeper. Answer: C Topic: Consumption Possibilities, Change in Price Skill: Conceptual Status: Old AACSB: Analytical Skills

171) Lizzie's budget line is shown in the figure above. If the price of a cookie falls, the budget line A) shifts rightward and its slope does not change. B) shifts leftward and its slope does not change. C) becomes flatter. D) becomes steeper. Answer: D Topic: Consumption Possibilities, Change in Price Skill: Conceptual Status: Old AACSB: Analytical Skills

172) Lizzie's budget line is shown in the figure above. If Lizzie's income increases, her budget line A) shifts rightward and its slope does not change. B) shifts leftward and its slope does not change. C) becomes flatter. D) becomes steeper. Answer: A Topic: Consumption Possibilities, Change in Income Skill: Conceptual Status: Old AACSB: Analytical Skills

173) Which of the following statements best describes a consumer's budget line? A) It shows all combinations of goods among which the consumer is indifferent. B) It shows the limits to a consumer's set of affordable consumption choices. C) It shows the desired level of consumption for the consumer. D) It shows the consumption choices made by a consumer. Answer: B Topic: Study Guide Question, Consumption Possibilities, Budget Line Skill: Conceptual Status: Old AACSB: Analytical Skills

174) The magnitude of the slope of the budget line A) is defined as marginal rate of substitution. B) equals the relative price of the good measured along the horizontal axis. C) increases when income increases. D) decreases when income increases. Answer: B Topic: Study Guide Question, Consumption Possibilities, Budget Line Skill: Conceptual Status: Old AACSB: Analytical Skills

175) The budget line can shift or rotate A) only when income changes. B) only when prices change. C) when either income or prices change. D) None of the above, because changes in income and prices do not shift or rotate the budget line. Answer: C Topic: Study Guide Question, Consumption Possibilities, Budget Line Skill: Conceptual Status: Old AACSB: Analytical Skills

176) Sue consumes apples and bananas. Suppose Sue's income doubles and the prices of apples and bananas do not change. Sue's budget line will A) shift leftward and its slope will not change. B) remain unchanged. C) shift rightward and its slope will not change. D) shift rightward and become steeper. Answer: C Topic: Study Guide Question, Consumption Possibilities, Budget Line Skill: Conceptual Status: Old AACSB: Analytical Skills

2 Preferences and Indifference Curves 1) Preferences depend on A) income but not relative prices. B) relative prices but not income. C) neither relative prices nor income. D) both relative prices and income. Answer: C Topic: Preferences and Indifference Curves Skill: Definition Status: Old AACSB: Analytical Skills

2) Preferences can be described as A) what a person likes and dislikes. B) the income opportunities of several activities. C) feasible consumption combinations. D) the relative prices of goods and services. Answer: A Topic: Preferences and Indifference Curves Skill: Definition Status: Old AACSB: Analytical Skills

3) Consumers' preferences are represented by A) budget lines. B) indifference curves. C) relative prices. D) household income. Answer: B Topic: Preferences and Indifference Curves Skill: Definition Status: Revised AACSB: Analytical Skills

4) Which of the following statements is FALSE? A) A consumer has only one indifference curve. B) A consumer possesses a preference map. C) An indifference curve is a curve that shows the combination of goods among which a consumer is indifferent. D) The marginal rate of substitution is the rate at which a consumer will give up good y to get more of good x and remain on the same indifference curve. Answer: A Topic: Preferences and Indifference Curves Skill: Conceptual Status: Old AACSB: Analytical Skills

5) Which of the following results in a "parallel" shift outward of your indifference curves between gasoline and movie rentals? A) any decrease in the prices of gasoline and movie rentals B) an equal percentage decrease in the prices of gasoline and movie rentals C) an increase in your income D) none of the above Answer: D Topic: Preferences and Indifference Curves Skill: Conceptual Status: Old AACSB: Analytical Skills

6) Which of the following will change the slopes of your indifference curves between gasoline and movie rentals? A) a change in your preferences for either of the two goods B) only a change in the price of either of the two goods C) only a change in your income D) Both a change in the price of either good and a change in income will change the slopes of your indifference curves. Answer: A Topic: Preferences and Indifference Curves Skill: Conceptual Status: Old AACSB: Analytical Skills

7) An indifference curve shows combinations of goods ________. A) which the consumer prefers equally B) that are affordable C) that are inside or on the budget line D) that have the same relative price Answer: A Topic: Indifference Curves Skill: Definition Status: Old AACSB: Analytical Skills

8) An indifference curve shows A) the relationship between prices and a household's budget. B) all possible prices and preferences for a good. C) combinations of goods among which a household is indifferent. D) budget lines among which a consumer is indifferent. Answer: C Topic: Indifference Curves Skill: Definition Status: Old AACSB: Analytical Skills

9) The combinations of gasoline and coffee along one of Sam's indifference curves are combinations A) which require the same total expenditure. B) that he can afford with his $60.00 income. C) among which he is "indifferent." D) that give him the same marginal rate of substitution. Answer: C Topic: Indifference Curves Skill: Definition Status: Old AACSB: Analytical Skills

10) An indifference curve shows A) different combinations of two goods among which the consumer is indifferent. B) consumption possibilities that a consumer faces at different prices and income. C) affordable combinations of goods. D) the opportunity cost of one good relative to another. Answer: A Topic: Indifference Curves Skill: Definition Status: Old AACSB: Analytical Skills

11) Indifference curves are drawn on a diagram with the A) price of a good on the vertical axis and its quantity on the horizontal axis. B) price of one good on the vertical axis and the price of another good on the horizontal axis. C) quantity of a good on the vertical axis and its price on the horizontal axis. D) quantity of one good on the vertical axis and the quantity of another good on the horizontal axis. Answer: D Topic: Indifference Curves Skill: Definition Status: Old AACSB: Analytical Skills

12) An indifference curve is a line that shows combinations of goods among which a consumer A) needs equally. B) does not care which combination he or she receives. C) can afford. D) has readily available. Answer: B Topic: Indifference Curves Skill: Definition Status: Old AACSB: Analytical Skills

13) A curve/line that shows combinations of goods among which a consumer would not desire one combination of goods to another combination of goods on that curve/line is called A) a budget line. B) an indifference curve. C) a utility possibilities curve. D) a demand curve. Answer: B Topic: Indifference Curves Skill: Definition Status: Old AACSB: Analytical Skills

14) The curve in the above figure shows alternative combinations of gasoline and coffee that Sam likes equally well. This curve is called A) a budget line. B) a demand curve. C) a consumption curve. D) an indifference curve. Answer: D Topic: Indifference Curves Skill: Definition Status: Old AACSB: Analytical Skills

15) The above figure shows one of Sam's indifference curves between gasoline and coffee. Which of the following about a movement along Sam's indifference curve is correct? A) As he moves leftward along the curve, he likes the combinations of gasoline and coffee better and better. B) As he moves rightward along the curve, he likes the combinations of gasoline and coffee better and better. C) He likes all combinations of gasoline and coffee along the curve equally well. D) None of the above is true. Answer: C Topic: Indifference Curves Skill: Definition Status: Old AACSB: Analytical Skills

16) ________ on an indifference curve that is farther from the origin ________ on an indifference curve that is closer to the origin. A) Some combinations; are preferred to some combinations B) Any combination; is preferred to any combination C) Most combinations; are preferred to all combinations D) Combinations; are not as affordable as combinations Answer: B Topic: Preferences and Indifference Curves Skill: Definition Status: Old AACSB: Analytical Skills

17) If two consumption points are not on the same indifference curve, then one point is ________. A) a substitute for the other point B) unaffordable and the other is affordable C) preferred to the other D) more expensive than the other Answer: C Topic: Indifference Curves Skill: Definition Status: Old AACSB: Analytical Skills

18) If the combination of goods consumed at point C is preferred to combination D then A) point C is on a higher indifference curve. B) point C is on the same indifference cure but at a point where the vertical axis value is greater than point D's vertical axis value. C) point C is on a lower indifference curve. D) point C is on the same indifference curve but at a point where the horizontal axis value is greater than point D's horizontal axis value. Answer: A Topic: Indifference Curves Skill: Conceptual Status: Old AACSB: Analytical Skills

19) Along an indifference curve A) the marginal rate of substitution is constant but not equal to zero. B) the consumer does not prefer one consumption point to another. C) the marginal rate of substitution is equal to 0. D) the consumer prefers some of the consumption points to others. Answer: B Topic: Indifference Curves Skill: Conceptual Status: Old AACSB: Analytical Skills

20) Except for perfect complements, an indifference curve has a ________ slope and becomes ________ moving to the right. A) negative; flatter B) negative; steeper C) positive; flatter D) positive; steeper Answer: A Topic: Indifference Curves Skill: Analytical Status: Old AACSB: Analytical Skills

21) Except for perfect substitutes or perfect complements, indifference curves A) are straight lines with a positive slope. B) slope upward to the right. C) are bowed in toward the origin. D) are bowed out away from the origin. Answer: C Topic: Indifference Curves Skill: Conceptual Status: Old AACSB: Analytical Skills

22) All points above a given indifference curve are A) inferior to any point on the indifference curve. B) preferred to any point on the indifference curve. C) definitely not affordable. D) Both answers Band C are correct. Answer: B Topic: Indifference Curves Skill: Conceptual Status: Old AACSB: Analytical Skills

23) All points below a given indifference curve are A) less preferred to any point on the indifference curve. B) preferred to any point on the indifference curve. C) definitely affordable. D) Both answers A and C are correct. Answer: A Topic: Indifference Curves Skill: Conceptual Status: Old AACSB: Analytical Skills

24) Given the indifference curve in the above figure, which point is preferred to point a? A) point b B) point c C) point d D) point e Answer: B Topic: Indifference Curves Skill: Analytical Status: Old AACSB: Analytical Skills

25) The figure above shows a consumer is indifferent between points A) d and c. B) a, b, c, d, and e. C) e and d. D) b and a. Answer: D Topic: Indifference Curves Skill: Analytical Status: Old AACSB: Analytical Skills

26) Which of the following statements about the above figure is true? A) Point A is equally preferred to point C. B) Point B is equally preferred to point C. C) Point C is preferred to point A. D) Point A is preferred to point C. Answer: C Topic: Indifference Curves Skill: Analytical Status: Old AACSB: Analytical Skills

27) Lizzie's preferences are shown in the figure above. Lizzie is just as happy to have ________ as she is to have ________. A) 2 comic books and 12 cookies; 4 comic books and 8 cookies B) 2 comic books and 12 cookies; 8 comic books and 8 cookies C) 4 comic books and 8 cookies; 6 comic books and 12 cookies D) 6 comic books and 6 cookies; 5 comic books and 13 cookies Answer: A Topic: Indifference Curves Skill: Analytical Status: Old AACSB: Analytical Skills

28) Lizzie's preferences are shown in the figure above. Lizzie is just as happy to have ________ as she is to have ________. A) 4 comic books and 12 cookies; 6 comic books and 12 cookies B) 2 comic books and 12 cookies; 11 comic books and 8 cookies C) 2 comic books and 8 cookies; 3 comic books and 5 cookies D) 4 comic books and 12 cookies; 8 comic books and 8 cookies Answer: D Topic: Indifference Curves Skill: Analytical Status: Old AACSB: Analytical Skills

29) Lizzie's preferences are shown in the figure above. Lizzie definitely prefers consuming ________ to consuming ________. A) 1 comic book and 12 cookies; 4 comic books and 4 cookies B) 2 comic books and 12 cookies; 4 comic books and 8 cookies C) 4 comic books and 12 cookies; 2 comic books and 12 cookies D) 6 comic books and 12 cookies; 8 comic books and 16 cookies Answer: C Topic: Indifference Curves Skill: Analytical Status: Old AACSB: Analytical Skills

30) Lizzie's preferences are shown in the figure above. Lizzie definitely prefers consuming ________ to consuming ________. A) 2 comic books and 12 cookies; 8 comic books and 8 cookies B) 8 comic books and 8 cookies; 10 comic books and 4 cookies C) 2 comic books and 12 cookies; 4 comic books and 8 cookies D) 8 comic books and 16 cookies; 10 comic books and 4 cookies Answer: B Topic: Indifference Curves Skill: Analytical Status: Old AACSB: Analytical Skills

31) Lizzie's preferences are shown in the figure above. Which of the following combinations of goods does Lizzie prefer the most? A) 6 comic books and 20 cookies B) 8 comic books and 8 cookies C) 12 comic books and 10 cookies D) 4 comic books and 12 cookies Answer: A Topic: Indifference Curves Skill: Analytical Status: Old AACSB: Analytical Skills

32) The indifference curves in the figure above (I1, I2, and I3) reflect Peter's consumption preferences. If Peter consumes 24 slices of pizza and 24 chocolate bars per month, he as satisfied as he would be consuming ________ slices of pizza and ________ chocolate bars per month. A) 48; 12 B) 40; 20 C) 32; 8 D) 16; 16 Answer: A Topic: Indifference Curves Skill: Analytical Status: Old AACSB: Analytical Skills

33) The indifference curves in the figure above (I1, I2, and I3) reflect Peter's consumption preferences. Peter prefers consuming ________ to consuming ________. A) 48 slices of pizza and 12 chocolate bars; 24 slices of pizza and 24 chocolate bars B) 40 slices of pizza and 20 chocolate bars; 48 slices of pizza and 12 chocolate bars C) 24 slices of pizza and 24 chocolate bars; 40 slices of pizza and 20 chocolate bars D) 32 slices of pizza and 8 chocolate bars; 16 slices of pizza and 16 chocolate bars Answer: B Topic: Indifference Curves Skill: Analytical Status: Old AACSB: Analytical Skills

34) The indifference curves in the figure above (I1, I2, and I3) reflect Peter's consumption preferences. Which of the following combinations of goods does Peter prefer the most? A) 48 slices of pizza and 12 chocolate bars B) 24 slices of pizza and 24 chocolate bars C) 40 slices of pizza and 20 chocolate bars D) 32 slices of pizza and 8 chocolate bars Answer: C Topic: Indifference Curves Skill: Analytical Status: Old AACSB: Analytical Skills

35) The rate at which Sam is willing to give up a gallon of gasoline to get one more pound of coffee, and remain on the same indifference curve is called his A) opportunity cost of coffee. B) opportunity cost of gasoline. C) personal price of coffee. D) marginal rate of substitution. Answer: D Topic: Marginal Rate of Substitution Skill: Analytical Status: Old AACSB: Analytical Skills

36) The marginal rate of substitution is A) the rate at which the consumer will give up one good to get an additional unit of another good while remaining on the same indifference curve. B) the rate at which utility increases as the consumer increases purchases of a good, holding purchases of the other good constant. C) the rate at which a consumer will exchange a good for income holding prices constant. D) None of the above answers is correct. Answer: A Topic: Marginal Rate of Substitution Skill: Definition Status: Old AACSB: Analytical Skills

37) The rate at which a person is willing to give up a gallon of gasoline to get one more pound of coffee and remain on the same indifference curve is called his or her A) relative cost of coffee in terms of gasoline. B) indifference cost of coffee. C) personal price of coffee. D) marginal rate of substitution. Answer: D Topic: Marginal Rate of Substitution Skill: Definition Status: Old AACSB: Analytical Skills

38) The marginal rate of substitution is equal to the ________. A) marginal cost of each good B) magnitude of the slope of the indifference curve C) inverse of the slope of the budget line D) relative price of the two goods Answer: B Topic: Marginal Rate of Substitution Skill: Definition Status: Old AACSB: Analytical Skills

39) The magnitude of the slope of an indifference curve A) is equal to the marginal rate of substitution. B) always equals the relative price of the product measured along the horizontal axis. C) increases as income increases. D) decreases when income increases. Answer: A Topic: Marginal Rate of Substitution Skill: Definition Status: Old AACSB: Analytical Skills

40) The magnitude of the slope of an indifference curve is the marginal A) rate of substitution. B) rate of relative prices. C) utility of substitution. D) rate of utility of income. Answer: A Topic: Marginal Rate of Substitution Skill: Definition Status: Old AACSB: Analytical Skills

41) The marginal rate of substitution is equal to the A) slope of the demand curve. B) marginal cost of each good. C) magnitude of the slope of the indifference curve. D) relative prices of the two goods. Answer: C Topic: Marginal Rate of Substitution Skill: Definition Status: Old AACSB: Analytical Skills

42) In an indifference curve diagram, the quantities of good Y are measured along the vertical axis and the quantities of good X are measured along the horizontal axis. The marginal rate of substitution is defined as A) how much good Y you must give up to get one more unit of good X. B) how much good Y you are willing to give up to get one more unit of good X. C) the relative price of good Y in terms of good X. D) how much you prefer to substitute good X for good Y. Answer: B Topic: Marginal Rate of Substitution Skill: Conceptual Status: Old AACSB: Analytical Skills

43) An indifference diagram has movies on the vertical axis and sodas on the horizontal axis. As the consumption of sodas increases, the marginal rate of substitution ________ and the indifference curve becomes ________. A) falls; flatter B) falls; steeper C) rises; flatter D) rises; steeper Answer: A Topic: Marginal Rate of Substitution Skill: Conceptual Status: Old AACSB: Analytical Skills

44) Jodie has indifference curves for CDs and colas, with CDs on the vertical axis. The flatter her indifference curves are, the A) smaller her average rate of substitution. B) larger her average rate of substitution. C) smaller her marginal rate of substitution. D) larger her marginal rate of substitution. Answer: C Topic: Marginal Rate of Substitution Skill: Conceptual Status: Old AACSB: Analytical Skills

45) Bobby moves along an indifference curve for shirts and pants by increasing consumption of shirts and decreasing consumption of pants. As Bobby has more and more pants, the number of shirts he is willing to trade for yet another pair of pants A) decreases. B) increases. C) does not change. D) initially decreases and then increases. Answer: A Topic: Marginal Rate of Substitution Skill: Conceptual Status: Old AACSB: Analytical Skills 73 Copyright © 2014 Pearson Education, Inc.

46) As Sam moves rightward along his indifference curve, his marginal rate of substitution A) is diminishing. B) is increasing. C) remains constant. D) shows the change in his income. Answer: A Topic: Marginal Rate of Substitution Skill: Conceptual Status: Old AACSB: Analytical Skills

47) Which of the following statements about the marginal rate of substitution is NOT correct? A) It measures the number of units of the good on the horizontal axis that a consumer must be compensated with to give up a unit of the good on the vertical axis, while remaining on the same indifference curve. B) It is measured by the slope of the indifference curve. C) It decreases in value when moving downward along a typical-shaped indifference curve. D) It is constant for goods that are perfect substitutes. Answer: A Topic: Marginal Rate of Substitution Skill: Conceptual Status: Old AACSB: Analytical Skills

48) The marginal rate of substitution is ________, the ________ is the ________. A) greater; flatter; indifference curve B) greater; steeper; budget line C) smaller; steeper; indifference curve D) smaller; flatter; indifference curve Answer: D Topic: Marginal Rate of Substitution Skill: Conceptual Status: Old AACSB: Analytical Skills

49) As a consumer moves along an indifference curve and decreases consumption of the good on the xaxis, the consumer needs ________ of the good on the y-axis to give up an additional unit of the good on the x-axis. A) less and less B) more and more C) none D) a constant amount Answer: B Topic: Marginal Rate of Substitution Skill: Conceptual Status: Old AACSB: Analytical Skills

50) The assumption that the magnitude of the slope of an indifference curve decreases moving to the right along the indifference curve is known as the assumption of A) the price effect. B) a diminishing marginal rate of substitution. C) an increasing marginal rate of substitution. D) an indifference curve effect. Answer: B Topic: Marginal Rate of Substitution Skill: Conceptual Status: Old AACSB: Analytical Skills

51) An indifference curve diagram has movies on the vertical axis and sodas on the horizontal. As the consumption of sodas increases and movies decreases (moving southeast along an indifference curve) the marginal rate of substitution of sodas for movies A) rises. B) falls. C) does not change. D) probably changes, but more information is needed to determine if it rises or falls. Answer: B Topic: Marginal Rate of Substitution Skill: Conceptual Status: Old AACSB: Analytical Skills

52) The concept of diminishing marginal rate of substitution indicates that A) individuals are willing to give up an increasing amount of good Y in order to obtain one more unit of good X as the consumption of good X increases. B) individuals are willing to give up a decreasing amount of good Y in order to obtain one more unit of good X as the consumption of good X increases. C) along an indifference curve, a consumer prefers the consumption combinations moving to the northwest along the curve. D) None of the above answers is correct. Answer: B Topic: Marginal Rate of Substitution Skill: Conceptual Status: Old AACSB: Analytical Skills

53) Indifference curves are A) bowed in toward the origin if there is diminishing marginal rate of substitution. B) straight lines if the goods are perfect complements. C) right angles if the goods are perfect substitutes. D) always bowed out and away from the origin. Answer: A Topic: Marginal Rate of Substitution Skill: Conceptual Status: Old AACSB: Analytical Skills

54) If an indifference curve is a straight line it will not show which of the following? A) any marginal rate of substitution B) diminishing marginal rate of substitution C) combinations of goods among which a consumer is indifferent D) None of the above answers is correct. Answer: B Topic: Marginal Rate of Substitution Skill: Conceptual Status: Old AACSB: Analytical Skills

55) If your marginal rate of substitution between two goods diminishes continuously as you give up one good for the other, that means the A) price per unit of one good declines when you buy it in larger and larger quantities. B) two goods are perfect substitutes. C) two goods are perfect complements. D) two goods are neither perfect substitutes nor perfect complements. Answer: D Topic: Marginal Rate of Substitution Skill: Conceptual Status: Old AACSB: Analytical Skills

56) In the figure above, the MRS at point A is ________ the MRS at point B. A) equal to B) less than C) greater than D) not able to be compared to Answer: C Topic: Marginal Rate of Substitution Skill: Analytical Status: Old AACSB: Analytical Skills

57) The figure illustrates Sally's budget line and her preferences. At point(s) ________, the marginal rate of substitution is equal to the relative price. A) B B) B, C, and E C) D D) E and C Answer: A Topic: Marginal Rate of Substitution Skill: Analytical Status: Old AACSB: Analytical Skills

58) In the above figure, what is the magnitude of the marginal rate of substitution (MRS) at point a? A) 1/2 B) the rate at which the consumer will give up magazines to purchase more CDs while preferring the new combination to the old C) 2 D) The question cannot be answered without more information. Answer: A Topic: Marginal Rate of Substitution Skill: Analytical Status: Old AACSB: Analytical Skills

59) The figure above shows Sally's budget line and one of her indifference curves. At point a, Sally's marginal rate of substitution is ________. A) 1/4 B) 4 C) 10 D) 40 Answer: A Topic: Marginal Rate of Substitution Skill: Analytical Status: Old AACSB: Analytical Skills

60) If an indifference map for a consumer is made up of straight, negatively sloped lines, the marginal rate of substitution ________ as more of the good on the horizontal axis is consumed. A) does not diminish B) diminishes C) increases D) More information is needed to answer the question. Answer: A Topic: Degree of Substitutability Skill: Analytical Status: Old AACSB: Analytical Skills

61) The more closely substitutable are two goods, the A) more normal looking is the indifference curve for the two items. B) more closely the indifference curve for these two items approximates a straight line. C) more tightly curved is the indifference curve for these items. D) None of the above answers is correct. Answer: B Topic: Degree of Substitutability Skill: Conceptual Status: Old AACSB: Analytical Skills

62) If green bikes and brown bikes are perfect substitutes, the corresponding indifference curves A) are horizontal. B) intersect each other. C) are vertical. D) have constant slope. Answer: D Topic: Degree of Substitutability Skill: Conceptual Status: Old AACSB: Analytical Skills

63) For goods and services that are perfect substitutes, the consumer's indifference curves are ________ lines. A) straight, negatively sloped B) L-shaped C) negatively sloped, bowed-outward D) negatively sloped, bowed-inward Answer: A Topic: Degree of Substitutability Skill: Conceptual Status: Old AACSB: Analytical Skills

64) An indifference curve will become ________ the origin the more that the consumer considers the two goods as substitutes. A) less bowed-in towards B) more bowed-in towards C) less bowed-out from D) more bowed-out from Answer: A Topic: Degree of Substitutability Skill: Conceptual Status: Old AACSB: Analytical Skills

65) An indifference curve will become ________ the origin the more that the consumer considers the two goods as complements. A) more bowed-in towards B) less bowed-in towards C) less bowed-out from D) more bowed-out from Answer: A Topic: Degree of Substitutability Skill: Conceptual Status: Old AACSB: Analytical Skills

66) A constant marginal rate of substitution between two goods implies that they are A) perfect complements. B) perfect substitutes. C) independent goods. D) unattainable. Answer: B Topic: Marginal Rate of Substitution Skill: Conceptual Status: Old AACSB: Analytical Skills

67) If two goods are perfect complements, the shapes of the indifference curves are A) bowed toward the origin. B) bowed away from the origin. C) straight lines. D) right-angled lines. Answer: D Topic: Degree of Substitutability Skill: Conceptual Status: Old AACSB: Analytical Skills

68) If an indifference map for a consumer is made up of straight, negatively sloped lines, the goods are A) perfect complements. B) unrelated. C) perfect substitutes. D) not desirable. Answer: C Topic: Degree of Substitutability Skill: Conceptual Status: Old AACSB: Analytical Skills

69) If Bill thinks tacos and turkey sandwiches are perfect substitutes, then his indifference curves for these two goods A) are L-shaped. B) are negatively sloped and linear. C) are positively sloped and linear. D) have slopes equal to 1. Answer: B Topic: Degree of Substitutability Skill: Conceptual Status: Old AACSB: Analytical Skills

70) Which two goods will most likely have indifference curves that are straight lines? A) blue and red balloons B) left and right shoes C) pizza and hair spray D) beef and chicken Answer: A Topic: Degree of Substitutability Skill: Conceptual Status: Old AACSB: Analytical Skills

71) Left shoes and right shoes are perfect complements. An indifference curve for left and right shoes is a line with A) constant slope. B) a 30-degree angle. C) a 45-degree angle. D) a 90-degree angle. Answer: D Topic: Degree of Substitutability Skill: Conceptual Status: Old AACSB: Analytical Skills

72) A recent article suggests that the introduction of the new iPhone 5 increased the demand for iPhone protective cases. The article suggests that these two goods are A) substitutes and their indifference curves are close to being straight lines. B) complements and their indifference curves are close to being straight lines. C) substitutes and their indifference curves are close to being L shaped. D) complements and their indifference curves are close to being L shaped. Answer: D Topic: Degree of Substitutability Skill: Conceptual Status: New AACSB: Analytical Skills

73) The indifference curve in the above figure A) illustrates two goods that are perfect substitutes. B) illustrates two goods that are perfect complements. C) violates assumptions about preferences. D) None of the above statements is correct. Answer: B Topic: Degree of Substitutability Skill: Conceptual Status: Old AACSB: Analytical Skills

74) The indifference curve in the above figure A) could illustrate a person's preferences for identical computer disks made by two different companies. B) could illustrate a person's preferences for right-handed and left-handed gloves. C) has a constant marginal rate of substitution. D) None of the above statements is correct. Answer: B Topic: Degree of Substitutability Skill: Conceptual Status: Old AACSB: Analytical Skills

75) Consider the indifference maps shown above. If X and Y are perfect substitutes, your indifference curves between them would look like those in A) Figure A. B) Figure B. C) Figure C. D) Figure D. Answer: A Topic: Degree of Substitutability Skill: Conceptual Status: Old AACSB: Analytical Skills

76) Consider the indifference maps shown above. If eyeglass frames and eyeglass lenses were perfect complements, your indifference curves between them would look like those in A) Figure A. B) Figure B. C) Figure C. D) Figure D. Answer: C Topic: Degree of Substitutability Skill: Conceptual Status: Old AACSB: Analytical Skills

77) In the above figure, which curve is an indifference curve for someone who views frozen pizzas and milk as perfect complements? A) indifference curve F B) indifference curve G C) indifference curve H D) indifference curve I Answer: D Topic: Degree of Substitutability Skill: Conceptual Status: Old AACSB: Analytical Skills

78) The indifference curves in the above figure could represent your indifference curves between A) Coke and Pepsi, which you consider perfect substitutes. B) eyeglass frames and eyeglass lenses, which you think are perfect complements. C) hot dogs and textbooks, which you think are neither perfect substitutes nor perfect complements. D) none of the above Answer: B Topic: Degree of Substitutability Skill: Conceptual Status: Old AACSB: Analytical Skills

79) The indifference curves in the above figure could represent your indifference curves between A) Coke and Pepsi, which you consider perfect substitutes. B) eyeglass frames and eyeglass lenses, which you think are perfect complements. C) hot dogs and textbooks, which you think are neither perfect substitutes nor perfect complements. D) none of the above Answer: A Topic: Degree of Substitutability Skill: Conceptual Status: Old AACSB: Analytical Skills

80) The indifference curves in the above figure could represent your indifference curves between A) Coke and Pepsi, which you consider perfect substitutes. B) eyeglass frames and eyeglass lenses, which you think are perfect complements. C) hot dogs and textbooks, which you think are neither perfect substitutes nor perfect complements. D) none of the above Answer: C Topic: Degree of Substitutability Skill: Conceptual Status: Old AACSB: Analytical Skills

81) The indifference curve in the above figure A) illustrates two goods that are perfect substitutes. B) illustrates two goods that are perfect complements. C) violates assumptions about preferences. D) None of the above statements is correct. Answer: A Topic: Degree of Substitutability Skill: Conceptual Status: Old AACSB: Analytical Skills

82) The indifference curve in the above figure A) could illustrate a person's preferences for identical computer disks made by two different companies. B) could illustrate a person's preferences for right-handed and left-handed gloves. C) has a marginal rate of substitution that at first decreases and then increases. D) None of the above statements is correct. Answer: A Topic: Degree of Substitutability Skill: Conceptual Status: Old AACSB: Analytical Skills

83) In the figure above, as more six-packs of soda are consumed, moving along any of the illustrated indifference curves, the MRS between twelve-packs of soda and six-packs of soda A) increases. B) decreases. C) stays constant. D) first increases, then decreases. Answer: C Topic: Marginal Rate of Substitution Skill: Conceptual Status: Old AACSB: Analytical Skills

84) The MRS of the indifference curves in the above figure A) equals 1/2. B) equals 2. C) changes when moving along any one of the curves. D) is constant along a particular indifference curve, but changes from one indifference curve to the next. Answer: A Topic: Marginal Rate of Substitution Skill: Conceptual Status: Old AACSB: Analytical Skills

85) In the above figure, the indifference curves indicate that the two goods are A) perfect complements. B) perfect substitutes. C) ordinary goods. D) normal goods. Answer: B Topic: Degree of Substitutability Skill: Conceptual Status: Old AACSB: Analytical Skills

86) As a consumer moves rightward along an indifference curve, the A) consumer remains indifferent among the different combinations of goods. B) consumer generally prefers the combinations of goods farther rightward along the indifference curve. C) income required to buy the combinations of the goods always increases. D) relative price of both goods falls. Answer: A Topic: Study Guide Question, Indifference Curves Skill: Conceptual Status: Old AACSB: Analytical Skills

87) Indifference curves shift or rotate A) only when income changes. B) only when prices change. C) when either income or prices change. D) with none of the above because changes in income and prices do not shift indifference curves. Answer: D Topic: Study Guide Question, Indifference Curves Skill: Conceptual Status: Old AACSB: Analytical Skills

88) If the newspaper reported that wearing plaid clothing was a sure way to obtain good grades, students' A) budget lines would shift rightward to compensate for the higher price of plaid clothing. B) budget lines would rotate so that more plaid clothing would be purchased. C) preferences would change in favor of more plaid clothing. D) none of the above Answer: C Topic: Study Guide Question, Indifference Curves Skill: Conceptual Status: Old AACSB: Analytical Skills

89) The assumption of diminishing marginal rate of substitution means that A) the budget line has a negative slope. B) the budget line does not shift when people's preferences change. C) indifference curves might have a positive slope. D) indifference curves will be concave. Answer: D Topic: Study Guide Question, Marginal Rate of Substitution Skill: Analytical Status: Old AACSB: Analytical Skills

90) If two goods are complements, then their A) indifference curves are positively sloped straight lines. B) indifference curves are negatively sloped straight lines. C) indifference curves are L-shaped. D) marginal rate of substitution is infinity. Answer: C Topic: Study Guide Question, Degree of Substitutability Skill: Analytical Status: Old AACSB: Analytical Skills

91) If the indifference curves between two goods are L-shaped, the goods are A) complementary goods. B) substitute goods. C) normal goods. D) inferior goods. Answer: A Topic: Study Guide Question, Degree of Substitutability Skill: Conceptual Status: Old AACSB: Analytical Skills

92) A recent article suggests that the introduction of the new iPhone 5 increased the demand for iPhone protective cases. The article suggests that these two goods are A) substitutes and their indifference curves are close to being straight lines. B) complements and their indifference curves are close to being straight lines. C) substitutes and their indifference curves are close to being L shaped. D) complements and their indifference curves are close to being L shaped. Answer: D Topic: Degree of Substitutability Skill: Conceptual Status: New AACSB: Analytical Skills

3 Predicting Consumer Choices 1) In an indifference curve/budget line diagram, a consumer's equilibrium consumption combination will occur A) inside the budget line. B) outside the budget line. C) on the budget line. D) at the origin. Answer: C Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Conceptual Status: Old AACSB: Analytical Skills

2) Which of the following statements is true? A) Every point on a budget line lies on an indifference curve. B) To determine a consumer's best affordable point, we need only the budget line or the indifference curve. C) The price effect is shown by moving up or down a fixed budget line. D) Both A and B are true. Answer: A Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Conceptual Status: Old AACSB: Analytical Skills

3) The point where the indifference curve is tangent to the budget line A) is the best affordable point. B) is where the marginal rate of substitution exceeds the relative price by as much as possible. C) is a point on consumer's demand curve. D) All of the above answers are correct. Answer: A Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Conceptual Status: Old AACSB: Analytical Skills

4) In an indifference curve/budget line diagram, a consumer will select the combination of goods that is on the budget line and for which the A) marginal rate of substitution between two goods is equal to the relative price of the two goods. B) marginal rate of substitution between two goods is greater than the relative price of the two goods. C) slope of the indifference curve is less than the relative price of the two goods. D) slope of the indifference curve is greater than the relative price of the two goods. Answer: A Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Conceptual Status: Old AACSB: Analytical Skills

5) When the consumer is at his or her best affordable consumption point, it is the case that the marginal rate of substitution is A) greater than the price ratio. B) equal to the price ratio. C) less than the price ratio. D) maximized. Answer: B Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Conceptual Status: Old AACSB: Analytical Skills

6) Samara's income is $30 a month and she spends all of it on music downloads and gasoline. The price of a music download is $1.50 and the price of a gallon of gasoline is $3. At Samara's best affordable point, her marginal rate of substitution is ________ per video tape. A) 0.5 of a download B) 1 download C) 1.5 downloads D) 2 downloads Answer: A Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Analytical Status: Old AACSB: Analytical Skills

7) Samara's income is $30 a month and she spends all of it on music downloads and gasoline. The price of a music download is $3 and the price of a gallon of gasoline is $3. At Samara's best affordable point, her marginal rate of substitution is ________ gallon of gasoline per music download. A) 0.5 B) 1 C) 1.5 D) More information is needed to determine the marginal rate of substitution. Answer: B Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Analytical Status: Old AACSB: Analytical Skills

8) When a consumer is at his or her best affordable point, the budget line A) is flatter than the highest attainable indifference curve. B) is tangent to the highest attainable indifference curve. C) is steeper than the highest attainable indifference curve. D) does not touch the highest attainable indifference curve. Answer: B Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Conceptual Status: Old AACSB: Analytical Skills

9) In a budget line/indifference curve diagram, at the consumer equilibrium A) any movement upward or downward on the budget line will move the consumer to a less preferred point. B) any movement to the northeast to higher indifference curves moves the consumer to a less preferred point. C) the slope of the budget line is as much larger as possible than the marginal rate of substitution. D) All of the above statements are correct. Answer: A Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Conceptual Status: Old AACSB: Analytical Skills

10) If Rachel is at her best affordable point, then ________. A) her marginal rate of substitution equals 1 B) her marginal rate of substitution is maximized C) the relative price of the goods she buys equals the marginal rate of substitution D) she is indifferent among other points on her budget line Answer: C Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Analytical Status: Old AACSB: Analytical Skills

11) If consumers buy only gasoline and food, at their best affordable choice the marginal rate of substitution between food and gasoline ________ the relative price of food and gasoline. A) must exceed B) must be less than the C) must equal D) might exceed or be less than but not equal to Answer: C Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Conceptual Status: New AACSB: Analytical Skills

12) In an indifference curve/budget line diagram, at your consumer equilibrium, that is, your best affordable point, which of the following statements is correct? A) Any movement upward or downward on your budget line will move you to a less preferred point. B) Any movement upward or downward on your indifference curve will move you to a less preferred point. C) Your marginal rate of substitution is greater than the magnitude of the budget line by as much as possible. D) All of the above are correct. Answer: A Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Analytical Status: Old AACSB: Analytical Skills

13) Tunitra consumes at a point on her budget line where her marginal rate of substitution exceeds the magnitude of the slope of her budget line. As Tunitra moves toward her consumer equilibrium point, she will move to a A) lower budget line. B) higher budget line. C) lower indifference curve. D) higher indifference curve. Answer: D Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Analytical Status: Old AACSB: Analytical Skills

14) Larry consumes at a point on his budget line where his marginal rate of substitution is less than the magnitude of the slope of his budget line. As Larry moves toward his consumer equilibrium point, he will move to a A) lower budget line. B) higher budget line. C) lower indifference curve. D) higher indifference curve. Answer: D Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Analytical Status: Old AACSB: Analytical Skills

15) The price of one good changes and Sue is now at a point on her indifference curve where the marginal rate of substitution exceeds the relative price. Sue will now choose to buy ________ of the good that is measured on the ________. A) more; x-axis B) more; y-axis C) the same quantity; x-axis D) less; x-axis Answer: A Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Analytical Status: Old AACSB: Analytical Skills

16) When a consumer is consuming at a point where his or her budget line is not as steep as his or her indifference curve, then he or she should A) consume more of the good that is measured on the horizontal axis. B) consume less of the good that is measured on the horizontal axis. C) not change his or her behavior. D) consume none of the good that is measured on the horizontal axis. Answer: A Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Analytical Status: Old AACSB: Analytical Skills 97 Copyright © 2014 Pearson Education, Inc.

17) At the best affordable point, consumers equate their marginal rates of substitution to A) their money income. B) their real income. C) relative prices. D) relative quantities. Answer: C Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Conceptual Status: Old AACSB: Analytical Skills

18) The above figure shows Sam's budget line and one of his indifference curves. What combination of coffee and gasoline will Sam select? A) Combination a because that contains all the gasoline he needs and still has some coffee. B) Combination c because that contains all the coffee he needs and some gasoline. C) Combination b because it is on his budget line and on the highest attainable indifference curve. D) None of the above Answer: C Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Analytical Status: Old AACSB: Analytical Skills

19) The figure illustrates Sally's budget line and her preferences. Point ________ is Sally's best affordable point, and Sally prefers point ________ to point ________. A) A; B; A B) E; C; B C) B; A; B D) B; B; D Answer: C Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Analytical Status: Old AACSB: Analytical Skills

20) Your weekly budget for gasoline and movie rentals is $45.00. Referring to the figure above, what is the price per gallon of gasoline? A) $1.00 B) $1.25 C) $1.50 D) $1.75 Answer: C Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

21) Your weekly budget for gasoline and movie rentals is $45.00. Referring to the figure above, what is the price per movie rental? A) $2.00 B) $2.25 C) $2.50 D) $3.00 Answer: D Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

22) The above figure shows your budget line and indifference curves. What quantities of gasoline and movie rentals would you choose? A) 25 gallons of gasoline and 15 movie rentals B) 10 gasoline and 10 movie rentals C) 20 gallons of gasoline and 5 movie rentals D) 15 gallons of gasoline and 8 movie rentals Answer: C Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Analytical Status: Old AACSB: Analytical Skills

23) Consider the budget line in the above figure. If the price of a magazine is $4, then the price of a hamburger is A) $1.75. B) $3.00. C) $4.00. D) $5.33. Answer: B Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

24) The relative price of a magazine in the above figure is A) 0.5 of a hamburger per magazine. B) 1 hamburger per magazine. C) 1.33 hamburgers per magazine. D) 8 hamburgers per magazine. Answer: C Topic: Consumption Possibilities, Relative Price Skill: Analytical Status: Old AACSB: Analytical Skills

25) In the above figure, point B A) is superior to point A. B) is inferior to point A. C) is as good as point A. D) could be superior to, inferior to, or as good as point A but there is no way of telling which. Answer: B Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Analytical Status: Old AACSB: Analytical Skills

26) In the above figure, which of the following statements is TRUE? I. The consumer maximizes utility by consuming at point A. II. The marginal rate of substitution at point B and point A are equal because they are on the same budget line. A) only I B) only II C) both I and II D) neither I nor II Answer: A Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Analytical Status: Old AACSB: Analytical Skills

27) In the above figure, at the best affordable point, the marginal rate of substitution is A) 0.5 of a hamburger per magazine. B) 1 hamburger per magazine. C) 1.33 hamburgers per magazine. D) 8 hamburgers per magazine. Answer: C Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Analytical Status: Old AACSB: Analytical Skills

28) In the above figure, the best affordable point is A) 8 hamburgers and 0 magazines. B) 0 hamburgers and 6 magazines. C) 4 hamburgers and 3 magazines. D) some combination that is not given above. Answer: C Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Conceptual Status: Old AACSB: Analytical Skills

29) Julie's demand curve for video downloads is downward sloping because as the price of a download decreases, ________ and she watches ________ videos. A) the slope of her budget line changes; fewer B) her budget line shifts inward; fewer C) the slope of her budget line changes; more D) her budget line shifts outward; more Answer: C Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Conceptual Status: Old AACSB: Analytical Skills

30) In an indifference curve/budget line diagram, generally when the price of a good increases, the consumer purchases ________ of the good and moves to a ________ indifference curve. A) less; lower B) less; higher C) more; lower D) more; higher Answer: A Topic: Predicting Consumer Behavior, Change in Price Skill: Conceptual Status: Old AACSB: Analytical Skills

31) If Sue is consuming two normal goods and her income decreases, then her best affordable bundle of goods will contain ________ goods with ________ marginal rate of substitution as her bundle prior to her income change. A) less; the same B) less; a higher C) less; a lower D) the same amount of; a lower Answer: A Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Analytical Status: Old AACSB: Analytical Skills

32) In the above figure, Mark's monthly budget line for movies and plays changed, as shown by the arrow. The change was caused by A) a decrease in Mark's income. B) an increase in Mark's income. C) a fall in the price of a play. D) a rise in the price of a play. Answer: C Topic: Consumption Possibilities, Change in Price Skill: Analytical Status: Old AACSB: Analytical Skills

33) In the above figure, Mark's monthly budget line for movies and plays changed, as shown by the arrow. Responding to this change, Mark probably will see A) fewer movies and fewer plays. B) fewer movies and more plays. C) more movies and fewer plays. D) more movies and more plays. Answer: B Topic: Predicting Consumer Behavior, Change in Price Skill: Analytical Status: Old AACSB: Analytical Skills

34) Suppose the quantity of sodas and the quantity of popcorn are on an indifference curve/budget line diagram. An increase in income shifts the budget line ________ and, if popcorn is a normal good, shifts the demand curve for popcorn ________. A) rightward; rightward B) rightward; leftward C) leftward; rightward D) leftward; leftward Answer: A Topic: Predicting Consumer Behavior, Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

35) In the above figure, Reggie's budget line rotates outward from BL1 to BL2. He initially consumes at point A. If his new consumption bundle is at point C, this implies that his demand curve for kiwi fruit A) has shifted. B) is a vertical line. C) slopes downward. D) is a horizontal line. Answer: C Topic: Predicting Consumer Behavior, Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

36) In the above figure, Reggie's budget line rotates outward from BL1 to BL2. He initially consumes at point A. If his new consumption bundle is at point B, this implies that kiwi fruit and mangoes are A) both lower in price. B) both inferior goods. C) neither substitutes nor complements. D) None of the above answers is correct. Answer: D Topic: Predicting Consumer Behavior, Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

37) In the above figure, Brendan originally consumes at point A. If his income rises and both compact discs and haircuts are normal goods then he will begin consuming at a point such as A) F. B) B. C) C. D) D. Answer: C Topic: Predicting Consumer Behavior, Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

38) In the above figure, Brendan originally consumes at point A. If his income rises and compact discs are a normal good but haircuts are an inferior good then he will begin consuming at a point such as A) E. B) B. C) C. D) D. Answer: B Topic: Predicting Consumer Behavior, Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

39) In the above figure, Brendan originally consumes at point A. If his income falls and compact discs are a normal good but haircuts are an inferior good then he will begin consuming at a point such as A) B. B) E. C) F. D) G. Answer: D Topic: Predicting Consumer Behavior, Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

40) In the above figure, Brendan originally consumes at point A. If his income rises and both compact discs and haircuts are normal goods then he could begin consuming at point A) B, C, or D. B) B. C) C. D) D. Answer: C Topic: Predicting Consumer Behavior, Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

41) In the above figure, as Brendan's income rises his consumption bundle moves from point A to point B. This implies that for Brendan, compact discs are ________ good and haircuts are ________ good. A) a normal; an inferior B) a normal; a normal C) an inferior; an inferior D) an inferior; a normal Answer: A Topic: Predicting Consumer Behavior, Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

42) In the above figure, as Brendan's income rises his consumption bundle moves from point A to point C. This implies that for Brendan, compact discs are ________ good and haircuts are ________ good. A) a normal; an inferior B) a normal; a normal C) an inferior; an inferior D) an inferior; a normal Answer: B Topic: Predicting Consumer Behavior, Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

43) In the above figure, as Brendan's income falls his consumption bundle moves from point A to point E. This implies that for Brendan, compact discs are ________ good and haircuts are ________ good. A) a normal; an inferior B) a normal; a normal C) an inferior; an inferior D) an inferior; a normal Answer: D Topic: Predicting Consumer Behavior, Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

44) The price effect refers to how changes in A) price affect real income. B) price affect the quantity of a good consumed. C) income affect prices. D) preference affect prices. Answer: B Topic: Predicting Consumer Behavior, Price Effect Skill: Definition Status: Old AACSB: Analytical Skills

45) The price effect is the effect of a ________ on the quantity of the good ________. A) decrease in the price; demanded B) change in the price; supplied C) change in price and income; consumed D) change in the price; consumed Answer: D Topic: Predicting Consumer Behavior, Price Effect Skill: Definition Status: Old AACSB: Analytical Skills

46) The ________ effect can be divided into the ________ effect and the ________ effect. A) marginal; substitution; price B) income; substitution; price C) substitution; price; income D) price; substitution; income Answer: D Topic: Predicting Consumer Behavior, Price Effect Skill: Definition Status: Old AACSB: Analytical Skills

47) The price effect is equal to the A) substitution effect. B) substitution effect plus the income effect. C) marginal rate of substitution minus relative prices. D) substitution effect minus the income effect. Answer: B Topic: Predicting Consumer Behavior, Price Effect Skill: Analytical Status: Old AACSB: Analytical Skills

48) Gasoline is a normal good. If the price of gasoline falls, a consumer buys more gasoline because of A) only an income effect. B) only a substitution effect. C) an increase in the marginal rate of substitution. D) both an income effect and a substitution effect. Answer: D Topic: Predicting Consumer Behavior, Price Effect Skill: Analytical Status: Old AACSB: Analytical Skills

49) When the price of a normal good decreases, the ________ can be divided between the ________, which keeps the best affordable point on the same indifference curve and the ________, which moves the best affordable point farther away from the origin. A) substitution effect; price effect; income effect B) price effect; income effect; substitution effect C) income effect; substitution effect; price effect D) price effect; substitution effect; income effect Answer: D Topic: Predicting Consumer Behavior, Price Effect Skill: Conceptual Status: Old AACSB: Analytical Skills

50) The effect of a change in price on the quantity bought while keeping the consumer on the same indifference curve, is called the A) price effect. B) income effect. C) substitution effect. D) real effect. Answer: C Topic: Predicting Consumer Behavior, Substitution Effect Skill: Definition Status: Revised AACSB: Analytical Skills

51) The substitution effect reflects a movement along a given A) horizontal line. B) vertical line. C) indifference curve. D) budget line. Answer: C Topic: Predicting Consumer Behavior, Substitution Effect Skill: Definition Status: Old AACSB: Analytical Skills

52) The change in consumption that results from a change in the relative price of goods while staying on the same indifference curve is the A) income effect. B) substitution effect. C) indifference effect. D) price effect. Answer: B Topic: Predicting Consumer Behavior, Substitution Effect Skill: Definition Status: Old AACSB: Analytical Skills

53) The effect of a change in price on the quantity bought when the consumer remains indifferent between the original and the new situation is called the A) income effect. B) indifference effect. C) substitution effect. D) demand effect. Answer: C Topic: Predicting Consumer Behavior, Substitution Effect Skill: Definition Status: Old AACSB: Analytical Skills

54) According to the substitution effect along an indifference curve, when the relative price of a good falls, the consumer ________ substitutes ________ of that good for the other good. A) always; more B) always; less C) sometimes; more D) sometimes; less Answer: A Topic: Predicting Consumer Behavior, Substitution Effect Skill: Definition Status: Old AACSB: Analytical Skills

55) The substitution effect A) is always larger than the price effect. B) always decreases purchases of a good as the price of a good rises. C) increases purchases of the good as the price rises if the good is a normal good. D) is always smaller than the income effect. Answer: B Topic: Predicting Consumer Behavior, Substitution Effect Skill: Definition Status: Old AACSB: Analytical Skills

56) The substitution effect from a rise in the price of pizza A) leads to a movement along the fixed budget line, due to a change in relative prices. B) increases the quantity demanded of pizza. C) decreases the quantity demanded of pizza. D) Both answers A and B are correct. Answer: C Topic: Predicting Consumer Behavior, Substitution Effect Skill: Conceptual Status: Old AACSB: Analytical Skills

57) If consumers spend their money only on beef and vegetables, then the substitution effect of an increase in the price of beef would result in consuming ________ beef and ________ vegetables. A) more; more B) less; fewer C) more; fewer D) less; more Answer: B Topic: Predicting Consumer Behavior, Substitution Effect Skill: Conceptual Status: New AACSB: Analytical Skills

58) When the price of a normal good decreases, people buy ________ of the good due to ________. A) more; the substitution effect only B) more; the substitution and income effects C) less; the substitution effect only D) less; the income effect only Answer: B Topic: Predicting Consumer Behavior, Substitution and Income Effect Skill: Conceptual Status: Old AACSB: Analytical Skills

59) Bart consumes food and clothing, which are both normal goods. Suppose that the price of food falls. The substitution effect of this price decrease is ________ and the income effect of this price decrease is ________. A) that Bart buys more clothing and less food; that Bart buys more of both food and clothing B) reflected by a change in the relative prices of food and clothing; is represented by a movement along the original indifference curve C) reflected by a parallel shift outward of the budget line; that Bart earns more money each month D) reflected by the change in the slope of the budget line; that Bart has greater purchasing power Answer: D Topic: Predicting Consumer Behavior, Substitution and Income Effect Skill: Conceptual Status: Old AACSB: Analytical Skills

60) Wendy spends $30 a week on movies and magazines. The price of a movie is $8, the price of a magazine is $2, and Wendy sees 3 movies a week and buys 3 magazines. The price of a magazine now increases to $4 and Wendy's brother gives her $6 a week so that she can still see 3 movies a week and buy 3 magazines. In this situation, Wendy will see ________ movies and buy ________ magazines. A) 3; 3 B) less than 3; less than 3 C) more than 3; fewer than 3 D) less than 3; more than 3 Answer: C Topic: Predicting Consumer Behavior, Substitution and Income Effect Skill: Analytical Status: Old AACSB: Analytical Skills

61) Sue consumes only sandwiches and soda and is at her best affordable point. The price of a sandwich falls. The substitution effect is that Sue substitutes ________ for ________. The income effect is that Sue ________. A) sandwiches; soda; buys less of both goods B) soda; sandwiches; buys more soda and fewer sandwiches C) sandwiches; soda; buys more of both goods D) soda; sandwiches; buys less soda and more sandwiches Answer: C Topic: Predicting Consumer Behavior, Substitution and Income Effect Skill: Analytical Status: Old AACSB: Analytical Skills

62) Nick considers macaroni and cheese to be an inferior good. As a result of macaroni and cheese being an inferior good, the A) substitution effect must be larger in magnitude than the income effect so that less is purchased as the price falls. B) substitution effect must be smaller in magnitude than the income effect so that less is purchased as the price falls. C) income effect is positive, so that more is purchased as income increases. D) income effect is negative, so that less is purchased as income increases. Answer: D Topic: Predicting Consumer Behavior, Substitution and Income Effect Skill: Conceptual Status: Old AACSB: Analytical Skills

63) Suppose the price of a good rises. The income effect A) shows the change in consumption that results from the change in relative price while staying on the same indifference curve. B) shows the change in consumption that results from the change in relative price while keeping income constant. C) is shown by decreasing income at the new relative price in order to move from the old indifference curve to the new indifference curve after the price change. D) is shown by increasing income at the new relative price in order to move from the old indifference curve to the new indifference curve after the price change. Answer: C Topic: Predicting Consumer Behavior, Income Effect Skill: Conceptual Status: Old AACSB: Analytical Skills

64) The income effect for an inferior good A) is negative. B) is zero. C) is positive. D) could be negative, zero, or positive. Answer: A Topic: Predicting Consumer Behavior, Income Effect Skill: Definition Status: Old AACSB: Analytical Skills

65) Which of the following statements is FALSE? A) When the relative price of a good falls, the substitution effect always leads the consumer to substitute more of that good for the other good. B) For a normal good, the income effect reinforces the substitution effect. C) For an inferior good, the income effect offsets the substitution effect. D) For an inferior good, the income effect is positive. Answer: D Topic: Predicting Consumer Behavior, Income Effect Skill: Conceptual Status: Old AACSB: Analytical Skills

66) The concept of inferior goods can be used to show that A) lower prices signal poorer quality. B) indifference curves can have positive slopes. C) being able to consume more of all goods does not mean that a person will consume more of every good. D) consumers will always buy more of all products if their incomes increase. Answer: C Topic: Predicting Consumer Behavior, Income Effect Skill: Conceptual Status: Old AACSB: Analytical Skills

67) Consider the change in the price of a book depicted in the above figure. The original budget line is BC. The new budget line is BD. As a result of this price change, the substitution effect can be represented by a movement from A) point A to point E. B) point A to point G. C) point F to point G. D) point A to point F. Answer: A Topic: Predicting Consumer Behavior, Substitution and Income Effect Skill: Analytical Status: Old AACSB: Analytical Skills

68) Consider the change in the price of a book depicted in the above figure. The original budget line is BC. The new budget line is BD. As a result of this price change, the income effect can be represented by a movement from A) point E to point F. B) point G to point A. C) point G to point F. D) point A to point F. Answer: A Topic: Predicting Consumer Behavior, Substitution and Income Effect Skill: Analytical Status: Old AACSB: Analytical Skills

69) Consider the budget line labeled RT in the above figure. What would shift the budget line to RS? A) a rise in the price of good X B) a fall in the price of good X C) a rise in the price of good Y D) a fall in the price of good Y Answer: B Topic: Consumption Possibilities, Change in Price Skill: Analytical Status: Old AACSB: Analytical Skills

70) In the above figure, if the budget line shifts from RT to RS, the substitution effect is illustrated by the move from A) a to b. B) a to c. C) b to c. D) T to S. Answer: A Topic: Predicting Consumer Behavior, Substitution Effect Skill: Analytical Status: Old AACSB: Analytical Skills

71) In the above figure, if the budget line shifts from RT to RS, the income effect is illustrated by the move from A) a to b. B) a to c. C) b to c. D) T to S. Answer: C Topic: Predicting Consumer Behavior, Income Effect Skill: Analytical Status: Old AACSB: Analytical Skills

72) Kristen has an income of $450 per year to spend on music CDs and movies on DVDs. The price of a CD is $15 and the price of a DVD is $22.50. The indifference curves in the figure above (I1, I2, and I3) reflect Kristen's preferences. What is Kristen's best affordable combination of DVDs and CDs? A) 10 DVDs and 15 CDs per year B) 15 DVDs and 12 CDs per year C) 12.5 DVDs and 12 CDs per year D) 5 DVDs and 18 CDs per year Answer: A Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Analytical Status: Old AACSB: Analytical Skills

73) Kristen has an income of $450 per year to spend on music CDs and movies on DVDs. Initially the price of a CD is $15 and the price of a DVD is $22.50. The indifference curves in the figure above (I1, I2, and I3) reflect Kristen's preferences. If the price of a DVD falls to $18, Kristen will buy A) 10 DVDs and 15 CDs per year B) 15 DVDs and 12 CDs per year C) 12.5 DVDs and 11 CDs per year D) 13 DVDs and 15 CDs per year Answer: B Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Analytical Status: Old AACSB: Analytical Skills

74) Kristen has an income of $450 per year to spend on music CDs and movies on DVDs. The price of a CD is $15. The indifference curves in the figure above (I1, I2, and I3) reflect Kristen's preferences. If the price of a DVD is $22.50, then Kristen buys ________ DVDs; if the price of a DVD is $18.00, then Kristen buys ________ DVDs. A) 12; 14 B) 5; 10 C) 10; 15 D) 7.5; 12.5 Answer: C Topic: Predicting Consumer Behavior, Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

75) Kristen has an income of $450 per year to spend on music CDs and movies on DVDs. The price of a CD is $15 and the initial price of a DVD is $22.50. The indifference curves in the figure above (I1, I2, and I3) reflect Kristen's preferences. If the price of a DVD falls to $18, the income effect on Kristen's consumption of DVDs ________ the substitution effect, so a DVD is ________ good. A) partly offsets; an inferior B) partly offsets; a normal C) reinforces; an inferior D) reinforces; a normal Answer: D Topic: Predicting Consumer Behavior, Substitution and Income Effect Skill: Analytical Status: Old AACSB: Analytical Skills

76) The substitution effect from a fall in the price of a gallon of gasoline is shown in the above figure by the movement from A) point A to point C. B) point A to point B. C) point B to point C. D) point A to point B and then to point C. Answer: B Topic: Predicting Consumer Behavior, Substitution Effect Skill: Analytical Status: Old AACSB: Analytical Skills

77) Jane spends her monthly dining-out budget of $300.00 on either steak or lobster dinners. Using the above figure, what is the price of a steak dinner? A) $10.00 B) $15.00 C) $20.00 D) $30.00 Answer: B Topic: Consumption Possibilities, Budget Line Skill: Conceptual Status: Old AACSB: Analytical Skills

78) Jane spends her monthly dining-out budget of $300.00 on either steak or lobster dinners. Using the above figure, what is the price of a lobster dinner? A) $10.00 B) $15.00 C) $20.00 D) $30.00 Answer: D Topic: Consumption Possibilities, Budget Line Skill: Conceptual Status: Old AACSB: Analytical Skills

79) Jane spends her monthly dining-out budget of $300.00 on either steak or lobster dinners. Using the above figure, what is the opportunity cost of a lobster dinner in terms of steak dinners? A) 0.5 steak dinners per lobster dinner B) 2.0 steak dinners per lobster dinner C) 5.0 steak dinners per lobster dinner D) 10.0 steak dinners per lobster dinner Answer: B Topic: Consumption Possibilities, Relative Price Skill: Analytical Status: Old AACSB: Analytical Skills

80) The above figure shows Jane's budget line and two of her indifference curves. Which of the following happens to Jane's budget line if the price of a lobster dinner fell? A) It would rotate inward around the vertical intercept, 10 lobster dinners. B) It would rotate outward around the vertical intercept, 10 lobster dinners. C) It would rotate inward around the horizontal intercept, 20 steak dinners. D) It would rotate outward around the horizontal intercept, 20 steak dinners. Answer: D Topic: Consumption Possibilities, Change in Price Skill: Analytical Status: Old AACSB: Analytical Skills

81) The above figure shows Jane's budget line and two of her indifference curves. Which of the following happens to Jane's budget line if the price of a lobster dinner increased? A) It would rotate inward around the vertical intercept, 10 lobster dinners. B) It would rotate outward around the vertical intercept, 10 lobster dinners. C) It would rotate inward around the horizontal intercept, 20 steak dinners. D) It would rotate outward around the horizontal intercept, 20 steak dinners. Answer: C Topic: Consumption Possibilities, Change in Price Skill: Analytical Status: Old AACSB: Analytical Skills

82) The above figure shows Jane's budget line and two of her indifference curves. Which of the following happens to Jane's budget line if the price of a steak dinner fell? A) It would rotate inward around the vertical intercept, 10 lobster dinners. B) It would rotate outward around the vertical intercept, 10 lobster dinners. C) It would rotate inward around the horizontal intercept, 20 steak dinners. D) It would rotate outward around the horizontal intercept, 20 steak dinners. Answer: B Topic: Consumption Possibilities, Change in Price Skill: Analytical Status: Old AACSB: Analytical Skills

83) The above figure shows Jane's budget line and two of her indifference curves. Which of the following happens to Jane's budget line if there were an increase in her monthly dining-out budget? A) It would bend toward the origin, becoming more convex. B) It would bend away from the origin, becoming more concave. C) It would shift rightward and not change its slope. D) It would shift leftward and not change its slope. Answer: C Topic: Consumption Possibilities, Change in Income Skill: Analytical Status: Old AACSB: Analytical Skills

84) The above figure shows Jane's budget line and two of her indifference curves. Which of the following happens to Jane's budget line if there were a decrease in her monthly dining out budget? A) It would bend toward the origin, becoming more convex. B) It would bend away from the origin, becoming more concave. C) It would shift rightward and not change its slope. D) It would shift leftward and not change its slope. Answer: D Topic: Consumption Possibilities, Change in Income Skill: Analytical Status: Old AACSB: Analytical Skills

85) The above figure shows Jane's budget line and two of her indifference curves. How many steak dinners will Jane purchase each month? A) 4 steak dinners B) 6 steak dinners C) 8 steak dinners D) 10 steak dinners Answer: D Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Analytical Status: Old AACSB: Analytical Skills

86) The above figure shows Jane's budget line and two of her indifference curves. How many lobster dinners will Jane purchase each month? A) 4 lobster dinners B) 5 lobster dinners C) 8 lobster dinners D) 10 lobster dinners Answer: B Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Analytical Status: Old AACSB: Analytical Skills

87) The above figure shows Jane's budget line and two of her indifference curves. Jane's marginal rate of substitution is A) the rate at which she would give up a lobster dinner for a steak dinner and consider herself just as well off. B) equal to the ratio of the price of a steak dinner to the price of a lobster dinner when she is at her best affordable point. C) equal to 2 lobster dinners per steak dinner at her best affordable point. D) Both answers A and B are correct. Answer: D Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Analytical Status: Old AACSB: Analytical Skills

88) The above figure shows Jane's budget line and two of her indifference curves. When Jane is consuming at her best affordable point, what is her marginal rate of substitution? A) 2.0 lobster dinners per steak dinner B) 1.0 lobster dinners per steak dinner C) 0.5 lobster dinners per steak dinner D) 0.33 lobster dinners per steak dinner Answer: C Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Analytical Status: Old AACSB: Analytical Skills

89) The above figure shows Jane's budget line and two of her indifference curves. If the price of a lobster dinner falls so that Jane can now purchase the combination represented by Point B, Jane would experience A) an increase in the opportunity cost of a lobster dinner. B) no change in her marginal rate of substitution. C) an income and a substitution effect. D) Both answers B and C are correct. Answer: C Topic: Predicting Consumer Behavior, Substitution and Income Effect Skill: Analytical Status: Old AACSB: Analytical Skills

90) The income effect from a fall in the price of a gallon of gasoline is shown in the above figure by the movement from A) point A to point C. B) point A to point B. C) point B to point C. D) point A to point B and then to point C. Answer: C Topic: Predicting Consumer Behavior, Income Effect Skill: Analytical Status: Old AACSB: Analytical Skills

91) In the above figure, when the price of a gallon of gasoline falls, which points in the above figure are used to derive points on the consumer's demand curve for gasoline? A) points A and B B) points A and C C) points B and C D) points A, B, and C Answer: B Topic: Predicting Consumer Behavior, Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

92) In the above figure, the movement from point C to point A is the result of A) a decrease in the price of coffee. B) an increase in the price of coffee. C) a decrease in the price of gasoline. D) an increase in the price of gasoline. Answer: D Topic: Consumption Possibilities, Change in Price Skill: Conceptual Status: Old AACSB: Analytical Skills

93) In the above figure, the rise in the price of a gallon of gasoline that created the movement from point C to point A would be shown as a movement ________ along the demand curve for ________. A) upward; coffee B) downward; coffee C) upward; gasoline D) downward; gasoline Answer: C Topic: Predicting Consumer Behavior, Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

94) In the above figure, if income is $8, the initial price of a soft drink is $1, and the initial price of a milkshake is $2, a decrease in the price of a milkshake to $1 will move the consumer from point ________ to point ________. A) a; b B) b; c C) a; d D) a; c Answer: D Topic: Predicting Consumer Behavior, Substitution and Income Effect Skill: Analytical Status: Old AACSB: Analytical Skills

95) In the above figure, income is $8, the price of a soft drink is $1, and the initial price of a milkshake is $2. If the price of a milkshake decreases to $1, the income effect is the movement from point ________ to point ________. A) a; b B) b; d C) b; c D) a; c Answer: C Topic: Predicting Consumer Behavior, Substitution and Income Effect Skill: Analytical Status: Old AACSB: Analytical Skills

96) In the above figure, income is $8, the price of a soft drink is $1, and the initial price of a milkshake is $2. If the price of a milkshake decreases to $1, the substitution effect is the movement from point ________ to point ________. A) a; b B) b; d C) b; c D) a; c Answer: A Topic: Predicting Consumer Behavior, Substitution and Income Effect Skill: Analytical Status: Old AACSB: Analytical Skills

97) In the above figure, income is $8, the price of a soft drink is $1, and the initial price of a milkshake is $2. If the price of a milkshake decreases to $1, milkshakes are revealed to be A) an inferior good. B) a normal good. C) less preferred than soft drinks. D) None of the above answers is correct. Answer: B Topic: Predicting Consumer Behavior, Substitution and Income Effect Skill: Analytical Status: Old AACSB: Analytical Skills

98) The figure illustrates Elijah's preferences. He is currently at point A. The price of pizza decreases. The move from point A to point ________ is the substitution effect and the move from point ________ to point ________ is the income effect. A) B; B; C B) E; E; C C) D; D; B D) C; C; B Answer: B Topic: Predicting Consumer Behavior, Change in Price Skill: Analytical Status: Old AACSB: Analytical Skills

99) In the figure above, the marginal rate of substitution (MRS) at point A is A) greater than the MRS at any other point on the indifference curve. B) equals the MRS at all other points on the indifference curve. C) less than the MRS at any other point on the indifference curve. D) equal to the slope of the budget line. Answer: D Topic: Predicting Consumer Behavior, Marginal Rate of Substitution Skill: Conceptual Status: Old AACSB: Analytical Skills

100) In the figure above, the marginal rate of substitution (MRS) at point A is equal to ________ pounds of pickles per pound of olives. A) 8 B) 6 C) 1 1/3 D) 2 Answer: C Topic: Predicting Consumer Behavior, Marginal Rate of Substitution Skill: Analytical Status: Old AACSB: Analytical Skills

101) In the figure above, at point A the consumer is willing to give up ________ pounds of pickles to get one additional pound of olives. A) 8 B) 6 C) 1 1/3 D) 2 Answer: C Topic: Predicting Consumer Behavior, Marginal Rate of Substitution Skill: Analytical Status: Old AACSB: Analytical Skills

102) In the figure above, Sam originally selects his consumption bundle at point A with 3 pounds of olives and 4 pounds of pickles a year. Then the price of pickles rises and the price of olives falls so that his budget line rotates but it still goes through point A. Sam's consumption of olives A) definitely will rise. B) definitely will fall. C) definitely will stay the same. D) could rise, fall, or stay the same. Answer: A Topic: Predicting Consumer Behavior, Substitution Effect Skill: Analytical Status: Old AACSB: Analytical Skills

103) In the figure above, Sam originally selects his consumption bundle at point A with 3 pounds of olives and 4 pounds of pickles a year. Then the price of pickles rises and the price of olives falls so that his budget line rotates but it still goes through point A. Sam's consumption of pickles A) definitely will rise. B) definitely will fall. C) definitely will stay the same. D) could rise, fall, or stay the same. Answer: B Topic: Predicting Consumer Behavior, Substitution Effect Skill: Analytical Status: Old AACSB: Analytical Skills

104) In the figure above, Sam originally selects his consumption bundle at point A with 3 pounds of olives and 4 pounds of pickles a year. Then the price of pickles rises and the price of olives falls so that his budget line rotates but it still goes through point A. At point A, the slope of the indifference curve I1 ________ the slope of the new budget line. A) is steeper than B) is flatter than C) has the same slope as D) could be steeper than, flatter than, or have the same slope as Answer: A Topic: Predicting Consumer Behavior, Substitution Effect Skill: Analytical Status: Old AACSB: Analytical Skills

105) A consumer is in equilibrium when the consumption point is on A) the budget line. B) an indifference curve. C) the highest indifference curve that just touches the budget line. D) none of the above. Answer: C Topic: Study Guide Question, Predicting Consumer Behavior, Best Affordable Point Skill: Conceptual Status: Old AACSB: Analytical Skills

106) When oranges increase in price, the income effect A) decreases the consumption of oranges only if oranges are a normal good. B) decreases the consumption of oranges only if oranges are an inferior good. C) always increases the consumption of oranges. D) always decreases the consumption of oranges. Answer: A Topic: Study Guide Question, Predicting Consumer Behavior, Income Effect Skill: Conceptual Status: Old AACSB: Analytical Skills

107) When the price of a normal good rises, the income effect results in ________ in the quantity demanded and the substitution effect results in ________ in the quantity demanded. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease Answer: D Topic: Study Guide Question, Predicting Consumer Behavior, Sub. & Income Effects Skill: Analytical Status: Old AACSB: Analytical Skills

4 News Based Questions 1) Bananas in 2008 cost about $1 a pound and ground beef costs about $3 a pound. If Jenna has $18 to spend on groceries and she only buys bananas and beef, which of the following is a possible combination of these goods that could maximize her total utility? A) 18 lbs of bananas and 6 lbs of beef B) 10 lbs of bananas and 8 lbs of beef C) 8 lbs of bananas and 3 lbs of beef D) 3 lbs of bananas and 5 lbs of beef Answer: D Topic: Consumption Possibilities, Budget Line Skill: Conceptual Status: Old AACSB: Analytical Skills

2) Beta Alpha Psi is an accounting student professional organization with chapters on 279 campuses nationwide. Suppose each meeting the local chapter has $30 to spend on pizza and soda. If pizza costs $8 and the chapter buys 3, how much money can be spent on soda? A) $6 B) $30 C) $24 D) $3 Answer: A Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

3) Some parents struggling with back-to-school buys. "A couple of years ago, I was able to buy everything practically new," said Charles Lane-Bey, a U.S. Postal Service worker who's struggling to make ends meet. Suppose Charles has $10 to spend on back-to-school clothing for his son, and pants cost 50 cents and shirts cost $1. Which of the following combinations of pants and shirts is affordable? A) 10 pants and 6 shirts B) 7 pants and 7 shirts C) 3 pants and 8 shirts D) 6 pants and 2 shirts Answer: D Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

4) Some parents struggling with back-to-school buys. "A couple of years ago, I was able to buy everything practically new," said Charles Lane-Bey, a U.S. Postal Service worker who's struggling to make ends meet. Suppose Charles has $10 to spend on back-to-school clothing for his son, and pants cost 50 cents and shirts cost $1. What is the slope of Charles's budget line if it is drawn with pants on the x-axis? A) 2 B) -2 C) -1/2 D) 1/2 Answer: C Topic: Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

5) Some parents struggling with back-to-school buys. "A couple of years ago, I was able to buy everything practically new," said Charles Lane-Bey, a U.S. Postal Service worker who's struggling to make ends meet. Suppose Charles has $10 to spend on back-to-school clothing for his son, and pants cost 50 cents and the price of shirts has decreased from $1 to 50 cents. What is the effect of the fall in price of shirts on Charles's real income in terms of pants? A) It increases from 10 to 20. B) It decreases from 10 to 5. C) It does not change. D) It increases from 20 to 40. Answer: C Topic: Consumption Possibilities, Real Income Skill: Analytical Status: Old AACSB: Analytical Skills

6) Ramen noodles are hotter than ever in 2010. Considered a bargain meal for cash-starved college students... last year, 4 billion individual packets were devoured in the United States, a 4 percent increase over 2006. If once college students graduated, they stopped eating ramen, would ramen be considered a normal or inferior good? A) Inferior because students only eat ramen when income is low B) Normal because students only eat ramen when income is low C) Inferior because students only eat ramen when income is high D) Normal because students only eat ramen when income is high Answer: A Topic: Inferior Goods Skill: Conceptual Status: Old AACSB: Communication

7) Ramen noodles are hotter than ever in 2010. Considered a bargain meal for cash-starved college students... last year, 4 billion individual packets were devoured in the United States, a 4 percent increase over 2006. Once students leave college for that first well-paying job, however, they stop eating Ramen. If the price of ramen falls, and income remains the same, describe the substitution and income effects that occur. A) Both the substitution and income effects would be positive. B) The substitution effect would be negative and the income effect would be positive. C) Both the substitution and income effects would be negative. D) The substitution effect would be positive and the income effect would be negative. Answer: D Topic: Predicting Consumer Behavior, Substitution and Income Effect Skill: Conceptual Status: Old AACSB: Communication

8) Janelle spends all of her income on songs from iTunes ($1 each) and applications ($5 each) for her iTouch. If she makes her best affordable choice, she purchases 20 songs and 4 applications, what is her income? A) $40 B) $20 C) $30 D) $25 Answer: A Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

9) Janelle spends all of her $40 income on songs from iTunes ($1 each) and applications ($4 each) for her iTouch. What is her budget equation? A) $1 × Qsong - $5 × Qapp = Y B) Qsong = 10 - 4 × Qapp C) $40 + $1 × Qsong = $4 × Qapp D) Qapp = 10 - 1/4 × Qsong Answer: D Topic: Consumption Possibilities, Budget Equation Skill: Analytical Status: Old AACSB: Analytical Skills

10) Janelle spends all of her income on songs from iTunes ($1 each) and applications ($5 each) for her iTouch. If she makes her best affordable choice, she purchases 20 songs and 4 applications, what is her real income in terms of applications? A) 40 applications B) 4 applications C) 10 applications D) 20 songs Answer: C Topic: Consumption Possibilities, Real Income Skill: Conceptual Status: Old AACSB: Analytical Skills

11) Janelle spends all of her income on songs from iTunes ($1 each) and applications ($5 each) for her iTouch. At current prices, she makes her best affordable choice and purchases 20 songs and 4 applications. Suppose, for a limited time only, applications are buy-one, get-one-free and she purchases 30 songs and 4 applications. Which of the following statements is true? A) For songs, the substitution effect just equals the income effect. B) For songs, the income effect is stronger than the income effect for applications. C) For applications, the substitution effect is stronger than the income effect. D) For applications, the income effect is stronger the income effect for songs. Answer: B Topic: Predicting Consumer Behavior, Income & Substitution Effects Skill: Analytical Status: Old AACSB: Communication

12) On a big weekend of college football in 2010, The Associated Press found fans… who said they are making concessions yet determined to indulge their passion. "We basically let the wife and children not eat for a week so we can do this," joked Neil Plotkin, who was attending his first Penn State game. If Neil's marginal rate of substitution between weeks of food and his first Penn State game is 1, what do you predict the marginal rate of substitution between food and subsequent Penn State games is for Neil? A) Less than one B) Greater than one C) Equal to one D) Cannot determine without knowing Neil's income Answer: A Topic: Marginal Rate of Substitution Skill: Conceptual Status: Old AACSB: Analytical Skills

13) On a big weekend of college football in 2010, The Associated Press found fans… who said they are making concessions yet determined to indulge their passion. "We basically let the wife and children not eat for a week so we can do this," joked Neil Plotkin, who was attending his first Penn State game. If Neil views eating and football games as perfect substitutes, how would his indifference curve be shaped? A) Downward sloping line that is bowed out B) Downward sloping line that is bowed in C) "L" shaped D) Straight line that is downward sloping Answer: D Topic: Degree of Substitutability Skill: Conceptual Status: Old AACSB: Analytical Skills

14) Barth Anderson states that the 2008 "downturn in the economy has really brought a lot of people home. They don't say, 'Well, we're going to order a pizza.' They actually cook." Assuming that restaurant meals and eating at home are substitutes for one another and only consumers' income decreases, what is true? A) Restaurant meals are an inferior good and eating at home is a normal good. B) Restaurant meals are a normal good and eating at home is an inferior good. C) Restaurant meals are an inferior good and eating at home is an inferior good. D) Restaurant meals are a normal good and eating at home is a normal good. Answer: B Topic: Predicting Consumer Behavior, Income Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking

15) Organic food might be good for your health but in light of the 2008 downturn in the economy and falling incomes, consumers are buying less organic and more non-organic food. Based on these events, what is true? A) Organic food is a normal good and non-organic food is an inferior good. B) Organic food is an inferior good and non-organic food is a normal good. C) Organic food is a normal good and non-organic food is a normal good. D) Organic food is an inferior good and non-organic food is an inferior good. Answer: A Topic: Predicting Consumer Behavior, Income Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking

16) During October and November 2008, gasoline prices were falling dramatically making travel by car less expensive but air travel prices were as high as ever. How does the fall in gasoline price affect the relative price of air travel in terms of travel by car? A) Decreases B) Does not change C) Decreases then increases D) Increases Answer: D Topic: Consumption Possibilities, Relative Price Skill: Conceptual Status: Old AACSB: Reflective Thinking

17) During October and November 2008, gasoline prices were falling dramatically making travel by car less expensive but air travel prices were as high as ever. If travel by car is less expensive, and income remains the same, describe the substitution and income effects that occur for air travel. A) If air travel is a normal good, the substitution effect would cause an increase and the income effect would cause a decrease in air travel. B) If air travel is a normal good, both the substitution and income effects would cause a decrease in air travel. C) If air travel is a normal good, the substitution effect would cause a decrease and the income effect would cause an increase in air travel. D) If air travel is a normal good, both the substitution and income effects would be cause an increase in air travel. Answer: C Topic: Predicting Consumer Behavior, Income & Substitution Effects Skill: Conceptual Status: Old AACSB: Communication

18) During October and November 2008, gasoline prices were falling dramatically making travel by car less expensive but air travel prices were as high as ever. If travel by car is less expensive, and income remains the same, describe the substitution and income effects that occur for travelling by car. A) If travelling by car is a normal good, the substitution effect would cause an increase and the income effect would cause a decrease in travelling by car. B) If travelling by car is a normal good, both the substitution and income effects would be cause an increase in travelling by car. C) If travelling by car is a normal good, the substitution effect would cause a decrease and the income effect would cause an increase in travelling by car. D) If travelling by car is a normal good, both the substitution and income effects would cause a decrease in travelling by car. Answer: B Topic: Predicting Consumer Behavior, Income & Substitution Effects Skill: Conceptual Status: Old AACSB: Communication

19) During October and November 2008, gasoline prices were falling dramatically, making travel by car less expensive but air travel prices were as high as ever. What is true about consumer preferences, possibilities, or choices? A) The relative price of air travel in terms of travelling by car decreases. B) If travelling by car is a normal good, both the substitution and income effects would lead to a decrease in travelling by car. C) The consumers' budget line would shift outward and its slope would not change. D) If air travel is a normal good, both the substitution and income effects would lead to an increase in air travel. Answer: A Topic: Consumption Possibilities, Relative Price Skill: Conceptual Status: Old AACSB: Communication

5 Essay Questions 1) "Consumption possibilities are limited by total utility." True or false? Explain. Answer: False. Consumption possibilities are limit by the consumers' income and by the prices of goods and services they buy. Total utility does not limit consumption, it is a measure of total benefit that consumers get from consumption of goods and services. Topic: Consumption Possibilities Skill: Recognition Status: Old AACSB: Communication

2) You are studying with a friend and your friend says "A budget line shows the various combinations of two goods that can be purchased with the buyer's income at current prices." Is your friend's assessment correct or not? Answer: Your friend's description of the budget line is accurate. Topic: Consumption Possibilities, Budget Line Skill: Recognition Status: Old AACSB: Communication

3) How is a budget line similar to a production possibilities frontier? How do they differ? Answer: Both the budget line and the production possibilities frontier illustrate limits. The budget line describes the limits to consumption possibilities; the production possibilities frontier describes the limits to production possibilities. A consumer is unable to consume combinations of goods that lie beyond his or her budget line. Similarly, a nation is unable to produce combinations of goods that lie beyond its production possibilities frontier. Topic: Consumption Possibilities, Budget Line Skill: Recognition Status: Old AACSB: Communication

4) What information do you need to draw your budget line? What is your budget line? What does it show for any pair of goods? Answer: To draw a budget line for any pair of goods, you need to know your income and the price of each good. The budget line shows all combinations of the two goods that you can afford. The slope of the budget line is the ratio of the prices and shows, therefore, the rate at which the market requires you to give up some of one for more of the other. Topic: Consumption Possibilities, Budget Line Skill: Conceptual Status: Old AACSB: Communication

5) What is a household's real income? Answer: A household's real income is the household's income expressed as a quantity of goods the household can afford to buy. Measured using a budget line, the household's real income is the maximum quantity of the specific goods or services plotted on the budget line. Topic: Consumption Possibilities, Budget Line Skill: Recognition Status: Old AACSB: Communication

6) Why is the budget line negatively sloped? Answer: Given the consumer's budget and the prices for two goods, if a consumer buys more of one good, he or she must buy less of the other. The budget line shows the trade-off between the two goods, that is, as more of one is purchased, less of the other can be purchased. Topic: Consumption Possibilities, Budget Line Skill: Conceptual Status: Old AACSB: Communication

7) Suppose a budget line is drawn between pizza, on the horizontal axis, and tacos, on the vertical axis. How does a change in the price of a pizza affect the budget line? Answer: When the price of the good measured on the horizontal axis, pizza, falls, the budget line rotates outward and becomes flatter. And, when the price of a pizza rises, the budget line rotates inward and becomes steeper. Topic: Consumption Possibilities, Budget Line Skill: Conceptual Status: Old AACSB: Communication

8) What does the slope of the budget line equal? Answer: The slope of the budget line equals an opportunity cost. It is the same as the opportunity cost of the good measured along the x-axis. It also equals a relative price. In particular, it is the same as the relative price of the good measured along the x-axis. Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Communication

9) If the price of a good rises and the consumer's budget remains the same, what happens to the consumer's consumption possibilities? Answer: The consumer's consumption possibilities decrease. This decrease is reflected by the change in the budget line, which rotates inward. The inward movement means that consumption possibilities that had previously been affordable are no longer affordable and hence the possible consumption possibilities have decreased. Topic: Consumption Possibilities, Change in Price Skill: Conceptual Status: Old AACSB: Communication

10) If your income increases, what is the effect on your budget line? Answer: Your budget line will shift outward and not change its slope. Topic: Consumption Possibilities, Change in Income Skill: Conceptual Status: Old AACSB: Communication

11) "If Bill's income increases from $30,000 per year to $41,000 per year and he consumes pickup trucks and lamb chops with his money, Bill's budget line shifts outward and the increase in income means he can consume more trucks and more lamb." Is this statement true or false? Briefly explain your answer. Answer: The statement is true. The increase in Bill's income shifts his budget line outward and enables Bill to consume more trucks and more lamb chops. Topic: Consumption Possibilities, Change in Income Skill: Conceptual Status: Old AACSB: Communication

12) Explain how changes in the price of goods and the consumer's budget affect the budget line. Answer: If the price of the good measured on the x-axis increases, the budget line rotates inward as the xintercept decreases and the budget line becomes steeper. Conversely, if the price of the good measured on the x-axis decreases, the budget line rotates outward, the x-intercept increases, and the budget line becomes flatter. If the price of the good measured on the y-axis increases, the y-intercept decreases as the budget line rotates inward and becomes flatter. However, if the price of the good measured on the y-axis decreases, the budget line rotates outward as the y-intercept increases, and the budget line becomes steeper. Finally, if the budget increases, the budget line shifts outward (both intercepts increase) and the slope remains unchanged while if the budget decreases, the budget line shifts inward (both intercepts decrease), and the slope remains unchanged. Topic: Consumption Possibilities, Change in Prices and Income Skill: Conceptual Status: Old AACSB: Analytical Skills

13) What is an indifference curve? Answer: An indifference curve measures the combinations of goods and services among which the consumer is indifferent as to which he or she consumes. Topic: Preferences and Indifference Curves Skill: Recognition Status: Old AACSB: Communication 140 Copyright © 2014 Pearson Education, Inc.

14) "If Ivan says he is indifferent between the consumption of a new pair of jeans or a set of earrings, he means that he does not want either product." Is the previous analysis correct? Explain your answer. Answer: The analysis is incorrect. The term "indifferent" means that Ivan does not care if he gets another pair of jeans or another set of earrings. Topic: Preferences and Indifference Curves Skill: Recognition Status: Old AACSB: Communication

15) Why do consumers prefer higher indifference curves (farther to the right) to lower indifference curves? Answer: When comparing two indifference curves, it is always possible to find consumption combinations on the higher indifference curve that have more of both goods than any particular point on the lower indifference curve. Consumers prefer consuming more goods rather than fewer, so they prefer the higher indifference curve because it offers more consumption of everything. Topic: Indifference Curves Skill: Conceptual Status: Old AACSB: Communication

16) "Every point on a budget line has an indifference curve passing through it." Explain whether the previous statement is correct or not. Answer: The statement is correct. The consumer has a preference map that consists of an infinite number of indifference curves, one through every possible consumption combination. So there is an indifference curve passing through every point on a budget line. Topic: Indifference Curves Skill: Conceptual Status: Old AACSB: Communication

17) What is the meaning of the term "marginal rate of substitution"? Answer: The marginal rate of substitution between two goods is the rate at which a consumer is willing to give up some of one in exchange for more of the other, and remain indifferent between the old and the new combination. It is also the slope of an indifference curve between the two goods. Topic: Marginal Rate of Substitution Skill: Recognition Status: Old AACSB: Communication

18) What is the marginal rate of substitution and how does it relate to an indifference curve? Answer: The marginal rate of substitution is the rate at which a person will give up the good measured along the y-axis in order to get more of the good measured along the x-axis. The marginal rate of substitution equals the magnitude of the slope of the indifference curve. Because the indifference curve is not linear, the marginal rate of substitution changes as the consumer moves along the indifference curve. In particular, as more of the good measured along the x-axis is consumed, its marginal rate of substitution diminishes. In general, as more of a good is consumed, its marginal rate of substitution decreases. Topic: Marginal Rate of Substitution Skill: Recognition Status: Old AACSB: Communication 141 Copyright © 2014 Pearson Education, Inc.

19) Why does your marginal rate of substitution between chocolate and vanilla ice cream decline continuously as you move rightward on your indifference curve between the two? Answer: With chocolate on the vertical axis and vanilla on the horizontal, as you move rightward along your indifference curve, the more chocolate you give up and the less you have remaining. As a result, you grow to value your chocolate more and more and your vanilla less and less. You therefore become willing to give up less chocolate to get more vanilla. Topic: Marginal Rate of Substitution Skill: Analytical Status: Old AACSB: Communication

20) "The marginal rate of substitution of the good measured along the x-axis increases as a consumer moves downward along an indifference curve." Is the previous statement correct or not? Answer: The statement is incorrect because the marginal rate of substitution decreases as a consumer moves downward along an indifference curve. Topic: Diminishing Marginal Rate of Substitution Skill: Conceptual Status: Old AACSB: Communication

21) "As Jake consumes more sodas over the course of a day, it is likely that his marginal rate of substitution of sodas for other goods will rise." Is the previous statement correct or incorrect? Answer: The statement is incorrect. The principle of diminishing marginal rate of substitution means that as Jake consumes more sodas, he is willing to give up fewer other goods in order to get an additional soda. Topic: Diminishing Marginal Rate of Substitution Skill: Conceptual Status: Old AACSB: Communication

22) What will an indifference curve look like between two commodities that are perfect complements, such as right shoes and left shoes? Answer: The indifference curve will be L-shaped. This shape indicates that more of either product, without any more of the other, would not make the consumer better off. Topic: Degree of Substitutability Skill: Conceptual Status: Old AACSB: Communication

23) Suppose that Dell computers and Gateway computers are very close substitutes. Then the indifference curves between Dell computers and Gateway computers are almost straight lines. Is this analysis correct or incorrect? Explain. Answer: The analysis is correct. When two goods are perfect substitutes, their indifference curves are straight lines. A Dell computer and a Gateway computer are very close substitutes, so their indifference curves are close to straight lines. Topic: Degree of Substitutability Skill: Conceptual Status: Old AACSB: Communication 142 Copyright © 2014 Pearson Education, Inc.

24) In an indifference curve/budget line framework, how does a consumer decide which of all possible combinations of goods to purchase? Answer: The consumer will select the combination of goods and services that he or she most prefers and which he or she can afford to buy. Taking the latter consideration first, the consumer will buy a combination of goods and services that lie upon the budget line because all of these combinations are affordable. From the combinations that lie upon the budget line, the consumer will select the combination that is on the highest indifference curve because this is the combination that is most preferred. Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Conceptual Status: Old AACSB: Communication

25) Describe the consumer equilibrium in the indifference curve/budget line model. Answer: A consumer equilibrium occurs when the consumer is spending his or her entire income (is on the budget line), and is on the highest attainable indifference curve (is consuming the "best" point on the budget line).The equilibrium occurs at the point where the budget line just touches the highest indifference curve at one point. At this point, the budget line and indifference curve have the same slope, so the marginal rate of substitution (the slope of the indifference curve) is equal to the relative price (the slope of the budget line). Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Conceptual Status: Old AACSB: Communication

26) In a budget line/indifference curve figure, how do you identify the best affordable combination of any two goods? Answer: Any combination of goods along the budget line is affordable. The best of these combinations is on the highest indifference curve. This best combination is where the indifference curve is tangent to the budget line, so this combination is the best affordable combination. Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Conceptual Status: Old AACSB: Communication

27) Hermione and Ron are at a sweet shop in London. Hermione looks at the prices of ice cream and chocolate bars and says to Ron: "I can tell you what your marginal rate of substitution between ice cream and chocolate bars is at your best affordable point." "No, you can't," says Ron. "You don't know my preferences and how much money I have." "I don't need to know all this because I know the prices," Hermione replies. Is she right? Explain. Answer: Yes, Hermione is correct. All information she needs is the relative price of ice cream in terms of chocolate bars (or vice versa), which determines the slope of Ron's budget line. The marginal rate of substitution at Ron's best affordable point is the slope of his indifference curve at this point. But because the best affordable point is the point where the budget line is tangent to the highest attainable indifference curve, the slope of the indifference curve at this point equals the slope of the budget line. So if Hermione knows the relative price, she knows the slope of Ron's budget line. Then she also knows the slope of his indifference curve at the best affordable point, which is the marginal rate of substitution at this point. Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Conceptual Status: Old AACSB: Analytical Skills

28) Can the process of consumer choice as illustrated with a budget line/indifference curves approach explain the downward sloping demand curves that consumers have for goods, such as Pepsi? Answer: Yes. Measure the quantity of Pepsi consumed on the horizontal axis of the budget line/indifference curve diagram. Holding income and other prices constant, a series of decreases in the price of a Pepsi rotates the budget line outward. As the consumer then moves to successively higher indifference curves, the quantity of Pepsis consumed will increase successively, thereby demonstrating that lower prices increase the quantity demanded. Topic: Predicting Consumer Behavior, Demand Curve Skill: Analytical Status: Old AACSB: Communication

29) "Every point on a demand curve represents a consumer equilibrium in the indifference curve model." Explain why the previous statement is correct or not. Answer: The statement is correct. The demand curve is derived using the indifference curve/budget line diagram. Hence every point on the demand curve is the result of a consumer equilibrium in the indifference curve/budget line diagram. Topic: Predicting Consumer Behavior, Demand Curve Skill: Analytical Status: Old AACSB: Communication

30) What is the substitution effect? Answer: The substitution effect is the effect of a change in price on the quantity bought when the consumer (hypothetically) remains indifferent between the original situation and the new one. Topic: Predicting Consumer Behavior, Substitution Effect Skill: Recognition Status: Old AACSB: Communication

31) What is the relationship between the income effect and the substitution effect for a normal good and what is it for an inferior good? Answer: For a normal good, the income effect reinforces the substitution effect. In other words, if the price falls so that a consumer's real income increases, both the substitution effect and the income effect lead the consumer to increase his or consumption of the good. For an inferior good, the income effect reduces the substitution effect. In this case, when the price of a good falls, the substitution effect leads to an increase in the consumption of the good and the income effect leads to a decrease in the consumption of the good. Topic: Predicting Consumer Behavior, Substitution and Income Effect Skill: Recognition Status: Old AACSB: Communication

6 Numeric and Graphing Questions

1) Suppose you have a $20 budget per week, the price of soda is $1 per bottle, and the price of pizza is $4 per slice. In the above figure, draw a budget line for soda and pizza, placing soda on the horizontal axis. Correctly label the axes. Answer:

The budget line is illustrated in the figure above. Topic: Consumption Possibilities Skill: Analytical Status: Old AACSB: Analytical Skills

2) John likes to spend Thursday nights playing pool and drinking soda. John's budget for Thursday nights is $10, a soda costs $2, and one game of pool costs $1. a) Draw a graph of John's budget line in the figure above. b) In your graph, label the affordable and unaffordable areas. Answer:

a) The budget line is in the figure above. b) The affordable area is the lighter area and the budget line itself. The unaffordable area is the darker area. Topic: Consumption Possibilities Skill: Analytical Status: Old AACSB: Analytical Skills

3) Joe spends $72 on gasoline and sandwiches. The price of a gallon of gasoline is $3 and a sandwich is $4. Placing the quantity of sandwiches on the left side, what is Joe's budget equation? If sandwiches are measured on the vertical axis, what is the slope of Joe's budget line? Answer: The budget equation is QS = 18 - 0.75QG, where QS is the quantity of sandwiches and QG is the quantity of gasoline. To determine the slope of Joe's budget line, first notice that Joe's budget line intersects the vertical axis when Joe buys 18 sandwiches (which equals his income, $72, divided by the price of a sandwich, $4). Second, Joe's budget line intersects the horizontal axis when he buys 24 gallons of gasoline (which equals his income, $72, divided by the price of a gallon of gasoline, $3). So calculating the slope of Joe's budget line over the horizontal distance from 0 gallons of gasoline to 24 gallons of gasoline, the slope equals the vertical fall is -18 sandwiches divided by the horizontal distance of 24 gallons of gasoline, so the budget line's slope of -18 sandwiches/24 gallons of gasoline, which is -0.75 of a sandwich per gallon of gasoline. Topic: The Budget Equation Skill: Analytical Status: Old AACSB: Analytical Skills

Possibility A B C D E

Hamburgers (per day) 0 1 2 3 4

Hot dogs (per day) 8 6 4 2 0

4) The table above has different combinations of hamburgers and hot dogs that Alex can buy. After labeling the axes, graph Alex's budget line in the figure, putting hot dogs on the x-axis. a) Alex's income is $8 per day. What is the price of a hot dog? Of a hamburger? b) What is the slope of the budget line? Answer:

The figure above has Alex's budget line. a) The price of a hot dog is $1 and the price of a hamburger is $2. b) The slope of the budget line is 1/2 of a hamburger per hot dog. Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

5) Sherry is on vacation and wants to bring souvenirs home to family and friends. Her souvenir budget is $100, and she can choose between T-shirts, which cost $20 each, and key chains, which cost $5 each. a) Draw a graph of Sherry's budget line in the figure above. b) What is the slope of Sherry's budget line? How does that slope represent an opportunity cost? Suppose that Sherry now finds a store where T-shirts are on sale for $10 each. (Key chains still cost $5 each). c) Draw the new budget line in the figure. d) What is the slope of the new budget line? How has the opportunity cost changed? Answer:

a) The budget line is in the figure above and is the budget line labeled BL1.

b) The slope of the budget line is 20 key chains divided by 5 T-shirts, which equals 4 key chains per Tshirt. 4 key chains per T-shirt is an opportunity cost because it represents the quantity of key chains that must be given up to acquire one more T-shirt. c) The new budget line is in the figure above and is labeled BL2. d) The slope of the new budget line is 2 key chains per T-shirt, which means that the opportunity cost of one T-shirt is now 2 key chains, rather than 4. Thanks to the new store, the opportunity cost of a T-shirt has fallen. Topic: Consumption Possibilities, Change in Prices and Income Skill: Analytical Status: Old AACSB: Analytical Skills

6) The figure above contains several budget lines for Sarah, who uses her income to purchase two goods, cheese and crackers. a) A movement between which two budget lines represents an increase in income? b) A movement between which two budget lines represents an increase in the price of a pound of cheese? c) A movement between which two budget lines represents an increase in the price of a box of crackers? Answer: a) A movement from BL1 to BL3 shows an increase in income. b) A change from BL2 to BL1 shows an increase in the price of a pound of cheese. c)

A change from BL3 to BL2 shows an increase in the price of a box of crackers.

Topic: Consumption Possibilities, Change in Prices and Income Skill: Analytical Status: Old AACSB: Analytical Skills

7) Tom is stranded on a deserted island where he can only consume coconuts and crabs. Two of his indifference curves are in the figure above. a) Would Tom prefer his consumption to be at point a or at point b? At point b or at point c? Explain your answers. b) Between points a and b, what is Tom's marginal rate of substitution for a crab? Answer: a) Tom is indifferent between consuming at point a or at point b because both points are on the same indifference curve, I1. Tom would prefer to consume at point c rather than point b because point c is on a higher indifference curve, I2 versus I1. b) Between points a and b, Tom's marginal rate of substitution for a crab is 2 coconuts per crab. Topic: Indifference Curves Skill: Conceptual Status: Old AACSB: Analytical Skills

8) The figure above shows a preference map for Sarah, who likes hamburgers and milk shakes. a) Which two combinations contain the same amount of hamburgers but different quantities of shakes? b) Which combination(s) does Sarah most prefer? Why? c) Which combination(s) does Sarah least prefer? Why? d) Between which combinations is Sarah indifferent? Why? Answer: a) Combinations a and b have the same amount of hamburgers but different amounts of milk shakes. b) Sarah most prefers combination d because it is on the highest indifference curve. c) Sarah least prefers combination a because it is on the lowest indifference curve. d) Sarah is indifferent between combinations b and c because they are on the same indifference curve. Topic: Indifference Curves Skill: Conceptual Status: Old AACSB: Analytical Skills

9) The figure above shows one of Bob's indifference curves for CDs and books. a) Is the indifference curve steeper at point a or point b? b) What is Bob's marginal rate of substitution at point a? c) What is Bob's marginal rate of substitution at point b? Answer: a) The indifference curve is steeper at point a. b) The marginal rate of substitution at point a is 5 CDs per book, the slope of the line that just touches the indifference curve at this one point. c) The marginal rate of substitution at point b is 1 1/2 CDs per book, the slope of the line that just touches the indifference curve at this one point. Topic: Marginal Rate of Substitution Skill: Analytical Status: Old AACSB: Analytical Skills

10) Nadya spends $200 a year to buy computer games and Barbie dolls. The price of a computer game is $20 and the price of a Barbie doll is $10. The figure above illustrates Nadya's preferences. What combination of computer games and Barbie dolls does Nadya buy? Answer:

The figure above shows that Nadya buys 5 computer games and 10 Barbie dolls. Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

11) Nadya spends $200 a year to buy computer games and Barbie dolls. The price of a computer game is $40 and the price of a Barbie doll is $10. The figure above illustrates Nadya's preferences. What combination of computer games and Barbie dolls does Nadya buy? Answer:

The figure above shows that Nadya buys 3 computer games and 8 Barbie dolls. Topic: Consumption Possibilities, Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

12) George has a $600 annual entertainment budget that he uses to buy trips to the movies and dinners at local restaurants. The figure above shows indifference curves and budget lines for these two goods. The price of a movie is $15. a) Along budget line BL1, what is the price of a dinner? b)

What combination of dinners and movies will George select along budget line BL1?

Budget line BL2 represents a change in the price of dinners from that along BL1. What is the new

price of dinners along this budget line? d) What combination of dinners and movies will George select along budget line BL2? e) Use the information in this problem to give two points on George's demand curve for dinners. Answer: a) George can buy 20 dinners and his income is $600, so the price of a dinner is $30. b) George will buy 20 movies and 10 dinners because this combination is on his budget line, and hence is affordable, as well as on the highest attainable indifference curve, and hence is the "best" combination. c) If George spends all his income on dinners, he can purchase 40. Therefore the price of a dinner must be $15 (= $600 income/40 dinners = $15 per dinner). d) George will buy 20 movies and 20 dinners because this combination is on his budget line, and hence is affordable, as well as on the highest attainable indifference curve, and hence is the "best" combination. e) One point on George's demand curve for dinners is a price of $30 per dinner and a quantity demanded of 10 dinners (from part b). Another point is a price of $15 per dinner and a quantity demanded of 20 dinners (from part d). Topic: Predicting Consumer Behavior, Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills

7 True or False 1) To draw your budget line between steak and lobster, all you need to know is the price of a steak and the price of a lobster. Answer: FALSE Topic: Consumption Possibilities, Budget Line Skill: Conceptual Status: Old AACSB: Reflective Thinking

2) To draw your budget line between steak and lobster, all you need to know is your income. Answer: FALSE Topic: Consumption Possibilities, Budget Line Skill: Conceptual Status: Old AACSB: Reflective Thinking

3) The lower the price of the good measured on the vertical axis, other thing remaining the same, the flatter the budget line. Answer: FALSE Topic: Consumption Possibilities, Change in Price Skill: Conceptual Status: Old AACSB: Reflective Thinking

4) The higher the price of the good measured on the vertical axis, other thing remaining the same, the flatter the budget line. Answer: TRUE Topic: Consumption Possibilities, Change in Price Skill: Conceptual Status: Old AACSB: Reflective Thinking

5) For a person who consumes only steak and lobster, a fall in either the price of a steak or the price of a lobster shifts the budget line for the two leftward and does not change its slope. Answer: FALSE Topic: Consumption Possibilities, Change in Price Skill: Conceptual Status: Old AACSB: Reflective Thinking

6) An increase in income shift a person's budget line rightward and does not change its slope. Answer: TRUE Topic: Consumption Possibilities, Change in Income Skill: Conceptual Status: Old AACSB: Reflective Thinking

7) A change in a person's money income changes real income and therefore changes the slope of the person's budget line. Answer: FALSE Topic: Consumption Possibilities, Change in Income Skill: Conceptual Status: Old AACSB: Reflective Thinking

8) For a person who consumes only steak and lobster, the slope of the budget line is called the marginal rate of substitution between steak and lobster. Answer: FALSE Topic: Marginal Rate of Substitution Skill: Recognition Status: Old AACSB: Reflective Thinking

9) The marginal rate of substitution is the rate at which a person is willing to substitute one good for another good while remaining on the same indifference curve. Answer: TRUE Topic: Marginal Rate of Substitution Skill: Recognition Status: Old AACSB: Reflective Thinking

10) The magnitude of the slope of the indifference curve between steak and lobster is called the marginal rate of substitution. Answer: TRUE Topic: Marginal Rate of Substitution Skill: Recognition Status: Old AACSB: Reflective Thinking

11) Consumption at points on a steeper part of the indifference curve will reflect a higher marginal rate of substitution than consumption points on a flatter part of the indifference curve. Answer: TRUE Topic: Marginal Rate of Substitution Skill: Recognition Status: Old AACSB: Reflective Thinking

12) The slope of the indifference curve between steak and lobster is always equal to the ratio of their prices. Answer: FALSE Topic: Marginal Rate of Substitution Skill: Conceptual Status: Old AACSB: Reflective Thinking

13) The larger the marginal rate of substitution, the larger is the amount of one good that the consumer is willing to give up in exchange for another good and still remain at the same level of satisfaction. Answer: TRUE Topic: Marginal Rate of Substitution Skill: Conceptual Status: Old AACSB: Reflective Thinking

14) If you considered steak and lobster to be perfect substitutes for each other, your indifference curves between them would be L-shaped. Answer: FALSE Topic: Degree of Substitutability Skill: Conceptual Status: Old AACSB: Reflective Thinking

15) When two goods are perfect substitutes, their indifference curves are straight lines. Answer: TRUE Topic: Degree of Substitutability Skill: Conceptual Status: Old AACSB: Reflective Thinking

16) In order for you to consider steak and lobster to be perfect substitutes, their prices per pound must be identical. Answer: FALSE Topic: Degree of Substitutability Skill: Conceptual Status: Old AACSB: Reflective Thinking

17) When your budget line is just tangent to your indifference curve, you are at the point on the budget line that you least prefer. Answer: FALSE Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Conceptual Status: Old AACSB: Reflective Thinking

18) When your budget line is just tangent to your indifference curve, you are at your best affordable point. Answer: TRUE Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Conceptual Status: Old AACSB: Reflective Thinking

19) A consumer will maximize utility, given income and prices, when the marginal rate of substitution is equal to the ratio of the prices of the two goods. Answer: TRUE Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Conceptual Status: Old AACSB: Reflective Thinking

20) A decrease in price allows a consumer to attain a higher indifference curve. Answer: TRUE Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Analytical Status: Old AACSB: Reflective Thinking

21) Holding your income and the price of lobster constant, you can derive your demand curve for steak from an indifference curve/budget line diagram by determining how your consumption of steak changes when the price of a steak changes. Answer: TRUE Topic: Predicting Consumer Behavior, Demand Curve Skill: Analytical Status: Old AACSB: Reflective Thinking

22) You consume only steak and lobster. Your substitution effect from a drop in the price of lobster is measured by a movement along your indifference curve between steak and lobster. Answer: TRUE Topic: Predicting Consumer Behavior, Substitution Effect Skill: Analytical Status: Old AACSB: Reflective Thinking

23) You consume only steak and lobster. Your income effect from a drop in the price of lobster is measured by a movement along your indifference curve between steak and lobster. Answer: FALSE Topic: Predicting Consumer Behavior, Income Effect Skill: Analytical Status: Old AACSB: Reflective Thinking

8 Extended Problems 1) Margo spends $108 a year on music CDs and movies on DVDs. Initially the price of a music CD is $18 and the price of a movie on DVD is $18. Then record companies, faced with the growing competitions from digital music download services, lower the price of a music CD to $13.50. a) Draw graphs showing Margo's consumption possibilities before and after the price of a CD fell. b) How has the relative price of a CD changed? If Margo bought 4 CDs per year, how many DVDs could she buy before and after the price of a CD fell? Answer:

a) The figure with the budget lines is above. b) The relative price of a CD fell from 1 DVD to 0.75 DVDs. If Margo bought 4 CDs per year, she could buy 2 DVDs per year before the price of a CD fell and 3 DVDs after the price of a CD fell. Topic: Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills

2) Olivia's income is $216 a year and she spends all of it on music CDs and movies on DVDs. The price of a music CD is $18 and the price of a DVD is $18. a) What is Olivia's real income in terms of CDs? What is her real income in terms of DVDs? b) What is the relative price of a CD in terms of DVDs? What is the opportunity cost of a DVD? c) Calculate the equation for Olivia's budget line. Place the quantity of DVDs on the left side of the equation. d) Draw a graph of Olivia's budget line (with CDs on the horizontal axis). What is the slope of Olivia's budget line? What determines its magnitude? Answer: a) Olivia's real income in terms of CDs is the maximum number of CDs that she can buy, which is the quantity her money income can buy if she spends it all on CDs. So her real income in terms of CDs is her money income divided by the price of a CD. So, in terms of CDs, Olivia's real income is $216/$18, which is 12 CDs. Similarly, her real income in term of DVDs is her money income divided by the price of a DVD, which is $216/$18 or 12 DVDs. b) The relative price of a CD in terms of DVDs is the money price of a CD divided by the money price of a DVD. So the relative price of a CD is $18/$18, which is 1 DVD per CD. The opportunity cost of a DVD is the quantity of CDs that must be given up to get a DVD. The price of a DVD is $18. To get a DVD, Olivia must give up $18, which is what she pays to get a CD. So the opportunity cost of a DVD is 1 CD. c) The amount that Olivia spends on CDs is $18 × QCD, where QCD is the quantity of CDs she buys. The amount that she spends on DVDs is $18 × QDVD, where QDVD is the quantity of DVDs she buys. Since Olivia spends all her income of $216 on CDs and DVDs, we can write $18 × QCD + $18 × QDVD = $216. Solving for QDVD gives the budget equation as QDVD = 12 - QCD.

d) The budget line is in the figure above. The slope of the budget line over is the change in DVDs over a range divided by the resulting change in CDs. Because the budget line is a straight line, the slope can be calculated over any range. When the quantity of CDs increases by 1 CD, the quantity of DVDs decreases by 1 DVD, so the slope is -1 DVD/1 CD, which equals -1 DVD per CD. Topic: Budget Line Skill: Analytical Status: Old AACSB: Analytical Skills 163 Copyright © 2014 Pearson Education, Inc.

3) Olivia's income is $216 a year and she spends all of it on music CDs and movies on DVDs. The price of a music CD is $18 and the price of a DVD is $18. The figure above illustrates Olivia's preferences. a) What quantities of CDs and DVDs does Olivia buy? Explain your solution. b) What is Olivia's marginal rate of substitution at the point at which she consumes? Explain. Answer:

a) Olivia chooses the quantities of CDs and DVDs on her budget line that are on the highest indifference curve. At this point the budget line is tangent to the indifference curve. The highest indifference curve that Olivia can reach on the budget line shows that so Olivia buys 5 CDs and 7 DVDs. b) The marginal rate of substitution is the rate at which Olivia will give up DVDs to get an additional CD. The marginal rate of substitution is measured by the magnitude of the slope of an indifference curve. At the point where Olivia consumes, the slope of the indifference curve is the same as that of the budget line. The slope of the budget line is -1, so the marginal rate of substitution is 1. 164 Copyright © 2014 Pearson Education, Inc.

Topic: Consumption Possibilities, Budget Equation Skill: Analytical Status: Old AACSB: Analytical Skills

4) Record companies, faced with the growing competitions from digital music download services, lower the price of a music CD from $18.00 to $13.50. The price of a DVD is $18. Olivia's income is $216 a year and she spends all of it on music CDs and movies on DVDs. a) What is Olivia's real income in terms of CDs? What is her real income in terms of DVDs? b) What is the relative price of a CD in terms of DVDs? What is the opportunity cost of a DVD? c) Calculate the equation for Olivia's budget line. Place the quantity of DVDs on the left side of the equation. d) Draw a graph of Olivia's budget line (with CDs on the horizontal axis). What is the slope of Olivia's budget line? What determines its magnitude? The figure above illustrates Olivia's preferences. e) Given the price of a CD, the price of a DVD, and Olivia's income, what quantities of CDs and DVDs does Olivia buy? Explain your solution. f) What is Olivia's marginal rate of substitution at the point at which she consumes? Explain. g) Determine how many CDs Olivia buys if the price of a CD is $18 and there is no change in the price of DVD nor in Olivia's income. Derive Olivia's demand curve for CDs for the price change from $18 to $13.50 per CD. Answer: a) Olivia's real income in terms of CDs is the maximum number of CDs that she can buy, which is the quantity her money income can buy if she spends it all on CDs. So her real income in terms of CDs is her money income divided by the price of a CD. So, in terms of CDs, Olivia's real income is $216/$13.50, which is 16 CDs. Similarly, her real income in term of DVDs is her money income divided by the price of a DVD, which is $216/$18 or 12 DVDs.

b) The relative price of a CD in terms of DVDs is the money price of a CD divided by the money price of a DVD. So the relative price of a CD is $13.50/$18.00, which is 0.75 of a DVD per CD. The opportunity cost of a DVD is the quantity of CDs that must be given up to get a DVD. The price of a DVD is $18. To get a DVD, Olivia must give up $18, which is what she pays to get 1.33 CDs. So the opportunity cost of a DVD is 1.33 CDs. c) The amount that Olivia spends on CDs is $13.50 × QCD, where QCD is the quantity of CDs she buys. The amount that she spends on DVDs is $18.00 × QDVD, where QDVD is the quantity of DVDs she buys. Since Olivia spends all her income of $216 on CDs and DVDs, we can write $13.50 × QCD + $18.00 × QDVD = $216. Solving for QDVD gives the budget equation as QDVD = 12 - 0.75QCD.

d) The budget line is in the figure above. The slope of the budget line over is the change in DVDs over a range divided by the resulting change in CDs. Because the budget line is a straight line, the slope can be calculated over any range. When the quantity of CDs increases by 1 CD, the quantity of DVDs decreases by 0.75 of a DVD, so the slope is -0.75 DVD/1 CD, which equals -0.75 of a DVD per CD.

e) Olivia chooses the quantities of CDs and DVDs on her budget line that are on the highest indifference curve. At this point the budget line is tangent to the indifference curve. The highest indifference curve that Olivia can reach on the budget line shows that so Olivia buys 8 CDs and 6 DVDs.4 f) The marginal rate of substitution is the rate at which Olivia will give up DVDs to get an additional CD. The marginal rate of substitution is measured by the magnitude of the slope of an indifference curve. At the point where Olivia consumes, the slope of the indifference curve is the same as that of the budget line. The slope of the budget line is -0.75, so the marginal rate of substitution is 0.75.

g) The demand curve is illustrated in the figure above. When the price of a CD is $18, Olivia buys 5 CDs. When the price of a CD is $13.50, Olivia buys 8 CDs. Topic: Consumption Possibilities, Budget Equation Skill: Analytical Status: Old AACSB: Analytical Skills 167 Copyright © 2014 Pearson Education, Inc.

Economics, 11e, Global Edition (Parkin) Chapter 10 Organizing Production 1 The Firm and Its Economic Problem 1) The most important goal of the firm is to A) maximize its revenues. B) maximize its sales volume. C) maximize its profits. D) minimize its costs. Answer: C Topic: The Firm's Goal Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

2) A firm's basic goal is best described as A) maximizing total revenue. B) maximizing sales. C) maximizing profit. D) minimizing total cost. Answer: C Topic: The Firm's Goal Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

3) Profit maximization A) makes a firm become as large as possible. B) makes a firm remain small in the long run. C) increases the likelihood that a firm will survive. D) leads a firm to become the target of a takeover. Answer: C Topic: The Firm's Goal Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

4) Firms that survive in the long run are usually those that A) become as large as possible. B) remain small. C) use more capital rather than more labor. D) earn the largest possible profit. Answer: D Topic: The Firm's Goal Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

5) Firms use incentives to pursue their most fundamental goal, which is to maximize A) profits. B) sales revenue. C) worker satisfaction. D) worker pay. Answer: A Topic: The Firm's Goal Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

6) A firm's opportunity costs ________. A) equal the costs of resources it buys from others in the market B) include the cost of using resources owned by the firm C) increase when economies of scope exist D) do not include any opportunity costs for resources the owner suppliers Answer: B Topic: Opportunity Cost Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

7) Which of the following costs are part of a firm's opportunity costs? I. costs for resources bought in markets II. costs for resources the firm owns III. costs for resources supplied by the owner A) I and II B) I and III C) I only D) I, II, and III Answer: D Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

8) If instead of working on his own as a consultant making $25,000, Joe takes a job at a bank, the $25,000 is A) an opportunity cost. B) a depreciation. C) a loss. D) an accounting profit. Answer: A Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

9) An electrician quits her current job, which pays $40,000 per year. She can take a job with another firm for $45,000 per year or work for herself. The opportunity cost of working for herself is A) $5,000. B) $40,000. C) $45,000. D) $85,000. Answer: C Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

10) Which of the following is part of a firm's opportunity costs? I. wages II. utility costs III. interest on a bank loan IV. interest forgone on funds used to buy capital equipment A) I and II B) III and IV C) I, II and III D) I, II, III and IV Answer: D Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

11) The implicit rental rate for capital is A) an accounting cost. B) part of the firm's normal profit. C) an opportunity cost. D) a cost that is irrelevant to the business. Answer: C Topic: Implicit Rental Rate Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

12) The implicit rental rate for capital includes the A) total value of a piece of capital equipment. B) interest income forgone by purchasing the piece of capital equipment. C) firm's normal profit. D) amount paid for the use of a piece of capital equipment owned by someone else. Answer: B Topic: Implicit Rental Rate Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

13) Which of the following are two components of the opportunity cost of using capital already owned by the firm? A) economic profit and normal profit B) implicit rental rate and economic profit C) explicit rental rate and economic costs D) economic depreciation and forgone interest Answer: D Topic: Implicit Rental Rate Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

14) Wanda takes $3,000 from her savings account that pays 5 percent interest per year and uses the funds to purchase a computer for $3,000 for her business. At the end of the year the computer is worth $2,000. Wanda pays an implicit rental rate of ________ a year. A) $1,150 B) $4,000 C) $3,150 D) zero Answer: A Topic: Implicit Rental Rate Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

15) Over a given period, economic depreciation is the change in capital equipment's A) output. B) market value. C) rate of return. D) cost of maintenance. Answer: B Topic: Economic Depreciation Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

16) Economic depreciation is the A) firm's opportunity cost of using its own capital. B) change in the market value of capital over a given period. C) return that an entrepreneur can expect to receive on average. D) forgone return on the funds used to buy capital. Answer: B Topic: Economic Depreciation Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

17) The difference between the market price of a new car used by a firm and the market price of the same car one year later is known as A) economic depreciation. B) physical depreciation. C) economic deterioration. D) physical deterioration. Answer: A Topic: Economic Depreciation Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

18) ________ is the change in market value of capital over a given period. A) Accounting depreciation B) Implicit rental rate C) Economic depreciation D) Accounting implicit rental cost Answer: C Topic: Economic Depreciation Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

19) Costs as measured by accountants generally does not include A) any of the opportunity costs of the firm. B) any measure of depreciation. C) the economic depreciation of the firm's equipment. D) any rental rates. Answer: C Topic: Economic Depreciation Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

20) Tudor's Deli and Catering could have sold their delivery van on December 31, 2010 for $16,000. If they could sell the same van on December 31, 2011, for $13,000, then the economic depreciation in 2011 for this van A) is $13,000. B) is $16,000. C) is $29,000. D) is $3,000. Answer: D Topic: Economic Depreciation Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

21) Flora's Flower Shop bought a new van for $23,000. Today, the market price of this van is $11,000. The economic depreciation of the van is ________. A) $23,000 B) $12,000 C) $11,000 D) $34,000 Answer: B Topic: Economic Depreciation Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

22) Suppose Pippi buys an oven for her pizza parlor for $100,000. Pippi's pizza tasted so pitiful she went out of business 12 months later. She was able to sell the pizza oven for $75,000. This decrease in the value of the oven is A) the total implicit rental rate on the oven. B) an economic loss. C) economic depreciation. D) interest forgone. Answer: C Topic: Economic Depreciation Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

23) The average return for supplying entrepreneurial ability is the entrepreneur's A) accounting profit. B) normal profit. C) explicit profit. D) economic profit. Answer: B Topic: Normal Profit Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

24) The return that an entrepreneur can expect to earn, on average, is called A) profit. B) normal profit. C) economic profit. D) accounting profit. Answer: B Topic: Normal Profit Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

25) Lucinda starts a business consulting company. She makes all the business decisions and bears the risk of running the business. The typical payment for Lucinda's work is ________. A) all the revenue greater than her opportunity cost B) all the revenue greater than the capital investment C) a normal profit D) an economic profit Answer: C Topic: Normal Profit Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

26) Which of the following statements does NOT correctly characterize normal profit? A) It is part of a firm's opportunity cost. B) It is equal to a firm's total revenue minus its opportunity cost. C) It is the average return for supplying entrepreneurial ability. D) None of the above because all the statements correctly characterize normal profit. Answer: B Topic: Normal Profit Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

27) A normal profit is A) the revenue remaining after all opportunity costs have been paid. B) the profit a firm makes each year. C) the average return for entrepreneurship. D) part of the implicit rental rate of capital. Answer: C Topic: Normal Profit Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

28) A normal profit for a self-employed entrepreneur is I. an opportunity cost. II. part of the implicit rental rate of the funds invested in the business. A) only I B) only II C) both I and II D) neither I nor II Answer: A Topic: Normal Profit Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

29) Economic profit is the difference between total revenue and A) the normal profit. B) interest costs of production. C) opportunity costs of production. D) the costs of resources bought in markets. Answer: C Topic: Economic Profit Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

30) Economic profit is A) equal to the firm's total revenue minus its opportunity costs. B) an opportunity cost of operating the firm. C) equal to the firm's total revenue minus its normal profit. D) the average return for supplying entrepreneurial ability. Answer: A Topic: Economic Profit Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

31) An economic profit for a self-employed entrepreneur is A) an opportunity cost. B) the same as the normal profit. C) a profit over and above opportunity cost. D) None of the above answers is correct. Answer: C Topic: Economic Profit Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

32) If economic profit is equal to zero, then A) the entrepreneur's profit as measured by accountants is also equal to zero. B) the entrepreneur's profit as measured by accountants must be less than zero. C) the entrepreneur is earning only a normal profit. D) The entrepreneur's profit cannot be determined based on the information given. Answer: C Topic: Economic Profit Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

33) Among the opportunity costs of a firm are all of the following EXCEPT A) the owner's forgone wage. B) costs of resources bought in markets, such as labor. C) normal profits. D) economic profits. Answer: D Topic: Economic Profit Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

34) Joe quits his job as an insurance agent and opens his own sporting goods store. If his profits as measured by his accountant are greater than zero, then A) he made a good move because he is earning above normal profits. B) his economic profit must be greater than zero. C) his opportunity costs must be zero. D) There is not enough information to determine his economic profit, if any. Answer: D Topic: Economic Profit Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

35) Sue owns a baking company. The company's total revenue for a month is $4000. The monthly costs of resources bought in the market and of resources owned by the firm are $2000 and monthly costs of resources supplied by the owner are $1000. Sue's economic profit for the month is equal to A) $4000. B) $3000. C) $2000. D) $1000. Answer: D Topic: Economic Profit Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

36) Ed is a freelance writer who could work for a newspaper at $25,000 a year but instead works for himself for $41,000 a year. His only business expenses are $1,000 for writing materials and $12,000 for rent. Ed's normal profit is $1,000. Ed's economic profit from working as a freelance writer is A) $1,000. B) $2,000. C) $15,000. D) $25,000. Answer: B Topic: Economic Profit Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

37) Heidi quit her job as a chef making $40,000 per year to start her own restaurant. The first year, Heidi's restaurant earned $100,000 in revenue. Heidi pays $50,000 per year in wages to the waitresses and hostess and $20,000 per year to buy food. What is Heidi's profit as measured by an accountant for the year? A) $80,000 B) $50,000 C) $30,000 D) -$10,000 Answer: C Topic: Accounting Profit Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

38) Heidi quit her job as a chef making $40,000 per year to start her own restaurant. The first year, Heidi's restaurant earned $100,000 in revenue. Heidi pays $50,000 per year in wages to the waitresses and hostess and $20,000 per year to buy food. What is Heidi's economic profit for the year? A) $80,000 B) $50,000 C) $30,000 D) -$10,000 Answer: D Topic: Economic Profit Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

39) Sheila's Sports Shop is a very popular sporting goods store, which has a yearly revenue of $600,000. Sheila runs the business herself. Her alternative employment options are to be a college swimming coach for $50,000 per year or a construction worker for $40,000 per year. Sheila spends $230,000 purchasing goods for resale to her customers. She also has four employees, who each earn $25,000 per year. Sheila owns the building that her Sports Shop is housed in and she could have rented it out for $20,000 per year. Sheila's costs for resources bought in the market equal A) $70,000 per year. B) $200,000 per year. C) $330,000 per year. D) $350,000 per year. Answer: C Topic: Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

40) Sheila's Sports Shop is a very popular sporting goods store, which has a yearly revenue of $600,000. Sheila runs the business herself. Her alternative employment options are to be a college swimming coach for $50,000 per year or a construction worker for $40,000 per year. Sheila spends $230,000 purchasing goods for resale to her customers. She also has four employees, who each earn $25,000 per year. Sheila owns the building that her Sports Shop is housed in and she could have rented it out for $20,000 per year. Sheila's costs for the resources that she supplies to the business equal A) $70,000 per year. B) $90,000 per year. C) $0 per year. D) $330,000 per year. Answer: A Topic: Opportunity Cost Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

41) Sheila's Sports Shop is a very popular sporting goods store, which has a yearly revenue of $600,000. Sheila runs the business herself. Her alternative employment options are to be a college swimming coach for $50,000 per year or a construction worker for $40,000 per year. Sheila spends $230,000 purchasing goods for resale to her customers. She also has four employees, who each earn $25,000 per year. Sheila owns the building that her Sports Shop is housed in and she could have rented it out for $20,000 per year. Sheila's economic profit is equal to A) $160,000 per year. B) $200,000 per year. C) $250,000 per year. D) $270,000 per year. Answer: B Topic: Economic Profit Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

42) Tara, a pharmacist, is planning on opening her own pharmacy. Tara currently earns $50,000 a year at her job. She has calculated that it will cost her $6,000 in rent and utilities and $25,000 for an assistant per year to run her pharmacy. What is the amount of opportunity cost that Tara incurs in running her own pharmacy? A) $31,000 B) $25,000 C) $50,000 D) $81,000 Answer: D Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

43) Greg, a landscaper, is planning on opening his own landscaping company. He currently earns $40,000 per year working for his uncle but he will need to quit that job. He plans to use $10,000 in savings to pay for the equipment he needs, though even after use he could sell the equipment for what he paid, $10,000. The current interest rate on savings is 5 percent. What is the total opportunity cost incurred by Greg in running his own business? A) $10,000 B) $40,500 C) $40,000 D) $50,000 Answer: B Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

44) Bud opened a flower shop. He rented a building for $9,000 a year. To buy equipment for the store, he withdrew $10,000 from his savings account, which earned an annual interest rate of 3 percent. During the first year of operation, Bud paid $4,000 for utilities and $12,000 to his suppliers. The store's total annual revenue was $55,000. The market value of the store's equipment at the end of the year was $8,000. If Bud had not started this business, he would have continued to work as an employee at another flower shop for $30,000 a year. What was Bud's opportunity cost of running his business? A) $57,300 B) $67,000 C) $67,300 D) $27,000 Answer: A Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

45) Bud opened a flower shop. He rented a building for $9,000 a year. To buy equipment for the store, he withdrew $10,000 from his savings account, which earned an annual interest rate of 3 percent. During the first year of operation, Bud paid $4,000 for utilities and $12,000 to his suppliers. The store's total annual revenue was $55,000. The market value of the store's equipment at the end of the year was $8,000. If Bud had not started this business, he would have continued to work as an employee at another flower shop for $30,000 a year. During the first year of operation, Bud A) received an economic profit of $30,000. B) received an economic profit of $20,000. C) incurred an economic loss of $2,300 D) incurred an economic loss of $12,300 Answer: C Topic: Economic Profit Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

46) Mr. Sweet opened a candy store. He rented a building for $30,000 a year. During the first year of operation, Sweet paid $40,000 to his employees, $10,000 for utilities, and $20,000 for goods he bought from other firms. His total revenue was $135,000. Sweet's best alternative to running this candy store is to work for Wal-Mart as a sales associate for $15,000 a year. What is Sweet's total opportunity cost? A) $15,000 B) $100,000 C) $135,000 D) $115,000 Answer: D Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

47) Mr. Sweet opened a candy store. He rented a building for $30,000 a year. During the first year of operation, Sweet paid $40,000 to his employees, $10,000 for utilities, and $20,000 for goods he bought from other firms. His total revenue was $135,000. Sweet's best alternative to running this candy store is to work for Wal-Mart as a sales associate for $15,000 a year. What is Sweet's economic profit? A) $20,000 B) -$20,000 C) zero D) $35,000 Answer: A Topic: Economic Profit Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

48) Which of the following constrain (that is, limit) a firm's profits? I. its technology II. its information III. the market in which it operates A) I only B) I and II C) II and III D) I, II and III Answer: D Topic: Constraints Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

49) Any method of producing a good or service is ________. It ________ the maximum profit that a firm can make. A) an information constraint; always increases B) a technology; always increases C) a technology; limits D) an information constraint; limits Answer: C Topic: Technology Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

50) A firm's market constraints include the conditions under which it can A) convert inputs into outputs. B) buy its inputs and sell its outputs. C) issue stock. D) produce the inputs to production. Answer: B Topic: Market Constraints Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

51) An economic profit is A) an opportunity cost of the company. B) a cost that is always measured by the accountant. C) the amount of profit an accountant calculates for a company. D) not the same as the company's normal profit. Answer: D Topic: Study Guide Question, Economic Profit Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

2 Technological and Economic Efficiency 1) Technological efficiency occurs when the firm produces a given output A) by using the least amount of inputs. B) by using the maximum amount of inputs. C) at the least cost. D) at the greatest cost. Answer: A Topic: Technological Efficiency Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

2) Technological efficiency necessarily means producing A) at minimum cost. B) with the highest level technology available. C) without using more inputs than necessary. D) technology itself. Answer: C Topic: Technological Efficiency Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

3) A firm has achieved technological efficiency whenever it has A) fully depreciated all its assets. B) produced the given output using the fewest inputs. C) produced the given output at the lowest cost. D) all of the above Answer: B Topic: Technological Efficiency Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

4) Emma owns a firm that produces umbrellas. Currently, Emma produces 2,500 umbrellas a day. Emma cannot produce more umbrellas in a day unless she purchases another machine or else hires more workers. Emma is ________ efficient. A) cost B) technologically C) economically D) capital and labor Answer: B Topic: Technological Efficiency Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

5) Which of the following is true? A) Technological efficiency occurs if the maximum feasible amount of output is achieved from a given quantity of inputs. B) Technological efficiency depends on the relative cost of the resources used in production. C) If production is technologically efficient, then it must be economically efficient. D) All of the above answers are correct. Answer: A Topic: Technological Efficiency Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

6) Which of the following is a correct statement? A) Economic efficiency definitely occurs when a firm cannot increase production without using more resources. B) Technological efficiency depends on the costs of resources while economic efficiency depends on only production methods. C) Technological efficiency depends only on production methods, while economic efficiency depends on the costs of resources. D) all of the above Answer: C Topic: Technological Efficiency Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

7) A company does not need to know the price of each resource it employs if it wants to determine whether or not it is achieving A) technological efficiency. B) economic efficiency. C) accounting efficiency. D) managerial efficiency. Answer: A Topic: Technological Efficiency Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

8) A firm uses labor and capital. To tell if the firm is technologically efficient, you A) do not need to know the cost of labor or the cost of capital. B) need to know the cost of capital but not the cost of labor. C) need to know the cost of labor and the cost of capital. D) need to know the cost of labor but not the cost of capital. Answer: A Topic: Technological Efficiency Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

9) Firm A can produce a unit of output with 10 hours of labor and 5 units of material. Firm B can produce a unit of output with 5 hours of labor and 10 units of material. Firm C can produce a unit of output with 10 hours of labor and 10 units of material. If the prices of labor and material are $10 per hour and $5 per unit, respectively, which of these firms is the most technologically efficient? A) firm A only B) firm B only C) firm C only D) Firms A and B could both be technologically efficient. Answer: D Topic: Technological Efficiency Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills 16 Copyright © 2014 Pearson Education, Inc.

10) The accountant for Muzhi's Sushi claims that Muzhi has accomplished "technological efficiency." This means that Muzhi's Sushi A) produces a given output using the least inputs. B) produces a given output at the lowest cost. C) has an economic profit greater than a normal profit. D) has a normal profit greater than an economic profit. Answer: A Topic: Technological Efficiency Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

11) When Acme Inc. produces a certain amount of output by using the least amount of inputs, Acme Inc. definitely A) maximizes profits. B) minimizes labor costs. C) achieves technological efficiency. D) achieves economic efficiency. Answer: C Topic: Technological Efficiency Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

12) When Acme, Inc. produces a certain amount of output at least cost, Acme, Inc. definitely A) achieves economic efficiency. B) uses more capital than labor. C) earns a normal profit. D) None of the above is true. Answer: A Topic: Economic Efficiency Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

13) Economic efficiency occurs when the firm produces a given output A) by using the least amount of inputs. B) by using the maximum amount of inputs. C) at the least cost. D) at the greatest cost. Answer: C Topic: Economic Efficiency Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

14) Economic efficiency necessarily occurs when the firm A) produces a given output at least cost. B) produces a given output by using the least inputs. C) earns a normal profit. D) earns an economic profit. Answer: A Topic: Economic Efficiency Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

15) Which of the following is true? A) Economic efficiency occurs if the maximum feasible amount of output is achieved from a given quantity of inputs. B) Economic efficiency depends only on what is feasible. C) If production is technologically efficient then it must be economically efficient. D) None of the above statements are correct. Answer: D Topic: Economic Efficiency Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

16) Economic efficiency definitely occurs whenever A) a firm cannot increase its output without increasing all its inputs. B) there are no implicit costs. C) the most modern technology is used in the production process. D) the firm produces a given output at the least cost. Answer: D Topic: Economic Efficiency Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

17) Which of the following statements is correct? A) Technological efficiency depends on the relative costs of resources. B) Economic efficiency occurs when the firm produces a given output at the least cost. C) A firm can be economically efficient without being technologically efficient. D) Economic efficiency depends only on production methods. Answer: B Topic: Economic Efficiency Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

18) A company needs to know the price of each resource it employs if it wants to determine whether or not it is achieving A) technological efficiency. B) economic efficiency. C) accounting efficiency. D) managerial efficiency. Answer: B Topic: Economic Efficiency Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

19) The accountant for Muzhi's Sushi claims that Muzhi has accomplished "economic efficiency." This means that Muzhi's Sushi A) produces a given output using the least inputs. B) produces a given output at the lowest cost. C) has an economic profit greater than a normal profit. D) has a normal profit greater than an economic profit. Answer: B Topic: Economic Efficiency Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

20) Firm A can produce a unit of output with 10 hours of labor and 5 units of material. Firm B can produce a unit of output with 5 hours of labor and 10 units of material. Firm C can produce a unit of output with 10 hours of labor and 10 units of material. If the prices of labor and material are $10 per hour and $5 per unit, respectively, which of these firms is economically efficient? A) firm A only B) firm B only C) firm C only D) Firms A and B could both be economically efficient. Answer: B Topic: Economic Efficiency Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

Techniques that produce 100 sweaters Labor Capital Technique (hours) (machines) A 10 35 B 25 25 C 10 60 D 30 20 21) In the above table, the technique that is not technologically efficient is A) A. B) B. C) C. D) D. Answer: C Topic: Technological Efficiency Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

22) In the above table, the technique that is never economically efficient is A) A. B) B. C) C. D) D. Answer: C Topic: Economic Efficiency Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

23) Using the data in the above table, if the price of an hour of labor is $10 and the price of a unit of capital is $20, then the most economically efficient technique for producing 100 sweaters is A) A. B) B. C) C. D) D. Answer: D Topic: Economic Efficiency Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

24) Using the data in the above table, if the price of an hour of labor is $20 and the price of a unit of capital is $10, then the most economically efficient technique for producing 100 sweaters is A) A. B) B. C) C. D) D. Answer: A Topic: Economic Efficiency Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

Technique A B C D

Number of workers 1 1 2 3

Units of capital 3 5 3 2

25) The table above shows four methods for producing 10 computer desks a day. Of the four methods, ________ technologically inefficient. A) B and C are B) B is C) D is D) A and B are Answer: A Topic: Technological Efficiency Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

26) The table above shows four methods for producing 10 computer desks a day. If the cost of a worker is $100 a day and the cost of capital is $100 a day, the method that is economically efficient is ________. A) C B) B C) B, C, or D D) A Answer: D Topic: Economic Efficiency Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

27) The table above shows four methods for producing 10 computer desks a day. If the cost of a worker is $50 a day and the cost of capital is $150 a day, ________ economically efficient . A) method A is B) method B is C) method D is D) method A or C is Answer: C Topic: Economic Efficiency Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

Technique W X Y Z

Capital (units) 25 35 25 45

Labor (units) 30 10 25 5

28) The table above shows techniques that can be used to produce 100 shirts. The technique that is NOT technologically efficient is A) W. B) X. C) Y. D) Z. Answer: A Topic: Technological Efficiency Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

29) The table above shows techniques that can be used to produce 100 shirts. If the price of an hour of labor is $6 and the price of a unit of capital is $30, then the economically efficient technique is A) W. B) X. C) Y. D) Z. Answer: C Topic: Economic Efficiency Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

30) The table above shows techniques that can be used to produce 100 shirts. If the price of an hour of labor is $10 and the price of a unit of capital is $12, then the economically efficient technique is A) W. B) X. C) Y. D) Z. Answer: B Topic: Economic Efficiency Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

31) The table above shows techniques that can be used to produce 100 shirts. If the price of an hour of labor is $20 and the price of a unit of capital is $8, then the economically efficient technique is A) W. B) X. C) Y. D) Z. Answer: D Topic: Economic Efficiency Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

Technique A B C D

Capital (units) 70 80 120 5

Labor (units) 20 60 20 180

32) The above table gives techniques Jitters Coffee Company can use to package 5,000 pounds of coffee. Which technique(s) is (are) technologically inefficient? A) A B) C C) B and C D) B, C, and D Answer: C Topic: Technological Efficiency Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

33) The above table gives techniques Jitters Coffee Company can use to package 5,000 pounds of coffee. If the cost of capital is $50 per unit and the cost of labor is $100 per unit, the economically efficient technique for packaging 5000 pounds of coffee is A) A. B) B. C) C. D) D. Answer: A Topic: Economic Efficiency Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

Technique A B C D

Capital (units) 110 90 80 75

Labor (units) 10 20 15 20

34) The above table gives techniques that Fatz Confectionery can use to produce 2,000 pounds of candy. Which technique is technology inefficient? A) A B) B C) C D) D Answer: B Topic: Technological Efficiency Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

35) The above table gives techniques that Fatz confectionery can use to produce 2,000 pounds of candy. If the cost of capital is $20 per unit and the cost of labor is $40 per unit, the economically efficient technique for producing 2000 pounds of candy is A) A. B) B. C) C. D) D. Answer: C Topic: Economic Efficiency Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

Production Information for Scully's Splendid Spacecrafts Technique to Units of capital Hours of labor produce 50 (thousands) (thousands) space crafts W 4 28 X 4 16 Y 8 4 Z 10 1 36) In the above table, which technique is technologically inefficient? A) Technique W B) Technique X C) Technique Y D) Technique Z Answer: A Topic: Technological Efficiency Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Analytical Skills

37) In the above table, if the price of labor is $10 per hour and the price of capital is $20 per unit, what is the total cost of Technique W? A) $80,000 B) $200,000 C) $280,000 D) $360,000 Answer: D Topic: Economic Efficiency Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

38) In the above table, if the price of labor is $10 per hour and the price of capital is $20 per unit, which method of producing 50 space crafts is economically efficient? A) Technique W B) Technique X C) Technique Y D) Technique Z Answer: C Topic: Economic Efficiency Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

Options 1 2 3 4

Techniques for making 100 pizzas Labor (workers) Capital (units) 23 2 10 5 8 5 5 10

39) Labor costs $20 per worker and capital costs $100 per unit. Then, according to the above table, which of the following options for pizza production is technologically efficient? A) Option 1 B) Option 2 C) Option 4 D) All of the above listed options are technologically efficient. Answer: D Topic: Technological Efficiency Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

40) Labor costs $20 per worker and capital costs $100 per unit. Then, according to the above table, which of the following options for pizza production is economically efficient? A) Option 1 B) Option 3 C) Option 4 D) Both options 1 and 3 are economically efficient. Answer: D Topic: Economic Efficiency Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

Techniques for making 100 automobiles Method Labor (workers) Capital (units) A 50 500 B 20 700 C 6 0400 41) The table above shows three production methods to produce 100 automobiles per day. Which of the three methods is technologically efficient? A) Method A only B) Method B only C) Method C only D) Method A, B and C are all technologically efficient. Answer: D Topic: Technological Efficiency Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Analytical Skills 26 Copyright © 2014 Pearson Education, Inc.

42) The table above shows three production methods to produce 100 automobiles per day. If the price of labor is $20 per unit and the price of capital is $100 per unit, which of the three methods is economically efficient? A) Method A only. B) Method B only. C) Method C only. D) All three methods are economically efficient. Answer: C Topic: Economic Efficiency Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Analytical Skills

Methods for making 2,000 CDs per day Method Capital (units) Labor (workers) A 12 200 B 20 80 C 70 10 D 30 85 43) In the table above, which method is NOT technologically efficient? A) A B) B C) C D) D Answer: D Topic: Technological Efficiency Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

44) In the table above, if a unit of capital is $50 per day and an hour of labor is $15 per day, which method is economically efficient? A) A B) B C) C D) D Answer: B Topic: Economic Efficiency Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

45) In the table above, if the cost of capital is $20 per day and an hour of labor is $15 per day, which method is economically efficient? A) A B) B C) C D) D Answer: C Topic: Economic Efficiency Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

Method T-1 T-2 T-3 T-4

Labor required (person-hours) 200 150 150 100

Capital required (machine-hours) 100 150 130 200

46) The table below shows four alternative techniques for assembling a car. The cost of labor is $20 per hour, and the cost of capital is $10 per hour. Which of the four techniques for assembling a car is not technologically efficient? A) T-1 B) T-2 C) T-3 D) T-4 Answer: B Topic: Technological Efficiency Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

47) The table below shows four alternative techniques for assembling a car. The cost of labor is $20 per hour, and the cost of capital is $10 per hour. Which of the four techniques for assembling a car is economically efficient? A) T-1 B) T-2 C) T-3 D) T-4 Answer: D Topic: Economic Efficiency Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

48) The table below shows four alternative techniques for assembling a car. Which of the four techniques for assembling a car cannot be economically efficient with any input prices ? A) T-1 B) T-2 C) T-3 D) T-4 Answer: B Topic: Economic Efficiency Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Analytical Skills

49) Which of the following is correct? A) If a firm is technologically efficient, it is always economically efficient. B) If a firm is technologically efficient, it is always producing at the lowest costs of production. C) If a firm is economically efficient, it is always technologically efficient. D) None of the above answers is correct. Answer: C Topic: Economic Efficiency Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

50) A firm that is maximizing its profit A) is economically efficient and technologically efficient. B) is economically efficient but might be technologically inefficient. C) is technologically efficient but might be economically inefficient. D) might be economically inefficient and/or technologically inefficient. Answer: A Topic: Technological and Economic Efficiency Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

51) A firm that is technologically efficient A) must be economically efficient, but a firm that is economically efficient is not always technologically efficient. B) must be economically efficient, and a firm that is economically efficient must always be technologically efficient. C) is not always economically efficient, and a firm that is economically efficient is not always technologically efficient. D) is not always economically efficient, but a firm that is economically efficient must always be technologically efficient. Answer: D Topic: Technological and Economic Efficiency Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

52) A method that is technologically inefficient A) might or might not be economically efficient. B) can never be economically efficient. C) results from failure to calculate the ratio of the cost of labor to the cost of capital. D) means that it uses too much labor and too little capital. Answer: B Topic: Technological and Economic Efficiency Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

53) Which of the following statements is true? I. A firm that is not economically efficient does not maximize profit. II. Economic efficiency depends on the relative costs of resources. III. A technological efficient firm is also economically efficient. A) I only B) II only C) II and III D) I and II Answer: D Topic: Technological and Economic Efficiency Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

54) If a firm chooses to produce 100 units of output for $150 with 10 units of labor and 12 units of capital, when they could produce the same 100 units for $120 with 10 units of labor and 8 units of capital, the firm is technologically ________ and economically ________. A) efficient; inefficient B) inefficient; efficient C) efficient; efficient. D) inefficient; inefficient Answer: D Topic: Technological and Economic Efficiency Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

3 Information and Organization 1) Firms organize production by using a mix of A) command and incentive systems. B) market and agency systems. C) command and market systems. D) incentive and agency systems. Answer: A Topic: Information and Organization Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking 30 Copyright © 2014 Pearson Education, Inc.

2) In order to maximize profits, firms organize their production using A) only a command system. B) only an incentive system. C) a combination of command and incentive systems. D) neither a command nor an incentive system. Answer: C Topic: Information and Organization Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

3) If worker output is not measurable in physical units, and employees are hard to monitor, it would be best to organize the firm using A) a command system. B) a monitoring system. C) an incentive system. D) None of the above answers is correct. Answer: C Topic: Information and Organization Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

4) A command system is a method of coordinating a firm's productive resources that uses A) government regulations. B) discipline and punishment. C) a managerial hierarchy. D) survival of the fittest. Answer: C Topic: Command Systems Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

5) A command system is a A) method of organizing production that uses a market-like mechanism inside the firm. B) method of organizing production that uses a managerial hierarchy. C) set of rules that induce an agent to act in the best interest of a principal. D) method of production that implements an assembly-line process. Answer: B Topic: Command Systems Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

6) A command system is a method of organizing production that A) uses a market-like mechanism inside the firm. B) relies on competitive markets. C) uses a managerial hierarchy. D) uses incentives most extensively. Answer: C Topic: Command Systems Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

7) An incentive system is a A) method of organizing production that uses a market-like mechanism inside the firm. B) method of organizing production that uses a managerial hierarchy. C) set of rules that induce an agent to act in the best interest of a principal. D) method of production that implements an assembly-line process. Answer: A Topic: Incentive Systems Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

8) When a firm links its employees' compensation to the performance of the firm, the firm is using A) an incentive system. B) a command system. C) a cooperative system. D) an agency system. Answer: A Topic: Incentive Systems Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

9) A golf club manufacturer pays its workers based on the number of sets of clubs they produce. This firm A) organizes production based on an incentive system. B) organizes production based on a command system. C) does not have any implicit costs. D) does not have explicit costs. Answer: A Topic: Incentive Systems Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

10) Which of the following statements is correct? A) Command systems are used only in the military. B) An incentive system is a method of organizing production that uses a market-like mechanism inside the firm. C) Selling organizations usually don't use incentive systems. D) A production line is a good example of how an incentive system works. Answer: B Topic: Incentive Systems Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

11) The principal-agent problem is the issue of inducing A) agents and principals to work hard. B) principals to act in the best interests of agents. C) agents to act in the best interests of principals. D) None of the above answers is correct. Answer: C Topic: The Principal-Agent Problem Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

12) An example of the principal-agent problem is when A) managers try to cope with employees that are inefficient. B) proprietors don't receive any money payment for their entrepreneurial skills. C) managers devise penalties that eliminate employee waste. D) managers devise incentives that encourage employees to act in the owner's behalf. Answer: D Topic: The Principal-Agent Problem Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

13) The principal-agent problem incentivizes management to A) find ways for managers to get people to buy stock in their company. B) devise compensation rules to induce principals to act in the best interest of agents. C) devise compensation rules to induce agents to act in the best interest of principals. D) find efficient agents who will negotiate fair compensation rules for a firm's principal managers. Answer: C Topic: The Principal-Agent Problem Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

14) A large part of the principal-agent problem stems from the desire of A) agents to work hard. B) agents to avoid working. C) principals to work hard. D) principals to avoid working. Answer: B Topic: The Principal-Agent Problem Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

15) The principal-agent problem refers to the fact that firms must A) choose between economic efficiency and technological efficiency. B) choose between a managerial and an incentive system. C) devise incentives to get employees to work in the best interest of the firm's owners. D) choose between operating as a partnership or corporation. Answer: C Topic: The Principal-Agent Problem Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

16) A principal-agent problem occurs when hiring workers to work for a firm because A) workers' interests are not always the same as the interests of the owners of the firm. B) workers do not respond to incentives. C) the owners of a firm are always in a position to exploit the workers. D) workers' interests are not important in the managerial decisions of the firm. Answer: A Topic: Principal-Agent Problem Skill: Recognition Status: New 10th edition AACSB: Reflective Thinking

17) Bill is working as the only employee at a local store. The relation between Bill and the owner of the store is such that Bill is ________ and the owner is ________ . A) the agent; the principal B) both principal and agent; neither a principal nor an agent C) neither a principal nor an agent; both principal and agent D) the principal; the agent Answer: A Topic: Principal-Agent Problem Skill: Recognition Status: New 10th edition AACSB: Reflective Thinking

18) The principal-agent problem suggests that A) principals and agents always have the same goals. B) principals and agents will never have the same goals. C) principals and agents are more likely to have the same goals if the principal gives the agent flexibility to make his own decisions. D) principals and agents are more likely to have the same goals if the agent's pay is tied to satisfying the principal's goals. Answer: D Topic: The Principal-Agent Problem Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

19) When bank tellers converse with each other, keeping customers waiting in line, they are A) unemployed. B) out of the labor force. C) working in the best interest of the agent. D) working in the best interest of the principals. Answer: C Topic: The Principal-Agent Problem Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

20) A baseball player who has signed a long-term contract with his club and then constantly says he is injured and cannot play is an example of ________. A) the principal-agent problem B) marginal returns to work C) the law of diminishing returns D) inefficient hiring practices Answer: A Topic: The Principal-Agent Problem Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

21) In their relationship with stockholders, a firm's managers act A) as agents. B) as principals. C) in loco parentis. D) as proprietors. Answer: A Topic: The Principal-Agent Problem Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

22) A manager in a corporation is likely to be A) both a principal and an agent. B) neither a principal nor an agent. C) an agent but not a principal. D) a principal but not an agent. Answer: A Topic: The Principal-Agent Problem Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

23) In the principal-agent relationship between a bank manager and a bank teller, the manager is A) an agent, as is the teller. B) an agent and the teller is a principal. C) a principal and the teller is an agent. D) a principal, as is the teller. Answer: C Topic: The Principal-Agent Problem Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

24) Which of the following statements regarding principal-agent relations is correct? A) Workers are principals for managers. B) Stockholders are agents. C) Managers are both principals and agents. D) All of the above answers are correct. Answer: C Topic: The Principal-Agent Problem Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

25) Which of the following correctly characterize principals and agents in important examples of the principal-agent problem? A) In the doctor/patient relationship, the patient is the principal and the doctor is the agent. B) In the lawyer/client relationship, the client is the principal and the lawyer is the agent. C) Both of the above answers are correct. D) Neither of the above answers is correct. Answer: C Topic: The Principal-Agent Problem Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

26) In a corporation, the managers are the stockholders' A) principals. B) agents. C) level coordinators. D) incentive system. Answer: B Topic: The Principal-Agent Problem Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

27) In a corporation, the stockholders are the A) principals. B) agents. C) level coordinators. D) entrepreneurs. Answer: A Topic: The Principal-Agent Problem Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

28) You have just been named President and Chief Executive Officer at the StrideRite Shoe Corporation. This appointment places you in the role of ________ to lower managers and ________ to the stockholders. A) principal; principal B) principal; agent C) agent; principal D) agent; agent Answer: B Topic: The Principal-Agent Problem Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

29) You have just purchased 100 shares of the stock of Microsoft Corporation. This places you in the role of A) principal. B) incentive system operator. C) agent. D) long-term contractor. Answer: A Topic: The Principal-Agent Problem Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

30) Which of the following forms of business organization is likely to suffer most from the principal agent problem between the owners and managers of the business? A) proprietorships B) partnerships C) corporations D) All are equally likely to suffer from the principal-agent problem. Answer: C Topic: The Principal-Agent Problem Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

31) Which of the following compensation schemes can be explained as an attempt to solve a principalagent problem? A) Real estate agents are paid on a strict commission basis; if they don't sell a client's listed property they don't get paid. B) Personal injury lawyers often work on a contingency basis. If the lawyer wins the case they receive a significant share of the award; if the lawyer doesn't win the case the lawyer doesn't get paid. C) Traveling sales people, who are costly and difficult to monitor, generally receive a significant share of their compensation in the form of commissions or bonuses for meeting sales targets. D) All of the above compensation schemes attempt to solve a principal-agent problem. Answer: D Topic: The Principal-Agent Problem, Solutions Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

32) By making most of its employees owners of the company, United Airlines attempted to A) cope with the unlimited liability problem. B) change its business organization from a corporation to a partnership. C) address the principal-agent problem between the workers and managers. D) increase the role of the command system in managing the firm. Answer: C Topic: The Principal-Agent Problem, Solutions Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

33) Mr. Adams owns a textile business. In order to deal with the principal-agent problem, Mr. Adams might offer his employees A) incentive pay. B) long-term contracts. C) part- ownership. D) all of the above. Answer: D Topic: The Principal-Agent Problem, Solutions Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

34) Which of the following is NOT a solution to a principal-agent problem? A) ownership B) managerial hierarchy C) incentive pay D) long-term contracts Answer: B Topic: Principal-Agent Problem Skill: Conceptual Status: New A-level heading: Information and Organization AACSB: Reflective Thinking

35) Giving managers an ownership stake in a company is an example of A) a command system. B) an incentive system. C) a system that encourages managers to become agents that monitor their principals. D) economies of scope. Answer: B Topic: The Principal-Agent Problem, Ownership Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

36) Corporations that offer incentive pay schemes that link pay to meeting profit, production, or sales targets are doing so to cope with the A) scarcity problem. B) inefficiencies usually found in large firms. C) principal-agent problem. D) problems of unionization. Answer: C Topic: The Principal-Agent Problem, Incentive Pay Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

37) One of the ways of coping with the principal-agent problem is A) giving orders. B) providing incentive pay. C) shirking. D) using only short-term contracts. Answer: B Topic: The Principal-Agent Problem, Incentive Pay Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

38) A chief reason firms give employees bonuses based on the firm's profit is to cope with A) the tax laws. B) the law of diminishing returns. C) the principal-agent problem. D) unions. Answer: C Topic: The Principal-Agent Problem, Incentive Pay Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

39) Gilda's Art Gallery rewards its employees with stock each year the gallery makes profits. This stock allows the employees to own part of the gallery. This practice is known as A) the principle-agent problem. B) incentive pay. C) minimizing implicit costs. D) minimizing explicit costs. Answer: B Topic: The Principal-Agent Problem, Incentive Pay Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

40) Gilda's Art Gallery pays a commission to her sales people when they sell a painting. This practice is known as A) the principal-agent problem. B) incentive pay. C) minimizing implicit costs. D) minimizing explicit costs. Answer: B Topic: The Principal-Agent Problem, Incentive Pay Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

41) A chief purpose of long-term contracts is to improve agents' A) information. B) incentives. C) control over principals. D) security. Answer: B Topic: The Principal-Agent Problem, Long-Term Contracts Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

42) Proprietorships, partnerships, and corporations are the primary forms of A) industries. B) business organization. C) principal-agent relationships. D) command-incentive relationships. Answer: B Topic: Types of Business Organization Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

43) Which of the following are characteristics of a proprietorship? I. Single owner II. Limited liability A) I only B) II only C) both I and II D) neither I nor II Answer: A Topic: Proprietorship Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

44) A proprietorship is a firm with A) two or more owners who both have unlimited liability. B) a single owner who has limited liability. C) a single owner who has unlimited liability. D) many owner all of whom have limited liability. Answer: C Topic: Proprietorship Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

45) The main disadvantage to organizing a business as a proprietorship is A) its complex management structure. B) limited liability. C) unlimited liability. D) that economic profit cannot be maximized. Answer: C Topic: Proprietorship Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

46) The owner of a proprietorship has ________ liability and ________ required to use all of his or her entire wealth to pay for the firm's losses. A) limited; might be B) limited; is not C) unlimited; might be D) unlimited; is not Answer: C Topic: Proprietorship Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

47) The legal responsibility for losses incurred by a proprietorship falls upon the A) stockholders. B) partners. C) owner. D) creditors. Answer: C Topic: Proprietorship Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

48) A major disadvantage of a proprietorship is that the ________. A) owner's entire wealth is at risk B) profits are taxed twice C) firm has perpetual life D) owner has limited liability Answer: A Topic: Proprietorship Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

49) The profits of a proprietorship are A) taxed at the same rate as the owner's other personal income. B) subject to a corporate tax. C) taxed as capital gains indexed for inflation. D) exempt from taxation. Answer: A Topic: Proprietorship Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

50) Owners of ________ have unlimited liability. A) partnerships and corporations B) corporations C) proprietorships and partnerships D) partnerships, proprietorships, and corporations Answer: C Topic: Proprietorship and Partnership Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

51) A firm with two or more owners who have unlimited liability is known as A) a partnership. B) a proprietorship. C) a corporation. D) an establishment. Answer: A Topic: Partnership Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

52) As owner of a one-third share of a partnership, Josh is legally liable for A) none of its debts. B) one-third of its debts. C) all of its debts. D) all of its taxes but none of its private debt. Answer: C Topic: Partnership Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

53) Fatz Confectionery is a candy company that operates at the risk of unlimited liability for its many owner in case, for instance, all of its former employees win a class action lawsuit because of "sugar-lung" developed over decades of working there. Thus Fatz is a A) proprietorship. B) partnership. C) either of the above D) neither of the above Answer: B Topic: Proprietorship and Partnership Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

54) Smith's Shoes is a failed business enterprise, with debts of $10 million. Steve Smith has an ownership stake in Smith's shoes. Which of the following statements INCORRECTLY characterizes Steve Smith's legal liability for the debts of Smith's Shoes, depending on the firm's type of business organization? A) If Smith's Shoes is a proprietorship, then Steve Smith is fully liable for the entire $10 million in debt of the failed shoe store. B) If Steve Smith is a partner in Smith's Shoes, then his legal liability for the debts of Smith Shoes is $10 million divided by the number of partners. C) If Smith's Shoes is a corporation in which Steve Smith is a stockholder, then Steve Smith does not need to use any of his wealth to pay the debt because the company has limited liability. D) None of the above statements is incorrect. Answer: B Topic: Partnership Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

55) The profits of a partnership are A) taxed as personal income. B) subject to a corporate tax. C) taxed as capital gains indexed for inflation. D) exempt from taxation. Answer: A Topic: Partnership Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

56) An advantage of a partnership over a corporation is that A) a partnership's profits are taxed only once, while retained profits of a corporation are taxed twice. B) a partnership's owners usually have limited liability, while the entire wealth of owners of a corporation is at risk. C) a partnership has a perpetual life, while a corporation dies with its owners. D) a partnership's cost of capital is low relative to that of a corporation. Answer: A Topic: Partnership Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

57) A corporation is a firm owned by A) two or more owners who have unlimited liability. B) a single owner who has unlimited liability. C) at least 20 stockholders who have partially limited liability. D) stockholders who have limited liability. Answer: D Topic: Corporation Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

58) Which types of firms have limited liability? A) corporations B) corporations and partnerships C) partnerships D) proprietorships Answer: A Topic: Corporation Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

59) An advantage of the corporate form of organization is that A) the management structure is usually simple. B) owners have limited liability. C) owners have unlimited liability. D) a corporation cannot go bankrupt. Answer: B Topic: Corporation Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

60) A firm that has limited liability is classified as a A) proprietorship. B) partnership. C) partnership or proprietorship. D) corporation. Answer: D Topic: Corporation Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

61) Owners of a proprietorship have ________ liability and stockholders in a corporation have ________. A) limited; limited B) limited; unlimited C) unlimited; unlimited D) unlimited; limited Answer: D Topic: Corporation Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

62) Which of the following types of business organization have limited liability? I. proprietorship II. partnership III. corporation A) I, II only B) II, III only C) III only D) I, II, III Answer: C Topic: Corporation Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

63) Which of the following businesses have limited liability? A) Mainline Texaco, a gas station downtown with Frank Jones as proprietorship. B) Fakker, Chayse, and Blaimm, partners in medical malpractice law. C) StrideRite Shoe Company, Inc., a corporation that produces shoes. D) Both answers B and C are correct. Answer: C Topic: Corporation Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

64) Paul and Wayne are starting a consulting firm together. Their liability is limited; therefore, their firm is an example of a A) partnership. B) proprietorship. C) corporation. D) None of the above answers is correct. Answer: C Topic: Corporation Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

65) The limited liability enjoyed by Jitters Coffee Company Corporation is a benefit that protects A) its employees. B) its Board of Directors. C) its stockholders. D) all of the above Answer: C Topic: Corporation Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

66) Last Tuesday you purchased 100 shares of Jitters Coffee Company, a corporation, for $25.00 per share. Unfortunately, the company went bankrupt later that same day. If the company still owed $1 million in debts after all assets have been liquidated and there are 1 million stockholders, what would be your personal loss from the remaining debt? A) $0 B) $1.00 C) $100.00 D) $1 million Answer: A Topic: Corporation Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

67) An advantage of the corporate form of organization is that A) owners have joint unlimited liability. B) owners have limited liability. C) owners have individual unlimited liability. D) creditors have unlimited liability. Answer: B Topic: Corporation Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

68) The stockholders of a corporation have ________ liability and ________ required to pay all of the firm's losses. A) limited; are B) limited; are not C) unlimited; are D) unlimited; are not Answer: B Topic: Corporation Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

69) The owner of a proprietorship might decide incorporate the firm as a corporation in order to A) be able to conduct business in more than one county. B) avoid the principal-agent problem. C) be eligible for patent protection of new products. D) gain limited liability. Answer: D Topic: Corporation Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

70) An advantage of the corporation over other forms of business organization is that A) the owners have unlimited liability. B) a corporation's profits are taxed only once. C) large-scale, low-cost capital is more readily available. D) the decision-making structure is simple. Answer: C Topic: Corporation Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

71) Which of the following about corporations is true? A) The cost of capital and labor is high relative to that paid by a proprietorship. B) Profits are taxed only once as the owners' income. C) The owners' entire wealth is at risk. D) Corporations' profits are taxed independently of their owners' incomes. Answer: D Topic: Corporation Skill: Conceptual Status: New A-level heading: Information and Organization AACSB: Reflective Thinking

72) A corporation ________ taxes on its profits and its stockholders ________ taxes on any dividends made to them by the company. A) pays; pay B) pays; do not pay C) does not pay; pay D) does not pay; do not pay Answer: A Topic: Corporation Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

73) Unlimited liability is NOT a characteristic of A) corporations. B) partnerships. C) proprietorships. D) the market economy today. Answer: A Topic: Corporation Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

74) Where large amounts of capital are used, the dominant form of business organization is the A) corporation. B) partnership. C) proprietorship. D) partnership in manufacturing and the corporation in finance. Answer: A Topic: Corporation Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

75) Greg and Todd form a partnership and start a business in which each has a 50 percent share of the profit. After a year, the firm goes bankrupt and has debts of $20,000. Greg has no money, but Todd has $25,000 in the bank. Todd must pay ________ of debt. A) $0 because in a partnership each partner must pay the same B) $0 because partners in a partnership have limited liability C) half, or $10,000 D) $20,000 Answer: D Topic: Partnership Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

76) Martha and Wendy start a cookie shop and the business is organized as a corporation. Because of poor planning the business goes bankrupt and the corporation's debt is $30,000. Martha has $30,000 in savings and Wendy has $80,000 in savings. Martha must pay ________ of the debt and Wendy must pay ________ of the debt. A) $0; $0 B) $15,000; $15,000 C) $0; $30,000 D) None of the above answers is correct because each must pay but the amount each must pay cannot be determined without more information about who managed the company. Answer: A Topic: Corporation Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

77) Compared to corporations, businesses that are proprietorships A) are far more numerous. B) account for a larger percentage of the economy's total revenue each year. C) can raise capital more cheaply. D) All of the above are correct answers. Answer: A Topic: Relative Importance of Different Types of Firms Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

78) The type of firm that is most numerous is the A) proprietorship. B) corporation. C) partnership. D) multinational. Answer: A Topic: Relative Importance of Different Types of Firms Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

79) The manufacturing sector is dominated by A) corporations. B) partnerships. C) proprietorships. D) government firms. Answer: A Topic: Relative Importance of Different Types of Firms Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

80) The vast majority of all business sales are accounted for by A) partnerships. B) proprietorships. C) corporations. D) nonprofit organizations. Answer: C Topic: Relative Importance of Different Types of Firms Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

81) ________ account for the largest portion of all firms; ________ account for most of the total revenue received by businesses. A) Proprietorships; partnerships B) Proprietorships; corporations C) Partnerships; corporations D) Corporations; proprietorships Answer: B Topic: Relative Importance of Different Types of Firms Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

82) Which type of firm produces the largest share of manufacturing output? A) proprietorships only B) partnerships only C) corporations only D) Proprietorships and corporations are tied. Answer: C Topic: Study Guide Question, Relative Importance of Different Types of Firms Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

83) Which of the following firms has unlimited liability? A) only proprietorships B) only partnerships C) only corporations D) both proprietorships and partnerships Answer: D Topic: Study Guide Question, Proprietorship and Partnership Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

84) Suppose that Tracy and Pat start a business. Because of a series of bad decisions by Tracy, the company goes bankrupt, owing a total of $50,000. Tracy is penniless and Pat is a millionaire. If the company were organized as a partnership, Pat would be responsible for A) over $1 million of debt. B) $50,000 of debt. C) $25,000 of debt. D) $0 of debt. Answer: B Topic: Study Guide Question, Partnership Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

85) What is the major advantage of the corporate form of business organization? A) Its owners have limited liability. B) Its owners have unlimited liability. C) Its profits are not taxed. D) Its profits are taxed twice. Answer: A Topic: Study Guide Question, Corporation Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

86) A form of business whose profits are taxed twice is A) a proprietorship. B) a partnership. C) a corporation. D) either a proprietorship or a partnership, depending on other information. Answer: C Topic: Study Guide Question, Corporation Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

4 Markets and the Competitive Environment 1) Which of the following are types of economic markets? I. perfectly competitive II. oligopoly III. monopoly IV. multilateral A) I and II B) II and III C) I and IV D) I, II and III Answer: D Topic: Markets Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

2) A market structure in which many firms are selling an identical product is called A) perfect competition. B) monopolistic competition. C) oligopoly. D) monopoly. Answer: A Topic: Market Structure, Perfect Competition Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

3) A market with the characteristics of many firms selling an identical product, many buyers, and no restrictions on entry or exit to the market is A) a monopoly market. B) an oligopolistic market. C) a perfectly competitive market. D) a monopolistically competitive market. Answer: C Topic: Market Structure, Perfect Competition Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking 52 Copyright © 2014 Pearson Education, Inc.

4) The market for wheat is an example of A) a monopoly market. B) an oligopolistic market. C) a perfectly competitive market. D) a monopolistically competitive market. Answer: C Topic: Market Structure, Perfect Competition Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

5) Under ________ there are many firms selling identical products. A) perfect competition B) monopolistic competition C) oligopoly D) monopoly Answer: A Topic: Market Structure, Perfect Competition Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

6) Which of the following pairs of market types are both characterized by having a large number of firms? A) monopoly and oligopoly B) monopoly and monopolistic competition C) perfect competition and oligopoly D) perfect competition and monopolistic competition Answer: D Topic: Market Structure, Perfect & Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

7) Under ________, there are many firms selling slightly different products. A) perfect competition B) monopolistic competition C) oligopoly D) monopoly Answer: B Topic: Market Structure, Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

8) In a market where firms are successful in convincing their customers that their product is different from their competitors' product but otherwise have no barriers to entry would be best characterized by A) monopolistic competition. B) a monopoly. C) perfect competition. D) an oligopoly market. Answer: A Topic: Monopolistic Competition Skill: Recognition Status: New 10th edition AACSB: Reflective Thinking

9) Which market type has characteristics as follows: large number of firms, differentiated product? A) perfect competition B) monopolistic competition C) oligopoly D) monopoly Answer: B Topic: Market Structure, Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

10) A market structure in which many firms compete by making similar but slightly different products is called A) perfect competition. B) monopolistic competition. C) oligopoly. D) monopoly. Answer: B Topic: Market Structure, Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

11) In a given market, a large number of firms sell a similar product. Consumers think that each firm's product is somewhat different from that of its competitors. This market is A) perfectly competitive. B) monopolistically competitive. C) equivalent to a monopoly because consumers think the products are different. D) equivalent to an oligopoly because consumers think the products are different. Answer: B Topic: Market Structure, Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

12) The market structure in which a large number of firms compete by making similar but slightly different products is called A) monopoly. B) monopolistic competition. C) perfect competition. D) oligopoly. Answer: B Topic: Market Structure, Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

13) In monopolistic competition, there are ________. A) many firms selling products for which no good substitutes exist B) many firms selling similar but slightly different products C) many firms, each selling an identical product D) a small number of firms, each selling an identical product Answer: B Topic: Market Structure, Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

14) A market structure in which a small number of firms compete is called A) perfect competition. B) monopolistic competition. C) oligopoly. D) monopoly. Answer: C Topic: Market Structure, Oligopoly Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

15) Under oligopoly, there are ________ firms selling products that are ________. A) many; either identical or different B) a few; either identical or different C) many; different D) a few; identical Answer: B Topic: Market Structure, Oligopoly Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

16) Coca Cola and Pepsi, which together account for about 85 percent of the soft drink market, are best described as being in A) a monopoly market. B) an oligopolistic market. C) a perfectly competitive market. D) a monopolistically competitive market. Answer: B Topic: Market Structure, Oligopoly Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

17) The air travel market, which is dominated by a few large firms, is an example of A) a monopoly market. B) an oligopolistic market. C) a perfectly competitive market. D) a monopolistically competitive market. Answer: B Topic: Market Structure, Oligopoly Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

18) A market structure in which one firm produces a good or service that has no close substitutes is called A) perfect competition. B) monopolistic competition. C) oligopoly. D) monopoly. Answer: D Topic: Market Structure, Monopoly Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

19) Which market type has characteristics as follows: one firm, good or service produced has no close substitutes, barriers to entry prevent new firms from entering into the industry? A) perfect competition B) monopolistic competition C) oligopoly D) monopoly Answer: D Topic: Market Structure, Monopoly Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

20) Kansas Power and Light, the only supplier of electricity in Kansas, is an example of a firm in what type of market? A) a monopoly market B) an oligopolistic market C) a perfectly competitive market D) a monopolistically competitive market Answer: A Topic: Market Structure, Monopoly Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

21) The correct ranking of the four basic market structures from low (Herfindahl-Hirschaman Index) HHI to high HHI is A) perfect competition, oligopoly, monopolistic competition, monopoly. B) monopoly, oligopoly, monopolistic competition, perfect competition. C) perfect competition, monopolistic competition, oligopoly, monopoly. D) monopoly, monopolistic competition, oligopoly, perfect competition. Answer: C Topic: Market Structure Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

22) Industry concentration measures the extent to which A) products are differentiated by the firms in the industry. B) the market is dominated by a small number of firms. C) the industry executives concentrate on their product. D) consumers are geographically concentrated. Answer: B Topic: Measures of Concentration Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

23) A low concentration ratio suggests A) a high degree of monopolization. B) a high degree of competition. C) that wages are a low share of costs. D) that wages are a high share of costs. Answer: B Topic: Measures of Concentration Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

24) For monopoly A) the four-firm concentration ratio is 100. B) the Herfindahl-Hirschman Index is 10,000. C) there is only one firm in the industry. D) All of the above answers are correct. Answer: D Topic: Measures of Concentration Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

25) The four-firm concentration ratio equals the percentage of the value of ________ accounted for by the four ________ firms in the industry. A) sales; smallest B) profits; smallest C) sales; largest D) profits; largest Answer: C Topic: The Four-Firm Concentration Ratio Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

26) Which of the following statements pertains to the four-firm concentration ratio? I. It is the percentage of the value of sales accounted for by the four largest firms in an industry. II. A high concentration ratio is indicative of a high degree of competition. III. The ratio is used to measure product differentiation. A) I only B) I, II only C) I, III only D) I, II, and III Answer: A Topic: The Four-Firm Concentration Ratio Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

27) The four-firm concentration ratio is the percentage of the ________ accounted for by ________ in an industry. A) normal profit; any four firms B) value of sales; the four largest firms C) economic profit; any four firms D) economic profit; the four largest firms Answer: B Topic: The Four-Firm Concentration Ratio Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

28) The four-firm concentration ratio measures A) profitability. B) economic efficiency. C) technological efficiency. D) competitiveness. Answer: D Topic: The Four-Firm Concentration Ratio Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

29) A high four-firm concentration ratio implies A) an absence of product differentiation. B) a presence of product differentiation. C) an absence of competition. D) a presence of competition. Answer: C Topic: The Four-Firm Concentration Ratio Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

30) If the four-firm concentration ratio is a very small number, then A) there is a high degree of competition in the market. B) there is no competition in the market. C) the market must be dominated by a few firms. D) the market is not perfectly competitive. Answer: A Topic: Four-Firm Concentration Ratio Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

31) Suppose the four-firm concentration ratio for an industry is 10 percent. This value indicates ________. If the four-firm concentration ratio for another industry is 95 percent, this value indicates ________. A) the industry is competitive; the industry has very little competition B) the industry has very little competition; the industry is very competitive C) the industry has firms worldwide; the industry is concentrated in one country D) the HHI will be high; the HHI will be low Answer: A Topic: The Four-Firm Concentration Ratio Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

32) If an industry is monopolized by one firm, the four-firm concentration ratio equals A) 1 percent. B) 25 percent. C) 40 percent. D) 100 percent. Answer: D Topic: The Four-Firm Concentration Ratio Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

33) If an industry has a four-firm concentration ratio equal to one hundred percent, then it is definitely the case that the industry is A) a monopoly. B) perfectly competitive. C) monopolistically competitive. D) either a monopoly or an oligopoly. Answer: D Topic: The Four-Firm Concentration Ratio Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

34) If the four-firm concentration ratio for an industry equals 100 percent, then definitely A) the Herfindahl-Hirschman Index (HHI) equals 10,000. B) the industry is a monopoly. C) a small number of firms are in the industry. D) there are no barriers to entry into the industry. Answer: C Topic: The Four-Firm Concentration Ratio Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

35) If 10 firms share the sales of the market equally, the four-firm concentration ratio is ________ percent. A) 100 B) 40 C) 10 D) 5 Answer: B Topic: The Four-Firm Concentration Ratio Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

36) There are 6 firms in a market and the market shares of the firms are 40 percent, 30 percent, 10 percent, 8 percent, 7 percent, and 5 percent. The four-firm concentration ratio is equal to A) 2738. B) 2664. C) 100. D) 88. Answer: D Topic: Four-Firm Concentration Ratio Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

Firm Will's Wendy's Wallace's Willima's Other 100 firms

Widgets Sales 300 250 200 150 900

Firm Gail's Gary's Gina's George's Other 100 firms

Gadgets Sales 400 300 200 100 1500

Firm Bill's Brenda's Boyd's Bertha's Other 100 firms

Blodgets Sales 200 150 150 100 400

37) In the above table, what is the four-firm concentration ratio for the Gadgets industry? A) 25 percent B) 40 percent C) 250 percent D) 1,000 percent Answer: B Topic: Four-Firm Concentration Ratio Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

38) In the above table, based on the four-firm concentration ration, which industry is the most concentrated? A) Widgets B) Gadgets C) Blodgets D) All three industries are equally concentrated. Answer: C Topic: Four-Firm Concentration Ratio Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

Firm Susan's Stitches Tommy's Threads Robert's Wardrobe Katie's Klothes Greg's Garments Amy's Attire

Market share (percentage of sales) 40 25 10 10 10 5

39) The table above gives the market share of sales of firms in the retail clothing market. What is the fourfirm concentration ratio? A) 70 percent B) 100 percent C) 85 percent D) 65 percent Answer: C Topic: The Four-Firm Concentration Ratio Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

40) If an industry were perfectly competitive, the four-firm concentration ratio would be close to ________ and the Herfindahl-Hirschman index would be close to ________. A) 0; 0 B) 0; 100 C) 100; 0. D) 100; 100. Answer: A Topic: Four-Firm Concentration Ratio & Herfindahl-Hirschman Index Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Analytical Skills

41) Which of the following statements about the Herfindahl-Hirschman Index is correct? I. It is the square of the percentage market share of each firm summed over the largest 50 firms (or summed over all the firms if there are fewer than 50) in a market. II. A small index is indicative of a high degree of competition. III. The index is used to measure the degree of competition. A) I only B) I, II only C) I, III only D) I, II, and III Answer: D Topic: The Herfindahl-Hirschman Index Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

42) The ________ the Herfindahl-Hirschman Index (HHI), the ________ the industry. A) higher; less competitive B) lower; less competitive C) higher; more firms in D) lower; more profitable Answer: A Topic: The Herfindahl-Hirschman Index Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

43) The Herfindahl-Hirschman Index measures an industry's concentration of A) employment. B) sales. C) profits. D) productive capital. Answer: B Topic: The Herfindahl-Hirschman Index Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

44) If an industry's Herfindahl-Hirschman Index is less than 1, the industry is likely to be A) competitive. B) an oligopoly. C) a monopoly. D) technologically inefficient. Answer: A Topic: The Herfindahl-Hirschman Index Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

45) The Herfindahl-Hirschman Index is definitely larger in a ________ market than in a ________ market. A) monopoly; perfectly competitive B) monopolistic competitive; monopoly C) perfectly competitive; monopoly D) perfectly competitive; monopolistic competitive Answer: A Topic: The Herfindahl-Hirschman Index Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

46) Which of the following indicates a high degree of competition? A) A HHI that is between 1,800 and 2,800. B) A HHI that exceeds 2,800. C) A concentration ratio that is less than 40 percent. D) A concentration that is greater than 60 percent . Answer: C Topic: Measures of Concentration Skill: Conceptual Status: New A-level heading: Market s and the Competitive Environment AACSB: Reflective Thinking

47) If more firms enter a market that initially had 20 firms in it, then the Herfindahl-Hirschman Index will ________. A) increase B) decrease C) not change D) change in an unpredictable direction Answer: A Topic: The Four-Firm Concentration Ratio Skill: Analytical Status: New 10th edition AACSB: Analytical Skills

48) The minimum value of the Herfindahl-Hirschman Index is A) -100. B) -1. C) approximately 0. D) 1. Answer: C Topic: The Herfindahl-Hirschman Index Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

49) The maximum value that the Herfindahl-Hirschman Index can attain is A) 1. B) 10. C) 100. D) 10,000. Answer: D Topic: The Herfindahl-Hirschman Index Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

50) The Herfindahl-Hirschman Index for a monopoly is A) 1. B) 100. C) 10,000. D) undefined. Answer: C Topic: The Herfindahl-Hirschman Index Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

51) If a market is shared equally by four firms, the Herfindahl-Hirschman Index is A) 1/4. B) 4. C) 25. D) 2,500. Answer: D Topic: The Herfindahl-Hirschman Index Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

52) If a market is shared equally by 100 firms, the Herfindahl-Hirschman Index is A) 1/100. B) 1/50. C) 50. D) 100. Answer: D Topic: The Herfindahl-Hirschman Index Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

53) In an oligopoly with two firms, one firm's share of the market is 70 percent. The HerfindahlHirschman Index is ________. A) 4,900 B) 0.7 C) 5,800 D) 100 Answer: C Topic: The Herfindahl-Hirschman Index Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

54) If a market is shared equally by 200 firms the Herfindahl-Hirschman Index is A) 12.5. B) 25. C) 50. D) 200. Answer: C Topic: The Herfindahl-Hirschman Index Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

55) Suppose there are five firms in the disposable diaper market. Hug-Me's share is 30 percent. Plumper's share is 30 percent. Drippy's share is 20 percent. Kool Kid's share is 10 percent. Nappomatic's share is 10 percent. The Herfindahl-Hirschman Index in this industry is A) 100. B) 900. C) 1,350. D) 2,400. Answer: D Topic: The Herfindahl-Hirschman Index Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

56) There are six firms in an industry, with market shares of 50 percent, 25 percent, 10 percent, 10 percent, 3 percent and 2 percent. The four firm concentration ratio is ________, and the HHI is ________. A) 100; 100 B) 95; 3338 C) 95; 10,000 D) 100; 3338 Answer: B Topic: Four-Firm Concentration Ratio & Herfindahl-Hirschman Index Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

57) Suppose that there are 10 firms in an industry, each accounting for 10 percent of industry sales. Two of these firms decide to merge. Which of the following statements about the impact of this merger is (are) INCORRECT? A) The merger causes the four-firm concentration ratio to increase from 40 to 50. B) The merger causes the HHI to increase by 100. C) The merger will not change the HHI unless the industry's sales increase. D) Both answers A and C are incorrect. Answer: B Topic: Four-Firm Concentration Ratio & Herfindahl-Hirschman Index Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

58) If there are five firms in an industry, each with a market share of 20 percent, the HerfindahlHirschman Index (HHI) of concentration is A) 2000. B) 400. C) 100. D) 20. Answer: A Topic: The Herfindahl-Hirschman Index Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

59) There are 6 firms in a market and the market shares of the firms are 40 percent, 30 percent, 10 percent, 8 percent, 7 percent, and 5 percent. The Herfindahl-Hirschman index is A) 2738. B) 2664. C) 100. D) 88. Answer: A Topic: The Herfindahl-Hirschman Index Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

Sales ($ million) P & Q, Inc. 15 Kook, Inc. 12 Sweetee & Crunch 8 EFG, Inc. 10 Shuger, Ltd. 5 Firm

60) The cookie industry in Eatsweetland consists of 15 firms. The industry sales are $80 million per month. The sales of the largest 5 firms are shown in the table below. The rest 10 firms have sales of $3 million each. What is the four-firm concentration ratio in Eatsweetland's cookie industry? A) 63 percent B) 44 percent C) 87 percent D) 56 percent Answer: D Topic: The Four-Firm Concentration Ratio Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

61) The cookie industry in Eatsweetland consists of 15 firms. The industry sales are $80 million per month. The sales of the largest 5 firms are shown in the table below. The rest 10 firms have sales of $3 million each. What is the Herfindahl-Hirschman index in the market for cookies in Eatsweetland? A) 1013 B) 2278 C) 872 D) 2632 Answer: A Topic: The Herfindahl-Hirschman Index Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

62) The cookie industry in Eatsweetland consists of 15 firms. The industry sales are $80 million per month. The sales of the largest 5 firms are shown in the table below. The rest 10 firms have sales of $3 million each. Which of the following best describes the structure of the market for cookies in Eatsweetland? A) perfect competition B) monopolistic competition C) oligopoly D) monopoly Answer: B Topic: Market Structure Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Analytical Skills

63) The cookie industry in Eatsweetland consists of 15 firms. The industry sales are $80 million per month. The sales of the largest 5 firms are shown in the table below. The rest 10 firms have sales of $3 million each. The U.S. Department of Justice would classify the market for cookies in Eatsweetland as A) competitive. B) uncompetitive. C) moderately competitive. D) monopolistic. Answer: C Topic: Market Structure Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Analytical Skills

Company A B C D E F G H I J K L M N O P Q R S T

Sales (millions of dollars) 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100

64) The table above lists the market shares of the twenty makers of personal computers. The four-firm concentration equals A) 5 percent. B) 20 percent. C) 25 percent. D) 100 percent. Answer: B Topic: The Four-Firm Concentration Ratio Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

65) The table above lists the market shares of the twenty makers of personal computers. The four-firm concentration ratio tells us that A) the four largest firms have 20 percent of the market. B) there are no barriers to entry in this market. C) the firms sell differentiated products. D) all firms sell identical products. Answer: A Topic: The Four-Firm Concentration Ratio Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

66) The table above lists the market shares of the twenty makers of personal computers. The HerfindahlHirschman Index for this industry equals A) 5. B) 250. C) 1250. D) 500. Answer: D Topic: The Herfindahl-Hirschman Index Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

67) The table above lists the market shares of the twenty makers of personal computers. Based upon the Herfindahl-Hirschman Index, A) the industry is an oligopoly. B) the industry is a monopoly. C) the industry is competitive. D) the firms in the industry will not be allowed to merge. Answer: C Topic: Market Structure Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Analytical Skills

68) The table above lists the market shares of the twenty makers of personal computers. Based upon the Herfindahl-Hirschman Index for this industry, the Justice Department would A) regard the industry as highly concentrated. B) be against any two firms merging. C) consider the market oligopolistic. D) regard the industry as competitive. Answer: D Topic: Market Structure Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Analytical Skills

Firm ABC DEF GHI JKL MNO PQR STU

Sales (millions of dollars) 50 60 80 100 130 150 170

69) Based on the above table, which shows the firms and sales in an industry, what is the four-firm concentration ratio? A) 55 B) 74 C) 100 D) $740 million Answer: B Topic: Four-Firm Concentration Ratio Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

70) Based on the above table, which shows the firms and sales in an industry, what is the approximate value of the Herfindahl-Hirschman Index? A) 1,660 B) 2,300 C) 4,800 D) 10,000 Answer: A Topic: The Herfindahl-Hirschman Index Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

Company A B C D E F G H I J K

Sales (millions of dollars) 120 89 531 452 269 125 25 89 155 69 85

71) The table above shows sales of the firms in the pet food industry. The four-firm concentration ratio in the industry is A) 59 percent. B) 80 percent. C) 70 percent. D) 40 percent. Answer: C Topic: The Four-Firm Concentration Ratio Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

72) The table above shows sales of the firms in the pet food industry. The Herfindahl-Hirschman Index in the industry is A) 1260. B) 1443. C) 1100. D) 1588. Answer: D Topic: The Herfindahl-Hirschman Index Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

73) The table above shows sales of the firms in the pet food industry. What type of market is this? A) perfect competition B) monopolistic competition C) oligopoly D) monopoly Answer: C Topic: Oligopoly Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills 72 Copyright © 2014 Pearson Education, Inc.

Company A B C D E F G H I J K

Sales (millions of dollars) 130 95 456 352 312 100 53 78 142 186 95

74) The table above shows sales of the firms in the chocolate industry. The four-firm concentration ratio in the industry is A) 52 percent. B) 65 percent. C) 72 percent. D) 80 percent. Answer: B Topic: The Four-Firm Concentration Ratio Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

75) The table above shows sales of the firms in the chocolate industry. The Herfindahl-Hirschman Index in the industry is A) 1346. B) 896. C) 1160. D) 2588. Answer: A Topic: The Herfindahl-Hirschman Index Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

76) The table above shows sales of the firms in the chocolate industry. What type of market is this? A) perfect competition B) monopolistic competition C) oligopoly D) monopoly Answer: C Topic: Oligopoly Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills 73 Copyright © 2014 Pearson Education, Inc.

Company A B C D E F G H I J K

Sales (thousands of dollars) 750 500 250 125 125 125 125 125 125 125 125

77) The above table shows the market shares for all the landscaping services in a suburban area. The fourfirm concentration ratio equals A) 30 percent. B) 60 percent. C) 65 percent. D) 100 percent. Answer: C Topic: The Four-Firm Concentration Ratio Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

78) The above table shows the market shares for all the landscaping services in a suburban area. Which of the following mergers would cause the greatest increase in the four-firm concentration ratio? A) A and B B) D and E C) E and F D) six of the smallest firms Answer: D Topic: The Four-Firm Concentration Ratio Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

79) The above table shows the market shares for all the landscaping services in a suburban area. A merger between firms E and F would A) raise the four-firm concentration ratio. B) have no effect on the four-firm concentration ratio. C) lower the four-firm concentration ratio. D) create a monopoly. Answer: A Topic: The Four-Firm Concentration Ratio Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

80) The above table shows the market shares for all the landscaping services in a suburban area. A merger between the three largest firms would A) make the industry more competitive. B) increase the four-firm concentration ratio and increase the Herfindahl-Hirschman Index (HHI). C) increase the four-firm concentration ratio and decrease the Herfindahl-Hirschman Index (HHI). D) decrease the four-firm concentration ratio and decrease the Herfindahl-Hirschman Index (HHI). Answer: B Topic: Four-Firm Concentration Ratio & Herfindahl-Hirschman Index Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

81) The above table shows the market shares for all the landscaping services in a suburban area. The Herfindahl-Hirschman Index (HHI) equals A) 65. B) 900. C) 1400. D) 1600. Answer: D Topic: The Herfindahl-Hirschman Index Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

82) High concentration measures will understate the extent of competition in a market if A) the true geographical scope of the market is global rather than national. B) entry into the industry is easy. C) the geographical scope of the market is regional rather than national. D) Both answers A and B are correct. Answer: D Topic: Limitations of Concentration Measures Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

83) Which of the following factors helps explain limitations of concentration measures? A) data collection challenges B) failure of the market and industry to correspond C) poor public information about firms D) lack of staff to perform professional market research Answer: B Topic: Limitations of Concentration Measures Skill: Conceptual Status: New A-level heading: Market s and the Competitive Environment AACSB: Reflective Thinking

84) Concentration ratios are generally computed for ________ markets. A) local B) regional C) national D) global Answer: C Topic: Limitations of Concentration Measures; Geographic Scope Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

85) The national concentration ratio A) underestimates concentration for both the newspaper and the automobile industries. B) overestimates concentration for both the newspaper and the automobile industries. C) underestimates concentration for the newspaper industry and overestimates it for the automobile industry. D) overestimates concentration for the newspaper industry and underestimates it for the automobile industry. Answer: C Topic: Limitations of Concentration Measures; Geographic Scope Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

86) Even though the market for bricks has a low concentration ratio nationally, the U.S. Justice Department might still scrutinize any mergers in this industry because the A) HHI is high nationally. B) HHI is above 1800 nationally. C) HHI is below 1800 nationally. D) market is regional not national, and the regional concentration might be high. Answer: D Topic: Limitations of Concentration Measures; Geographic Scope Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

87) On a national level, the concentration ratio for grocery stores is very low. But, the "true" market for grocery stores is local in nature. What limitation does the geographic market put on the measure of concentration for grocery stores? A) On the local level, grocery stores are more concentrated than they appear on the national level. B) On the local level, grocery stores are not as concentrated as they appear on the national level. C) The level of concentration is overestimated when viewing the national level. D) Both answers A and C are correct. Answer: A Topic: Limitations of Concentration Measures; Geographic Scope Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

88) An industry with a high concentration ratio might still be competitive if A) there are no close substitutes for its product. B) its barriers to entry are low. C) its production is geographically concentrated. D) it has a high ratio of value added to sales. Answer: B Topic: Limitations of Concentration Measures; Barriers to Entry Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

89) The largest share of the U.S. private economy is A) in manufacturing. B) competitive or monopolistically competitive. C) oligopolistic. D) monopolistic. Answer: B Topic: Market Structure in the U.S. Economy Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

90) Over the years, the U.S. economy has become increasingly A) monopolistic. B) oligopolistic. C) competitive. D) cartelized. Answer: C Topic: Market Structure in the U.S. Economy Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

91) During the twentieth century, the market structure of the U.S. economy has A) become less competitive. B) remained about the same. C) become more competitive. D) become mostly monopolies. Answer: C Topic: Market Structure in the U.S. Economy Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

5 Produce or Outsource? Firms and Markets 1) Which of the following can lead to a firm being more efficient that a market? A firm can have I. economies of scale. II. economies of scope. III. lower transactions costs. A) III only B) I and II C) II and III D) I, II and III Answer: D Topic: Why Firms? Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

2) Which of the following is a reason why firms may be more efficient than markets as coordinators of economic activity? A) economies of scale and scope B) lower transactions costs C) economies of team production D) all of the above Answer: D Topic: Why Firms? Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

3) Which of the following is a reason why firms can be more efficient than markets as coordinators of economic activity? A) economies of scale and scope B) higher transactions charges C) elimination of the principal-agent problem D) all of the above Answer: A Topic: Why Firms? Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking 78 Copyright © 2014 Pearson Education, Inc.

4) Dell uses outsourcing, that is, Dell buys the components of the computers it produces from other firms. This is an example of A) firm coordination. B) a partnership. C) a command system. D) market coordination. Answer: D Topic: Why Firms? Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

5) Which of the following is NOT an advantage of firm coordination of economic activity? A) Firm coordination decreases transactions costs. B) When firms coordinate economic activity, there are no opportunity costs. C) Firms can take advantage of the economies of team production. D) Economies of scope can be realized by firms that produce a range of goods and services that share specialized resources. Answer: B Topic: Why Firms? Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

6) Costs to the firm arising from reaching agreements on input prices with suppliers and then ensuring that terms of agreements are fulfilled, are called A) negotiation costs. B) agency costs. C) transactions costs. D) implicit costs. Answer: C Topic: Why Firms?, Transactions Costs Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

7) One reason why firms replace markets for some activities is that firms A) reduce the number of transactions required. B) enable individuals to avoid a large portion of their taxes. C) reduce the rate at which the product is wasted. D) do not require team production. Answer: A Topic: Why Firms?, Transactions Costs Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

8) Firms are often more efficient than markets as coordinators of economic activity because A) firms can achieve lower transaction costs. B) markets cannot coordinate production. C) firms don't rely on economies of scale while markets do. D) firm coordination is always more economically efficient than market coordination. Answer: A Topic: Why Firms?, Transactions Costs Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

9) According to Nobel laureate Ronald Coase, firms exist in order to A) maximize transactions costs. B) minimize transactions costs. C) maximize transactions. D) employ workers. Answer: B Topic: Why Firms?, Transactions Costs Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

10) A key reason for the existence of firms is that, compared to markets, firms often achieve lower A) explicit costs. B) transactions costs. C) accounting costs. D) scope of team production. Answer: B Topic: Why Firms?, Transactions Costs Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

11) One of the reasons that a firm can be ________ efficient than a market is that the firm ________. A) more; does not have any economies of scale B) more; lowers transactions costs C) less; has economies of scope D) less; produces lower profits Answer: B Topic: Why Firms?, Transactions Costs Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

12) Kris wants to purchase a house. She buys newspapers to read the classified advertisements and spends her evenings with realtors looking at houses. Kris has incurred the ________ costs of making a purchase. A) transactions B) market C) buying D) scale Answer: A Topic: Why Firms?, Transactions Costs Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

13) When the cost of producing a unit of a good decreases as its output rate increases, there are economies of A) scale. B) scope. C) production. D) size. Answer: A Topic: Why Firms?, Economies of Scale Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

14) "When the cost of producing a unit of a good falls as its output rate increases" is the definition of A) economies of scope. B) economies of scale. C) economic efficiency. D) technological efficiency. Answer: B Topic: Why Firms?, Economies of Scale Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

15) Economies of scale exist when the A) total cost of production falls as the output increases. B) cost of producing a unit of a good falls as its output decreases. C) cost of producing a unit of a good falls as its output increases. D) firm uses specialized resources to produce a range of goods and services. Answer: C Topic: Why Firms?, Economies of Scale Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

16) Economies of scale exist when the ________ a unit of a good ________. A) average cost of producing; falls as its output rate increases B) price; falls as its input rate decreases C) price; rises as its output rate increases D) average cost of producing; rises as its input rate increases Answer: A Topic: Why Firms?, Economies of Scale Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

17) ________ coordinate economic activity in which there are substantial ________. A) Markets; team production efficiencies B) Markets; transactions costs C) Firms; economies of scale D) Firms; principal-agent problems Answer: C Topic: Why Firms?, Economies of Scale Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

18) If Quick Auto Service increases the size of its shop, enabling it to purchase cost-saving capital equipment so that the cost of servicing a car falls, this would be an example of A) economies of scope. B) economies of scale. C) monitoring. D) increasing transactions costs. Answer: B Topic: Why Firms?, Economies of Scale Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

19) When Jitters Coffee Company, Inc., can lower the cost of packaging a pound of coffee by doubling the quantity packaged each day, it is achieving A) economies of scale. B) economies of scope. C) economies of team production. D) all of the above Answer: A Topic: Why Firms?, Economies of Scale Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

20) When Fatz confectionery can lower the cost of manufacturing and packaging a pound of candy by doubling the quantity manufactured and packaged each day, it will achieve A) economies of scope. B) economies of scale. C) economies of team production. D) all of the above Answer: B Topic: Why Firms?, Economies of Scale Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

21) "When the cost of producing a unit of a good falls because the firm uses specialized resources to produce a range of goods and services" is the definition of A) economies of scope. B) economies of scale. C) economic efficiency. D) technological efficiency. Answer: A Topic: Why Firms?, Economies of Scope Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

22) Economies of scope are cost reductions achieved by A) the production of multiple, related products. B) the production of large amounts of a single product. C) limiting the size of the firm. D) increasing firm size. Answer: A Topic: Why Firms?, Economies of Scope Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

23) A firm finds that it can produce several different goods at a lower average cost by using some of the same production facilities than it could if it produced each of the goods with separate production facilities. This firm is A) gaining economies of scope. B) gaining economies of team production. C) gaining economies of scale. D) incurring diseconomies of scale. Answer: A Topic: Why Firms?, Economies of Scope Skill: Conceptual Status: New 10th edition AACSB: Reflective Thinking

24) Which of the following best defines "economies of scope"? A) As output expands the cost of producing a good decreases. B) As output expands the cost of producing a unit of a good decreases. C) Because firms use specialized resources to produce a range of goods, as the number of products produced increases, the cost of producing a unit decreases. D) Costs increase as firms seek to find more consumers. Answer: C Topic: Why Firms?, Economies of Scope Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

25) If a firm that repairs both motorcycles and cars is able to do so at a lower cost than a firm that does only one or the other, this would be an example of A) economies of scope. B) economies of scale. C) monitoring. D) increasing transactions costs. Answer: A Topic: Why Firms?, Economies of Scope Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

26) Economies of scope exist when A) the total cost of production falls as the output increases. B) a firm hires specialized resources to produce a range of goods and services. C) a firm uses outsourcing to produce a good or service. D) the cost of producing a unit of a good falls as its output increases. Answer: B Topic: Economies of Scope Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

27) Taco Bell produces both tacos and burritos because when it does so, Taco Bell experiences A) economies of scope. B) decreasing scope of costs. C) increasing normal profit. D) economies of scale. Answer: A Topic: Why Firms?, Economies of Scope Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

28) Team production is a production process in which A) pay is based on group output. B) individuals specialize in mutually supportive tasks. C) competing groups perform identical tasks. D) individuals rotate from one task to another. Answer: B Topic: Why Firms?, Team Production Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

29) A firm with a sales department, a production department, and a marketing department provides an example of A) team production. B) joint production. C) economies of scale. D) economies of different departments. Answer: A Topic: Why Firms?, Team Production Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

30) Economies of team production exist when the A) average cost of producing a unit of a good falls as its output rate increases. B) firm buys parts or products from other firms. C) firm uses specialized resources to produce a range of goods and services. D) individuals in a group specialize in mutually supportive tasks in the production process. Answer: D Topic: Why Firms?, Team Production Skill: Definition Status: New A-level heading: Produce or Outsource? Firms and Markets AACSB: Reflective Thinking

31) Quick Auto Service will do oil changes. If each oil change is done by five people, each of whom specializes in one task, this is an example of A) economies of scope. B) team production. C) economies of monitoring. D) economies of coordination. Answer: B Topic: Why Firms?, Team Production Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

32) Joe's Pizza Shop only makes pizza. If each pizza requires five people, each of whom specializes in one task, this method of production is an example of A) economies of scope. B) team production. C) economies of monitoring. D) economies of coordination. Answer: B Topic: Why Firms?, Team Production Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

33) Which of the following may yield economies of team production for Jitters Coffee Company, Inc.? A) Dividing the process of packaging and shipping coffee into several specialized tasks, each performed by different people. B) Expanding into a larger coffee packaging plant. C) Expanding into the packaging and sale of tea and powdered chocolate. D) all of the above Answer: A Topic: Why Firms?, Team Production Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

6 News Based Questions 1) U.S. auto sales took a beating in September 2008 as the nation's worsening economy turned dealer showrooms into ghost towns. Automakers reported a sharp drop-off in sales in the last ten days of the month as news of bank failures and a stock market meltdown increased economic uncertainty. What type of constraint do the automakers face when there is increased economic uncertainty? A) Information constraint B) Technology constraint C) Market constraint D) Price constraint Answer: A Topic: Information Constraints Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

2) Suppose Angelo Sessa, owner of Sezz Medi Brick Oven Pizza in NYC, earns $350,000 in revenue per year. He spends $800 a month on ash wood for his stove, $2000 a month on rent, and $1500 a month on ingredients. He used to be a lawyer and earned $240,000 a year before he opened up Sezz Medi. Normal profit for a pizza business is $30,000. What is Angelo's opportunity cost of production? A) $350,000 B) $312,600 C) $288,000 D) $321,600 Answer: D Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

3) Suppose Angelo Sessa, owner of Sezz Medi Brick Oven Pizza in NYC, earns $350,000 in revenue per year. He spends $800 a month on ash wood for his stove, $2000 a month on rent, and $1500 a month on ingredients. He used to be a lawyer and earned $240,000 a year before he opened up Sezz Medi. Normal profit for a pizza business is $30,000. What is Angelo's economic profit? A) $28,400 B) $350,000 C) $58,400 D) $268,400 Answer: A Topic: Economic Profit Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

4) Suppose Angelo Sessa, owner of Sezz Medi Brick Oven Pizza in NYC, earns $350,000 in revenue per year. He spends $800 a month on ash wood for his stove, $2000 a month on rent, and $1500 a month on ingredients. He used to be a lawyer and earned $240,000 a year before he opened up Sezz Medi. Normal profit for a pizza business is $30,000. If Angelo switches to oak wood to fire his stove and oak costs an extra $2500 each month, but this change causes his revenues to increase to $351,000. What is Angelo's economic profit? A) -$1,600 B) -$600 C) $9,000 D) $8,000 Answer: B Topic: Economic Profit Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

5) Suppose Angelo Sessa, owner of Sezz Medi Brick Oven Pizza in NYC, earns $350,000 in revenue per year. He spends $800 a month on ash wood for his stove, $2000 a month on rent, and $1500 a month on ingredients. He used to be a lawyer and earned $240,000 a year before he opened up Sezz Medi. Normal profit for a pizza business is $30,000. If Angelo switches to oak wood to fire his stove and oak costs an extra $2500 each month, but this change causes his revenues to increase to $351,000. What is Angelo's opportunity cost of production? A) $351,000 B) $342,000 C) $351,600 D) $321,600 Answer: C Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

6) The Roomba 570 is a robotic vacuum cleaner made and sold by iRobot. It can vacuum 4 rooms on a single battery charge and it costs $2 worth of electricity to charge the Roomba. Lynn is a house cleaner and can vacuum 4 rooms in 1 hour with a traditional vacuum. Suppose you want the 4 rooms in your house vacuumed once a week for one year. Ignoring the cost of any electricity Lynn uses, which method is economically efficient if Lynn charges $20 per hour? $30 per hour? A) Roomba if Lynn charges $20 per hour and Lynn if she charges $30 per hour B) Lynn if she charges $20 or $30 per hour C) Roomba if Lynn charges $20 or $30 per hour D) Lynn if she charges $20 per hour and Roomba if Lynn charges $30 per hour Answer: D Topic: Technological and Economic Efficiency Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Analytical Skills

7) The Roomba 570 is a robotic vacuum cleaner made and sold by iRobot. It can vacuum 4 rooms on a single battery charge and it costs $10 worth of electricity to charge the Roomba. Lynn is a house cleaner and can vacuum 4 rooms in 1/2 hour with a traditional vacuum. Suppose you want the 4 rooms in your house vacuumed once a week for one year. Ignoring the cost of any electricity Lynn uses, which method is economically efficient if Lynn charges $20 per hour? $30 per hour? A) Lynn if she charges $20 or $30 per hour B) Lynn if she charges $20 per hour and Roomba if Lynn charges $30 per hour C) Roomba if Lynn charges $20 per hour and Lynn if she charges $30 per hour D) Roomba if Lynn charges $20 or $30 per hour Answer: A Topic: Technological and Economic Efficiency Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Analytical Skills

8) The Roomba 570 is a robotic vacuum cleaner made and sold by iRobot. It can vacuum 4 rooms on a single battery charge and it costs $2 of electricity to charge the Roomba. Lynn is a house cleaner and can vacuum 4 rooms in 1 hour with a traditional vacuum. Suppose you want the 4 rooms in your house vacuumed once a week for one year. Ignoring the cost of any electricity Lynn uses, what is the maximum Lynn could charge per hour for you to choose her over the Roomba? A) $10.23 per hour B) $20.45 per hour C) $8.27 per hour D) $16.54 per hour Answer: B Topic: Technological and Economic Efficiency Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Analytical Skills

9) It was more than a century ago that an engineer named Frederick Taylor walked into factories and starting timing workers with a stop watch. He dissected their movements, and organized them more efficiently. He turned factory production into a science. Suppose work was completed in the factory based on what the floor manager decided and workers were paid a flat daily wage. How does this firm organize production? A) Through the incentive system B) Through the command system C) Through a mixed command and incentive system D) Through the market system Answer: B Topic: Command Systems Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

10) It was more than a century ago that an engineer named Frederick Taylor walked into factories and starting timing workers with a stop watch. He dissected their movements, and organized them more efficiently. He turned factory production into a science. Suppose workers were paid a wage based on how much they produced. How does this firm organize production? A) Through the command system B) Through a mixed command and incentive system C) Through the incentive system D) Through the market system Answer: C Topic: Incentive Systems Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

11) It was more than a century ago that an engineer named Frederick Taylor walked into factories and starting timing workers with a stop watch. He dissected their movements, and organized them more efficiently. He turned factory production into a science. Suppose work was completed in the factory based on what the floor manager decided and workers were paid a base daily wage plus a bonus when they produced more than expected. How does this firm organize production? A) Through the command system B) Through the incentive system C) Through the market system D) Through a mixed command and incentive system Answer: D Topic: Incentive Systems Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

12) It was more than a century ago that an engineer named Frederick Taylor walked into factories and starting timing workers with a stop watch. He dissected their movements, and organized them more efficiently. The monitoring tool, the 21st century equivalent of Taylor's stopwatch, is the computer. Those of us who use them produce rivers of data describing the hours of our work day. Suppose modern firms pay employees based on the quantity of work completed each day as monitored through computers by managers. How would this solve the principal-agent problem? A) Through employee incentive pay B) Through employee ownership C) Through employee long-term contracts D) Through employee monitoring Answer: A Topic: Principal-Agent Problem Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

13) Much of the outcry in the 2008 fight over a fat bailout for Wall Street focused on the size of Wall Street's fat paychecks. The real problem, according to corporate governance researchers, isn't the amount executives receive, it's how companies pay them. Most companies link compensation to quarterly performance, encouraging short-term gambles. One way to align pay with long-term incentives and discourage risky bets would be to stretch compensation over more years. What is a suggested solution to the principal-agent problem? A) Employee ownership B) Employee incentive pay C) Employee long-term contracts D) Employee monitoring Answer: C Topic: Principal-Agent Problem Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

14) In the personal computer (PC) market in the first half of 2008, Hewlett-Packard maintained its worldwide No. 1 ranking at a market share of 19.1 percent. Dell's market share was 16 percent and Acer held onto third place with a 9.5 percent share, and Lenovo maintained fourth place, with a 7.9 percent share. What type of market structure would the market for PCs represent? A) Oligopoly B) Perfect competition C) Monopolistic competition D) Monopoly Answer: A Topic: Oligopoly Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Communication

15) In the personal computer (PC) market in the first half of 2008, Hewlett-Packard maintained its worldwide No. 1 ranking at a market share of 19.1 percent. Dell's market share was 16 percent and Acer held onto third place with a 9.5 percent share, and Lenovo maintained fourth place, with a 7.9 percent share. What is the four-firm concentration ratio in the PC market? A) 60.3 B) 52.5 C) 45 D) 36.5 Answer: B Topic: Four-Firm Concentration Ratio Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Analytical Skills

16) In the personal computer (PC) market in the first half of 2008, Hewlett-Packard maintained its worldwide No. 1 ranking at a market share of 19.1 percent. Dell's market share was 16 percent and Acer held onto third place with a 9.5 percent share, and Lenovo maintained fourth place, with a 7.9 percent share. What is the Herfindahl-Hirschman Index for the firms mentioned? A) 52.5 B) 1643 C) 773 D) 105 Answer: C Topic: Four-Firm Concentration Ratio & Herfindahl-Hirschman Index Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Analytical Skills

17) In the personal computer (PC) market in the first half of 2008, Hewlett-Packard maintained its worldwide No. 1 ranking at a market share of 19.1 percent. Dell's market share was 16 percent, Acer held onto third place with a 9.5 percent share, and Lenovo maintained fourth place with a 7.9 percent share. Predict the range of the Herfindahl-Hirschman Index for the PC market. A) 0 - 100 B) 100 - 999 C) 10,000 D) 800 - 1,200 Answer: D Topic: Four-Firm Concentration Ratio & Herfindahl-Hirschman Index Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Analytical Skills

18) In September 2008, Toyota Motor's share of the U.S. auto sales market was 15 percent, Ford's market share was 12.1 percent, GM's was 29.1 percent, Honda's was 10 percent, Nissan's share was 6.2 percent, and Chrysler's market share was 11.1 percent. What is the four-firm concentration ratio in the auto market? A) 83.5 B) 66.2 C) 67.3 D) 62.3 Answer: C Topic: Four-Firm Concentration Ratio & Herfindahl-Hirschman Index Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

19) In September 2008, Toyota Motor's share of the U.S. auto sales market was 15 percent, Ford's market share was 12.1 percent, GM's was 29.1 percent, Honda's was 10 percent, Nissan's share was 6.2 percent, and Chrysler's market share was 11.1 percent. What is the Herfindahl-Hirschman Index for the firms mentioned? A) 167 B) 1670 C) 1641 D) 1479 Answer: D Topic: Four-Firm Concentration Ratio & Herfindahl-Hirschman Index Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

20) In September 2008, Toyota Motor's share of the U.S. auto sales market was 15 percent, Ford's market share was 12.1 percent, GM's was 29.1 percent, Honda's was 10 percent, Nissan's share was 6.2 percent, and Chrysler's market share was 11.1 percent. What type of market structure would the market for autos represent? A) Monopolistic competition B) Monopoly C) Oligopoly D) Markets and Competitive Environment Answer: C Topic: Oligopoly Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

21) Constellation Brands Inc. is the world's biggest wine firm with 300-plus brands, from jug wines to coveted California reds, including the Clos du Bois, Geyser Peak and Woodbridge by Robert Mondavi labels. Based on this characteristic of firms, why would Constellation be more efficient than a market at coordinating economic activity? A) Constellation has economies of scope. B) Constellation has lower transaction costs. C) Constellation has economies of scale. D) Constellation has economies of team production. Answer: A Topic: Economies of Scope Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

7 Essay Questions 1) What is a firm? Answer: A firm is an institution that hires factors of production and organizes those factors to produce and sell goods and services. Topic: Firm Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Communication

2) Jake opens a pig farm in Idaho. To start his farm, he uses his entire $50,000 of savings from his savings account. The bank was paying him $2,500 interest on his saving. Explain why the $2,500 is one of Jake's costs. Answer: When Jake provides the $50,000 to finance his farm's operations, he forgoes the $2,500 in interest. Thus the opportunity cost of the $50,000 is the interest income forgone and so the $2,500 is an opportunity cost of running the farm. Topic: Opportunity Cost Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Communication

3) What is a normal profit? Is it part of the firm's opportunity costs, total revenue, or neither? Answer: The normal profit is the return to entrepreneurship. It is part of the firm's opportunity costs. Topic: Normal Profit Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Communication

4) What is the difference between a normal profit and an economic profit? Answer: A normal profit is the return to entrepreneurship and is part of the opportunity cost of operating a business. An economic profit is the difference between the firm's total revenue and its total opportunity cost. Because the normal profit is part of the firm's opportunity cost, an economic profit is a profit above and beyond a normal profit. If the firm earns an economic profit, the entrepreneur running the firm receives the normal profit plus the economic profit. Topic: Economic Profit and Normal Profit Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Communication

5) What is economic profit? Answer: A firm's economic profit is its total revenue minus its total opportunity cost, which is the sum of explicit costs and implicit costs. Topic: Economic Profit Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Communication

6) Can a firm achieve technological efficiency without achieving economic efficiency? Answer: Yes. Technological efficiency means achieving the most output possible from any given combination of inputs. There might, however, be a different combination of inputs that can produce the same quantity of output at a lower cost. Economic efficiency is attained when the lowest cost combination of inputs is chosen, and when that combination of inputs is used to produce the largest possible quantity of output. Topic: Technological Efficiency and Economic Efficiency Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Communication

7) What is an incentive system? Answer: An incentive system is a method of organizing production that uses a market-like mechanism inside the firm. Instead of issuing commands, senior managers create compensation schemes that will induce workers to perform in ways that maximize the firm's profit. Topic: Incentive Systems Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Communication

8) What is the principal-agent problem as applied to corporations? Answer: The principals are the owners of the corporation who want to see their profits maximized. The agents are the hired managers of the corporations who might serve their own goals instead. The principal-agent problem is to devise ways to make managers (the agents) act in the best interest of the owners (the principals). Topic: The Principal-Agent Problem Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Communication

9) What are three major ways that corporations can cope with the principal-agent problem? Answer: First, employees can be made part-owners of the corporation. Second, employees can be given incentive pay linked to achieving targets that serve the interests of the owners. Third, managers can be given long-term contracts that encourage them to pursue long-term strategies that can yield higher profit over time. Topic: Coping With the Principal-Agent Problem Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Communication

10) What is the main advantage and the main disadvantage of organizing a businesses as either a proprietorship or as a partnership rather than as a corporation? Answer: The main advantage of a proprietorship and partnership is that income is taxed only once by the personal income tax imposed on the owner's income. The main disadvantage of a proprietorship and partnership is that the owner(s) have unlimited liability. Topic: Types of Business Organization Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Communication

11) What are the main advantages and disadvantages of organizing a business as a corporation? Answer: The main advantages are limited liability to the stockholders and better access to lower cost capital by issuing stocks and bonds. The main disadvantage is that some of the corporate income is taxed twice. First, the corporation pays a corporate income tax. Second, the owners of the corporation pay a personal income tax on any capital gains they might earn. Topic: Corporation Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Communication

12) Is the number of sellers in the market the only thing that is different in each of the four market types economists study? Answer: No, the number of sellers is not the only factor that differs; the degree of similarity of each firm's product also plays a role. For instance, in a perfectly competitive market, each firm sells an identical product whereas in a monopolistically competitive market, each firm sells a slightly different product. Topic: Market Structure Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Communication

Answer: The four types of markets are perfect competition, monopoly, monopolistic competition, and oligopoly. Perfect competition has many firms selling identical products to many buyers, with no barriers to entry or exit. Monopoly has one firm selling a good with no close substitutes and a barrier that blocks the entry of new firms. Monopolistic competition has many firms making similar but not identical products with no barriers to entry or exit. Oligopoly has a small number of generally large firms producing either identical or differentiated products. Topic: Market Structure Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Communication

14) A student wrote: "Monopolistic competition is a market structure in which a small number of firms compete by making an identical product." If you were the instructor, how would you correct this statement? Answer: The answer is wrong in several respects: Monopolistic competition is a market structure in which a small large number of firms compete by making an identical product similar but slightly different products. Topic: Market Structure, Monopolistic Competition Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Communication

15) Describe the conditions under which monopoly exists. Give two examples. Answer: Monopoly occurs when one firm produces a unique good or service for which there are no close substitutes. No competing firms can enter the market because there are barriers to entry. These barriers can be legal or natural. Your local water company and the U.S. Postal service are monopolies. Topic: Market Structure, Monopoly Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Communication

16) What is the Herfindahl-Hirschman Index and what does it measure? Answer: The Herfindahl-Hirschman Index, or HHI, is an index used to measure the extent to which a market is dominated by a small number of firms. The HHI equals the sum of the squared percentage market shares of each of the 50 largest firms in the market. A monopoly will have a HHI of 10,000 whereas perfect competition will have a small HHI. Topic: The Herfindahl-Hirschman Index Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Communication

17) If the Herfindahl-Hirschman Index for an industry is 8,528, is the industry competitive or concentrated? Answer: With a Herfindahl-Hirschman Index of 8,528, the industry is quite concentrated or, in other words, the industry is not very competitive. Topic: The Herfindahl-Hirschman Index Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Communication

18) What is the difference between a four-firm concentration ratio and a Herfindahl-Hirschman Index? Answer: A four-firm concentration ratio sums the market shares of the four largest firms in an industry while the Herfindahl-Hirschman Index sums the squares of the market shares of the 50 largest firms. Topic: Four-Firm Concentration Ratio & Herfindahl-Hirschman Index Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Communication

19) How would a merger between Coca-Cola and Pepsi Cola affect the four-firm concentration ratio for the soft drink market? How would it affect the Herfindahl-Hirschman Index for the soft drink market? Answer: Both Coca-Cola and Pepsi Cola are among the four largest firms in the soft drink market, so a merger between the two firms would (drastically) raise the four-firm concentration ratio and (drastically) raise the Herfindahl-Hirschman Index. Topic: Four-Firm Concentration Ratio & Herfindahl-Hirschman Index Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Communication

20) "The concentration measures for the United States calculated by the Department of Commerce understate the degree of concentration in the newspaper industry." Do you agree? Explain. Answer: Yes. The concentration measures calculated by the Department of Commerce take a national view of the market while the newspaper industry consists of mainly local markets. The calculated concentration measures for newspapers are low, but there is a high degree of concentration in the newspaper industry in most cities. Topic: Limitations of Concentration Measures; Geographic Scope Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Communication

21) What would be an example of economies of scope achieved in the automobile insurance industry? Answer: The auto insurance industry can achieve economies of scope, for example, by also offering to insure homes, boats, and people's lives. There could be cost savings, compared to selling each kind of insurance by different specialized companies, because one sales force can sell all kinds of policies. Also, there would not have to be multiple buildings for the headquarters and branch offices, computer networks, or cars for the sales agents. Topic: Why Firms?, Economies of Scope Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Communication

8 Numeric and Graphing Questions 1) Professor Rush decides to quit teaching economics and opens a shoe store out at the mall. He gave up an annual income of $50,000 to open the store. A year after opening the shoe store, the total revenue for the year was $200,000. Rush's expenses were $30,000 for labor, rent was $18,000, and utilities were $1,200. He also had to purchase new shoes from manufacturers, at a cost of $60,000, which was financed by cashing in his savings of $60,000 that had been in a bank earning 8 percent per year. The normal profit from operating a shoe store in the mall is $20,000. Determine Professor Rush's total cost and economic profit. Answer: The costs are the cost of labor, the rent, the utilities, the cost of the shoes, the forgone interest, the foregone salary, and the normal profit. The forgone interest is (8 percent) × ($60,000) = $4,800, so the total cost equals $30,000 + $18,000 + $1,200 + $60,000 + $4,800 + $50,000 + $20,000 = $180,000. The economic profit equals the total revenue minus the total opportunity cost so the economic profit = $200,000 $184,000 = $16,000. Topic: Economic Profit Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

2) Mr. Blowfish opened a seafood store in December . He borrowed $60,000 from a bank at an annual interest rate of 8 percent. He used the funds he borrowed to purchase $60,000 of capital equipment. Over the year, he rented a building for $50,000 a year. During the first year of operation, Blowfish paid $45,000 to his employees, $20,000 for utilities, and $25,000 for raw fish he bought from other firms. In December of the next year, the market value of his capital was $50,000. Blowfish's best alternative to running the seafood store is to work for a grocery store as a sales clerk for $20,000 a year. a) What is the economic depreciation of Blowfish's capital? b) What are Blowfish's total opportunity costs? c) What is Blowfish's economic profit? Answer: a) Economic depreciation is the change in the market value of capital over a given period. The market value of Blowfish's capital was $60,000 at the beginning of the period and $50,000 at the end. So the economic depreciation is $60,000 - $50,000 = $10,000. b) Blowfish's costs are: the economic depreciation, $10,000; the forgone income, which is the $20,000 he could have earned working for a grocery store; the wages paid, $45,000; rent, $50,000; utilities, $20,000; interest paid, $4,800; and raw fish bought, $25,000. So Blowfish's total cost is $174,800. c) Economic profit equals total revenue minus total opportunity costs. Blowfish's total revenue is $165,000 and his total opportunity cost is $174,800. So his economic profit is $165,000 - $174,800 = -$9,800, which means that Blowfish incurred an economic loss of $9,800. Topic: Economic Profit Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

3) Jessica is a young doctor who has just started her own practice. Her previous position paid her $80,000 a year. For office space, she uses a building which she owns and which she has rented in the past for $40,000 a year. Her total revenue from her new practice is $250,000. She pays $50,000 to other firms for materials and supplies, and she pays $40,000 in wages to her office nurse. Assume that Jessica's building and equipment do not depreciate and that her normal profit is $20,000. a) What is the opportunity cost of all factors of production employed by Jessica? b) What is Jessica's economic profit? Answer: a) Jessica's opportunity costs are: the wages, $40,000; the amount she paid to other firms for material and supplies, $50,000; her forgone wages, $80,000; the forgone rent on her building, $40,000; and, the normal profit, $20,000. The opportunity cost equals the sum of all these costs and so is $230,000. b) Economic profit equals total revenue minus total opportunity cost, or $250,000 - $230,000 = $20,000. Topic: Economic Profit Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

4) The four largest firms in an industry account for the following value of industry sales: 12 percent, 8 percent, 5 percent and 4 percent. Calculate the four-firm concentration ratio. Would this industry be regarded as competitive or concentrated? Answer: The four-firm concentration ratio is 29 percent. The four-firm concentration ratio is less than 40 percent, so the industry would be regarded as competitive. Topic: The Four-Firm Concentration Ratio Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

Company A B C D

Market share (percent of sales) 12 10 5 3

5) The above table shows the percent of sales held by the four largest firms in an industry. a) Calculate this industry's four-firm concentration ratio. b) Is this industry competitive? c) What market type does it most likely represent? Answer: a) The four-firm concentration rate is 30 percent. b) Because the four-firm concentration ratio is relatively low, the industry is competitive. c) The industry is most likely monopolistic competition. Topic: The Four-Firm Concentration Ratio Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

6) An industry has only four firms, who have market shares of 45 percent, 25 percent, 20 percent, and 10 percent. What is the Herfindahl-Hirschman Index? Answer: The Herfindahl-Hirschman Index is 3,150. Topic: The Herfindahl-Hirschman Index Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

Company A B C D E F G H I J

Market share (percent of sales) 32 17 15 10 7 7 5 4 2 1

7) Suppose there are ten firms that occupy the Odell, Oregon cherry pie market. The market share of each firm is listed in the above table. a) What is the four-firm concentration ratio in this market? b) What is the Herfindahl-Hirschman Index for this market? c) If Firm H and Firm A merge, what is the new Herfindahl-Hirschman Index for this market? d) A severe winter causes every firm except A, B, and E to close. With only these three firms operating, Firm A's market share is 71 percent, Firm B's market share is 23 percent, and Firm C's market share is 6 percent. What is the Herfindahl-Hirschman Index for this market now? Answer: a) The four-firm concentration rate is 74 percent. b) The Herfindahl-Hirschman Index is 1,782. c) Once firms H and A merge, the new Herfindahl-Hirschman Index is 2,038. d) The Herfindahl-Hirschman Index is now 5,606. Topic: The Herfindahl-Hirschman Index Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

Industry A (percent of sales) 5 7 4 16 11 10 8 19 13 4 3

Industry B (percent of sales) 10 8 9 8 9 10 9 9 10 9 9

8) Listed in the above table are the market shares for the firms in two different industries. Each industry has only eleven firms. Find the four-firm concentration ratio and the Herfindahl-Hirschman Index for each industry. Answer: Industry A has a four-firm concentration ratio of 59 percent and a Herfindahl-Hirschman Index of 1,186. Industry B has a four-firm concentration ratio of 39 percent and Herfindahl-Hirschman Index of 914. Topic: Four-Firm Concentration Ratio & Herfindahl-Hirschman Index Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

Company A B C D E F G H I

Market share (percent of sales) 20 20 15 10 10 8 7 5 5

9) There are 9 firms in an industry with market shares in the table above. Calculate the HHI for the industry. What kind of market does this operate in and why? Answer: The HHI equals 202 + 202 + 152 + 102 + 102 + 82 + 72 +52 + 52 = 1388. With this HHI, the concentration ratio is small and so the market is monopolistic competition. Topic: The Herfindahl-Hirschman Index Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

9 True or False 1) A firm's goal is to maximize normal profit. Answer: FALSE Topic: The Firm's Goal Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

2) Technological efficiency occurs when it is not possible for a firm to get more output from the inputs it is currently using. Answer: TRUE Topic: Technological Efficiency Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

3) Technological efficiency occurs when the firm produces a given output by using the least amount of inputs. Answer: TRUE Topic: Technological Efficiency Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

4) If a firm is achieving economic efficiency it must also be achieving technological efficiency. Answer: TRUE Topic: Economic Efficiency Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

5) If a firm produces a given amount of output using the least amount of inputs, it definitely achieves economic efficiency. Answer: FALSE Topic: Economic Efficiency Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

6) Firms organize production by using a mixture of two systems: (1) command systems and (2) incentive systems. Answer: TRUE Topic: Information and Organization Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

7) The possibility that the managers of a corporation might not always act in the best interest of its owners is an example of the principal-agent problem. Answer: TRUE Topic: Principal-Agent Problem Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

8) The only two ways of dealing with the principal agent problem are the use of long-term contracts and monitoring. Answer: FALSE Topic: The Principal-Agent Problem, Solutions Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

9) The decision about whether a firm in each particular industry must operate as a proprietorship, partnership, or corporation is made by the Internal Revenue Service. Answer: FALSE Topic: Types of Business Organization Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

10) Proprietorships generally have unlimited liability, whereas partnerships and corporations have limited liability. Answer: FALSE Topic: Types of Business Organization Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

11) Although a corporation is the most common type of firm, corporations generate only a small share of business revenue in the U.S. economy. Answer: FALSE Topic: Market Structure in the U.S. Economy Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

12) A monopolistically competitive firm produces a good or service that has no close substitutes. Answer: FALSE Topic: Market Structure, Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

13) In their calculation, concentration ratios take barriers to entry into a market into consideration. Answer: FALSE Topic: Measures of Concentration Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

14) The most prevalent market structures in the U.S. economy are perfect competition and monopolistic competition. Answer: TRUE Topic: Market Structure in the U.S. Economy Skill: Recognition Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

15) Economies of scope has to do with lowering production costs by increasing the quantity of a product produced, whereas economies of scale has to do with lowering production costs by producing several products within the same firm. Answer: FALSE Topic: Why Firms?, Economies of Scale and Scope Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking

10 Extended Problems 1) Two university graduates, Bill and Steve, worked for an advertising agency at an annual salary of $40,000 each for 3 years after they graduated. Then, they decided to quit their jobs and start a partnership that designs and builds Web sites. They rented an office for $12,000 a year and bought capital for $30,000. To pay for the equipment, Bill and Steve borrowed money from a bank at an annual interest rate of 6 percent. During their first year of operation, the partners' total revenue was $100,000. The market value of their capital at the end of the year was $20,000. If Bill and Steve do not design Web pages, their best alternatives are to return to their previous job. a) What is the firm's economic depreciation? b) What are the partnership's costs? c) What is the firm's economic profit in the first year of operation? Answer: a) The economic depreciation of the firm's capital is the market value of its equipment at the beginning of the year, $30,000, minus its market value at the end of the year, $20,000, so the economic depreciation is $10,000. b) The partnership's costs are: the rent, $12,000; the interest expense, $1,800; the economic depreciation, $10,000; and, the opportunity cost of the owners' resources, which is the best alternative use of their resources, working at their previous job for $40,000 each, for a total of $80,000. therefore the total cost is $103,800. c) A firm's economic profit is its total revenue minus its total cost. Bill and Steve's total economic profit is $100,000 - $103,800 = -$3,800, which means that the firm has an economic loss. Topic: Economic Profit Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills 104 Copyright © 2014 Pearson Education, Inc.

2) One year ago, Ms. Case and Mr. Bond opened a jewelry store called T & J. They invested $1,000,000 of their savings into the partnership to buy equipment and initial inventory. They rented a building for $90,000 a year, and hired two employees for an annual wage of $40,000 each. Case and Bond believed that the best alternative investment of their money would be government bonds, which could yield an annual return of 8 percent. To run the store, Case quit her previous job, at which she earned $100,000, but her former boss told her that she was welcome to return anytime. Bond kept his job with the government, but gave up 6 hours of leisure each week (for 50 weeks), the time he used to spend playing golf. Bond used to say: "I'd only give up my golf time if someone paid me $100 an hour." During the first year of operation, T & J paid $20,000 for utilities and the firm's total revenue was $350,000. The market value of T & J's equipment was $200,000 at the beginning of the year and $170,000 at the end of the year. a) What is the economic depreciation of their capital? b) What are T & J's opportunity costs? c) What is the firm's economic profit in the first year of operation? Answer: a) The economic depreciation of the firm's capital is the market value of its equipment at the beginning of the year, $200,000, minus its market value at the end of the year, $170,000, so the economic depreciation is $30,000. b) T & J's costs are: rent, $90,000; wages, $80,000; utilities, $20,000; economic depreciation, $30,000; the interest forgone, the lost interest on the $1,000,000 invested in the business, which is equal to $1,000,000 × 0.08 or $80,000; and the opportunity cost of the owners' resources, which for Case is her wage at the previous job, $100,000 and for Bond is the 300 hours of his leisure time , which he values at $100 per hour for a total opportunity cost is $100 × 300 = $30,000. Thus, T&J's total costs are $240,000. c) A firm's economic profit is its total revenue minus its total opportunity cost. T & J's economic profit is $350,000 - $330,000 = $20,000. Topic: Economic Profit Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

Technique A B C D E

Labor (hours) 120 80 60 30 20

Capital (units) 10 21 20 22 30

3) FasterChip, Inc. is considering five alternative techniques for assembling personal computers. The table shows the amounts of labor and capital required by each of these techniques to make 10 computers a day. Labor costs $15 an hour and capital costs $100 a unit. a) Which techniques are technologically efficient and which are not? Explain your answer. b) Which technique is economically efficient? Explain. c) If FasterChip uses its plant in Mexico, it can lower the labor cost to $10 an hour. Which technique will the company use in Mexico? Explain. Answer: a) Technique B is technologically inefficient. It requires more labor and more capital than technique C to produce a given output. All other techniques are technologically efficient. b) Economic efficiency occurs when the firm produces a given output at the least cost. Technique D has the lowest cost and therefore is economically efficient. c) With the change in costs, the economically efficient method of production changes. The company will now use a more labor intensive technique A, which, with the lower labor cost, becomes the economically efficient method. Topic: Technological Efficiency and Economic Efficiency Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

Firm Nimbus, Inc Cleansweep, Inc Bogey, Inc Muggle Handles, Inc Salazar's Sticks Draco Dormiens, Inc Avada's Broom

Sales (thousands of galleons) 57.5 33.3 12.6 9.9 11.1 8.6 7.8

4) The table above shows sales of the firms in the broomstick industry: a) Calculate the four-firm concentration ratio. b) Calculate the Herfindahl-Hirschman Index. c) Based on your calculations, what is the structure of the industry? Answer: a) The four-firm concentration ratio is the percentage of the value of sales accounted for by the four largest firms in an industry. The percentage of the value of sales accounted for by the four largest firms in the broomstick industry (Nimbus, Inc., Cleansweep, Inc., Bogey, Inc., and Salazar's Sticks) is (114.5/140.8) × 100 = 81.3 percent. So the four-firm concentration ratio in the broomstick industry is 81.3 percent. Firm Nimbus, Inc Cleansweep, Inc Bogey, Inc Muggle Handles, Inc Salazar's Sticks Draco Dormiens, Inc Avada's Broom Total

Sales Market share (thousands of galleons) (percent) 57.5 40.8 33.3 23.7 12.6 8.9 9.9 7.0 11.1 7.9 8.6 6.1 7.8 5.5 140.8 100.0

Market share squared 1667.7 559.3 80.1 49.4 62.1 37.3 30.7 2486.8

b) The Herfindahl-Hirschman Index (HHI) is the square of the percentage market share of each firm summed over the largest 50 firms or over all firms if there are fewer than 50. The table above shows the HHI calculations. Summing the squared market shares gives the HHI as 2,487. c) A four-firm concentration ratio that exceed 60 percent indicates that the market is highly concentrated and dominated by a few firms in an oligopoly. A market in which the HHI exceeds 1,800 is regarded as being uncompetitive. So both the four-firm concentration ratio (81.3) and the HHI (2,487) indicate that the broomstick industry is an oligopoly. Topic: Four-Firm Concentration Ratio & Herfindahl-Hirschman Index Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills

Economics, 11e, Global Edition (Parkin) Chapter 11 Output and Costs 1 Decision Time Frames 1) All the decisions made by people who operate firms have one overriding objective, which is to ________. A) make maximum attainable profit B) maximize the firm's total revenue C) maximize the firm's market share D) maximize the quantity that the firm sells Answer: A Topic: Goal Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

2) The short run is a period of time in which A) the quantity of at least one factor of production is fixed. B) the amount of output is fixed. C) prices and wages are fixed. D) nothing the firm does can be altered. Answer: A Topic: Short Run Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

3) The short run is a period of time in which A) the quantity used of at least one factor of production is fixed. B) the quantities used of all factors of production are fixed. C) output prices are fixed. D) factor of production prices are fixed. Answer: A Topic: Short Run Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

4) A period of time in which the quantity of at least one factor of production used by a firm is fixed is called the A) market period. B) intermediate run. C) short run. D) long run. Answer: C Topic: Short Run Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

5) Economists define the short run as a period of time so short that A) the amount of output cannot be changed except under diminishing marginal returns. B) the amount of output cannot be changed at all. C) only one factor of production can be varied. D) at least one factor of production cannot be varied. Answer: D Topic: Short Run Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

6) The short run is a time frame in which A) at least one factor of production is fixed. B) all factors of production can be varied. C) all factors of production are fixed. D) at least one factor of production can be varied. Answer: A Topic: Short Run Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

7) In the short run, A) all factors of production are fixed. B) at least one factor of production is fixed. C) all factors of production are variable. D) there are no variable costs. Answer: B Topic: Short Run Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

8) In the short run, A) all factors of production are fixed. B) labor usage must remain fixed. C) a firm's plant is fixed. D) no factors of production are fixed. Answer: C Topic: Short Run Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

9) The short run is a time period during which A) a firm can earn a normal profit. B) all factors of production are variable. C) at least one factor of production is fixed. D) all factors of production are fixed. Answer: C Topic: Short Run Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

10) The short run is a time frame in which A) the quantities of some factors of production are fixed and the quantities of other factors of production can be varied. B) the quantities of all factors of production can be varied. C) the quantities of all factors of production are fixed. D) all costs are sunk costs. Answer: A Topic: Short Run Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

11) An example of a variable factor of production in the short run is A) a building. B) capital equipment. C) an employee. D) land. Answer: C Topic: Short Run Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

12) When the demand for electricity peaks during the hottest days of summer, Florida Power and Light Company can generate more electricity by using more fuel and increasing the working hours of many of its employees. The company cannot, however, increase electric power production by building additional generating capacity. This means that the company is in the A) market run. B) short run. C) intermediate run. D) long run. Answer: B Topic: Short Run Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

13) An example of a short-run fixed factor of production is A) capital equipment. B) labor. C) electricity. D) postage for mailing. Answer: A Topic: Short Run Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

14) A cost that has already been made and cannot be recovered is called a A) variable cost. B) fixed cost. C) sunk cost. D) marginal cost. Answer: C Topic: Sunk Cost Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

15) After constructing a new factory, the cost of building the factory is a A) past cost. B) sunk cost. C) variable cost. D) None of the above answers are correct. Answer: B Topic: The Long Run Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

16) The long run is a time frame in which A) the quantities of some factors of production are fixed and the quantities of other factors of production can be varied. B) the quantities of all factors of production can be varied. C) the quantities of all factors of production are fixed. D) all costs are sunk costs. Answer: B Topic: Long Run Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

17) A period of time in which the quantity of all factors of production used by a firm can be varied is called the A) market period. B) variable run. C) short run. D) long run. Answer: D Topic: Long Run Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

18) In the long run, a firm has A) no factors of production that are fixed. B) no factors of production that are variable. C) no factors of production that are either fixed or variable. D) fixed factors of production but no variable resources. Answer: A Topic: Long Run Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

19) The long run A) means a long period of time, always longer than a year. B) is a period of time in which all factors of production can be varied. C) is different for different firms. D) Both answers B and C are correct. Answer: D Topic: Long Run Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

20) The long run is a period of time in which A) all factors of production are variable. B) all factors of production are fixed. C) some but not all factors of production are fixed. D) some but not all factors of production are variable. Answer: A Topic: Long Run Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

21) Which of the following factors is fixed in the long run? A) Capital B) Land C) Entrepreneurship D) None of the above because all factors are variable in the long run. Answer: D Topic: The Long Run Skill: Conceptual Status: New A-level heading: Decision Time Frames AACSB: Reflective Thinking

22) In the long run, a firm can vary A) its capital but not its labor. B) its labor but not its capital. C) both its labor and its capital. D) neither its labor nor its capital. Answer: C Topic: Long Run Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

23) The long run is distinguished from the short run because only in the long run A) output prices can vary. B) factor of production prices can vary. C) the quantities of all factors of production can be varied. D) the firm no longer maximizes its profit. Answer: C Topic: Long Run Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

24) In economics, the short run is the time frame in which the quantities of ________ and the long run is the period of time in which ________. A) some factors of production are variable; the quantities of all factors of production are fixed B) all factors of production are variable but technology is fixed; technology is variable C) all factors of production are fixed; the quantities of all factors of production can be varied D) some factors of production are fixed; the quantities of all factors of production can be varied Answer: D Topic: Short Run and Long Run Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

25) In the short run, A) the size of the plant is fixed. B) all factors of production are variable. C) all factors of production are fixed. D) some firms experience increasing returns to scale. Answer: A Topic: Study Guide Question, Short Run Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

26) The long run is a time period in which A) one year or less elapses. B) all factors of production are variable. C) all factors of production are fixed. D) there is at least one fixed factor of production and at least one variable factor of production. Answer: B Topic: Study Guide Question, Long Run Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

27) Which of the following statements is correct? A) A firm does not need to take into account its sunk cost when making current decisions. B) Long-run decisions are easily reversed. C) Short-run decisions are not easily reversed. D) In the long run, a firm can change its plant but not the quantity of its labor. Answer: A Topic: Short Run and Long Run Skill: Conceptual Status: New A-level heading: Decision Time Frames AACSB: Reflective Thinking

2 Short-Run Technology Constraint 1) Total product is A) the increase in output that results from a one-unit increase in the quantity of labor employed with all other inputs remaining the same. B) maximum output that a given quantity of labor can produce. C) maximum amount of output produced by a given quantity of labor divided by the given quantity of labor employed. D) maximum amount of amount of output produced by a given quantity of labor divided by price of the output. Answer: B Topic: Total Product Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

2) Points below a firm's total product curve are A) both attainable and technologically efficient. B) neither attainable nor technologically efficient. C) attainable but not technologically efficient. D) technologically efficient but not attainable. Answer: C Topic: Total Product Curve Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

3) Points on a firm's total product curve are A) both attainable and technologically efficient. B) neither attainable nor technologically efficient. C) attainable but not technologically efficient. D) technologically efficient but not attainable. Answer: A Topic: Total Product Curve Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

4) When the total product curve is drawn in a figure that measures employment along the horizontal axis, it is a graph that shows the A) minimum cost of producing a given amount of output using different techniques. B) maximum profit attainable for each unit of output sold per unit of labor employed. C) maximum output attainable for each quantity of labor employed. D) minimum output attainable for each quantity of labor employed. Answer: C Topic: Total Product Curve Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 8 Copyright © 2014 Pearson Education, Inc.

5) All the production points that lie ________ the total product curve are attainable and ________. A) above; efficient B) above; inefficient C) below; efficient D) below; inefficient Answer: D Topic: Total Product Curve Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

6) A firm's total product curve shows A) that inefficiency is not possible. B) how the cost of the fixed resources change when output changes. C) how the amount of output changes when the quantity of labor changes. D) that in the long run the firm must adjust the quantity of all the resources it employs. Answer: C Topic: Total Product Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

7) Most total product curves have A) first increasing and then decreasing marginal returns to labor. B) output first increasing and then decreasing as labor is added. C) first decreasing and then increasing marginal returns to labor. D) output increasing at an increasing rate as labor is added. Answer: A Topic: The Marginal Product Curve Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

8) The marginal product of labor is equal to the A) total product divided by the total number of workers hired. B) increase in the total product that results from hiring one more worker with all other inputs remaining the same. C) slope of the marginal product of labor curve. D) None of the above answers are correct. Answer: B Topic: Marginal Product of Labor Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

9) Marginal product is A) the increase in output that results from a one-unit increase in the quantity of labor employed with all other inputs remaining the same. B) total amount of output produced. C) total amount of output produced divided by the quantity of labor employed. D) total amount of output produced divided by price of the output. Answer: A Topic: Marginal Product of Labor Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

10) The marginal product of labor is the increase in total product from a A) one unit increase in the quantity of labor, while holding the quantity of other inputs constant. B) one unit increase in the quantity of labor, while also increasing the quantity of other inputs by one unit. C) one dollar increase in the wage rate, while holding the price of other inputs constant. D) one percent increase in the wage rate, while also increasing the price of other inputs by one percent. Answer: A Topic: Marginal Product of Labor Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

11) The marginal product of labor is the change in total product from a one-unit increase in A) the quantity of labor employed, holding the quantity of other inputs constant. B) the quantity of capital employed, holding the quantity of labor constant. C) both the quantity of labor and the quantity of other inputs employed. D) the wage rate. Answer: A Topic: Marginal Product of Labor Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

12) The marginal product of labor is the A) change in output resulting from a one-unit increase in labor with all other inputs remaining the same. B) maximum output attainable with fixed factors of production when labor is the only variable factor of production. C) output level above which the slope of the total product curve falls. D) output level above which the rate of total product per unit of labor falls. Answer: A Topic: Marginal Product of Labor Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

13) The total output produced with any quantity of labor is equal to the sum of the A) marginal products of each of the workers hired. B) average products of each of the workers hired. C) total wages the firm pays its workers. D) Both answers A and B are correct. Answer: A Topic: Marginal Product of Labor Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

14) The average product of labor is equal to the A) total product divided by the total number of workers hired. B) total number of workers hired divided by the total product. C) slope of the marginal product of labor curve. D) Both answers B and C are correct. Answer: A Topic: Average Product of Labor Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

15) Average product equals the A) increase in output that results from a one-unit increase in the quantity of labor employed with all other inputs remaining the same. B) total amount of output produced. C) total amount of output produced divided by the quantity of labor employed. D) total amount of output produced divided by price of the output. Answer: C Topic: Average Product of Labor Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

16) Average product of labor is equal to ________. A) total product multiplied by the quantity of labor employed. B) the total product produced C) the quantity of labor employed divided by total product D) total product divided by the quantity of labor employed Answer: D Topic: Average Product of Labor Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

17) The average product of labor is A) the inverse of the average product of capital. B) the slope of the curve showing the marginal product of labor. C) the slope of the curve showing the total product of labor. D) total product divided by the total quantity of labor employed. Answer: D Topic: Average Product of Labor Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

Pizza Hut Total product Labor (workers) (pizzas produced per hour) 0 0 1 5 2 9 3 12 4 14 5 15 18) Using the data in the above table, what is the marginal product of the second worker? A) 4.5 pizzas per hour B) 4 pizzas per hour C) 5 pizzas per hour D) The marginal product is undefined. Answer: B Topic: Total Product Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

19) Using the data in the above table, what is the marginal product of the third employee? A) 2 pizzas per hour B) 3 pizzas per hour C) 4 pizzas per hour D) 12 pizzas per hour Answer: B Topic: Marginal Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

20) Using the data in the above table, what is the average product of three employees? A) 2 pizzas per hour B) 3 pizzas per hour C) 4 pizzas per hour D) 12 pizzas per hour Answer: C Topic: Average Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Labor (workers per day) 0 1 2 3 4 5

Total product (hats per day) 0 4 10 18 25 30

21) The above table shows the total product of producing baseball hats. The marginal product of the 4th worker is equal to A) 25 baseball hats. B) 21 baseball hats. C) 7 baseball hats. D) 6.25 baseball hats. Answer: C Topic: Marginal Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

22) The above table shows the total product of producing baseball hats. The average product of 3 workers is equal to A) 1.67 baseball hats. B) 6.00 baseball hats. C) 12.78 baseball hats. D) 18.00 baseball hats. Answer: B Topic: Average Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Labor (workers) 0 1 2 3 4 5 6

Total product (units) 0

Marginal product

Average product

3 4.5 14 3 19 1

23) The above (incomplete) table provides information about the relationships between labor and various product measures. The total product that can be produced with 6 units of labor is A) 20. B) 19. C) More information is needed to answer the question. D) None of the above answers is correct. Answer: A Topic: Total Product Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

24) The above (incomplete) table provides information about the relationships between labor and various product measures. The amount of labor that maximizes the marginal product of labor is A) 2 units of labor. B) 3 units of labor. C) 4 units of labor. D) 5 units of labor. Answer: A Topic: Marginal Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

25) The above (incomplete) table provides information about the relationships between labor and various product measures. The average product of the fourth unit of labor A) exceeds the marginal product of the fourth unit of labor. B) is less than the marginal product of the fourth unit of labor. C) is equal to the marginal product of the fourth unit of labor. D) is equal to 4.0. Answer: A Topic: Average Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Total Product, Marginal Product, Average Product Labor Total product Marginal Average (workers per day) (units per day) product product 0 0 0 0 1 2 2 2 2 8 3 12 4 15 5 16 1 26) In the above table, the marginal product of the second worker is A) 1. B) 2. C) 3. D) 4. Answer: D Topic: Total Product Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

27) In the above table, the marginal product of the third worker is A) 1. B) 2. C) 3. D) 4. Answer: D Topic: Marginal Product of Labor Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

28) In the above table, the marginal product of the fourth worker is A) 1. B) 3. C) 4. D) 6. Answer: B Topic: Marginal Product of Labor Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

29) In the above table, the marginal product is greatest when the A) first worker is hired. B) second worker is hired. C) third worker is hired. D) fourth worker is hired. Answer: B Topic: Marginal Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

30) In the above table, the average product of three workers is A) 1. B) 2. C) 3. D) 4. Answer: D Topic: Average Product of Labor Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

31) In the above table, the average product is less than the marginal product A) when the first worker is hired. B) when the second worker is hired. C) when the third worker is hired. D) for the entire range of output given. Answer: B Topic: Average Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Labor (workers per day) 0 1 2 3 4 5

Quantity (T shirts per day) 0 10 22 30 34 35

32) The table shows some data that describes Tom's T-Shirts' total product when Tom's has 1 sewing machine. When 4 workers are employed, ________. A) average product of labor is a maximum B) marginal product of labor is less than average product of labor C) marginal product of labor exceeds average product of labor D) marginal product of labor equals average product of labor Answer: B Topic: Average Product of Labor and Marginal Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Labor (workers per day) 0 1 2 3 4 5

Total product (pizzas per day) 0 10 25 37 45 50

33) Based on the production data for Pat's Pizza Parlor in the above table, the marginal product of the 4th worker is ________ pizzas. A) 5 B) 8 C) 10 D) 45 Answer: B Topic: Marginal Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

34) Based on the production data for Pat's Pizza Parlor in the above table, which worker has the largest marginal product? A) Worker 1 B) Worker 2 C) Worker 3 D) Worker 4 Answer: B Topic: Marginal Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

35) Based on the above production data table for Ken's Pizza Parlor, we know that the average product of labor curve begins to decrease after hiring worker ________. A) 1 B) 2 C) 3 D) 4 Answer: B Topic: Average Product of Labor Skill: Analytical Status: New 10th edition AACSB: Analytical Skills

36) Based on the production data for Pat's Pizza Parlor in the above table, the average product of labor when 4 workers are hired is ________ pizzas. A) 8 B) 10 C) 11.25 D) 45 Answer: C Topic: Average Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

37) Based on the production data for Pat's Pizza Parlor in the above table, which of the following pair of workers have the same average product? A) 1 and 2 B) 2 and 4 C) 1 and 5 D) 2 and 5 Answer: C Topic: Average Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

38) In the figure above, the marginal product of the second worker is A) 10 units. B) 5 units. C) 2 units. D) 1 units. Answer: B Topic: Marginal Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

39) In the above figure, after the second worker is hired, the marginal product of labor is A) increasing. B) diminishing. C) constant. D) zero. Answer: B Topic: Marginal Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

40) At point d in the above figure, the average product of labor equals A) 15. B) 4. C) 3.75. D) approximately 1. Answer: C Topic: Average Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 19 Copyright © 2014 Pearson Education, Inc.

41) In the above figure, the average product of labor at point c is A) 10. B) 5. C) 2. D) None of the above answers is correct. Answer: B Topic: Average Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

42) In the figure above, ________ is a technologically efficient point. A) d B) f C) g D) None of the selections is correct. Answer: A Topic: Total Product Curve Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

43) In the above figure, a technologically inefficient point is A) a. B) e. C) g. D) f. Answer: D Topic: Total Product Curve Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

44) In the above figure, an unattainable point is A) a. B) e. C) g. D) f. Answer: C Topic: Total Product Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

45) In the above figure, the most efficient way to produce 10 units is to hire A) 1 worker. B) 2 workers. C) 3 workers. D) 5 workers. Answer: B Topic: Total Product Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

46) In the above figure, the most efficient way to produce 15 units is to hire A) 2 workers. B) 3 workers. C) 4 workers. D) 5 workers. Answer: C Topic: Total Product Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

47) In the above figure, the maximum number of units that 4 workers can produce is A) 5 units. B) 10 units. C) 15 units. D) more than 15 units. Answer: C Topic: Total Product Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

48) In the above figure, the marginal product of labor is zero at point A) a. B) c. C) e. D) f. Answer: C Topic: Marginal Product Curve Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

49) At point e in the above figure, the marginal product of labor A) is less than the average product of labor. B) equals the average product of labor. C) is greater than the average product of labor. D) is at its maximum. Answer: A Topic: Marginal Product Curve Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

50) The steeper the slope of the total product curve, the A) larger is the marginal product of labor. B) smaller is the marginal product of labor. C) higher is the level of the total cost curve. D) more efficient is the technology employed. Answer: A Topic: Marginal Product Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

51) Increasing marginal returns to labor might occur at low levels of labor input because of A) increasing average costs. B) differing factor proportions. C) increasing specialization of tasks. D) decreasing use of machinery and increasing use of technology. Answer: C Topic: Increasing Marginal Returns Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

52) In general, increasing marginal returns occur A) as output expands at low levels of production. B) through the entire range of production. C) as output expands at high levels of production. D) whenever the slope of the total product curve is positive. Answer: A Topic: Increasing Marginal Returns Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

53) At that amount of output where diminishing marginal returns first sets in, A) total product will begin to decline. B) average product will begin to decline. C) marginal product will begin to decline. D) all of the above Answer: C Topic: Diminishing Marginal Returns Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

54) "Diminishing marginal returns" refer to a situation in which the A) marginal cost of the next worker hired is less than the marginal cost of the previous worker hired. B) average cost of the next worker hired is less than the average cost of the previous worker hired. C) marginal product of the next worker hired is less than the marginal product of the previous worker hired. D) average product of the next worker hired is less than the average product of the previous worker hired. Answer: C Topic: Diminishing Marginal Returns Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

55) A firm's total product curve shows that at first it has A) economies of scale and then diseconomies of scale. B) diseconomies of scale and then economies of scale. C) increasing marginal returns and then diminishing marginal returns. D) diminishing marginal returns and then increasing marginal returns. Answer: C Topic: Diminishing Marginal Returns Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

56) Diminishing marginal returns to labor occur because A) after a while it is hard to find a good worker. B) the capital resources used by the firm are fixed in the short run. C) workers become more efficient over time. D) larger companies are less efficient. Answer: B Topic: Diminishing Marginal Returns Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

57) Which of the following statements regarding the marginal product curve is FALSE? A) Increasing marginal returns occur only when the total product increases as the number of workers increases. B) Increasing marginal returns is due to greater efficiency from specialization in the production process. C) The law of diminishing returns applies in the short run. D) Along the marginal product curve, increasing marginal returns occur first and then diminishing marginal returns. Answer: A Topic: Diminishing Marginal Returns Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

58) Diminishing marginal returns occur when ________. A) the average product of the variable input eventually diminishes B) the marginal product of an additional worker is less than the marginal product of the previous worker hired C) the firm hires cheap, less-skilled workers in place of expensive, high-skilled workers D) total product diminishes Answer: B Topic: Diminishing Marginal Returns Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

59) The law of diminishing returns states that as A) the size of a plant increases, the firm's fixed cost decreases. B) the size of a plant increases, the firm's fixed cost increases. C) a firm uses more of a variable input, given the quantity of fixed inputs, the marginal product of the variable input eventually diminishes. D) a firm uses more of a variable input, given the quantity of fixed inputs, the firm's average total cost will decrease eventually. Answer: C Topic: Law of Diminishing Returns Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

60) The law of diminishing returns states that as a firm increases A) all the inputs is uses, the marginal product of each of these inputs always decreases. B) a variable input, with a given quantity of fixed inputs, the firm's marginal cost eventually decreases. C) a variable input, with a given quantity of fixed inputs, the marginal product of the variable input eventually decreases. D) a variable input, given the quantity of fixed inputs, the firm's average total cost will eventually decrease. Answer: C Topic: Law of Diminishing Returns Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 24 Copyright © 2014 Pearson Education, Inc.

61) The law of diminishing marginal returns says that as the firm uses more of ________, with a given quantity of ________, the ________ product of the variable input eventually diminishes. A) a fixed input; variable inputs; marginal B) all inputs; capital; average C) a variable input; fixed inputs; average D) a variable input; fixed inputs; marginal Answer: D Topic: Law of Diminishing Returns Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

62) The law of diminishing returns makes it clear that as more a variable input is employed, in the ________ the marginal product of the variable input eventually will ________. A) short run; rise B) long run; rise C) short run; fall D) long run; fall Answer: C Topic: Law of Diminishing Returns Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

63) The law of diminishing returns occurs because A) the marginal product of an additional worker is greater than the marginal product of the previous worker. B) the marginal product of a variable input, such as labor, depends in part on the amount of fixed inputs, such as capital. C) total production decreases as more of the variable inputs are used. D) adding more and more workers leads to a decrease in the quantity of capital. Answer: B Topic: Law of Diminishing Returns Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

64) The law of diminishing returns implies that, with the quantity of capital fixed, as the use of labor rises, A) total product will fall eventually. B) the marginal product of labor will fall eventually. C) the total product of labor will fall below the marginal product of labor. D) the production process will become technologically inefficient eventually. Answer: B Topic: Law of Diminishing Returns Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

Total product Labor (workers) (units) 0 0 5 1000 10 3000 15 4000 20 4500 65) In the above table, between what two levels of output does one first observe the law of diminishing returns? A) 0 and 1000 B) 1000 and 3000 C) 3000 and 4000 D) 4000 and 4500 Answer: C Topic: Law of Diminishing Returns Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Decent Donuts Total product Labor (workers) (dozens of donuts per day) 0 0 1 12 2 26 3 44 4 64 5 86 6 110 7 122 8 125 9 127 10 128 66) Using the table above, what is the marginal product of the 5th worker hired at Decent Donuts? A) 86 dozen donuts per day B) 22 dozen donuts per day C) 17.2 dozen donuts per day D) 64 dozen donuts per day Answer: B Topic: Marginal Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

67) Based on the data in the table above, which worker at Decent Donuts has the highest marginal product? A) the fourth B) the fifth C) the sixth D) the seventh Answer: C Topic: Marginal Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

68) Based on the data in the table above, what is the average product of labor when Decent Donuts employs five workers? A) 16.66 dozen donuts per day B) 17.2 dozen donuts per day C) 20 dozen donuts per day D) 22 dozen donuts per day Answer: B Topic: Average Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

69) Based on the data in the table above, when Decent Donuts hires eight workers, the A) average product of labor is greater than the marginal product. B) marginal product of labor is greater than the average product. C) marginal product of labor is equal to the average product. D) marginal product of labor is not defined. Answer: A Topic: Average Product of Labor and Marginal Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

70) Using the table above, for which of the following levels of employment does the marginal product of labor exceed the average product of labor at Decent Donuts? A) four workers B) seven workers C) both of the above D) neither of the above Answer: A Topic: Average Product of Labor and Marginal Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

71) Using the table above, for which of the following levels of employment does the average product of labor exceed the marginal product of labor at Decent Donuts? A) ten workers B) seven workers C) both of the above D) neither of the above Answer: C Topic: Average Product of Labor and Marginal Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

72) Based on the data in the table above, after which worker is hired do diminishing marginal returns begin? A) the first B) the fifth C) the sixth D) the ninth Answer: C Topic: Diminishing Marginal Returns Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

Total product Labor (workers) (shirts) 0 0 1 50 2 120 3 180 4 220 5 250 73) The table above shows the short-run product schedule for Virginia's Tee-Shirts. What is the marginal product associated with the hiring the fifth worker? A) 30 shirts B) 50 shirts C) 235 shirts D) 250 shirts Answer: A Topic: Marginal Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

74) The table above shows the short-run product schedule for Virginia's Tee-Shirts. What is the average product associated with hiring the fourth worker? A) 40 shirts B) 55 shirts C) 50 shirts D) 220 shirts Answer: B Topic: Average Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

75) The table above shows the short-run product schedule for Virginia's Tee-Shirts. The worker for whom the law of diminishing returns initially occurs is the ________ worker. A) 5th B) 4th C) 3rd D) 2nd Answer: C Topic: Law of Diminishing Returns Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Labor (workers) 0 1 2 3 4 5 6 7 8 9

Jefferson's Cleaners Total product (suits cleaned per day) 0 12 26 46 60 73 84 94 102 109

76) Based on the above table, what is the marginal product of the 6th worker hired at Jefferson's Cleaners? A) 10 suits per day B) 11 suits per day C) 14 suits per day D) 84 suits per day Answer: B Topic: Marginal Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 29 Copyright © 2014 Pearson Education, Inc.

77) Using the data in the above table, which worker at Jefferson's Cleaners has the highest marginal product? A) the second B) the third C) the fourth D) the fifth Answer: B Topic: Marginal Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

78) Using the above table, what is the average product of labor when Jefferson's Cleaners employs six workers? A) 11 suits per day B) 12 suits per day C) 13 suits per day D) 14 suits per day Answer: D Topic: Average Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

79) Using the above table, when Jefferson's Cleaners hires three workers, A) the average product of labor is greater than the marginal product. B) the marginal product of labor is greater than the average product. C) it has already experienced diminishing marginal returns. D) Both answers A and C are correct. Answer: B Topic: Average Product of Labor and Marginal Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

80) Using the data in the above table, which worker hired at Jefferson's Cleaners is the first to show diminishing marginal returns? A) the second B) the third C) the fourth D) the fifth Answer: C Topic: Diminishing Marginal Returns Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

81) Based on the data in the above table, at what level of output does the marginal cost start to rise at Jefferson's Cleaners? A) 45 suits per day B) 47 suits per day C) 74 suits per day D) 85 suits per day Answer: B Topic: Cost Curves and Product Curves Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Total product (books sold per Labor (workers) hour) 0 0 1 10 2 24 3 40 4 58 5 73 6 83 7 87 8 89 9 90 10 90 82) The above table shows the short-run total product schedule for the campus book store. What is the marginal product (MP) of going from 5 to 6 employees at the book store? A) 83 books sold B) 13.83 books sold C) 10 books sold D) between 11 and 14 books sold Answer: C Topic: Marginal Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

83) The above table shows the short-run total product schedule for the campus book store. Which employee has the highest marginal product (MP)? A) the 10th employee B) the 5th employee C) the 4th employee D) the 1st employee Answer: C Topic: Marginal Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

84) The above table shows the short-run total product schedule for the campus book store. What is the average product (AP) of the 4th employee? A) 58 books sold B) 14.5 books sold C) 18 books sold D) 13.3 books sold Answer: B Topic: Average Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

85) The above table shows the short-run total product schedule for the campus book store. When the fifth employee is hired, the marginal product is ________ and is ________ the average product. A) increasing; greater than B) increasing; less than C) decreasing; greater than D) decreasing; less than Answer: C Topic: Marginal Product and Average Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

86) The above table shows the short-run total product schedule for the campus book store. At what levels of books sold per hour will the marginal product of labor be greater than the average product of labor? A) 40 books sold per hour B) 73 books sold per hour C) Both A and B are correct. D) Neither A nor B is correct. Answer: C Topic: Marginal Product and Average Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

87) The above table shows the short-run total product schedule for the campus book store. When the book store hires the 3rd employee, A) the bookstore is still experiencing increasing marginal returns. B) the book store has already begun to experience diminishing marginal returns, but average product is still rising. C) both marginal and average product have already begun to decline. D) marginal product is at its maximum. Answer: A Topic: Law of Diminishing Returns Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

88) The above table shows the short-run total product schedule for the campus book store. With which employee do diminishing marginal returns set in? A) the 9th employee B) the 6th employee C) the 5th employee D) the 2nd employee Answer: C Topic: Law of Diminishing Returns Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Labor (workers per day) 0 1 2 3 4 5

Quantity (T shirts per day) 0 10 22 30 34 35

89) The table above shows some data that describe Tom's T-Shirts' total product when Tom has 1 sewing machine. An increase in the number of workers from 1 to 2 a day increases average product of labor from ________ T shirts per worker and marginal product of labor is ________ T shirts per worker. A) 10 to 11; 22 B) 10 to 22; 12 C) 10 to 22; 22 D) 10 to 11; 12 Answer: D Topic: Average Product of Labor and Marginal Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

90) The table above shows some data that describe Tom's T-Shirts' total product when Tom's has 1 sewing machine. Diminishing marginal returns begin when the ________ is employed. A) second worker B) fifth worker C) fourth worker D) third worker Answer: D Topic: Law of Diminishing Returns Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Total product Labor (workers) (units per hour) 0 0 1 8 2 20 3 34 4 46 5 56 6 64 7 8 74 9 75 91) In the above table, the marginal product of the 7th worker is 6. What is the total product when 7 workers are employed? A) 68 B) 70 C) 72 D) 76 Answer: B Topic: Total Product Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

92) In the above table, what is marginal product of labor for the 2nd worker? A) 20 B) 8 C) 10 D) 12 Answer: D Topic: Marginal Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

93) In the above table, what is marginal product of labor for the 5th worker? A) 10 B) 14 C) 9 D) 11.2 Answer: A Topic: Marginal Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

94) In the above table, what is average product when 4 workers are employed? A) 12 B) 10 C) 11.5 D) 9.5 Answer: C Topic: Average Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

95) In the above table, diminishing marginal returns start to occur when the A) 3rd worker is employed. B) 4th worker is employed. C) 5th worker is employed. D) 6th worker is employed. Answer: B Topic: Law of Diminishing Returns Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

96) If a firm's marginal product of labor is less than its average product of labor, then an increase in the quantity of labor it employs definitely will A) decrease its total product. B) decrease its average product of labor. C) increase its marginal product of labor. D) not change its average product of labor. Answer: B Topic: Relationship Between Marginal Product and Average Product Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

97) Which of the following statements is true? A) When marginal product is less than average product, average product is increasing. B) When marginal product is less than average product, average product is decreasing. C) When marginal product is falling, average product is decreasing. D) When marginal product is rising, average product is decreasing. Answer: B Topic: Relationship Between Marginal Product and Average Product Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

98) Which of the following statements is true? A) If average product equals marginal product, average product decreases. B) If marginal product equals average product, average product is a maximum. C) If marginal product equals average product, marginal product is a maximum. D) If marginal product exceeds average product, marginal product increases. Answer: B Topic: Relationship Between Marginal Product and Average Product Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

99) When the marginal product of labor is greater than the average product of labor, the A) marginal product of labor must be increasing as labor increases. B) average product of labor must be increasing as labor increases. C) total product must be increasing at an increasing rate as labor increases. D) None of the above answers is correct. Answer: B Topic: Relationship Between Average Product and Marginal Product Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

100) When the average product of labor is greater than the marginal product of labor, A) the marginal product of labor must be increasing as labor increases. B) there must be increasing marginal returns. C) the average product of labor is decreasing as labor increases. D) None of the above answers is correct Answer: C Topic: Relationship Between Average Product and Marginal Product Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

101) When the marginal and average products of labor are equal to each other, the A) average product must be at its maximum value. B) marginal product must be at its maximum value. C) total product must be at its maximum value. D) None of the above answers is correct Answer: A Topic: Relationship Between Average Product and Marginal Product Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

102) When the marginal product of labor is a maximum, the average product of labor is ________. A) a maximum B) increasing C) decreasing D) equal to marginal product Answer: B Topic: Relationship Between Marginal Product and Average Product Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

103) When the marginal product equals the average product, the A) average product curve is downward sloping. B) average product curve is upward sloping. C) marginal product is at its maximum. D) average product is at its maximum. Answer: D Topic: Relationship Between Average Product and Marginal Product Curves Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

104) Which of the following statements is true for any marginal and average? A) When the marginal is greater than the average, the average increases. B) When the marginal is less than the average, the average increases. C) When the marginal is rising, the average is increasing. D) When the marginal is equal to the average, the average decreases. Answer: A Topic: Relationship Between Average Product and Marginal Product Curves Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

105) When the marginal product curve is above the average product curve, ________ as output increases. A) average product must decrease B) average product must increase C) marginal product must decrease D) marginal product must increase Answer: B Topic: Relationship Between Average Product and Marginal Product Curves Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

106) Which of the following statements is true? A) The marginal and average product curves intersect at the maximum level of output. B) At every output level the marginal product curve lies above the average product curve. C) The marginal product and average product curves intersect when average product is at its maximum. D) The marginal product curve always has a positive slope. Answer: C Topic: Relationship Between Average Product and Marginal Product Curves Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

107) The marginal product and average product curves A) never intersect. B) intersect at the maximum point of the marginal product curve. C) intersect at the maximum point of the average product curve. D) do not intersect at any predictable point. Answer: C Topic: Relationship Between Average Product and Marginal Product Curves Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills

108) When the marginal product curve is downward sloping, the average product curve A) must also be downward sloping. B) might be either upward or downward sloping. C) must be upward sloping. D) must be horizontal. Answer: B Topic: Relationship Between Average Product and Marginal Product Curves Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

109) If a firm's marginal product of labor is greater than its average product of labor, then an increase in the quantity of labor it employs definitely A) increases its total product. B) increases its marginal product of labor. C) decreases its average product of labor. D) does not change its average product of labor. Answer: A Topic: Average Product of Labor and Marginal Product of Labor Skill: Conceptual Status: New A-level heading: Short-Run Technology Constraint AACSB: Reflective Thinking

110) With a technological change that increases productivity, the average product curve ________ and the marginal product curve ________. A) shifts upward; is unchanged B) is unchanged; is unchanged C) is unchanged; shifts upward D) shifts upward; shifts upward Answer: D Topic: Technology Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills

111) Total product divided by the total quantity of labor employed equals the A) average product of labor. B) marginal product of labor. C) average total cost. D) average variable cost. Answer: B Topic: Study Guide Question, Average Product Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills

112) Diminishing marginal returns occurs when A) all inputs are increased and output decreases. B) all inputs are increased and output increases by a smaller proportion. C) a variable input is increased and output decreases. D) a variable unit is increased and its marginal product falls. Answer: D Topic: Study Guide Question, Diminishing Marginal Returns Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

113) The average product of labor exceeds the marginal product of labor A) when the average product of labor is falling. B) when the average product of labor is rising. C) when the marginal product of labor is at its maximum. D) when the average product of labor is at its maximum. Answer: A Topic: Study Guide Question, Relationship Between Marginal & Avg. Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

114) When the marginal product of labor exceeds the average product of labor, A) the average product of labor is increasing. B) the average product of labor is decreasing. C) the total product curve is negatively sloped. D) the firm is experiencing decreasing returns to scale. Answer: A Topic: Study Guide Question, Relationship Between Marginal & Avg. Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Total product Labor (workers) (units per day) 0 0 1 3 2 12 3 19 4 23 5 25 115) Using the data in the above table, if the firm employs 3 workers, total product (measured in units per day) and average product and marginal product of the third worker (measured in units per worker) are A) 19, 6 1/3, and 9 respectively. B) 3, 19, and 6 1/3 respectively. C) 19, 3, and 9 respectively. D) 19, 6 1/3, and 7 respectively. Answer: D Topic: Parallel MyEconLab Questions Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

116) Using the data in the above table, if the firm employs 5 workers, total product (measured in units per day) and average product and marginal product of the fifth worker (measured in units per worker) are A) 23, 5.00, and 4 respectively. B) 23, 5.75, and 4 respectively. C) 25, 5.00, and 2 respectively. D) 25, 5.75, and 4 respectively. Answer: C Topic: Parallel MyEconLab Questions Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

3 Short-Run Cost 1) A firm's total cost (TC) equals the sum of its fixed cost plus its A) marginal cost. B) variable cost. C) variable cost plus its marginal cost. D) sunk cost plus its variable cost plus its marginal cost. Answer: B Topic: Total Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

2) Total cost is equal to the A) sum of the total fixed cost and the total variable cost. B) sum of the average fixed cost and the average variable cost. C) difference between the average variable cost and the average fixed cost. D) product of the marginal cost multiplied by the average total cost. Answer: A Topic: Total Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

3) Which of the following statements is correct? A) As output increases, total cost and total fixed cost increase by the same amount. B) As output increases, total cost and total fixed cost increase but not necessarily by the same amount. C) As output increases, total cost increases and total fixed cost decreases. D) Total fixed cost plus total variable cost equals total cost. Answer: D Topic: Total Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

4) A firm has fixed costs A) in the short run and in the long run. B) in the short run but not in the long run. C) in the long run but not in the short run. D) neither in the long run nor in the short run. Answer: B Topic: Total Fixed Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

5) Total fixed cost is the sum of all A) costs of the firm's fixed factors of production. B) costs associated with the production of goods. C) costs that rise as output increases. D) the marginal costs of the different factors of production. Answer: A Topic: Total Fixed Cost Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

6) A firm's total fixed cost (TFC) is a cost A) it is certain ("fixed") that the firm must pay. B) that does not change as output changes. C) that is dependent on marginal cost. D) that is paid in only the long run. Answer: B Topic: Total Fixed Cost Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

7) Total fixed cost A) increases as output increases. B) does not change as output changes. C) decreases as output increases. D) initially decreases and then increases as output increases. Answer: B Topic: Total Fixed Cost Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

8) Which type of cost is does not change as the quantity of output produced changes? A) total cost B) average cost C) fixed cost D) marginal cost Answer: C Topic: Total Fixed Cost Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

9) Which of the following would be classified as a fixed cost for the local supermarket? A) The cost of the boxes of cereal sold in the store. B) The salary and any overtime paid the store's manager. C) The rent from the six-year lease for the building the store uses. D) The Social Security tax the store pays the federal government on the workers' income. Answer: C Topic: Total Fixed Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

10) Which of the following would be classified as a fixed cost for the proprietor who owns and operates the local Texaco station? A) The federal excise tax paid on each gallon of Texaco gasoline sold. B) The state income tax on the profit earned. C) The rent paid on the 10 year lease for the property on which the station is located. D) The Social Security tax the owner pays the federal government on the owner's income. Answer: C Topic: Total Fixed Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

11) Total variable cost is the sum of all A) costs of the firm's fixed factors of production. B) costs associated with the production of goods. C) costs that rise as output increases. D) implicit costs. Answer: C Topic: Total Variable Cost Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

12) A firm's total variable cost (TVC) is defined as a cost that A) does not change (is not "variable") as the firm changes its output. B) changes as the firm changes its output. C) falls as the firm increases its output. D) varies only when the firm reaches the long run. Answer: B Topic: Total Variable Cost Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

13) Total variable cost A) increases as output increases. B) does not change as output changes. C) decreases as output increases. D) initially decreases and then increases as output increases. Answer: A Topic: Total Variable Cost Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

14) Ernie's Earmuffs produces 200 earmuffs per year at a total cost of $2,000 and $400 of this cost is fixed. What is Ernie's total variable cost? A) $2,400 B) $2,000 C) $1,600 D) $800 Answer: C Topic: Total Variable Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

15) Which of the following would be classified as a variable cost for the local Texaco station? A) Interest payments to a local bank for a 5-year loan. B) The total wages paid to the workers who are all paid $16.00 per hour, no matter how many hours they work each week. C) The premiums paid for liability insurance, which are constant throughout the life of the contract. D) The opportunity cost of money used to finance the installation of some new pumps. Answer: B Topic: Total Variable Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

16) In a diagram with the total cost curve and the total variable cost curve, as output increases, the vertical distance between these two curves A) is constant. B) decreases. C) increases. D) gets smaller and then bigger again. Answer: A Topic: The Relationship Between Total Cost and Total Variable Cost Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills

17) Ernie's Earmuffs produces 200 earmuffs per year at a total cost of $2,000 and $400 of this cost is fixed. What is Ernie's average total cost? A) $12 B) $10 C) $8 D) $2 Answer: B Topic: Average Total Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Labor (workers) Output (bikes) 0 1 2 3 4

0 20 50 60 64

Total fixed costs (dollars) 200

Total variable cost (dollars)

Total cost (dollars)

100

18) The table above gives costs at Jan's Bike Shop. Unfortunately, Jan's record keeping has been spotty. Each worker is paid $100 a day. Labor costs are the only variable costs of production. What is the total cost of producing 50 bikes? A) $100 B) $200 C) $300 D) $400 Answer: D Topic: Total Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

19) The table above gives costs at Jan's Bike Shop. Unfortunately, Jan's record keeping has been spotty. Each worker is paid $100 a day. Labor costs are the only variable costs of production. What is the total fixed cost of producing 64 bikes? A) $200 B) $300 C) $400 D) $500 Answer: A Topic: Total Fixed Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

20) The table above gives costs at Jan's Bike Shop. Unfortunately, Jan's record keeping has been spotty. Each worker is paid $100 a day. Labor costs are the only variable costs of production. What is the total variable cost of producing 60 bikes? A) $200 B) $300 C) $400 D) $500 Answer: B Topic: Total Variable Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

21) A firm's marginal cost is the increase in its total cost divided by the increase in its A) quantity of labor. B) average cost. C) output. D) average revenue. Answer: C Topic: Marginal Cost Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

22) Marginal cost is equal to A) total cost divided by output. B) output divided by total cost. C) the change in total cost divided by the change in total revenue. D) the change in total cost divided by the change in output. Answer: D Topic: Marginal Cost Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

23) Marginal cost is the increase in total ________ that results from a one-unit increase in ________. A) fixed cost; the fixed input B) cost; output C) variable cost; the variable input D) fixed cost; output Answer: B Topic: Marginal Cost Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

24) Marginal cost is A) all the costs of the fixed inputs. B) all the costs of production of goods. C) all the costs that vary with output. D) the change in the total cost resulting from a one-unit change in output. Answer: D Topic: Marginal Cost Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

25) Marginal cost is calculated as A) total cost divided by output. B) the increase in total cost divided by the increase in output. C) the increase in total cost divided by the increase in labor, given the amount of capital. D) total cost minus total fixed cost. Answer: B Topic: Marginal Cost Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

26) Marginal cost ________ as the quantity produced is increased. A) first increases and then decreases B) first decreases and then increases C) always increases D) always decreases Answer: B Topic: Marginal Cost Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

27) A decrease in the price of a fixed factor of production decreases total cost and A) increases marginal cost. B) leaves marginal cost unchanged. C) decreases marginal cost. D) increases variable cost. Answer: B Topic: Marginal Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

28) Ernie's Earmuffs produces 200 earmuffs per year at a total cost of $2,000 and $400 of this cost is fixed. If he increases output to 220 earmuffs, his total cost increases to $2100, and his fixed cost remains $400. What is Ernie's marginal cost per earmuff? A) $105 B) $35 C) $9.55 D) $5 Answer: D Topic: Marginal Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

29) A company could produce 99 units of a good for $316 or produce 100 units of the same good for $320. The marginal cost of the 100th unit A) is $3.20. B) is $4.00. C) is $320. D) cannot be calculated with this information. Answer: B Topic: Marginal Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

30) A company could produce 100 units of a good for $320 or produce 101 units of the same good for $324. The $4 difference in costs is A) the marginal benefit of producing the 101st unit. B) the marginal cost of producing the 101st unit. C) both the marginal benefit and the marginal cost of producing the 101st unit. D) neither the marginal benefit nor the marginal cost of producing the 101st unit. Answer: B Topic: Marginal Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

31) As output increases, marginal cost will eventually A) increase because of the law of increasing returns. B) increase because of the law of diminishing returns. C) decrease because of the law of diminishing returns. D) decrease because of the law of increasing returns. Answer: B Topic: Marginal Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

32) Which of the following statements is true? A) Average fixed cost equals average total cost plus average variable cost. B) Average variable cost is always greater than average fixed cost. C) Average fixed cost equals total fixed cost divided by total output. D) Average total cost always falls as output increases. Answer: C Topic: Average Fixed Cost Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

33) As output increases, average fixed cost A) always decreases. B) increases, then decreases. C) decreases, then increases. D) remains constant. Answer: A Topic: Average Fixed Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

34) By using more labor to produce more output, a firm can always reduce its A) marginal cost. B) average variable cost. C) average total cost. D) average fixed cost. Answer: D Topic: Average Fixed Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

35) Average total cost minus average variable cost ________ as output increases because ________ as output increases. A) decreases and then increases; marginal cost initially decreases and then increases B) decreases; average fixed cost decreases C) decreases; marginal returns diminish D) decreases; economies of scale are present Answer: B Topic: Average Fixed Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

36) As output increases, AVC approaches ATC because of A) diseconomies of scale. B) diminishing marginal returns. C) decreasing average fixed cost. D) increasing marginal cost. Answer: C Topic: Average Fixed Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

37) Average variable cost is equal to A) average total cost minus average fixed cost. B) average total cost multiplied by output. C) total cost divided by output. D) the change in total cost divided by the change in output. Answer: A Topic: Average Variable Cost Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

38) The average total cost curve eventually slopes upwards because of the A) law of diminishing returns. B) reductions in average fixed costs. C) increase in capital costs. D) decrease in labor costs. Answer: A Topic: Why the Average Total Cost Curve is U-Shaped Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

39) The average total cost curve A) is U-shaped. B) diminishes initially because average fixed costs diminish. C) increases eventually because of diminishing returns. D) All of the above answers are correct. Answer: D Topic: Why the Average Total Cost Curve is U-Shaped Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

40) Average total costs are total costs divided by A) total output. B) total fixed costs. C) total variable costs. D) the total number of workers employed. Answer: A Topic: Average Total Cost Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills

41) Average total costs are A) total costs divided by total output. B) total output divided by total costs. C) the change in total costs divided by the change in output. D) the change in output divided by the change in total costs. Answer: A Topic: Average Total Cost Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

42) A firm's average total cost is $60, its average variable cost is $30, and its total fixed cost is $600. Its output is A) 20 units. B) 30 units. C) 40 units. D) 50 units. Answer: A Topic: Average Costs Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Labor (workers per day) 0 1 2 3 4 5

Output (units per day) 0 13 18 22 24 25

43) Sandra's Sweaters' production function is shown in the above table. Sandra rents three knitting machines for $30 a day each and hires workers at a wage rate of $40 a day. If Sandra produces 18 sweaters per day, what is her average total cost? A) $5.00 B) $6.67 C) $9.44 D) $10.00 Answer: C Topic: Average Total Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

44) Sandra's Sweaters' production function is shown in the above table. Sandra rents three knitting machines for $30 a day each and hires workers at a wage rate of $40 a day. If the rental rate of capital rises to $50 per machine a day, Sandra's ________ curve shifts upward. A) average variable cost B) total variable cost C) average fixed cost D) marginal cost Answer: C Topic: Average Fixed Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Labor (workers) 0 5 10 15 20

Output (frijoles) 0 1000 3000 4000 4500

Total cost (dollars) 1,000 3,000 5,000 7,000 9,000

45) The above table gives some production and cost information for Flaming Fernando's, a restaurant that sells Fiery Frijoles. What is the total fixed cost of producing 4,500 frijoles? A) $1000 B) $8000 C) $9000 D) More information is needed to determine the answer. Answer: A Topic: Total Fixed Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

46) The above table gives some production and cost information for Flaming Fernando's, a restaurant that sells Fiery Frijoles. Between what two levels of output does the marginal cost of producing Fiery Frijoles first begin to rise? A) 0 and 1000 B) 1000 and 3000 C) 3000 and 4000 D) 4000 and 4500 Answer: C Topic: Marginal Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

47) The above table gives some production and cost information for Flaming Fernando's, a restaurant that sells Fiery Frijoles. What is the average variable cost of producing 1,000 frijoles? A) $1 B) $2 C) $3 D) More information is needed to determine the answer. Answer: B Topic: Average Variable Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

48) The above table gives some production and cost information for Flaming Fernando's, a restaurant that sells Fiery Frijoles. What is the average total cost of producing 4,500 frijoles? A) $2 B) $225 C) $9000 D) More information is needed to determine the answer. Answer: A Topic: Average Total Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

49) The production and cost information provided in the table above for Flaming Fernando's, a restaurant that sells Fiery Frijoles, is for the A) short run because there are no variable costs. B) short run because there is a fixed cost. C) long run because there are no variable costs. D) long run because there are no fixed costs. Answer: B Topic: Short Run and Long Run Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

50) As output increases, total cost ________, total fixed cost ________, and total variable cost ________. A) increases; increases; increases B) increases; increases; does not change C) increases; does not change; increases D) does not change; increases; increases Answer: C Topic: Total Cost, Variable Cost, and Fixed Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

51) The vertical distance between the total variable cost curve and the total cost curve ________ as output increases; the vertical distance between the average variable cost curve and the average total cost curve ________ as output increases. A) decreases; remains the same B) is constant; becomes smaller C) increases; becomes smaller at first but then increases D) increases; remains the same Answer: B Topic: Fixed Cost and Average Fixed Cost Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills

52) If total fixed cost increases, then the average total cost curve ________ and the marginal cost curve ________. A) does not shift; shifts upward B) shifts upward; shifts upward C) does not shift; does not shift D) shifts upward; does not shift Answer: D Topic: Fixed Cost and Marginal Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Labor (workers per week) 0 1 2 3 4 5 6

Output (units per week) 0 20 50 70 85 95 100

53) In the table above, the marginal product of the 5th worker is ________ units per week. A) 2 B) 5 C) 10 D) 19 Answer: C Topic: Marginal Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

54) The table above gives a firm's total product schedule. Suppose labor is the only variable factor of production. The price of labor is $500 per week and total fixed costs are $600 per week. What is the total cost of producing 70 units? A) $1,700 B) $1,900 C) $2,100 D) $2,300 Answer: C Topic: Total Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

55) The table above gives a firm's total product schedule. Suppose labor is the only variable factor of production. The price of labor is $500 per week and total fixed costs are $600 per week. If 95 units are produced, the average total cost is A) $6.31. B) $17.45. C) $26.32. D) $32.63. Answer: D Topic: Average Total Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

56) The table above gives a firm's total product schedule. Suppose labor is the only variable factor of production. The price of labor is $500 per week and total fixed costs are $600 per week. What is the marginal cost of producing the 90th unit? A) $10.00 B) $24.92 C) $31.61 D) $50.00 Answer: D Topic: Marginal Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Decent Donuts Total product (dozens Labor (workers) of donuts per day) 0 0 1 12 2 26 3 44 4 64 5 86 6 110 7 122 8 125 9 127 10 128 57) Use the data in the table above and suppose that labor is the only variable factor of production. If each worker is paid $42.00 per day, what is the average variable cost to Decent Donuts of producing 122 dozen donuts per day? A) $1.91 B) $2.16 C) $2.41 D) $3.06 Answer: C Topic: Average Variable Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

58) Use the data in the table above and suppose that labor is the only variable factor of production. When 122 dozen donuts are produced at Decent Donuts, the MC curve A) has a positive slope. B) shows the effect of increasing marginal returns. C) Both answers A and B are correct. D) Neither answer A nor B is correct. Answer: A Topic: Marginal Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

59) Use the data in the table above and suppose that labor is the only variable factor of production. When 122 dozen donuts are produced at Decent Donuts, the AVC curve A) has a negative slope. B) has a positive slope. C) is at its minimum point. D) is at its maximum point. Answer: B Topic: Average Variable Cost Curve Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

60) Use the data in the above table and suppose that labor is the only variable factor of production. At what level of output does the marginal cost start to rise at Decent Donuts? A) 0 dozen donuts B) 111 dozen donuts C) 128 dozen donuts D) There is not enough information given to determine when the marginal cost starts to increase. Answer: B Topic: Cost Curves and Product Curves Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Labor (workers per day) 0 1 2 3 4 5

Output (units per day) 0 10 15 18 20 21

61) Cindy's Sweaters' production function is shown in the above table. What is the marginal product of labor when the 4th worker is hired? A) 4 sweaters per day B) 2 sweaters per day C) 20 sweaters per day D) 5 sweaters per day Answer: B Topic: Marginal Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

62) Cindy's Sweaters' production function is shown in the above table. Cindy rents two knitting machines for $30 a day each and hires workers at a wage rate of $40 a day. If Cindy produces 18 sweaters per day, what is her total cost? A) $120 B) $140 C) $180 D) $60 Answer: C Topic: Total Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

63) Cindy's Sweaters' production function is shown in the above table. Cindy rents two knitting machines for $30 a day each and hires workers at a wage rate of $40 a day. If Cindy produces 20 sweaters per day, what is her average fixed cost of production? A) $3.00 B) $3.33 C) $8.00 D) $11.00 Answer: A Topic: Average Fixed Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

64) Cindy's Sweaters' production function is shown in the above table. Cindy rents two knitting machines for $30 a day each and hires workers at a wage rate of $40 a day. What is the marginal cost of the 19th sweater? A) $40.00 B) $20.00 C) $10.00 D) $8.00 Answer: B Topic: Marginal Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

65) Cindy's Sweaters' production function is shown in the above table. Cindy rents two knitting machines for $30 a day each and hires workers at a wage rate of $40 a day. If Cindy produces 18 sweaters per day, what is her average total cost? A) $6.67 B) $10.00 C) $11.00 D) $13.33 Answer: B Topic: Average Total Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Labor (workers) 0 1 2 3 4 5 6 7 8 9 10

Total product (books sold per hour) 0 10 24 40 58 73 83 87 89 90 90

66) The above table shows the total product schedule for the campus book store. If employees are paid $6 per hour and there are no other variable costs, then what is the marginal cost (MC) per book of increasing book sales from 83 to 87 books per hour? A) $6.00 B) $4.00 C) $2.07 D) $1.50 Answer: D Topic: Marginal Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

67) The above table shows the total product schedule for the campus book store. If each employee is paid $6 per hour and there are no other variable costs, then at what level of books sold per hour does the marginal cost begin to increase? A) 41 books per hour B) 59 books per hour C) 73 books per hour D) 90 books per hour Answer: B Topic: Short-Run Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

68) The above table shows the total product schedule for the campus book store. If each employee is paid $6 per hour, what is the average variable cost of selling 83 books per hour (assuming labor costs are the only variable costs of production)? A) $0.43 per book B) $0.07 per book C) $2.30 per book D) $6.00 per book Answer: A Topic: Average Variable Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

69) The above table shows the total product schedule for the campus book store. If employees are paid $6 per hour, assuming there are no other variable costs, then the average variable cost of selling books will reach its minimum at A) 58 books sold per hour. B) 59 books sold per hour. C) 73 books sold per hour. D) 83 books sold per hour. Answer: C Topic: Average Variable Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

70) The above table shows the total product schedule for the campus book store. When the book store is selling 60 books per hour it is certain that A) marginal costs are increasing, but average variable costs are still decreasing. B) both marginal and average costs are decreasing. C) both marginal and average costs are increasing. D) hiring one more employee per hour will lead to fewer books being sold. Answer: A Topic: Short-Run Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 61 Copyright © 2014 Pearson Education, Inc.

Cost schedule Labor (workers) 0 1 2 3 4 5

Output Total fixed cost (units per day) (dollars) 0 4 9 13 16 18

20 20 20 20 20 20

Total variable cost (dollars) 0 25 50 75 100 125

71) In the above table, the total cost of producing 9 units of output is A) $20. B) $30. C) $50. D) $70. Answer: D Topic: Total Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

72) The above table shows a firm's A) long-run costs. B) short-run costs. C) short-run and long-run costs. D) More information is needed to determine if the costs are long-run costs or short-run costs. Answer: B Topic: Total Fixed Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

73) In the above table, the total variable cost of producing 16 units of output is A) $20. B) $60. C) $100. D) $120. Answer: C Topic: Total Variable Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

74) Using the data in the above table, when output increases from 4 to 9 units, the marginal cost of one of those 5 units is A) $4.00. B) $4.25. C) $5.00. D) $6.25. Answer: C Topic: Marginal Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

75) Using the data in the above table, the average fixed cost of producing 9 units per day is A) $2.22. B) $5.00. C) $5.55. D) $20.00. Answer: A Topic: Average Fixed Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

76) Using the data in the above table, the average total cost of producing 16 units per day is A) $1.25. B) $6.25. C) $7.00 D) $7.50. Answer: D Topic: Average Variable Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Output (pies) 0 100 200 300 400

Total variable cost (dollars) 0 400 1,000 1,800 2,800

Total cost (dollars) 300

77) The above table gives some of the costs of the Delicious Pie Company. What is the total fixed cost of producing 100 pies? A) $300 B) $400 C) $700 D) More information is needed to calculate the total fixed cost. Answer: A Topic: Total Fixed Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

78) The above table gives some of the costs of the Delicious Pie Company. The marginal cost of increasing pie output from 200 to 300 pies equals ________ per pie. A) $1.800 B) $1,000 C) $8 D) $6 Answer: C Topic: Marginal Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

79) The above table gives some of the costs of the Delicious Pie Company. What is the average variable cost of producing 300 pies? A) $1,800 B) $6 C) $5 D) More information is needed to calculate the average variable cost. Answer: C Topic: Average Variable Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

80) The above table gives some of the costs of the Delicious Pie Company. What is the average total cost of producing 200 pies? A) $5.00 B) $650 C) $6.50 D) More information is needed to calculate the average total cost. Answer: C Topic: Average Total Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Total product Labor (workers per (baseball hats per hour) hour) 0 0 1 4 2 10 3 18 4 25 5 30 81) The table above gives production information for Bob's Baseball Cap Company. Bob's total cost when zero caps are produced is $200 and workers cost $10 per hour. The total fixed cost of producing 10 baseball hats per hour is A) $400. B) $200. C) $22. D) More information is needed to answer the question. Answer: B Topic: Total Fixed Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

82) The table above gives production information for Bob's Baseball Cap Company. Bob's total cost when zero caps are produced is $200 and workers cost $10 per hour. The total variable cost of producing 18 baseball hats per hour is A) $200.00 B) $30.00. C) $1.67. D) More information is needed to answer the question. Answer: B Topic: Total Variable Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

83) The table above gives production information for Bob's Baseball Cap Company. Bob's total cost when zero caps are produced is $200 and workers cost $10 per hour. The total cost of producing 30 baseball hats per hour is A) $50. B) $200. C) $250. D) More information is needed to answer the question. Answer: C Topic: Total Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

84) The table above gives production information for Bob's Baseball Cap Company. Bob's total cost when zero caps are produced is $200 and workers cost $10 per hour. The average fixed cost of producing 25 baseball hats per hour is A) $1.60 B) $8.00. C) $9.60. D) More information is needed to answer the question. Answer: B Topic: Average Fixed Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

85) The table above gives production information for Bob's Baseball Cap Company. Bob's total cost when zero caps are produced is $200 and workers cost $10 per hour. The average variable cost of producing 10 baseball hats per hour is A) $1. B) $2. C) $20. D) More information is needed to answer the question. Answer: B Topic: Average Variable Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

86) The table above gives production information for Bob's Baseball Cap Company. Bob's total cost when zero caps are produced is $200 and workers cost $10 per hour. The average total cost of producing 4 baseball hats per hour is A) $1.67. B) $50.00. C) $52.50. D) More information is needed to answer the question. Answer: C Topic: Average Total Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

87) The table above gives production information for Bob's Baseball Cap Company. Bob's total cost when zero caps are produced is $200 and workers cost $10 per hour. The marginal cost per hat of producing 30 hats per hour (instead of 25) is A) $240.00 per hat. B) $250.00 per hat. C) $8.33 per hat. D) $2.00 per hat. Answer: D Topic: Marginal Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Output (units)

Total cost (dollars)

0 3 9 14 17

Average variable cost (dollars)

Marginal cost (dollars) 80

20 290 380

88) The above (incomplete) table provides information about the relationships between output and various cost measures. The total fixed cost (TFC) for the firm is A) zero. B) $45. C) $10. D) None of the above answers is correct. Answer: C Topic: Total Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

89) The above (incomplete) table provides information about the relationships between output and various cost measures. The total cost (TC) of producing 9 units of output is A) $180. B) $190. C) $20. D) None of the above answers is correct. Answer: B Topic: Total Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

90) The above (incomplete) table provides information about the relationships between output and various cost measures. The marginal cost per unit when increasing output from 14 to 17 units is A) $20. B) $30. C) $380. D) None of the above answers is correct. Answer: B Topic: Marginal Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Output (tents) 0 1 2 3 4

Total fixed cost (dollars) 50 50 50 50 50

Total variable cost (dollars) 0 25 45 70 115

Total cost (dollars) 50 75 95 120 165

91) The above table shows some cost data for Tracey's Tents. What is the marginal cost of the 3rd tent? A) $25 B) $20 C) $70 D) $120 Answer: A Topic: Marginal Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

92) The above table shows some cost data for Tracey's Tents. What is the average total cost when output is 3? A) $120 B) $30 C) $40 D) $50 Answer: C Topic: Average Total Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

93) The above table shows some cost data for Tracey's Tents. What is the average fixed cost when 4 tents are produced? A) $50.00 B) $12.50 C) $25.00 D) $37.50 Answer: B Topic: Average Fixed Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Quantity (barrels of pickles) 0 1 2 3 4 5 6

Total variable cost (dollars) 0 20 35 50 75 110 160

94) The above table gives some cost data for Peter's Pickles. Peter's fixed cost is $20. His total cost of producing 6 barrels of pickles is A) $160. B) $180. C) $450. D) There is not enough information to answer the question. Answer: B Topic: Total Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

95) The above table gives some cost data for Peter's Pickles. Peter's fixed cost is $20. The marginal cost of increasing output from 3 to 4 barrels of pickles is A) $25. B) $75. C) $20. D) $50. Answer: A Topic: Marginal Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

96) The above table gives some cost data for Peter's Pickles. Peter's fixed cost is $20. The average total cost (ATC) when 5 barrels of pickles are produced is A) $22. B) $26. C) $35. D) There is not enough information to answer the question. Answer: B Topic: Average Total Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

97) The above table gives some cost data for Peter's Pickles. Peter's fixed cost is $20. Average variable cost (AVC) is lowest when output is equal to A) 1 barrel of pickles. B) 2 barrels of pickles. C) 3 barrels of pickles. D) 4 barrels of pickles. Answer: C Topic: Average Variable Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Output (T shirts per hour) 4 5 6

Total cost (dollars) 42 50 60

Total variable cost (dollars) 22 30 40

98) The table above gives the cost of producing T-shirts. The total fixed cost is ________ and the marginal cost of increasing production from 5 to 6 T shirts is ________. A) $20; $6 B) $20; $10 C) $10.40; $8 D) unable to be determined; $8 Answer: B Topic: Total Fixed Cost and Marginal Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

99) The table above gives the cost of producing T-shirts. When 5 T-shirts are produced, the average fixed cost is ________ and the average variable cost is ________. A) $4; $10 B) $10; $6 C) $5; $3 D) $4; $6 Answer: D Topic: Average Fixed Cost and Average Variable Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Cost schedule Total variable Output Labor (workers) cost (units per day) (dollars) 0 0 0 1 3 20 2 8 40 3 12 60 4 14 80 5 15 100

Total cost (dollars) 30 50 70 90 110 130

100) In the above table, the total fixed cost is A) $0. B) $20. C) $30. D) $50. Answer: C Topic: Fixed Costs Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

101) In the above table, when output increases from 8 to 12 units, the marginal cost of one of those 4 units is A) $1.20. B) $2.00. C) $5.00. D) $15.00. Answer: C Topic: Marginal Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

102) In the above table, the average fixed cost of producing 15 units of output is A) $0.50. B) $2.00. C) $6.66. D) $8.66. Answer: B Topic: Average Fixed Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

103) In the above table, the average variable cost of producing 14 units of output is A) $0.175. B) $5.71. C) $7.86. D) $10.00. Answer: B Topic: Average Variable Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

104) In the above table, the average total cost of producing 14 units of output is A) $5.71. B) $6.75. C) $7.00. D) $7.86. Answer: D Topic: Average Total Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

105) A firm's average total cost is $100, its average variable cost is $90, and its total fixed cost is $1,000. Its output is A) less than 70 units. B) between 70 and 120 units. C) between 120 and 170 units. D) more than 170 units. Answer: B Topic: Costs Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

106) A firm's average total cost is $80, its average variable cost is $75, and its output is 50 units. Its total fixed cost is A) less than $100. B) between $100 and $200. C) between $200 and $300. D) more than $300. Answer: C Topic: Costs Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

107) A firm's average variable cost is $60, its total fixed cost is $3,000, and its output is 600 units. Its average total cost is A) less than $58. B) between $58 and $62. C) between $62 and $64. D) more than $64. Answer: D Topic: Costs Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

108) A firm's average variable cost is $90, its total fixed cost is $10,000, and its output is 1,000 units. Its total cost is A) less than $85,000. B) between $85,000 and $95,000. C) between $95,000 and $105,000. D) more than $105,000. Answer: C Topic: Costs Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

109) A firm's average total cost is $80, its fixed cost is $1000, and its output is 100 units. Its average variable cost A) is less than $40. B) is between $40 and $60. C) is more than $60. D) cannot be determined without more information. Answer: C Topic: Costs Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

110) A firm's marginal cost is $30, its average total cost is $50, and its output is 800 units. Its total cost of producing 801 units is A) less than $40,000. B) between $40,000 and $40,050. C) between $40,050 and $40,080. D) greater than $40,080. Answer: B Topic: Costs Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

111) A firm's marginal cost is $82, its average total cost is $50, and its output is 800 units. Its total cost of producing 801 units is A) less than $40,000. B) between $40,000 and $40,050. C) between $40,050 and $40,080. D) greater than $40,080. Answer: D Topic: Costs Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

112) The vertical distance between a firm's total cost (TC) and its total variable cost (TVC) curves A) decreases as output decreases. B) is equal to the average variable cost, AVC. C) is equal to the total fixed cost, TFC. D) is equal to the marginal cost, MC. Answer: C Topic: Total Fixed Cost Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

113) In the above figure, the total fixed cost curve is curve A) A. B) B. C) C. D) none of the curves in the figure Answer: C Topic: Total Fixed Cost Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

114) In the above figure, the total variable cost curve is curve A) A. B) B. C) C. D) none of the curves in the figure Answer: B Topic: Total Variable Cost Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

115) In the above figure, the total cost curve is curve A) A. B) B. C) C. D) none of the curves in the figure Answer: A Topic: Total Cost Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 76 Copyright © 2014 Pearson Education, Inc.

116) In the above figure, the relationship between costs indicates that the distance between curves A) A and B is equal to the fixed cost. B) A and B is equal to the variable cost. C) B and C is equal to the fixed cost. D) B and C is equal to the average total cost. Answer: A Topic: Total Fixed Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

117) Fernando charges the restaurant Flaming Fernando's $1,000 annually for use of his name. If Fernando increases the fee for use of his name, A) the restaurant's average fixed cost, average variable cost, average total cost, and marginal cost curves all shift upward. B) the restaurant's average fixed cost, average total cost, and marginal cost curves shift upward. C) the restaurant's average variable cost, average total cost, and marginal cost curves shift upward. D) the restaurant's average fixed cost and average total cost curves shift upward. Answer: D Topic: Change in the Price of a Resource Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

118) As output increases, the slope of the curve showing the firm's average fixed cost is A) first negative, then positive. B) first positive, then negative. C) always negative. D) always positive. Answer: C Topic: Average Fixed Cost Curve Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

119) The vertical distance between a firm's average total cost curve, ATC, and its average variable cost curve, AVC, A) decreases as output increases. B) is equal to its marginal cost, MC. C) is equal to its total fixed cost, TFC. D) is equal to its average product. Answer: A Topic: Average Fixed Cost Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

120) The output at which average variable cost is a minimum is ________ than the output at which ________ is a minimum. A) the same as; average total cost B) the same as; marginal cost C) less than; average total cost D) less than; marginal cost Answer: C Topic: Average Variable Cost Curve and Average Total Cost Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

121) Which of the following curves is not U-shaped? A) average variable cost curve B) average fixed cost curve C) average total cost curve D) marginal cost curve Answer: B Topic: Average Fixed Cost Curve Skill: Conceptual Status: New A-level heading: Short-Run Cost AACSB: Reflective Thinking

122) In the figure above, curve C is the ________ curve. A) average fixed cost B) average variable cost C) average total cost D) marginal cost Answer: B Topic: Average Variable Cost Curve Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills

123) In the figure above, curve A is the ________ curve. A) average fixed cost B) average variable cost C) average total cost D) marginal cost Answer: D Topic: Average Variable Cost Curve Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills

124) In the figure above, curve B is the ________ curve. A) average fixed cost B) average variable cost C) average total cost D) marginal cost Answer: C Topic: Average Variable Cost Curve Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills 79 Copyright © 2014 Pearson Education, Inc.

125) In the figure above, when 20 units are produced the marginal cost is A) less than $8. B) $8. C) more than $8 and less than $16. D) None of the above answers is correct. Answer: A Topic: Marginal Cost Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

126) In the figure above, when 40 units are produced the average fixed cost is A) $4. B) $8. C) $12. D) $20. Answer: A Topic: Average Fixed Cost Curve Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

127) In the above figure, the marginal cost curve is curve A) A. B) B. C) C. D) D. Answer: A Topic: Marginal Cost Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 80 Copyright © 2014 Pearson Education, Inc.

128) In the above figure, the average fixed cost curve is curve A) A. B) B. C) C. D) D. Answer: D Topic: Average Fixed Cost Curve Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills

129) In the above figure, the average variable cost curve is curve A) A. B) B. C) C. D) D. Answer: C Topic: Average Variable Cost Curve Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills

130) In the above figure, the average total cost curve is curve A) A. B) B. C) C. D) D. Answer: B Topic: Average Total Cost Curve Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills

131) In the above figure, as output increases, the distance between curves B and C decreases because A) total cost decreases as output increases. B) average fixed cost decreases as output increases. C) there are diminishing returns to average total cost. D) there are increasing marginal costs as output increases. Answer: B Topic: Average Fixed Cost Curve Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

132) In the above figure, curve D slopes downward because A) average fixed costs decrease as output increases. B) all costs decrease as output increases. C) there are diminishing returns. D) there are decreasing marginal costs. Answer: A Topic: Average Fixed Cost Curve Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

133) In the above figure, the intersection of curves A and C is the point at which A) average total cost is minimized. B) average variable cost is minimized. C) average fixed cost is minimized. D) total product is maximized. Answer: B Topic: Relationship Between Marginal Cost and Average Variable Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

134) In the above figure, the intersection of curves A and B is the point at which A) average total cost is minimized. B) average variable cost is minimized. C) average fixed cost is minimized. D) total product is maximized. Answer: A Topic: Relationship Between Marginal Cost and Average Total Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

135) The above figure shows the costs at Barney's Bagel Bakery. At which of the following amounts of output is the AFC be the lowest? A) at 2000 bagels B) at 3000 bagels C) at 3500 bagels D) None of the above because the AFC is constant regardless of how many bagels are produced each day. Answer: C Topic: Average Fixed Cost Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills

136) The above figure shows the costs at Barney's Bagel Bakery. As the amount of output increases, the AVC curve approaches the ATC curve because the A) TFC curve (not shown) slopes down. B) AFC curve (not shown) slopes down. C) MC curve is rising. D) AVC curve is rising. Answer: B Topic: Average Fixed Cost Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

137) The above figure shows the costs at Barney's Bagel Bakery. After 3000 bagels are produced each day, the ATC curve starts to slope upward because the A) MC curve slopes upward. B) MC exceeds the ATC. C) AFC curve (not shown) starts to slope upward. D) None of the above answers is correct. Answer: B Topic: Relationship Between Marginal Cost and Average Total Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

138) The above figure shows the costs at Barney's Bagel Bakery. Up to which level of output will increasing marginal returns in production be experienced at Barney's Bagel Bakery? A) up to 500 bagels B) up to 2000 bagels C) up to 3000 bagels D) up to 3500 bagels Answer: A Topic: Cost Curves and Product Curves Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills

139) Based on the above figure of the costs at Barney's Bagel Bakery, at which level of output will diminishing marginal returns first occur? A) at 1 bagel B) at 500 bagels C) at 2000 bagels D) at 3000 bagels Answer: B Topic: Cost Curves and Product Curves Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills

140) Based on the above figure of the costs at Barney's Bagel Bakery, at which of the following levels of output does the marginal product of labor equal the average product of labor? A) at 500 bagels B) at 2000 bagels C) at 3000 bagels D) None of the above because the marginal and average products of labor can never be equal. Answer: B Topic: Cost Curves and Product Curves Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills

141) The above figure shows the costs at Barney's Bagel Bakery. For which of the following levels of output does the marginal product of labor exceed the average product of labor? A) at 1000 bagels daily B) at 2000 bagels daily C) at 3000 bagels daily D) all of the above Answer: A Topic: Cost Curves and Product Curves Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills

142) The above figure shows the costs at Barney's Bagel Bakery. For which of the following levels of output does the average product of labor exceed the marginal product of labor? A) at 1000 bagels daily B) at 2000 bagels daily C) at 3000 bagels daily D) all of the above Answer: C Topic: Cost Curves and Product Curves Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills

143) Some of the cost curves for Ike's Ice Cream Kitchen are given in the above figure. At which of the following levels of output will AFC be the lowest? A) at 0 gallons B) at 10 gallons C) at 40 gallons D) at 70 gallons Answer: D Topic: Average Fixed Cost Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills

144) As illustrated in the above figure, after 40 gallons are produced each hour at Ike's Ice Cream Kitchen, the AVC curve starts to slope upward. The AVC starts to slope upward because the A) MC curve slopes upward. B) MC exceeds the AVC. C) ATC curve has not yet reached its minimum. D) None of the above answers is correct. Answer: B Topic: Relationship Between Marginal Cost and Average Variable Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

145) As illustrated in the above figure, after 60 gallons are produced each hour at Ike's Ice Cream Kitchen, the ATC curve starts to slope upward. The ATC starts to slope upward because the A) MC curve slopes upward. B) MC exceeds the ATC. C) distance between the ATC and the AVC curve is shrinking. D) None of the above answers is correct. Answer: B Topic: Relationship Between Marginal Cost and Average Total Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

146) Based on the above figure, up to which level of output will Ike's Ice Cream Kitchen have increasing marginal returns? A) only at 0 gallons B) up to 10 gallons C) up to 40 gallons D) up to 60 gallons Answer: B Topic: Cost Curves and Product Curves Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills

147) Based on the above figure, at which level of output does diminishing marginal returns first occur at Ike's Ice Cream Kitchen? A) at 0 gallons B) at 10 gallons C) at 40 gallons D) at 60 gallons Answer: B Topic: Cost Curves and Product Curves Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills

148) Some of the cost curves for Ike's Ice Cream Kitchen are given in the above figure. At which of the following levels of output does the marginal product of labor equal the average product of labor? A) at 0 gallons B) at 10 gallons C) at 40 gallons D) at 60 gallons Answer: C Topic: Cost Curves and Product Curves Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills

149) Based on the above figure, for which of the following levels of output at Ike's Ice Cream Kitchen does the marginal product of labor exceed the average product of labor? A) at 10 gallons B) at 40 gallons C) at 70 gallons D) all of the above Answer: A Topic: Cost Curves and Product Curves Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills

150) Based on the above figure, for which of the following amounts of output at Ike's Ice Cream Kitchen does the average product of labor exceed the marginal product of labor? A) at 10 gallons B) at 40 gallons C) at 70 gallons D) all of the above Answer: C Topic: Cost Curves and Product Curves Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills

151) The marginal cost (MC) curve intersects the A) ATC, AVC, and AFC curves at their minimum points. B) ATC and AFC curves at their minimum points. C) AVC and AFC curves at their minimum points. D) ATC and AVC curves at their minimum points. Answer: D Topic: Relationship Between Marginal Cost and Average Total Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

152) If average variable cost is decreasing as output increases, then marginal cost is definitely A) decreasing as output increases. B) increasing as output increases. C) less than average variable cost. D) greater than average variable cost. Answer: C Topic: Relationship Between Marginal Cost and Average Variable Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

153) When marginal cost is greater than average total cost, the A) marginal cost decreases as output increases. B) marginal cost does not change as output increases. C) average total cost increases as output increases. D) average total cost decreases as output increases. Answer: C Topic: Relationship Between Marginal Cost and Average Total Cost Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills

154) If marginal cost is less than average variable cost and output increases, average total cost ________ and average variable cost ________. A) increases; increases B) decreases; decreases C) decreases; increases D) increases; decreases Answer: B Topic: Relationship Between Marginal Cost and Average Total Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

155) If marginal cost exceeds average variable cost but is less than average total cost, then as output increases average total cost ________ and average variable cost ________. A) increases; decreases B) decreases; decreases C) increases; increases D) decreases; increases Answer: D Topic: Relationship Between Marginal Cost and Average Total Cost Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

156) If marginal cost is less than average total cost, then ________ is ________. A) average total cost; falling B) average variable cost; falling C) marginal cost; falling D) marginal cost; rising Answer: A Topic: Relationship Between Marginal Cost and Average Total Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

157) The marginal cost curve passes through the ________ points of the ________ cost curve and the ________ cost curve. A) minimum; average total; average variable B) minimum; average total; average fixed C) maximum; total cost; total variable D) minimum; average variable; average fixed Answer: A Topic: Relationship Between Marginal Cost and Average Total Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

158) If marginal cost exceeds average variable cost, then ________ cost is ________ as output increases. A) average total; at a maximum B) average total; falling C) average variable; rising D) average fixed; at a maximum Answer: C Topic: Relationship Between Marginal Cost and Average Variable Cost Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

159) Average variable cost is at a minimum at the same amount of output at which A) average product is at a maximum. B) marginal product is at a maximum. C) average product is at a minimum. D) marginal product is at a minimum. Answer: A Topic: Cost Curves and Product Curves Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

160) The range of output over which a firm's average variable cost is decreasing is the same as the range over which its A) marginal cost is increasing. B) average fixed cost is decreasing. C) average product is increasing. D) average product is decreasing. Answer: C Topic: Cost Curves and Product Curves Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

161) If as output increases average product increases, then ________. A) average total cost decreases B) average fixed cost decreases C) marginal cost decreases D) average variable cost decreases Answer: D Topic: Cost Curves and Product Curves Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

162) The output at which average product is a maximum is the same output at which ________ is a minimum. A) average fixed cost B) average variable cost C) average total cost D) marginal cost Answer: B Topic: Cost Curves and Product Curves Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

163) Increasing marginal returns means that as the firm expands its output, its A) long-run average total cost increases. B) long-run average total cost decreases. C) short-run average total cost increases. D) short-run average total cost decreases. Answer: D Topic: Cost Curves and Product Curves Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

164) Marginal cost eventually increases because A) of the law of diminishing returns. B) eventually each additional worker produces a successively smaller addition to output. C) the marginal product of the variable input eventually falls. D) All of the above answers are correct. Answer: D Topic: Cost Curves and Product Curves Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

165) A technological change that increases productivity ________ marginal product and ________ marginal cost. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: B Topic: Cost Curves and Product Curves Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

166) Which of the following shifts the ATC curve upward at the XYZ Co.? A) an increase in the hourly wage that XYZ pays its workers B) a decrease in the hourly wage that XYZ pays its workers C) an increase in the fixed amount of liability insurance premiums that XYZ pays for its business D) Both answers A and C are correct. Answer: D Topic: Shifts in the Cost Curves Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

167) Which of the following shifts the AVC curve upward at Barney's Bagel Bakery? A) an increase in the hourly wage that Barney pays his workers B) a decrease in the hourly wage that Barney pays his workers C) an increase in the fixed amount of liability insurance premiums that Barney pays for his business D) Both answers A and C are correct. Answer: A Topic: Change in the Price of a Resource Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

168) Which of the following shifts the AVC curve upward at Barney's Bagel Bakery? A) an increase in the hourly wage that Barney pays his workers B) an increase in Barney's daily output from hiring more workers C) an increase in the fixed amount of local property tax that Barney pays on the building he owns and uses D) all of the above Answer: A Topic: Change in the Price of a Resource Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

169) A change in technology that shifts the firm's total product curve upward without changing the quantity of capital used A) shifts the average total cost curve upward. B) shifts the average total cost curve downward. C) does not change the cost curves. D) shifts the marginal cost curve upward. Answer: B Topic: Change in Technology and Costs Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

170) The a firm's short-run cost curves shifts when there is a change in A) technology B) the prices of factors of production C) the quantity of outputs D) Both answers A and B are correct. Answer: D Topic: Short Run Cost Curves Skill: Conceptual Status: New A-level heading: Short-Run Cost AACSB: Reflective Thinking

171) Which cost always increases as output increases? A) total cost B) marginal cost C) average total cost D) average fixed cost Answer: A Topic: Study Guide Question, Total Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

172) Pat's Catering finds that when it caters 20 meals a week, its total cost is $6,000. If Pat has total variable cost of $5,000, what is Pat's total fixed cost? A) $50 B) $250 C) $1,000 D) $6,000 Answer: C Topic: Study Guide Question, Total Fixed Costs Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

173) The change in total cost from producing another unit of output equals the A) average total cost. B) variable cost. C) average variable cost. D) marginal cost. Answer: D Topic: Study Guide Question, Marginal Cost Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

174) A farmer discovers that the total cost of growing 50 acres of eggplant is $50,000 and that the total cost of growing 51 acres of eggplant is $52,000. The marginal cost of the 51st acre of eggplant is A) $52,000. B) $50,000. C) $2,000. D) $1,000. Answer: C Topic: Study Guide Question, Marginal Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

175) Which curve intersects the AVC curve at its minimum point? A) the MC curve B) the ATC curve C) the AFC curve D) the MP curve Answer: A Topic: Study Guide Question, Relationship Between Marginal Cost & Avg. Var. Cost Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills

176) If the ATC curve has a positive slope, then the MC curve must be A) horizontal. B) vertical. C) above the ATC curve. D) below the ATC curve. Answer: C Topic: Study Guide Question, Relationship Between Marginal Cost & Avg. Total Cost Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills

177) The average variable cost curve shifts downward if A) there is a decrease in fixed costs. B) there is a technological advance. C) the cost of a variable input increases. D) the price of output decreases. Answer: B Topic: Study Guide Question, Technological Change and Costs Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

178) The cost of a variable input, such as the wage paid to workers, decreases. This decrease shifts the A) total fixed cost curve downward. B) marginal product of labor curve downward. C) average variable cost curve downward. D) marginal product of labor curve upward. Answer: C Topic: Study Guide Question, Change in the Price of a Resource Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Labor (workers)

Output (units)

Total fixed cost, TFC (dollars)

0 1 2 3 4 5

0 4 9 13 16 18

20 20 20 20 20 20

Total variable cost, TVC (dollars) 0 25 50 75 100 125

Total cost, TC (dollars) 20 45 70 95 120 145

179) Using the data in the above table, the average fixed cost of producing 16 units is A) $1.11 a unit. B) $1.25 a unit. C) $1.54 a unit. D) $2.22 a unit. Answer: B Topic: Parallel MyEconLab Questions Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

180) Using the data in the above table, when the firm increases its output from 4 to 9 units, the marginal cost of a unit is A) $4.00 a unit. B) $5.00 a unit. C) $6.00 a unit. D) $7.00 a unit. Answer: B Topic: Parallel MyEconLab Questions Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

181) In the above figure, which of the following statements is FALSE? A) The total fixed cost curve is curve C. B) Total variable cost and total cost both increase as output increases. C) Marginal cost is equal to the slope of curve A. D) The vertical gap between curves A and B is equal to average fixed cost. Answer: D Topic: Parallel MyEconLab Questions Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

182) In the above figure, which of the following statements is FALSE? A) Average fixed cost decreases as output decreases. B) The vertical gap between curves B and C equals marginal fixed cost. C) The vertical gap between curves B and C gets smaller as AFC decreases. D) Curve A is the marginal cost curve. Answer: B Topic: Parallel MyEconLab Questions Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

183) Poppy Lipstick is a lipstick producer. A decrease in the rent paid by Poppy Lipstick A) shifts its TFC curve downward but not its TVC curve. B) shifts both its TFC curve and its TVC curve downward. C) does not shift its TFC curve but shifts its TVC curve upward. D) does not shift its TFC curve but shifts its TVC curve downward. Answer: A Topic: Parallel MyEconLab Questions Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

184) Sticky Cakes is a bakery. A decrease in the wage rate that Sticky Cakes pays its workers A) does not shift its MC curve or its ATC curve. B) shifts its MC curve downward but not its ATC curve. C) shifts both its MC curve and its ATC curve downward. D) does not shift its MC curve but shifts its ATC curve downward. Answer: C Topic: Parallel MyEconLab Questions Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 97 Copyright © 2014 Pearson Education, Inc.

4 Long-Run Cost 1) Which of the following statements is true? A) In the long run, the average cost curve is always downward sloping. B) In the long run, the quantities of all inputs are fixed. C) In the long run, the firms' fixed costs are greater than its variable costs. D) In the long run, all costs are variable costs. Answer: D Topic: Long Run Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

2) Which of the following is FALSE? A) Long-run average variable costs equal long-run average total costs. B) Fixed costs increase in the long run. C) As a firm produces more output, eventually it experiences diseconomies of scale. D) In the long run, both the amount of capital and labor used by the firm can be changed. Answer: B Topic: Short Run Versus Long Run Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

3) In the long run, A) all inputs can be varied. B) all inputs are fixed. C) some inputs are variable and other inputs are fixed. D) output is fixed. Answer: A Topic: Long Run Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

4) The firm's production function is the relationship between the ________ and ________. A) output produced; the quantities of all inputs B) maximum output attainable; the quantity of variable inputs C) possible range of maximum output; the quantity of variable inputs D) maximum output attainable; the quantities of both labor and capital Answer: D Topic: Production Function Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

5) A firm's long run cost is the cost of production when the firm A) calculates its cost at least one year into the future. B) adds together all of its short run costs. C) uses the economically efficient quantities for its plant and its labor. D) can vary the amount of output it produces. Answer: C Topic: Long-Run Cost Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

6) A firm's long-run average cost curve A) shows the lowest attainable average total cost of producing any level of output when the plant and labor are fixed. B) is the sum of all of its short-run average cost curves. C) tells the firm which plant size to use and which quantity of labor to use to minimize the cost of producing any level of output. D) all of the above Answer: C Topic: Long-Run Average Cost Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

7) The long-run average cost curve is the A) change in total product divided by the change in capital when the quantity of labor is constant. B) change in output resulting from a one-unit increase in the quantity of capital. C) relationship between the lowest attainable average total cost and output when both the plant size and labor are varied. D) relationship between the lowest attainable average total cost and output when both the plant size and labor are fixed. Answer: C Topic: Long-Run Average Cost Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

8) A firm's long-run average cost curve A) shows the lowest attainable average total cost of producing any level of output when the plant and labor are variable. B) is U-shaped. C) tells the firm which plant size to use and which quantity of labor to use to minimize the cost of producing any level of output. D) all of the above Answer: D Topic: Long-Run Average Cost Curve Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

9) Which of the following is correct? A) A firm's short-run average cost curve is derived from a series of long-run average cost curves. B) A firm's long-run average cost curve is derived from a series of short-run average cost curves. C) A firm's long-run total cost is the difference between its long-run fixed cost and long-run variable cost. D) Both answers A and C are correct. Answer: B Topic: Long-Run Average Cost Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

10) For each short-run average total cost curve, the ________ the plant, the ________ is the output at which average total cost is at a ________. A) larger; greater; maximum B) larger; greater; minimum C) larger; smaller; minimum D) smaller; smaller; minimum Answer: B Topic: Long-Run Average Cost Curve Skill: Conceptual Status: New A-level heading: Long-Run Cost AACSB: Reflective Thinking

Labor (workers per week) 1 2 3 4 5

Output with Plant 1 (1 oven) (pizzas per week) 50 80 100 110 115

Output with Plant 2 (2 ovens) (pizzas per week) 60 130 180 220 240

11) Silvio's Pizza is a small pizzeria. The firm's production function is shown in the table above. Suppose that Silvio's costs include only the cost of renting ovens, which is $100 per oven per week, the labor cost, $280 per worker per week, and the opportunity cost of Silvio's entrepreneurship, $1,000 per week. Suppose Silvio's kitchen currently has enough room for only one oven. If Silvio employs 3 workers, producing 200 pizzas per week is ________ in the short run and ________ in the long run. A) impossible; impossible B) impossible; possible C) possible; impossible D) possible; possible Answer: B Topic: Short Run and Long Run Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

12) Silvio's Pizza is a small pizzeria. The firm's production function is shown in the table above. Suppose that Silvio's costs include only the cost of renting ovens, which is $100 per oven per week, the labor cost, $280 per worker per week, and the opportunity cost of Silvio's entrepreneurship, $1,000 per week. If Silvio's uses Plant 1, the marginal product of the 3rd worker is ________ pizzas per week. A) 33 B) 100 C) 20 D) 80 Answer: C Topic: Marginal Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

13) Silvio's Pizza is a small pizzeria. The firm's production function is shown in the table above. Suppose that Silvio's costs include only the cost of renting ovens, which is $100 per oven per week, the labor cost, $280 per worker per week, and the opportunity cost of Silvio's entrepreneurship, $1,000 per week. With Plant 2, Silvio's average product per worker is highest if ________ workers per week are employed. A) 3 B) 4 C) 5 D) 2 Answer: D Topic: Average Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

14) Silvio's Pizza is a small pizzeria. The firm's production function is shown in the table above. Suppose that Silvio's costs include only the cost of renting ovens, which is $100 per oven per week, the labor cost, $280 per worker per week, and the opportunity cost of Silvio's entrepreneurship, $1,000 per week. Suppose Silvio's uses Plant 2. If Silvio hires the 4th worker, the firm will experience ________ marginal returns. A) diminishing B) increasing C) constant D) zero Answer: A Topic: Diminishing Marginal Returns Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

15) Silvio's Pizza is a small pizzeria. The firm's production function is shown in the table above. Suppose that Silvio's costs include only the cost of renting ovens, which is $100 per oven per week, the labor cost, $280 per worker per week, and the opportunity cost of Silvio's entrepreneurship, $1,000 per week. When Silvio's uses 2 ovens and hires the 3rd worker, the marginal product of labor is ________ the average product of labor, and therefore the average product of labor ________. A) less than; decreases B) less than; increases C) greater than; decreases D) greater than; increases Answer: B Topic: Average Product of Labor and Marginal Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

16) Silvio's Pizza is a small pizzeria. The firm's production function is shown in the table above. Suppose that Silvio's costs include only the cost of renting ovens, which is $100 per oven per week, the labor cost, $280 per worker per week, and the opportunity cost of Silvio's entrepreneurship, $1,000 per week. Suppose Silvio's uses Plant 1 and hires 3 workers. What is the firm's average fixed cost? A) $4.33 B) $8.40 C) $19.40 D) $11.00 Answer: D Topic: Average Fixed Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

17) Silvio's Pizza is a small pizzeria. The firm's production function is shown in the table above. Suppose that Silvio's costs include only the cost of renting ovens, which is $100 per oven per week, the labor cost, $280 per worker per week, and the opportunity cost of Silvio's entrepreneurship, $1,000 per week. Suppose Silvio's uses Plant 1 and hires 2 workers. What is the firm's average variable cost? A) $7.00 B) $6.40 C) $19.50 D) $8.25 Answer: A Topic: Average Variable Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

18) Silvio's Pizza is a small pizzeria. The firm's production function is shown in the table above. Suppose that Silvio's costs include only the cost of renting ovens, which is $100 per oven per week, the labor cost, $280 per worker per week, and the opportunity cost of Silvio's entrepreneurship, $1,000 per week. Suppose Silvio's uses Plant 2 and hires 4 workers. What is the firm's average total cost? A) $6.00 B) $8.26 C) $10.55 D) $12.40 Answer: C Topic: Average Total Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

19) Silvio's Pizza is a small pizzeria. The firm's production function is shown in the table above. Suppose that Silvio's costs include only the cost of renting ovens, which is $100 per oven per week, the labor cost, $280 per worker per week, and the opportunity cost of Silvio's entrepreneurship, $1,000 per week. Suppose Silvio's uses Plant 2. What is the marginal cost of producing the 200 th pizza? A) $5.09 B) $7.00 C) $10.55 D) $4.40 Answer: B Topic: Marginal Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

20) Silvio's Pizza is a small pizzeria. The firm's production function is shown in the table above. Suppose that Silvio's costs include only the cost of renting ovens, which is $100 per oven per week, the labor cost, $280 per worker per week, and the opportunity cost of Silvio's entrepreneurship, $1,000 per week. Suppose Silvio's uses Plant 2. The firm's average total cost is minimized when ________ pizzas per week are produced. A) 180 B) 130 C) 220 D) 60 Answer: C Topic: Average Total Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

21) Silvio's Pizza is a small pizzeria. The firm's production function is shown in the table above. Suppose that Silvio's costs include only the cost of renting ovens, which is $100 per oven per week, the labor cost, $280 per worker per week, and the opportunity cost of Silvio's entrepreneurship, $1,000 per week. What is Silvio's long-run average cost if the output is 100 pizzas per week? A) $8.40 B) $11.00 C) $19.40 D) $17.90 Answer: D Topic: Long-Run Average Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

22) Dustin's copy shop can use four alternative plants. The figure above shows the average total cost curves for Plant 1 (ATC1), Plant 2 (ATC2), Plant 3 (ATC3), and Plant 4 (ATC4).What is Dustin's long-run average cost if the output is 3,000 copies per day? A) 3.7 cents per copy B) 5.0 cents per copy C) 8.5 cents per copy D) More information is needed to determine the long-run average cost. Answer: A Topic: Long-Run Average Cost Curve Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

23) Dustin's copy shop can use four alternative plants. The figure above shows the average total cost curves for Plant 1 (ATC1), Plant 2 (ATC2), Plant 3 (ATC3), and Plant 4 (ATC4). Dustin's Plant 2 will be economically efficient if the firm produces A) 2,000 copies per day. B) 4,800 copies per day. C) 5,300 copies per day. D) 6,000 copies per day. Answer: B Topic: Long-Run Average Cost Curve Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

24) Dustin's copy shop can use four alternative plants. The figure above shows the average total cost curves for Plant 1 (ATC1), Plant 2 (ATC2), Plant 3 (ATC3), and Plant 4 (ATC4). Dustin's minimum efficient scale is A) 2,650 copies per day. B) 6,000 copies per day. C) 4,000 copies per day. D) More information is needed to determine the minimum efficient scale. Answer: C Topic: Long-Run Average Cost Curve Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

25) The average total cost curves for plants A, B, C and D are shown in the above figure. Which plant is best to use to produce 20 units per day? A) plant A B) plant B C) plant C D) plant D Answer: A Topic: Long-Run Average Cost Curve Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

26) The average total cost curves for plants A, B, C and D are shown in the above figure. Which plant is best to use to produce 60 units per day? A) plant A B) plant B C) plant C D) plant D Answer: B Topic: Long-Run Average Cost Curve Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

27) The average total cost curves for plants A, B, C and D are shown in the above figure. Which plant is best to use to produce 80 units per day? A) plant A B) plant B C) plant C D) plant D Answer: C Topic: Long-Run Average Cost Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

28) The average total cost curves for plants A, B, C, and D are shown in the above figure. The plant size that is the most economically efficient A) is plant A. B) is plant B. C) is plant C. D) depends on the desired level of output. Answer: D Topic: Long-Run Average Cost Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

29) The average total cost curves for plants A, B, C, and D are shown in the above figure. It is possible that the long-run average cost curve runs through points A) a, b, and c. B) b, d, and e. C) d, e, and f. D) c and d. Answer: C Topic: Long-Run Average Cost Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

30) The average total cost curves for Plant 1, ATC0, and Plant 2, ATC1, are shown in the figure above. Over what range of output is it efficient to operate Plant 1? A) 0-20 B) 0-25 C) 20-25 D) greater than 25 Answer: B Topic: Long-Run Average Cost Curve Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

31) The average total cost curves for Plant 1, ATC0, and Plant 2, ATC1, are shown in the figure above. Over what range of output is it efficient to operate Plant 2? A) 0-20 B) 0-25 C) 20-25 D) greater than 25 Answer: D Topic: Long-Run Average Cost Curve Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

32) The average total cost curves for Plant 1, ATC0, and Plant 2, ATC1, are shown in the figure above. The long-run average cost curve goes through points A) C, D, G. B) A, C, E. C) A, B, D, G. D) A, B, D, E, F. Answer: C Topic: Long-Run Average Cost Curve Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

33) A firm is operating in its range of economies of scale and is on both its LRAC curve and its short-run ATC curve. At that level of output, the slope of its LRAC curve is A) zero and the slope of its ATC curve is zero. B) zero and the slope of its ATC curve is negative. C) negative and the slope of its ATC curve is zero. D) negative and the slope of its ATC curve is negative. Answer: D Topic: Long-Run Average Cost Curve Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

34) When economies of scale are present, the LRAC curve touches each short-run ATC curve A) to the left of the ATC curve's minimum point. B) to the right of the ATC curve's minimum point. C) at the ATC curve's minimum point. D) at no points. Answer: A Topic: Long-Run Average Cost Curve Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

35) Economies of scale refer to A) the point at which marginal cost equals average cost. B) the fact that in the long run, fixed costs remain constant as output increases. C) the range of output over which the long-run average cost falls as output increases. D) a feature of short-run production functions but not long-run production functions. Answer: C Topic: Economies of Scale Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

36) In the short run, A) all inputs are variable. B) all firms experience increasing returns to scale. C) some firms experience economies of scale. D) no firm experiences economies of scale. Answer: D Topic: Economies of Scale Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

37) When long-run average costs decrease as output increases, there are A) economies of scale. B) diseconomies of scale. C) constant returns to scale. D) constant marginal costs. Answer: A Topic: Economies of Scale Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

38) When a firm experiences economies of scale, its ________ cost curve slopes ________ as output increases. A) long-run average; downward B) short-run average total; downward C) short-run marginal cost; downward D) long-run average; upward Answer: A Topic: Economies of Scale Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

39) A firm experiences ________ when its ________ downward as output increases. A) diseconomies of scale; average total cost curve slopes B) economies of scale; long-run average cost curve slopes C) diminishing marginal returns; long-run average cost curve slopes D) diminishing marginal returns; average total cost curve shifts Answer: B Topic: Economies of Scale Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

40) Economies of scale refer to the range of output over which A) marginal cost exceeds average cost. B) the long-run average cost falls as output increases. C) the marginal product of labor diminishes. D) the long-run average cost is lower than the short-run average total cost. Answer: B Topic: Economies of Scale Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

41) When long-run average cost decreases as output increases, there are definitely I. increasing marginal returns. II. economies of scale. A) only I B) only II C) both I and II D) neither I nor II Answer: B Topic: Economies of Scale Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

42) If Dell Computer Company could produce more computers at lower long-run average cost by increasing the quantity of all the inputs it uses, Dell definitely would experience A) decreasing marginal returns. B) diseconomies of scale. C) increasing marginal returns. D) economies of scale. Answer: D Topic: Economies of Scale Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

43) When long-run average cost decreases as output increases there are definitely A) increasing marginal returns. B) economies of scale. C) Both answers A and B are correct. D) Neither answer A nor B is correct. Answer: B Topic: Economies of Scale Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

44) Electric utility companies have built larger and larger electric generating stations and, as a result, the long-run average cost of producing each kilowatt hour decreased. This is an example of A) constant returns to cost. B) increasing returns to cost. C) economies of scale. D) diseconomies of scale. Answer: C Topic: Economies of Scale Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

45) Electric utility companies have built larger and larger electric generating stations and, as a result, the long-run average cost of producing each kilowatt hour decreased. This is an example of A) increasing marginal returns. B) diminishing marginal returns. C) economies of scale. D) diseconomies of scale. Answer: C Topic: Economies of Scale Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

46) If the average total cost of producing 20 sweaters an hour falls when the firm doubles all its inputs, then the A) short-run average total cost curve shifts upward because all inputs have increased. B) firm moves along its short-run average total cost curve. C) firm experiences economies of scale. D) long-run average cost curve shifts downward. Answer: C Topic: Economies of Scale Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

47) If all inputs are increased by 5 percent and output increases by 8 percent, then the A) firm experiences constant returns to scale. B) long-run average cost curve slopes downward. C) long-run average cost curve shifts downward. D) firm experiences diseconomies of scale. Answer: B Topic: Economies of Scale Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

48) Economies of scale occur when the percentage increase in output A) exceeds the percentage increase in all inputs. B) is less than the percentage increase in all inputs. C) exceeds the percentage decrease in all inputs. D) is less than the percentage decrease in all inputs. Answer: A Topic: Economies of Scale Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

49) Economies of scale A) lead to rising long-run average costs as output increases. B) occur if output more than doubles when all inputs are doubled. C) occur if output less than doubles when all inputs are doubled. D) occur when management complexity brings rising average cost. Answer: B Topic: Economies of Scale Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

50) Diminishing marginal returns means that the firm definitely is experiencing A) diseconomies of scale. B) constant returns to scale. C) Both answers A and B are correct. D) Neither answer A nor B is correct. Answer: D Topic: Diseconomies of Scale Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

51) "Diseconomies of scale" occur in A) the long run, but not the short run. B) the short run, but not the long run. C) both the short run and the long run. D) neither the short run nor the long run. Answer: A Topic: Diseconomies of Scale Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

52) When long-run average cost increases as output increases there are A) economies of scale. B) diseconomies of scale. C) constant returns to scale. D) none of the above Answer: B Topic: Diseconomies of Scale Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

53) When long-run average costs increase as output increases, there are A) economies of scale. B) diseconomies of scale. C) constant returns to scale. D) constant marginal costs. Answer: B Topic: Diseconomies of Scale Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

54) Diseconomies of scale definitely means that as the firm increases its output, its A) long-run average total cost increases. B) long-run average total cost decreases. C) short-run average total cost increases. D) short-run average total cost decreases. Answer: A Topic: Diseconomies of Scale Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

55) If diseconomies of scale are present and the firm ________ all its inputs, its output ________. A) doubles; more than doubles B) doubles; less than doubles C) increases; increases by the same percentage D) halves; doubles Answer: B Topic: Diseconomies of Scale Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

56) One reason for diseconomies of scale is that, at very large scales, management systems can become A) more efficient because they can effectively manage more workers. B) increasingly complex and inefficient. C) more numerous than the workers they manage. D) none of the above Answer: B Topic: Diseconomies of Scale Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

57) A common source of diseconomies of scale is the A) diminishing marginal returns to capital. B) diminishing marginal returns to labor. C) diminishing marginal returns to land. D) growing complexity of management and organizational structure. Answer: D Topic: Diseconomies of Scale Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

Quantity 0 20 40 60 80

Long-run total cost (dollars) 0 100 160 180 190

58) The cost data in the above table data show that production is characterized by A) economies of scale. B) constant returns to scale. C) decreasing returns to scale. D) More information is needed to answer the question. Answer: A Topic: Economies of Scale Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

59) Based on the cost data in the above table, the long-run average cost (LRAC) is lowest when output is A) 20. B) 40. C) 80. D) Long-run average cost is constant at all levels of output. Answer: C Topic: Long-Run Average Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

60) When long-run average cost remains constant as output increases there are constant A) marginal returns. B) returns to scale. C) economies of scale. D) diseconomies of scale. Answer: B Topic: Constant Returns to Scale Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

61) Farmer Seth has a perfectly flat long-run average total cost curve over the range of output from 10,000 bushels of wheat to 100,000 bushels of wheat. Hence, over this range of output, Farmer Seth definitely experiences A) constant marginal returns. B) constant returns to scale. C) constant economies of scale. D) none of the above Answer: B Topic: Constant Returns to Scale Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

62) In the above figure, the long-run average cost curve exhibits economies of scale A) between 5 and 10 units per hour. B) between 10 and 20 units per hour. C) between 20 and 25 units per hour. D) along the entire curve. Answer: A Topic: Economies of Scale Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

63) In the above figure, between 5 and 10 units per hour, the firm experiences A) economies of scale. B) diseconomies of scale. C) constant returns to scale. D) decreasing total fixed costs. Answer: A Topic: Economies of Scale Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

64) In the above figure, the long-run average cost curve exhibits constant returns to scale A) between 5 and 10 units per hour. B) between 10 and 20 units per hour. C) between 20 and 25 units per hour. D) along the entire curve. Answer: B Topic: Constant Returns to Scale Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 117 Copyright © 2014 Pearson Education, Inc.

65) In the above figure, the long-run average cost curve exhibits diseconomies of scale A) between 5 and 10 units per hour. B) between 10 and 20 units per hour. C) between 20 and 25 units per hour. D) along the entire curve. Answer: C Topic: Diseconomies of Scale Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

66) In the above figure, between 20 and 25 units per hour, the firm experiences A) economies of scale. B) diseconomies of scale. C) constant returns to scale. D) increasing total fixed costs. Answer: B Topic: Diseconomies of Scale Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

67) In the above figure, economies of scale are present up to an output level of A) 5,000 pounds of coffee. B) 10,000 pounds of coffee. C) 13,000 pounds of coffee. D) 15,000 pounds of coffee. Answer: B Topic: Economies and Diseconomies of Scale Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills 118 Copyright © 2014 Pearson Education, Inc.

68) In the above figure, the minimum efficient scale of output is A) 5,000 pounds of coffee. B) 10,000 pounds of coffee. C) 13,000 pounds of coffee. D) 15,000 pounds of coffee. Answer: B Topic: Minimum Efficient Scale Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills

69) If wages a firm pays it workers increase, then A) the firm's long-run average cost curve shifts upward. B) the firm moves rightward along its long-run average cost curve to where it has diseconomies of scale. C) the firm's long-run average cost curve does not shift and there is no movement along the long-run average cost curve. D) the firm moves rightward along its long-run average cost curve but not necessarily to where it has diseconomies of scale. Answer: A Topic: Long-Run Average Cost Curve Skill: Conceptual Status: New 10th edition AACSB: Reflective Thinking

70) The LRAC curve A) is the minimum points on all the short-run ATC curves. B) shows the lowest possible marginal cost of producing the different levels of output. C) shows the lowest attainable average total cost for all levels of output when all inputs can be varied. D) generally lies above the short-run ATC curves. Answer: A Topic: Study Guide Question, Long-Run Average Cost Curve Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

71) The LRAC curve generally is A) shaped as an upside-down U. B) U-shaped. C) upward sloping. D) downward sloping. Answer: B Topic: Study Guide Question, Long-Run Average Cost Curve Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

72) When a firm is experiencing economies of scale, A) the MP curve slopes upward. B) the LRAC curve slopes downward. C) diminishing returns to labor have been suspended. D) the MC curve slopes downward. Answer: B Topic: Study Guide Question, Economies of Scale Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

73) Constant returns to scale means that as all inputs are increased, A) total output remains constant. B) average total cost rises. C) average total cost rises at the same rate as do the inputs. D) total output increases in the same proportion as do the inputs. Answer: D Topic: Study Guide Question, Constant Returns to Scale Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

74) When a firm is experiencing diseconomies of scale, A) the MP curve has a negative slope. B) the LRAC curve has a positive slope. C) it must also experience diminishing returns to labor. D) the MC curve has a negative slope. Answer: B Topic: Study Guide Question, Diseconomies of Scale Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

5 News Based Questions 1) In 2008, Precision Pattern Interiors, which makes high-end aircraft interiors, began a $1 million renovation of a building at the Hutchinson Air Base Industrial Tract south of Yoder, Kansas. The company will also add some $400,000 in new equipment and triple its Yoder work force. Which of Precision Pattern Interiors' decisions is a short run decision? A) Triple its Yoder work force B) $1 million renovation of a building at the Hutchinson Air Base Industrial Tract C) $400,000 in new equipment purchases D) All of these decisions are short run decisions. Answer: A Topic: Short-Run Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

2) In 2008, Precision Pattern Interiors, which makes high-end aircraft interiors, began a $1 million renovation of a building at the Hutchinson Air Base Industrial Tract south of Yoder, Kansas. The company will also add some $400,000 in new equipment and triple its Yoder work force. Which of Precision Pattern Interiors' decisions is a long run decision? A) $1 million renovation of a building at the Hutchinson Air Base Industrial Tract and $400,000 in new equipment purchases B) $1 million renovation of a building at the Hutchinson Air Base Industrial Tract C) $400,000 in new equipment purchases D) Triple its Yoder work force Answer: A Topic: Long-Run Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

3) In 2008, Precision Pattern Interiors, which makes high-end aircraft interiors, began a $1 million renovation of a building at the Hutchinson Air Base Industrial Tract south of Yoder, Kansas. The company will also add some $400,000 in new equipment and triple its Yoder work force. Why would the long run decisions be riskier than the short run decisions? A) Because the firm has to live with the long run decisions for a long time B) Because it is easier to sell the equipment than it is to lay off employees C) Because the firm has to raise prices to purchase equipment D) Because employees will be upset Answer: A Topic: Long Run Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

4) For the past 15 years the American public has wanted to buy big trucks. The Big Three automakers delivered, investing billions in plants that build gas guzzlers. Now, when customers walk into showrooms, gas mileage is on their mind. Retooling the industry will take years, so in the meantime GM, Ford and Chrysler are tweaking their existing models. They're changing tires, adjusting transmissions and exhaust valves in hopes of getting one or maybe two more miles per gallon. Which of the decisions by the Big Three to gain gas mileage is a short run decision? A) Adjusting exhaust valves B) Adjusting transmissions C) Changing tires D) All of these decisions are short run decisions. Answer: D Topic: Short Run Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

5) For the past 15 years the American public has wanted to buy big trucks. The Big Three automakers delivered, investing billions in plants that build gas guzzlers. Now, when customers walk into showrooms, gas mileage is on their mind. Retooling the industry will take years. Mike Quincy says the industry is "like a huge aircraft carrier. It doesn't stop on a dime. It doesn't turn on a dime." What does Mike mean? A) The decision time frame to enter into the long run is very long in this industry. B) The industry has increasing returns to scale. C) Short run decisions are easily reversed. D) The industry experiences diminishing marginal returns. Answer: A Topic: Long Run Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

6) In August 2008, Toyota halted production of the Tundra, its full-size, gas-guzzling pick-up. Sales of the vehicle are down 15 percent and the production suspension could last for months. When production of the truck resumes, it'll be at a slower pace. If Toyota, like many car makers, experiences increasing returns to scale, what would happen to long run average cost if production resumed, but at a slower pace? A) Long run average cost would increase. B) Long run average cost would decrease. C) Long run average cost would stay constant. D) Long run average cost would increase and then decrease. Answer: A Topic: Long-Run Average Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

7) Angel Rodriguez pulls up in his 24-foot panel truck in front of Sezz Medi Brick Oven Pizza in Upper Manhattan. Even though it's the middle of the summer, he's delivering— firewood. He says even though fuel costs have doubled in the past year, it's still worth the premium he gets delivering ash and cherry to the captive and growing market in NYC. Which of the following statements is true about short run costs for Angel? A) His truck is a fixed cost and gasoline is a variable cost. B) His truck is a variable cost and gasoline is a fixed cost. C) Both his truck and gasoline is a variable cost. D) Neither his truck nor gasoline is a variable cost. Answer: A Topic: Fixed Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

8) Angel Rodriguez pulls up in his 24-foot panel truck in front of Sezz Medi Brick Oven Pizza in Upper Manhattan. Even though it's the middle of the summer, he's delivering— firewood. He says even though fuel costs have doubled in the past year, it's still worth the premium he gets delivering ash and cherry to the captive and growing market in NYC. How would a decrease in gasoline prices affect Angel's short run costs? A) Short run total costs would decrease. B) Short run variable costs would increase. C) Short run fixed costs would decrease. D) Short run average variable costs would increase. Answer: A Topic: Total Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

9) Angel Rodriguez pulls up in his 24-foot panel truck in front of Sezz Medi Brick Oven Pizza in Upper Manhattan. Even though it's the middle of the summer, he's delivering— firewood. He says even though fuel costs have doubled in the past year, it's still worth the premium he gets delivering ash and cherry to the captive and growing market in NYC. How does the doubling of fuel costs affect Angel's short run costs? A) Short run variable costs would increase. B) Short run fixed costs would decrease. C) Short run total costs would decrease. D) Short run average fixed costs would increase. Answer: A Topic: Variable Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

10) Angel Rodriguez pulls up in his 24-foot panel truck in front of Sezz Medi Brick Oven Pizza in Upper Manhattan. Even though it's the middle of the summer, he's delivering— firewood. He says even though fuel costs have doubled in the past year, it's still worth the premium he gets delivering ash and cherry to the captive and growing market in NYC. How would an increase in Angel's salary affect short run costs? A) Short run variable costs would increase. B) Short run fixed costs would decrease. C) Short run total costs would decrease. D) Short run average fixed costs would increase. Answer: A Topic: Variable Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

11) Minneapolis business Rogue Chocolatier sells specialty chocolate bars with a high cocoa content. The price of cocoa beans had shot up 44 percent in the first nine months of 2008. How does this affect Rogue's short run costs? A) Short run variable costs would increase. B) Short run fixed costs would decrease. C) Short run total costs would decrease. D) Short run average fixed costs would increase. Answer: A Topic: Variable Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

12) Minneapolis business Rogue Chocolatier sells specialty chocolate bars with a high cocoa content. If Rogue's average total cost decreases as the business increases plant size, then Rogue experiences: A) Economies of scale. B) Diseconomies of scale. C) Diminishing marginal returns. D) Constant returns to scale. Answer: A Topic: Economies of Scale Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

13) Minneapolis business Rogue Chocolatier sells specialty chocolate bars with a high cocoa content. Most chocolate companies use already processed chocolate to craft their sweets. But Rogue buys raw cocoa beans, and roasts and grinds them until they're in a liquid state and then runs the chocolate through a big squat machine with rollers. Which statement is true for Rogue? A) Raw cocoa beans are a variable factor of production and the machine is a fixed factor of production. B) Both processed chocolate and raw cocoa beans are variable factors of production. C) Processed chocolate is a variable factor of production and the machine is a fixed factor of production. D) Processed chocolate and raw cocoa beans are variable factors of production and the machine is a fixed factor of production. Answer: A Topic: Inputs, Fixed and Variable Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

14) Minneapolis business Rogue Chocolatier sells specialty chocolate bars with a high cocoa content. Rogue can produce 15 chocolate bars per day with one employee, 35 with 2, 50 with 3 and 55 with 4 employees. Which statement is true? A) Rogue's marginal product curve initially increases and then decreases. B) Rogue's marginal product curve decreases continually. C) Rogue's total product curve increases at an increasing rate. D) Rogue's marginal product curve decreases initially and then increases. Answer: A Topic: Marginal Product Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

15) Minneapolis business Rogue Chocolatier sells specialty chocolate bars with a high cocoa content. Rogue can produce 15 chocolate bars per day with one employee, 29 with 2, 35 with 3 and 40 with 4 employees. Which statement is true? A) Rogue's marginal product curve decreases continually. B) Rogue's marginal product curve initially increases and then decreases. C) Rogue's total product curve increases at an increasing rate. D) Rogue's marginal product curve decreases initially and then increases. Answer: A Topic: Marginal Product Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

16) Health care costs are expected to rise more than 10 percent into 2011, according to a survey of insurers by Aon Consulting Worldwide. Which of the following would be a variable cost in a hospital? A) Nurses B) An MRI machine C) Laboratory equipment D) Gurneys Answer: A Topic: Variable Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

17) Health care costs are expected to rise more than 10 percent into 2011, according to a survey of insurers by Aon Consulting Worldwide. Which of the following would be a fixed cost in a hospital? A) An MRI machine B) Bandages C) Nurses D) Syringes Answer: A Topic: Fixed Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

18) Health care costs are expected to rise more than 10 percent into 2011, according to a survey of insurers by Aon Consulting Worldwide. If the increase in costs is expected to solely come from increased wages to nurses and doctors, then for the health care industry: A) Variable costs are increasing. B) Fixed costs are increasing. C) Long run average total cost is decreasing. D) Productivity is increasing. Answer: A Topic: Variable Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

19) Health care costs are expected to rise more than 10 percent into 2011, according to a survey of insurers by Aon Consulting Worldwide. If the increase in costs is expected to solely come from increased costs to buy MRI and X-ray machines, then for the health care industry: A) Fixed costs are increasing. B) Long run average total cost is decreasing. C) Productivity is increasing. D) Variable costs are increasing. Answer: A Topic: Fixed Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

6 Essay Questions 1) What is the difference between the short run and the long run? Answer: The short run is a time period so short that the firm cannot change the quantity of at least one factor of production, say plant size for a manufacturer or land for a farmer. The only way to increase output, therefore, is by combining more units of the variable factors of production with the fixed factor of production. The long run is a time period sufficiently long that a firm can change the quantity of all factors of production. In the long run, nothing is fixed so output can be produced with whatever combination of factors of production the firm chooses. Topic: Short Run Versus Long Run Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication

2) What factors of production can a firm change in the short run? In the long run? Answer: In the short run, the firm can change its variable factors of production, such as labor. The firm cannot change its fixed factors of production, such as its capital stock. The factors of production the firm cannot change are called its "plant." In the long run, the firm can change all of its factors of production. Indeed, the long run is defined as the period of time long enough so that the firm can change all of its factors of production. Topic: Short Run Versus Long Run Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication 126 Copyright © 2014 Pearson Education, Inc.

3) What do economists mean when they say that a firm's plant is fixed? Answer: The phrase that a "firm's plant is fixed" refers to the fact that, in the short run, there are some factors that are fixed, that is, the quantity employed cannot be changed. These factors of production, which include factors such as the firm's capital and land, are collectively referred to as the firm's plant. Topic: Short Run Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication

4) What does a firm's short-run total product curve show and what is its significance? Answer: A short-run total product curve shows the way the maximum output increases when the input of a variable factor of production (such as labor) increases, holding all other factors of production fixed. Its significance is that it shows the productivity of the variable factor of production as output is increased. The latter, in turn, is an important determinant of a firm's short run costs. Topic: Total Product Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication

5) What is the law of diminishing returns? Why is this proposition called a "law"? Answer: The law of diminishing returns states that as a firm uses more of a variable factor, with a given quantity of fixed factors, the marginal product of the variable factor eventually decreases. This proposition is called a "law" because there is no case where adding more labor, capital, materials, fuel or any other variable factor will cause output to increase indefinitely. Eventually, adding any variable factor to some fixed factor will lead to smaller and smaller additions to output. If the law of diminishing returns did not always hold true, farmers could grow the entire world's supply of food on one acre of land, by just adding more water and more fertilizer (variable factors) to the acre (the fixed factor). Topic: Law of Diminishing Returns Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Communication

6) "The law of diminishing returns is the same as the decreasing returns to scale." Do you agree? Explain. Answer: The statement is incorrect. The law of diminishing returns states that as a firm uses more of a variable factor, with a given quantity of fixed factors, the marginal product of the variable factor eventually diminishes. In the long run all factors are variable, and decreasing returns to scale occurs when an increase in all factors by the same percentage results in a smaller percentage increase in output. Topic: Law of Diminishing Returns Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication

7) What does the average product of labor equal? Answer: The average product of labor equals the total product (the total output) divided by the quantity of labor. Topic: Average Product of Labor Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

8) "If the marginal product of labor curve slopes downward, then the average product of labor curve necessarily must slope downward." Explain whether the previous statement is correct or incorrect? Answer: The statement is incorrect. The relationship between the marginal product and average product of labor is that when the marginal product of labor exceeds the average product of labor, the average product of labor curve slopes upward and when the marginal product of labor is less than the average product of labor, the average product of labor curve slopes downward. So, even if the marginal product of labor curve slopes downward, as long as it is above the average product of labor curve, the average product of labor curve slopes upward. Topic: Relationship Between the Marginal & Average Product of Labor Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

9) Describe the relationship between the marginal and average products of labor as the employment of labor increases in the short run. Answer: Holding other factors such as capital constant, additional workers have increasing and then diminishing marginal returns. So, the marginal product of additional workers rises and then falls, even though remaining positive. As that happens, when the marginal product is greater than the average product, the average product is increasing. When the marginal product is less than the average product, the average product is decreasing. The average product equals the marginal product when the average product is at its maximum. Topic: Relationship Between the Marginal & Average Product of Labor Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication

10) A student wrote: "When the average product of labor exceeds the marginal product, the marginal product is increasing." If you were the instructor, how would you correct this statement? Answer: There are several errors. The corrected sentence is "When the average marginal product of labor exceeds the marginal average product, the marginal average product is increasing." Topic: Relationship Between the Marginal & Average Product of Labor Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication

11) What are the two components of a firm's total cost in the short run, and what are their definitions? Answer: The two parts are the total fixed cost (TFC) and the total variable cost (TVC). TFC is the cost that does not vary as output varies. Examples include rent on a building or interest on a business loan. TVC is the cost that varies as output varies. Examples include a firm's payroll for labor or payments for raw materials. Topic: Total Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication

12) Jake is a corn farmer in Nebraska. He rents his land on a long-term lease for $250,000 a year. He pays his farm hands $28,000 a year. Is his rent a fixed cost or a variable cost? Are the wages he pays his workers a fixed cost or a variable cost? Briefly explain your answers. Answer: Jake's rent is a fixed cost. He is renting his land on a long-term lease and so the land is a fixed factor. The wages Jake pays are a variable cost. Labor is a variable factor so the wages are a variable cost. Topic: Fixed Cost and Variable Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication

13) "In the short run, even when output is zero, the firm still has some variable costs it must pay." Is the statement correct or incorrect? Briefly explain your answer. Answer: The statement is incorrect. When output is zero, there are no variable costs because there are no variable factors being employed. However, in the short run there might be fixed factors of production, in which case the firm would still have some fixed costs it must pay. Topic: Fixed Cost and Variable Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication

14) When plotted against the total output, what does the total fixed cost curve look like? Answer: The total fixed cost curve is a horizontal straight line, indicating that at any level of output the total fixed cost does not change as output changes. Topic: Fixed Cost Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

15) Explain why average total costs initially decrease and then increase as output increases. Answer: Initially, as output increases, both average fixed cost and average variable cost decrease. So, average total cost decreases at first. But as output increases further, diminishing returns set in and average variable cost begins to increase. Eventually, average variable cost increases more quickly than average fixed cost decreases, so average total cost increases. Topic: Average Total Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication

16) Downsizing is the practice of laying off workers in an attempt to decrease average total cost. Can laying off workers decrease average total cost? Is it possible for the firm to downsize and have its average total cost increase? Explain your answer. Answer: Yes, downsizing by laying off workers can decrease the firm's average total cost. And it is possible for a firm to downsize and increase its average total cost. Suppose that the firm initially is producing more output than the level that minimizes average total cost. In this case, downsizing by laying off workers decreases the amount of output the firm produces and the firm moves along its average total cost curve to a lower average total cost. However, the firm can lay off too many workers. If it lays off too many workers, it decreases its output so much that it moves along its average total cost curve enough that its average total costs wind up higher than they were initially. Topic: Average Total Cost Curve Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Communication

17) How do we calculate average fixed cost and why does average fixed cost fall as output increases? Answer: Average fixed cost is calculated by dividing total fixed cost by the quantity of output. Because total fixed cost stays the same for all levels of output, as the quantity produced increases, the average fixed cost decreases. Topic: Average Fixed Cost Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Communication

18) "Marginal cost is the increase in total cost that results from a one-unit increase in a variable input." True or false? Explain. Answer: False. Marginal cost is the increase in total cost that results from a one-unit increase in output, not a one unit increase in an input. Topic: Marginal Cost Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Communication

19) "Marginal cost eventually increases because of the law of diminishing returns." True or false? Explain. Answer: The statement is true. The law of diminishing returns means that each additional worker produces a successively smaller addition to output. So to get an additional unit of output, ever more workers are required. Because more workers are required to produce one additional unit of output, the cost of the additional unit of output—marginal cost—must increase. Topic: Marginal Cost Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Communication

20) The average total cost curve is U-shaped. At the quantity of output where average total cost is at its minimum, is the marginal cost curve above the average total cost curve, below the average total cost curve, or intersecting the average total cost curve? Answer: When the average total cost is at its minimum, the average total cost equals the marginal cost. Therefore at the quantity of output where the average total cost is at its minimum, the marginal cost curve intersects the average total cost curve. Topic: Relationship Between Marginal Cost and Average Total Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication

21) What is the difference between average total cost and marginal cost and are they ever equal to each other? Answer: Average total cost is total cost divided by output. Marginal cost is the change in total cost divided by the change in output. Marginal cost equals average total cost when the average total cost is at its minimum. Topic: Relationship Between Marginal Cost and Average Total Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication

22) Which average cost curves are U-shaped? Answer: Both the average total cost and the average variable cost curves are U-shaped. The only average cost curve that is not U-shaped is the average fixed cost curve. Topic: Why the Average Total Cost Curve is U-Shaped Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Communication

23) What is the relationship between the marginal product of labor and the marginal cost? Answer: Initially, as each additional unit of labor is employed, the marginal product of labor increases. The cost of each worker is the same—the wage rate. Because each worker's cost is the same, but each additional worker produces more output than the previous worker, the cost of producing an additional unit of output decreases. The cost of producing an additional unit of output is the marginal cost. Therefore when the marginal product of labor is increasing, the marginal cost is decreasing. At some point, the marginal product of labor will reach a peak, at which level of output marginal cost is minimized. After that point, the law of diminishing returns means that the marginal product decreases. When the marginal product decreases, the marginal cost increases; each worker costs the same to hire, but an additional worker produces less output than the previous worker. Therefore when the marginal product of labor is decreasing, the marginal cost is increasing. Topic: Cost Curves and Product Curves Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication

24) Explain how new technologies, which increase productivity, affect the average variable cost, average total cost, and marginal cost curves. Answer: A technological change that increases productivity shifts the total product, average product, and the marginal product curves upward. Because the new technologies enable existing inputs to produce more output, this effect means that the average variable cost, average total cost, and marginal cost curves shift downward, reflecting the decrease in average and marginal costs. However, the new technologies often need to use more capital and less labor. In this case, the firm's fixed cost increases and its variable cost decreases. The increase in fixed cost leads to an increase in total cost while the decrease in variable cost leads to a decrease in total cost. Although the net effect is ambiguous, generally the total cost increases at low levels of output and decreases at higher levels of output. In this case, the average total cost curve shifts upward at lower levels of output and shifts downward at higher levels of output. Topic: Change in Technology Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication

25) When the Rent-A-Limo Company negotiates its new labor contract it finds that the wages it must pay drivers have increased. How does this wage hike affect the Rent-A-Limo Company's average fixed cost, average variable cost, average total cost, and marginal cost? Answer: The drivers' wages are a variable cost because the number of drivers needed varies with how many limousines are rented. The increase in wages will have no effect on the average fixed cost but the average variable cost will increase. The increase in average variable cost leads to an increase in the average total cost and an increase in the marginal cost. Topic: Change in the Price of a Resource Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication

26) How do the marginal and average products of labor affect a firm's marginal and average variable costs in the short run? Answer: Over the range of output for which the marginal product is increasing, marginal cost is decreasing and vice versa. At the level of output at which the marginal product is at its maximum, marginal cost will be at its minimum. And, over the range of output for which the average product is increasing, average variable cost is decreasing and vice versa. Finally, the level of output at which the average product is at its maximum is the same level at which average variable cost is at its minimum. Topic: Relationship Between Cost Curves and Product Curves Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication

27) In the long run all costs are variable costs. Why? Answer: The long run is defined as the time frame over which all factors of production can be varied. The costs of the variable factors of production are the variable costs. Taken together, these definitions imply that in the long run all factors of production are variable factors of production so all costs are variable costs. Topic: Long-Run Average Cost Curve Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Communication

28) Which curve shows the lowest average total cost at which it is possible to produce each output when the firm has time to change both its labor force and plant size? Answer: The long-run average cost curve shows the lowest average total cost at which it is possible to produce each output when the firm has had time to change all its inputs. Topic: Long-Run Average Cost Curve Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Communication

29) What is the long-run average cost curve? What are the three ranges of output and in what order do they occur? Briefly define each of the three ranges. Answer: The long-run average cost curve shows the lowest average cost at which it is possible to produce each output when the firm has time to change both its labor force and its plant size. The long-run average cost curve is U-shaped and shows three possible production ranges. In order, these ranges are: economies of scale, constant returns to scale, and diseconomies of scale. Economies of scale are when a firm increases its plant size and labor employed by the same percentage and its output increases by a larger percentage so that its average total cost decreases. Constant returns to scale are when a firm increases its plant size and labor employed by the same percentage and its output increases by the same percentage so that its average total cost does not change. And, diseconomies of scale are when a firm increases its plant size and labor employed by the same percentage and its output increases by a smaller percentage so that its average total cost increases. Topic: Long-Run Average Cost Curve Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Communication

30) What are economies of scale? What is the main source of economies of scale? Answer: Economies of scale are when a firm increases its plant size and labor employed by the same percentage and its output increases by a larger percentage so that its average total cost decreases. Economies of scale result because of specialization. When a firm increases its capital stock, the capital can be more specialized and hence produce more output than less specialized, more generalized capital. Similarly, when a firm increases its labor force, it can hire more specialists, each of whom is better at doing his or her assigned task than a less specialized individual. As a result of specialization, the firm's average product increases so that its average total cost decreases. Topic: Economies of Scale Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Communication

31) Explain the difference between increasing marginal returns and economies of scale. Answer: Increasing marginal returns apply to the case where a firm has increased only the amount of labor it uses while keeping capital fixed. If increasing marginal returns occur, an additional worker is more productive than the previous worker hired. In this case, the marginal product of the new worker exceeds the marginal product of the previous worker. Economies of scale apply when a firm increases both the amount of labor it uses and the amount of capital it uses. If there are economies of scale, when a firm increases labor and capital by the same percentage, its output increases by a larger percentage. Topic: Increasing Marginal Returns and Economies of Scale Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication 133 Copyright © 2014 Pearson Education, Inc.

32) What are diseconomies of scale and why might they occur? Answer: Diseconomies of scale mean that as the firm increases all its inputs by the same percentage, its output increases by a smaller percentage. As a result, the firms' long-run average cost rises. Diseconomies of scale can arise from the sheer size of a firm. As a firm grows larger, it becomes increasingly more difficult to manage. Communicating information up and down the management hierarchy as well as communicating between managers and workers on the same level becomes more costly. As a result, the firm experiences diseconomies of scale, that is, its long-run average cost increases as it expands the scale of its operation by producing yet more output. Topic: Diseconomies of Scale Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Communication

33) A firm increases both its plant and its labor force by the same percentage and its average total costs remain unchanged. Is the firm experiencing increasing returns to scale, constant returns to scale, or decreasing returns to scale? Answer: The firm is experiencing constant returns to scale. Topic: Constant Returns to Scale Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication

34) Are the short-run average total cost curve and the long-run average cost both U-shaped for the same reasons? If so, carefully explain these reasons. If not, explain why each curve is U-shaped. Answer: The curves are U-shaped for quite different reasons. In the short run, the firm's plant, that is, its capital, is fixed. Therefore the only way to increase output is by increasing the quantity of the variable factor, labor. Initially as labor increases, there are gains from specialization and division of labor, which leads the marginal product to rise and the average total cost to fall as more workers are employed. Eventually, however, the firm runs up against its capital constraint and workers must share tools and building space. As this happens, decreasing marginal returns begin and average total cost eventually begins to rise. In the long run, both labor and capital are variable. As a firm expands its use of both factors, gains from specialization of both labor and capital cause average total costs to fall. Eventually, however, the business becomes so large it is difficult to coordinate and control. When this happens, average total cost begins to rise. So, the short-run average total cost is U-shaped because more workers must make do with the same amount of plant. The long-run average cost curve is U-shaped because the very scale of the firm's operations makes it difficult to control efficiently and effectively. Topic: Short-Run and Long-Run Average Cost Curves Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication

35) What is the difference between diminishing marginal returns and diseconomies of scale? Answer: Diminishing marginal returns is a short run concept. It occurs when increases in output become smaller and smaller as more units of a variable factor are combined with some fixed factor. Diseconomies of scale is a long run concept. It occurs when, as output increases, long-run average cost increases. Topic: Diseconomies of Scale Versus Diminishing Marginal Returns Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication

7 Numeric and Graphing Questions Quantity of labor Total product (workers) (lawns mowed per day) 0 0 1 3 2 8 3 15 4 20 5 21

1) The above table has the total product schedule for Jesse's Lawn Service. a) In the figure, label the axes and then graph the total product curve. b) Find the average product for the different amounts of employment.

Answer:

a) The figure graphs the total product curve. b) The average product when 1 worker is employed is 3 lawns mowed per day; when 2 workers are employed, it is 4 lawns per day; when 3 workers are employed, it is 5 lawns per day; when 4 workers are employed, it is 5 lawns per day; and when 5 workers are employed, it is 4.2 lawns per day. Topic: Total Product Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Quantity of labor (workers) 0 1 2 3 4 5 6 7 8 9

Total product 0 24 50 74 94 110 122 130 134 134

Average product

Marginal product ____ ____ ____ ____ ____ ____ ____ ____ ____

____ ____ ____ ____ ____ ____ ____ ____ ____

2) Ajax Manufacturing has a fixed scale of plant with the levels of total product given in the table for different levels of labor. Complete the table by calculating the average product and marginal product. Answer: Quantity of Average Marginal labor Total product product product (workers) 0 0 24 1 24 24.0 26 2 50 25.0 24 3 74 24.7 20 4 94 23.5 16 5 110 22.0 12 6 122 20.3 8 7 130 18.6 4 8 134 16.8 0 9 134 14.9 The completed table is above. Topic: Average Product of Labor and Marginal Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Quantity of labor (workers) 0 1 2 3 4 5

Total product (hair stylings per day) 0 10 25 45 60 70

3) The above table shows the total product schedule for Hair Today, a hair styling salon. a) What is the first worker's marginal product? The second worker? The third worker? The fourth worker? The fifth worker? b) Over what range of workers is there increasing marginal returns? Over what range is there decreasing marginal returns? Answer: a) The first worker's marginal product is 10 hair stylings. The second worker's marginal product is 15 hair stylings. The third worker's marginal product is 20 hair stylings. The fourth worker's marginal product is 15 hair stylings. The fifth worker's marginal product is 10 hair stylings. b) There are increasing marginal returns for the first 3 workers. After the third worker, there are decreasing marginal returns. Topic: Marginal Product of Labor Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Labor (workers) 0 1 2 3 4 5

Total product (shirts per day) 0 20 36 48 56 60

4) The table above shows Randy's Shirts' short-run production function. Randy hires workers at a wage rate of $50 a day and his total fixed cost is $100. a) What is the marginal product of the 3rd worker? b) What is Randy's average fixed cost if 48 shirts are produced? c) What is Randy's average variable cost if 56 shirts are produced? d) What is Randy's marginal cost of producing the 52nd sweater? e) What is Randy's average total cost if 48 sweaters are produced? Answer: a) When the 3rd worker is hired, output increases from 36 to 48, an increase of 12 shirts per day. So the marginal product of the 3rd worker is 12 shirts per day. b) Average fixed cost is total fixed cost divided by the output produced. Total fixed cost is $100, so Randy's average fixed cost is $100/48, which is $2.08 per shirt. c) Average variable cost is total variable cost divided by the output produced. To produce 56 shirts, Randy needs 4 workers. So Randy's total variable cost is $50 × 4, which is $200. Then, his average variable cost is $200/56, which is $3.57 per shirt. d) The 52nd sweater is produced when the 4th worker is hired and the output increases from 48 to 56 shirts. The marginal cost of producing these additional 8 shirts is the cost of employing the additional worker, $50. So the marginal cost of producing the 52nd shirt is $50/8 = $6.25. Alternatively, the total cost of producing 48 shirts is $100, the fixed cost, plus 3 × $50, the variable cost, which is $250. And the total cost of producing 56 shirts is $100, the fixed cost, plus 4 × $50, the variable cost, which is $300. Then the marginal cost equals the change in the total cost divided by the change in output, or $50/8, which is $6.25. e) Average total cost is total cost divided by the output produced. Total cost is fixed cost plus variable cost. Randy's fixed cost is $100. To produce 48 shirts, he needs 3 workers, so his total variable cost is $50 × 3 = $150. Randy's total cost is $100 + $150 = $250. Then his average total cost is $250/48, which is $5.21. Topic: Total Product and Costs Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Quantity of labor (workers) 0 1 2 3 4 5 6 Total product (widgets per day) 0 5 15 35 50 60 65 Total product (widgets per day) 0 5 15 35 50 60 65

Total product (widgets per day) 0 5 15 35 50 60 65

TFC

TVC

AFC

AVC

ATC

5) The first table above has the total product schedule for an imaginary good called a widget. Each unit of labor costs $25 and the total cost of capital is $100. a) Use this information to complete the remaining two tables. In the tables, TFC is the total fixed cost, TVC is the total variable cost, TC is the total cost, AFC is the average fixed cost, AVC is the average variable cost, ATC is the average total cost, and MC is the marginal cost.

Quantity of labor (workers) 0 1 2 3 4 5 6 Total product (widgets per day) 0 5 15 35 50 60 65

Total product (widgets per day) 0 5 15 35 50 60 65

TFC

TVC

b) Suppose that labor becomes twice as expensive (so that one unit of labor now costs $50) but nothing else changes. Complete the above tables with the new cost schedules. If you plotted the cost curves, how would the increased wage rate affect the cost curves? Answer: Total product TFC TVC TC (widgets per day) 0 100 0 100 5 100 25 125 15 100 50 150 35 100 75 175 50 100 100 200 60 100 125 225 65 100 150 250 Total product (widgets per day) 0 5 15 35 50 60 65

AFC

AVC

ATC

20.00 6.67 2.86 2.00 1.67 1.54

5.00 3.33 2.14 2.00 2.08 2.31

25.00 10.00 5.00 4.00 3.75 3.85

5.00 2.50 1.25 1.67 2.50 5.00

Total product (widgets per day) 0 5 15 35 50 60 65 Total product (widgets per day) 0 5 15 35 50 60 65

TFC

TVC

100 100 100 100 100 100 100

0 50 100 150 200 250 300

100 150 200 250 300 350 400

AFC

AVC

ATC

20.00 6.67 2.86 2.00 1.67 1.54

10.00 6.67 4.29 4.00 4.17 4.62

30.00 13.33 7.14 6.00 5.83 6.15

10.00 5.00 2.50 3.33 5.00 10.00

b) The completed tables are above. All the costs are in dollars. There would be no change in the total fixed and average fixed cost curves because the fixed cost did not change. The total cost, total variable cost, average total cost, average variable cost, and marginal cost curves would all shift upward. Topic: Short Run Costs Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

6) This month, the local widget factory produced 100 widgets. The total variable cost of production was $500 and the average total cost of production was $8. a) What is the total cost? b) What is the total fixed cost? c) What is the average fixed cost? d) What is the average variable cost? Answer: a) Total cost can be calculated as average total cost times output, which is $8 × 100 = $800. b) Total fixed cost equals total cost minus total variable cost. The total cost from part (a) is $800. The total variable cost is $500. Therefore the total fixed cost is $800 - $500 = $300. c) Average fixed cost equals total fixed cost divided by output, which is $300/100 = $3. d) Average variable cost equals total variable cost divided by output. The total variable cost from part (b) is $500, so the average variable cost is $500/100 = $5. Topic: Short Run Costs Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Output (oil changes per hour) 0 1 2 3 4

Total cost (dollars per hour) 10 20 35 50 80

7) The above table gives the total cost schedule for oil changes at the local Jiffy Lube. a) What is Jiffy Lube's total fixed cost? b) What is the total variable cost of 2 oil changes? c) What is the average variable cost of 4 oil changes? d) What is the average fixed cost of 2 oil changes? e) What is the marginal cost of the 3rd oil change? Answer: a) The total fixed cost is $10. At zero output, the total variable cost is $0, so the entire cost, $10, must be the fixed cost. b) The total variable cost of 2 oil changes is $25. The total cost, TC, is $35 and from part (a) the total fixed cost, TFC, is $10. The total variable cost, TVC, is equal to TC - TFC or $35 - $10 = $25. c) The average variable cost for 4 oil changes is $17.50. Start similarly to part (b) by calculating that the total variable cost, TVC, for 4 oil changes is $70. Then, the average variable cost, AVC, equals the total variable cost divided by output, or TVC ÷ Q. In this case, the AVC is equal to $70 ÷ 4 = $17.50. d) The average fixed cost of 2 oil changes is $5. The average fixed cost, AFC, equals the total fixed cost divided by output, or TFC ÷ Q. From part (a), the total fixed cost is $10, so the average fixed cost equals $10 ÷ 2 = $5. e) The marginal cost is $15. Marginal cost is defined as the change in the total cost that results from a one-unit increase in output. The total cost of 2 oil changes is $35 and the total cost of 3 oil changes is $50. Therefore the change in the total cost is $15, which is the marginal cost. Topic: Short Run Costs Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

8) Draw an average total cost curve, an average variable cost, and a marginal cost curve all on the same graph. Make sure to correctly label the axes. What relationship must exist between the marginal cost curve and the average total cost and average variable cost curves? Answer:

Typical cost curves are above. The average variable cost curve, AVC, and average total cost curve, ATC, are U-shaped. The marginal cost curve, MC, intersects the AVC curve and ATC curve at their minimum points. Topic: Short Run Cost Curves Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

9) Are the curves in the figure above drawn correctly? If not, what's wrong? Answer: The curves are not drawn correctly. First, the marginal cost curve must intersect the average variable cost curve and the average total cost curve where they are at their minimums, which is not the case in the figure. Second, the vertical distance between the ATC curve and the AVC curve is the AFC, which decreases as output increases. So the vertical distance between the ATC curve and the AVC curve should shrink in size, which is not the case in the figure. Topic: Short Run Cost Curves Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

10) Suppose the local newspaper hires students to fold and bag newspapers for delivery and pays them $20 per shift. Five students can fold and bag 300 newspapers per shift. The fourth student added 50 newspapers to total output. The capital cost is fixed at $50 per shift. a) Is the newspaper operating in the long run or short run? Why? b) What is the average product of 5 students? c) Calculate the total fixed, total variable, and total costs of folding and bagging 300 newspapers. d) Calculate the average fixed, average variable, and average total costs of folding and bagging 300 newspapers. e) What is the marginal cost of one of the 50 newspapers folded and bagged by the fourth student? Answer: a) The firm is operating in the short run because its capital cost is fixed. b) Average product equals 300 ÷ 5 = 60 newspapers per shift. c) Total fixed cost = $50, total variable cost = 5 × $20 = $100, and so total cost = $50 + $100 = $150. d) Average fixed cost = $50 ÷ 300 = $0.17, average variable cost = $100 ÷ 300 = $0.33, and average total cost = $150 ÷ 300 = $0.50 (alternatively, average total cost = average fixed cost + average variable cost = $0.17 + $0.33 = $0.50). e) Marginal cost = change in total cost divided by change in output, or $20 ÷ 50 = $0.40. Topic: Cost Curves and Product Curves Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 145 Copyright © 2014 Pearson Education, Inc.

Year

Total product

1 2 3 4 5 6

100 240 500 1,000 1,800 2,500

Total cost (dollars) 1,000 2,000 4,000 8,000 16,000 32,000

Average cost (dollars) ___ ___ ___ ___ ___ ___

11) Jones Production started business with a small scale plant. Fortunately for Smith, the owner of Jones Production, the business grew rapidly. It doubled its plant scale and its labor force every year for the next six years. The table above gives the total costs and the associated total products for each year. a) Complete the table by finding the average cost for each scale. b) Over what range of total product (output) did Jones Production experience economies of scale, constant returns to scale, and diseconomies of scale? Answer: Total cost Average cost Year Total product (dollars) (dollars) 1 100 1,000 10.00 2 240 2,000 8.33 3 500 4,000 8.00 4 1,000 8,000 8.00 5 1,800 16,000 8.88 6 2,500 32,000 12.80 a) The completed table is above. b) There are economies of scale from 100 to 500 units of total product, constant returns to scale from 500 to 1,000 units of total product, and diseconomies of scale from 1,000 to 2,500 units of total product. Topic: Long-Run Average Cost Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

12) Ayanna grows herbs. Last year she grew 2,000 pounds of herbs in a year while using 250 square feet of land and 1 worker. This year she doubled her land to 500 square feet, doubled her workers to 2, and grew 4,500 pounds of herbs. She sells her rare, organic herbs for $50 a pound. She pays her workers $25,000 a year and rents her land for $100 per square foot for a year. These are her only costs. a) What was Ayanna's total cost last year and this year? b) What was Ayanna's average total cost last year and this year? c) Did Ayanna experience economies or diseconomies of scale? Answer: a) Ayanna's total cost last year was $50,000 and her total cost this year is $100,000. b) Ayanna's average total cost last year was $25 a pound and her average total cost this year is $22.22 a pound. c) Ayanna's average total cost decreased so she experienced economies of scale. Topic: Long-Run Average Cost Curve Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 146 Copyright © 2014 Pearson Education, Inc.

13) The above figure represents the average total cost curves of a wheat farmer. a) Which average total cost curve has the lowest average total cost of producing 30,000 bushels of wheat? b) Over what range of output is the farmer experiencing economies of scale? c) Over what range of output is the farmer experiencing diseconomies of scale? d) Which average total cost curve has the lowest possible average cost of production? e) Which average total cost curve represents the largest plant? Answer: a) ATC3 has the lowest average total cost to produce 30,000 bushels of wheat. b) The farmer is experiencing economies of scale between 0 to 30,000 bushels of wheat. c) The farmer is experiencing diseconomies of scale for more than 30,000 bushels of wheat. d) ATC3 has the lowest possible average total cost, which occurs at 30,000 bushels of wheat. e) ATC4 represents the largest plant. Topic: Long-Run Average Cost Curve Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

8 True or False 1) All the production points that lie above the total product curve are inefficient. Answer: FALSE Topic: Total Product Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

2) The marginal product of labor is defined as the increase in output attributable to the last worker hired divided by the total number of workers employed. Answer: FALSE Topic: Marginal Product of Labor Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

3) When there are diminishing marginal returns to labor, the marginal product of the last worker hired must be negative. Answer: FALSE Topic: Diminishing Marginal Returns Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

4) When the marginal product of labor exceeds the average product of labor, the average product must increase when employment increases. Answer: TRUE Topic: Relationship Between the Marginal & Average Product of Labor Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

5) When the marginal product of labor is below the average product of labor, the average product must increase when employment increases. Answer: FALSE Topic: Relationship Between the Marginal & Average Product of Labor Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

6) A firm's total cost in the short run is the sum of its fixed cost plus its variable cost plus its marginal cost. Answer: FALSE Topic: Total Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

7) The term "fixed cost" refers to the cost a firm incurs to produce a specific fixed quantity of output. Answer: FALSE Topic: Fixed Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

8) In the short run, average fixed cost is constant as output increases. Answer: FALSE Topic: Fixed Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

9) Marginal cost refers to the increase in cost attributable to hiring one more unit of labor, capital, or some other input. Answer: FALSE Topic: Marginal Cost Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

10) The vertical distance between the average variable cost curve and the average total cost curve equals average fixed cost. Answer: TRUE Topic: Average Cost Curves Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

11) The marginal cost curve intersects the average fixed, average variable, and average total cost curves all at their minimum points. Answer: FALSE Topic: Marginal Cost Curve/Avg. Variable/Avg. Total Cost Curves Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

12) When marginal cost is greater than average cost, average cost decreases as output increases. Answer: FALSE Topic: Marginal Cost Curve/Avg. Variable/Avg. Total Cost Curves Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

13) Over the range of output for which the average product of labor curve is negatively sloped, the average variable cost curve is positively sloped. Answer: TRUE Topic: Relationship Between Cost Curves and Product Curves Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

14) Over the range of output for which the marginal product of labor curve is negatively sloped, the marginal cost curve is negatively sloped. Answer: FALSE Topic: Relationship Between Cost Curves and Product Curves Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

15) In the long run, total fixed cost equals zero. Answer: TRUE Topic: Long Run Costs Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

16) In the long run, total variable cost is zero. Answer: FALSE Topic: Long Run Costs Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

17) A firm's minimum efficient scale is the largest quantity of output at which long-run average cost reaches its highest level. Answer: FALSE Topic: Long Run Costs Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

18) When a firm's long-run average cost is constant as output increases, the firm is experiencing constant returns to scale. Answer: TRUE Topic: Long Run Costs Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

19) Diminishing marginal returns and diseconomies of scale are two different names for the same thing. Answer: FALSE Topic: Diseconomies of Scale Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

20) The long-run average cost curve is the relationship between the highest attainable average total cost and output when both the plant size and labor are varied. Answer: FALSE Topic: Long-Run Average Cost Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 150 Copyright © 2014 Pearson Education, Inc.

21) A firm's long-run average cost curve is derived from a series of short-run average total cost curves. Answer: TRUE Topic: Long-Run Average Cost Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

22) A firm's long-run average cost curve is derived by adding together its short-run average total cost curves. Answer: FALSE Topic: Long-Run Average Cost Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

9 Extended Problems

Output (pizzas per day) Labor (workers) 1 2 3 4 5 6 7 Ovens

Plant 1 8 18 26 31 34 35 33 1

Plant 2 11 22 30 36 40 42 40 2

Plant 3 13 24 33 40 45 48 47 3

Plant 4 14 25 35 43 50 54 54 4

1) Tony's Pizza's production function is shown in the table above. a) Suppose Tony operates Plant 2. He hires 2 workers and produces 20 pizzas a day. Is the pizzeria technologically efficient? Why or why not? b) Suppose Tony operates Plant 1. He hires 2 workers and produces 18 pizzas per day. Is Tony's Pizza technologically efficient? Why or why not? Can Tony increase production to 22 pizzas a day in the short run? If yes, how? c) Suppose Tony operates Plant 3. What is the marginal product of labor when the fourth worker is hired? When operating Plant 3, does Tony experience diminishing marginal returns? Explain. d) Suppose Tony currently uses Plant 3. Can he increase production from 40 to 50 pizzas per day in the short run? In the long run? If yes, how? Answer: a) The firm is not technologically efficient. The production function shows that with 2 ovens and 2 workers it is possible to produce 22 pizzas a day. b) Tony's Pizza is technologically efficient. The production function shows that 18 pizzas is the maximum output that 2 workers can produce with 1 oven. Tony can increase production to 22 pizzas per day in the short run by hiring more labor. c) When the 4th worker is hired, the marginal product of labor is the change in output, 40 pizzas - 33 pizzas = 7 pizzas, divided by the change in the labor input, 1 worker. So the marginal product of labor for the 4th worker is 7 pizzas per day. Tony experiences diminishing marginal returns because the marginal product of labor diminishes as more workers are hired. d) If Tony uses Plant 3, he cannot increase production from 40 to 50 pizzas per day in the short run. The short-run production function for Plant 3 shows that the maximum output that the firm can produce with this plant is 48 pizzas per day. In the long run, however, Tony can increase his output to 50 pizzas per day by increasing his plant size to 4 ovens (Plant 4) and hiring 5 workers. Topic: Costs Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

2) Tony's Pizza's production function is shown in the table above. Tony currently operates Plant 1. He hires workers at a wage rate of $50 a day and his total fixed cost is $100. a) Calculate Tony's Pizza's total variable cost and total cost for each output level. b) Calculate Tony's marginal costs. c) Calculate the average fixed costs, average variable costs, and average total costs. d) Draw Tony's marginal, average variable, and average total cost curves in one figure. What is the relationship between marginal cost and average cost? Answer: Output TVC TC MC AFC AVC ATC Labor (pizzas (dollars (dollars (dollars (dollars (dollars (dollars (workers) per day) per day) per day) per day) per day) per day) per day) 0 0 0 100 6.25 1 8 50 150 12.50 6.25 18.75 5.00 2 18 100 200 5.56 5.56 11.11 6.25 3 26 150 250 3.85 5.77 9.62 10.00 4 31 200 300 3.23 6.45 9.68 16.67 5 34 250 350 2.94 7.35 10.29 50.00 6 35 300 400 2.86 8.57 11.43 a) The total variable cost and total cost for each level of output are in the table above. b) The firm's marginal costs are shown in the table above. c) The firm's average fixed costs, average variable costs, and average total costs are shown in the table above.

d) The figure above has the cost curves. The marginal cost curve intersects both the average total cost and the average variable cost curves at the minimum point on each curve. When the marginal cost is below the average cost, the average cost is decreasing. When the marginal cost is above the average cost, the average cost is increasing. Because ATC = AFC + AVC, it is the case that AFC = ATC - AVC, so that the average fixed cost is the vertical distance between the ATC and AVC curves. Topic: Costs Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

3) Tony's Pizza's production function is shown in the table above. Tony currently operates Plant 2. He hires workers at a wage rate of $50 a day and his total fixed cost is $150. a) Calculate Tony's Pizza's total variable cost and total cost for each output level. b) Calculate the marginal costs. c) Calculate the average fixed costs, average variable costs, and average total costs. d) Suppose that total fixed cost increases to $200. Explain what changes occur in the costs. Answer: Output TVC TC MC AFC AVC ATC Labor (pizzas (dollars (dollars (dollars (dollars (dollars (dollars (workers) per day) per day) per day) per day) per day) per day) per day) 0 0 0 150 4.55 1 8 50 200 13.64 4.45 18.18 4.55 2 18 100 250 6.82 4.55 11.36 6.25 3 26 150 300 5.00 5.00 10.00 8.33 4 31 200 350 4.17 5.56 9.72 12.50 5 34 250 400 3.75 6.25 10.00 25.00 6 35 300 450 3.57 7.14 10.71 a) The total variable cost and total cost for each level of output are in the table above. b) The firm's marginal costs are shown in the table above. c) The firm's average fixed costs, average variable costs, and average total costs are shown in the table above. d) The increase in total fixed cost raises the average fixed costs and average total costs. However, the increase in the fixed costs has no effect on the average variable cost or the marginal cost. So, the ATC and AFC curves shift upward, but the AVC and MC curves do not change. Topic: Costs Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

4) Tony's Pizza's production function is shown in the table above. Tony hires workers at a wage rate of $50 a day and his total fixed cost is $100 for Plant 1 and $150 for Plant 2. a) Calculate Tony's Pizza's average total costs for Plant 1. Draw the short-run average total cost curve. b) Calculate average total costs for Plant 2. Draw the short-run average total cost curve on the same figure that you used for part a. c) In the figure, illustrate Tony's long-run average cost curve. d) If Tony wants to produce 34 pizzas per day, what plant size should he choose? Over what output range is it efficient to operate Plant 1? Answer: Output ATC for Plant 1 (pizzas per day) (dollars per day) 8 18.75 18 11.11 26 9.62 31 9.68 34 10.29 35 11.43

a) The table above shows Tony's short-run average total costs for Plant 1. The figure shows this shortrun aver-age total cost curve, labeled ATC1. (The ATC curve is shaded both black and gray.)

Output (pizzas per day) 11 22 30 36 40 42

ATC for Plant 1 (dollars per day) 18.18 11.36 10.00 9.72 10.00 10.71

b) The table above shows Tony's short-run average total costs for Plant 2. The figure shows this shortrun aver-age total cost curve, labeled ATC2. (The ATC curve is shaded both black and gray.) c) The figure above shows Tony's long-run average total cost curve, the curve shaded black and made up of part of the ATC1 curve and the ATC2 curve. For each level of output, the long-run average cost curve shows the lowest attainable average cost of production. d) If Tony produces 34 pizzas per day operating Plant 1, his average total cost is $10.29. If he operates Plant 2, the ATC is below $10 (see the figure). Therefore Tony should choose Plant 2. It is efficient to operate the plant that has the lowest average total cost of a pizza. Plant 1 is efficient as long as the output does not exceed 33 pizzas per day. Topic: Long-Run Average Cost Curve Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Economics, 11e, Global Edition (Parkin) Chapter 12 Perfect Competition 1 What Is Perfect Competition? 1) Perfect competition arises if the ________ efficient scale of a single producer is ________ relative to the demand for the good or service. A) minimum; small B) minimum; large C) maximum; small D) maximum; large Answer: A Topic: How Perfect Competition Arises Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

2) Which of the following is true regarding a perfectly competitive firm? A) The firm can charge a lower price than its competitors and thereby sell more output and increase its profits. B) The firm always earns a normal profit. C) The firm's marginal revenue continually decreases. D) The firm's minimum efficient scale is small relative to the market demand. Answer: D Topic: How Perfect Competition Arises Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

3) The smallest quantity of output at which long-run average cost is at a minimum is a firm's ________. A) maximum efficient scale B) profit-maximizing output point C) minimum efficient scale D) efficient output point Answer: C Topic: How Perfect Competition Arises Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

4) If the minimum efficient scale of a firm is small relative to the demand for the good, then A) many small firms can compete in the market. B) several large firms will enter the market thereby reducing competition. C) there will be no economic profits for any small firms, so no new firms will ever enter the market. D) the firms already in the market have lower average total cost than any new firm entering the market. Answer: A Topic: How Perfect Competition Arises Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

5) In perfect competition, the A) market demand for the good or service is large relative to the minimum efficient scale of a single producer. B) market demand for the good or service is small relative to the minimum efficient scale of a single producer. C) market demand for the good or service can be small relative to the minimum efficient scale of a single producer as long as the goods or services are not identical. D) size of the market demand for the good or service relative to the minimum efficient scale of a single producer does not affect competition. Answer: A Topic: How Perfect Competition Arises Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

6) In perfect competition, ________. A) there are restrictions on entry into the market B) firms in the market have advantages over firms that plan to enter the market C) only firms know their competitors' prices D) there are many firms that sell identical products Answer: D Topic: Perfect Competition Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

7) Perfect competition exists in a market if A) there are many firms producing an identical product. B) there are many firms producing a similar product, each of which may have unique features. C) the firm is protected by a barrier to entry. D) the firm is always at the break-even point where it is earning only a normal profit. Answer: A Topic: Perfect Competition Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

8) A market is perfectly competitive if A) each firm in it can influence the price of its product. B) there are many firms in it, each selling a slightly different product. C) there are many firms in it, each selling an identical product. D) there are few firms in the market. Answer: C Topic: Perfect Competition Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

9) In a perfectly competitive market, there are A) many buyers and many sellers. B) many buyers, but there might be only one or two sellers. C) many sellers, but there might be only one or two buyers. D) one firm that sets the price for the others to follow. Answer: A Topic: Perfect Competition Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

10) In perfect competition, the product of a single firm A) has many perfect substitutes produced by other firms. B) has many perfect complements produced by other firms. C) is sold under many differing brand names. D) is sold to different customers at different prices. Answer: A Topic: Perfect Competition Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

11) Which of the following is a defining characteristic of a perfectly competitive market? A) advertisements by well-known celebrities B) persistent economic profits in the long run C) no restrictions on entry into the industry D) higher prices being charged for certain name brands Answer: C Topic: Perfect Competition Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

12) Which of the following is true regarding perfect competition? I. The firms are price takers. II. Marginal revenue equals the price of the product. III. Established firms have no advantage over new firms. A) I and II B) II and III C) I, II and III D) I only Answer: C Topic: Perfect Competition Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

13) In perfect competition A) many firms sell slightly different products to many buyers. B) sellers are better informed about the prices than buyers. C) firms face no restrictions on entry into market. D) established firms have advantage over new ones. Answer: C Topic: Perfect Competition Skill: Conceptual Status: New A-level heading: What is Perfect Competition? AACSB: Reflective Thinking

14) Perfect competition implies that A) there are many firms in the market. B) all firms are price takers. C) all firms are producing the same identical product. D) All of the above answers are correct. Answer: D Topic: Perfect Competition Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

15) A perfectly competitive market is characterized by A) high barriers to entry. B) firms that are price setters. C) firms facing a downward sloping demand curve. D) no restrictions on entry into the market. Answer: D Topic: Perfect Competition Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

16) In perfect competition, restrictions on entry into an market A) apply to both capital and labor. B) apply to labor but not to capital. C) apply to capital but not to labor. D) do not exist. Answer: D Topic: Perfect Competition Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

17) Which of the following is NOT an assumption of perfect competition? A) many firms B) many buyers C) restrictions on entry into the market D) each firm sells an identical product Answer: C Topic: Perfect Competition Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

18) Which of the following is NOT an assumption of perfect competition? A) Firms compete by making their product different from products produced by other firms. B) There are no restrictions on entry into the market. C) Established firms have no advantage over new firms. D) Sellers and buyers are well informed about prices. Answer: A Topic: Perfect Competition Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

19) Which of the following is NOT an assumption of perfectly competitive markets? A) many buyers and many sellers B) no restriction on entry C) complete information about prices D) new entrants have higher costs Answer: D Topic: Perfect Competition Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

20) Which of the following is NOT an assumption of perfect competition? A) There are many firms, each selling an identical product. B) There are many buyers. C) The price each firm sets differs from the prices set by the other firms. D) There are no restrictions on entry into the market. Answer: C Topic: Perfect Competition Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

21) Which of the following is NOT a defining characteristic of perfectly competitive industries? A) many buyers and sellers B) unrestricted entry and exit C) consumer knowledge about prices charged by each firm D) higher prices being charged for certain name brands Answer: D Topic: Perfect Competition Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

22) Which of the following is NOT a characteristic of a perfectly competitive industry? A) There are many firms. B) There are no restrictions on entry into the market. C) Each firm produces a slightly differentiated product. D) Each firm takes price as given, determined by the equilibrium of industry supply and industry demand. Answer: C Topic: Perfect Competition Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

23) An example of a perfectly competitive industry is A) a big city police department. B) the market for corn in the United States. C) the market for French impressionists' paintings. D) the National Football League. Answer: B Topic: Perfect Competition Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

24) An example of a perfectly competitive firm is A) an oat farmer in the United States. B) the local cable TV company. C) a U.S. automobile producer. D) a big city newspaper. Answer: A Topic: Perfect Competition Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

25) In perfect competition, A) each firm can influence the price of the good. B) there are few buyers. C) there are significant restrictions on entry. D) all firms in the market sell their product at the same price. Answer: D Topic: Price Takers Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

26) In perfect competition, each firm ________. A) can influence the price that it charges B) produces as much as it can C) is a price taker D) faces a perfectly inelastic demand for its product Answer: C Topic: Price Takers Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

27) In a perfectly competitive industry, A) each firm sets its own price so that it is different from the prices of its competitors. B) earning an economic profit is certain. C) each firm is a price taker. D) consumers band together to demand the lowest price possible. Answer: C Topic: Price Takers Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

28) The assumption that a perfectly competitive industry has many sellers, each selling an identical product, leads to the conclusion that A) consumers get to see a variety of outputs. B) there are many buyers. C) the economic profit will be positive in the long run. D) firms are price takers. Answer: D Topic: Price Takers Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

29) When a firm is considered to be a "price taker" that means that the firm A) can charge any price that it wants to charge, that is, "take" any price it wants. B) pays a fixed price for all of its inputs. C) will accept ("take") the lowest price that its customers offer. D) cannot influence the market price of the good that it sells. Answer: D Topic: Price Takers Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

30) Individual firms in perfectly competitive industries are price takers because A) the government sets all prices. B) buyers set prices. C) firms decide together on the best price to charge. D) each individual firm is too small to affect the market price. Answer: D Topic: Price Takers Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

31) In a perfectly competitive market, A) each firm sets its own price so that it is different from its competitors. B) an economic profit is certain. C) each firm takes the good's price as given to it by the market. D) consumers are persuaded by advertising. Answer: C Topic: Price Takers Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

32) Price taking behavior exists in A) perfectly competitive markets. B) markets with a monopolist, where consumers have to take price as it is given to them by the monopolist. C) automobile markets where consumers have to take the price set by the dealer. D) Both answers B and C are correct. Answer: A Topic: Price Takers Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

33) In perfect competition, the market demand for the good ________ perfectly elastic and the demand for the output of one firm ________ perfectly elastic. A) is; is B) is; is not C) is not; is D) is not; is not Answer: C Topic: Price Takers Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

34) Firms in perfectly competitive industries have a ________ individual demand curve when the price is on the vertical axis and the quantity is on the horizontal axis. The shape of the curve is result of the firm being a ________. A) horizontal; price taker B) downward sloping; price maker C) vertical; price taker D) downward sloping; price taker Answer: A Topic: Price Takers Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

35) In perfect competition, an individual firm A) sets the price and determines the quantity it sells in the marketplace. B) sets the price but does not determine the quantity it sells in the marketplace. C) determines the quantity it sells in the marketplace but has no influence over its price. D) can not affect its price nor determine the quantity it sells in the marketplace. Answer: C Topic: Price Takers Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

36) The market for lawn services is perfectly competitive. Larry's Lawn Service cannot increase its total revenue by raising its price because ________. A) Larry's supply of lawn services is perfectly inelastic B) the demand for Larry's services is perfectly inelastic C) Larry's supply of lawn services is inelastic D) the demand for Larry's services is perfectly elastic Answer: D Topic: Price Takers Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

37) The price elasticity of demand for any particular perfectly competitive firm's output is A) less than 1. B) 1. C) equal to zero. D) infinite. Answer: D Topic: Price Takers Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

38) The demand for wheat from farm A is perfectly elastic because wheat from farm A is A) a perfect complement for wheat from farm B. B) a normal good. C) a perfect substitute for wheat from farm B. D) an inferior good. Answer: C Topic: Price Takers Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

39) In a perfectly competitive industry, the demand for a single firm's product is perfectly elastic A) because this firm's output is a perfect substitute for any other firm's output. B) because this firm is a price maker. C) only in the long run. D) because there are many buyers in this market. Answer: A Topic: Price Takers Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

40) In perfect competition, the elasticity of demand for the product of a single firm is A) 0. B) between 0 and 1. C) 1. D) infinite. Answer: D Topic: Price Takers Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

41) In perfect competition, the elasticity of demand for the product of a single firm is A) zero because the firm produces a unique product. B) zero because many other firms produce identical products. C) infinite because the firm produces a unique product. D) infinite because many other firms produce identical products. Answer: D Topic: Price Takers Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

42) Because each perfectly competitive firm sells a product identical to that of the other firms, A) each firm tries to cut prices to increase its market share. B) each firm's output is a perfect substitute for the output of any other firm. C) each firm expects to earn some economic profit. D) the demand for each firm's product is perfectly inelastic. Answer: B Topic: Price Takers Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

43) In perfect competition, each individual firm faces ________ demand curve. A) an inelastic B) an upward sloping C) a perfectly elastic D) a downward sloping Answer: C Topic: Price Takers Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

44) A perfectly competitive firm's demand curve is A) upward sloping. B) downward sloping. C) a vertical line. D) a horizontal line. Answer: D Topic: Perfect Competition Skill: Conceptual Status: New A-level heading: What is Perfect Competition? AACSB: Reflective Thinking

45) In perfect competition, an individual firm A) faces unitary elasticity of demand. B) has a price elasticity of supply equal to one. C) faces a perfectly elastic demand. D) has perfectly elastic supply. Answer: C Topic: Price Takers Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

46) In a perfectly competitive market, which of the following determines the market price? A) market demand and a firm's supply B) market supply and a firm's demand C) a firm's demand and its supply D) market demand and market supply Answer: D Topic: Price Takers Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

47) In perfect competition, the price of the product is determined where the market A) elasticity of supply equals the market elasticity of demand. B) supply curve and market demand curve intersect. C) average variable cost equals the market average total cost. D) fixed cost is zero. Answer: B Topic: Market Demand/Firm Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

48) The goal of a perfectly competitive firm is to maximize its A) normal profit. B) revenue. C) output. D) economic profit. Answer: D Topic: Economic Profit and Revenue Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

49) Economic profit is ________. A) included in the firm's total opportunity cost B) equal to normal profit minus total opportunity cost C) equal to total revenue minus marginal cost D) equal to total revenue minus total opportunity cost Answer: D Topic: Economic Profit and Revenue Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

50) The difference between a firm's total revenue and its total opportunity cost is the firm's A) normal profit. B) economic profit. C) marginal profit. D) marginal revenue. Answer: B Topic: Economic Profit and Revenue Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

51) A competitive firm's total revenue minus its total opportunity cost equals its ________. A) marginal revenue B) economic profit C) opportunity cost D) normal profit Answer: B Topic: Economic Profit and Revenue Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

52) Total economic profit is A) total revenue minus total opportunity cost. B) total revenue divided by total cost. C) marginal revenue minus marginal cost. D) marginal revenue divided by marginal cost. Answer: A Topic: Economic Profit and Revenue Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

53) The economic profit of a perfectly competitive firm A) is less than its total revenue. B) equals its total revenue. C) is greater than its total revenue. D) is less than its total revenue if its supply curve is inelastic and is greater than its total revenue if its supply curve is elastic. Answer: A Topic: Economic Profit and Revenue Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

54) In perfect competition, a firm that maximizes its economic profit will sell its good at a price that is A) below the market price. B) at the market price. C) above the market price. D) below the market price if its supply curve is inelastic and above the market price if its supply curve is elastic. Answer: B Topic: Economic Profit and Revenue Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

55) The return that the entrepreneur can obtain in the best alternative business is called the A) normal profit. B) economic profit. C) marginal profit. D) marginal revenue. Answer: A Topic: Normal Profit Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

56) A perfectly competitive firm has a total revenue curve that is A) upward sloping with an increasing slope. B) downward sloping with a constant slope. C) upward sloping with a decreasing slope. D) upward sloping with a constant slope. Answer: D Topic: Total Revenue Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

57) The above figure shows a firm's total revenue line. The firm must be in a market with A) perfect competition. B) monopolistic competition. C) monopoly. D) oligopoly. Answer: A Topic: Total Revenue Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

58) For a perfectly competitive firm, curve A in the above figure is the firm's A) total fixed cost curve. B) average fixed cost curve. C) average variable cost curve. D) total revenue curve. Answer: D Topic: Total Revenue Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Analytical Skills

59) The figure above portrays a total revenue curve for a perfectly competitive firm. Curve A is straight because the firm A) is a price taker. B) faces constant returns to scale. C) wants to maximize its profits. D) has perfect information. Answer: A Topic: Total Revenue Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

60) The figure above portrays a total revenue curve for a perfectly competitive firm. The firm's marginal revenue from selling a unit of output A) equals $0.50. B) equals $1.00. C) equals $2.00. D) cannot be determined. Answer: C Topic: Total Revenue Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

61) The figure above portrays a total revenue curve for a perfectly competitive firm. The price of the product in this industry A) equals $0.50. B) equals $1.00. C) equals $2.00. D) cannot be determined. Answer: C Topic: Total Revenue Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

62) In the above figure showing a perfectly competitive firm's total revenue line, the firm's marginal revenue A) falls as output increases. B) does not change as output increases. C) rises as output increases. D) cannot be determined. Answer: B Topic: Marginal Revenue Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

Quantity sold 5 6 7

Price $15 $15 $15

63) In the above table, if the firm sells 5 units of output, its total revenue is A) $15. B) $30. C) $75. D) $90. Answer: C Topic: Total Revenue Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

64) In the above table, if the quantity sold by the firm rises from 5 to 6, its marginal revenue is A) $15. B) $30. C) $75. D) $90. Answer: A Topic: Marginal Revenue Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

65) In the above table, if the quantity sold by the firm rises from 6 to 7, its marginal revenue is A) $15. B) $30. C) $90. D) $105. Answer: A Topic: Marginal Revenue Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 17 Copyright © 2014 Pearson Education, Inc.

66) In a perfectly competitive industry, the demand for a single firm's product is A) perfectly inelastic. B) perfectly elastic. C) as elastic as the market demand. D) inelastic, but not perfectly inelastic. Answer: B Topic: Market Demand/Firm Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

67) The market demand for wheat is ________ and the demand for wheat produced by an individual farm is ________. A) perfectly elastic; perfectly inelastic B) not perfectly elastic; perfectly elastic C) not perfectly inelastic; inelastic D) elastic; unit elastic Answer: B Topic: Market Demand/Firm Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

68) If Steve's Apple Orchard, Inc. is a perfectly competitive firm, the demand for Steve's apples has A) zero elasticity. B) unitary elasticity. C) elasticity equal to the price of apples. D) infinite elasticity. Answer: D Topic: Market Demand/Firm Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

69) In a perfectly competitive market, the price elasticity of demand for the market demand is ________ and the price elasticity of demand for an individual firm's demand is ________. A) infinite; infinite B) less than infinite; infinite C) infinite; less than infinite D) less than infinite; less than infinite Answer: B Topic: Market Demand/Firm Demand Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

70) The market for fish is perfectly competitive. So, the price elasticity of demand for fish from a single fishing boat A) is less than the elasticity of demand for fish overall. B) equals the elasticity of demand for fish overall. C) is greater than the elasticity of demand for fish overall. D) is sometimes greater than and sometimes less than the elasticity of demand for fish overall. Answer: C Topic: Market Demand/Firm Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

71) Marginal revenue is equal to A) total revenue divided by price. B) the change in total revenue divided by total output. C) the change in total revenue divided by the change in quantity sold. D) price divided by quantity sold. Answer: C Topic: Marginal Revenue Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

72) Marginal revenue is defined as A) the value of a firm's sales. B) the total revenue from the total amount the firm sells. C) the change in total revenue that results from a one-unit increase in the quantity sold. D) total revenue divided by the total quantity sold. Answer: C Topic: Marginal Revenue Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

73) In perfect competition, the marginal revenue of an individual firm A) is zero. B) is positive but less than the price of the product. C) equals the price of the product. D) exceeds the price of the product. Answer: C Topic: Marginal Revenue Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

74) In perfect competition, at all levels of output the market price is the same as the firm's ________. A) marginal revenue B) normal profit C) average variable cost D) fixed cost Answer: A Topic: Marginal Revenue Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

75) For a perfectly competitive firm, price is the same as A) marginal revenue. B) average variable cost. C) total revenue. D) Both answers A and B are correct. Answer: A Topic: Marginal Revenue Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

76) A perfectly competitive firm's marginal revenue A) increases as the firm produces more output. B) decreases as the firm produces more output. C) is less than the market price of its product. D) equals the market price of its product. Answer: D Topic: Marginal Revenue Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

77) Because the demand for a perfectly competitive firm's product is perfectly elastic, marginal revenue is equal to A) one. B) zero. C) the price of the product. D) negative one. Answer: C Topic: Marginal Revenue Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

78) For a perfectly competitive firm, no matter how much the firm produces, price always equals A) marginal product. B) average total cost. C) minimum average total cost. D) marginal revenue. Answer: D Topic: Marginal Revenue Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

79) Which of the following is always true for a perfectly competitive firm? A) P = MR B) P = ATC C) MR = ATC D) P = AVC Answer: A Topic: Marginal Revenue Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

80) In perfect competition, the firm's marginal revenue curve A) cuts its demand curve from below, going from left to right. B) cuts its demand curve from above, going from left to right. C) always lies below its demand curve. D) is the same as its demand curve. Answer: D Topic: Marginal Revenue Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

81) The marginal revenue curve for a perfectly competitive firm is A) an upward sloping curve. B) a downward sloping curve. C) a horizontal line. D) None of the above answers is correct. Answer: C Topic: Marginal Revenue Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

Price Quantity (units) (dollars per unit) 9 10 10 10 11 10

Total revenue (dollars) 90 100 110

82) Based on the table above, what is the marginal revenue of the tenth unit of output? A) $190 B) $100 C) $10 D) $9 Answer: C Topic: Marginal Revenue Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

83) In the above figure, if the milk industry is perfectly competitive, then the firm's marginal revenue curve is represented by A) curve F. B) curve G. C) curve H. D) curve I. Answer: C Topic: Marginal Revenue Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Analytical Skills

84) Which of the following characterizes a perfectly competitive market? A) The market demand curve is vertical. B) The demand for each individual firm's product is perfectly elastic. C) Each firm sets a different price. D) Each firm produces a product slightly different from that of its competitors. Answer: B Topic: Study Guide Question, Perfect Competition Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

85) The above figure shows the total revenue curve for Dizzy Discs. The demand curve for CDs sold by Dizzy Discs A) has negative slope. B) has positive slope. C) is horizontal. D) is vertical. Answer: C Topic: Parallel MyEconLab Questions Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

2 The Firm's Output Decision 1) At a firm's break-even point, its A) total revenue equals its total opportunity cost. B) marginal revenue exceeds its marginal cost. C) marginal revenue equals its average variable cost. D) marginal revenue equals its average fixed cost. Answer: A Topic: Break-Even Point Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

2) When Sidney's Sweaters, Inc. makes exactly zero economic profit, Sidney, the owner, A) is taking a loss. B) will shut down in the short run. C) makes an income equal to his best alternative forgone income. D) will boost output. Answer: C Topic: Break-Even Point Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

3) The break-even point is defined as occurring at an output rate at which A) total revenue equals total opportunity cost. B) economic profit is maximized. C) marginal revenue equals marginal cost. D) total cost is minimized. Answer: A Topic: Break-Even Point Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

4) A perfectly competitive firm that is producing a positive quantity of a good maximizes its economic profit if it produces so that A) total revenue = total cost. B) marginal revenue = marginal cost. C) average revenue = average total cost. D) average total cost = average variable cost. Answer: B Topic: Profit-Maximizing Output Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

5) The difference between a perfectly competitive firm's total revenue and its total cost is A) always positive. B) always negative. C) always zero. D) greatest at the profit-maximizing level of output. Answer: D Topic: Profit-Maximizing Output Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

6) A perfectly competitive firm maximizes its profit by A) setting its price so that it exceeds the marginal revenue. B) choosing to produce the quantity that sets MC equal to MR. C) cutting wages. D) manipulating demand. Answer: B Topic: Profit-Maximizing Output Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

7) A firm is producing the profit-maximizing amount of output when it is producing where its ________ curve intersects its ________ curve. A) MC; MR B) MC; AVC C) MC; ATC D) MC; TR Answer: A Topic: Profit-Maximizing Output Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

8) A perfectly competitive firm's economic profit is maximized by producing the amount of output such that A) total revenue equals total variable cost. B) marginal revenue equals marginal cost. C) total revenue equals total cost. D) marginal revenue is equal to total revenue. Answer: B Topic: Profit-Maximizing Output Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

9) A perfectly competitive firm maximizes its profits by producing the amount of output such that A) MR = P. B) MR = MC. C) P = AVC. D) P = ATC. Answer: B Topic: Profit-Maximizing Output Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

10) A perfectly competitive firm maximizes its economic profit when it produces the quantity that sets A) MR = MC. B) TR = TC. C) MC =.AVC. D) MC = ATC. Answer: A Topic: Economic Profit Skill: Recognition Status: New A-level heading: The Firm's Output Decision AACSB: Reflective Thinking

11) When marginal revenue equals marginal cost, a perfectly competitive firm is A) determining the price it will set. B) maximizing its revenues. C) maximizing its profit. D) establishing its shutdown point. Answer: C Topic: Profit-Maximizing Output Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

12) As long as it does not shut down, a perfectly competitive firm earns the maximum profit as long as it operates so that A) its price exceeds its average total cost. B) market demand is inelastic. C) its price exceeds its marginal revenue. D) its marginal revenue equals its marginal cost. Answer: D Topic: Profit-Maximizing Output Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

13) As long as it does not shut down, a profit-maximizing perfectly competitive firm will A) always earn an economic profit. B) produce so that marginal revenue equals marginal cost. C) produce so that price equals average cost. D) never set its price equal to its marginal revenue. Answer: B Topic: Profit-Maximizing Output Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

14) Charlie's Chimps is a perfectly competitive firm that produces cuddly chimps for children. The market price of a chimp is $10, and Charlie's produces 100 chimps at a marginal cost of $9 a chimp. Charlie's ________. A) is maximizing its profit B) will maximize its profit if it produces more than 100 chimps C) will maximize its profit if it lowers the price to $9 a chimp D) will maximize its profit if it produces fewer than 100 chimps Answer: B Topic: Profit-Maximizing Output Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

15) For a perfectly competitive firm, as its output increases its marginal revenue ________ and its marginal cost ________. A) changes; changes B) changes; does not change C) does not change; changes D) does not change; does not change Answer: C Topic: Marginal Analysis Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

Output 0 1 2 3 4 5 6

Total Revenue $0 $30 $60 $90 $120 $150 $180

Total Cost $25 $49 $69 $91 $117 $147 $180

16) In the above table, the price of the product is A) $30. B) $147. C) $150. D) $180. Answer: A Topic: Total Revenue Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

17) In the above table, the firm A) must be in a perfectly competitive market because its marginal revenue is constant. B) must be in a perfectly competitive market because its marginal cost curve eventually rises. C) cannot be in a perfectly competitive market because its short-run economic profits are greater than zero. D) cannot be in a perfectly competitive market because its long-run economic profits are greater than zero. Answer: A Topic: Total Revenue Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

18) In the above table, the marginal revenue from the fourth unit of output is A) $30. B) $147. C) $150. D) $180. Answer: A Topic: Marginal Revenue Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

19) In the above table, if the firm produces 2 units of output, it will A) make an economic profit of $9. B) make an economic profit of $60. C) incur an economic loss of $9. D) incur an economic loss of $60. Answer: C Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

Price (dollars per CD) 8.00 8.50 9.00 9.50 10.00

Quantity demanded (CDs per week) 30,000 25,000 20,000 15,000 10,000

Quantity (CDs per week) 50 100 150 200 250

Marginal cost (dollars per CD) 8.50 9.00 9.50 10.00 10.20

20) The first table shows the market demand schedule for CDs, and the second table shows the cost structure of each firm. The CD market is perfectly competitive and there are 100 identical firms. The market price of a CD is ________, and ________ CDs are produced and sold. A) $9.00; 20,000 B) $9.50; 15,000 C) $10.00; 10,000 D) $8.50; 24,000 Answer: B Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

Output Total Cost (balloons per hour) (dollars per hour) 0 $4.00 1 $7.00 2 $8.00 3 $12.50 4 $17.20 5 $22.00 6 $29.00 21) In the above table, the firm's total fixed cost of production is A) $3.00. B) $4.00. C) $7.00. D) $29.00. Answer: B Topic: Firm's Decisions in Perfect Competition, Fixed Cost Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

22) In the above table, the average fixed cost at 4 units of output is A) $1.00. B) $4.50. C) $4.70. D) $4.80. Answer: A Topic: Firm's Decisions in Perfect Competition, Average Fixed Cost Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

23) In the above table, the average variable cost at 2 units of output is A) $1.00. B) $2.00. C) $4.00. D) $4.80. Answer: B Topic: Firm's Decisions in Perfect Competition, Average Variable Cost Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

24) In the above figure, by increasing its output from Q1 to Q2, the firm A) reduces its marginal revenue. B) increases its marginal revenue. C) decreases its profit. D) increases its profit. Answer: D Topic: Total Revenue, Total Cost, and Economic Profit Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

25) In the above figure, by increasing its output from Q2 to Q3, the firm A) reduces its marginal revenue. B) increases its marginal revenue. C) decreases its profit. D) increases its profit. Answer: C Topic: Total Revenue, Total Cost, and Economic Profit Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

26) The above figure illustrates a firm's total revenue and total cost curves. Which one of the following statements is FALSE? A) Economic profit is the vertical distance between the total revenue curve and the total cost curve. B) At output Q1 the firm makes zero economic profit. C) At an output above Q3 the firm incurs an economic loss. D) At output Q2 the firm incurs an economic loss. Answer: D Topic: Total Revenue, Total Cost, and Economic Profit Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

27) The feature of the above figure that indicates that the firm is a perfectly competitive firm is the A) shape of the total cost curve. B) shape of the total revenue curve. C) fact that the total cost and total revenue curves are farthest apart at output is Q2. D) fact that the total cost and total revenue curves cross twice. Answer: B Topic: Total Revenue, Total Cost, and Economic Profit Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

28) Given the total cost and total revenue curves in the above figure, what are the output levels at which the perfect competitor will earn a positive economic profit? A) from 0 to 30,000 bushels B) from 0 to 60,000 bushels C) between 30,000 and 80,000 bushels D) over 80,000 bushels Answer: C Topic: Total Revenue, Total Cost, and Economic Profit Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

29) Given the total cost and total revenue curves in the above figure, what are the output levels at which the perfect competitor will incur economic losses? A) below 80,000 bushels B) from 30,000 to 80,000 bushels C) below 30,000 bushels and over 80,000 bushels D) at 30,000 bushels and at 80,000 bushels Answer: C Topic: Total Revenue, Total Cost, and Economic Profit Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

30) Given the total cost and total revenue curves in the figure above, what is the profit-maximizing output level? A) 30,000 bushels B) 60,000 bushels C) 80,000 bushels D) All output levels occur between 30,000 and 80,000 bushels are profit-maximizing output levels. Answer: B Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

31) In the above figure, the firm is incurring an economic loss at A) point a. B) point c. C) points b and d. D) points a, b, and d. Answer: A Topic: Total Revenue, Total Cost, and Economic Profit Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

32) In the above figure, the firm is breaking even at points A) a and c. B) b and d. C) c and d. D) a and d. Answer: B Topic: Total Revenue, Total Cost, and Economic Profit Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

33) In the above figure, when the firm produces output corresponding to point c, the firm's marginal cost A) is less than its marginal revenue. B) equals its marginal revenue. C) exceeds its marginal revenue. D) equals its average revenue. Answer: B Topic: Total Revenue, Total Cost, and Economic Profit Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

34) A perfectly competitive firm maximizes its profit by producing the output at which its marginal cost equals its A) marginal revenue. B) average total cost. C) average variable cost. D) average fixed cost. Answer: A Topic: Marginal Analysis Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

35) For a firm in perfect competition, a diagram shows quantity on the horizontal axis and both the firm's marginal cost (MC) and its marginal revenue (MR) on the vertical axis. The firm's profit-maximizing quantity occurs at the point where the A) slope of the MC curve is zero. B) MC and MR curves are parallel. C) MC curve intersects the MR curve from below, going from left to right. D) MC curve intersects the MR curve from above, going from left to right. Answer: C Topic: Marginal Analysis Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

36) A firm will expand the amount of output it produces as long as its A) average total revenue exceeds its average total cost. B) average total revenue exceeds its average variable cost. C) marginal cost exceeds its marginal revenue. D) marginal revenue exceeds its marginal cost. Answer: D Topic: Marginal Analysis Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

37) A perfectly competitive firm is producing at the point where its marginal cost equals its marginal revenue. If the firm boosts its output, its total revenue will ________ and its profit will ________. A) rise; rise B) rise; fall C) fall; rise D) fall; fall Answer: B Topic: Marginal Analysis Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

38) A perfectly competitive firm is producing at the point where its marginal cost equals its marginal revenue. If the firm boosts its output, its total revenue will A) rise and its total variable cost will rise even more. B) rise and its total variable cost will rise, but not by as much. C) fall but its total variable cost will rise. D) fall and its total variable cost will fall, but not by as much. Answer: A Topic: Marginal Analysis Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

39) A perfectly competitive firm's marginal revenue exceeds its marginal cost at its current output. To increase its profit, the firm will A) lower its price. B) raise its price. C) decrease its output. D) increase its output. Answer: D Topic: Marginal Analysis Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

40) A perfectly competitive firm's marginal cost exceeds its marginal revenue at its current output. To increase its profit, the firm will A) lower its price. B) raise its price. C) decrease its output. D) increase its output. Answer: C Topic: Marginal Analysis Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

41) A perfectly competitive firm is producing more than the profit-maximizing amount of its product. You can conclude that its A) total cost exceeds its total revenue. B) average total cost exceeds the price of the product. C) marginal revenue is less than the price of the product. D) marginal cost exceeds the price of the product. Answer: D Topic: Marginal Analysis Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

42) If a perfectly competitive firm finds that it is producing an amount of output such that MR > MC and P > AVC, it will A) leave the industry. B) decrease its output. C) increase its output. D) not change its behavior. Answer: C Topic: Marginal Analysis Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

43) If marginal revenue exceeds marginal cost, to increase its profit the firm will A) decrease its output. B) increase its output. C) keep its output the same. D) shut down. Answer: B Topic: Marginal Analysis Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

44) If the price exceeds the average variable cost, by producing the level of output such that marginal revenue equals marginal cost, the firm ensures that it will A) earn an economic profit. B) not suffer any losses. C) earn the largest profit possible. D) survive in the long run. Answer: C Topic: Marginal Analysis Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

45) In a perfectly competitive market, if a firm finds it is producing an amount of output such that its marginal cost exceeds its price, it will A) immediately shut down for the short run. B) be maximizing profits. C) increase its output to increase its profit. D) decrease its output to increase its profit. Answer: D Topic: Marginal Analysis Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

46) Jane's Garage Cleaning is a perfectly competitive firm that currently cleans 40 garages a week. Jane's marginal cost is less than the price she charges. Jane can increase her profit if she A) charges a higher price. B) charges a lower price. C) cleans fewer than 40 garages a week. D) cleans more than 40 garages a week. Answer: D Topic: Marginal Analysis Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

47) Bob's Lawn Care Services is a perfectly competitive firm that currently mows 22 lawns a week. Bob's marginal cost exceeds the price he charges. Bob can increase his profit if he A) charges a higher price. B) charges a lower price. C) mows fewer than 22 lawns a week. D) mows more than 22 lawns a week. Answer: C Topic: Marginal Analysis Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

Quantity (pounds of cookies) 1 2 3 4 5

Total revenue (dollars)

Total cost, (dollars)

15 30 45 60 75

13 24 39 58 81

48) The table above gives the total revenue and total cost for a perfectly competitive firm producing chocolate chip cookies. If the firm increases its output from 2 pounds of cookies to 3 pounds, the marginal revenue is ________ per pound of cookies. A) $11 B) $15 C) $30 D) $45 Answer: B Topic: Marginal Revenue Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

49) The table above gives the total revenue and total cost for a perfectly competitive firm producing chocolate chip cookies. If the firm increases its output from 2 pounds of cookies to 3 pounds, the marginal cost is ________ per pound of cookies. A) $11 B) $15 C) $24 D) $39 Answer: B Topic: Marginal Cost Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

50) The table above gives the total revenue and total cost for a perfectly competitive firm producing chocolate chip cookies. If the firm is producing 1 pound of cookies, to maximize its profit it will A) increase its output. B) decrease its output. C) continue producing 1 pound of cookies. D) shut down. Answer: A Topic: Marginal Analysis Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

51) The table above gives the total revenue and total cost for a perfectly competitive firm producing chocolate chip cookies. If the firm is producing 4 pounds of cookies, to maximize its profit it will A) increase its output. B) decrease its output. C) continue producing 4 pounds of cookies. D) shut down. Answer: B Topic: Marginal Analysis Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

Quantity 0 1 2 3 4 5 6 7 8 9 10

Total fixed cost, Total variable TFC cost, TVC (dollars) (dollars) 500 0 500 100 500 180 500 220 500 300 500 390 500 500 500 640 500 800 500 1000 500 1250

52) The table above shows some of the costs for a perfectly competitive firm. The firm will produce 9 units of output if the price per unit is A) $1750. B) $200. C) $300. D) $500. Answer: B Topic: Marginal Analysis Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

53) The table above shows some of the costs for a perfectly competitive firm. If the price is $160 per unit, how many units of output will the firm produce? A) 8 B) 9 C) 10 D) more than 10 Answer: A Topic: Marginal Analysis Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

54) The table above provides cost data for a perfectly competitive firm producing toy cars. The firm is producing non-divisible goods. If the market price is $70 and the firm is a profit maximizer, the firm can earn a maximum economic profit of ________. A) a loss of $500 B) a loss of $10 C) a loss of $510 D) $210 Answer: A Topic: Shutdown Point Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

55) In the above figure, the line represented by the "2" is the A) average fixed cost. B) average variable cost. C) total cost. D) average total cost. Answer: B Topic: Marginal Analysis Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

56) In the above figure, the line represented by the "1" is the A) average fixed cost. B) marginal revenue. C) total cost. D) average total cost. Answer: B Topic: Marginal Analysis Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

57) In the above figure, the line represented by the "4" is the A) average fixed cost. B) marginal revenue. C) average total cost. D) marginal cost. Answer: D Topic: Marginal Analysis Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 42 Copyright © 2014 Pearson Education, Inc.

Quantity (coats per day) 7 8 9 10 11

Total cost (dollars per coat) 1,410 1,640 1,910 2,210 2,560

58) The table above shows the total cost incurred by Sue's Coat Shop, a perfectly competitive firm. If the market price of a coat is $285, Sue's will maximize economic profit by selling ________ coats a day. A) 7 B) 11 C) 8 D) 9 Answer: D Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

59) Tammy sells woolen hats in a perfectly competitive market. The marginal cost of producing 1 hat is $24. The marginal cost of producing a second hat is $26 and the marginal cost of producing a third hat is $28. The market price of a hat is $26. To maximize profit, Tammy produces ________ per day. A) 1 hat B) 3 hats C) 2 hats D) as many hats as possible Answer: C Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

60) In the above figure, the firm will produce A) 0 units. B) 5 units. C) 15 units D) 20 units. Answer: D Topic: Profit-Maximizing Output Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

61) In the above figure, the marginal cost of the last unit produced by the profit maximizing firm is A) $5. B) $10. C) $15. D) $20. Answer: B Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

62) In the above figure, the firm's total economic profit is equal to A) $60. B) $200. C) $150. D) MR - MC. Answer: A Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 44 Copyright © 2014 Pearson Education, Inc.

63) By producing less, a firm can reduce A) its fixed costs and its variable costs. B) its fixed costs but not its variable costs. C) its variable costs but not its fixed costs. D) neither its variable costs nor its fixed costs. Answer: C Topic: Shutdown Point Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

64) The costs incurred even when no output is produced are called A) fixed costs. B) variable costs. C) external costs. D) marginal costs. Answer: A Topic: Shutdown Point Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

65) A firm's shutdown point is the quantity and price at which the firm's total revenue just equals its A) total cost. B) total variable cost. C) total fixed cost. D) marginal cost. Answer: B Topic: Shutdown Point Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

66) A perfectly competitive firm shuts down if the price of its product is A) greater than its minimum average variable cost. B) less than its minimum average variable cost. C) greater than its maximum variable cost. D) less than its minimum total cost. Answer: B Topic: Shutdown Point Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

67) The owners will shut down a perfectly competitive firm if the price of its good falls below its minimum A) average total cost. B) average marginal cost. C) average variable cost. D) wage rate. Answer: C Topic: Shutdown Point Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

68) A firm's shutdown point is the output and price at which the firm just covers its A) total fixed cost. B) total variable cost. C) total cost. D) marginal cost. Answer: A Topic: Shutdown Point Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

69) For a perfectly competitive firm, the shutdown point is the A) amount of output at which price equals minimum average variable cost. B) amount of output at which price equals minimum average total cost. C) price at which economic profit is zero. D) price at which total opportunity cost is zero. Answer: A Topic: Shutdown Point Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

70) A perfectly competitive firm's short-run shutdown point is the level of output at which A) price equals average total cost. B) price equals average fixed cost. C) price equals the minimum average variable cost. D) price is above the minimum average total cost but below the minimum average fixed cost. Answer: C Topic: Shutdown Point Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

71) In the short run a perfectly competitive firm will A) never shut down. B) shut down if P < ATC. C) shut down if P < AVC. D) shut down if P > AFC. Answer: C Topic: Shutdown Point Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

72) A perfectly competitive firm will shut down rather than produce if its A) price is less than average variable cost. B) price is less than total variable cost. C) total revenue is less than total cost. D) price is less than marginal cost. Answer: A Topic: Shutdown Point Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

73) In the short run, a perfectly competitive firm will shut down if A) it incurs any economic loss. B) price equals average cost. C) total revenue is less than total variable cost. D) total revenue is less than total fixed cost. Answer: C Topic: Shutdown Point Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

74) In the short run, a perfectly competitive firm will shut down if at the profit maximizing quantity the A) P < AVC. B) AVC < ATC. C) P > ATC. D) P > MC. Answer: A Topic: Shutdown Point Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

75) If a perfectly competitive firm decides to shut down in the short run, its loss will equal its A) minimum average variable cost, AVC. B) total variable cost, TVC. C) total fixed cost, TFC. D) average total cost, ATC. Answer: C Topic: Shutdown Point Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

76) A firm that shuts down and produces no output incurs a loss equal to its A) total fixed costs. B) total variable costs. C) marginal costs. D) marginal revenue. Answer: A Topic: Shutdown Point Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

77) In the short run, a firm will A) not produce if its total revenue does not cover its total cost. B) produce and incur an economic loss if its total revenue covers its total variable cost but not its total cost. C) produce and break even if its total revenue covers its total fixed cost but not its total variable cost. D) produce and earn an economic profit if its total revenue is equal to its total cost. Answer: B Topic: Shutdown Point Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

78) The shutdown point occurs at the level of output for which the ________ is at its minimum. A) marginal cost B) average variable cost C) average fixed cost D) total cost Answer: B Topic: Shutdown Point Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

79) A perfectly competitive firm is more likely to shut down during a recession, when the demand for its product declines, than during an economic expansion, because during the recession it might be unable to cover its A) fixed costs. B) variable costs. C) external costs. D) depreciation due to machinery becoming obsolete. Answer: B Topic: Shutdown Point Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

80) If the price of its product falls below the minimum point on the AVC curve, the best a perfectly competitive firm can do is to A) keep producing and incur an economic loss equal to its total variable cost. B) keep producing and incur an economic loss equal to its total fixed cost. C) shut down and incur an economic loss equal to its total variable cost. D) shut down and incur an economic loss equal to its total fixed cost. Answer: D Topic: Shutdown Point Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

81) When a perfectly competitive firm produces the profit-maximizing output and it is at its shutdown point, the firm's ________. A) marginal revenue equals its average fixed cost B) total revenue equals its total variable cost C) marginal cost is less than its average variable cost D) total revenue is less than its total variable cost Answer: B Topic: Shutdown Point Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

82) At its shutdown point, a perfectly competitive firm earns total revenue that A) exceeds its total cost. B) generates a normal profit. C) just equals its total variable cost. D) exceeds its total variable cost. Answer: C Topic: Shutdown Point Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

83) If the market price of a perfectly competitive firm's product is below its average variable cost, then the firm's A) marginal revenue is zero. B) total revenue is as large as possible. C) total revenue if it stayed open would be less than its total variable costs. D) total revenue if it stayed open is less than its total cost but greater than its total fixed costs. Answer: C Topic: Shutdown Point Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

84) In the short run, a perfectly competitive firm NEVER A) earns an economic profit. B) incurs a loss greater than its total fixed costs. C) produces where MR = MC. D) earns a normal profit. Answer: B Topic: Shutdown Point Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

85) In the short run, a perfectly competitive firm might A) set its price above marginal cost. B) set its price above marginal revenue. C) adjust the size of its fixed inputs. D) operate even though it is incurring an economic loss. Answer: D Topic: Shutdown Point Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

86) In the short run, a perfectly competitive firm A) shuts down if it incurs any economic loss. B) incurs an economic loss if it shuts down. C) does not consider total revenue in its shut down decision. D) can earn a small economic profit while being shut down. Answer: B Topic: Shutdown Point Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

87) A perfectly competitive firm will operate and incur an economic loss in the short run if A) the loss is smaller than its total fixed costs. B) it knows it can recoup the loss in the long run. C) shareholders do not know about the loss. D) the loss can offset future profits. Answer: A Topic: Shutdown Point Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

88) If the price of its product just equals the average variable cost of production for a competitive firm, A) total revenue equals total fixed cost and the firm's loss equals total variable cost. B) total revenue equals total variable cost and the firm's loss equals total fixed cost. C) total fixed cost is zero. D) total variable cost equals total fixed cost. Answer: B Topic: Shutdown Point Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

89) If the market price in a perfectly competitive market is less than a firm's minimum average variable cost, then the firm's total revenue will always ________. A) exceed its total fixed cost B) be less than its total economic loss C) equal its total cost D) be less than its total variable cost Answer: D Topic: Shutdown Point Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

Output (tons of rice per year) 0 1 2 3 4 5

Total cost (dollars per ton) $1,000 $1,200 $1,600 $2,200 $3,000 $4,000

90) Based on the table above which shows Chip's costs, if rice sells for $600 a ton, Chip's profitmaximizing output is A) less than one ton. B) between two and three tons. C) between three and four tons. D) between one and two tons. Answer: B Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

91) Based on the table above which shows Chip's costs, if rice sells for $600 a ton, Chip will A) shut down because he incurs an economic loss. B) shut down because the price is below his minimum average variable cost. C) stay open because he makes an economic profit. D) stay open because the price is above his minimum average variable cost. Answer: D Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

92) Based on the table above which shows Chip's costs, if rice sells for $600 a ton, Chip A) makes an economic profit and should stay open in the short run. B) makes an economic profit, but should shut down in the short run. C) incurs an economic loss, but should stay open in the short run. D) incurs an economic loss and should shut down in the short run. Answer: C Topic: Shutdown Point Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

93) Based on the table above which shows Chip's costs, if Chip shuts down in the short run, his total cost will be A) $0. B) $1,000. C) $1,200. D) $4,000. Answer: B Topic: Shutdown Point Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

94) Based on the table above which shows Chip's costs, if Chip shuts down in the short run, his economic loss will be A) $0. B) $1,000. C) $1,200. D) $4,000. Answer: B Topic: Shutdown Point Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

Quantity (pizzas per hour) 0 1 2 3 4 5 6

Total cost, TC (dollars per hour) 10 18 30 48 70 98 120

95) Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table above. If the market price is $15, what is Giuseppe's profit-maximizing output? A) 2 pizzas per hour B) 3 pizzas per hour C) 4 pizzas per hour D) 0 pizzas per hour Answer: A Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

96) Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table above. If the market price is $20, what is Giuseppe's profit-maximizing output? A) 2 pizzas per hour B) 3 pizzas per hour C) 4 pizzas per hour D) 0 pizzas per hour Answer: B Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

97) Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table above. The firm's shutdown point is A) $12. B) $17. C) $8. D) $2. Answer: C Topic: Shutdown Point Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

Quantity (tattoos per hour) 0 1 2 3 4 5 6

Total cost, TC (dollars per hour) 10 25 35 50 70 95 125

98) Archibald's Tattoos is a perfectly competitive firm. The firm's costs are shown in the table above. If the market price of a tattoo is $12.50 and if Archibald's does not shut down, what is the firm's profitmaximizing output? A) 2 tattoos per hour B) 3 tattoos per hour C) 4 tattoos per hour D) 5 tattoos per hour Answer: A Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

99) Archibald's Tattoos is a perfectly competitive firm. The firm's costs are shown in the table above. What is Archibald's shut-down point? A) $10.00 B) $16.67 C) $15.00 D) $12.50 Answer: D Topic: Shutdown Point Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

100) Archibald's Tattoos is a perfectly competitive firm. The firm's costs are shown in the table above. If the market price of a tattoo is $12.50 what is the firm's economic profit? A) zero B) $10 per hour C) -$10 per hour D) $20 per hour Answer: C Topic: Shutdown Point Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

101) Archibald's Tattoos is a perfectly competitive firm. The firm's costs are shown in the table above. If the market price of a tattoo is $12, the firm A) incurs an economic loss, but will not shut down. B) will not shut down in the short run, but will leave the industry in the long run. C) will shut down. D) is breaking even. Answer: C Topic: Shutdown Point Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

102) Archibald's Tattoos is a perfectly competitive firm. The firm's costs are shown in the table above. If the market price of a tattoo is $17.50 what is the firm's profit-maximizing output? A) 2 tattoos per hour B) 3 tattoos per hour C) 4 tattoos per hour D) 5 tattoos per hour Answer: B Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

Output (sandwiches per hour) 1 2 3 4 5 6

Average total cost ($ per sandwich) 17.00 10.00 8.00 8.00 8.80 10.00

103) The table above shows output and costs of Evan's Subs, a typical perfectly competitive firm in a local market for sandwiches. Evan's fixed cost is $9 per hour. The current market price of a sandwich is $6. What is Evan's marginal revenue from the 2nd sandwich sold? A) $10.00 B) $13.50 C) $3.00 D) $6.00 Answer: D Topic: Marginal Revenue Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

104) The table above shows output and costs of Evan's Subs, a typical perfectly competitive firm in a local market for sandwiches. Evan's fixed cost is $9 per hour. The current market price of a sandwich is $6. If Evan's sells the 5th sandwich, the marginal cost is ________ the marginal revenue, so the firm's profit ________. A) greater than; decreases B) greater than; increases C) less than; increases D) less than; decreases Answer: A Topic: Marginal Analysis Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

105) The table above shows output and costs of Evan's Subs, a typical perfectly competitive firm in a local market for sandwiches. Evan's fixed cost is $9 per hour. The current market price of a sandwich is $6. What quantity of sandwiches produced will maximize Evan's economic profit in the short run? A) 2 sandwiches per hour B) 3 sandwiches per hour C) 4 sandwiches per hour D) 5 sandwiches per hour Answer: B Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 56 Copyright © 2014 Pearson Education, Inc.

106) The table above shows output and costs of Evan's Subs, a typical perfectly competitive firm in a local market for sandwiches. Evan's fixed cost is $9 per hour. The current market price of a sandwich is $6. What is Evan's maximum short-run economic profit? A) $6 per hour B) $1 per hour C) -$6 per hour D) zero Answer: C Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

107) The table above shows output and costs of Evan's Subs, a typical perfectly competitive firm in a local market for sandwiches. Evan's fixed cost is $9 per hour. The current market price of a sandwich is $6. What is Evan's shut-down price? A) $6 per sandwich B) $4 per sandwich C) $3 per sandwich D) $5 per sandwich Answer: D Topic: Shutdown Point Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

108) The table above shows output and costs of Evan's Subs, a typical perfectly competitive firm in a local market for sandwiches. Evan's fixed cost is $9 per hour. The current market price of a sandwich is $6. If the market price does not change, Evan's will A) continue to operate in the short run, but will exit the industry in the long run. B) continue to operate in the short run and in the long run. C) shut down. D) increase its production in the long run. Answer: A Topic: Shutdown Point Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

109) In the above figure, if the price is P1, the firm will produce A) nothing. B) where MC equals ATC. C) where MC equals P1. D) where ATC equals P1. Answer: C Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

110) In the above figure, if the price is P1, the firm maximizes its profit by producing A) nothing. B) where MC equals ATC. C) where MC equals P1. D) where ATC equals P1. Answer: C Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

111) In the above figure, if the firm increases its output from Q1 to Q2, it will A) reduce its marginal revenue. B) increase its marginal revenue. C) decrease its profit. D) increase its profit. Answer: D Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

112) In the above figure, if the firm increases its output from Q2 to Q3, it will A) reduce its marginal revenue. B) increase its marginal revenue. C) decrease its profit. D) increase its profit. Answer: C Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

113) The figure above shows a perfectly competitive firm. In the short run, the firm will shut down A) only if the AVC of producing 10 units is less than $20. B) only if the AVC of producing 10 units is more than $20. C) only if the AVC curve reaches its minimum before 10 units are produced. D) always. Answer: B Topic: Shutdown Point Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 59 Copyright © 2014 Pearson Education, Inc.

114) The figure above shows a perfectly competitive firm. The firm will shut down in the short run if total fixed costs A) are between $201 and $400. B) exceed $401. C) are less than $200. D) exceed total costs. Answer: C Topic: Shutdown Point Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

115) Consider the perfectly competitive firm in the above figure. The profit maximizing level of output for the firm is equal to A) 0 units. B) 14 units. C) 17 units. D) 19 units. Answer: C Topic: Profit-Maximizing Output Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

116) Consider the perfectly competitive firm in the above figure. At the profit maximizing level of output, the firm is A) incurring an economic loss equal to $119.00. B) incurring an economic loss equal to $123.50. C) incurring an economic loss equal to $187.00. D) making zero economic profit. Answer: A Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

117) Consider the perfectly competitive firm in the above figure. The shutdown point occurs at a price of A) $11.00. B) $12.00. C) $16.00. D) $22.00. Answer: A Topic: Shutdown Point Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

118) Consider the perfectly competitive firm in the above figure. What will the firm choose to do in the short-run and why? A) shut down because the firm incurs an economic loss B) stay in business because the firm is making an economic profit C) stay in business because the firm's economic loss is less than fixed costs D) stay in business because it is making zero economic profit Answer: C Topic: Shutdown Point Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

119) A perfectly competitive firm's short-run supply curve is the same as its A) ATC curve. B) MR curve. C) AVC curve. D) MC curve above the minimum of the AVC curve. Answer: D Topic: The Firm's Short-Run Supply Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

120) The short-run supply curve for a perfectly competitive firm is its A) marginal cost curve above the horizontal axis. B) marginal cost curve above its shutdown point. C) average cost curve above the horizontal axis. D) average cost curve above its shutdown point. Answer: B Topic: The Firm's Short-Run Supply Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

121) The short-run supply curve for a perfectly competitive firm is its marginal cost curve A) above the horizontal axis. B) above its shutdown point. C) below its shutdown point. D) everywhere. Answer: B Topic: The Firm's Short-Run Supply Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

122) The short-run supply curve for a perfectly competitive firm is its marginal cost curve above the minimum point on the A) average fixed cost curve. B) average variable cost curve. C) average total cost curve. D) demand curve. Answer: B Topic: The Firm's Short-Run Supply Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

123) The firm's supply curve is its A) marginal cost curve, at all points above the minimum average variable cost curve. B) marginal cost curve, at all points above the minimum average fixed cost curve. C) marginal cost curve, at all points above the minimum average total cost curve. D) marginal revenue curve, at all points above the minimum average total cost curve. Answer: A Topic: The Firm's Short-Run Supply Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

124) A perfectly competitive firm's short-run supply curve is A) its marginal cost curve above the shutdown point. B) its marginal revenue curve above the shutdown point. C) its demand curve. D) horizontal at the going price. Answer: A Topic: The Firm's Short-Run Supply Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

125) The section of the marginal cost curve that lies above the average variable cost curve is A) a perfectly competitive firm's supply curve. B) a perfectly competitive firm's average total cost curve. C) a perfectly competitive firm's total fixed costs curve. D) irrelevant to the firm because it never produces at any point along this curve. Answer: A Topic: The Firm's Short-Run Supply Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

126) A perfectly competitive firm's supply curve A) shows the relationship between the price and the quantity the firm will produce. B) is the portion of the marginal cost curve above the average variable cost curve. C) is upward sloping. D) All of the above are correct. Answer: D Topic: The Firm's Short-Run Supply Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

127) A perfectly competitive firm's short-run supply curve is A) its marginal cost curve above the shutdown point. B) its average total cost curve above the minimum of the average variable cost. C) its average variable cost curve above the breakeven point. D) horizontal at the market price. Answer: A Topic: The Firm's Short-Run Supply Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

128) The firm's short run supply curve is equal to the A) entire marginal cost curve. B) marginal cost curve above the AVC curve. C) marginal cost curve above the ATC curve. D) marginal cost curve above the AFC curve. Answer: B Topic: The Firm's Short-Run Supply Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

129) Which of the following best describes the short-run supply curve for an individual perfectly competitive firm? A) It is the firm's marginal cost curve. B) It is the upward-sloping part of the firm's marginal cost curve. C) It is the vertical axis at prices less than minimum average variable cost and is the firm's marginal cost curve at prices above minimum average variable cost. D) It is the vertical axis at prices less than minimum average total cost and is the firm's marginal cost curve at prices above minimum average total cost. Answer: C Topic: The Firm's Short-Run Supply Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

130) An individual perfectly competitive firm has a supply curve A) with a positive slope. B) with a negative slope. C) that is parallel to the quantity axis. D) that has a positive slope at lower output levels and a negative slope at higher output levels. Answer: A Topic: The Firm's Short-Run Supply Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

131) The figure above shows short-run cost curves for a perfectly competitive firm. If the price of the product is $8, in the short run the firm will A) make zero economic profit. B) make an economic profit. C) incur an economic loss. D) None of the above answers is correct because more information is needed to determine the firm's economic profit or loss. Answer: C Topic: The Firm's Short-Run Supply Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

132) The figure above shows short-run cost curves for a perfectly competitive firm. If the price of the product is $8 and the firm does not shut down, the firm's output in the short run A) will be 0. B) will be between 0 and 10. C) will be 10 or higher. D) cannot be determined without more information. Answer: B Topic: The Firm's Short-Run Supply Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

133) The donut market is perfectly competitive. The figure shows the costs of a typical donut producer. In the short run, the donut producer's supply curve is the curve running from point ________ to point E. A) A B) B C) C D) D Answer: B Topic: The Firm's Short-Run Supply Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

134) In the above figure, the perfectly competitive firm's shutdown point is at a price of A) $4 per unit. B) $8 per unit. C) $12 per unit. D) $16 per unit. Answer: B Topic: Shutdown Point Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

135) In the above figure, if the price is $16 per unit, how many units will a profit maximizing perfectly competitive firm produce? A) 0 B) 20 C) 30 D) 35 Answer: D Topic: The Firm's Short-Run Supply Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

136) In the above figure, if the price is $12 per unit, how many units will a profit maximizing perfectly competitive firm produce? A) 0 B) 20 C) 30 D) 35 Answer: C Topic: The Firm's Short-Run Supply Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

137) In the above figure, if the price is $8 per unit, how many units will a profit maximizing perfectly competitive firm produce? A) 5 B) 20 C) 30 D) 35 Answer: B Topic: The Firm's Short-Run Supply Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

138) In the above figure, if the price is $4 per unit, how many units will a profit maximizing perfectly competitive firm produce? A) 0 B) 5 C) 20 D) 30 Answer: A Topic: The Firm's Short-Run Supply Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

139) The figure above shows a firm in a perfectly competitive market. The firm will shut down if price falls below A) P1. B) P2. C) P3. D) P4. Answer: B Topic: Shutdown Point Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

140) The figure above shows a firm in a perfectly competitive market. If the firm does not shut down, the least amount of output that it will produce is A) less than 5 units. B) 5 units. C) 8 units. D) 10 units. Answer: C Topic: Shutdown Point Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

141) The figure above shows a firm in a perfectly competitive market. If the price rises from P3 to P4 then output will increase by A) 0 units. B) 1 unit. C) 2 units. D) 3 units. Answer: B Topic: The Firm's Short-Run Supply Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

142) The figure above shows a firm in a perfectly competitive market. The firm's supply curve is the curved line linking A) point a to point c and stopping at point c. B) point b to point d and continuing on past point d along the MC curve. C) point b to point f and stopping at point f. D) point c to point e and continuing on past point e along the ATC curve. Answer: B Topic: The Firm's Short-Run Supply Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

143) In the above figure, the vertical distance between the ATC and AVC curves is A) the marginal cost. B) the total cost. C) the average fixed costs. D) None of the above answers is correct. Answer: C Topic: Output, Price and Profit Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

144) In the above figure, if the price is $16, a profit-maximizing perfectly competitive firm will A) produce 50 units. B) produce 35 units. C) produce 10 units. D) choose not to produce. Answer: B Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

145) In the above figure, if the price is $12, a profit-maximizing perfectly competitive firm will have an economic profit A) of less than $100 but more than $0. B) of more than $100. C) that is negative, that is, it will have an economic loss. D) of zero, that is, it will break even with a normal profit. Answer: D Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

146) In the above figure, if the price is $10, a profit-maximizing perfectly competitive firm will A) produce 40 units. B) produce 25 units. C) produce 10 units. D) choose not to produce. Answer: C Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

147) Using the above figure, of the prices below, which price enables a perfectly competitive firm to earn the maximum economic profit? A) $4 per unit. B) $10 per unit. C) $12 per unit. D) $16 per unit. Answer: D Topic: Output, Price and Profit Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

148) In the above figure, at any price between $8 per unit to $12 per unit, how many units will a profitmaximizing perfectly competitive firm produce? A) None, because the producer will never choose to operate at a loss. B) Less than 20 because this will reduce marginal cost. C) Between 20 and 30, because variable costs are covered so the firm's losses will be minimized by producing rather than shutting down. D) More than 30, because variable costs are covered so that the producer can earn economic profits. Answer: C Topic: The Firm's Short-Run Supply Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

149) In the above figure, below what minimum price will a perfectly competitive firm shut down rather than produce? A) for any price less than $16 per unit B) for any price less than $12 per unit C) for any price less than $8 per unit D) for any price less than $4 per unit Answer: A Topic: The Firm's Short-Run Supply Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

150) In the above figure, at a price of $4 per unit, a profit-maximizing perfectly competitive firm will A) shut down because its total revenue is less than its variable costs. B) incur an economic loss. C) produce 5 units. D) Both answers A and B are correct. Answer: D Topic: Shutdown Point Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

151) Bubba's BBQ has fallen on some hard times. Bubba has analyzed his past revenue and cost information and knows that if he shuts down, he will incur an economic loss equal to $20,000 in remaining lease payments. Apparently, Bubba's current planning horizon is A) the short run because he still faces some fixed costs. B) the long run because he faces only variable costs. C) the short run because he faces only variable costs. D) neither the short run nor the long run because lease payments do not figure into cost determinations. Answer: A Topic: Short-Run versus Long-Run Decisions Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

152) Homer's Holesome Donuts has determined that its profit-maximizing quantity is 10,000 donuts per year. Homer's earns $12,000 in revenue from the sale of those donuts. Homer's has two costs. First he pays $16,000 in annual rental payments for its five-year lease on its store. Second Homer incurs an additional cost of $5,000 for ingredients. Homer's fixed cost is equal to A) 0. B) $5,000. C) $16,000. D) $21,000. Answer: C Topic: Fixed Cost Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

153) Homer's Holesome Donuts has determined that its profit-maximizing quantity is 10,000 donuts per year. Homer's earns $12,000 in revenue from the sale of those donuts. Homer's has two costs. First he pays $16,000 in annual rental payments for its five-year lease on its store. Second Homer incurs an additional cost of $5,000 for ingredients. Homer's variable cost is equal to A) 0. B) $5,000. C) $16,000. D) $21,000. Answer: B Topic: Variable Cost Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

154) Homer's Holesome Donuts has determined that its profit-maximizing quantity is 10,000 donuts per year. Homer's earns $12,000 in revenue from the sale of those donuts. Homer's has two costs. First he pays $16,000 in annual rental payments for its five-year lease on its store. Second Homer incurs an additional cost of $5,000 for ingredients. Homer's economic profit is equal to A) -$16,000, that is, an economic loss of $16,000. B) -$9,000, that is, an economic loss of $9,000. C) +$9,000. D) +$12,000. Answer: B Topic: Shutdown Point Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

155) Homer's Holesome Donuts has determined that its profit-maximizing quantity is 10,000 donuts per year. Homer's earns $12,000 in revenue from the sale of those donuts. Homer's has two costs. First he pays $16,000 in annual rental payments for its five-year lease on its store. Second Homer incurs an additional cost of $5,000 for ingredients. Should Homer's shut down in the short run? A) Yes, because he is incurring an economic loss. B) Yes, because he cannot cover all of his fixed costs. C) No, because is making positive economic profit. D) No, because he can cover all of his variable costs. Answer: D Topic: Shutdown Point Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

156) Paul runs a shop that sells printers. Paul is a perfect competitor and can sell each printer for a price of $300. The marginal cost of selling one printer a day is $200; the marginal cost of selling a second printer is $250; and the marginal cost of selling a third printer is $350. To maximize his profit, Paul should sell A) one printer a day. B) two printers a day. C) three printers a day. D) more than three printers a day. Answer: B Topic: Study Guide Question, Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

157) Because of a decrease in the wage rate it must pay, a perfectly competitive firm's marginal costs decrease but its demand curve stays the same. As a result, the firm A) decreases the amount of output it produces and raises its price. B) increases the amount of output it produces and lowers it price. C) increases the amount of output it produces and does not change its price. D) decreases the amount of output it produces and lowers its price. Answer: C Topic: Study Guide Question, Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

158) For prices above the minimum average variable cost, a perfectly competitive firm's supply curve is A) horizontal at the market price. B) vertical at zero output. C) the same as its marginal cost curve. D) the same as its average variable cost curve. Answer: C Topic: Study Guide Question, The Firm's Short-Run Supply Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

159) A perfectly competitive firm is definitely making an economic profit when A) MR < MC. B) P > ATC. C) P < ATC. D) P > AVC. Answer: B Topic: Study Guide Question, Economic Profits & Economic Losses in the Short Run Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

160) In the figure above, a firm is operating at point A on the graph. At point A, the firm's average cost curve A) has negative slope. B) has positive slope. C) is horizontal. D) is vertical. Answer: C Topic: Parallel MyEconLab Questions Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

161) Carol's Candies is producing 150 boxes of candy a day. Carol's marginal revenue and marginal cost curves are shown in the figure above. To increase her profit, Carol should A) increase her output. B) decrease her output. C) maintain the current level of output because it gives her the maximum profit. D) Not enough information is given to determine if Carol should increase, decrease, or not change her level of output. Answer: B Topic: Parallel MyEconLab Questions Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

3 Output, Price, and Profit in the Short Run 1) If there are 1,000 rutabaga farms, all perfectly competitive, an increase in the price of fertilizer used for growing rutabagas will A) have no effect on the total quantity of rutabagas supplied, because no farm has enough market power to raise the price. B) have no effect on the total quantity of rutabagas supplied, because each farm's supply curve is a vertical line. C) decrease the total quantity of rutabagas supplied, because each farm's supply curve shifts leftward. D) reduce the total quantity of rutabagas supplied, because each farm's supply curve is a horizontal line and will shift upward. Answer: C Topic: Change in Industry Costs Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

2) The short-run market supply curve for a perfectly competitive market is obtained by summing the part of each firm's A) AVC curve that lies above its MC curve. B) MC curve that lies above its AVC curve. C) AVC curve that lies below the MC curve. D) MC curve that lies below the AVC curve. Answer: B Topic: The Short-Run Market Supply Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

3) In a perfectly competitive market, the market supply curve is the sum of the A) supply curves of all the individual firms. B) average variable cost curves of all the individual firms. C) average total cost curves of all the individual firms. D) average fixed cost curves of all the individual firms. Answer: A Topic: The Short-Run Market Supply Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

4) In the short run, a perfectly competitive firm's economic profits A) must equal zero, that is, the firm earns a normal profit. B) must be positive. C) might be positive, negative (an economic loss), or zero (a normal profit). D) must be negative, that is the firm must incur an economic loss. Answer: C Topic: Economic Profits and Economic Losses in the Short Run Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

5) In the short run, a perfectly competitive firm A) can either make an economic profit, incur an economic loss, or make zero economic profit. B) never incurs an economic loss larger than its average fixed costs. C) produces at any price. D) always makes an economic profit. Answer: A Topic: Economic Profits and Economic Losses in the Short Run Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

6) In the short run, a perfectly competitive firm A) cannot shut down. B) must make zero economic profit. C) can make an economic profit, incur an economic loss, or make zero economic profit. D) will not incur an economic loss if it shuts down. Answer: C Topic: Economic Profits and Economic Losses in the Short Run Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

7) In the short run, a perfectly competitive firm A) might not make an economic profit greater than zero. B) will always make an economic profit greater than zero. C) chooses its optimal plant size. D) is in equilibrium only when its economic profit is positive. Answer: A Topic: Economic Profits and Economic Losses in the Short Run Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

8) In the short run, a perfectly competitive firm will make an economic profit as long as A) it maximizes its profit. B) P > AVC. C) P > AFC. D) P > ATC. Answer: D Topic: Economic Profits and Economic Losses in the Short Run Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

9) In the short run, the firm makes zero economic profit when the price is ________ minimum average total cost, makes an economic profit when the price is ________ minimum average total cost, and incurs an economic loss when the price is ________ minimum average total cost. A) equal to; higher than; lower than B) equal to; lower than; higher than C) higher than; equal to; lower than D) lower than; equal to; higher than Answer: A Topic: Economic Profits and Economic Losses in the Short Run Skill: Recognition Status: New A-level heading: Output, Price, and Profit in the Short Run AACSB: Reflective Thinking

10) A perfectly competitive firm is making an economic profit when A) its total revenue is greater than its total cost. B) the price is greater than the minimum of its average total cost. C) the price is greater than the minimum of its average variable cost. D) Both answers A and B are correct. Answer: D Topic: Economic Profits and Economic Losses in the Short Run Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

11) A perfectly competitive firm will have an economic profit of zero if, at its profit-maximizing output, its marginal revenue equals its A) average total cost. B) marginal cost. C) average variable cost. D) average fixed cost. Answer: A Topic: Economic Profits and Economic Losses in the Short Run Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

12) In a perfectly competitive market, which of the following will increase the economic profit the firms make in the short run? A) a decrease in market demand B) an increase in market demand C) an increase in labor costs D) an increase in the number of firms Answer: B Topic: Economic Profits and Economic Losses in the Short Run Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

13) In a perfectly competitive market in the short run, as the market demand increases, the firms ________ their output and their economic profit ________. A) increase; increases B) increase; decreases C) decrease; decreases D) decrease; increases Answer: A Topic: Economic Profits and Economic Losses in the Short Run Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

14) In the short run, an increase in demand for a good that is sold in a perfectly competitive market A) increases the number of firms in the market. B) increases the economic profits of existing firms in the market. C) has no effect on the price. D) causes more firms to shut down. Answer: B Topic: Economic Profits and Economic Losses in the Short Run Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

15) Which of the following statements is TRUE? A) The presence of positive economic profit in a perfectly competitive market is consistent with the characteristics of a long-run competitive equilibrium. B) When firms in a perfectly competitive market incur economic losses, some will exit in the long run, thereby shifting the industry supply curve rightward. C) If a profit-maximizing firm in a perfectly competitive market is making an economic profit, then it must be producing at a level of output where price is greater than average total cost. D) If a profit-maximizing firm in a perfectly competitive market is incurring an economic loss, then it must be producing at a level of output where price is greater than average total cost. Answer: C Topic: Economic Profits and Economic Losses in the Short Run Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

Quantity (tattoos per hour) 0 1 2 3 4 5 6

Total cost, TC (dollars per hour) 10 25 35 50 70 95 125

16) Archibald's Tattoos is a perfectly competitive firm. The firm's costs are shown in the table above. If the market price of a tattoo is $17.50, what is the firm's economic profit? A) zero B) $2.50 per hour C) $12.50 per hour D) -$10.00 per hour Answer: B Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 81 Copyright © 2014 Pearson Education, Inc.

Quantity (gloves per day) 0 1 2 3 4 5 6 7 8

Total cost (dollars) 80 100 105 135 170 210 270 350 450

17) The above table shows the per day total cost for Kiley's Baseball Glove Company. Each glove is priced at $50 and Kiley's Baseball Glove Company is a perfectly competitive firm. At which of the following amounts of output is the economic profit maximized for Kiley's Baseball Glove Company? A) 0 B) 2 C) 5 D) 8 Answer: C Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

18) The above table shows the per day total cost for Kiley's Baseball Glove Company. Each glove is priced at $50 and Kiley's Baseball Glove Company is a perfectly competitive firm. Between which two amounts of output does Kiley's Baseball Glove Company earn an economic profit? A) 0 and 8 B) 1 and 8 C) 2 and 7 D) 3 and 6 Answer: D Topic: Economic Profit Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

Quantity (pizzas per hour) 0 1 2 3 4 5 6

Total cost, TC (dollars per hour) 10 18 30 48 70 98 120

19) Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table above. If the market price is $15, how much economic profit does the firm make? A) $0 B) $30 C) -$10 D) -$15 Answer: A Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

20) Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table above. If the market price is $20, how much economic profit does the firm make? A) $0 B) $12 C) -$20 D) -$10 Answer: B Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

21) In the above figure, if the price is P1, the firm is A) making an economic profit. B) incurring an economic loss. C) making zero economic profit. D) earning enough revenue to pay all of its opportunity costs. Answer: B Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

22) If the price is $12 per pizza, the perfectly competitive firm in the above figure is A) making an economic profit. B) making zero economic profit. C) incurring an economic loss. D) More information about the firm's total cost is needed to determine if the firm has a positive economic profit, zero economic profit, or an economic loss. Answer: B Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

23) The figure above shows Mollie's Mugs' costs of producing mugs. The mug market is perfectly competitive. If the market price of a mug falls to $5 and Mollie's shuts down temporarily, its total variable cost is ________ an hour and it incurs an economic loss of ________ an hour. A) $160; $280 B) $8; $14 C) $0; $120 D) $0; $6 Answer: C Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

24) The figure illustrates the short-run costs of Paul's Picture Frames Inc. The picture frame market is perfectly competitive and the market price is $30 a frame. Paul produces ________ frames each week, makes ________ of total revenue, and makes zero ________ profit. A) 200; $4,000; economic B) 300; $9,000; normal C) 200; $4,000; normal D) 300; $9,000; economic Answer: D Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

25) The figure above shows a perfectly competitive firm. The firm is operating; that is, the firm has not shut down. The firm is A) making an economic profit of $200. B) incurring a economic loss of $200. C) incurring an economic loss of $600. D) making zero economic profit. Answer: B Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

26) The figure above shows a perfectly competitive firm. The firm is operating; that is, it has not shut down. The firm produces A) 20 units of output and makes zero economic profit. B) 20 units of output and incurs an economic loss. C) 10 units of output and makes zero economic profit. D) 10 units of output and incurs an economic loss. Answer: D Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

27) The figure above shows the costs for a grower in the perfectly competitive turnip market. If the price is $1,000 for a ton of turnips, the firm is A) making an economic profit. B) making zero economic profit. C) incurring an economic loss. D) More information is needed to determine if the firm is making a positive economic profit, zero economic profit, or incurring an economic loss. Answer: C Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

28) The figure above shows the costs for a grower in the perfectly competitive turnip market. If the price is $1,200 for a ton of turnips, the firm is A) making an economic profit. B) making zero economic profit. C) incurring an economic loss. D) More information is needed to determine if the firm is making a positive economic profit, zero economic profit, or incurring an economic loss. Answer: B Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

29) The figure above shows the costs for a grower in the perfectly competitive turnip industry. If the price is $1,400 for a ton of turnips, the firm is A) making an economic profit. B) making zero economic profit. C) incurring an economic loss. D) More information is needed to determine if the firm is making a positive economic profit, zero economic profit, or incurring an economic loss. Answer: A Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

30) In the above figure, at a price of $8, a perfectly competitive firm produces ________ and it ________. A) 0; incurs an economic loss B) 0; makes zero economic profit C) some output; makes zero economic profit D) some output; makes an economic profit Answer: C Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

31) In the above figure, at a price of $6, a perfectly competitive firm produces ________ and it ________. A) some output; incurs an economic loss B) 0; incurs an economic loss C) 0; does not incur an economic loss or make an economic profit D) 0; makes an economic profit Answer: A Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

32) In the above figure, at what price does a perfectly competitive firm make zero economic profit? A) $4 per unit B) $8 per unit C) $12 per unit D) $16 per unit Answer: C Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

33) In the above figure, if the price is $16 per unit, a profit maximizing perfectly competitive firm will A) shut down. B) incur an economic loss but continue to operate. C) make zero economic profit. D) make an economic profit. Answer: D Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 91 Copyright © 2014 Pearson Education, Inc.

34) The figure above shows a perfectly competitive firm. To maximize its profit, the firm will produce ________ units of output and the price will be ________ for a unit. A) 30; $40 B) 30; $30 C) 20; $40 D) 20; $30 Answer: A Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

35) The figure above shows a perfectly competitive firm. When the firm maximizes its profit, its total revenue is A) $1,200. B) $900. C) $600. D) unable to be determined without more information. Answer: A Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

36) The figure above shows a perfectly competitive firm. When the firm maximizes its profit, its total cost is A) $1,200. B) less than $1,200 but more than zero. C) more than $1,200. D) zero. Answer: A Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

37) The figure above shows a perfectly competitive firm. When the firm maximizes its profit, its economic profit A) is more than $300. B) is $300. C) is less than $300. D) The premise of the question is wrong because the firm is incurring an economic loss. Answer: C Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

38) The figure above shows a perfectly competitive firm. The figure shows a firm A) in the short run. B) in the long run. C) at its shutdown point. D) Both answers A and C are correct. Answer: A Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

39) In the above figure, if the price is P1 and the firm produces Q2, it is A) making an economic profit. B) incurring an economic loss. C) breaking even. D) More information is needed to determine if the firm is earning a positive economic profit, zero economic profit, or is incurring an economic loss. Answer: A Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

40) In the above figure, if the price is P1 and the firm produced Q1, the firm's economic profit is ________ than if it produced Q2 and ________ than if it produced Q3. A) less; less B) less; more C) more; less D) more; more Answer: B Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

41) In the above figure, if the price is P1 and the firm produced Q3, the firm's economic profit is ________ than if it produced Q1 and ________ than if it produced Q2. A) less; less B) less; more C) more; less D) more; more Answer: A Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

42) Consider the perfectly competitive firm in the figure above. At the profit maximizing level of output, the firm will A) make an economic profit equal to the area ABCD. B) incur an economic loss equal to the area ABCD. C) make zero economic profit. D) make an economic profit equal to the area AECD. Answer: A Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

43) The figure above shows the marginal revenue and costs of a perfectly competitive firm. The firm's profit is maximized when the firm produces A) 90 units of output. B) 130 units of output. C) 170 units of output. D) 210 units of output. Answer: C Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

44) The figure above shows the marginal revenue and costs of a perfectly competitive firm. When the firm produces 170 units, A) marginal cost is less than marginal revenue. B) marginal revenue equals marginal cost. C) total revenue is less than total cost. D) total revenue equals total cost. Answer: B Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

45) The figure above shows the marginal revenue and costs of a perfectly competitive firm. The marginal cost of the last unit produced is A) $4 per unit. B) $8 per unit. C) $16 per unit. D) None of the above answers is correct. Answer: C Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

46) The figure above shows depicts the marginal revenue and costs of a perfectly competitive firm. The price the firm charges is A) $4 per unit. B) $8 per unit. C) $16 per unit. D) None of the above answers is correct. Answer: C Topic: Marginal Analysis Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

47) The figure above shows the marginal revenue and costs of a perfectly competitive firm. When 170 units are produced, the A) firm has total revenue of $2,720. B) firm's total costs are less than $2,720. C) firm is making an economic profit. D) All of the above are true. Answer: D Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

48) The figure above shows depicts the marginal revenue and costs of a perfectly competitive firm. When 170 units are produced, the firm A) would definitely shut down. B) would incur an economic loss. C) would increase its price. D) has total costs less than $2,720. Answer: D Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

49) The short-run market supply curve is A) the sum of the quantities supplied by all the firms. B) undefined because the number of firms is constant in the short run. C) vertical at the total level of output being produced by all firms. D) horizontal at the current market price. Answer: A Topic: Study Guide Question, Perfectly Competitive Firm in the Short Run Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

50) In the short run, a perfectly competitive firm can A) only make an economic profit. B) only make zero economic profit. C) only incur an economic loss. D) make an economic profit, zero economic profit, or incur an economic loss. Answer: D Topic: Study Guide Question, Perfectly Competitive Firm in the Short Run Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

51) A perfectly competitive firm is definitely making an economic profit when A) MR = MC. B) P = ATC. C) P < ATC. D) P > ATC. Answer: D Topic: Study Guide Question, Perfectly Competitive Firm in the Short Run Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

4 Output, Price, and Profit in the Long Run 1) If firms in a perfectly competitive industry are making zero economic profit, then A) some of those firms will leave the industry, because firms cannot persistently go without making economic profit. B) new firms will enter the industry, because the new entrants would be ensured of doing as well as in their best foregone alternative. C) there is no incentive for either entry or exit. D) some of the firms will temporarily shut down. Answer: C Topic: Long-Run Adjustments Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

2) Today, firms in a perfectly competitive market are making an economic profit. In the long run, firms will ________ the market until all firms in the market are ________. A) exit; covering only their total fixed costs B) enter; making zero economic profit C) exit; producing at the minimum point on their long-run average cost curve D) enter; making zero normal profit Answer: B Topic: Long-Run Adjustments; Entry Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

3) Which of the following statements regarding the long-term equilibrium is true? A) As new firms enter a market, each existing firm increases the quantity it produces. B) Firms leave a market if they are making zero economic profit. C) Entry and exit stop when firms are making an economic profit. D) Entry and exit stop when firms make zero economic profit. Answer: D Topic: Long-Run Equilibrium Skill: Conceptual Status: New A-level heading: Output, Price, and Profit in the Long Run AACSB: Reflective Thinking

4) The firms in a perfectly competitive are making an economic profit when new firms enter. The entry shifts the short-run market supply curve ________, the market price ________, and each firm's economic profit ________. A) leftward; rises; decreases B) rightward; rises; increases C) rightward; falls; decreases D) leftward; falls; decreases Answer: C Topic: Long-Run Adjustments; Entry Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

5) Suppose firms in a perfectly competitive industry are making economic profits. As a result, I. new firms enter the industry. II. the market price falls. III. the economic profits of the existing firms decrease. A) I, II and III B) I and II C) II and III D) I and III Answer: A Topic: Long-Run Adjustments; Entry Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 99 Copyright © 2014 Pearson Education, Inc.

6) Economic profit sends a signal to entrepreneurs by telling them where A) price exceeds marginal cost. B) there are many buyers and many sellers. C) the shutdown point is. D) an above normal return on investment can be earned. Answer: D Topic: Long-Run Adjustments; Entry Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

7) In the long run, for a perfectly competitive market, if economic profit is A) less than zero, then some firms will exit the market and the market supply curve will shift leftward. B) greater than zero, then some firms will enter the market and the market supply curve will shift rightward. C) equal to zero, then there is no entry or exit of firms into or out of the market. D) All of the above answers are correct. Answer: D Topic: Long-Run Adjustments; Entry Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

8) Entry in a perfectly competitive market A) shifts the market supply curve rightward. B) decreases the market price. C) shifts the market supply curve leftward. D) Both answers A and B are correct. Answer: D Topic: Long-Run Adjustments; Entry Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

9) Suppose firms in a perfectly competitive market are earning an economic profit. As new firms enter, the price ________ and the economic profit of each existing firm ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases Answer: D Topic: Long-Run Adjustments; Entry Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

Quantity (pizzas per hour) 0 1 2 3 4 5 6

Total cost, TC (dollars per hour) 10 18 30 48 70 98 120

10) Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table above. If the market price is $15, the firm will A) shut down. B) leave the market in the long run. C) stay in the market in the long run. D) make an economic profit. Answer: C Topic: Long-Run Adjustments; Entry Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

11) Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table above. If the market price is $22, the firm will A) shut down. B) leave the market in the long run. C) stay in the market in the long run. D) incur an economic loss. Answer: C Topic: Long-Run Adjustments; Entry Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

Quantity Total variable (dozens of sea cost shells per day) (dollars) 200 60.00 201 61.00 202 62.50 203 64.00 204 66.00 205 68.50 206 72.00 12) Sue's Sea Shells by the Sea Shore is a perfectly competitive firm selling sea shells at the market price of $2 per dozen. Sue's Sea Shells by the Sea Shore has fixed costs of $40 per day and a variable cost schedule in the table above. The profit-maximizing level of output for Sue's Sea Shells by the Sea Shore is A) 202 dozen sea shells by the sea shore per day. B) 204 dozen sea shells by the sea shore per day. C) 205 dozen sea shells by the sea shore per day. D) 206 dozen sea shells by the sea shore per day. Answer: B Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

13) Sue's Sea Shells by the Sea Shore is a perfectly competitive firm selling sea shells at the market price of $2 per dozen. Sue's Sea Shells by the Sea Shore has fixed costs of $40 per day and a variable cost schedule in the table above. The maximum profit attainable by Sue's Sea Shells by the Sea Shore is A) $262.00 per day. B) $262.50 per day. C) $302.00 per day. D) $302.50 per day. Answer: C Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

14) Sue's Sea Shells by the Sea Shore is a perfectly competitive firm selling sea shells at the market price of $2 per dozen. Sue's Sea Shells by the Sea Shore has fixed costs of $40 per day and a variable cost schedule in the table above. Based on this information, we can expect the number of firms in the sea shell market to A) decrease. B) increase. C) remain constant. D) It is impossible to say. Answer: B Topic: Long-Run Adjustments; Entry Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

15) The above figure shows the cost curves for a perfectly competitive firm. If all firms in the market have the same cost curves and the price equals $16 per unit, A) the market is in its long-run equilibrium. B) over time, firms will leave this market. C) the firm is making zero economic profit. D) over time, the price will fall as new firms enter the market. Answer: D Topic: Long-Run Adjustments; Entry Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

16) The apple market is perfectly competitive and is in long-run equilibrium. Now a disease kills 50 percent of the apple orchards. In the short run, the price of a bag of apples ________ and the remaining apple growers make ________ economic profit. In the long run, the ________. A) increases; zero; price of apples will return to their original level B) remains the same; zero; orchards will be replanted and growers will make normal profits C) increases; zero; orchards will be replanted and economic profit will return to zero D) increases; positive; orchards will be replanted and economic profit will return to zero Answer: D Topic: Long-Run Adjustments; Entry Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

17) Homer's Holesome Donuts has determined that its profit-maximizing quantity is 10,000 donuts per year. Homer's earns $12,000 in revenue from the sale of those donuts. Homer's has two costs. First he pays $16,000 in annual rental payments for its five-year lease on its store. Second Homer incurs an additional cost of $5,000 for ingredients. Should Homer's exit the market in the long run? A) Yes, because he is incurring an economic loss. B) Yes, because all costs are fixed in the long run. C) No, because he is making an economic profit. D) No, because all costs are variable in the long run. Answer: A Topic: Long-Run Adjustments; Exit Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

18) If firms in a competitive market are ________ then there is ________ for firms to ________ the industry. A) incurring economic losses; an incentive; exit B) incurring economic losses; no incentive; exit C) making economic profits; no incentive; enter D) making zero economic profit; an incentive; exit Answer: A Topic: Long-Run Adjustments; Exit Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

19) Suppose some firms in a perfectly competitive market are incurring an economic loss. As a result, A) all the firms will eventually incur an economic loss. B) some firms will leave the market and the price of the good will rise. C) some firms will leave the market and the remaining firms' quantity will decrease. D) the total market economic profit must equal $0. Answer: B Topic: Long-Run Adjustments; Exit Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

20) Suppose firms in a perfectly competitive market are incurring an economic loss. As firms exit, the price ________ and the economic loss of the surviving firms ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases Answer: B Topic: Long-Run Adjustments; Exit Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

21) In the long-run, if firms in a perfectly competitive market are incurring persistent economic losses, some firms will A) exit and the price will fall. B) exit and the price will rise. C) enter and the price might either rise or fall. D) exit and the price might either rise or fall. Answer: B Topic: Long-Run Adjustments; Exit Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

22) In the long run, if firms in a perfectly competitive market are incurring economic losses, then A) new firms will enter the market and the price will rise. B) some firms will leave the market and the price will fall. C) some firms will leave the market and the price will rise. D) new firms will enter the market and the price will fall. Answer: C Topic: Long-Run Adjustments; Exit Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

23) If perfectly competitive firms exit a market, the A) market supply curve shifts leftward. B) price of the good or service falls. C) profits of the remaining firms decrease. D) output of the industry increases. Answer: A Topic: Long-Run Adjustments; Exit Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

24) As perfectly competitive firms leave a market because they are incurring an economic loss, the price of the good ________ and the economic loss of each remaining firm ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases Answer: B Topic: Long-Run Adjustments; Exit Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

25) In the long run, a perfectly competitive firm will exit a market when A) its total revenue is less than its total cost. B) its marginal revenue curve is below the minimum of its average total cost curve. C) the price is greater than the minimum of its average total cost curve. D) Both answers A and B are correct. Answer: D Topic: Long-Run Adjustments; Exit Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

26) A perfectly competitive firm initially is earning zero economic profit. Then, a decrease in demand for the firm's product occurs. Of the following, in the long run which action listed below is the firm most likely to take? A) Increase the quantity it produces. B) Increase its advertising to increase the demand for its product. C) Exit the market. D) Increase the size of its plant. Answer: C Topic: Long-Run Adjustments; Exit Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

27) Suppose that newspaper companies are now required to use recycled paper, which is more expensive than new paper. Which of the following is most likely to result if the newspaper industry is highly competitive? A) The firms' costs rise, resulting in positive economic profit in the short run and, hence, the industry supply curve shifts rightward in the long run. B) The firms' costs rise, resulting in economic losses in the short run and, hence, the industry supply curve shifts rightward in the long run. C) The firms' costs rise, resulting in economic losses in the short run and, hence, the industry supply curve shifts leftward in the long run. D) The industry supply curve shifts leftward in the short run, causing permanent long-run economic losses. Answer: C Topic: Long-Run Adjustments; Exit Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

28) Suppose the cost curves in the above figure apply to all firms in the market. Then, if the initial price is P1, in the long run the market A) demand will increase. B) demand will decrease. C) supply will increase. D) supply will decrease. Answer: D Topic: Long-Run Adjustments; Exit Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

29) Suppose the cost curves in the above figure apply to all firms in the market. If the initial price is P1, firms are ________ and some firms will ________ the industry. A) making an economic profit; leave B) making an economic profit; enter C) incurring an economic loss; leave D) incurring an economic loss; enter Answer: C Topic: Long-Run Adjustments; Exit Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

30) The figure above shows the costs for the typical grower in the perfectly competitive turnip market. Currently, the price is $1,000 for a ton of turnips. In the long run, the market supply of turnips will ________. A) decrease and the price of a ton of turnips will fall to $600 B) increase and the turnip grower's economic profit will increase C) increase and the turnip grower's economic profit will decrease D) decrease and the price of a ton of turnips will rise to $1,200 Answer: D Topic: Long-Run Adjustments; Exit Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

31) The figure above shows the costs for the typical grower in the perfectly competitive turnip market. Currently, the price of a ton of turnips is $1,200. The demand for turnips increases permanently. The turnip industry experiences neither external economies nor external diseconomies. In the long run, the price of a ton of turnips ________. A) increases so it is above $1,200 B) is $1,200 and turnip growers will make normal profit C) decreases so it is below $1,200, and turnip growers will make normal profit D) decreases so it is below $1,200 and the turnip growers make an economic profit Answer: B Topic: Long-Run Adjustments; Entry Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

32) In the long run, fixed costs are A) zero and variable costs are zero. B) zero and variable costs are positive. C) positive and variable costs are zero. D) positive and variable costs are positive. Answer: B Topic: Long-Run Equilibrium Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

33) In the long run, the economic profit of a firm in a perfectly competitive market A) will be above zero. B) will be below zero. C) will equal zero. D) can be above, below, or equal to zero. Answer: C Topic: Long-Run Equilibrium Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

34) In the long run, the firms in a perfectly competitive market A) maximize their profit. B) make an economic profit. C) display price setting behavior. D) are protected by barriers to entry. Answer: A Topic: Long-Run Equilibrium Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

35) In the long run, which of the following is present in a perfectly competitive market? A) barriers to entry B) many firms in the market C) firms incurring an economic loss in the long run D) firms making an economic profit in the long run Answer: B Topic: Long-Run Equilibrium Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

36) In the long-run equilibrium in a perfectly competitive market, the economic profit of the firms is A) positive. B) negative. C) zero. D) increasing. Answer: C Topic: Long-Run Equilibrium Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

37) In the long-run equilibrium in a perfectly competitive market, A) the firms make an economic profit. B) the firms' owners make a normal profit. C) the average total cost is maximized. D) marginal cost is at a minimum. Answer: B Topic: Long-Run Equilibrium Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

38) In the short run, perfectly competitive firms ________ but in the long run, perfectly competitive firms ________. A) can incur an economic loss; incur an economic loss B) can incur economic losses; make an economic profit C) must make an economic profit; make an economic profit D) can incur an economic loss; make zero economic profit Answer: D Topic: Long-Run Equilibrium Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

39) In the long-run equilibrium, perfectly competitive firms make zero economic profit because of A) government regulations. B) the ability of firms to enter and exit. C) inefficient production processes. D) high fixed costs. Answer: B Topic: Long-Run Equilibrium Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

40) In the long run, perfectly competitive firms make zero economic profit. This result is due mainly to which of the following assumptions? A) few buyers and sellers B) unrestricted entry and exit C) firms must act as price takers D) demand for the firm's output is perfectly elastic Answer: B Topic: Long-Run Equilibrium Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

41) Which of the following is NOT present in a perfectly competitive market? A) profit maximizing firms B) an economic profit in the long run C) price taking behavior D) identical products Answer: B Topic: Long-Run Equilibrium Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

42) In the long run, perfectly competitive firms make zero economic profit. This result is due mainly to the point that a perfectly competitive market has A) few buyers and sellers. B) no barriers to entry and exit. C) price taking by the firms. D) firms with perfectly elastic market demand. Answer: B Topic: Long-Run Equilibrium Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

43) For a perfectly competitive firm, in the long-run equilibrium, A) P = MC = ATC = MR. B) MR = MC = AFC. C) MR = P = ATC = AFC. D) P = MC > ATC. Answer: A Topic: Long-Run Equilibrium Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

44) In the long run, perfectly competitive firms earn just enough revenue to A) pay all fixed costs. B) pay all accounting costs. C) pay all opportunity costs. D) attract entry. Answer: C Topic: Long-Run Equilibrium Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

45) If the market for maple syrup is perfectly competitive, then in the long-run equilibrium, firms are A) entering the market. B) exiting the market. C) making zero economic profit. D) temporarily shutting down. Answer: C Topic: Long-Run Equilibrium Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

46) Consider the perfectly competitive firm in the above figure. At what price will long-run equilibrium occur? A) $11 B) $12 C) $22 D) $23 Answer: C Topic: Long-Run Equilibrium Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

47) Fast Copy is a perfectly competitive firm. The figure above shows Fast Copy's cost curves. If the market price is 4 cents per page, what is Fast Copy's profit maximizing level of output? A) 16 pages per hour B) 32 pages per hour C) 48 pages per hour D) 64 pages per hour Answer: C Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

48) Fast Copy is a perfectly competitive firm. The figure above shows Fast Copy's cost curves. If the market price is 4 cents per page, what is Fast Copy's economic profit? A) zero B) between 0 and $0.50 per hour C) between $0.51 and $1.00 per hour D) more than $1.00 per hour Answer: C Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

49) Fast Copy is a perfectly competitive firm. The figure above shows Fast Copy's cost curves. The current market price is 4 cents per page. With no change in demand and technology, in the long run, the price will A) remain unchanged. B) rise to 5 cents per page. C) fall to 2 cents per page. D) fall to 1 cent per page. Answer: C Topic: Long-Run Equilibrium Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

50) Fast Copy is a perfectly competitive firm. The figure above shows Fast Copy's cost curves. If the market price is 2 cents per page, what is Fast Copy's profit maximizing level of output? A) 16 pages per hour B) 32 pages per hour C) 48 pages per hour D) 64 pages per hour Answer: B Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

51) Fast Copy is a perfectly competitive firm. The figure above shows Fast Copy's cost curves. If the market price is 2 cents per page, what is Fast Copy's economic profit? A) zero B) between 0 and $0.50 per hour C) between $0.51 and $1.00 per hour D) more than $1.00 per hour Answer: A Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

52) Fast Copy is a perfectly competitive firm. The figure above shows Fast Copy's cost curves. The current market price is 2 cents per page. With no change in demand and technology, in the long run, the price will A) remain unchanged. B) rise to 5 cents per page. C) rise to 4 cents per page. D) fall to 1 cent per page. Answer: A Topic: Long-Run Equilibrium Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

53) Suppose firms in a perfectly competitive market are incurring an economic loss. Over time, A) other firms enter the market, so the price rises and the economic loss decreases. B) some firms leave the market, so the price rises and the economic loss decreases. C) other firms enter the market, so the price falls and the economic loss decreases. D) some firms leave the market, so the price falls and the economic loss decreases. Answer: B Topic: Study Guide Question, Long-Run Adjustments Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

54) As firms enter a perfectly competitive market, the price A) falls and the existing firms' economic profits do not change. B) rises and the existing firms' economic profits decrease. C) falls and the existing firms' economic profits decrease. D) falls and the existing firms' economic losses do not change. Answer: C Topic: Study Guide Question, Long-Run Adjustments Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

55) In the long run, a perfectly competitive firm can A) only make an economic profit. B) only make zero economic profit. C) only incur an economic loss. D) make an economic profit, make zero economic profit, or incur an economic loss. Answer: B Topic: Study Guide Question, Long-Run Equilibrium Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

5 Changes in Demand and Supply as Technology Advances 1) If a perfectly competitive market is in long-run equilibrium and there is a permanent decrease in demand, then A) some firms will incur economic losses. B) firms are no longer maximizing profits. C) some firms must immediately exit. D) each firm must produce less output in the new long run equilibrium and earn less economic profit. Answer: A Topic: A Permanent Decrease in Demand Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

2) If there is a permanent decrease in demand in a perfectly competitive market, then there is an initial ________ in price and existing firms ________. A) rise; make an economic profit B) rise; incur an economic loss C) fall; make an economic profit D) fall; incur an economic loss Answer: D Topic: A Permanent Decrease in Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

3) Suppose a perfectly competitive market is in a long-run equilibrium when a permanent decrease in the market demand occurs. In the long run, which of the following definitely occurs? A) The price decreases. B) The number of firms decreases. C) The firms' marginal cost increases. D) Marginal revenue increases. Answer: B Topic: A Permanent Decrease in Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

4) A perfectly competitive market is in long-run equilibrium. Then demand decreases. The decrease in demand leads to A) a rise in the price in the short run. B) the firms' incurring an economic loss in the short run. C) firms entering the market in the long run. D) none of the above Answer: B Topic: A Permanent Decrease in Demand Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

5) In a perfectly competitive market, a permanent decrease in demand initially brings a lower price, economic A) loss, and entry into the market. B) loss, and exit from the market. C) profit, and entry into the market. D) profit, and exit from the market. Answer: B Topic: A Permanent Decrease in Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

6) In a perfectly competitive market that is in long-run equilibrium, a permanent leftward shift in the market demand curve A) raises the price in the short run. B) raises profits in the short run. C) leads to new firms entering the market in the long run. D) lowers the price at first but then raises it as firms leave the market. Answer: D Topic: A Permanent Decrease in Demand Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

7) In a perfectly competitive market that is in long-run equilibrium, a permanent leftward shift in the market demand curve A) raises the price in the short run. B) raises profits in the short run. C) leads to firms leaving the market in the long run. D) raises the price at first but then returns it to its original level in the long run. Answer: C Topic: A Permanent Decrease in Demand Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

8) New reports indicate that eating turnips helps people remain healthy. The news shifts the demand curve for turnips rightward. In response, new farms enter the turnip industry. During the period in which the new farms are entering, the price of a turnip ________ and the economic profit of each existing firm ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls Answer: D Topic: A Permanent Increase in Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

9) In a perfectly competitive market that is in long-run equilibrium, a rightward shift in the market demand curve results in A) the price falling in the short run. B) the firms' economic profits falling in the short run. C) firms leaving the industry in the long run. D) none of the events listed above. Answer: D Topic: A Permanent Increase in Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

10) Suppose a perfectly competitive market is in long-run equilibrium. If there is a permanent increase in demand, A) at least in the short run, some firms will increase their output. B) at least in the short run, the price will increase initially. C) new firms will enter the market. D) All of the above answers are correct. Answer: D Topic: A Permanent Increase in Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

11) The market for maple syrup is perfectly competitive. Suppose that the market is in long-run equilibrium when the market demand for maple syrup increases. What happens in the short run? A) Firms will enter the market. B) Some of the existing firms shut down. C) The firms decrease production. D) The firms increase production. Answer: D Topic: A Permanent Increase in Demand Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

12) The market for maple syrup is perfectly competitive. Suppose that the market is in long-run equilibrium when the market demand for maple syrup increases. After the demand increases, a typical firm will A) make zero economic profit. B) make an economic profit. C) incur an economic loss. D) exit the market. Answer: B Topic: A Permanent Increase in Demand Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

13) The market for maple syrup is perfectly competitive. Suppose that the market is in long-run equilibrium when the market demand for maple syrup increases. In the long run, firms will ________ the market and the market ________ will ________. A) leave; supply; decrease B) enter; supply; increase C) leave; demand; decrease D) enter; supply; decrease Answer: B Topic: A Permanent Increase in Demand Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

14) In a perfectly competitive market, a permanent increase in demand initially brings a higher price, economic A) loss, and entry into the market. B) loss, and exit from the market. C) profit, and entry into the market. D) profit, and exit from the market. Answer: C Topic: A Permanent Increase in Demand Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

15) In a perfectly competitive market that is in long-run equilibrium, which of the following will NOT occur? A) Firms make only zero economic profit. B) Firms' owners earn a normal profit. C) The price equals the minimum average total cost. D) Entrepreneurs want to enter this industry. Answer: D Topic: Long-Run Equilibrium Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

16) In the long run, perfectly competitive firms make zero economic profit (their owners earn a normal profit) because A) any economic profit would attract newcomers to the industry. B) the firms are incompetent. C) any economic loss would increase the demand for the good, thereby raising its price. D) there are many buyers and sellers. Answer: A Topic: Long-Run Equilibrium Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

17) When a perfectly competitive market is in its long-run equilibrium, the fact that the firms make zero economic profit will A) encourage new firms to enter the market. B) cause existing firms to shut down. C) cause existing firms to leave the market. D) mean that the firms' owners earn a normal return. Answer: D Topic: Long-Run Equilibrium Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

18) In a perfectly competitive market, an increase in market demand A) raises the price in the short run and attracts new firms in the long run. B) raises the price in the short run and the long run. C) lowers the price in the short run and in the long run. D) has no effect on the price in either the short run or the long run because the firms are price takers. Answer: A Topic: A Permanent Change in Demand Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

19) The figure above shows a typical perfectly competitive corn farm, whose marginal cost curve is MC and average total cost curve is ATC. The market is initially in a long-run equilibrium, where the price is $3.00 per bushel. Then, the market demand for corn decreases and, in the short run, the price falls to $2.50 per bushel. In the new short-run equilibrium, the farm produces ________ bushels of corn and sells corn at ________ per bushel. A) 250,000; $3.00 B) 250,000; $2.50 C) 300,000; $2.50 D) 200,000; $2.50 Answer: B Topic: A Permanent Decrease in Demand Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

20) The figure above shows a typical perfectly competitive corn farm, whose marginal cost curve is MC and average total cost curve is ATC. The market is initially in a long-run equilibrium, where the price is $3.00 per bushel. Then, the market demand for corn decreases and, in the short run, the price falls to $2.50 per bushel. In the new short-run equilibrium, the farm A) incurs an economic loss of between $1 and $40,000. B) receives zero economic profit. C) incurs an economic loss of between $40,001 and $130,000. D) incurs an economic loss of more than $130,001. Answer: C Topic: A Permanent Decrease in Demand Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

21) The figure above shows a typical perfectly competitive corn farm, whose marginal cost curve is MC and average total cost curve is ATC. The market is initially in a long-run equilibrium, where the price is $3.00 per bushel. Then, the market demand for corn decreases and, in the short run, the price falls to $2.50 per bushel. In the long run, the price of corn is ________ and a typical farm produces ________ bushels of corn. A) $2.00; 200,000 B) $3.50; 250,000 C) $2.50; 250,000 D) $3.00; 300,000 Answer: D Topic: A Permanent Change in Demand Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

22) The figure above shows a typical perfectly competitive corn farm, whose marginal cost curve is MC and average total cost curve is ATC. Assuming there are no changes in technology, in the long run the lowest possible price for corn is ________ per bushel. A) $2.50 B) $2.00 C) $3.00 D) $3.50 Answer: C Topic: A Permanent Change in Demand Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

23) In a perfectly competitive market, technological advances bring ________ economic profits for producers and ________ lower prices for consumers. A) permanent; permanently B) permanent; temporarily C) temporary; permanently D) temporary; temporarily Answer: C Topic: Technological Change Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

24) There is a technological advance in a perfectly market. Which of the following statements is NOT true? A) As more firms begin to use the new technology, the market supply increases and the price falls. B) Technological change brings permanent gains to producers and temporary gains to consumers. C) In the new long-run equilibrium, all the old-technology firms have exited. D) In the long-run equilibrium, competition eliminates any short-run economic profit. Answer: B Topic: Technological Change Skill: Conceptual Status: New A-level heading: Changes in Demand and Supply as Technology Advances AACSB: Reflective Thinking

25) The demand for a product produced in a perfectly competitive market permanently increases. In the short run, the price A) rises and each firm produces less output. B) rises and each firm produces more output. C) does not change as new firms enter the industry. D) does not change because each firm produces more output. Answer: B Topic: Study Guide Question, A Permanent Change in Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

26) The industry that produces zangs is in long-run equilibrium. Then the demand for zangs increases permanently. As a result, firms in the industry will ________. Some firms will ________ the industry, and the industry supply curve will shift ________. A) make economic an profit; enter; rightward B) make zero economic profit; exit; leftward C) incur economic losses; exit; rightward D) incur economic losses; exit; leftward Answer: A Topic: Permanent Change in Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

27) Initially, a perfectly competitive industry that has 1,000 firms is in long-run equilibrium. Then 100 firms in the industry adopt a new technology that reduces the average cost of producing the good. In the short run, the price ________, firms with the new technology make ________ economic profit, and firms with the old technology ________. A) remains the same; zero; incur economic losses B) falls; positive; incur economic losses C) remains the same; positive; make normal profit D) remains the same; positive; incur economic losses Answer: B Topic: Technological Change Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

28) A perfectly competitive industry is in long-run equilibrium. Some firms in the industry adopt new technology that reduces the average total cost of producing the good. In the long run, the price is ________, firms with the new technology make ________ economic profit, and firms with the old technology ________. A) lower; zero; exit the industry B) constant; a positive; make normal profit C) lower; zero; switch to the new technology or exit the industry D) constant; zero; exit the industry Answer: C Topic: Technological Change Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

6 Competition and Efficiency 1) In the long-run equilibrium for a perfectly competitive market, A) the firms' economic profits are zero. B) there is no incentive for entry or exit. C) average total costs of production are minimized. D) All of the above are correct. Answer: D Topic: Efficiency of Perfect Competition Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

2) If the donut industry is perfectly competitive and is in long-run equilibrium, then the price of a donut A) is greater than marginal cost. B) is greater than short-run average cost. C) is greater than long-run average cost. D) equals long-run average cost. Answer: D Topic: Efficiency of Perfect Competition Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

3) In the long-run equilibrium, perfectly competitive firms produce the level of output such that A) marginal cost is minimized. B) average total cost is minimized. C) marginal cost equals the price. D) Both answers B and C are correct. Answer: D Topic: Efficiency of Perfect Competition Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

4) In the long-run equilibrium, perfectly competitive firms produce where A) marginal cost is minimized. B) average total cost is minimized. C) average revenue is zero. D) All of the above are correct. Answer: B Topic: Efficiency of Perfect Competition Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

5) The figure above shows the marginal revenue and long-run cost curves for a perfectly competitive firm. Which of the following statements is true? A) The firm is producing at minimum long-run average cost. B) Over time, this firm will leave this industry. C) The firm is earning positive economic profit. D) The firm will eventually decrease its production. Answer: A Topic: Efficiency of Perfect Competition Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

6) The figure above shows the marginal revenue and long-run cost curves for a perfectly competitive firm. All other firms in the industry have identical curves. Which of the following statements is true? A) The firm's average cost exceeds the price. B) Over time, firms will enter this industry. C) The firm is earning economic profit. D) None of the above is true. Answer: D Topic: Efficiency of Perfect Competition Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

7) Consumer surplus ________. A) equals total revenue minus marginal cost B) is maximized when the market outcome is efficient C) equals total revenue minus opportunity cost D) plus producer surplus is maximized when resources are used efficiently Answer: D Topic: Efficiency of Perfect Competition Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

8) In the long-run equilibrium in a perfectly competitive market, the firms produce at the ________ possible average total cost and the price equals the ________ possible average total cost. A) highest; highest B) lowest; lowest C) highest; lowest D) lowest; highest Answer: B Topic: Study Guide Question, Efficiency of Perfect Competition Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

7 News Based Questions 1) Which of the following four firms would most likely be part of a perfectly competitive market? A) Village Pizza sells NY style pizza and hard-to-find microbrews in a college town. B) The WaveHouse is the only place in San Diego where you can ride an indoor 10 foot wave. C) Mark sells the tomatoes he grew in his backyard at the local farmers market. D) Amara Massage specializes in pre- and post-natal massage. Answer: C Topic: Perfect Competition Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

2) Which of the following four firms would most likely NOT be part of a perfectly competitive market? A) Mark sells his tomatoes at the local farmers market. B) The WaveHouse is the only place in San Diego where you can ride an indoor 10 foot wave. C) Village Pizza sells pizza in a college town. D) Space Age Fuel is a gas station in Bend, Oregon. Answer: B Topic: Perfect Competition Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

3) Fresno County, California is the largest agricultural producing county in the country and almonds are an important crop with more than 99,000 acres harvested. Each acre produces about a ton of almonds and sold at a price of $4300 a ton. The Sagardia Brothers grew 600 acres of almonds that year. In what type of market does the Sagardia Brother operate? A) Perfect Competition B) Monopoly C) Oligopoly D) Monopolistic Competition Answer: A Topic: Perfect Competition Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

4) Fresno County, California is the largest agricultural producing county in the country and almonds are an important crop with more than 99,000 acres harvested. Each acre produces about a ton of almonds and sold at a price of $4300 a ton. The Sagardia Brothers grew 600 acres of almonds that year and they are price takers. What is the Brother's total revenue? A) $4300 B) $4900 C) $59.4 million D) $2.58 million Answer: D Topic: Total Revenue Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

5) Fresno County, California is the largest agricultural producing county in the country and almonds are an important crop with more than 99,000 acres harvested. Each acre produces about a ton of almonds and sold at a price of $4300 a ton. The Sagardia Brothers grew 600 acres of almonds. What would happen if the Sagardia Brothers priced their almonds at $4500 a ton? A) Profits will be higher than when they sell them at the lower price. B) The quantity sold will be higher. C) They will not sell any almonds. D) They will sell fewer almonds, but profits will be higher. Answer: C Topic: Firm's Demand in Perfect Competition Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

6) Fresno County, California is the largest agricultural producing county in the country and almonds are an important crop with more than 99,000 acres harvested. Each acre produces about a ton of almonds and sold at a price of $4300 a ton. The Sagardia Brothers grew 600 acres of almonds. What would happen if the Sagardia Brothers priced their almonds at $4000 a ton? A) Profits will be higher than when they sell them at the higher price. B) They will sell the same amount of almonds, but profits will be lower. C) The quantity sold will be higher. D) They will not sell any almonds. Answer: B Topic: Firm's Demand in Perfect Competition Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

7) Fresno County, California is the largest agricultural producing county in the country and almonds are an important crop with more than 99,000 acres harvested. Each acre produces about a ton of almonds and sold at a price of $4300 a ton. The Sagardia Brothers grew 600 acres of almonds . How many tons would the brothers sell if they priced the almonds at $4500 a ton? A) 0 tons B) 600 tons C) 400 tons D) 200 tons Answer: A Topic: Firm's Demand in Perfect Competition Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

8) All along the beach in San Diego, California are shops which rent boogie boards by the hour. Tourists perceive that all rental boogie boards are identical, all prices are clearly listed on signs in front of the shops, and there are no restrictions on entry and exit in the boogie board market. What type of market is the boogie board market? A) Monopoly B) Oligopoly C) Monopolistic Competition D) Perfect Competition Answer: D Topic: Perfect Competition Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

9) All along the beach in San Diego, California are shops which rent boogie boards by the hour. Tourists perceive that all rental boogie boards are identical, all prices are clearly listed on signs in front of the shops, and there are no restrictions on entry and exit in the boogie board market. Suppose Surf's Up is a boogie board rental shop. What is the shape of Surf's Up's demand curve as compared to the market demand curve? A) Surf's Up's demand curve is vertical and the market demand curve is downward sloping. B) Surf's Up's demand curve is horizontal and the market demand curve is upward sloping. C) Surf's Up's demand curve is horizontal and the market demand curve is downward sloping. D) Surf's Up's demand curve is vertical and the market demand curve is upward sloping. Answer: C Topic: Firm's Demand in Perfect Competition Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

10) All along the beach in San Diego, California are shops which rent boogie boards for $3 per hour. Tourists perceive that all rental boogie boards are identical and there are no restrictions on entry and exit in the boogie board market. Suppose Surf's Up is a boogie board rental shop. To maximize profits, Surf's Up would produce a quantity where: A) Marginal revenue is greater than marginal cost. B) Marginal revenue is equal to marginal cost. C) Marginal revenue is less than marginal cost. D) Price is maximized. Answer: B Topic: Profit Maximization Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

11) A worldwide hops (a flowers used in brewing) shortage will make stouts, ales and other specialty microbrews more pricy in 2008. A triple whammy of bad weather in Europe, an increase in the price of barley and a decrease in hops production in the U.S. has led to a price increase of 20 percent for the most widely grown varieties, to 80 percent for specialty hops. What is the effect of this hops shortage on a microbrewery's cost curves? A) Short run fixed costs would increase. B) Short run total costs would decrease. C) Short run average variable costs would decrease. D) Short run variable costs would increase. Answer: D Topic: Variable Cost Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

12) A worldwide hops (a flowers used in brewing) shortage will make stouts, ales and other specialty microbrews more pricy in 2008. Gayle Goshie, a hops farmer, blames overproduction for hops' previously cheap place on the agricultural market. The glut pushed many hop farmers out business, which gradually helped hop prices recover. Suppose farming hops is a perfectly competitive market. Why would some hop farmers go out of business? A) Because the price of hops was below the minimum of average fixed cost B) Because the price of hops was lower than the minimum of average variable cost C) Because the price of hops was higher than the minimum of average variable cost D) Because the price of hops was lower than the minimum of average total cost Answer: B Topic: Long-Run Adjustments; Exit Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

13) A worldwide hops (a flower used in brewing) shortage will make stouts, ales and other specialty microbrews more pricy in 2008. Gayle Goshie, a hops farmer, blames overproduction for hops' previously cheap place on the agricultural market. The glut pushed many hops farmers out business, which gradually helped hops prices recover. Suppose farming hops is a perfectly competitive market. How did farmers going out of business help hops prices recover? A) Fewer farmers cause the market supply curve to shift leftward, causing price to rise. B) Fewer farmers cause an increase in market demand, causing price to rise. C) Fewer farmers cause an increase in the surviving firms' costs, causing higher prices. D) Fewer farmers cause the individual firms' supply curves to decrease, causing higher prices. Answer: A Topic: Long-Run Adjustments; Exit Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

14) The USDA maintains ethanol has an impact on food prices. "Higher ethanol production definitely and directly raises the price of corn," said USDA economist Ephraim Leibtag. In the short run, what is true if the production of ethanol increases? A) The demand for corn will increase. B) The supply of ethanol will decrease. C) The supply of corn will increase. D) The demand for ethanol will increase. Answer: A Topic: Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

15) The USDA maintains ethanol has an impact on food prices. "Higher ethanol production definitely and directly raises the price of corn," said USDA economist Ephraim Leibtag. In the short run in the corn market, what is true if the production of ethanol increases? A) The demand curve for individual corn farmers will shift upward. B) The price individual corn farmers receive will decrease. C) The total cost curve for individual corn farmers will shift upward. D) The marginal cost curve for individual corn farmers will shift downward. Answer: A Topic: Firm's Demand in Perfect Competition Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

16) The USDA maintains ethanol has an impact on food prices. "Higher ethanol production definitely and directly raises the price of corn," said USDA economist Ephraim Leibtag. In the short run in the corn market, what is true if the production of ethanol increases? A) Individual corn farmers will incur an economic loss in the short run and will shut down. B) Individual corn farmers will make an economic profit in the short run. C) Individual corn farmers will incur an economic loss in the short run, but they will still produce. D) Individual corn farmers will make zero economic profit in the short run. Answer: B Topic: A Permanent Increase in Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

17) The USDA maintains ethanol has an impact on food prices. "Higher ethanol production definitely and directly raises the price of corn," said USDA economist Ephraim Leibtag. In the long run in the corn market, what is true if the production of ethanol increases? A) Existing corn farmers will exit the market and decrease the market price. B) New corn farmers will enter the market and increase the market price. C) Existing corn farmers will exit the market and increase the market price. D) New corn farmers will enter the market and decrease the market price. Answer: D Topic: Long-Run Adjustments; Entry Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

18) The USDA maintains ethanol has an impact on food prices. "Higher ethanol production definitely and directly raises the price of corn," said USDA economist Ephraim Leibtag. In the long run in the corn market, what is true if the production of ethanol increases? A) Individual corn farmers will make zero economic profit in the long run. B) Individual corn farmers will make an economic profit in the long run. C) Individual corn farmers will incur an economic loss in the long run, but they will still produce. D) Individual corn farmers will incur an economic loss in the long run and will shut down. Answer: A Topic: Long-Run Equilibrium Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

19) What is one reason why would corn production, which takes place in a perfectly competitive market, achieve an efficient use of resources? A) Because a perfectly competitive firm produces at the lowest possible long run average total cost B) Because a perfectly competitive firm produces where marginal revenue exceeds marginal cost C) Because a perfectly competitive firm is a price maker D) Because the goal of a perfectly competitive firm is to profit maximize Answer: A Topic: Efficiency of Perfect Competition Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

8 Essay Questions 1) What are the requirements for perfect competition? Answer: The requirements are: many firms selling an identical product; many buyers; no restrictions on entry into the market; established firms have no advantages over new entrants; and sellers and buyers have good information about prices of each firm's product. Topic: Perfect Competition Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Communication

2) "A perfectly competitive firm is called a price maker because all the firms together must make the market price." Is the previous statement correct or incorrect? Briefly explain your answer. Answer: The statement is false. A perfectly competitive firm is called a "price taker" because the firm must take whatever price the market determines. Any single firm's actions cannot affect the market price. Topic: Price Takers Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Communication

3) "Perfectly competitive firms have total control over the price they set for their product." Explain why the previous statement is correct or incorrect. Answer: The statement is incorrect. Perfectly competitive firms are price takers, which means that they have no control over the price of their product. They must "take" the price given to them by the market as a whole, that is, they must take the price determined by the market demand and market supply. Topic: Price Takers Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

4) Does a perfectly competitive producer have any incentive to undercut the current market price? Explain your answer Answer: A perfectly competitive producer has no incentive to undercut the market price because the producer can sell all he or she produces at the going market price. In this case, a producer will not lower the price he or she charges because no additional sales can be garnered. Hence it is nonsensical to undercut the market price because the lower price means lower revenue and hence lower profit. Topic: Price Takers Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

5) Why are perfectly competitive ranchers in Montana price takers? Answer: Because one farmer's beef is identical to another farmer's, each farmer's beef is a perfect substitute for all other farmers' beef. In addition, there are over one million ranchers in the United States. As a result, no individual rancher can impact the market price by increasing or decreasing production. Therefore each rancher faces a perfectly elastic demand. Each can sell all of the beef desired at the market price, but not one penny more. Once the market sets the price, the rancher must take as given whatever the price might be. Topic: Price Takers Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

6) If a perfectly competitive firm manufacturing chairs produces 100 more chairs, what happens to the market price of a chair? Answer: The price will not change. Any one perfectly competitive firm is such a small part of the market that a change in its output has virtually no effect on the price. This result is why the firm's marginal revenue equals its price: No matter how much (or how little) the firm produces, the marginal revenue from one more unit always equals the price of the product. Topic: Price Takers Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

7) Why is the demand for a perfectly competitive firm's good perfectly elastic even though the market demand is not? Answer: Each firm takes the market price as given. Because each firm's good can be perfectly substituted with any other firm's product, consumers will only pay the market price. Hence, any deviation above the market price causes the firm's sales to plunge to zero and any deviation below causes the firm's sales to soar to the entire amount sold in the market. Topic: Market Demand/Firm Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

8) Hubert's Copy Services is in perfect competition. Hubert currently charges 10 cents per page, which is the going market price. He thinks that he can increase his profit by raising the price. Is it possible? Why or why not? Answer: If Hubert raises his price, his profit will not increase. As a perfectly competitive firm, Hubert's is a price taker. It produces a tiny proportion of the copy services in the area, and buyers are well informed about the prices charged by other firms. So, if the market price is 10 cents per page and Hubert asks, say, 12 cents per page, his customers will go to the next copy service and Hubert will lose all his sales. Topic: Market Demand/Firm Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

9) Jane's Copy Services is in perfect competition. Jane currently charges 10 cents per page, which is the going market price. Jane thinks that she can increase her profit if she lowers her price to 8 cents per page to increase the demand for her service. Is Jane right? Why or why not? Answer: If Jane lowers her price, her profit will not increase. As a perfectly competitive firm, Jane can sell as much of her service as she wants at the going market price. And to maximize her profit, she should choose the quantity at which her marginal cost equals the market price. If Jane lowers the price, her total revenue, and hence profit, will fall. Topic: Market Demand/Firm Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

10) Do firms in perfect competition advertise their products? Why or why not? Answer: Firms in perfect competition do not advertise their product. The purpose of advertising is to increase the demand for the firm's product by convincing consumers that it's better than that of competitors. Perfectly competitive firms sell a standard product, so consumers won't believe that, for example, wheat sold by Farm A is somehow better than wheat sold by Farm B. So if a perfectly competitive firm advertised, this would only increase its costs, with no effect on demand and price. Topic: Market Demand/Firm Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

11) What is a normal profit? Answer: A normal profit is the return a firm's owner could obtain in the best alternative business. As a result, it is an opportunity cost to the firm. Topic: Normal Profit Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Communication

12) Why does the profit-maximizing level of production occur at the point where marginal revenue equals marginal cost? Answer: If a firm produces at a level where marginal revenue is greater than marginal cost, more profit could be gained by increasing output. Why? Because the added revenue (the marginal revenue) from producing another unit exceeds the added cost (the marginal cost) of producing the unit. Therefore the firm should increase production until no more additional profit can be earned, which occurs where marginal revenue equals marginal cost. Similarly, if a firm produces at a level where marginal cost exceeds marginal revenue, the firm's profit would rise by decreasing output. In this case, the saved costs (the marginal cost) exceed the lost revenue (the marginal revenue). Therefore the firm should decrease production until the point at which marginal cost equals marginal revenue. Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Communication

13) Martha's Cleaning Services is a perfectly competitive firm that currently cleans 30 offices a week and charges $20 per office, which is the going market price. Martha's marginal cost is $15. What should Martha do to increase her economic profit? Clean more offices? Raise her price? Explain your answer. Answer: Martha should increase the number of offices she cleans until her marginal cost equals the market price. This way she will maximize her profit. As a perfectly competitive firm, Martha is a price taker and cannot raise or lower her price without losing profit. Topic: Marginal Analysis Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Communication

14) Ellen's Painting Services is a perfectly competitive firm that currently paints 10 houses a month and charges $100 per house, which is the going market price. Ellen's marginal cost is positively related with the quantity of service she provides and is currently $120. What should Ellen do to increase her economic profit? Paint more houses? Raise her price? Explain your answer. Answer: Ellen should decrease the number of houses she paints until her marginal cost equals the market price. This way she will maximize her profit. As a perfectly competitive firm, Ellen is a price taker and cannot raise or lower her price without losing profit. Topic: Marginal Analysis Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Communication

15) "A perfectly competitive firm will shut down if the price falls below its average total cost." Do you agree? Explain. Answer: A perfectly competitive firm will not shut down as far as the price is above its average variable cost. If the price is below the ATC but above the AVC, the firm can cover part of its fixed cost if it continues to operate. If the firm shuts down, it incurs an economic loss equal to total fixed cost. So as long as the price is above the AVC, the firm will have a smaller economic loss if it continues to operate than if it shuts down. Topic: Shutdown Point Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Communication

16) If the price received by a perfectly competitive firm is less than its average variable cost, what will the firm do in the short run? Why? Answer: If the price is less than the average variable cost, the firm will shut down in the short run. By shutting down, the firm will incur an economic loss equal to its fixed cost, whereas if the firm operated, its economic loss would be larger. The firm minimizes its loss by shutting down. Topic: Shutdown Point Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

17) Define the shutdown point. Explain why the firm shuts down in the short run if the price falls below this point. Answer: The shutdown point is the point at which the price equals minimum average variable cost. If the price falls further, the firm does not even cover its variable costs if it operates. Its loss if it operated thus exceeds the loss of shutting down and so the firm shuts down. Topic: Shutdown Point Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

18) Will a perfectly competitive firm ever produce in the short run even though it is incurring an economic loss? Answer: Yes, a perfectly competitive firm will continue to produce even though it is suffering an economic loss if the price exceeds the minimum average variable cost. In this case, even though the firm has an economic loss, if it shut down, its economic loss would be larger. Topic: Shutdown Point Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

19) What must be the case if a perfectly competitive firm's economic loss is less by shutting down rather than by producing and selling some output? Answer: If a firm's economic loss is greater when it produces and sells some output than when it shuts down, it is the case that the price of the product is less than the average variable cost. When the price is less than the average variable cost, the firm's economic loss is less if it shuts down than if it produces and sells output. Topic: Shutdown Point Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

20) Can a perfectly competitive firm make an economic profit in the short run? Can it incur an economic loss? Answer: In the short run, a perfectly competitive firm can make an economic profit or incur an economic loss. Indeed, the firm also can make zero economic profit in the short run. Basically, any profit or loss outcome is possible in the short run. Topic: Economic Profits and Economic Losses in the Short Run Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

21) If the market price is less than a perfectly competitive firm's average total cost, what sort of profit or loss is the firm making? Answer: If the price is less than the average total cost, the firm is incurring an economic loss. Topic: Economic Profits and Economic Losses in the Short Run Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

22) What is the relationship between the price, P, and the average total cost, ATC, for a firm in perfect competition that earns an economic profit? That earns a normal profit? That incurs an economic loss? Answer: If the price is greater than the average total cost, P > ATC, the firm makes an economic profit. If the price equals the average total cost, P = ATC, the firm makes zero economic profit. If the price is less than the average total cost,

the firm incurs an economic loss.

Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Communication

23) What is a perfectly competitive firm's short-run supply curve? Answer: A perfectly competitive firm's short-run supply curve is its marginal cost curve above the minimum average variable cost. Topic: The Firm's Short-Run Supply Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Communication

24) If the market price faced by a perfectly competitive firm increases, in the short run how does the firm respond? Answer: If the market price rises, a perfectly competitive firm increases its output. The firm moves upward along its marginal cost curve, thereby increasing the quantity the firm will supply. Topic: The Firm's Short-Run Supply Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Communication

25) Explain the process that drives the economic profit to zero in the long run for a perfectly competitive firm. Answer: In the long run, new firms enter a perfectly competitive market if they can make an economic profit. The increased supply causes the price to fall. As long as an economic profit exists, new firms continue to enter, and the price continues to fall until eventually the economic profit equals zero. In the long run, firms leave a perfectly competitive market if they are incurring an economic loss. By exiting, the price rises and the economic loss of the surviving firms shrinks. Eventually enough firms exit so that the price rises to the point that the survivors no longer incur an economic loss, earning instead zero economic profit. Topic: Long-Run Adjustments Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

26) Describe the different possible profit outcomes for a perfectly competitive firm in the short run versus the long run. Explain why they occur. Answer: In the short run, a perfectly competitive firm can make an economic profit, zero economic profit or economic loss. A firm makes an economic profit when P > ATC. It makes zero economic profit (its owners earn a normal profit) when P=ATC. And incurs an economic loss when P < ATC. If firms are making an economic profit, new firms will enter and compete away the existing firms' economic profit until all firms make zero economic profit. At this point, no new firms will enter the market and a long-run equilibrium occurs. If firms are already making zero economic profit, no new firms will enter the market, and this condition continues into the long run. And, if some firms are incurring an economic loss, some will exit the industry. This exit decreases the supply and drives up the price, thereby allowing the remaining firms to make zero economic profit. So, in the long run, a perfectly competitive firm will only make zero economic profit. Topic: Economic Profits and Losses in the Short Run and the Long Run Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

27) When do new firms enter a perfectly competitive market? When does entry stop? Answer: New firms enter a perfectly competitive market as long as the existing firms are making an economic profit. Essentially the new firms enter in order to make an economic profit themselves. Entry stops when it is no longer possible to make an economic profit, which occurs when the existing firms are earning zero economic profit, that is, the owners are earning a normal profit. Topic: Long-Run Adjustments; Entry Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

28) What role does economic profit play in a competitive market? Answer: Economic profit acts as a signal to entrepreneurs telling them where above normal returns are being earned. Economic profit serves society by directing resources to those activities for which society is currently paying a premium. Topic: Long-Run Adjustments; Entry Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

29) "For a perfectly competitive market, an economic profit attracts new firms. But when these firms enter the market, the price falls and the economic profit is eliminated." Are the previous statements correct or incorrect? What is the long-run profit or loss outcome for firms in a perfectly competitive market? Answer: The statements are correct. As the statements point out, in the long run the economic profit of perfectly competitive firms is eliminated by entry. Similarly, an economic loss is eliminated by exit. Therefore the long-run equilibrium profit for a perfectly competitive firm is zero economic profit. Topic: Long-Run Adjustments; Entry Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

30) In the long run, perfectly competitive firms cannot make an economic profit. Why? Answer: An economic profit attracts entry by new firms. As new firms enter the market, the market supply increases and the market supply curve shifts rightward. The increase in supply decreases the price. And, as the price falls, the economic profit is eliminated. Topic: Long-Run Adjustments; Entry Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

31) The U-pick berry market is perfectly competitive. Suppose that all U-pick blueberry farms have the same cost curves and all are making an economic profit. What happens as time passes? What is the longrun equilibrium outcome? Answer: The presence of economic profit attracts new firms into the U-pick blueberry market. As the new firms, that is, new farmers enter the market, the supply of U-pick blueberries increases. The increase in the supply drives the price lower and decreases the economic profits of the existing farmers. New farmers continue to enter the market as long as there is the possibility of making an economic profit. Eventually enough new firms enter so that the price is driven so low that the economic profit is eliminated. All the firms earn zero economic profit, which keeps them in business but provides no incentive for new firms to enter the market. At this point, the long-run equilibrium has been reached. Topic: Long-Run Adjustments; Entry Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

32) During the first half of the 2000s, the price of pork rose. After that, within a couple of years the price fell back to about the level before the initial increase. What might have led to these events? Answer: There are thousands upon thousands of hog farmers in the United States. In the first half of the 2000s, a general decrease in the demand for beef led to a large increase in the demand for pork. As a result of the increase in market demand, the price of pork increased dramatically. Hog farmers were getting a high price and making large economic profits. In the long run, the word got out that economic profit was possible in this arena. Over time, more hog farmers entered the market, which led to a large increase in the supply of pork. As supply increased, the price of pork dropped. Thus the higher price was the short-run result of an increase in demand. The falling price reflected the adjustment to the long-run equilibrium, as new hog farmers entered the market. The long run was ultimately reached and the price of pork was more or less the same as before the increase in demand. Topic: Long-Run Adjustments; Entry Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

33) Describe how economic losses are eliminated in a perfectly competitive industry. Answer: If firms are incurring economic losses, some will exit in the long run. When firms exit, the market supply decreases and the market supply curve shifts leftward. When supply decreases, the price rises. As the price rises, the surviving firms increase production and their economic losses are eliminated. Topic: Long-Run Adjustments; Exit Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

34) Pumpkin growing is a perfectly competitive industry. Suppose that pumpkin growers are all incurring an economic loss. What happens as time passes? What is the long-run equilibrium outcome? Answer: Because the firms are experiencing economic losses, as time passes some firms exit the market, perhaps by switching to other crops, or perhaps by closing entirely. As farmers leave the market, the supply of pumpkins decreases. The supply curve shifts leftward and the price of a pumpkin rises. As the price rises, the economic losses of the remaining firms decrease. Eventually enough farmers leave the market so that the price rises sufficiently so that the remaining firms make zero economic profit and no longer incur an economic loss. At that point, the long-run equilibrium is reached because there is no further incentive for any firms to leave the market. Topic: Long-Run Adjustments; Exit Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

35) Suppose a farmer raising beef is making a normal profit. Then, because of a scare about mad cow disease, the demand for beef decreases drastically. What happens to the profits of the beef farmer in the short run and in the long run? Answer: In the short run, the fall in beef prices will decrease the farmer's profits. With the fall in price, the farmer incurs an economic loss. If the price is high enough to cover the farmer's variable costs, the farmer continues to operate. In the long run, if demand continues to remain depressed, some farmers exit the market until the remaining farmers earn a normal profit (zero economic profit) once again. Topic: Long-Run Adjustments; Exit Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

36) How does a decrease in the demand for wheat ultimately lead to normal profits for wheat growers in the long run? Answer: If the demand for wheat decreases, the price of wheat falls and many wheat farmers incur economic losses. These losses lead to some farmers shutting down their operations. As these farmers exit the market, the supply of wheat decreases. A decrease in the supply of wheat pushes wheat prices back up. The process of exit and rising prices continues until finally the price of wheat rises enough so that the surviving wheat farmers are earning a normal profit. At this time, which occurs in the long run, the economic losses have disappeared so that no further exit occurs. The wheat market is back in its long-run equilibrium. Topic: Long-Run Adjustments; Exit Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

37) Entry by competitive firms decreases the market price, while exit by competitive firms increases the market price. Explain why firms enter or exit an industry and why these price changes occur. Answer: Competitive firms will enter an industry where economic profits exist in an attempt to make an economic profit. As new firms enter, the supply increases and the supply curve for the product shifts rightward. The increase in supply drives the price lower. Firms exit an industry when economic losses are incurred. As they leave, supply decreases and the supply curve shifts leftward. The decrease in the supply forces the price higher. Entry and exit continue until the remaining firms in the industry are making zero economic profit. Topic: Long-Run Adjustments; Exit Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

38) In the long run, a perfectly competitive firm makes zero economic profit. What incentive does the firm have to stay in business if it is making zero economic profit? Answer: Zero economic profits do not mean no profit whatsoever. The firm's owners are still making a normal profit. A normal profit compensates the firm's owners enough to keep the firm in business because it is equal to the owner's opportunity cost. Hence the firm has the incentive to stay in business. Topic: Long-Run Equilibrium Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

39) When a perfectly competitive firm is in long-run equilibrium, what is the relationship between the firm's marginal cost, average total cost, marginal revenue, and price? Answer: Marginal cost and average total cost equal the market price, which is also the marginal revenue. Topic: Long-Run Equilibrium Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

40) With regard to its economic profits and economic losses, how is the short run different from the long run for a perfectly competitive firm? Answer: The firm can make an economic profit, incur an economic loss in the short run, or make zero economic profit in the short run. In the long run, however, the only possible outcome is zero economic profit. An economic profit attracts entry by new firms and economic losses lead to exit by some firms. Thus, after entry or exit is complete in the long run, the remaining firms will make zero economic profit. Topic: Long-Run Equilibrium Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

9 Numeric and Graphing Questions

Quantity (dozens of roses a week) 1 2 3 4

Price (dollars per dozen roses) 12 12 12 12

1) Pete is a perfectly competitive rose grower. The above table gives quantities and the price for which Pete can sell his roses. a) What is Pete's total revenue if he sells 1 dozen roses? 2 dozen roses? 3 dozen roses? 4 dozen roses? b) What is the marginal revenue of the 2nd dozen roses sold? Of the 3rd dozen? Of the 4th dozen? Answer: a) The total revenue when 1 dozen roses is sold is $12. When Pete sells 2 dozen roses, the total revenue is $24. When 3 dozen roses are sold, the total revenue is $36. And the total revenue when 4 dozen roses are sold is $48. b) The marginal revenue is always $12 per dozen roses. Topic: Total Revenue and Marginal Revenue Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

2) Farmer Brown produces corn in a perfectly competitive market. Farmer Brown produces and sells 500 bushels of corn. The market supply and demand curves are illustrated in the above figure. a) What is Farmer Brown's total revenue? b) What is Farmer Brown's marginal revenue? Answer: a) Total revenue = price × quantity. The price is determined by the intersection of the demand and supply curves, $6 a bushel. As a result, Farmer Brown's total revenue is $6 × 500 = $3,000. b) For a perfectly competitive firm, the marginal revenue equals the price, so Farmer Brown's marginal revenue is $6. Topic: Total Revenue and Marginal Revenue Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

Quantity (wreaths) 0 1 2 3 4 5 6 7 8 9

Total cost (dollars) 1 10 18 24 28 33 40 49 60 73

Total revenue (dollars)

Profit or loss (dollars)

3) The above table gives Amy's total cost schedule for producing holiday wreaths. Amy is a perfect competitor and can sell each wreath for $9. a) Complete the table by calculating Amy's total revenue and her profit or loss schedule. b) When Amy is producing 4 wreaths, what is her total cost? What is her total revenue? What is her economic profit or economic loss? c) What number of wreaths maximizes Amy's profit? Answer: Quantity Total cost Total revenue Profit or loss (wreaths) (dollars) (dollars) (dollars) 0 1 0 -1 1 10 9 -1 2 18 18 0 3 24 27 3 4 28 36 8 5 33 45 12 6 40 54 14 7 49 63 14 8 60 72 12 9 73 81 8 a) The completed table is above. b) When Amy is producing 4 wreaths, her total cost is $28, her total revenue is $36, and her economic profit is $8. c) Amy can produce 6 or 7 wreaths, with a maximum economic profit of $14. Topic: Total Revenue, Total Cost, and Economic Profit Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

Quantity (thousands of bushels of corn a week) 0 10 20 30 40 50 60 70 80

Total revenue (thousands of dollars per week)

Total cost (thousands of dollars per week)

0 30 60 90 120 150 180 210 240

50 70 80 90 110 140 200 280 400

4) Jimmy grows corn. His total revenue and total cost are in the above table. What quantity of corn maximizes his profit and what is his profit? What is the marginal revenue and marginal cost at this quantity? Answer: Jimmy's profit is greatest if he grows either 40,000 or 50,000 bushels of corn. His (economic) profit at either amount is $10,000 a week. Between 40,000 and 50,000 bushels of corn, Jimmy's marginal revenue is $30,000, or $3 per bushel and his marginal cost is $30,000, or $3 per bushel. Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

Quantity (units) 0 1 2 3 4 5

Total cost (dollars) 3 6 12 21 33 49

5) The above table gives the quantity of output and the total cost for a perfectly competitive firm that can sell all of its output at $9 per unit. a) Find the profit maximizing level of output for this firm. b) How much economic profit is the firm making? Answer: Quantity Total cost Total revenue Profit or loss (units) (dollars) (dollars) (dollars) 0 3 0 -3 1 6 9 3 2 12 18 6 3 21 27 6 4 33 36 3 5 49 45 -4 a) Total revenue equals price times quantity sold. We can find the total revenue for this firm because the market price is a constant $9. The total revenue schedule is given in the table above. The total profit (or loss) equals total revenue minus total cost. The last column shows that the total profit is largest if either 2 or 3 units are produced. b) When the firm produces either 2 or 3 units of output, the total economic profit is $6. Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

Quantity (units) 0 1 2 3 4 5 6 7 8 9

Total cost (dollars) 400 550 600 650 740 850 990 1,140 1,400 1,690

Total revenue (dollars) ___ ___ ___ ___ ___ ___ ___ ___ ___ ___

Profit or loss (dollars) ___ ___ ___ ___ ___ ___ ___ ___ ___ ___

6) The above table shows the total cost schedule for a perfectly competitive firm. The market price is $250 per unit. Complete the table. Answer: Quantity Total cost Total revenue Profit or loss (units) (dollars) (dollars) (dollars) 0 400 0 -400 1 550 250 -300 2 600 500 -100 3 650 750 100 4 740 1,000 260 5 850 1,250 400 6 990 1,500 510 7 1,140 1,750 610 8 1,400 2,000 600 9 1,690 2,250 560 The completed table is above. Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

Quantity (units) 0 1 2 3 4 5 6 7 8 9 10

Total cost (dollars) 12.00 20.00 26.00 30.00 32.00 36.00 42.00 49.80 64.00 87.60 124.00

7) Acme is a perfectly competitive firm. It has the total cost schedule given in the above table. Acme's product sells for $8.00 per unit. What amount of output is the most profitable and what is Acme's economic profit or economic loss? Answer: Acme's profit-maximizing level of output is 7 units. Acme's total economic profit equals its revenue, $56.00 ($8.00 per unit × 7 units), minus its total cost, $49.80 at this level of output, or $56.00 $49.80 = $6.20. Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

Quantity (cones per day) 0 100 200 300 400 500 600

Total cost (dollars per day) 100 250 350 500 700 950 1,2500

8) Cory's is one of many ice cream stands in town. Cory's costs are shown in the table above. a) If the market price of ice cream is $1.75 per cone, what is Cory's profit-maximizing quantity of cones? b) If the market price of ice cream is $2.25 per cone, what is Cory's profit-maximizing quantity of coins? c) If the market price of ice cream is $2.75 per cone, what is Cory's profit-maximizing quantity of coins? d) Can you determine any points on Cory's supply curve? Answer: Quantity Total cost Marginal cost (cones per day) (dollars per day) (dollars per cone) 0 100 1.50 100 250 1.00 200 350 1.50 300 500 2.00 400 700 2.50 500 950 3.00 600 1,2500 a) Cory's profit is maximized when his marginal cost is equal to the market price. Marginal cost is the change in the total cost divided by the change in the quantity. Cory's marginal costs are shown in the table above. Marginal cost equals the price of $1.75 when Cory sells 300 cones, so 300 cones maximizes Cory's profit. b) Cory's profit is maximized when his marginal cost is equal to the market price. Marginal cost equals the price of $2.25 when Cory sells 300 cones, so 400 cones maximizes Cory's profit. c) Cory's profit is maximized when his marginal cost is equal to the market price. Marginal cost equals the price of $2.75 when Cory sells 300 cones, so 500 cones maximizes Cory's profit. d) One point on Cory's supply curve is a price of $1.75, quantity of 300 cones; another point is a price of $2.25, quantity of 400 cones; and a third point is price of $2.75, quantity of 500 cones. Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 150 Copyright © 2014 Pearson Education, Inc.

Quantity (units) 1

Average variable cost (dollars) 8.00

Marginal cost (dollars) 6.00

7.00 4.00

6.00 2.00

5.00 4.00

4.80 6.00

5.00 7.80

5.40 14.20

6.50 23.60

8.40 36.40

9) Acme is a perfectly competitive firm. It has the cost schedules given in the above table and has a fixed cost of $12.00. The price of Acme's product is $14.20. What is Acme's most profitable amount of output? What is Acme's total economic profit or loss? Answer: The profit maximizing level of output is either 7 or 8 units. Acme's total economic profit is the economic profit per unit times the number of units produced. The economic profit per unit equals the price minus the average total cost. To calculate average total cost, note that when Acme produces 8 units, the average variable cost per unit is $6.50 and the average fixed cost is $1.50, so Acme's aver-age total cost equals $8.00. Thus Acme makes an economic profit of $14.20 - $8.00 = $6.20 per unit. Hence Acme's total economic profit is ($6.20) × (8 units) = $49.60. Acme's total economic profit when it makes 7 units is (except for rounding) identical. Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

Quantity (units) 1

Average variable cost (dollars) 8.00

Marginal cost (dollars) 6.00

7.00 4.00

6.00 2.00

5.00 4.00

4.80 6.00

5.00 7.80

5.40 14.20

6.50 23.60

8.40 36.40

10) Acme is a perfectly competitive firm. It has the cost schedules given in the above table and has a fixed cost of $12.00. The price of Acme's product is $4.00. What is Acme's most profitable amount of output? What is Acme's total economic profit or loss? Answer: Acme's most profitable (which means, in this case, minimum loss) is output of 0 units. The price is below Acme's minimum average variable cost, so Acme shuts down. Acme's economic loss equals its fixed costs, $12.00. Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

11) The above figure illustrates a perfectly competitive wheat farmer. a) What will be the firm's profit-maximizing price and output? b) When the farmer produces 25,000 bushels of wheat, the difference between the firm's average total cost and the price is at its maximum. Explain why this amount of wheat either is or is not the profitmaximizing quantity. Answer: a) The firm will maximize its profits by producing where its marginal revenue equals its marginal cost, or 30,000 bushels of wheat. The price will equal the marginal revenue, $3.00 a bushel. b) At 25,000 bushels, the difference between average cost and price (which is the average revenue) is indeed at the maximum, but choosing 25,000 will maximize the profit per bushel of wheat, not the total profit. The firm is interested in maximizing the total profit not the profit per bushel. At 30,000 bushels of wheat, the total profit is maximized because this is the amount of output where the difference between total revenue and total cost is at a maximum. Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

12) The above diagram shows the cost curves for a perfectly competitive wheat farmer. At what price does the wheat farmer shut down? Answer: The wheat farmer shuts down if the price is less than the minimum average variable cost. So in the figure, the wheat farmer shuts down if the price is less than $2 per bushel. Topic: Shutdown Point Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

13) John keeps beehives and sells 100 quarts of honey per month. The honey market is perfectly competitive, and the price of a quart of honey is $10. John has an average variable cost of $5 and an average fixed cost of $3. At 100 quarts per month, John's marginal cost is $10. a) Is John maximizing his profit? If not, what should John do? b) Calculate John's total revenue, total cost, and total economic profit or economic loss when he produces 100 quarts of honey. Answer: a) Yes, John is maximizing his profit because marginal revenue (price) equals marginal cost. b) Total revenue equals price times quantity = $10 × 100 = $1,000. Total cost equals average total cost times quantity = ($5 + $3) × 100 = $800. Economic profit equals total revenue minus total cost = $1,000 - $800 = $200. Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

14) The above diagram shows the cost curves for a perfectly competitive wheat farmer. At what price(s) does the wheat farmer earn an economic profit? Earn a normal profit? Incur an economic loss? How many bushels of wheat does the farmer produce if the price is $3 per bushel? If the price is $0.50 per bushel? Answer: At any price that exceeds the minimum of the average total cost the farmer earns an economic profit. So the farmer makes an economic profit if the price is greater than $2 per bushel. The farmer makes a normal profit if the price equals the minimum total cost. So the farmer makes a normal profit if the price is $2 per bushel. Finally, the farmer incurs an economic loss if the price is less than the minimum average total cost. So the farmer incurs an economic loss if the price is less than $2 per bushel .If the price is $3 per bushel, the farmer produces 30,000 bushels of wheat per year. If the price is $0.50 per bushel, the farmer has shut down because the price is less than the minimum average variable cost and so the farmer produces 0 bushels per year. Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

15) The above figure shows the cost curves of a profit-maximizing perfectly competitive firm. If the price equals $7, a) how much will the firm produce? b) how much is the firm's average total, average variable, and marginal costs? c) how much is the firm's total, total variable, and total fixed costs? d) how much is the firm's total revenue and economic profit? e) what will happen in this market in the long run? Answer: a) The firm will produce 40 units of output because that is where the marginal revenue equals the marginal cost. b) The firm's average total cost equals $4, its average variable cost equals $3, and its marginal cost equals $7. c) The firm's total cost is $160 (= $4 × 40), its total variable cost is $120 (= $3 × 40), and its total fixed cost is $40 (= $160 - $120). d) The firm's total revenue is $280 (= $7 × 40) and its economic profit is $120 (= $280 - $160). e) In the long run, firms will enter the market in response to the economic profit. The market supply curve will shift rightward, the price will fall, and the economic profit will be eliminated. Topic: Long-Run Adjustments; Entry Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

16) American restaurants receive their supply of baby back-ribs from American farms and from farms in Denmark. In the figures above, the first diagram shows the perfectly competitive market for baby back ribs in the United States. The second figure shows the situation at Premium Standard Farm in Kansas, one of the many U.S. farms supplying these ribs. Now assume that the United States imposes a ban on European meat in response to the foot-and-mouth disease that has infected livestock in Europe. (Which the United States did several years ago.) In particular, suppose that the U.S. ban decreases the supply by 40 tons a year. Using the first figure, show the impact of this ban on the baby back rib market. Using the second figure, show the impact on Premium Standard Farm in Kansas.

Answer:

The ban on European meat decreases the supply of baby back ribs and shifts the supply curve leftward, as shown by the shift from S0 to S1. The price rises to $4 a pound. As the figure on the right shows, the MR curve for the Premium Standard Farm will shift upward, from MR0 to MR1. As a result, the farm increases its production to 40,000 pounds of ribs. Because the price exceeds the average total cost, the Premium Standard Farm makes an economic profit. Topic: Long-Run Adjustments; Change in Price Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

17) Suppose the bobby pin industry is perfectly competitive. The price of a packet of bobby pins is $2.00. Pins and Needles, Inc. is a firm in this industry and is producing 1,000 packets of bobby pins per day at the point where the MC = MR. The average cost of production at this output level is $1.50 per packet. a) What is the marginal cost of the 1,000th packet? b) Is this firm making an economic profit, zero economical profit, or an economic loss? How much? c) Is the firm in long-run equilibrium? Why or why not? Answer: a) The price per packet is $2, which is also the Pins and Needle's marginal revenue. The marginal cost of the 1,000th packet is equal to marginal revenue, so for Pins and Needles the marginal cost is $2 per packet. b) The firm is making a $0.50 economic profit per unit (which equals the price minus the average total cost). Because Pins and Needles produces 1,000 packets, its total economic profit is $500. c) The firm is making an economic profit, so it is not in long-run equilibrium. In the long run, a perfectly competitive firm cannot make an economic profit. The only outcome possible in the long run is a normal profit. Topic: Long-Run Equilibrium Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

10 True or False 1) In a perfectly competitive market, many firms sell an identical product. Answer: TRUE Topic: Perfect Competition Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

2) Perfectly competitive firms are price takers. Answer: TRUE Topic: Price Takers Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

3) A perfectly competitive firm produces so that its marginal cost equals the price. Answer: TRUE Topic: Price Takers Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

4) A perfectly competitive firm maximizes its profit by producing the level of output so that its average total cost equals the market price. Answer: FALSE Topic: Profit-Maximizing Output Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 159 Copyright © 2014 Pearson Education, Inc.

5) If a firm is maximizing profits, the extra revenue it receives from selling its last unit of output exceeds the extra cost of producing that unit. Answer: FALSE Topic: Marginal Analysis Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

6) In perfect competition, firms enter the market whenever the market price exceeds the minimum average variable cost. Answer: FALSE Topic: Entry and Exit Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

7) A perfectly competitive firm definitely will shut down in the short run if its price is below its average total cost. Answer: FALSE Topic: Shutdown Point Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

8) A firm's shutdown point is the output and price at which the firm's total revenue just equals its total variable cost. Answer: TRUE Topic: Shutdown Point Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

9) Perfectly competitive firms will sometimes operate even though they incur an economic loss in the short run. Answer: TRUE Topic: Economic Profits and Economic Losses in the Short Run Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

10) The supply curve for a perfectly competitive firm is the portion of its marginal cost curve that lies above its marginal revenue curve. Answer: FALSE Topic: The Firm's Short-Run Supply Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

11) The supply curve for a perfectly competitive firm is the portion of its marginal cost curve that lies above the average variable cost curve. Answer: TRUE Topic: The Firm's Short-Run Supply Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

12) In the long run, a perfectly competitive firm can make an economic profit because its marginal cost equals its average total cost. Answer: FALSE Topic: Long-Run Equilibrium Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

13) In the long run, perfectly competitive firms cannot earn an economic profit. Answer: TRUE Topic: Long-Run Equilibrium Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

14) Entry of new firms into a perfectly competitive market raises the product's price. Answer: FALSE Topic: Long-Run Adjustments; Entry Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

15) Entry of new firms into a perfectly competitive market lowers the profits of the existing firms. Answer: TRUE Topic: Long-Run Adjustments; Entry Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

16) In the long run, a perfectly competitive firm leaves the market if the market price is less than the firm's average total cost. Answer: TRUE Topic: Long-Run Adjustments; Exit Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

17) Easy entry and exit ensure that perfectly competitive firms cannot make a long-run economic profit. Answer: TRUE Topic: Long-Run Equilibrium Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 161 Copyright © 2014 Pearson Education, Inc.

18) In the long run, perfectly competitive firms make zero economic profit, that is, their owners make a normal profit. Answer: TRUE Topic: Long-Run Equilibrium Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

19) In a perfectly competitive market, in the long run a permanent decrease in the market demand results in a smaller number of firms. Answer: TRUE Topic: A Permanent Change in Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

20) When the market demand increases in a perfect competition, the long-run result is a larger number of firms, a higher price, and a permanent economic profit for the firms. Answer: FALSE Topic: A Permanent Change in Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

11 Extended Problems Quantity Total cost (gallons per day) (dollars per day) 0 500 100 713 200 800 300 838 400 900 500 1,063 600 1,400 1) Brennan's Farm produces and sells milk. The market for milk is perfectly competitive. The market price of milk is $2.50 per gallon. The relationship between the farm's output and total costs is shown in the table above. a) Draw Brennan's average variable, average total, and marginal cost curves. b) Use your graphs to find Brennan's profit-maximizing output. c) If Brennan maximizes his profit, how much profit does he make? d) Should Brennan stay in business? Will other farms with costs the same as Brennan's enter the milk market? Explain.

Answer: Quantity TC MC TVC AVC ATC (gallons per (dollars per (dollars per (dollars per (dollars per (dollars per day) day) day) day) day) day) 0 500 2.13 100 713 213 2.13 7.13 0.87 200 800 300 1.50 4.00 0.38 300 838 338 1.13 2.79 0.62 400 900 400 1.00 2.25 1.63 500 1,063 563 1.13 2.13 3.37 600 1,400 900 1.50 2.33

a) Brennan's cost schedules are shown in the table above and the cost curves are shown in the figure above. b) As the figure indicates, marginal cost equals the price when the farm produces 510 gallons of milk per day. So Brennan's profit-maximizing output is 510 gallons per day. c) At the profit maximizing level of output, the average total cost is (about) $2.13 per gallon. Because the price is $2.50 per gallon, the economic profit per gallon is $2.50 - $2.13 = $0.37 and so the total economic profit is $0.37 × 510 = $188.70 per day. d) Brennan should stay in business because his economic profit is positive. Other firms, attracted by economic profit, will enter the market. Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 163 Copyright © 2014 Pearson Education, Inc.

Quantity Total cost (gallons per day) (dollars per day) 0 400 100 703 200 880 300 1,008 400 1,160 500 1,410 600 1,840 2) Petunia's Farm produces and sells milk. The market for milk is perfectly competitive. The market price of milk is $2.50 per gallon. The relationship between the farm's output and total costs is shown in the table above. a) Draw Petunia's average variable, average total, and marginal cost curves. b) Use your graphs to find Petunia's profit-maximizing output. c) If Petunia maximizes her profit, how much profit does she make? d) What is Petunia's shutdown point? What is her economic profit at the shut-down point? e) Should Petunia shut down? Will farms with costs the same as Petunia's enter or exit the milk market? Explain. Answer: Quantity TC MC TVC AVC ATC (gallons per (dollars per (dollars per (dollars per (dollars per (dollars per day) day) day) day) day) day) 0 400 3.03 100 703 303 3.03 7.03 1.77 200 880 480 2.40 4.40 1.28 300 1,008 608 2.03 3.36 1.52 400 1,160 760 1.90 2.90 2.50 500 1,410 1,010 2.02 2.82 4.30 600 1,840 1,440 2.40 3.07

a) Petunia's cost schedules are shown in the table above and the cost curves are shown in the figure above. b) As shown in the graph, marginal cost equals the price when the farm produces 450 gallons of milk per day. So Petunia's profit-maximizing level of output is 450 gallons per day. c) At the profit maximizing level of output, the average total cost is $2.86 per gallon. Because the price is $2.50 per gallon, the economic profit per gallon is $2.50 - $2.86 = -$0.36 per gallon, that is, an economic loss of $0.36 per gallon. The total economic loss is -$0.36 × 450 = -$162 per day. d) A firm's shut-down point is the output and price at which the firm just covers its variable costs. As shown in the graph, Petunia can just cover her variable costs when the price falls to $1.90 per gallon and the farm produces 400 gallons of milk per day. At the shut-down point, the farm suffers an economic loss equal to the fixed costs. So Petunia's economic profit is negative $400. e) As soon as the market price is above the shut-down point, Petunia should not shut down. If the farm continues to operate, it can cover part of the fixed costs and only loses $162 per day. If the firm shuts down, the economic loss equals total fixed cost, i.e. $400 per day. But since Petunia's profit is below normal, her farm and other farms with the same costs will exit the market in the long run. Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

Quantity demanded Price (thousands of gallons (dollars per gallon) per day) 2.50 600 3.50 500 4.50 400 3) The market for milk is perfectly competitive. There are 1,000 farms in the industry and the relationship between a typical farm's output and total costs is the same as in Problem 2. The market demand schedule for milk is shown in the table above. a) What is a typical farm's supply schedule and what is the market supply schedule? b) What is the market price? What quantity of milk is sold? c) What is the output produced by each farm? What type of profit or loss is made by each farm? d) Do farms enter or exit the market? Answer: Market quantity Firm quantity Price supplied supplied (dollars per gallon) (thousands of (gallons per day) gallons per day) 2.50 450 450 4.50 550 550 a) A typical farm's supply schedule is the same as its marginal cost schedule for prices above the minimum average variable cost, $1.90. The table above gives this schedule. Then the market supply schedule is the sum of what 1,000 firms will supply, so the market supply schedule is 1,000 times the quantity supplied by an individual firm. b) The equilibrium market price is $3.50, at which 500,000 gallons of milk per day are sold. c) At the market price, each farm maximizes its profit by producing 500 gallons of milk per day. At this level of output the price exceeds the average total cost, so the farms are earning an economic profit. d) Because the firms are earning an economic profit, new firms enter the market. Topic: Economic Profits and Economic Losses in the Short Run Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

Economics, 11e, Global Edition (Parkin) Chapter 13 Monopoly 1 Monopoly and How It Arises 1) A monopoly has two key features, which are ________. A) barriers to entry and no close substitutes B) franchises and barriers to entry C) barriers to entry and close substitutes D) close substitutes and no barriers to entry Answer: A Topic: How Monopoly Arises Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

2) A monopoly is best defined as a firm that A) produces a good or service for which no close substitute exists and which is protected by a barrier that prevents other firms from selling that good or service. B) purchases its resources from only one supplier because of a barrier preventing it from buying from other suppliers. C) produces a good or service for which no close substitute exists and that sells all its output to one buyer because there is barrier preventing other buyers from purchasing the good or service. D) cannot control the price it sets for its good or service because there is barrier that prevents the firm from changing the price. Answer: A Topic: How Monopoly Arises Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

3) Which of the following is NOT a characteristic of a monopoly? A) a single firm B) no close substitutes for the product produced C) barriers to entry D) easy entry and exit Answer: D Topic: How Monopoly Arises Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

4) Which of the following is a characteristic of monopoly? A) The firm faces competition from a few other firms. B) The firm produces a product that has many close substitutes. C) There are barriers to enter the market. D) The firm's demand curve is perfectly elastic. Answer: C Topic: How Monopoly Arises Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

5) Which of the following statements about a monopoly is FALSE? A) Monopolies have no barriers to entry or exit. B) The good produced by a monopoly has no close substitutes. C) A monopoly is the only producer of the good. D) None of the above; that is, all of the above answers are true statements about a monopoly. Answer: A Topic: How Monopoly Arises Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

6) An example of a monopoly is A) a big city restaurant. B) the stock market. C) the only veterinarian in an isolated farm community. D) a large hospital in a big city. Answer: C Topic: How Monopoly Arises Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

7) Which of the following firms is most likely to be a monopoly? A) a local restaurant B) the local water company C) a local drug store D) a clothing store Answer: B Topic: How Monopoly Arises Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

8) An example of a monopoly would be A) one of many U.S. wheat farmers. B) one of the few U.S. auto makers. C) AT&T long distance phone service. D) the local water company. Answer: D Topic: How Monopoly Arises Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

9) Which of the following is LEAST likely to be a monopoly? A) the holder of a public franchise B) a pharmaceutical company with a patent on a drug C) a store in a large shopping mall D) an artist who owns a copyright for a painting Answer: C Topic: How Monopoly Arises Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

10) A barrier to entry is A) a natural or legal impediment that makes it difficult for new firms to enter a market. B) a necessary condition for perfect competition. C) the result of highly elastic demand. D) a brick wall that a firm places around its corporate headquarters. Answer: A Topic: Barriers To Entry Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

11) When natural or legal forces work to protect a firm from potential competitors, the market is said to have ________. A) non-competitive supply B) non-competitive entry C) barriers to entry D) restricted competition Answer: C Topic: Barriers To Entry Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

12) Which of the following is a barrier to entry for a monopoly? A) a patent B) severe diseconomies of scale C) close substitutes for the good or service exist D) All of the above answers are correct. Answer: A Topic: Barriers To Entry Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

13) Which of the following can create a monopoly? I. high prices II. public franchise III. patent IV. government license A) I and II B) I and III C) I, II and III D) II, III and IV Answer: D Topic: Barriers To Entry Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

14) Which of the following is NOT a barrier to entry for a monopoly? A) economies of scale for the relevant range of output B) a patent on the product being sold C) the ability to charge a price that is above marginal cost D) receiving a public franchise Answer: C Topic: Barriers To Entry Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

15) Which of the following cannot be an effective entry barrier? A) a firm earning very high economic profits B) a firm being granted a patent for its product C) a firm owning all of a vital resource needed to produce a good D) when huge economies of scale exist Answer: A Topic: Barriers To Entry Skill: Recognition Status: New 10th edition AACSB: Reflective Thinking

16) Which of the following is NOT a legal barrier to entry? A) public franchise B) government license C) patent D) innovation Answer: D Topic: Legal Barriers to Entry Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

17) A legal monopoly is defined as a market where A) only one lawyer operates. B) a legal barrier to entry exists. C) only one firm could earn a profit. D) entry and exit are legal. Answer: B Topic: Legal Barriers to Entry Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

18) A public franchise is A) an exclusive right granted to a firm to supply a good or service. B) a government issued license required to practice a profession. C) an exclusive right granted to an inventor of a product. D) a unique source of raw materials. Answer: A Topic: Legal Barriers to Entry Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

19) If the government grants a firm a public franchise to supply coal, a monopoly is created by A) a natural barrier to entry. B) a legal barrier to entry. C) price discrimination. D) All of the above answers are correct. Answer: B Topic: Legal Barriers to Entry Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

20) A market in which competition and entry are restricted by the granting of a public franchise, government license, patent, or copyright is called a A) legal monopoly. B) natural monopoly. C) single-price monopoly. D) price-discriminating monopoly. Answer: A Topic: Legal Barriers to Entry Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

21) Public franchises create monopolies by restricting A) demand. B) prices. C) entry. D) profit. Answer: C Topic: Legal Barriers to Entry Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

22) A copyright creates a monopoly by restricting ________. A) the prices that can be charged B) demand for the product C) entry into the market D) the number of creators and inventors Answer: C Topic: Legal Barriers to Entry Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

23) A patent creates a monopoly by restricting ________. A) demand for the product B) the number of complements for the product C) the amount of advertising that can be undertaken D) entry into the market Answer: D Topic: Legal Barriers to Entry Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

24) Patents encourage invention by A) offering subsidies to inventors. B) offering tax breaks to inventors. C) preventing others from copying an invention. D) preventing inventors from working on the same project. Answer: C Topic: Legal Barriers to Entry Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

25) Suppose a new vaccine for Lyme disease is developed by Merck, a large drug company. Which of the following is most likely to occur? A) Merck will apply for a patent on the vaccine that grants it the monopoly rights to the vaccine for many years. B) Merck will have a monopoly on this vaccine because of economies of scale. C) Other firms will quickly copy the formula making the market for the vaccine competitive. D) Merck will not tell anyone about its discovery though it will sell the vaccine. Answer: A Topic: Legal Barriers to Entry Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

26) Patents encourage inventions because without a patent, A) other firms could enter the inventor's market by producing the same product. B) nobody would demand the inventor's product. C) the inventor would receive no tax breaks. D) all markets would be public franchises. Answer: A Topic: Legal Barriers to Entry Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

27) A patent grants A) a guarantee of quality to consumers. B) the right to practice a profession. C) an exclusive right to an inventor of a product. D) control over a unique source or supply of raw materials. Answer: C Topic: Legal Barriers to Entry Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

28) Patents create monopolies by restricting A) demand. B) prices. C) entry. D) profit. Answer: C Topic: Legal Barriers to Entry Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

29) Patents are ________ barriers to entry and public franchises are ________ barriers to entry. A) legal; legal B) legal; natural C) natural; legal D) natural; natural Answer: A Topic: Legal Barriers to Entry Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

30) An industry in which economies of scale allow one firm to supply the entire market at the lowest possible cost is called a A) legal monopoly. B) natural monopoly. C) single-price monopoly. D) one-firm monopoly. Answer: B Topic: Natural Monopoly Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

31) The existence of economies of scale can create ________. A) a natural monopoly B) a government monopoly C) a legal monopoly D) a market in which many firms make identical products Answer: A Topic: Natural Monopoly Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

32) Natural monopolies occur when there are A) large diseconomies of scale. B) external economies. C) large economies of scale. D) natural resources involved. Answer: C Topic: Natural Monopoly Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

33) A natural monopoly is defined as A) a market in which competition and entry are restricted by the granting of a government license. B) an industry in which economies of scale allow one firm to supply the entire market at the lowest possible cost. C) a market in which competition and entry are restricted by the granting of a patent. D) any market where one firm constitutes the entire industry. Answer: B Topic: Natural Monopoly Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

34) If economies of scale allow one cable TV firm to supply the entire market at the lowest possible cost, then this company is A) a natural monopoly. B) not a monopoly. C) a monopoly, but not a natural monopoly. D) a legal monopoly. Answer: A Topic: Natural Monopoly Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

35) A natural monopoly A) is not protected by any barrier to entry. B) exists because of legal barriers to entry. C) is an industry in which economies of scale exist at the level of output where the market demand curve intersects the long-run average cost curve. D) is an industry where two or more smaller firms can supply the market at a lower cost than one big firm could. Answer: C Topic: Natural Monopoly Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

36) Which of the following is true of a natural monopoly? A) Its long-run average cost curve slopes upward as it intersects the demand curve. B) Economies of scale exist to only a very low level of output. C) Economies of scale allow one firm to supply the entire market at the lowest possible cost. D) The firm is not protected by any barrier to entry. Answer: C Topic: Natural Monopoly Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

37) Given the market demand and cost data in the above figure, the existence of two firms equal sized firms producing a total of 8 million cubic feet of natural gas means that the long-run average cost of producing natural gas is A) 10 cents per cubic foot. B) 20 cents per cubic foot. C) 30 cents per cubic foot. D) 40 cents per cubic foot. Answer: B Topic: Natural Monopoly Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

38) Given the market demand and cost data in the above figure, the existence of a monopoly firm producing 8 million cubic feet of natural gas makes it possible to produce natural gas at a long-run average cost of A) 10 cents per cubic foot. B) 20 cents per cubic foot. C) 30 cents per cubic foot. D) 40 cents per cubic foot. Answer: A Topic: Natural Monopoly Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

39) A single-price monopoly charges the same price A) even if the demand curve shifts. B) even if its cost curves shift. C) to all customers for each unit of output they buy. D) at all times, and that price equals the firm's marginal revenue. Answer: C Topic: Monopoly Price-Setting Strategies Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

40) A monopoly that sells every unit of its output at the same price is a ________. A) unit-price monopoly B) legal monopoly C) natural monopoly D) single-price monopoly Answer: D Topic: Monopoly Price-Setting Strategies Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

41) All of the following are examples of price discrimination EXCEPT A) buy-one-get-one-free offers. B) "early bird specials" at a restaurant. C) lower ticket prices for matinee performances. D) "buy now, pay later" payment options. Answer: D Topic: Monopoly Price-Setting Strategies Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

42) When Dominant Pizza is willing to sell a pizza to a student who lives on-campus at a lower price than it sells the identical pizza to a student who lives a block away from the campus, the pizza firm is ________. A) practicing price discrimination B) unfair C) incurring a loss on on-campus sales D) eliminating all competition Answer: A Topic: Monopoly Price-Setting Strategies Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

43) Firms that can price discriminate between customers do so to ________. A) increase consumer surplus B) increase employment C) increase their profit D) decrease the quantity they produce Answer: C Topic: Price Discrimination Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

44) A single-price monopoly A) charges all consumers the lowest price that they want to pay for each unit purchased. B) produces less output than it would if it could price discriminate. C) eliminates all the consumer surplus. D) creates a smaller deadweight loss than it would if it could price discriminate. Answer: B Topic: Study Guide Question, Monopoly Price-Setting Strategies Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

2 A Single-Price Monopoly's Output and Price Decision 1) Total revenue equals A) marginal revenue multiplied by quantity sold. B) price multiplied by quantity sold. C) total cost minus profit. D) the area between the demand curve and the marginal revenue curve. Answer: B Topic: Price and Marginal Revenue Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

2) For a monopoly, the market demand curve is the firm's A) supply curve. B) marginal revenue curve. C) demand curve. D) profit function. Answer: C Topic: Price and Marginal Revenue Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

3) The demand curve facing the monopolist is A) the same as the market demand curve. B) more elastic than the market demand curve. C) less elastic than the market demand curve. D) upward sloping. Answer: A Topic: Price and Marginal Revenue Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

4) A single-price monopolist's demand curve is A) its marginal revenue curve. B) perfectly elastic. C) the same as the market demand curve. D) more elastic than the market demand curve. Answer: C Topic: Price and Marginal Revenue Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

5) Monopolists A) maximize revenue, not profits. B) have no short-run fixed costs. C) face downward sloping demand curves. D) are price takers. Answer: C Topic: Price and Marginal Revenue Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

6) A single-price monopoly's demand curve lies A) below its marginal revenue curve. B) on top of its marginal revenue curve. C) above its marginal revenue curve. D) on top of its total revenue curve. Answer: C Topic: Price and Marginal Revenue Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

7) The marginal revenue curve for a single-price monopoly A) lies below its demand curve. B) coincides with its demand curve. C) lies above its demand curve. D) is horizontal. Answer: A Topic: Price and Marginal Revenue Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

8) The marginal revenue curve for a single-price monopoly A) is horizontal. B) is upward sloping. C) lies above the market demand curve. D) lies below the market demand curve. Answer: D Topic: Price and Marginal Revenue Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

9) A monopoly A) faces a perfectly elastic demand curve. B) does not need to take account of demand because it's the only seller. C) raises the price it can charge for its product by increasing the quantity sold. D) raises the price it can charge for its product by decreasing the quantity sold. Answer: D Topic: Price and Marginal Revenue Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

10) A single-price monopolist A) can sell as much as it wants at the chosen price because it is the only seller. B) can increase the price and the quantity sold at the same time. C) can increase the price only if it decreases the quantity sold. D) is not restricted by the law of demand. Answer: C Topic: Price and Marginal Revenue Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

11) For a single-price monopolist to sell one more unit of a good, it must A) lower the price on just the last unit sold. B) lower the price on all units sold. C) raise the price on just the last unit sold. D) raise the price on all units sold. Answer: B Topic: Price and Marginal Revenue Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

12) A single-price monopoly is characterized by a marginal revenue curve that is A) upward sloping. B) downward sloping. C) horizontal. D) vertical. Answer: B Topic: Price and Marginal Revenue Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

13) For a single-price monopolist, price is ________ marginal revenue. A) less than B) greater than C) equal to D) less than or equal to but never more than Answer: B Topic: Price and Marginal Revenue Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

14) Marginal revenue for a single-price monopolist is A) less than price. B) equal to price. C) greater than price. D) equal to zero for all levels of output. Answer: A Topic: Price and Marginal Revenue Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

15) A single-price monopolist A) sets its price where its demand is inelastic. B) can always increase its profits by increasing its price. C) has its marginal revenue less than its price. D) is guaranteed an economic profit. Answer: C Topic: Price and Marginal Revenue Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

16) Which of the following is a characteristic of a single-price monopoly? A) The firm is a price taker. B) Demand is perfectly elastic. C) There are many close substitutes for the firm's product. D) Price exceeds marginal revenue. Answer: D Topic: Price and Marginal Revenue Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

17) For a single-price monopolist, marginal revenue is less than price because A) the revenue gain from the last unit sold is offset by a revenue loss on the units that previously had been sold at a higher price. B) the revenue gain from the last unit sold is offset by further gains in price on units not sold at all. C) total revenue always decreases as output increases. D) the price does not have to be lowered on all previous units sold. Answer: A Topic: Price and Marginal Revenue Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

18) Which of the following is true for a single-price monopolist? A) P > MR B) P < MR C) P = MR D) P = elasticity of demand Answer: A Topic: Price and Marginal Revenue Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

19) For a single-price monopolist, A) MR = P. B) MR < P. C) MR first increases and then decreases with the quantity sold. D) MR first decreases and then increases with the quantity sold. Answer: B Topic: Price and Marginal Revenue Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

20) A major difference between a single-price monopolist and a perfectly competitive firm is that the A) monopolist can maximize profit by setting the price of the output where demand is inelastic. B) monopolist can always increase its profits by increasing the price of its output. C) monopolist's marginal revenue is less than price. D) monopolist is guaranteed to earn an economic profit. Answer: C Topic: Price and Marginal Revenue Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

21) In the monopoly, the firm's marginal revenue curve is ________, while in a perfectly competitive market, each firm's marginal revenue curve is ________ . A) downward sloping; horizontal B) horizontal; downward sloping C) upward sloping; horizontal D) downward sloping; upward sloping Answer: A Topic: Price and Marginal Revenue Skill: Conceptual Status: New AACSB: Reflective Thinking

22) Sue's Surfboards is the sole renter of surfboards on Big Wave Island. Sue does not price discriminate. For Sue's Surfboards, the change in total revenue from each additional surfboard rented is her A) marginal revenue and is equal to the rental price of a surfboard. B) marginal cost and is greater than the rental price of a surfboard. C) marginal revenue and is less than the rental price of a surfboard. D) marginal cost and is constant regardless of how many surfboards are rented. Answer: C Topic: Price and Marginal Revenue Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

Quantity (units) 4 5 6

Price (dollars per unit) 16 14 12

23) The table above gives the demand for a monopolist's output. What is the marginal revenue of increasing production from 4 to 5 units? A) $70 B) $16 C) $14 D) $6 Answer: D Topic: Price and Marginal Revenue Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

Price (dollars per haircut) 5 10 15 20 25 30

Quantity demanded (haircuts per day) 50 40 30 20 10 0

24) Christy's Haircuts, the sole supplier of haircuts in a small town, faces the demand schedule shown in the table above. What is Christy's marginal revenue from the 25th haircut? A) zero B) $5.00 C) $17.50 D) $50.00 Answer: B Topic: Price and Marginal Revenue Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

25) Christy's Haircuts, the sole supplier of haircuts in a small town, faces the demand schedule shown in the table above. What is Christy's marginal revenue from the 35th haircut? A) zero B) -$5.00 C) $5.00 D) $12.50 Answer: B Topic: Price and Marginal Revenue Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

Quantity (units) 1 2 3 4 5 6

Price (dollars per unit) 8 7 6 5 4 3

26) The table above gives the demand for a monopolist's output. Between which two quantities is marginal revenue equal to 0? A) 4 and 5 B) 3 and 4 C) 2 and 3 D) 1 and 2 Answer: A Topic: Price and Marginal Revenue Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

27) The table above gives the demand for a monopolist's output. Between which two quantities is demand elastic? A) 6 and 5 B) 5 and 4 C) 4 and 3 D) 3 and 2 Answer: A Topic: Marginal Revenue and Elasticity Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

28) The table above gives the demand for a monopolist's output. What is the total revenue when 3 units of output are produced? A) $21 B) $20 C) $18 D) $6 Answer: C Topic: Price and Marginal Revenue Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

29) The table above gives the demand for a monopolist's output. What is the marginal revenue when output is increased from 5 to 6 units? A) $18 B) $4 C) $3 D) -$2 Answer: D Topic: Price and Marginal Revenue Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

30) The table above gives the demand for a monopolist's output. What is the marginal revenue when output is increased from 2 to 3 units? A) $18 B) $4 C) $7 D) $6 Answer: B Topic: Price and Marginal Revenue Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

31) For a single-price monopoly, marginal revenue is ________ when demand is elastic and is ________ when demand is inelastic. A) negative; negative B) negative; positive C) positive; negative D) positive; positive Answer: C Topic: Marginal Revenue and Elasticity Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

32) For a monopolist, on the inelastic range of its demand, A) marginal revenue is negative. B) marginal revenue is positive. C) marginal revenue is equal to zero. D) total revenue is maximized. Answer: A Topic: Marginal Revenue and Elasticity Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

33) If the price elasticity of demand is greater than 1, a monopoly's A) total revenue increases when the firm lowers its price. B) total revenue decreases when the firm lowers its price. C) marginal revenue is negative. D) marginal revenue is zero. Answer: A Topic: Marginal Revenue and Elasticity Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

34) If the price elasticity of demand is less than 1, a monopoly's A) total revenue increases when the firm lowers its price. B) total revenue decreases when the firm lowers its price. C) marginal revenue is undefined. D) marginal revenue is zero. Answer: B Topic: Marginal Revenue and Elasticity Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

35) If the demand is ________, a fall in price ________ total revenue. A) elastic; increases B) elastic; decreases C) inelastic; increases D) inelastic; does not change Answer: A Topic: Marginal Revenue and Elasticity Skill: Conceptual Status: New AACSB: Reflective Thinking

36) If a monopolist was operating in a price range where marginal revenue was negative, it would be A) in the inelastic range of the demand for its product. B) in the unit elastic range of the demand for its product. C) in the elastic range of the demand for its product. D) maximizing revenue but not profits. Answer: A Topic: Marginal Revenue and Elasticity Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

37) If a decrease in price decreases total revenue, then A) demand is elastic. B) demand is inelastic. C) demand is unit elastic. D) the law of demand is violated. Answer: B Topic: Marginal Revenue and Elasticity Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

38) If a monopolist lowers its price and its demand is inelastic, then its A) total revenue increases. B) total revenue decreases. C) total revenue does not change. D) total revenue is negative. Answer: B Topic: Marginal Revenue and Elasticity Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

39) A monopolist that operates along the elastic range of its demand will find that A) total revenue increases when price decreases. B) total revenue decreases when price decreases. C) marginal revenue is negative. D) it is more profitable to operate along the inelastic range of the demand curve. Answer: A Topic: Marginal Revenue and Elasticity Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

40) If a monopoly is operating along the portion of its demand curve where marginal revenue is positive, its A) total revenue increases when price decreases. B) total revenue decreases when price decreases. C) total revenue remains the same when price decreases. D) total revenue is zero. Answer: A Topic: Marginal Revenue and Elasticity Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

41) Sue's Surfboards is the sole renter of surfboards on Big Wave Island. If marginal revenue is positive at the number of surfboard rentals made each hour, then Sue's Surfboards A) must face an elastic demand for surfboard rentals. B) must face an inelastic demand for surfboard rentals. C) can increase its total revenue by increasing the price of rentals. D) must face a unit elastic demand for surfboard rentals. Answer: A Topic: Marginal Revenue and Elasticity Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

42) For a monopoly, at the level of output where marginal revenue equals zero, then the A) firm earns no revenue. B) price elasticity of demand at this amount of output is zero. C) firm has maximized total revenue. D) firm is a price taker. Answer: C Topic: Marginal Revenue and Elasticity Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

43) If marginal revenue equals zero, then demand at this level of output is A) perfectly inelastic. B) inelastic. C) unit elastic. D) elastic. Answer: C Topic: Marginal Revenue and Elasticity Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

44) If marginal revenue is greater than zero, then demand at this level of output is A) unit elastic. B) elastic. C) inelastic. D) steeper than the marginal revenue curve. Answer: B Topic: Marginal Revenue and Elasticity Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

45) If the demand for its product is elastic, a monopoly's A) total revenue is unchanged when the firm lowers its price. B) total revenue decreases when the firm lowers its price. C) marginal revenue is positive. D) marginal revenue is zero. Answer: C Topic: Marginal Revenue and Elasticity Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

46) If the demand for its product is inelastic, a monopoly's A) total revenue increases when the firm lowers its price. B) total revenue is unchanged when the firm lowers its price. C) marginal revenue is negative. D) marginal revenue is equal to zero. Answer: C Topic: Marginal Revenue and Elasticity Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

47) A monopoly firm expands its output and lowers its price. The firm finds that its total revenue falls. Hence, the firm is producing in the A) elastic range of its demand curve. B) inelastic range of its demand curve. C) elastic range of its supply curve. D) inelastic range of its supply curve. Answer: B Topic: Marginal Revenue and Elasticity Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

48) For a single-price monopolist, as output increases, total revenue A) initially increases and then decreases. B) initially decreases and then increases. C) increases continually. D) decreases continually. Answer: A Topic: Marginal Revenue and Elasticity Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

49) Tris owns the only auto repair shop on Lonely Island. Tris is a single-price monopoly, so Tris operates on the ________ part of the ________ curve. A) elastic; supply B) inelastic; supply C) inelastic; demand D) elastic; demand Answer: D Topic: Marginal Revenue and Elasticity Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

50) Which of the following is true of a monopoly? A) It can always increase its revenue by increasing the price to its customers. B) It will always operate somewhere along the inelastic portion of the demand curve. C) Its marginal cost curve is always downward sloping. D) None of the above is correct. Answer: D Topic: Marginal Revenue and Elasticity Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

51) A single-price monopolist will always produce where the elasticity of demand A) is greater than 1. B) is smaller than 1. C) equals 1. D) equals infinity. Answer: A Topic: Marginal Revenue and Elasticity Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

52) Which of the following statements applies to a single-price monopolist? A) In order to maximize profits, the monopolist will produce an amount of output that lies in the elastic range of its demand. B) In order to maximize profits, the monopolist will produce an amount of output that lies in the inelastic range of its demand. C) In order to maximize profits, the monopolist will produce where its demand is unit elastic. D) In order to maximize profits, the monopolist will produce an amount of output in the inelastic range of its supply. Answer: A Topic: Marginal Revenue and Elasticity Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

53) The figure above shows a monopoly firm's demand curve. If the price and quantity of haircuts move from point t to point r, the monopoly's A) total revenue will rise. B) total revenue will fall. C) total revenue will remain the same. D) marginal revenue will decrease. Answer: B Topic: Price and Marginal Revenue Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

54) The figure above shows a monopoly firm's demand curve. If the price and quantity of haircuts move from point t to point u, the monopoly's A) total revenue will rise. B) total revenue will fall. C) total revenue will remain the same. D) marginal revenue will increase. Answer: B Topic: Price and Marginal Revenue Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

55) The figure above shows a monopoly firm's demand curve. At point t A) demand is elastic. B) demand is unit elastic. C) demand is inelastic. D) total revenue is at a minimum. Answer: B Topic: Marginal Revenue and Elasticity Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

56) The figure above shows a monopoly firm's demand curve. The monopoly's total revenue is at its maximum when the firm produces at point A) x. B) r. C) t. D) u. Answer: C Topic: Marginal Revenue and Elasticity Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

57) The figure above shows a monopoly firm's demand curve. The monopoly's total revenue is zero at point A) x. B) r. C) t. D) u. Answer: A Topic: Marginal Revenue and Elasticity Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

58) The figure above shows a monopoly firm's demand curve. At point u in the figure, the demand facing the monopoly is A) elastic. B) unit elastic. C) inelastic. D) less than the supply. Answer: C Topic: Price and Marginal Revenue Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

59) An unregulated monopoly will A) flood the market with goods to deter entry. B) produce only where marginal revenue is zero. C) produce in the inelastic range of its demand curve. D) produce in the elastic range of its demand curve. Answer: D Topic: Single-Price Monopoly's Output and Price Decisions Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

60) A single-price monopolist determines A) its output but not its price. B) its price but not its output. C) both its output and its price. D) neither its output nor its price. Answer: C Topic: Single-Price Monopoly's Output and Price Decisions Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

61) To maximize profit, the monopolist produces on the ________ portion of its demand where ________. A) elastic; P = MC B) elastic; MR = MC C) inelastic; P = MC D) inelastic; MR = MC Answer: B Topic: Single-Price Monopoly's Output Decision Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

62) A single-price monopolist maximizes profits by producing the output at which A) price equals marginal cost. B) price equals marginal revenue. C) marginal revenue equals marginal cost. D) marginal cost equals average cost. Answer: C Topic: Single-Price Monopoly's Output Decision Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

63) A single-price monopolist will maximize profit by producing so that marginal revenue A) exceeds marginal cost. B) is less than marginal cost. C) equals marginal cost. D) equals price. Answer: C Topic: Single-Price Monopoly's Output Decision Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

64) A monopolist maximizes its profit by producing the amount of output where A) total revenue equals total cost. B) marginal revenue equals marginal cost. C) marginal revenue equals zero. D) price equals marginal cost. Answer: B Topic: Single-Price Monopoly's Output Decision Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

65) If a monopolist is maximizing profits, then it is producing an amount of output so that A) MR = ATC. B) MC = AVC. C) MR = TC. D) MR = MC. Answer: D Topic: Single-Price Monopoly's Output Decision Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

66) A single-price monopolist will produce at the point where A) MR = 0. B) MR = P. C) MR = MC. D) P = MC. Answer: C Topic: Single-Price Monopoly's Output Decision Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

67) Single-price monopolies maximize profit by producing the amount of output where A) total revenue is maximized. B) price is equal to marginal cost. C) price is equal to marginal revenue. D) marginal revenue is equal to marginal cost. Answer: D Topic: Single-Price Monopoly's Output Decision Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

68) A single-price monopolist will produce the output at which ________. A) marginal revenue equals marginal cost B) demand is perfectly inelastic C) marginal revenue is zero D) demand is inelastic but not perfectly inelastic Answer: A Topic: Single-Price Monopoly's Output Decision Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

69) Which of the following is FALSE for a profit-maximizing single-price monopolist? A) P = MC B) MC = MR C) P > MR D) None of the above because they are all true. Answer: A Topic: Single-Price Monopoly's Output Decision Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

70) Which of the following is ALWAYS true for a profit-maximizing single-price monopolist? A) P > MC B) P > MR C) MR = MC D) All of the above are always true. Answer: D Topic: Single-Price Monopoly's Output Decision Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

71) Which of the following is ALWAYS true for a profit-maximzing single-price monopolist? A) P = MC B) P = MR C) MR = MC D) MC = ATC Answer: C Topic: Single-Price Monopoly's Output Decision Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

72) Which of the following is not necessarily true for a profit-maximizing single-price monopolist? A) P > ATC B) P > MC C) P > MR D) MR = MC Answer: A Topic: Single-Price Monopoly's Output Decision Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

73) A single-price monopolist will find when it produces its profit-maximizing amount of output that A) price exceeds marginal revenue. B) price exceeds marginal cost. C) marginal revenue equals marginal cost. D) All of the above occur at the profit-maximizing output level. Answer: D Topic: Single-Price Monopoly's Output Decision Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

74) Suppose that a monopoly is currently producing the quantity at which marginal revenue is less than marginal cost. The monopoly can increase its profit by ________. A) shutting down B) lowering its price and increasing its output C) raising its price and decreasing its output D) lowering its price and decreasing its output Answer: C Topic: Single-Price Monopoly's Output and Price Decisions Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

75) A single-price monopoly will set its price according to which of the following rules? A) P = MR and MR = MC B) P = MC where the MC curve crosses the demand curve C) P = MR where the MR curve crosses the demand curve D) None of the above answers is correct. Answer: D Topic: Single-Price Monopoly's Price Decision Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

76) A profit maximizing single-price monopolist charges a price equal to A) average total cost. B) marginal revenue. C) the highest price consumers are willing to pay for the profit maximizing quantity. D) the price necessary for the firm to earn a normal return on its investment. Answer: C Topic: Single-Price Monopoly's Price Decision Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

77) For a single-price monopolist that is maximizing profit, the price is A) less than marginal revenue. B) equal to marginal revenue. C) equal to marginal cost. D) greater than marginal cost. Answer: D Topic: Single-Price Monopoly's Price Decision Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

78) An unregulated monopoly finds that its marginal cost exceeds its marginal revenue. In order to increase its profit, the firm will A) raise its price and decrease its output. B) lower its price and increase its output. C) raise its price and increase its output. D) continue to produce this level of output because any change will lower its profit. Answer: A Topic: Single-Price Monopoly's Output and Price Decisions Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

Price Quantity demanded (dollars per movie) (movies per week) 18 0 15 100 12 200 9 300 6 400 3 500 79) Roxie's Movie Theatre is the only one in town. The table above gives the demand schedule for movies. If Roxie's is a single-price monopoly and the marginal cost of a movie is $6, Roxie's will charge ________ a movie and will sell ________ movie tickets a week. A) $15; 100 B) $12; 200 C) $6; 400 D) $9; 300 Answer: B Topic: Single-Price Monopoly's Output and Price Decisions Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

80) Which of the following is true for a profit maximizing monopolist? A) Marginal cost is always less than average total cost. B) In the long run, the firm's economic profit equals zero. C) In the short run, the firm will shut down if its marginal cost is less than its average variable cost. D) In the short run, the firm can make an economic profit even if its marginal cost is less than its average variable cost. Answer: D Topic: A Single-Price Monopoly's Price and Output Decisions Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

81) Monopolies can earn an economic profit in the long run because of A) rent seeking by competitors. B) the elastic demand for the monopoly's product. C) the cost-savings gained by the monopoly. D) barriers to enter the monopoly's market. Answer: D Topic: A Monopoly's Long-Run Economic Profit Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

82) In the long run, a single-price monopolist will A) make zero economic profit. B) be able to continue to make an economic profit as long as the market remains a monopoly. C) end up being regulated by the government because it is making short-run economic profits. D) Both answers A and C are correct. Answer: B Topic: A Monopoly's Long-Run Economic Profit Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

83) Unregulated monopolies can often make an economic profit in the long run because A) they receive government subsidies. B) they have high costs. C) barriers to entry prevent competing firms from entering the market. D) the risks of running a monopoly are high. Answer: C Topic: A Monopoly's Long-Run Economic Profit Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

84) A monopolist can make an economic profit in the long run because of A) the relatively elastic demand for its product. B) the relatively inelastic demand for its product. C) the firm's price setting behavior. D) barriers to entry. Answer: D Topic: A Monopoly's Long-Run Economic Profit Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

85) Why can a monopoly make an economic profit in the long run? A) because there are close substitutes for the firm's product B) because the firm is protected by barriers to entry C) because the firm produces where MR = MC D) ALL of the above are reasons why a monopoly can earn an economic profit in the long run. Answer: B Topic: A Monopoly's Long-Run Economic Profit Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

86) Monopolies can make an economic profit in the long run because there A) are close substitutes for the product. B) is free entry and exit. C) is inelastic demand from consumers. D) is a barrier to entry. Answer: D Topic: A Monopoly's Long-Run Economic Profit Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

87) The primary reason why a monopoly can make a long-run economic profit is the existence of A) barriers to entry. B) inelastic demand. C) price discrimination. D) many buyers. Answer: A Topic: A Monopoly's Long-Run Economic Profit Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

88) Which of the following statements is true? A) All monopolists are perfect price discriminators. B) All monopolists earn short-run economic profits. C) A monopolist will leave the market if it incurs an economic loss in the long run. D) A monopolist does not need barriers to entry to sustain a long-run economic profit. Answer: C Topic: A Monopoly's Long-Run Economic Profit Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

89) Which of the following is a characteristic of monopoly in the long run? A) The firm makes zero economic profit. B) The firm can make an economic profit. C) Price equals marginal cost. D) Price equals marginal revenue. Answer: B Topic: A Monopoly's Long-Run Economic Profit Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

Price (dollars per repair) 100 90 80 70 60

Quantity demanded (repairs per week) 0 10 20 30 40

Total cost (dollars) 400 800 1400 2200 3200

90) Dee's TV Repair is the only TV repair shop in a small town. Dee is a single-price monopolist. Based on the demand and cost information in the table above, what quantity of TV repairs should Dee undertake? A) 0 per week B) 10 per week C) 20 per week D) 30 per week Answer: C Topic: Single-Price Monopoly's Output Decision Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

91) Dee's TV Repair is the only TV repair shop in a small town. Dee is a single-price monopolist. Based on the demand and cost information in the table above, what is the amount of economic profit made or loss incurred at the quantity of TV repairs that profits are maximized or losses minimized? A) -$400 B) $800 C) -$100 D) $200 Answer: D Topic: A Monopoly's Economic Profit Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

Price Quantity demanded (dollars per bottle) (bottles per day) 16 0 15 1 14 2 13 3 12 4 11 5 10 6 9 7 8 8 92) The table above gives the demand schedule for water bottled by Wanda's Healthy Waters. If the marginal cost is a constant $4 a bottle, Wanda's will produce ________ a day and charge ________ a bottle. A) 8 bottles; $8 B) 4 bottles; $12 C) 1 bottle; $15 D) 6 bottles; $10 Answer: D Topic: Single-Price Monopoly's Output and Price Decisions Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

93) The table above gives the demand schedule for water bottled by Wanda's Healthy Waters. Wanda's marginal cost is a constant $4 a bottle and has no fixed cost. Wanda's makes an economic profit of ________ a day. A) $0 B) $24 C) $36 D) $60 Answer: C Topic: A Monopoly's Economic Profit Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

Rooms rented monthly 0 1 2 3 4 5 6 7 8 9 10 11

Price (dollars per room) 201 191 181 171 161 151 141 131 121 111 101 91

Total cost (dollars) 100 200 290 370 440 520 610 710 820 940 1090 1290

94) The motel whose costs are given in the table above has total fixed costs equal to A) $0. B) $100. C) $200. D) $201. Answer: B Topic: Single-Price Monopoly Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

95) The table above shows the demand and total cost schedule for a monopolist hotel. What is the marginal revenue from renting out the fifth room each night? A) $111 B) $141 C) $151 D) $161 Answer: A Topic: Price and Marginal Revenue Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

96) The table above shows the demand and total cost schedule for a monopolist hotel. What price should the monopolist charge if it is a single-price monopoly that maximizes its profit? A) $171 B) $161 C) $151 D) $141 Answer: D Topic: Single-Price Monopoly's Price Decision Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

Price (dollars per unit) 50 45 40 35 30 25

Quantity (units per day)

Total cost (dollars)

0 20 40 60 80 100

10 110 310 710 1210 1810

97) The table above shows the demand and costs for a single-price monopolist. The firm can maximize its profit by selling A) 0 units. B) 20 units. C) 40 units. D) 60 units. Answer: D Topic: Single-Price Monopoly's Output Decision Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

98) The table above shows the demand and costs for a single-price monopolist. The firm can maximize its profit by setting its price at A) $30 per unit. B) $35 per unit. C) $40 per unit. D) $45 per unit. Answer: B Topic: Single-Price Monopoly's Price Decision Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

99) The table above shows the demand and costs for a single-price monopolist. The maximum economic profit this firm can make equals A) $1,390. B) $1,550. C) $1,580. D) $2,400. Answer: A Topic: A Monopoly's Economic Profit Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

Price (dollars per unit) 30 25 20 15 10 5

Quantity (units per day)

Total cost (dollars)

0 1 2 3 4 5

10 20 25 40 60 85

100) The table above shows the demand and costs for a single-price monopolist. The firm will A) maximize profit by producing 3 units. B) maximize profit by producing 2 units. C) operate on the inelastic portion of its demand curve. D) operate on the unit elastic portion of its demand curve. Answer: B Topic: Single-Price Monopoly's Output and Price Decisions Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

101) The table above shows the demand and costs for a single-price monopolist. When it maximizes its profit, the firm makes an economic profit of A) $15. B) $25. C) $40. D) $45. Answer: A Topic: A Monopoly's Economic Profit Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

102) The figure above shows a monopoly's total revenue and total cost curves. The monopoly's economic profit is positive if it produces between A) 0 and 5 units. B) 0 and 15 units. C) 0 and 20 units. D) 5 and 20 units. Answer: D Topic: Single-Price Monopoly's Output and Price Decisions Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

103) The figure above shows a monopoly's total revenue and total cost curves. The monopoly's economic profit is zero if it produces A) 0 units of output. B) 5 or 20 units of output. C) 15 units of output. D) none of the above Answer: B Topic: Single-Price Monopoly's Output and Price Decisions Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

104) The figure above shows a monopoly's total revenue and total cost curves. The monopoly's economic profit is maximized when it produces A) 0 units of output. B) 5 units of output. C) 15 units of output. D) 20 units of output. Answer: C Topic: Single-Price Monopoly's Output Decision Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

105) The figure above shows a monopoly's total revenue and total cost curves. The monopoly's marginal revenue equals its marginal cost when it produces A) 0 units of output. B) 5 units of output. C) 15 units of output. D) 20 units of output. Answer: C Topic: Single-Price Monopoly's Output Decision Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

106) To maximize its profit, the monopoly with the TR and TC curves shown in the figure above will produce A) 0 units of output. B) 5 units of output. C) 15 units of output. D) 20 units of output. Answer: C Topic: Single-Price Monopoly's Output Decision Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

107) In the figure above, the curve labeled "X" can be a A) monopoly's demand curve. B) monopoly's marginal revenue curve. C) perfectly competitive firm's demand curve. D) perfectly competitive firm's marginal revenue curve. Answer: A Topic: Price and Marginal Revenue Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

108) In the figure above, the curve labeled "W" can be a A) monopoly's demand curve. B) monopoly's marginal revenue curve. C) perfectly competitive firm's demand curve. D) perfectly competitive firm's marginal revenue curve. Answer: B Topic: Marginal Revenue Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

109) The figure above shows the cost, demand, and marginal revenue curves for a monopoly. The firm A) will make an economic profit of $20. B) will charge a price of $10 per unit. C) will produce 20 units per day. D) is a natural monopoly. Answer: C Topic: Single-Price Monopoly's Output and Price Decisions Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 44 Copyright © 2014 Pearson Education, Inc.

110) The figure above shows the cost, demand, and marginal revenue curves for a monopoly. At an output level of ________, demand is ________. A) 20; elastic B) 50; unit elastic C) 50; elastic D) 30; unit elastic Answer: A Topic: Marginal Revenue and Elasticity Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

111) For the unregulated, single-price monopoly shown in the figure above, when its profit is maximized, output will be A) 4 units per year and the price will be $6. B) 4 units per year and the price will be $4. C) 6 units per year and the price will be $4. D) None of the above answers is correct. Answer: A Topic: Single-Price Monopoly's Output and Price Decisions Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

112) The unregulated, single-price monopoly shown in the figure above will produce where its demand A) equals its MC curve. B) equals its ATC curve. C) is inelastic. D) is elastic. Answer: D Topic: Marginal Revenue and Elasticity Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

113) The unregulated, single-price monopoly shown in the figure above makes a total economic profit of A) $24. B) $16. C) $8. D) $4. Answer: C Topic: A Monopoly's Economic Profit Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

114) The figure above shows the demand and cost curves for a single-price monopoly. What level of output maximizes the firm's economic profit? A) 0 units B) 20 units C) 30 units D) 50 units Answer: B Topic: Single-Price Monopoly's Output Decision Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

115) The figure above shows the demand and cost curves for a single-price monopoly. What price will the firm charge? A) $50 per unit B) $30 per unit C) $20 per unit D) $10 per unit Answer: B Topic: Single-Price Monopoly's Price Decision Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

116) The figure above shows the demand and cost curves for a single-price monopoly. What economic profit does this firm make? A) zero B) $600 C) $400 D) $200 Answer: D Topic: A Monopoly's Economic Profit Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

117) The figure above shows the demand and cost curves for a single-price monopoly. The firm will produce ________ units and set a price of ________ per unit. A) 15; $20 B) 10; $20 C) 10; $30 D) None of the above answers is correct. Answer: C Topic: Single-Price Monopoly's Output and Price Decisions Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

118) The figure above shows the demand and cost curves for a single-price monopoly. The firm's economic profit equals A) $0. B) $300. C) $100. D) $50. Answer: C Topic: A Monopoly's Economic Profit Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

119) The figure above shows the demand and cost curves for a single-price monopoly. Which of the following statements is FALSE? A) To maximize its profit, the firm will set marginal revenue equal to zero by producing 12.5 units. B) The firm will make an economic profit. C) The firm is a not a natural monopoly. D) The firm will set price where demand is elastic. Answer: A Topic: Single-Price Monopoly's Output and Price Decisions Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

120) Donna owns the only dog grooming salon on Lonely Island. The figure above shows the dog grooming market. Donna is a single-price monopoly that maximizes profit by charging ________ per grooming and producing ________ groomings per day. A) $30; 8 B) $20; $8 C) $20; $12 D) None of the above answers is correct. Answer: A Topic: Single-Price Monopoly's Output and Price Decisions Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

121) The unregulated, single-price monopoly shown in the figure above will sell A) less than 30 tickets. B) 30 tickets. C) 50 tickets. D) 100 tickets. Answer: B Topic: Single-Price Monopoly's Output Decision Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

122) An unregulated, single-price monopoly is shown in the figure above. If fixed cost is $20, the monopoly's total costs when it is maximizing its profit will be A) $30. B) $40. C) $80 D) $140. Answer: C Topic: Single-Price Monopoly's Price Decision Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

123) An unregulated, single-price monopoly is shown in the figure above. If fixed cost is $20, the monopoly's total economic profit when it is maximizing its profit will be A) negative. B) $0. C) $25. D) $50. Answer: C Topic: Single-Price Monopoly's Output and Price Decisions Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

124) The monopoly illustrated in the figure above is unregulated and charges a single price. The deadweight loss created by the monopoly is A) $0. B) $22.50. C) $45.00. D) $90.00. Answer: B Topic: Single-Price Monopoly, Deadweight Loss Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

125) The above figure illustrates a single-price unregulated monopolist. If the monopolist maximizes its profit, the consumer surplus equals ________. A) $20,000 B) $10,000 C) $45,000 D) $40,000 Answer: A Topic: Single-Price Monopoly, Consumer Surplus Skill: Analytical Status: New 10th edition AACSB: Analytical Skills

126) The above figure illustrates a single-price unregulated monopolist. If the monopolist maximizes its profit, the deadweight loss equals ________. A) $10,000 B) $20,000 C) $45,000 D) $40,000 Answer: A Topic: Single-Price Monopoly, Deadweight Loss Skill: Analytical Status: New 10th edition AACSB: Analytical Skills

127) The above figure shows the demand and cost curves for a monopolist. What is the maximum economic profit this firm can make? A) zero B) $400 C) $100 D) $200 Answer: D Topic: A Monopoly's Economic Profit Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

128) In a small town, Marilyn's Christmas Tree Lot has a monopoly on sales of Christmas trees. In order to increase her sales from 100 trees to 101 trees, she must drop the price of all of her trees from $20 to $19. What is the marginal revenue? A) $2000 B) $20 C) $19 D) negative $81 Answer: D Topic: Study Guide Question, Price and Marginal Revenue Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

129) If a monopoly is producing an amount of output level at which marginal revenue exceeds marginal cost, in order to increase its profit the monopoly will ________ its price and ________ its output. A) raise; decrease B) lower; increase C) lower; decrease D) raise; increase Answer: B Topic: Study Guide Question, Single-Price Monopoly's Output & Price Decision Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

130) La Bella Pizza is the only pizza place on Pepper Island. The figure above shows La Bella Pizza's demand curve, marginal revenue curve, and marginal cost curve. At La Bella Pizza's profit-maximizing output, its annual total revenue is A) $168,000. B) $312,000. C) $336,000. D) $624,000. Answer: B Topic: MyEconLab Questions Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

131) Sue's Surfboards is the sole renter of surfboards on Big Wave Island. Sues demand and marginal revenue curves are illustrated in the figure above. Sue's Surfboards currently rents 15 surfboards an hour. Sue's total revenue from the 15 surfboards is A) $300. B) $225. C) $150. D) $10. Answer: C Topic: MyEconLab Questions Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

132) Sue's Surfboards is the sole renter of surfboards on Big Wave Island. Sue's demand and marginal revenue curves are illustrated in the figure above. The change in the total revenue from renting the 15th surfboard is A) $20. B) $15. C) $10. D) $0. Answer: D Topic: MyEconLab Questions Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

133) The figure above shows the demand and marginal revenue curves facing Sue's Surfboards, the sole renter of surfboards on Big Wave Island. If Sue is renting 25 surfboards an hour so that the marginal revenue is negative, then Sue's Surfboards A) can increase its profit by increasing the number of rentals. B) must face an inelastic demand for surfboard rentals. C) must face a unit elastic demand for surfboard rentals. D) must face an elastic demand for surfboard rentals. Answer: B Topic: MyEconLab Questions Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

134) Bob's Books is the only bookstore in town. The figure above shows the demand curve for books and Bob's Books' marginal revenue curve and marginal cost curve. Bob's Books maximizes its profit and sets the price of a book equal to ________ and has total annual revenue of ________. A) $40; $40,000. B) $30; $60,000. C) $20, $60,000. D) $10; $40,000. Answer: B Topic: MyEconLab Questions Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

3 Single-Price Monopoly and Competition Compared 1) Which of the following is true for BOTH monopoly and a perfectly competitive firm? A) The demand for the individual firm's product is perfectly elastic. B) Economic profits can be sustained indefinitely over time. C) The marginal revenue curve is horizontal at the market equilibrium price. D) Profits are maximized by producing at the level of output where marginal revenue is equal to marginal cost. Answer: D Topic: Single-Price Monopoly and Competition Compared Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

2) Which of the following statements is true for both a competitive market and a single-price monopoly? A) The firm maximizes profit by producing the quantity at which marginal revenue equals marginal cost. B) The firm can make an economic profit in the long run. C) The price is set where the supply curve and demand curve intersect. D) The firm always produces at the lowest possible long-run average cost. Answer: A Topic: Single-Price Monopoly and Competition Compared Skill: Conceptual Status: New AACSB: Reflective Thinking

3) A key difference between a monopoly and a perfectly competitive firm is that the monopolist A) does not face fixed costs in the short run. B) has a marginal revenue curve that lies below its demand curve. C) has no marginal cost curve. D) faces a perfectly elastic demand for its product. Answer: B Topic: Single-Price Monopoly and Competition Compared Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

4) One difference between perfectly competitive markets and single-price monopoly markets is that A) marginal revenue equals marginal cost for perfectly competitive firms, but not for monopolists. B) marginal revenue equals price for perfectly competitive firms, but not for single-price monopolists. C) marginal cost equals average variable cost for perfectly competitive firms but not for monopolists. D) All the above answers are correct. Answer: B Topic: Single-Price Monopoly and Competition Compared Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

5) Compared to a single-price monopoly, a perfectly competitive market with the same costs produces ________ output and has a ________ price. A) less; lower B) less; higher C) more; lower D) more; higher Answer: C Topic: Comparing Output and Price; Output Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

6) Relative to a perfectly competitive market with the same cost and demand, a single-price monopolist produces ________ output and has a ________ price. A) more; higher B) less ; lower C) more; lower D) less; higher Answer: D Topic: Comparing Output and Price Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

7) Compared to a perfectly competitive industry, a single-price monopoly with the same costs will A) create less consumer surplus. B) create less economic profit. C) create a deadweight loss. D) Both answers A and C are correct. Answer: D Topic: Comparing Output and Price Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

8) A single-price monopolist produces a ________ quantity than a perfectly competitive market with the same costs and charges a ________ price than the perfectly competitive market. A) greater; higher B) greater; lower C) lesser; lower D) lesser; higher Answer: D Topic: Comparing Output and Price Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

9) When comparing a single-price monopoly to a perfectly competitive market with the same costs, A) both the monopoly's output and price are lower than the perfectly competitive market's output and price. B) both the monopoly's output and price are higher than the perfectly competitive market's output and price. C) the monopoly's output is higher and the monopoly's price is lower than the perfectly competitive market's output and price. D) the monopoly's output is smaller and the monopoly's price is higher than the perfectly competitive market's output and price. Answer: D Topic: Comparing Output and Price Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

10) Which of the following statements is true? A) A perfectly competitive market produces more output and charges a lower price than a single-price monopoly. B) A perfectly competitive market produces more output and charges the same price as a single-price monopoly. C) A perfectly competitive market produces less output and charges a lower price than a single-price monopoly. D) A perfectly competitive market produces less output and charges the same price as a single-price monopoly. Answer: A Topic: Comparing Output and Price; Output Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

11) The fundamental reason a single-price monopoly creates a deadweight loss is that compared to the efficient outcome, the single-price monopoly A) raises variable cost. B) raises fixed cost. C) restricts output. D) reduces the elasticity of demand. Answer: C Topic: Comparing Output and Price; Deadweight Loss Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

12) Deadweight loss measures the inefficiency of the market as the loss of ________. A) consumer surplus and producer surplus B) producer surplus only C) consumer surplus only D) consumer surplus minus producer surplus Answer: A Topic: Comparing Output and Price; Deadweight Loss Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

13) A single-price monopoly causes a deadweight loss because it ________. A) restricts its output so it is less than the efficient quantity B) increases the amount produced beyond the efficient quantity C) maximizes marginal revenue rather than minimizes marginal cost D) increases marginal cost Answer: A Topic: Comparing Output and Price; Deadweight Loss Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

14) When comparing perfect competition to a single-price monopoly with the same costs, A) both market types use resources efficiently. B) there is a deadweight loss associated with a monopoly. C) the sum of producer and consumer surplus is maximized under a monopoly. D) the sum of producer and consumer surplus is minimized under perfect competition. Answer: B Topic: Comparing Output and Price; Deadweight Loss Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

15) Deadweight loss measures the inefficiency as the loss of A) consumer surplus only. B) consumer surplus minus producer surplus. C) consumer surplus plus producer surplus. D) producer surplus only. Answer: C Topic: Comparing Output and Price; Deadweight Loss Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

16) A deadweight loss occurs whenever A) the total benefit of a good does not equal its total cost. B) the marginal social benefit of a good does not equal its marginal social cost. C) there is perfect price discrimination. D) there is no consumer surplus. Answer: B Topic: Comparing Output and Price; Deadweight Loss Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

17) Which of the following markets will have the largest deadweight loss? A) A market that consists of perfectly competitive firms. B) A market that consists of a single-price monopoly. C) A market that consists of a perfect price discriminating monopoly. D) None of the above. There is no deadweight loss as long as firms produce at the level of output where marginal revenue equals marginal cost. Answer: B Topic: Comparing Output and Price; Deadweight Loss Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

18) A single-price monopolist is inefficient because A) MR = MC. B) P > ATC. C) it creates a deadweight loss. D) it increases producer surplus. Answer: C Topic: Comparing Output and Price; Deadweight Loss Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

19) Economists are critical of monopoly because A) monopolists can earn long-run economic profit. B) monopolists can create a deadweight loss. C) the demand for the monopolist's product is the market demand curve. D) economies of scope result in lower average costs. Answer: B Topic: Comparing Output and Price; Deadweight Loss Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

20) Compared to a similar perfectly competitive industry, a single-price monopoly A) creates a deadweight loss and decreases economic profit. B) produces more output. C) creates a deadweight loss and decreases consumer surplus. D) is more efficient because there is no wasteful competition. Answer: C Topic: Comparing Output and Price; Deadweight Loss Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

21) The unregulated, single-price monopolist illustrated in the figure above has a total revenue of A) $8.00 per day. B) $16.00 per day. C) $36.00 per day. D) $40.00 per day. Answer: D Topic: Total Revenue Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

22) The unregulated, single-price monopolist illustrated in the figure above has a total cost of A) $8.00 per day. B) $16.00 per day. C) $32.00 per day. D) $40.00 per day. Answer: C Topic: Total Cost Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills 62 Copyright © 2014 Pearson Education, Inc.

23) The unregulated, single-price monopolist illustrated in the figure above makes an economic profit of A) zero. B) $8.00 per day. C) $10.00 per day. D) $40.00 per day. Answer: B Topic: Economic Profit Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

24) The unregulated, single-price monopolist illustrated in the figure above will produce A) 0 units per day. B) 4 units per day. C) 6 units per day. D) 9 units per day. Answer: B Topic: Comparing Output and Price; Output Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

25) In the figure above, compared to a perfectly competitive industry with the same costs, a single-price, unregulated monopoly will decrease production by A) zero. B) 2 units per day. C) 4 units per day. D) 6 units per day. Answer: B Topic: Comparing Output and Price; Output Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

26) The unregulated, single-price monopolist illustrated in the figure above will set a price of A) $2.00 per unit. B) $6.00 per unit. C) $8.00 per unit. D) $10.00 per unit. Answer: D Topic: Comparing Output and Price; Price Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

27) In the figure above, compared to a perfectly competitive industry with the same costs, a single-price, unregulated monopoly will raise the price by A) $2.00 per unit. B) $4.00 per unit. C) $6.00 per unit. D) $8.00 per unit. Answer: B Topic: Comparing Output and Price; Price Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

28) In the figure above, the deadweight loss created if the industry changes from perfectly competitive to a single-price, unregulated monopoly is A) zero. B) $8.00 per day. C) $24.00 per day. D) $36.00 per day. Answer: B Topic: Comparing Output and Price; Deadweight Loss Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

29) In the figure above, the redistribution from the consumers to the producer if the firm is a single-price, unregulated monopoly rather than a perfectly competitive industry is A) zero. B) $8.00 per day. C) $16.00 per day. D) $32.00 per day. Answer: C Topic: Redistribution of Surpluses Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

30) Interlace, Inc. produces and a unique soda. The company cannot price discriminate. The figure above shows Interlace's demand curve, marginal revenue curve, and marginal cost curve. Interlace's profit maximizing level of output is A) 30,000 bottles. B) 50,000 bottles C) 100,000 bottles D) 0; that is, the firm shuts down. Answer: A Topic: Single-Price Monopoly's Output Decision Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

31) Interlace, Inc. produces and a unique soda. The company cannot price discriminate. The figure above shows Interlace's demand curve, marginal revenue curve, and marginal cost curve. Interlace's profit maximizing price is ________ per bottle. A) 70 cents B) 50 cents C) 40 cents D) 1 dollar Answer: A Topic: Single-Price Monopoly's Price Decision Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

32) Interlace, Inc. produces and a unique soda. The company cannot price discriminate. The figure above shows Interlace's demand curve, marginal revenue curve, and marginal cost curve. Interlace, Inc. is definitely A) a perfectly competitive firm. B) not a perfectly competitive firm. C) a natural monopoly. D) None of the above answers is correct. Answer: B Topic: Market Power Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

33) Interlace, Inc. produces and a unique soda. The company cannot price discriminate. The figure above shows Interlace's demand curve, marginal revenue curve, and marginal cost curve. The quantity of soda Interlace Inc. will choose to produce is ________ because when this quantity is produced, ________. A) efficient; marginal social benefit exceeds marginal social cost B) efficient; marginal social benefit equals marginal social cost C) not efficient; marginal social benefit exceeds marginal social cost D) not efficient; marginal social benefit equals marginal social cost Answer: C Topic: Comparing Output and Price; Deadweight Loss Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

34) Interlace, Inc. produces and a unique soda. The company cannot price discriminate. The figure above shows Interlace's demand curve, marginal revenue curve, and marginal cost curve. When Interlace maximizes its profit, the deadweight loss is A) zero. B) $15,000. C) $21,000. D) $3,000. Answer: D Topic: Comparing Output and Price; Deadweight Loss Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

35) In the figure above, the single-price, unregulated monopoly produces A) less than 19 units per day. B) 20 units per day. C) between 21 and 39 units per day. D) 40 or more units per day. Answer: B Topic: Comparing Output and Price; Output Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

36) If the industry in the above figure was perfectly competitive, the level of output would A) be less than the single-price monopoly level of output. B) be the same as the single-price monopoly level of output. C) exceed the single-price monopoly level of output by 20 units per day. D) exceed the single-price monopoly level of output by 60 units per day. Answer: C Topic: Comparing Output and Price; Output Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

37) In the figure above, the efficient amount of output is A) 20 units per day. B) 40 units per day. C) 60 units per day. D) 80 units per day. Answer: B Topic: Comparing Output and Price; Output Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills 67 Copyright © 2014 Pearson Education, Inc.

38) The output produced by the single-price, unregulated monopoly in the above figure is A) efficient because profit is maximized. B) inefficient because less than the efficient quantity is produced. C) efficient because marginal costs equals marginal revenue. D) inefficient because more than the efficient quantity is produced. Answer: B Topic: Comparing Output and Price; Output Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

39) In the figure above, the single-price, unregulated monopoly sets a price of A) $80 per unit. B) $60 per unit. C) $40 per unit. D) $0 per unit. Answer: B Topic: Comparing Output and Price; Price Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

40) For the monopoly shown in the figure above, the profit maximizing output is A) 4 units per day. B) 5 units per day. C) 6 units per day. D) 10 units per day. Answer: A Topic: Single-Price Monopoly's Output Decision Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 68 Copyright © 2014 Pearson Education, Inc.

41) For the monopoly shown in the figure above, the profit maximizing price is ________ per unit. A) $10 B) $20 C) $30 D) $50 Answer: C Topic: Single-Price Monopoly's Price Decision Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

42) For the monopoly shown in the figure above, when it maximizes its profit the marginal cost is ________ per unit and the price is ________ per unit. A) $10; $30 B) $20; $20 C) $10; $20 D) $30; $20. Answer: A Topic: Single-Price Monopoly's Output and Price Decisions Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

43) For the monopoly shown in the figure above, the economic profit is A) $0. B) $10. C) $40. D) $100. Answer: C Topic: A Monopoly's Economic Profit Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

44) If the market in the figure above was perfectly competitive rather than a monopoly, the perfectly competitive level of output would be A) 4 units per day. B) 5 units per day. C) 6 units per day. D) 10 units per day. Answer: C Topic: Comparing Output and Price Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

45) For the single-price monopoly shown in the figure above, the deadweight loss is A) zero. B) between $0 and $10. C) between $10.01 and $20. D) more than $20.01. Answer: C Topic: Comparing Output and Price; Deadweight Loss Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

46) Consumer surplus is A) positive in the case of a monopolist practicing perfect price discrimination. B) equal to the price minus the marginal cost. C) less in the case of a single-price monopoly than in the case of a perfectly competitive industry. D) zero for a single-price monopolist. Answer: C Topic: Redistribution of Surpluses Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

47) The creation of a monopoly results in gains to A) producers at no expense to consumers. B) consumers at no expense to producers. C) producers at the expense of consumers. D) consumers at the expense of producers. Answer: C Topic: Redistribution of Surpluses Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

48) In comparison with a perfect competition, a single-price monopolist with the same costs creates a ________ consumer surplus and makes a ________ economic profit. A) smaller; larger B) smaller; smaller C) larger; larger D) larger; smaller Answer: A Topic: Redistribution of Surpluses Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

49) Compared to a competitive industry, a monopoly transfers A) deadweight loss away from producers to consumers. B) deadweight loss away from consumers to producers. C) producer surplus to consumers. D) consumer surplus to producers. Answer: D Topic: Redistribution of Surpluses Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

50) Consider the monopolist depicted in the figure above. The profit maximizing level of output for a single-price monopolist is A) 7. B) 11. C) 13. D) 22. Answer: A Topic: Single-Price Monopoly's Output and Price Decisions Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

51) Consider the monopolist depicted in the figure above. When it maximizes its profit, a single-price monopolist sets a price of ________ per unit. A) $4 B) $7 C) $9 D) $11 Answer: D Topic: Single-Price Monopoly's Output and Price Decisions Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

52) If the above figure illustrated a perfectly competitive industry, the equilibrium market output would be equal to A) 7. B) 11. C) 13. D) 22. Answer: C Topic: Comparing Output and Price Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

53) If the above figure illustrated a perfectly competitive industry, the equilibrium market price would be equal to A) $4. B) $7. C) $9. D) $11. Answer: B Topic: Comparing Output and Price Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

54) In the above figure, if a single-price monopolist maximized its profit, the deadweight loss in the market is equal to the area A) ace. B) acg. C) ecg. D) bch. Answer: B Topic: Comparing Output and Price; Deadweight Loss Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

55) In the above figure, a single-price monopolist charges a price of ________, resulting in total revenue equal to area ________. A) $10; hbcd B) $20; fjem C) $10; fbcg D) $30; fbcg Answer: D Topic: Single-Price Monopoly's Output and Price Decisions Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

56) In the above figure, a single-price monopolist charges a price of ________ and the equilibrium competitive price is ________. A) $10; $20 B) $20; $30 C) $30; $20 D) $30; $10 Answer: C Topic: Comparing Output and Price Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

57) In the above figure, if the single-price monopolist charges a price that maximizes its profits, consumer surplus is A) area hacd. B) area bac. C) area jae. D) area jbce. Answer: B Topic: Redistribution of Surpluses Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

58) In the above figure, if a single-price monopolist charges the profit-maximizing price, the triangle dce represents A) consumer surplus. B) producer surplus. C) deadweight loss. D) marginal revenue. Answer: C Topic: Comparing Output and Price; Deadweight Loss Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

59) In the above figure, what quantity will a single-price monopolist produce? A) Q1 B) Q2 C) Q3 D) Q4 Answer: A Topic: Single-Price Monopoly's Output Decision Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

60) In the above figure, what price will a single-price monopoly set? A) P1 B) P2 C) P4 D) P5 Answer: D Topic: Single-Price Monopoly's Price Decision Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

61) In the above figure, for a single-price monopolist producing at its profit-maximizing equilibrium price and quantity, the price elasticity of demand at this equilibrium will be A) greater than 1 and the monopolist's total revenue is maximized. B) less than 1 and the monopolist's economic profit could be larger. C) equal to 1 and the monopolist's total revenue is maximized. D) greater than 1 and the economic profit is maximized but the total revenue is not. Answer: D Topic: Single-Price Monopoly Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

62) In the above figure, the total revenue for a single-price monopolist is shown by the area A) 0P5fQ1. B) P2P4eb. C) 0P3cQ1. D) 0P4eQ3. Answer: A Topic: Single-Price Monopoly's Output and Price Decisions Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

63) The area of economic profit shown in the above figure for the single-price monopolist is A) bed. B) P3P5fc. C) 0P5fQ1. D) 0P4eQ3. Answer: B Topic: A Monopoly's Economic Profit Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

64) If the market illustrated in the above figure was a perfectly competitive market with the MC curve being the sum of all individual firms' marginal costs, then the perfectly competitive price and quantity would be A) P3 and Q1. B) P5 and Q1. C) P1 and Q1. D) P4 and Q3. Answer: D Topic: Comparing Output and Price Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

65) The deadweight loss incurred when the market in the above figure is a single-price monopoly rather than perfectly competitive is the area A) cab. B) fcd. C) bed. D) fae. Answer: D Topic: Comparing Output and Price; Deadweight Loss Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

66) The single-price monopolist shown in the above figure could increase its economic profit if A) it became a price discriminator. B) its costs of production decreased. C) the demand for its good increased. D) any or all the above were to occur. Answer: D Topic: Price Discrimination Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

67) Which area in the above figure shows the consumer surplus at the price and quantity that would be attained if the industry were perfectly competitive? A) A + B + C + D B) A + B + C + D + E C) F + G + H D) A + B + C + D + E + F + G + H Answer: B Topic: Comparing Output and Price Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

68) Which area in the above figure shows the producer surplus at the price and quantity that would be attained if the industry were perfectly competitive? A) A + B + C + D + E B) C + D + E + F + G + H C) F + G + H D) F + G + H + I + J + K Answer: C Topic: Comparing Output and Price Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

69) Which area in the above figure shows the consumer surplus at the price and quantity that would be set by a single-price monopoly? A) A + B B) A + B + C + D + E C) C + D D) C + D + E + F + G + H Answer: A Topic: Comparing Output and Price Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

70) Which area in the above figure shows the producer surplus at the price and quantity that would be set by a single-price monopoly? A) C + D B) C + D + E C) C + D + F + G D) C + D + F + G + I Answer: C Topic: Redistribution of Surpluses Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

71) In the above figure, if the market was a single-price monopoly rather than perfectly competitive, which area shows the transfer of consumer surplus from consumers to producers? A) A + B B) C + D C) C + D + E D) E + H Answer: B Topic: Redistribution of Surpluses Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

72) In the above figure, which area is the deadweight loss from a single-price monopoly? A) E B) E + H C) E + H + K D) E + H + K + J Answer: B Topic: Deadweight Loss Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

73) In the market depicted in the above figure, if a single-price monopoly maximizes its profit ,which area shows the deadweight loss? A) area FHIL B) area GHJM C) area IJH D) area LJK Answer: D Topic: Deadweight Loss Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

74) In the market depicted in the above figure, if a single-price monopoly maximizes its profit, which area shows the consumer surplus? A) area GHIL B) area HIJ C) area HJKG D) area NFL Answer: B Topic: Redistribution of Surpluses Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

75) The figure shows the demand for and costs of producing Charlene's Chocolates. If Charlene's Chocolates is a monopoly and charges one price to all customers, then the consumer surplus is ________. A) $400 B) $900 C) $0 D) $200 Answer: A Topic: Consumer Surplus Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

76) The figure above shows the demand for and costs of producing Charlene's Chocolates. If Charlene's Chocolates is a monopoly that charges one price to all customers, then consumer surplus is ________ and it creates a deadweight loss of ________. A) $800; $400 B) $200; $100 C) $400; $200 D) $0; $200 Answer: C Topic: Redistribution of Surpluses Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

77) Any attempt to capture a consumer surplus, a producer surplus, or an economic profit is called A) profit-maximizing. B) rent-seeking. C) price discriminating. D) efficiency gain. Answer: B Topic: Rent Seeking Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

78) Efforts by a firm to obtain a monopoly A) are called price discrimination. B) increase consumer surplus. C) are called rent seeking. D) are called price taking. Answer: C Topic: Rent Seeking Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

79) Activity aimed at creating artificial barriers to entry into a particular market A) is rent seeking. B) has no social cost. C) improves competition. D) improves the economy's efficiency. Answer: A Topic: Rent Seeking Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

80) An attempt by a firm to create a monopoly and gain the economic profit from the monopoly is called A) collusion. B) intrusion. C) profit seeking. D) rent seeking. Answer: D Topic: Rent Seeking Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

81) ________ is defined as any attempt to capture consumer surplus, producer surplus or economic profit. A) Search B) Rent seeking C) Maximizing monopoly profits D) Price discrimination Answer: B Topic: Rent Seeking Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

82) When a person lobbies Congress to grant the person the exclusive right to sell a particular good, such lobbying activity is called A) rent seeking. B) revenue abatement. C) profit recovery. D) revenue seeking. Answer: A Topic: Rent Seeking Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

83) Rent seeking is best defined as attempts A) by landlords to get tenants. B) to achieve monopoly power and the resulting economic profit. C) by individuals to avoid paying taxes. D) by owners of a monopoly to sell the firm. Answer: B Topic: Rent Seeking Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

84) Methods of rent seeking include which of the following? I. Buying a monopoly II. Creating a monopoly III. Price discrimination A) I and II B) I and III C) II and III D) III only Answer: A Topic: Rent Seeking Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

85) Rent seeking is devoted to the creation of A) monopolies. B) competitive industries. C) human capital. D) more elastic demand. Answer: A Topic: Rent Seeking Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

86) The attempt to capture consumer surplus, producer surplus, or economic profit is called ________. A) a natural monopoly B) price discrimination C) rent seeking D) gouging Answer: C Topic: Rent Seeking Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

87) Rent seeking A) increases the social cost of monopoly. B) frees scarce resources that could otherwise have been employed in the production of goods and services. C) cannot take the form of lobbying for government imposed import restrictions. D) None of the above answers are correct. Answer: A Topic: Rent Seeking Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

88) Rent seeking A) is an additional social cost of monopoly. B) is only a problem in the commercial real estate market. C) helps employ resources that would otherwise be unemployed. D) is beneficial to society. Answer: A Topic: Rent-Seeking Equilibrium Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

89) Rent seeking through lobbying A) reduces deadweight loss. B) uses up resources. C) results in perfect price discrimination. D) results in perfectly competitive industries. Answer: B Topic: Rent-Seeking Equilibrium Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

90) The maximum amount a rent seeker would pay for a monopoly is the ________. A) market price B) deadweight loss C) monopoly's economic profit D) monopoly's normal profit Answer: C Topic: Rent Seeking Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

91) Rent seeking ________. A) increases consumer surplus B) occurs only when the firm practices perfect price discrimination C) increases deadweight loss D) results in a larger output than a competitive industry would produce Answer: C Topic: Rent Seeking Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

92) With competitive rent seeking under monopoly, A) the monopolist's average total costs will increase so that its average total cost curve is tangent to the demand curve at the profit-maximizing price. B) a monopoly uses all of what would be its economic profit to prevent other firms from taking its economic rent. C) the full deadweight loss of monopoly is larger than in the absence of rent seeking. D) All of the above answers are correct. Answer: D Topic: Rent-Seeking Equilibrium Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

93) Buying a monopoly from the existing owner does not ensure an economic profit because A) the market for monopolies is a monopoly. B) competition among buyers drives up the cost of buying the firm. C) profits equal zero in the long run anyway. D) of the deadweight loss triangle. Answer: B Topic: Rent-Seeking Equilibrium Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

94) The value of resources devoted to rent seeking will A) equal the monopoly's economic profits. B) reduce deadweight loss. C) reduce consumer surplus. D) raise output to an efficient level. Answer: A Topic: Rent-Seeking Equilibrium Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

95) Because of a decrease in labor costs, a monopoly finds that its marginal cost and average total cost have decreased. The monopoly ________ and ________ its quantity. A) raises; increases B) raises; decreases C) lowers; increases D) lowers; decreases Answer: C Topic: Study Guide Question, Single-Price Monopoly's Output & Price Decision Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

96) Compared to a single-price monopoly, the output of a perfectly competitive market with the same costs A) is more than the monopoly's output. B) is the same as the monopoly's output. C) is less than the monopoly's output. D) could be more than, less than, or equal to the monopoly's output. Answer: A Topic: Study Guide Question, Single-Price Monopoly and Competition Compared Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

97) Compared to a single-price monopoly, the price charged by a perfectly competitive market with the same costs A) is higher than the monopoly's price. B) is the same as the monopoly's price. C) is lower than the monopoly's price. D) could be higher than, lower than, or the same as the monopoly's price. Answer: C Topic: Study Guide Question, Single-Price Monopoly and Competition Compared Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

98) If a perfectly competitive market becomes a monopoly and the costs do not change, which of the following allocations of costs and benefits applies? A) The producer benefits, but consumers and society are harmed. B) The producer and society are harmed, but consumers benefit. C) The producer and society benefit, but consumers are harmed. D) The producer is harmed, but consumers and society benefit. Answer: A Topic: Study Guide Question, Redistribution of Surpluses Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

99) Of the following, consumer surplus is largest for A) a perfectly competitive industry. B) a single-price monopoly. C) any price-discriminating monopoly. D) a perfectly price-discriminating monopoly. Answer: A Topic: Study Guide Question, Redistribution of Surpluses Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

4 Price Discrimination 1) Joe, a hair dresser, offers students a discount price on haircuts. This form of pricing is an example of A) a marginal cost pricing rule. B) an average cost pricing rule. C) price discrimination. D) perfect price discrimination. Answer: C Topic: Price Discrimination Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

2) Price discrimination takes place when a firm A) charges the same price for all the units of its product that it sells. B) charges different prices for different units of its product. C) is discriminated against by consumers. D) None of the above answers is correct. Answer: B Topic: Price Discrimination Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

3) Which of the following is NOT necessary for a firm to engage in price discrimination? A) The firm must be able to identify different types of buyers. B) The firm must be able to separate buyers by preventing resales from one customer to another. C) The firm must produce output for different buyers at different costs. D) The firm must sell a product that cannot be resold. Answer: C Topic: Price Discrimination Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

4) A monopoly can price discriminate between two groups of consumers if each group has ________. A) a large consumer surplus B) a different willingness to pay C) the same willingness to pay D) the ability to resell the good to the other group Answer: B Topic: Price Discrimination Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

5) Which of the following is necessary for a monopolist to price discriminate between groups? A) The groups are identifiable. B) The groups have different willingness to pay. C) A customer from one group cannot resell to a customer in another group. D) All of the above conditions are necessary for the monopolist to price discriminate. Answer: D Topic: Price Discrimination Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

6) In order to be able to price discriminate and maximize profit, a monopolist must be able to do all of the following EXCEPT A) identify and separate different buyer types. B) sell a product that cannot be resold. C) identify competitors. D) determine the output where marginal revenue equals marginal cost. Answer: C Topic: Price Discrimination Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

7) What condition must exist for a monopolist to effectively price discriminate? A) The monopolist must face consumers with identical willingness to pay. B) The monopolist must produce a good or service that can be resold. C) The monopolist must produce a good that cannot be resold. D) The monopolist must charge the highest price possible. Answer: C Topic: Price Discrimination Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

8) Price discrimination A) is common in perfectly competitive markets. B) is more likely for services than for goods that can be stored and resold. C) is illegal because it always violates antitrust laws. D) works only if all groups of demanders have the same price elasticity of demand for the product. Answer: B Topic: Price Discrimination Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

9) Price discrimination by a monopolist is less effective if the A) good can be resold. B) good has no substitutes. C) monopolist can identify buyers by willingness to pay. D) good cannot be resold. Answer: A Topic: Price Discrimination Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

10) Price discrimination, where different units of a good are sold for different prices, A) is impossible because there can only be one market price. B) can be effectively practiced by all monopolists. C) maximizes consumer welfare because each consumer pays only the price he or she is willing to pay. D) is possible if the good cannot be resold. Answer: D Topic: Price Discrimination Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

11) It is easier for a monopolist to price discriminate between groups for a service than for a good because A) it is easier to calculate average willingness to pay for services. B) it is easier to distinguish between groups of customers for services than customers for goods. C) it is easier for consumers to resell goods than resell services. D) customers for goods usually do not differ with respect to their average willingness to pay. Answer: C Topic: Price Discrimination Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

12) Price discrimination by a monopoly A) increases consumer surplus. B) decreases consumer surplus. C) increases the firm's profit. D) Both answers B and C are correct. Answer: D Topic: Redistribution of Surpluses Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

13) Price discrimination A) eliminates the producer surplus. B) turns consumer surplus into economic profit. C) decreases output below the profit-maximizing level. D) lowers a monopoly's economic profit. Answer: B Topic: Redistribution of Surpluses Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

14) Price discrimination A) converts consumer surplus into economic profit. B) converts producer surplus into economic profit. C) maximizes the difference between consumer surplus and producer surplus. D) converts deadweight loss into consumer surplus. Answer: A Topic: Redistribution of Surpluses Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

15) A price discriminating monopolist A) produces more output than that produced by a single-price monopolist. B) has a lower marginal cost than that incurred by a single-price monopolist. C) makes a smaller economic profit than that earned by the single-price monopolist. D) makes zero economic profit in the long run. Answer: A Topic: Profiting By Price Discriminating Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

16) Compared to a single-price monopolist, a price-discriminating monopolist A) produces more output. B) produces the same amount of output but charges a higher price. C) generates a larger deadweight loss. D) produces less output but charges a lower price. Answer: A Topic: Profiting By Price Discriminating Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

17) A price discriminating monopolist charges lower prices to customers with A) lower supply elasticities. B) higher supply elasticities. C) lower willingness to pay. D) higher willingness to pay. Answer: C Topic: Profiting By Price Discriminating Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

18) Monopolists are able to price discriminate because A) of differing willingness to pay among consumers. B) of differing price elasticities of supply. C) they have constant marginal cost. D) they have constant average cost. Answer: A Topic: Profiting By Price Discriminating Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

19) Donna owns the only dog grooming salon on Lonely Island. If Donna can price discriminate between dog owners who are seniors and those who are not, her economic profit will be ________ than if she does not price discriminate and the number of dog groomings will be ________ than if she does not price discriminate. A) greater; more B) greater; less C) less; more D) less; less Answer: A Topic: Profiting By Price Discriminating Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

20) The more perfectly a monopoly can price discriminate, the A) smaller its output and the lower its profits. B) smaller its output and the greater its profits. C) larger its output and the lower its profits. D) larger its output and the greater its profits. Answer: D Topic: Profiting By Price Discriminating Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

21) Which of the following occurs with both perfectly price discriminating and single-price monopolies? A) The amount of output is inefficient. B) All consumer surplus goes to the monopoly. C) Deadweight loss is created. D) There is a redistribution of consumer surplus to the monopoly. Answer: D Topic: Redistribution of Surpluses Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

Price (dollars per movie) 18 15 12 9 6 3

Quantity demanded, Quantity demanded, weekend weekday (movies per week) (movies per week 0 0 100 0 200 0 300 100 400 200 500 300

22) Roxie's Movie Theatre has a monopoly and discovers that at $12 a movie, no one is buying movie tickets during weekdays. Roxie's conducts a survey and the table above reveals the results of the survey. Roxie decides to price discriminate between weekend and weekday moviegoers. The marginal cost of a showing a movie is $6. Roxie's charges ________ on weekdays and ________ on weekends. A) $9; $12 B) $6; $15 C) $6; $18 D) $3; $12 Answer: A Topic: Price Discrimination Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

23) If a monopolist can perfectly price discriminate, it will A) charge the same price for each unit sold. B) produce until price elasticity of demand equals one. C) not be concerned with the market demand. D) charge a different price for every unit sold. Answer: D Topic: Perfect Price Discrimination Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

24) A perfect price discriminator A) charges the maximum price for each unit that consumers are willing to pay. B) is able to convince consumers to pay more for each unit than they are willing to pay. C) is unable to make an economic profit. D) disregards the market demand curve. Answer: A Topic: Perfect Price Discrimination Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

25) Which of the following is true for a perfect price-discriminating monopoly? A) P = MR for each unit sold B) P = ATC for each unit sold C) P = MC for each unit sold D) P > MC for each unit sold Answer: A Topic: Perfect Price Discrimination Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

26) If a monopolist can perfectly price discriminate, then A) price equals average cost for each unit sold. B) price equals marginal cost for each unit sold. C) price equals marginal cost for the last unit sold. D) the firm can ignore the marginal cost curve. Answer: C Topic: Perfect Price Discrimination Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

27) For a monopoly able to practice perfect price discrimination, the market A) supply curve is the same as the marginal cost curve. B) supply curve is the same as the marginal revenue curve. C) demand curve is the same as the marginal cost curve. D) demand curve is the same as the marginal revenue curve. Answer: D Topic: Perfect Price Discrimination Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

28) If a monopolist can perfectly price discriminate, then A) it will charge just two different prices in two different markets. B) it will not give a discount to those who buy in bulk. C) the deadweight loss is larger than if it cannot price discriminate. D) there will be no consumer surplus. Answer: D Topic: Perfect Price Discrimination Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

29) When a monopoly perfectly price discriminates, there is ________. A) no producer surplus B) an increase in supply C) no consumer surplus D) a large consumer surplus Answer: C Topic: Perfect Price Discrimination Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

30) Perfect price discrimination A) turns all the producer surplus into consumer surplus. B) turns all the consumer surplus into economic profit. C) creates a deadweight loss. D) cannot result in profit maximization. Answer: B Topic: Perfect Price Discrimination Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

31) Which of the following is true about a perfect price discriminating monopolist? A) There is inefficiency. B) All consumers pay a price equal to marginal cost. C) There is no consumer surplus. D) There is zero economic profit. Answer: C Topic: Perfect Price Discrimination Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

32) Which of the following differs between a perfectly competitive market and a market with a perfectly price discriminating monopoly? A) The amount of producer surplus B) The quantity produced C) The total surplus D) None of the above because they are all the same in a perfectly competitive market and in a market with a perfectly price discriminating monopoly. Answer: A Topic: Perfect Price Discrimination Skill: Conceptual Status: New AACSB: Reflective Thinking

33) A perfect price discriminating monopoly produces the same quantity of output as a ________. A) single-price monopoly but charges a higher price B) perfectly competitive market C) perfectly competitive firm D) perfectly competitive market but charges a lower price Answer: B Topic: Efficiency with Price Discrimination Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

34) In the case of a perfectly price-discriminating monopoly, there is no A) transfer of consumer surplus to the producer. B) deadweight loss. C) producer surplus. D) economic profit. Answer: B Topic: Efficiency with Price Discrimination Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

35) Which of the following statements regarding perfect price discrimination is FALSE? A) Only part of consumer surplus is captured by the firm as producer surplus. B) For the firm, the market demand curve becomes the firm's marginal revenue curve. C) The monopoly produces the output at which the marginal revenue equals the marginal cost. D) No deadweight loss is created. Answer: A Topic: Perfect Price Discrimination Skill: Conceptual Status: New AACSB: Reflective Thinking

36) An efficient use of resources occurs when A) there is a deadweight loss. B) the total social benefit of a good equals its total social cost. C) there is perfect price discrimination by a monopoly. D) there is no producer surplus. Answer: C Topic: Efficiency with Price Discrimination Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

37) Which of the following is true about a perfect price discriminating monopolist? A) Price is greater than marginal revenue. B) Price always exceeds marginal cost. C) The firm makes zero economic profit. D) The firm produces the efficient level of output. Answer: D Topic: Efficiency with Price Discrimination Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

38) Which of the following statements is true? A) Perfectly competitive markets are efficient, but monopoly markets never are efficient. B) Perfectly competitive markets always reach equilibrium but monopoly markets never reach equilibrium. C) Perfect price discriminating monopolists can eliminate all deadweight losses and achieve efficiency. D) All the above statements are true. Answer: C Topic: Efficiency with Price Discrimination Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

39) In the case of a perfectly price-discriminating monopoly, there is no A) transfer of consumer surplus to the producer. B) deadweight loss. C) short-run economic profit. D) long-run economic profit. Answer: B Topic: Efficiency with Price Discrimination Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

40) Which area in the above figure equals the producer surplus under perfect price discrimination? A) A + B + C + D + E + F + G + H + I + J + K + L B) A + B + C + D + E + F + G + H + I + J + K C) A + B + C + D + E + F + G + H D) C + D + E + F + G + H Answer: C Topic: Perfect Price Discrimination Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

41) Which area in the above figure equals the consumer surplus under perfect price discrimination? A) A + B + C + D + E + F + G + H B) A + B + C + D + E C) A + B D) There is no consumer surplus. Answer: D Topic: Perfect Price Discrimination Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

Demand Schedule Facing a Perfectly Price Discriminating Firm Price (dollars) Quantity Sold 8 0 7 1 6 2 5 3 4 4 3 5 2 6 1 7 42) Using the demand schedule in the above table, if the firm's marginal cost is constant at $3.00, output for a perfectly price discriminating monopolist is A) 2 units. B) 3 units. C) 4 units. D) 5 units. Answer: D Topic: Perfect Price Discrimination Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

43) Using the demand schedule in the above table, the marginal revenue for a perfectly price discriminating monopolist from the sale of the third unit of output is A) $3. B) $4. C) $5. D) $6. Answer: C Topic: Perfect Price Discrimination Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

44) Using the demand schedule in the table above, the total revenue a perfectly price discriminating monopolist receives from selling 5 units of output is A) $5. B) $15. C) $18. D) $25. Answer: D Topic: Perfect Price Discrimination Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 99 Copyright © 2014 Pearson Education, Inc.

45) If the monopoly illustrated in the figure above could engage in perfect price discrimination, then each buyer would pay A) $2.00. B) $3.00. C) $3.50. D) a different price. Answer: D Topic: Perfect Price Discrimination Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

46) If the monopoly illustrated in the figure above could engage in perfect price discrimination, then the lowest ticket price would be A) $1.00. B) $2.00. C) $3.00. D) $3.50. Answer: B Topic: Perfect Price Discrimination Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

47) If the monopoly illustrated in the figure above could engage in perfect price discrimination, then it would sell A) 30 tickets. B) 50 tickets. C) 60 tickets. D) 100 tickets. Answer: C Topic: Perfect Price Discrimination Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

48) If the monopoly illustrated in the figure above could engage in perfect price discrimination, then when it maximizes its profit the total revenue collected by the firm would be A) $110. B) $120. C) $210. D) $310. Answer: C Topic: Perfect Price Discrimination Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

49) In the figure above, what is the loss of consumer surplus if the firm is a perfectly price-discriminating monopoly instead of a perfectly competitive industry? A) $0 B) $22.50 C) $45.00 D) $90.00 Answer: D Topic: Perfect Price Discrimination Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

50) If the monopoly illustrated in the figure above could engage in perfect price discrimination, the deadweight loss would be A) $0. B) $22.50. C) $90.00. D) $250.00. Answer: A Topic: Efficiency with Price Discrimination Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

51) In the figure above, the elasticity of demand facing the monopoly equals one when it produces ________ units of output. A) h B) j C) k D) none of the above Answer: C Topic: Price and Marginal Revenue Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

52) In the figure above, a single-price unregulated monopoly sets a price equal to A) a. B) b. C) c. D) d. Answer: B Topic: Single-Price Monopoly's Output and Price Decisions Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

53) In the figure above, a single-price unregulated monopoly will produce an amount of output equal to A) h. B) j. C) k. D) none of the above Answer: A Topic: Single-Price Monopoly's Output and Price Decisions Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

54) In the figure above, if the market is a single-price monopoly rather than a perfectly competitive industry, the transfer of consumer surplus from consumers to the producer is the area of A) trapezoid beic. B) triangle abe. C) rectangle begd. D) rectangle befc. Answer: D Topic: Redistribution of Surpluses Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

55) In the figure above, consumer surplus at the price that maximizes the profit for an unregulated, single-price monopolist is the area of A) rectangle 0heb. B) triangle abe. C) triangle eig. D) rectangle 0hgd. Answer: B Topic: Single-Price Monopoly, Consumer Surplus Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

56) In the figure above, the deadweight loss when the market is a single-price monopoly rather than perfectly competitive is the area of A) triangle aeb. B) triangle aic. C) triangle eig. D) triangle eif. Answer: C Topic: Single-Price Monopoly, Deadweight Loss Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

57) In the figure above, a perfectly price-discriminating monopoly will maximize profit by producing at amount of output equal to A) h. B) j. C) k. D) none of the above Answer: B Topic: Perfect Price Discrimination Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

58) In the figure above, the total revenue of a perfectly price-discriminating monopolist at the profitmaximizing output is equal to the area of A) 0aij. B) 0dgh. C) aci. D) obeij. Answer: A Topic: Perfect Price Discrimination Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

59) Prime Pharmaceuticals has developed a new asthma medicine, for it has a patent. An inhaler can be produced at a constant marginal cost of $2/inhaler. The demand curve, marginal revenue curve, and marginal cost curve for this new asthma inhaler are in the figure above. With its patent giving it a monopoly for its new inhaler, if it is a single-price monopoly, Prime Pharmaceuticals will produce ________ inhalers and set a price of ________ for each inhaler. A) 16 million; $2 B) 10 million; $5 C) 8 million; $6 D) 8 million; $2 Answer: C Topic: Single-Price Monopoly's Output and Price Decisions Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

60) Prime Pharmaceuticals has developed a new asthma medicine, for which is has a patent. An inhaler can be produced at a constant marginal cost of $2/inhaler. The demand curve, marginal revenue curve, and marginal cost curve for this new asthma inhaler are in the figure above. With its patent giving it a monopoly for its new inhaler, if Prime Pharmaceuticals operates as a single-price monopoly, then consumer surplus is ________ and producer surplus is ________. A) zero; $64 million B) $32 million; $32 million C) $16 million; $32 million D) $16 million; $48 million. Answer: C Topic: Redistribution of Surpluses Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

61) Prime Pharmaceuticals has developed a new asthma medicine, for which it has a patent. An inhaler can be produced at a constant marginal cost of $2/inhaler. The demand curve, marginal revenue curve, and marginal cost curve for this new asthma inhaler are in the figure above. With its patent giving it a monopoly for its new inhaler, if Prime Pharmaceuticals operates as a single-price monopoly, then there will be a deadweight loss equal to A) $24 million. B) zero. C) $16 million. D) $32 million. Answer: C Topic: Comparing Output and Price; Deadweight Loss Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

62) Prime Pharmaceuticals has developed a new asthma medicine, for which it has a patent. An inhaler can be produced at a constant marginal cost of $2/inhaler. The demand curve, marginal revenue curve, and marginal cost curve for this new asthma inhaler are in the figure above. With its patent giving it a monopoly for its new inhaler, if Prime Pharmaceuticals could perfectly price discriminate, then which of the following is true? A) It would produce and sell 16 million inhalers. B) Inhalers would sell for $5 each. C) Inhalers would sell for $2 each. D) None of the above answers is correct. Answer: C Topic: Perfect Price Discrimination Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

63) Prime Pharmaceuticals has developed a new asthma medicine, for which it has a patent. An inhaler can be produced at a constant marginal cost of $2/inhaler. The demand curve, marginal revenue curve, and marginal cost curve for this new asthma inhaler are in the figure above. With its patent giving it a monopoly for its new inhaler, if Prime Pharmaceuticals could perfectly price discriminate, then consumer surplus would equal A) $64 million. B) $16 million. C) $32 million. D) zero. Answer: D Topic: Perfect Price Discrimination Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Analytical Skills

64) Prime Pharmaceuticals has developed a new asthma medicine, for which it has a patent. An inhaler can be produced at a constant marginal cost of $2/inhaler. The demand curve, marginal revenue curve, and marginal cost curve for this new asthma inhaler are in the figure above. With its patent giving it a monopoly for its new inhaler, if Prime Pharmaceuticals could perfectly price discriminate, then producer surplus would equal A) $64 million. B) $16 million. C) $32 million. D) zero. Answer: A Topic: Perfect Price Discrimination Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

65) Prime Pharmaceuticals has developed a new asthma medicine, for which it has a patent. An inhaler can be produced at a constant marginal cost of $2/inhaler. The demand curve, marginal revenue curve, and marginal cost curve for this new asthma inhaler are in the figure above. With its patent giving it a monopoly for its new inhaler, if there is competitive rent seeking, then Prime Pharmaceuticals' producer surplus is equal to A) $32 million. B) $48 million. C) zero. D) $64 million. Answer: C Topic: Efficiency and Rent Seeking with Price Discrimination Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

5 Monopoly Regulation 1) According to social interest theory, ________. A) price regulations are unconstitutional B) regulation helps markets achieve efficiency C) monopoly practices last forever D) unregulated firms try to avoid creating deadweight loss Answer: B Topic: Social Interest Theory of Regulation Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

2) The social interest theory of regulation assumes that A) regulations favor voters over producers. B) regulations promote the attainment of competitive output. C) public officials seek to keep their jobs. D) public officials favor consumers over producers. Answer: B Topic: Social Interest Theory of Regulation Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

3) The social interest theory of regulation assumes that A) regulations promote the attainment of efficiency. B) regulations promote the attainment of the maximum economic profit. C) regulators will seek to maximize consumer surplus. D) public officials seek their own gain through regulation. Answer: A Topic: Social Interest Theory of Regulation Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

4) The social interest theory of regulation predicts that the political process will seek to minimize A) producer surplus. B) consumer surplus. C) total surplus. D) deadweight loss. Answer: D Topic: Social Interest Theory of Regulation Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

5) The social interest theory of regulation assumes that A) regulations maximize consumer surplus. B) regulations set price equal to average total revenue. C) public officials seek to minimize deadweight loss. D) public officials seek gain through regulation for only their own constituents. Answer: C Topic: Social Interest Theory of Regulation Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

6) The capture theory holds that regulations are supplied to maximize ________. A) total sales B) economic profit C) marginal product D) consumer surplus Answer: B Topic: Capture Theory Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

7) The capture theory of regulation implies that A) regulations promote the attainment of efficiency. B) regulations promote the attainment of economic profit. C) public officials favor voters over producers. D) the demand for regulation is less elastic than the supply. Answer: B Topic: Capture Theory of Regulation Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

8) The social interest theory of regulation suggests that the political process and regulations will ________ and the capture theory of regulation suggests that the political process and regulations will ________. A) seek to minimize deadweight loss; serve the interests of the producers B) try to maximize the producers' economic profits; seek to minimize deadweight loss C) be unaffected by deadweight loss; increase the firms economic profits D) ignore producers' interests and concentrate on consumers' interests; seek to minimize firms' economic profits Answer: A Topic: Capture Theory of Regulation Skill: Recognition Status: New 10th edition AACSB: Reflective Thinking

9) A natural monopoly occurs when A) one firm owns all the vital resources needed to produce a particular good. B) economies of scale allow one firm to supply the entire market at the lowest possible cost. C) a few firms collude to act as a single firm. D) one firm captures all the consumer surplus. Answer: B Topic: Natural Monopoly Basics Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

10) Today, you might be buying from a regulated natural monopoly when you purchase A) a car, a truck, or a bicycle. B) a computer, a phone, or a camera. C) natural gas or electricity. D) a house, a condominium, or a plot of land. Answer: C Topic: Natural Monopoly Basics Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

11) Customers are most likely buying from a natural monopoly when they purchase A) aspirin from a generic drug company. B) a laptop computer from Sony. C) a glass of water from the local water company. D) all of the above Answer: C Topic: Natural Monopoly Basics Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

12) Which of the following is definitely NOT an example of a natural monopoly? A) local water distribution companies B) urban rail services C) local electric power and gas distribution companies D) urban retail stores Answer: D Topic: Natural Monopoly Basics Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

13) Which of the following is an example of natural monopoly? A) cellular phone companies in a large city B) local water utility companies C) major league sports franchises in the largest cities D) All of the above are natural monopolies. Answer: B Topic: Natural Monopoly Basics Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

14) In Delaware County, Pennsylvania, all homes, businesses, and other organizations purchase their water from one seller, Philadelphia Suburban Water Co. (PSWCo). Economists refer to public utility companies like PSWCo as natural monopolies because their A) marginal cost curves lie everywhere beneath their average fixed cost curves. B) marginal cost curves lie everywhere beneath their demand curves. C) average total cost curves lie everywhere above their demand curves. D) None of the above answers is correct. Answer: D Topic: Natural Monopoly Basics Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

15) If a natural monopoly is broken up into many smaller firms then A) the price will decrease. B) the average total costs of production will increase. C) efficiency will increase. D) None of the above because it is illegal to break up a natural monopoly into smaller firms. Answer: B Topic: Natural Monopoly Basics Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

16) Suppose a firm is a natural monopoly. Then, until the long-run average cost curve crosses the demand curve, as the quantity increases the long-run average costs A) increase. B) decrease. C) decrease and then increase. D) increase and then decrease. Answer: B Topic: Natural Monopoly Basics Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

17) Which of the following will result in the most deadweight loss? A) a natural monopoly regulated with marginal cost pricing B) an unregulated natural monopoly C) a natural monopoly regulated with average cost pricing D) All of the above result in the same deadweight loss. Answer: B Topic: Natural Monopoly, Unregulated Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

18) A marginal cost pricing rule for a natural monopoly sets ________. A) price equal to marginal cost and greater than average total cost B) marginal revenue equal to marginal cost C) marginal revenue equal to average total cost D) price equal to marginal cost Answer: D Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

19) A natural monopoly regulated with a marginal cost pricing rule results in A) an economic loss for the regulated firm. B) an economic profit for the regulated firm. C) a normal profit for the regulated firm. D) a deadweight loss. Answer: A Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

20) A natural monopoly that is regulated to set its price equal to its marginal cost A) incurs an economic loss. B) makes zero economic profit. C) makes an economic profit. D) creates the maximum deadweight loss. Answer: A Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

21) A natural monopoly that is regulated to set its price according to the marginal cost pricing rule will A) incur an economic loss. B) maximize its profit. C) produce a quantity of output such that price is above average total cost. D) produce a quantity of output such that marginal cost is above average total cost. Answer: A Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

22) If the regulator had a natural monopoly set its price equal to its marginal cost, that would ensure A) an economic profit for the firm. B) zero economic profit for the firm. C) an economic loss for the firm. D) an accounting loss for the firms. Answer: C Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

23) What is the drawback of forcing a natural monopolist to use a marginal cost pricing rule? A) No deadweight loss is eliminated. B) The firm will incur an economic loss. C) The gain in consumer surplus will be less than the loss in producer surplus, thus creating additional deadweight loss. D) None of the above answers is correct. Answer: B Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

24) Which of the following statements regarding a marginal-cost pricing rule for a natural monopoly is WRONG? A) It maximizes total surplus in a regulated industry. B) The firm produces the efficient quantity. C) The firm's price equals its marginal cost. D) The firm earns an economic profit. Answer: D Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

25) The Public Service Company of Colorado is a natural monopoly in the transmission and distribution of electric power. As such, it will incur an economic loss if it A) goes out of business. B) prices its services at average total cost. C) prices its services at marginal cost. D) all of the above Answer: C Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

26) Under a marginal cost pricing rule, a regulated natural monopoly A) makes a positive economic profit and there is a deadweight loss. B) makes zero economic profit and there is no deadweight loss. C) incurs an economic loss and there is a deadweight loss. D) incurs an economic loss and there is no deadweight loss. Answer: D Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

27) In a regulated natural monopoly, a marginal cost pricing rule maximizes A) total costs. B) producer surplus. C) economic profit. D) total surplus. Answer: D Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

28) If the regulator wanted to maximize the total surplus in a natural monopoly market, the regulator has the firm set its price equal to its A) average fixed cost. B) average total cost. C) average variable cost. D) marginal cost. Answer: D Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

29) Regulation of a natural monopoly will maximize the sum of consumer surplus and producer surplus if the firm is regulated with A) an average cost pricing rule. B) a marginal cost pricing rule. C) rate of return regulation. D) All of the above answers are correct. Answer: B Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

30) If an industry is a natural monopoly and regulators decide that the firm must price at marginal cost, then consumers will be ________ off than if the firm was unregulated and the firm's owners will be ________ off than if it was unregulated. A) better; better B) better; worse C) worse; better D) worse; worse Answer: B Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

31) For a natural monopoly, if price is equal to marginal cost, then A) the deadweight loss is as large as possible. B) the firm makes zero economic profit. C) there is no deadweight loss. D) there is no deadweight loss and the firm makes a positive economic profit. Answer: C Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

32) There is no deadweight loss if the regulatory rule for a natural monopoly A) is an average cost pricing rule. B) sets price at a level that enables the regulated firm to earn a specified rate of return on its capital. C) is a marginal cost pricing rule. D) prevents the firm from engaging in any form of price discrimination. Answer: C Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

33) If the regulator wants to avoid any deadweight loss in a natural monopoly market, the regulator has the firm set its price equal to its A) average fixed cost. B) average total cost. C) average variable cost. D) marginal cost. Answer: D Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

34) A natural monopoly that charges the profit-maximizing price will produce ________ amount of output than a ________. A) a larger; natural monopoly regulated with an average cost pricing rule B) a more efficient; perfectly competitive industry C) the same; natural monopoly regulated with a marginal cost pricing rule D) a smaller; natural monopoly regulated with a marginal cost pricing rule Answer: D Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

35) If regulators of the local gas and water utility companies require those firms to price their service at marginal cost, A) there would be a deadweight loss in their markets. B) the firms might require a tax-financed subsidy to survive. C) their customers would enjoy no consumer surplus. D) None of the above answers are correct. Answer: B Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

36) The use of a two-part price in a regulated natural monopoly A) maximizes the deadweight loss. B) allows the firm to maximize profits. C) may make it possible for the firm to obey a marginal cost pricing rule and not go out of business. D) All of the above answers are correct. Answer: C Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

37) Gene's Car Wash is a natural monopoly. To wash 100 cars a week, if Gene is unregulated, he would charge a price of $10. Gene's long-run average cost for washing 100 cars is $8, his average variable cost is $6, and his marginal cost is $4. If Gene was regulated using a marginal cost pricing rule, the price he would be allowed to charge to wash 100 cars is A) $10. B) $8. C) $6. D) $4. Answer: D Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

38) Mountain Water is a natural monopoly. The government decides to regulate Mountain Water by imposing a marginal cost pricing rule. The figure above shows the demand for Mountain Water. Marginal cost is $0.20 per bottle. The price of a bottle of Mountain Water is ________, and ________ thousand bottles are sold per month. A) $0.20; 400 B) $0.50; 250 C) $0.20; 500 D) $1.00; 500 Answer: A Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

39) The figure above shows the marginal revenue, marginal cost, and demand curves for an airline offering daily flights between Los Angeles and Toronto. If the airline is regulated using a marginal cost pricing rule ________ flights will be offered each month at a price of ________ per flight. A) 200; $300 B) 200; $100 C) 300; $200 D) 400; $100 Answer: D Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

40) The figure above shows the marginal revenue, marginal cost, and demand curves for an airline offering daily flights between Los Angeles and Toronto. If the airline is regulated using a marginal cost pricing rule total surplus will be ________. A) $100,000 B) $60,000 C) $80,000 D) $20,000 Answer: C Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

41) For a regulated natural monopoly, an average cost pricing rule sets price equal to A) average fixed cost. B) average total cost. C) average external cost. D) average variable cost. Answer: B Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

42) When an average total cost pricing rule is enforced, average total cost equals ________. A) marginal revenue B) total revenue C) price D) average total cost Answer: C Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

43) When an average cost pricing rule is imposed on a natural monopoly, ________. A) total surplus is maximized and the monopoly incurs an economic loss B) the monopoly makes zero economic profit C) the monopoly makes an economic profit D) total surplus is maximized and the monopoly makes an economic profit Answer: B Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

44) If a natural monopoly has an average cost pricing rule imposed, the rule will A) maximize total surplus in the regulated industry. B) generate an economic loss for the regulated firm. C) reduce the consumer surplus and generate a deadweight loss when compared to a marginal cost pricing rule. D) set price below marginal cost. Answer: C Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

45) An average cost pricing rule for a natural monopoly sets the price ________ the marginal cost, thereby ________ a deadweight loss. A) below; avoiding B) below; creating C) above; avoiding D) above; creating Answer: D Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

46) Under an average cost pricing rule, a regulated natural monopoly ________ and there is ________. A) makes an economic profit; a deadweight loss B) makes zero economic profit; no deadweight loss C) makes zero economic profit; a deadweight loss. D) incurs an economic loss; no deadweight loss Answer: C Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

47) Which of the following statements regarding an average-cost pricing rule for a natural monopoly is WRONG? A) It sets price equal to average total cost. B) It is efficient. C) The firm makes zero economic profit. D) More output is produced than if the firm maximized profit. Answer: B Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

48) A natural monopoly regulated with an average cost pricing rule is ________. A) efficient and incurs an economic loss B) inefficient and makes zero economic profit C) inefficient and makes an economic profit D) efficient and makes zero economic profit Answer: B Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

49) There is a deadweight loss if a natural monopoly is regulated to use A) marginal cost pricing and if it is regulated to use average cost pricing. B) average cost pricing and if it is allowed to be unregulated and maximize its profit. C) marginal cost pricing and if it is allowed to be unregulated and maximize its profit. D) None of the above answers is correct. Answer: B Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

50) A regulated monopoly facing average cost pricing rule will make the same profit as a firm in ________ market does in the long run. A) an unregulated monopoly B) an oligopoly C) a perfectly competitive D) All of the above answers are correct. Answer: C Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

51) Natural gas is a natural monopoly. The figure above shows the market for natural gas in the city of Lucknow. When a marginal cost pricing rule regulation is imposed, the price per household per month is ________. A) $30 and 20,000 household are served B) $10 and 40,000 household are served C) $10 and 20,000 household are served D) $20 and 30,000 households are served Answer: B Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

52) Natural gas is a natural monopoly. The figure shows the market for natural gas in the city of Lucknow. When an average cost price rule regulation is imposed, the price per household per month is ________. A) $30 and 20,000 household are served B) $10 and 40,000 household are served C) $25 and 20,000 household are served D) $20 and 30,000 households are served Answer: D Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

53) Natural gas is a natural monopoly. The figure above shows the market for natural gas in the city of Lucknow. When an average cost price rule regulation is imposed, the price per household per month is ________. A) $20 and 30,000 households are served B) $40 and 40,000 households are served C) $40 and 30,000 households are served D) $60 and 20,000 households are served Answer: C Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

54) We know that the firm shown in the figure above is a natural monopoly because as output increases, the A) marginal cost is constant. B) demand curve slopes downward. C) marginal revenue curve lies below its demand curve. D) average total cost decreases so that the firm can supply the market at lower cost than two firms. Answer: D Topic: Natural Monopoly Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

55) If the natural monopoly shown in the figure above is unregulated, then it will charge a price of A) $2. B) $4. C) $5. D) $6. Answer: D Topic: Natural Monopoly, Unregulated Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

56) If the natural monopoly shown in the figure above is unregulated, it will sell A) 2 million units. B) 3 million units. C) 4 million units. D) 5 million units. Answer: A Topic: Natural Monopoly, Unregulated Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

57) If the natural monopoly shown in the figure above is unregulated, it will make an economic profit of A) $2 million. B) $4 million. C) $9 million. D) $0, that is, it earns a normal profit. Answer: A Topic: Natural Monopoly, Unregulated Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

58) If the natural monopoly shown in the figure above is unregulated, then consumer surplus will be A) $0. B) $4 million. C) $8 million. D) $16 million. Answer: B Topic: Natural Monopoly, Unregulated Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

59) If the natural monopoly shown in the figure above is unregulated, then the deadweight loss will be A) $0. B) $2 million. C) $4 million. D) $8 million. Answer: C Topic: Natural Monopoly, Unregulated Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

60) If a marginal cost pricing rule is imposed on the natural monopoly in the figure above, then the price will be A) $2. B) $4. C) $5. D) $6. Answer: A Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

61) If a marginal cost pricing rule is imposed on the natural monopoly shown in the figure above, then it will produce A) 2 million units. B) 3 million units. C) 4 million units. D) 5 million units. Answer: C Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

62) If a marginal cost pricing rule is imposed on the natural monopoly in the figure above, then the firm will A) incur an economic loss. B) make zero economic profit, that is, its owners make a normal profit. C) make an economic profit of $4 million. D) make an economic profit of $16 million. Answer: A Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

63) If a marginal cost pricing rule is imposed on the natural monopoly in the figure above, then the consumer surplus will be A) $0. B) $8 million. C) $16 million. D) $32 million. Answer: C Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

64) If a marginal cost pricing rule is imposed on the natural monopoly in the figure above, then total surplus will be A) $0. B) $4 million. C) $8 million. D) $16 million. Answer: D Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

65) If a marginal cost pricing rule is imposed on the natural monopoly shown in the figure above, then the deadweight loss will equal A) $0. B) $4 million. C) $8 million. D) $12 million. Answer: A Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

66) An efficient allocation of resources is reached in the figure above when output equals A) 1 million. B) 2 million. C) 3 million. D) 4 million. Answer: D Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

67) If an average cost pricing rule is imposed on the natural monopoly shown in the figure above, then the price will be A) $2. B) $4. C) $5. D) $6. Answer: B Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

68) If an average cost pricing rule is imposed on the natural monopoly shown in the figure above, then it will produce A) 2 million units. B) 3 million units. C) 4 million units. D) 5 million units. Answer: B Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

69) If an average cost pricing rule is imposed on the natural monopoly shown in the figure above, then consumer surplus will be A) $0. B) $8 million. C) $9 million. D) $16 million. Answer: C Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

70) If an average cost pricing rule is imposed on the natural monopoly in the figure above, then the firm will A) incur an economic loss. B) make zero economic profit, that is, its owners make a normal profit. C) make an economic profit of $4 million. D) make an economic profit of $9 million. Answer: B Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

71) If an average cost pricing rule is imposed on the natural monopoly shown in the figure above, then the firm's economic profit will be A) $9 million. B) $12 million. C) $0, that is, the firm's owners make only a normal profit. D) negative, that is, the firm incurs an economic loss. Answer: C Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

72) If an average cost pricing rule is imposed on the natural monopoly in the figure above, then the deadweight loss will be A) $0. B) $1 million. C) $9 million. D) $16 million. Answer: B Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

73) The figure above provides information about Light-U-Up Utilities, which is a natural monopoly that provides electricity. If Light-U-Up is unregulated, it will produce ________ and sell at a price of ________. A) 200 kwh; 10¢ per kwh B) 200 kwh; 30¢ per kwh C) 300 kwh; 20¢ per kwh D) 400 kwh; 10¢ per kwh Answer: B Topic: Natural Monopoly, Unregulated Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Analytical Skills

74) The figure above provides information about Light-U-Up Utilities, which is a natural monopoly that provides electricity. At the unregulated price and quantity, Light-U-Up's economic profit is equal to A) -$10. B) $10. C) $40. D) $60. Answer: B Topic: Natural Monopoly, Unregulated Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

75) The figure above provides information about Light-U-Up Utilities, which is a natural monopoly that provides electricity. What is the area of deadweight loss when Light-U-Up produces the unregulated, profit-maximizing level of output? A) abd B) acg C) deg D) There is no deadweight loss. Answer: B Topic: Natural Monopoly, Unregulated Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

76) The figure above provides information about Light-U-Up Utilities, which is a natural monopoly that provides electricity. If Light-U-Up is regulated and must follow a marginal cost pricing rule, it will produce ________ and sell at a price of ________. A) 200 kwh; 10¢ per kwh B) 300 kwh; 20¢ per kwh C) 300 kwh; 10¢ per kwh D) 400 kwh; 10¢ per kwh Answer: D Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

77) The figure above provides information about Light-U-Up Utilities, which is a natural monopoly that provides electricity. If Light-U-Up is regulated, what is its economic profit if it must follow a marginal cost pricing rule? A) -$40 B) -$20 C) $0 D) $30 Answer: B Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 130 Copyright © 2014 Pearson Education, Inc.

78) The figure above provides information about Light-U-Up Utilities, which is a natural monopoly that provides electricity. What is the area of deadweight loss when Light-U-Up is regulated and follows a marginal cost pricing rule? A) abd B) acg C) deg D) There is no deadweight loss. Answer: D Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

79) The figure above provides information about Light-U-Up Utilities, which is a natural monopoly that provides electricity. If Light-U-Up is regulated and must follow an average cost pricing rule, it will produce ________ and sell at a price of ________. A) 200 kwh; 30¢ per kwh B) 200 kwh; 25¢ per kwh C) 300 kwh; 20¢ per kwh D) 400 kwh; 15¢ per kwh Answer: C Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

80) The figure above provides information about Light-U-Up Utilities, which is a natural monopoly that provides electricity. If Light-U-Up is regulated, what is its economic profit if it must follow an average cost pricing rule? A) -$60 B) -$20 C) $0 D) $30 Answer: C Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

81) The figure above provides information about Light-U-Up Utilities, which is a natural monopoly that provides electricity. What is the area of deadweight loss when Light-U-Up is regulated and follows an average cost pricing rule? A) acg B) degf C) deg D) There is no deadweight loss. Answer: C Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

82) In the above figure, if the natural monopoly is not regulated it will produce A) 12 million units at a price of $18 per unit. B) 8 million units at a price of $12 per unit. C) 8 million units at a price of $21 per unit. D) 8 million units at a price of $24 per unit. Answer: D Topic: Natural Monopoly, Unregulated Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

83) In the above figure, if the natural monopoly is not regulated then consumer surplus is A) $48 million. B) $60 million. C) $108 million. D) $192 million. Answer: A Topic: Natural Monopoly, Unregulated Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

84) In the above figure, if this natural monopoly is not regulated the deadweight loss to society is A) ecf. B) ebc. C) gac. D) gde. Answer: C Topic: Natural Monopoly, Unregulated Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

85) In the above figure, if the natural monopoly is regulated using a marginal cost pricing rule, then the firm will A) produce 8 million units and make an economic profit of $24 million. B) produce 12 million units and make zero economic profit. C) produce 16 million units and incur an economic loss of $64 million. D) produce 16 million units and make zero economic profit. Answer: C Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

86) In the above figure, if the natural monopoly is regulated with a marginal cost pricing rule, then the deadweight loss to society is A) zero. B) ecf. C) gde. D) efcb. Answer: A Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

87) In the above figure, if the natural monopoly is regulated and a marginal cost pricing rule is followed, then the consumer surplus will be A) $192 million. B) $108 million. C) $60 million. D) $48 million. Answer: A Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

88) In the above figure, if the natural monopoly is regulated with an average cost pricing rule and the firm does not inflate its costs, then the firm will produce A) 8 million units and set a price of $21 per unit. B) 12 million units and set a price of $18 per unit. C) 16 million units and set a price of $16 per unit. D) nothing unless the government provides subsidies to cover its losses. Answer: B Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

89) In the above figure, if the natural monopoly is regulated with an average cost pricing rule and the firm does not inflate its costs, the deadweight loss to society is A) zero. B) efc. C) ebc. D) gac. Answer: C Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

90) In the above figure, if the natural monopoly is regulated with an average cost pricing rule and the firm does not inflate its costs, then consumer surplus will be A) $192 million. B) $108 million. C) $216 million. D) $60 million. Answer: B Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

91) In the above figure, if the natural monopoly is regulated using an average cost pricing rule, but the firm can pad its costs and make the regulator believe its costs are ATC (inflated), then the price the firm charges will increase from A) $18 to $24. B) $12 to $24. C) $12 to $18. D) $18 to $36. Answer: A Topic: Inflated Costs Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

92) The figure above shows the costs and demand curves for the Bigshow Cable Company. Bigshow Cable Company incurs an economic loss if the regulator set its price at A) $8. B) $6. C) $4. D) None of the above prices force Bigshow to incur an economic loss. Answer: C Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Analytical Skills

93) The figure above shows the costs and demand curves for the Bigshow Cable Company. To avoid any deadweight loss in the market served by Bigshow, the regulator must set the price at A) $8. B) $6. C) $4. D) $2. Answer: C Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Analytical Skills

94) The figure above shows the costs and demand curves for the Bigshow Cable Company. If the regulator wants to set the price so that Bigshow earns the same normal profit as a perfectly competitive firm, what price should be set? A) $8 B) $6 C) $4 D) $2 Answer: B Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Analytical Skills

95) The figure above shows the costs and demand curves for the Bigshow Cable Company. If the regulator of Bigshow Cable Company set its price at $4, the company would A) receive a producer surplus equal to $18 million. B) make zero economic profit. C) incur an economic loss of $7 million. D) none of the above Answer: B Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

96) The figure above shows the costs and demand curves for the Bigshow Cable Company. If the firm is required to set its price according to an average cost pricing rule, the price is ________ and the quantity produced is ________ million. A) $8; 1 B) $6; 1 C) $6; 2 D) $4; 3 Answer: D Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

97) Consider the market for cable television in the figure above. This graph depicts a natural monopoly because the A) marginal cost curve is constant. B) demand curve is downward sloping. C) average cost curve is declining as it crosses the demand curve. D) marginal revenue curve is downward sloping. Answer: C Topic: Natural Monopoly Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Analytical Skills

98) Consider the market for cable television, a natural monopoly, shown in the figure above. If the regulator imposes a marginal cost pricing rule, the firm provides service to A) 3.5 million households. B) 6 million households. C) 10.5 million households. D) 12.5 million households. Answer: D Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

99) Consider the market for cable television, a natural monopoly, shown in the figure above. If the regulator imposes an average cost pricing rule, the firm provides service to A) 3.5 million households. B) 6 million households. C) 10.5 million households. D) 12.5 million households. Answer: C Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

100) Consider the market for cable television, a natural monopoly, shown in the figure above. If the regulator imposes an average cost pricing rule, deadweight loss is equal to A) $5 million. B) $0 million. C) more than $10 million and less than $20 million.. D) $20 million or more. Answer: A Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

101) The figure above shows the demand curve (D) faced by Visual, Inc., a cable TV company, and the firm's marginal revenue (MR), marginal cost (MC), and average cost (LRAC) curves. If Visual is regulated according to the social interest theory, it will serve ________ million households and set a price of ________ per household per month. A) 2; $12 B) 3; $24 C) 4; $12 D) 2; $36 Answer: C Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

102) The figure above shows the demand curve (D) faced by Visual, Inc., a cable TV company, and the firm's marginal revenue (MR), marginal cost (MC), and average cost (LRAC) curves. If Visual is regulated according to an average cost pricing rule, it will serve ________ million households and set a price of ________ per household per month. A) 1; $48 B) 4; $12 C) 2; $36 D) 3; $24 Answer: D Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

103) The figure above shows the demand curve (D) faced by Visual, Inc., a cable TV company, and the firm's marginal revenue (MR), marginal cost (MC), and average cost (LRAC) curves. If Visual is regulated according to an average cost pricing rule, there will be A) a deadweight loss of $6 million per month. B) a deadweight loss of $24 million per month. C) a deadweight loss of $12 million per month. D) no deadweight loss. Answer: A Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

104) The figure above shows the demand curve (D) faced by Visual, Inc., a cable TV company, and the firm's marginal revenue (MR), marginal cost (MC), and average cost (LRAC) curves. If Visual is regulated using rate of return regulation, and the regulator knows the firm's costs curves, the company will serve ________ million households and set a price of ________ per household per month. A) 2.5; $30 B) 3; $24 C) 4; $12 D) 2; $36 Answer: B Topic: Rate of Return Regulation Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

105) The figure above shows the demand curve (D) faced by Visual, Inc., a cable TV company, and the firm's marginal revenue (MR), marginal cost (MC), and average cost (LRAC) curves. Suppose Visual is regulated according to a price cap rule, with the price cap set at $24 per household per month. The firm will maximize its profit if it serves ________ million households. A) 2 B) 2.5 C) 3 D) 3.5 Answer: C Topic: Price Cap Regulation Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

106) The firm shown in the figure above is A) a natural monopoly. B) a monopoly, but not a natural monopoly. C) perfectly competitive. D) naturally competitive. Answer: A Topic: Natural Monopoly Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Analytical Skills

107) The firm shown in the figure above is A) a natural monopoly because its LRAC curve slopes downward where it intersects the demand curve. B) not a natural monopoly because its LRAC curve slopes downward where it intersects the demand curve. C) not a natural monopoly because its MC curve is horizontal. D) not a natural monopoly because its MC curve is below its LRAC curve. Answer: A Topic: Natural Monopoly Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Analytical Skills

108) If the firm in the figure above is unregulated, it will charge a price of A) $5 per unit. B) $25 per unit. C) $40 per unit. D) $20 per unit. Answer: B Topic: Natural Monopoly, Unregulated Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

109) If the firm in the figure above is unregulated, it will produce A) 5 units. B) 20 units. C) 30 units. D) 40 units. Answer: B Topic: Natural Monopoly, Unregulated Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

110) If the firm in the figure above is unregulated, it will make an economic profit of A) zero. B) -$240. C) $100. D) $400. Answer: C Topic: Natural Monopoly, Unregulated Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

111) If the firm in the figure above is unregulated, the consumer surplus will be A) zero. B) $100. C) $400. D) $200. Answer: D Topic: Natural Monopoly, Unregulated Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

112) If the firm in the figure above is unregulated, the deadweight loss will be A) zero. B) $100. C) $200. D) $400. Answer: C Topic: Natural Monopoly, Unregulated Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

113) If a marginal cost pricing rule is imposed on the firm in the figure above, the price will be A) $5 per unit. B) $25 per unit. C) $40 per unit. D) $20 per unit. Answer: A Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

114) If a marginal cost pricing rule is imposed on the firm in the figure above, the firm will produce A) 5 units. B) 20 units. C) 30 units. D) 40 units. Answer: D Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

115) If a marginal cost pricing rule is imposed on the firm in the figure above, the consumer surplus will be A) zero. B) $800. C) $400. D) $200. Answer: B Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

116) If a marginal cost pricing rule is imposed on the firm in the figure above, the total surplus will be A) zero. B) $800. C) $400. D) $200. Answer: B Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

117) If a marginal cost pricing rule is imposed on the firm in the figure above, the deadweight loss will be A) zero. B) $100. C) $200. D) $50. Answer: A Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

118) If an average cost pricing rule is imposed on the firm in the figure above, the price will be A) $5 per unit. B) $25 per unit. C) $15 per unit. D) $20 per unit. Answer: C Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

119) If an average cost pricing rule is imposed on the firm in the figure above, the firm will produce A) 5 units. B) 20 units. C) 30 units. D) 40 units. Answer: C Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

120) If an average cost pricing rule is imposed on the firm in the figure above, the firm will make an economic profit of A) zero. B) -$240. C) $150. D) $400. Answer: A Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

121) If an average cost pricing rule is imposed on the firm in the figure above, the consumer surplus will be A) zero. B) $450. C) $400. D) $200. Answer: B Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

122) If an average cost pricing rule is imposed on the firm in the figure above, the deadweight loss will be A) zero. B) $150. C) $50. D) $250. Answer: C Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

123) When a firm is regulated so that its price enables it to earn a specified target percent return on its capital, the regulation is called A) rate of return regulation. B) price cap regulation. C) earnings limited regulation. D) target pricing regulation. Answer: A Topic: Rate of Regulation Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

124) Rate of return regulation sets the price at a level that enables the regulated firm to earn a specified target percent return on its A) total cost. B) sales revenue. C) capital. D) variable cost. Answer: C Topic: Rate of Regulation Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

125) Rate of return regulation is typically imposed on A) monopolistically competitive firms. B) an oligopoly. C) a natural monopoly. D) perfectly competitive firms. Answer: C Topic: Rate of Regulation Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

126) Rate of return regulation is equivalent to A) average cost pricing rule. B) marginal cost pricing rule. C) maximizing consumer surplus. D) maximizing producer surplus. Answer: A Topic: Rate of Regulation Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

127) Rate of return regulation is most similar to A) a marginal cost pricing rule. B) an average cost pricing rule. C) an average variable cost pricing rule. D) an inflation cost pricing rule. Answer: B Topic: Rate of Return Regulation Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

128) Under rate of return regulation, a regulated firm has an incentive to A) use an efficient amount of capital. B) set its price equal to its marginal cost. C) hide losses from bad debts. D) inflate its costs. Answer: D Topic: Rate of Regulation Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

129) Rate of return regulation, as currently applied to many natural monopolies such as public utilities, A) generally involves the use of price caps. B) gives the firms an incentive to inflate their costs. C) gives the firms an incentive to cut their costs as much as possible. D) generally keeps their prices higher than if they were unregulated monopolists. Answer: B Topic: Rate of Return Regulation Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

130) Which of the following types of economic regulation is most likely to encourage firms to inflate their costs? A) price cap regulation B) rate of return regulation C) cartel regulation D) earnings sharing and price cap regulation Answer: B Topic: Rate of Return Regulation Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

131) Under rate of return regulation, a natural monopoly ________. A) has an incentive to inflate its costs B) has an incentive to deflate its costs and capture more of the market C) makes an economic profit D) sets price equal to marginal cost Answer: A Topic: Rate of Return Regulation Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

132) A rule that specifies the highest price that a regulated firm is permitted to set is called A) rate of return regulation. B) price cap regulation. C) maximum price regulation. D) average/marginal cost pricing. Answer: B Topic: Price Cap Regulation Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

133) A price cap regulation ________. A) is illegal B) is a price floor C) is a price ceiling D) encourages a firm to operate inefficiently Answer: C Topic: Price Cap Regulation Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

134) Price cap regulation is a type of regulation that A) offers price subsidies to firms that comply with regulation guidelines. B) is equivalent to rate of return. C) sets the maximum price the firm can charge. D) sets the minimum price the firm can charge. Answer: C Topic: Price Cap Regulation Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

135) Price cap regulation is a A) price ceiling. B) price floor. C) form of marginal cost regulation. D) type of rate of return regulation. Answer: A Topic: Price Cap Regulation Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

136) Under a price cap regulation, the regulated industry has an incentive to A) operate efficiently and not inflate its costs. B) inflate costs. C) decrease its output. D) None of the above answers is correct. Answer: A Topic: Price Cap Regulation Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

137) Which of the following types of economic regulation is most likely to encourage a natural monopoly to NOT inflate its costs? A) average cost pricing rule B) rate of return regulation C) price cap regulation D) None of the above encourages cost cutting. Answer: C Topic: Price Cap Regulation Skill: Conceptual Status: New 10th edition AACSB: Reflective Thinking

138) Compared to the profit-maximizing equilibrium of a natural monopoly, a price cap regulation ________ price and ________ output. A) raises; decreases B) lowers; increases C) raises; increases D) lowers; decreases Answer: B Topic: Price Cap Regulation Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

139) Regulation that specifies that a firm's profits must be shared with its customers if the profit rises above a target level is called A) rate of return regulation. B) minimum price regulation. C) earnings sharing regulation. D) average cost pricing. Answer: C Topic: Earnings Sharing Regulation Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

140) If a natural monopoly is allowed to set its price above its average total cost, then A) the company makes an economic profit. B) the company incurs an economic loss. C) competitors will enter the market. D) the company will produce more than the efficient amount of output. Answer: A Topic: Study Guide Question, Natural Monopoly Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

141) If a natural monopoly does not inflate its costs, the output it produces is the smallest when the monopoly is A) left unregulated. B) regulated according to an average cost pricing rule. C) regulated according to a marginal cost pricing rule. D) regulated to maximize total surplus. Answer: A Topic: Study Guide Question, Natural Monopoly Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

142) A natural monopoly under rate of return regulation has an incentive to A) pad its costs. B) produce more than the efficient quantity of output. C) charge a price equal to marginal cost. D) maximize consumer surplus. Answer: A Topic: Study Guide Question, Rate of Return Regulation Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

6 News Based Questions 1) The iconic American drink-maker, Coca-Cola, announced plans in 2008 to buy the dominant Chinese fruit juice company for $2.5 billion. But China just rolled out a new law to guard against business monopolies. How would this rent-seeking behavior by Coca-Cola most likely affect efficiency in the drink market? A) Profit would increase. B) Producer surplus would increase. C) Consumer surplus would decrease. D) Deadweight loss would increase. Answer: D Topic: Single-Price Monopoly, Deadweight Loss Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 151 Copyright © 2014 Pearson Education, Inc.

2) The United States Mint is the only legal entity to produce circulating coinage for the United States. Michael Jackson's estate owns the copyrights to many of the Beatles songs. Xcel Energy is a public utility company who is the sole provider of electricity and natural gas in some states such as Colorado, New Mexico and Minnesota. Which of these entities, if any, is a natural monopoly? A) United States Mint B) Xcel Energy C) Michael Jackson's estate D) None of these are natural monopolies. Answer: B Topic: Natural Monopoly Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

3) The United States Mint is the only legal entity to produce circulating coinage for the United States. What are the barriers to entry, if any, that protect this firm from competition? A) The United States Mint is a natural monopoly. B) The United States Mint has a government license to produce coinage. C) The United States Mint is a public franchise to produce coinage. D) The United States Mint has a patent or copyright to produce coinage. Answer: C Topic: Legal Barriers to Entry Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

4) In July 2008, the Federal Communications Commission approved the merger of satellite radio providers XM Satellite and Sirius Satellite Radio, establishing a single satellite radio company in America. Under the terms of the deal, the companies agreed not to raise prices for the next three years. Why would the FTC require prices not to increase for three years? A) Compared to competition, monopolies are always worse for consumers. B) Compared to competition, monopolies restrict output and charge higher prices. C) Compared to competition, monopolies increase prices and output. D) Compared to competition, monopolies restrict output and charge lower prices. Answer: B Topic: Single-Price Monopoly and Competition Compared Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

5) In July 2008, the Federal Communications Commission approved the merger of satellite radio providers XM Satellite and Sirius Satellite Radio, establishing a single satellite radio company in America. The deal is tough for many to swallow. "We continue to believe that consumers are best served by competition rather than monopolies," said National Association of Broadcasters Vice President Dennis Wharton. What does Wharton argue? A) Producer surplus is greater with competition. B) Total surplus is greater with a monopoly. C) Consumer surplus is greater with competition. D) Prices are lower with a monopoly. Answer: C Topic: Single-Price Monopoly, Consumer Surplus Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

6) In July 2008, the Federal Communications Commission approved the merger of satellite radio providers XM Satellite and Sirius Satellite Radio, establishing a single satellite radio company in America. If the new company was a natural monopoly, which of the following would be a regulation to ensure an efficient quantity of satellite radio service? A) Application of the average cost pricing rule B) Government subsidization C) Government taxation D) Application of the marginal cost pricing rule Answer: D Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

7) In July 2008, the Federal Communications Commission approved the merger of satellite radio providers XM Satellite and Sirius Satellite Radio, establishing a single satellite radio company in America. What do you predict will happen to efficiency in the market for satellite radio? A) Deadweight loss will increase when an industry moves from competition to monopoly. B) Consumer surplus will increase when an industry moves from competition to monopoly. C) Producer surplus will decrease when an industry moves from competition to monopoly. D) Total surplus will increase when an industry moves from competition to monopoly. Answer: A Topic: Single-Price Monopoly, Deadweight Loss Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

8) Before summer 2008, if you wanted a cell phone in Bhutan, you only had one choice: B-Mobile, owned and operated by the government. What does Kuenga Gyalthen mean he states that, "Up until now, because of the monopoly, we've all been suffering. So, I mean, it's finally time the consumer actually is king for a little while."? A) He believes that producer surplus is greater with competition. B) He believes that total surplus is greater with a monopoly. C) He believes that prices are lower with a monopoly. D) He believes that consumer surplus is greater with competition. Answer: D Topic: Single-Price Monopoly, Consumer Surplus Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

9) Before summer 2008, if you wanted a cell phone in Bhutan, you only had one choice: B-Mobile, owned and operated by the government. Then, this past spring, a privately owned competitor, Tashi, was let in. What do you predict will happen to equilibrium price and quantity in the cell phone market? A) Price will decrease and quantity will increase. B) Price will increase and quantity will decrease. C) Both price and quantity will increase. D) Both price and quantity will decrease. Answer: A Topic: Single-Price Monopoly and Competition Compared Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

10) While smoking is on the decline in the United States, China is still puffing away madly. That's not because the government is eager to protect its citizens from the hazards of smoking. It's because China is eager to protect its own tobacco industry which is a state monopoly. Why did China announce in 2009 that it won't allow foreign companies to build new cigarette factories or enter joint ventures? A) Because China is concerned about the negative effects of smoking B) Because China wants to protect the economic profits its state monopoly makes C) Because China wants to protect jobs D) Because China regulates the tobacco industry Answer: B Topic: Single-Price Monopoly and Competition Compared Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

11) While smoking is on the decline in the United States, China is still puffing away madly. That's not because the government is eager to protect its citizens from the hazards of smoking. It's because China is eager to protect its own tobacco industry which is a state monopoly. What barriers, if any, exist in this market? A) Natural barriers to entry B) Ownership barrier to entry C) Legal barrier to entry; a government license D) Legal barrier to entry; a public franchise Answer: D Topic: Legal Barriers to Entry Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

12) While smoking is on the decline in the United States, China is still puffing away madly. That's not because the government is eager to protect its citizens from the hazards of smoking. It's because China is eager to protect its own tobacco industry which is a state monopoly. How would entry of foreign companies into the tobacco market affect the economic profit of the state monopoly? A) Its economic profits would decrease because of increased competition. B) Its economic profits would increase because of increased competition. C) Its economic profits would decrease because of rent seeking activity. D) Its economic profits would increase because of rent seeking activity. Answer: A Topic: Single-Price Monopoly and Competition Compared Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

13) The WaveHouse on Mission Beach in San Diego features the Bruticus Maximus, a ten foot wave, which tests the skills of even the most talented surf and wake board riders on the planet. WaveHouse is the only place in San Diego where this service is offered. You can ride B. Max for $40 for the first hour, $33 for the second hour, and $26 for the third hour. Why would WaveHouse charge different prices for each subsequent hour of riding? A) To capture consumer surplus among groups of buyers B) To capture consumer surplus among units of a good C) To create customer loyalty D) To encourage skill development Answer: B Topic: Price Discrimination Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

14) The WaveHouse on Mission Beach in San Diego features the Bruticus Maximus, a ten foot wave, which tests the skills of even the most talented surf and wake board riders on the planet. WaveHouse is the only place in San Diego where this service is offered. You can ride B. Max for $40 for the first hour, $33 for the second hour, and $26 for the third hour. Charging a different price for subsequent hours is a form of: A) Price discrimination among groups of buyers. B) Rent seeking behavior. C) Price discrimination among units of a good. D) Monopoly regulation. Answer: C Topic: Price Discrimination Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

15) The WaveHouse on Mission Beach in San Diego features the Bruticus Maximus, a ten foot wave, which tests the skills of even the most talented surf and wake board riders on the planet. WaveHouse is the only place in San Diego where this service is offered. You can ride B. Max for $40 for the first hour, $33 for the second hour, and $26 for the third hour. An effect of this price discrimination is that: A) Consumer surplus increases. B) Deadweight loss increases. C) Consumer surplus is completely eliminated. D) Producer profit increases. Answer: D Topic: Price Discrimination Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

16) The WaveHouse on Mission Beach in San Diego features the Bruticus Maximus, a ten foot wave, which tests the skills of even the most talented surf and wake board riders on the planet. WaveHouse is the only place in San Diego where this service is offered. If you are a member of WaveHouse, you can ride for half the price that a non-member pays. This is an example of: A) Price discrimination among groups of buyers. B) Price discrimination among units of a good. C) Rent seeking behavior. D) Monopoly regulation. Answer: A Topic: Price Discrimination Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

17) The WaveHouse on Mission Beach in San Diego features the Bruticus Maximus, a ten foot wave, which tests the skills of even the most talented surf and wake board riders on the planet. WaveHouse is the only place in San Diego where this service is offered. To maximize profits, WaveHouse would produce a quantity where: A) Marginal revenue is greater than marginal cost. B) Marginal revenue is equal to marginal cost. C) Marginal revenue is less than marginal cost. D) Price is maximized. Answer: B Topic: Profit Maximization Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

7 Essay Questions 1) What are the conditions that define a monopoly? Answer: There is only one firm producing a good or service with no close substitutes for the good or service sold and there are barriers to entry that prevent competing firms from entering the market. Topic: How Monopoly Arises Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Communication

2) Describe the general types of barriers. Answer: Barriers to entry can be divided into legal barriers and natural barriers. Legal barriers occur when government action blocks competition in a market. For instance, the government could grant a public franchise, government license, patent, or copyright. In all cases, the government action prevents other firms from entering the market. Alternatively, a firm might buy up a significant portion of a natural resource. For instance, DeBeers controls over 80 percent of the world's diamond market. The other type of barrier to entry is a natural barrier. A natural barrier to entry occurs when economies of scale are so large that they make it possible for one firm to meet the entire market demand at a lower price than could two or more firms. In this case, the market will "naturally" evolve to become a monopoly as a larger firm uses its cost advantage to cut its price and drive its high-cost, smaller competitors out of business. Topic: Barriers To Entry Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Communication

3) What is a legal barrier to entry? Answer: A legal barrier to entry arises when entry is restricted because a natural resource is owned by one person or the government has granted a franchise, patent, license or copyright to one person or firm. Topic: Legal Barriers to Entry Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Communication

4) Patents provide a firm with a monopoly on a given product. What is the economic rationale for granting patents? Answer: The rationale for patents is that without a patent, competitors could copy an innovation and drive the economic profit to zero. As a result, firms would have little incentive to innovate. Topic: Legal Barriers to Entry Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Communication

5) Are some monopolies created by government legislation that gives a firm the unique right to produce a good or service? Answer: Yes, some monopolies are created by government legislation, such as patent or copyright laws and the granting of public franchises. Monopolies that are created because of legal barriers to entry are called legal monopolies. Topic: Legal Barriers to Entry Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Communication

6) Competition keeps prices lower for consumers. So why do we have patent laws? Answer: Patent laws are necessary to promote innovation. Without such laws an inventor might spend countless hours and a great deal of money developing a new product, put the product out into the market only to have a competitor copy it without incurring any of the time or costs to develop it. In the long run, this prospect would serve as a mighty disincentive to innovate and so would drastically reduce the supply of new products that come into the market. Topic: Legal Barriers to Entry Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

7) What is a natural monopoly? Answer: A natural monopoly is a market in which one firm can supply the entire market at a lower cost than two or more firms can. Topic: Natural Monopoly Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Communication

8) A monopolist, unlike a perfect competitor, has total control in its market because it is the single producer. Why, then, must a single-price monopolist decrease its price if it wants to increase its output? Answer: Because the monopolist does control the market, the monopolist sets the price at the maximum level that sells all the output the monopolist produces. This maximum price is determined from the demand for the product. The demand curve shows that the only way to increase the quantity consumers will buy is to lower the price. As a result, when a monopolist wants to produce more output, demanders will not buy the additional output at the initial price. As the demand curve indicates, in order to sell the extra production, the monopolist must lower its price. Topic: Demand Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication 158 Copyright © 2014 Pearson Education, Inc.

9) What is the relationship between the marginal revenue curve and the demand curve for a single-price monopolist? Answer: For a single-price monopolist, price exceeds marginal revenue. The price is obtained from the demand curve, so for a single-price monopolist, the marginal revenue curve lies below the demand curve. Topic: Price and Marginal Revenue Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Communication

10) How does marginal revenue compare to price for a single-price monopoly? Answer: Marginal revenue is less than price. Topic: Price and Marginal Revenue Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Communication

11) What does the marginal revenue equal when a monopoly's total revenue is maximized? What is the elasticity of demand when the total revenue is maximized? Answer: When the total revenue is at its maximum, the marginal revenue equals 0 and the elasticity of demand equals 1. Topic: Marginal Revenue and Elasticity Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

12) Comment on the following: "A monopolist is a firm that can raise its price without experiencing a decrease in its total revenue." Answer: This statement describes a firm for which demand is price inelastic. Because a profit maximizing monopolist sets its price on the elastic portion of the demand curve, this statement is false. Topic: Marginal Revenue and Elasticity Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

13) "A profit-maximizing monopoly never produces an output in the inelastic range of its demand curve." True or false? Explain. Answer: The statement is true. The profit maximizing condition is MC = MR. If demand is inelastic, marginal revenue is negative. But marginal cost is never negative. So it's impossible to maximize profit producing an output in the inelastic range of the demand curve. Topic: Marginal Revenue and Elasticity Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

14) What is the relationship between price, marginal revenue, and marginal cost when a single-price monopoly is maximizing profit? Answer: Marginal cost equals marginal revenue and both are less than the price. Topic: Single-Price Monopoly's Output and Price Decisions Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication 159 Copyright © 2014 Pearson Education, Inc.

15) A monopolist can set any price it wants. So why does it still produce at a point where MC=MR, just like a perfectly competitive firm? Answer: The point where MC = MR maximizes any firm's profit for the same reason it maximizes a perfectly competitive firm's profit. In particular, for small amounts of output it is the case that the MR exceeds the MC. Any unit for which MR > MC is a profitable unit to produce and so the firm wants to produce all of these units. As it increases its output, its total profit increases even as the difference between MR and MC shrinks. But as long as MR > MC, the unit is profitable and therefore is produced. Eventually the firm gets to the point where MR = MC. The firm does not want to go beyond this level of output, because for every unit beyond it MC>MR. Producing these units would cost the firm profit. So, once it starts producing, the firm won't stop producing additional units of output before it reaches the level for which MR = MC. Then, once it reaches this point, it won't go beyond this amount. Therefore the condition MR = MC determines the profit maximizing level of output. Topic: Single-Price Monopoly's Output and Price Decisions Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

16) Why do perfectly competitive firms maximize their profits by producing so that the price is equal to marginal cost, but monopolists maximize their profits by setting a price that is greater than marginal cost? Answer: Both types of firms maximize profits by producing so that their marginal revenue equals their marginal cost. For perfect competitors, price also equals marginal revenue, and therefore, at maximum profits, price equals marginal cost. Topic: A Single-Price Monopoly's Output and Price Decisions Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

17) "A single-price monopolist will always charge a price that is on the elastic range of its demand." Explain why the previous statement is correct or incorrect. Answer: The statement is correct. Only when the demand is elastic is marginal revenue positive. (When demand is unit elastic, marginal revenue is zero and when demand is inelastic marginal revenue is negative.) Because marginal cost is always positive, a single-price monopolist will always produce in the elastic range of its demand because it produces where marginal cost equals marginal revenue. Hence the price that the monopolist sets will always be on the elastic range of its demand. Topic: Single-Price Monopoly's Output and Price Decisions Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

18) Why will a profit-maximizing, single-price monopolist NOT produce the amount of output that maximizes its total revenue? Answer: When total revenue is at its maximum, the demand is unit elastic and marginal revenue equals zero. However, to maximize its profit, a single-price monopolist produces so that its marginal revenue equals its marginal cost. If marginal revenue equals zero, then in order for this level of output to maximize the monopolist's profit, marginal cost also must equal zero. But marginal cost will never equal zero because to produce another unit always incurs some costs. Since marginal cost cannot equal zero, it is impossible for a profit-maximizing single-price monopolist to produce the amount of output that maximizes its total revenue. Topic: Single-Price Monopoly's Output and Price Decisions Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Communication

19) Can an unregulated monopoly make an economic profit in the long run? Explain your answer. Answer: An unregulated monopoly can make an economic profit in the long run. The fact that the monopoly is protected by a barrier to entry allows the firm to make an economic profit in the long run. If the monopoly is making an economic profit, other competitors want to enter the market but the barrier to entry keeps them out. Topic: A Monopoly's Economic Profit Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

20) What factor(s) enable a monopoly to make an economic profit in the long run? Answer: Monopolies can make an economic profit in the long run because of barriers to entry. Barriers to entry keep other firms from entering the industry and driving down the price and profits. Topic: A Monopoly's Economic Profit Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

21) What kind of profit can a monopoly make in the short run? In the long run? Explain your answers. Answer: In the short run, a monopoly can make an economic profit, zero economic profit, or incur an economic loss. In other words, any sort of profit outcome is possible in the short run. In the long run, a monopoly can make an economic profit or zero economic profit. A monopoly will not incur an economic loss in the long run because it would shut down. The key result that differentiates it from firms in other types of markets is that a monopoly can make an economic profit in the long run. It can do so because there are barriers to entry. These barriers prevent other firms from entering the market and usurping part of the economic profit. Topic: A Monopoly's Economic Profit Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

22) What does the deadweight loss from monopoly measure? Answer: The deadweight loss from monopoly measures the loss to society of having a product produced by a monopoly rather than a perfectly competitive industry. The deadweight loss results from the point that a monopolist produces less output than would a perfectly competitive industry. The monopolist produces less output in order to raise the price of the product and thereby earn an economic profit. Topic: Single-Price Monopoly and Competition Compared Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

23) "A single-price monopolist charges a higher price and produces more output than a perfectly competitive industry." Is the previous statement correct or incorrect? Explain your answer. Answer: The statement is partially correct because a monopolist charges a higher price than a perfectly competitive industry. However the statement also is partially incorrect because the monopolist produces less output than a perfectly competitive industry. Topic: Single-Price Monopoly and Competition Compared Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

24) Compare the outcome in a market with a single-price monopoly to that in a perfectly competitive market. Answer: The monopoly charges a higher price and produces less output than in a perfectly competitive market. The monopoly creates a deadweight loss by producing less than the efficient quantity of output, whereas a perfectly competitive market produces the efficient quantity of output and so has no deadweight loss. The monopoly decreases consumer surplus and increases producer surplus from what they would be if the market is perfectly competitive. Topic: Single-Price Monopoly and Competition Compared Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

25) Explain how a single-price monopoly determines its output and price. Compare this process to how a perfectly competitive firm determines its output and price. Answer: Single-price monopolies follow the same profit-maximizing rule as perfectly competitive firms and set their output level where marginal revenue equals marginal cost. However, unlike perfectly competitive firms, monopolies have control over price and can charge as much as the market will bear; therefore, given the quantity they produce, the monopoly chooses its price from the demand curve. Topic: Single-Price Monopoly and Competition Compared Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

26) Which creates a larger deadweight loss, perfect competition or a single-price monopoly? Answer: The single-price monopoly creates a larger deadweight loss because perfect competition does not create a deadweight loss. Topic: Single-Price Monopoly and Competition Compared Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication 162 Copyright © 2014 Pearson Education, Inc.

27) How do the price, output, consumer surplus, economic profit, and total surplus for a single-price monopoly compare to that of a competitive industry? Answer: For the monopolist, price is higher, output is lower, consumer surplus is less, economic profit is larger, and total surplus is smaller relative to a competitive industry. Topic: Redistribution of Surpluses Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

28) "Compared to a competitive market, a single-price monopoly decreases the consumer surplus and increases the economic profit." Is the previous statement correct or incorrect? Explain your answer. Answer: The statement is correct. A single-price monopoly produces less than a competitive market and sets a higher price, both of which decrease the consumer surplus but increase the economic profit. Topic: Redistribution of Surpluses Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

29) Suppose the government breaks up a single-price monopoly and turns it into a perfectly competitive industry. What will happen to price and the quantity produced? What will happen to the monopoly's economic profit and the deadweight loss associated with the monopoly? Answer: The price will fall and output will increase to the efficient level. The monopoly's economic profit will revert to the consumers as consumer surplus as the price falls and the quantity increases. The deadweight loss will be eliminated as output and the consumer surplus increase. Topic: Redistribution of Surpluses Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

30) What is rent seeking? How does rent seeking affect the deadweight loss from monopoly? Answer: Rent seeking is the act of obtaining special treatment by the government to create economic profit or to divert consumer surplus or producer surplus away from someone else. Often, rent seeking takes the form of lobbying to increase the economic profit of the lobbyist. Rent seeking increases the deadweight loss from monopoly. With rent seeking, not only does the monopoly create the (standard) deadweight loss, but also resources are used up in the process of rent seeking itself. Topic: Rent Seeking Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Communication

31) "Because of rent seeking, a monopoly may end up making zero economic profit." Is the previous statement correct or incorrect? Why? Answer: The statement is correct. Competition among rent seekers might cause the successful person striving to create a monopoly to pay so much in order to create the monopoly that, when taking into account the cost of creating the monopoly, the person makes only zero economic profit. Topic: Rent Seeking Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

activity called in general and what does it entail specifically? Answer: Rent seeking is the term used to describe activities that are performed for the purpose of obtaining or retaining a monopoly. Specific activities might include lobbying, campaign contributions, bribery, lawsuits. Topic: Rent Seeking Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

33) What is price discrimination? Give examples of price discrimination. Answer: Price discrimination is the practice of selling different units of a good or service for different prices. For example, airlines' customers pay different prices for the same trip, pizzerias charge a lower price for the second pizza bought, or Microsoft charges a lower than regular price when it sells its Office software to students. Topic: Price Discrimination Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Communication

34) What is price discrimination? Can a perfectly competitive firm price discriminate? Explain you answer. Answer: Price discrimination is the practice of selling different units of a good or service for different prices. A perfectly competitive firm cannot influence the price of its product—it is a price taker. So a perfectly competitive firm cannot price discriminate. Topic: Price Discrimination Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Communication

35) What are the characteristics of a market that allow a monopolist to successfully price discriminate between groups? Answer: A monopolist can price discriminate between groups when the groups are easily identifiable, can be separated, have different average willingness to pay for the good, and when the good or service cannot be resold. Topic: Price Discrimination Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Communication

36) Define price discrimination. What factors must be present in order for a monopolist to price discriminate? Why do firms price discriminate? Answer: Price discrimination is selling a good or service at a number of different prices. In order to price discriminate, the firm must be able to identify and separate different types of buyers. In particular, the firm must be able to identify which buyers are willing to pay a higher price than other buyers. And the firm must sell a product that cannot be resold. Therefore it must not be possible for a buyer who pays a low price to resell the product to a buyer who is willing to pay a higher price. Firms price discriminate because it increases their profit. By price discriminating the firm can charge a buyer a price that is closer to the maximum price the buyer is willing to pay. By setting the price closer to the maximum a buyer is willing to pay the firm can gain added total revenue and thereby added economic profit. Topic: Price Discrimination Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Communication

37) Give an example of price discrimination. Answer: Though there are many examples of price discrimination, price discrimination occurs when senior citizens get cheaper drugs, students get discounts at movies, or children under two can enter museums free. Topic: Price Discrimination Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

38) "Price discriminators lose money by being nice to their customers." Is the previous statement correct or incorrect? Answer: The statement is incorrect—price discrimination allows the firm to increase its economic profit. Topic: Price Discrimination Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

39) "Price discrimination allows a monopolist to increase his or her economic profits by capturing part of the consumer surplus and turning it into economic profit." Is the previous statement correct or incorrect? If the statement is correct, why is it important in understanding firms' behaviors? If it is incorrect, why is it incorrect? Answer: The statement is correct. The statement is important because it explains why firms want to price discriminate, namely because they can convert some of the consumer surplus into extra economic profit. Hence firms endeavor to price discriminate because if they can do so, they can increase their economic profit. Topic: Price Discrimination Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

40) Why do some firms practice price discrimination? Relate your answer to the common practice of public colleges charging lower tuition to in-state students and higher tuition to out-of-state students. Answer: Price discrimination helps businesses capture more consumer surplus and hence increase their economic profit. Basically the firm charges more to people who are willing to pay more. For a public college, out-of-state students will likely have a higher willingness to pay for attending that college because, by leaving their home state, they are demonstrating that they truly want to attend the college. If the college charged in-state residents the same tuition as out-of-state residents, the college would miss the chance to maximize revenue from each group. Charging in-state residents the same high price as out-ofstate residents would lead to a massive drop in quantity demanded and thus lower total revenue. By separating their customers based on differing demand conditions, the college earns more total revenue. Topic: Price Discrimination Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

41) Compare the consumer surplus in a perfect competition with that of a single-price monopoly and with a price-discriminating monopoly. Answer: The consumer surplus in a perfect competition is larger than the consumer surplus in a singleprice monopoly. And, the consumer surplus in a single-price monopoly is larger than that with a pricediscriminating monopoly. Indeed, for a monopoly able to perfectly price discriminate, there is no consumer surplus. Topic: Efficiency with Price Discrimination Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

42) What is perfect price discrimination? Is perfect price discrimination efficient? Why or why not? Answer: Perfect price discrimination occurs if a firm is able to sell each unit of output for the highest price anyone is willing to pay for it. With perfect price discrimination, output increases to the point at which price, and hence marginal benefit, equals marginal cost. So perfect price discrimination achieves efficiency. Topic: Perfect Price Discrimination Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

43) Even though a perfect price discriminator can extract all of the consumer surplus, how can it be efficient? Answer: Efficiency has nothing to do with who gets the surpluses; that is, efficiency has nothing to do with whether the consumer surplus (or producer surplus) is large or small. Instead, a market is efficient as long as there is no deadweight loss. Because there is no deadweight loss with perfect price discrimination, even though the amount of consumer surplus is as small as possible—zero!—and the producer surplus is as large as possible, nonetheless the market is efficient. Topic: Perfect Price Discrimination Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

44) Compare and contrast the effect of perfect competition to the effect of perfect price discrimination on: a) efficiency. b) consumer surplus. c) economic profit in the long run. Answer: a) Both perfect competition and perfect price discrimination create efficiency. b) Consumers receive consumer surplus with perfect competition. However, there is no consumer surplus with perfect price discrimination. c) Perfectly competitive firms cannot make an economic profit in the long run. A perfectly price discriminating monopoly makes the maximum amount of economic profit. Topic: Perfect Price Discrimination Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

45) Which produces more output: a perfectly price discriminating monopoly or a single-price monopoly? Answer: The monopoly practicing perfect price discrimination produces more output. Indeed, a perfectly price discriminating monopoly produces the efficient level of output. Topic: Perfect Price Discrimination Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

46) What is a natural monopoly and what problem does natural monopoly pose for regulators? Answer: A natural monopoly is a firm that can supply the market at lower cost than two or more firms. It can do so because it has declining long-run average total cost over the entire range of market output. Because the LRAC is declining, the marginal cost must be below the LRAC. Therefore, if the regulator forces the firm to price at MC to achieve efficiency (such as is done by a perfectly competitive firm), the natural monopolist will fail to cover its total cost. It incurs an economic loss and requires a government subsidy to survive. Topic: Natural Monopoly Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Communication

47) Why are water companies considered a natural monopoly? Answer: Once one water company incurs the cost of establishing a physical connection to one customers' home or place of business, the marginal cost of providing service falls rapidly over time as more and more service is provided. For instance, once a main pipe is buried under a street, adding additional customers on the street is relatively cheap. Economies of scale make it very cost prohibitive for another firm to enter the market, leaving one water company as the provider of the service in that area. Topic: Natural Monopoly Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

48) "A single-price natural monopoly that is regulated to set price equal to marginal cost incurs an economic loss." True or false? Explain. Answer: The statement is true. A natural monopoly's average cost is falling as its output increases. This means that marginal cost is below average cost. Because price equals marginal cost, price is less than average cost so that the firm incurs an economic loss. Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

49) "If a natural monopoly is regulated using a marginal cost pricing rule, the firm makes zero economic profit." Is the previous statement correct or incorrect? Answer: The statement is incorrect. If a firm is regulated using a marginal cost pricing rule, the firm incurs an economic loss. Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

50) When a natural monopoly is regulated using a marginal cost pricing rule, what can you say about the firm's profit and the market's efficiency? Answer: Using a marginal cost pricing rule, the monopoly is incurring an economic loss. However, there is an efficient quantity of output produced so that the market is efficient with no deadweight loss. Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

51) If a natural monopoly is regulated using the marginal cost pricing rule, how does the regulation affect prices, outputs, profits, and the distribution of surpluses? What are the pros and cons to this method of regulation? Answer: The marginal cost pricing rule sets the regulated price equal to the price where the marginal cost curve intersects the demand curve. This price is lower than the monopoly price, and results in a higher level of output. The monopoly's economic profit is eliminated; in fact, this rule results in the firm making economic losses, as marginal cost is less than average cost for a natural monopoly. Because output increases to the point where marginal cost equals price, consumer surplus is maximized. The advantage of this method of regulation is that it results in the efficient level of output. The disadvantage of this method is that means the firm will incur an economic loss. Unless subsidized by the government, the firm will eventually exit the industry, as no firm can operate at a loss in the long run. Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

52) What is an average cost pricing rule? Why do regulatory agencies use it for natural monopolies? Answer: Average cost pricing means that the firms will equate their price to their average cost. It is used by regulatory agencies, because if a natural monopoly is forced to charge a perfectly competitive price (using a marginal cost pricing rule), the firm will not be able to cover its costs. No firm can operate on losses, so average cost pricing is considered a second-best solution: it allows the natural monopoly to make zero economic profit but does not allow it to set its price as high as it would were it unregulated. Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

53) When a natural monopoly is regulated using an average cost pricing rule, what can you say about the firm's profit and the market's efficiency? Answer: Using an average cost pricing rule, the monopoly is making zero economic profit. However, there is an inefficient quantity of output produced so that the market is inefficient and there is a deadweight loss. Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

54) Why do some utilities have an incentive to exaggerate their costs of production? Answer: Because utilities are generally allowed to charge prices that cover their average cost of production, a utility might want to incur higher than normal costs (maybe from lush carpets, hunting lodges, tickets to sporting events, and so forth). If the utility exaggerates its costs, the regulators are likely to simply order higher rates to cover the higher costs, and so the utility executives can enjoy benefits (the carpet, hunting lodge, sporting events) without incurring any personal costs. Topic: Natural Monopoly, Cost Inflation Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

55) How can managers of natural monopolies exaggerate their costs? Answer: By increasing on-the-job luxury items such as sumptuous office suites, limousines, golf competitions at expensive locations, company jets, and other non-necessary expenditures, the managers can exaggerate their costs over what is truly necessary to produce the product. Topic: Natural Monopoly, Cost Inflation Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

56) What potential problem is there with rate of return pricing? Answer: The monopolist might exaggerate its costs and mislead the regulator. In this case, the regulator allows the firm to increase its price, so the monopolist has no incentive to operate efficiently and cost effectively. Topic: Rate of Return Regulation Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

57) Describe the main problem with rate of return regulation and name an alternative regulatory scheme that has been devised to deal with that problem. Answer: The main problem with rate of return regulation is that a firm might be inclined to inflate its costs, because its price is set at a level that permits the firm to recoup all its costs. Therefore, the firm might incur unnecessary costs that serve the interests of its managers, such as lavish offices, company cars, travel, entertainment, etc. The alternative regulation scheme is price cap regulation. With price cap regulation, the regulating agency sets the maximum price the company can charge. The company is allowed to charge any price below the cap and can keep all (or some) of any economic profit it can make. Topic: Rate of Return Regulation Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

58) What incentive does price cap regulation attempt to give the firm? How does it give the firm this incentive? Answer: Price cap regulation is intended to motivate the firm to operate efficiently and keep its costs under control. It does so setting the maximum price the company can charge and then allowing the firm to keep part (or perhaps all) of any economic profit it can make if it cuts its costs. Topic: Price Cap Regulation Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

59) Explain the difference between price cap regulation in a natural monopoly and the effect of a price ceiling in a competitive market. Answer: In regulating a natural monopoly, a price cap regulation is a price ceiling in which a rule specifies the highest price that the firm is allowed to charge. A price cap lowers the price and increases output. This type of regulation gives a firm an incentive to operate efficiently and to keep its costs under control. In a competitive market, a price ceiling establishes the highest price that all firms in the market are allowed to charge. But the major issue is that in a competitive market, the competitive equilibrium already is efficient. And, to be effective, the price ceiling needs to be below the market equilibrium price. A shortage of the good occurs because firms are willing to supply less output than they would produce in the absence of the price ceiling. As a result, inefficiency is created. Topic: Price Cap Regulation Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

60) Briefly describe and discuss the different ways a natural monopoly can be regulated: Marginal cost pricing, average cost pricing, rate of return regulation, and price cap regulation. Answer: Marginal cost pricing: The regulated price is set equal to marginal cost. In this case, the efficient quantity is produced so there is no deadweight loss. Consumer surplus is maximized. The firm incurs an economic loss unless it can raise revenues in an additional way, such as using price discrimination or a two-part tariff. Average cost pricing: The regulated price is set equal to average cost. While this form of regulation does not produce an efficient outcome, it allows firms to make zero economic profit. There is a deadweight loss. Rate of return regulation: The regulated price enables a regulated firm to make a specified target percent return on its capital. If a regulator could observe the firm's total cost and also know that the firm minimized total cost, the regulation would be the same as average cost pricing. In some cases, however, the firm is able to "capture" the regulator, which enables the firm to exaggerate it costs and so set its price and produce the amount of output that it would were it an unregulated monopoly. Price cap regulation: The regulator sets a price ceiling. The firm can charge any price it wants below the price cap and keep some or all of any economic profit it makes. This regulation induces the firm to operate efficiently and control costs. If the firm earns a profit that is too high, the regulator might impose earnings share regulation, which requires the firm to make refunds to customers when profits rise above a target level. Topic: Natural Monopoly, Regulation Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

61) Compare and contrast the marginal cost and average cost pricing rules for regulating natural monopolies. Answer: Marginal cost pricing sets the price equal to the marginal cost. It does so by determining the price using the intersection of the marginal cost curve and the demand curve. Marginal cost pricing results in an efficient level of output but the firm incurs an economic loss. Average cost pricing sets the price equal to the average cost. It does so by determining the price using the intersection of the long-run average cost curve and the demand curve. Average cost pricing results in an inefficient level of output and zero economic profit, that is, a normal profit. Topic: Regulating Natural Monopoly Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

62) Electric utilities are often considered natural monopolies and are regulated. When would the price be highest: when the utility is not regulated, when it is regulated using an average cost pricing rule, or when it is regulated using a marginal cost pricing rule? When would its price be lowest? Answer: The price would be highest if the utility was left unregulated and could set the profitmaximizing price. The price is lowest if the utility is regulated using a marginal cost pricing rule. Topic: Regulating Natural Monopoly Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication

8 Numeric and Graphing Questions

Quantity (units)

Price (dollars)

Total revenue (dollars)

____

Marginal revenue (dollars) ____

____ ____

____

1) The above table gives a monopolist's demand schedule. Complete the table by calculating the total revenue and the marginal revenue. Answer: Marginal Quantity Price Total revenue revenue (units) (dollars) (dollars) (dollars) 15 0 0 13 13 1 13 9 11 2 22 5 9 3 27 1 7 4 28 -3 5 5 25 -7 3 6 18 -11 1 7 7 -7 0 8 0 172 Copyright © 2014 Pearson Education, Inc.

The completed table is above. Topic: Price and Marginal Revenue Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

Quantity (units)

Price (dollars)

Total revenue (dollars)

____

Marginal revenue (dollars) ____

____ ____

____

2) The above table gives a monopolist's demand schedule. Complete the table by calculating the total revenue and the marginal revenue. Answer: Marginal Quantity Price Total revenue revenue (units) (dollars) (dollars) (dollars) 1 6 6 4 2 5 10 2 3 4 12 0 4 3 12 -2 5 2 10 -4 6 1 6 The completed table is above. Topic: Price and Marginal Revenue Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

Quantity (units)

Price (dollars)

Marginal revenue (dollars) ____ ____ ____ ____ ____ ____ ____ ____

3) The demand schedule for a monopolist is given in the above table. Calculate the marginal revenue. Answer: Marginal Quantity Price revenue (units) (dollars) (dollars) 0 22 22 1 24 18 2 20 14 3 18 10 4 16 6 5 14 2 6 12 -2 7 10 -6 8 8 The completed table is above. Topic: Price and Marginal Revenue Skill: Analytical 174 Copyright © 2014 Pearson Education, Inc.

Status: Previous edition, Chapter 13 AACSB: Analytical Skills

4) The above figure represents the demand and marginal revenue curves for Sue's Seafood, a seller of fresh fish. a) Over what range of output is demand elastic? b) Over what range of output is demand inelastic? c) What price maximizes total revenue? d) What is the demand elasticity at the revenue maximizing price? Answer: a) Demand is elastic from 0 to 20 pounds of fish. b) Demand is inelastic from 20 to 40 pounds of fish. c) Total revenue is maximized when the price is $8 a pound. d) Total revenue is maximized when demand is unit elastic. Topic: Marginal Revenue and Elasticity Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

Quantity (units)

Price (dollars)

1 2 3 4 5 6 7 8

22 20 18 16 14 12 10 8

Marginal revenue (dollars) 20 16 12 8 4 0 -4 -8

Marginal cost (dollars) 6 8 12 18 28 40 54 70

5) A single-price monopolist has the demand and marginal cost schedules given in the above table. What is the profit-maximizing level of output and price? Answer: The profit-maximizing output is 3 units, because that is the quantity for which the marginal revenue equals the marginal cost. The price is $18 a unit. Topic: Single-Price Monopoly's Output and Price Decisions Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

Price (dollars per rutabaga) 1 2 3 4 5 6

Quantity demanded (rutabagas per day) 100 80 60 40 20 0

6) Bob's Country Bunker is the only restaurant in town that serves fried rutabaga. Bob faces the demand schedule shown in the table above. a) What is Bob's marginal revenue from the 50th rutabaga? Quantity (rutabagas per day) 0 20 40 60 80 100

Total cost (dollars per day) 80 100 120 180 280 420

b) Bob has the cost schedule shown in the table above. Draw the demand curve faced by Bob and his marginal revenue curve. Draw Bob's marginal cost curve. If Bob wants to maximize his profit, how many fried rutabagas should he sell? 176 Copyright © 2014 Pearson Education, Inc.

c) What price will Bob charge? d) What is Bob's economic profit? e) Bob currently charges $3 per fried rutabaga. Is he maximizing his profit? Why or why not? Answer: a) When Bob sells 40 rutabagas, his total revenue is $160. When he sells 60 rutabagas, his total revenue is $180. Bob's total revenue increases by $20 when 20 additional rutabagas are sold, or by $1 per additional rutabaga. So the marginal revenue from the 50th fried rutabaga is $1.

b) The figure above has Bob's demand curve, marginal revenue curve, and marginal cost curve. Bob maximizes his profit if he sells 40 fried rutabagas per day. At this quantity, MC = MR = $2. c) As the figure shows, Bob will sell 40 fried rutabagas per day if he charges $4 per rutabaga. d) Bob sells 40 fried rutabagas at a price of $4, so his total revenue is $160. The total cost of producing 40 fried rutabagas is $120. So Bob makes a $40 economic profit. e) If Bob charges $3 per fried rutabaga, his sells 60 rutabagas and his marginal cost, $4, is greater than his marginal revenue, $0. In this case he is not maximizing his profit. Bob maximizes his profit if he charges $4 per fried rutabaga and sells 40 rutabagas per day. At this quantity, MC = MR = $2. Topic: Single-Price Monopoly's Output and Price Decisions Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

7) In the above figure, draw and label the demand and cost curves of a monopoly. Identify the quantity a single-price monopoly will produce by labeling it Qm and identify the price by labeling it Pm. Answer:

The completed figure is above. Topic: Single-Price Monopoly's Output and Price Decisions Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

8) Ron's Hamburger Joint is the only restaurant in town. The above figure represents Ron's cost, demand, and marginal revenue curves. Ron operates as a single-price monopoly. a) How many hamburgers does Ron produce? b) What price does Ron charge for a hamburger? c) What is Ron's total revenue? d) What is his total cost? e) What is Ron's economic profit? Answer: a) Ron produces 20 hamburgers per hour. b) The price is $6 for a hamburger. c) Ron's total revenue is $120 an hour. d) Ron's total cost is $80 an hour. e) Ron's economic profit is $40 an hour. Topic: Single-Price Monopoly's Output and Price Decisions Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

9) The above figure represents a perfectly competitive industry that is taken over by a single firm and operated as a monopoly. a) What was the competitive price and quantity? b) What is the monopoly price and quantity? c) What area represents consumer surplus under perfect competition? d) What area represents consumer surplus under monopoly? e) What area represents the deadweight loss of monopoly? Answer: a) The competitive price was P2 and the competitive quantity was Q2. b) The monopoly price is P3 and the monopoly quantity is Q1. c)

The consumer surplus with perfect competition is the area P4P2c.

d) The consumer surplus with monopoly is the area P4P3a. e) The deadweight loss from the monopoly is the area abc. Topic: Comparing Output and Price Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

Quantity (units) 1 2 3 4 5 6 7 8

Price (dollars) 22 20 18 16 14 12 10 8

Marginal cost (dollars) 9 10 12 16 22 30 40 52

10) A monopolist has the demand and marginal cost schedules given in the above table. If the monopoly can perfectly price discriminate, what is the profit-maximizing level of output and price? Answer: As a perfectly price discriminating monopoly, the profit-maximizing level of output is 4 units and the price ranges from $22 to $16 for each unit. Topic: Perfect Price Discrimination Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

11) The above figure represents the cost, demand, and marginal revenue curves for a monopolist. a) Indicate the price and quantity a single-price monopolist selects by labeling the price Pm and the quantity Qm. b) In the figure, lightly shade in the area that represents the single-price monopoly's economic profit. c) Indicate the quantity a perfectly price-discriminating monopolist selects by labeling it Qppd. d) In the figure, more darkly shade the area that represents the additional economic profit the monopoly earns as a result of the perfect price discrimination. Answer:

a) The price is labeled Pm and the quantity is labeled Qm. b) The single-price monopoly's economic profit is the lightly shaded rectangle. c) The quantity is labeled Qppd. d) The additional profit is the two darker areas in the figure. Topic: Perfect Price Discrimination Skill: Analytical 182 Copyright © 2014 Pearson Education, Inc.

Status: Previous edition, Chapter 13 AACSB: Analytical Skills

12) The above figure illustrates the market for electric power that is served by the one utility in Alberta, Canada. a) If the government did not regulate this utility, what would be the price of a kilowatt hour in this region and how much power would be generated? b) If the government regulates the utility and chooses an average cost pricing rule, what would be the price of a kilowatt hour and how much power would be generated? c) If the government regulates the utility and chooses a marginal cost pricing rule, what would be the price of a kilowatt hour and how much power would be generated? Answer: a) The price would be 12¢ a kilowatt hour and 20 megawatts per hour would be generated. b) The price would be 8¢ a kilowatt hour and 30 megawatts per hour would be generated. c) The price would be 4¢ a kilowatt hour and 40 megawatts per hour would be generated. Topic: Regulating Natural Monopoly Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

13) The above figure shows the demand for cable and the cable company's cost of providing cable. a) What price and quantity will be produced if the company is unregulated and profit maximizes? b) What price and quantity will be produced if the company is regulated using the marginal cost pricing rule? c) What is the advantage of the marginal cost pricing rule? d) What price and quantity will be produced if the company is regulated using the average cost pricing rule? e) What is the advantage of the average cost pricing rule? Answer: a) The price will be $90 per month and the quantity will be 20,000 households. b) The price will be $30 per month and the quantity will be 40,000 households. c) This rule results in the efficient level of production. d) The price will be $60 per month and the quantity will be 30,000 households. e) This rule results in the firm earning zero economic profit. Topic: Regulating Natural Monopoly Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

14) In the figure above, complete the graph of the electric utility company by adding the marginal revenue and marginal cost curves. Assume the marginal cost is constant at 4¢ per kilowatt-hour. Now discuss the two options regulators have in trying to regulate the firm. Be sure to state the price and quantity that are selected for each option. Also, what price and quantity does the firm select if it is not regulated? Answer:

The completed figure is above. The two methods regulators might use are a marginal cost pricing rule and an average cost pricing rule. If the regulators use a marginal cost pricing rule, the firm must set its price equal to its marginal cost. In the figure, the firm sets a price of 4¢ a kilowatt-hour and produces 400 megawatts per hour. The firm produces the efficient quantity of output, but it incurs an economic loss because LRAC > P. If the regulators use an average cost pricing rule, the firm must set its price equal to its average cost. In the figure, the firm sets a price of 8¢ a kilowatt-hour and produces 300 megawatts per hour. In this case the firm covers its costs (so that it earns a normal profit) but it produces an inefficient 185 Copyright © 2014 Pearson Education, Inc.

amount of output. Finally, if the firm is allowed to maximize its profit, it produces where its MR = MC. So the firm produces 200 megawatts of power and, setting its price from its demand curve, charges a price of 12¢ per kilowatt-hour. Topic: Natural Monopoly, Marginal Cost & Average Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

15) The above figure represents the cost and demand curves for a natural monopoly that is regulated using a marginal cost pricing rule. a) What is the quantity? b) What price is charged? c) What area represents the consumer surplus when the firm is regulated using a marginal cost pricing rule? d) What distance represents the firm's loss per unit when the firm is regulated using a marginal cost pricing rule? Answer: a) The quantity is the efficient quantity, Q3. b) The price is P2. c) When the firm is regulated using a marginal cost pricing rule, the consumer surplus is equal to the area of the triangle P1dP2. d) The loss per unit is the amount equal to the distance cd. Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

9 True or False 1) A monopoly is a firm that produces a good or service for which no close substitute exists. Answer: TRUE Topic: How Monopoly Arises Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

2) A monopolist is the sole supplier of a good or service for which there are no close substitutes. Answer: TRUE Topic: How Monopoly Arises Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

3) For a monopoly, the demand for its product is perfectly elastic at the market price. Answer: FALSE Topic: How Monopoly Arises Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

4) A natural monopoly is a firm that owns a key natural resource. Answer: FALSE Topic: Natural Monopoly Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

5) A natural monopoly is any market in which competition and entry are restricted by the granting of a public franchise, government license, patent, or copyright. Answer: FALSE Topic: Natural Monopoly Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

6) A natural monopoly is likely to experience diseconomies of scale. Answer: FALSE Topic: Natural Monopoly Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

7) A monopoly's marginal revenue is equal to the market price of its product. Answer: FALSE Topic: Marginal Revenue Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 187 Copyright © 2014 Pearson Education, Inc.

8) A monopoly always operates on the elastic portion of its demand curve. Answer: TRUE Topic: Marginal Revenue and Elasticity Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

9) In order to maximize its profit, a single-price monopoly always produces output in the inelastic range of the demand for its product. Answer: FALSE Topic: A Single-Price Monopoly's Output and Price Decisions Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

10) The monopolist always maximizes its profits by producing the amount of output that sets the marginal revenue equal to zero. Answer: FALSE Topic: Single-Price Monopoly's Output and Price Decisions Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

11) A profit maximizing single-price monopolist sets price equal to marginal cost. Answer: FALSE Topic: A Single-Price Monopoly's Output and Price Decisions Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

12) Monopolists can make an economic profit in the long-run because of barriers to entry. Answer: TRUE Topic: A Monopoly's Economic Profit Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

13) A monopoly creates no deadweight when it maximizes its profit. Answer: FALSE Topic: Single-Price Monopoly, Deadweight Loss Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

14) The deadweight loss from a monopoly loss measures the inefficiency created by monopoly. Answer: TRUE Topic: Single-Price Monopoly, Deadweight Loss Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

15) A monopoly creates a deadweight loss because the monopoly produces less than the efficient quantity. Answer: TRUE Topic: Single-Price Monopoly, Deadweight Loss Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

16) Attempts to create a monopoly by having favorable laws passed are examples of rent seeking. Answer: TRUE Topic: Rent Seeking Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

17) For a monopoly able to perfectly price discriminate, the marginal revenue curve coincides with the demand curve. Answer: TRUE Topic: Perfect Price Discrimination Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

18) A monopoly that can perfectly price discriminate creates no deadweight loss. Answer: TRUE Topic: Perfect Price Discrimination Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

19) The airline and trucking industries are two examples of industries that were regulated because they were natural monopolies. Answer: FALSE Topic: Natural Monopoly Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

20) Using average cost pricing to regulate a natural monopoly creates a deadweight loss. Answer: TRUE Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

21) For a natural monopoly, if price is set equal to marginal cost then the firm incurs an economic loss. Answer: TRUE Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 189 Copyright © 2014 Pearson Education, Inc.

22) If the local cable TV company is a natural monopoly and required by regulators to set its price equal to marginal cost, it makes zero profit and produces the efficient level of output. Answer: FALSE Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

23) If the local cable TV company is a natural monopoly and required by regulators to set its price equal to marginal cost, there is a deadweight loss in the market and the firm might need a government subsidy to survive. Answer: FALSE Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

10 Extended Problems Price (dollars per ounce) 100 200 300 400 500 600

Quantity demanded (ounces per day) 100 80 60 40 20 0

Quantity Total cost produced (dollars per day) (ounces per day) 9 6,000 20 7,200 40 8,800 60 10,800 80 13,200 100 16,000 1) Anastasia's Gold Mines, a single-price monopoly, faces the demand schedule shown in the first table above and has the cost schedule shown in the second table above. a) Calculate Anastasia's marginal revenue schedule. In a figure, draw the demand curve and the marginal revenue curve. b) Calculate Anastasia's marginal cost and average total cost schedules. In the same figure that you drew the demand and marginal revenue curves, draw the marginal and the average total cost curves. c) What are Anastasia's profit-maximizing output and price? What is Anastasia's economic profit? Explain your answer. d) Does Anastasia's Gold Mines use resources efficiently? Explain your answer. 190 Copyright © 2014 Pearson Education, Inc.

Answer: Quantity Price (ounces per day) (dollars) 0 600 20

500

400

300

200

100

TR MR TC (dollars) (dollars) (dollars) 0 6,000 500 10,000 7,200 300 16,000 8,800 100 18,000 10,800 -100 16,000 13,200 -300 10,000 16,000

MC (dollars)

ATC (dollars)

60 360 80 220 100 180 120 165 140 160

a) Anastasia's marginal revenue schedule is shown in the table above. The figure below shows the demand curve faced by the firm and its marginal revenue curve.

b) Anastasia's marginal cost and average total cost schedules are shown in the table above. The figure above shows the firm's marginal and average total cost curves. c) The firm maximizes its profit by producing 50 ounces of gold per day. At this level of output MC = MR = $100. The price is $350 per ounce. If the firm produces 50 ounces per day, the figure shows that its average total cost is $200 per ounce. So the economic profit per ounce is $350 - $200, which is $150 per ounce and the total economic profit $150 per ounce 50 ounces, or $7,500 per day. d) The monopoly is the source of inefficiency because at the output level that it produces the marginal social benefit, $350 from the demand curve, exceeds the marginal social cost, $100 from the marginal cost curve. Topic: Single-Price Monopoly's Output and Price Decisions Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 191 Copyright © 2014 Pearson Education, Inc.

Price (dollars per bottle) 1.50 2.00 2.50 3.00 3.50 4.00

Quantity demanded (bottles per week) 250 200 150 100 50 0

Quantity produced Total cost (bottles per week) (dollars per week) 0 120.00 50 145.00 100 157.50 150 195.00 200 257.50 250 345.00 2) Adele's Springs produces a unique mineral water. The firm faces the demand schedule shown in the first table above and has the cost schedule shown in the second table above. a) Calculate Adele's marginal revenue schedule. In a figure, draw the demand curve and the marginal revenue curve. b) Calculate Adele's marginal cost and average total cost schedules. In the same figure that you drew the demand and marginal revenue curves, draw the marginal and the average total cost curves. c) What are Adele's profit-maximizing output and price? What is Adele's economic profit? Explain your answer. d) Does Adele's Springs use resources efficiently? Explain your answer. Answer: Quantity Price TR MR TC MC ATC (bottles per week) (dollars) (dollars) (dollars) (dollars) (dollars) (dollars) 0 4.00 0 120.00 3.50 0.50 50 3.50 175 145.00 2.90 2.50 0.25 100 3.00 300 157.50 1.58 1.50 0.75 150 2.50 375 195.00 1.30 0.50 1.25 200 2.00 400 257.50 1.29 -0.50 1.75 250 1.50 375 345.00 1.38 a) Adele's marginal revenue schedule is shown in the table above. The figure below shows the demand curve faced by the firm and its marginal revenue curve.

b) Adele's marginal cost and average total cost schedules are shown in the table above. The figure above shows the firm's marginal and average total cost curves. c) The firm maximizes its profit by producing 150 bottles of mineral water per week. At this level of output MC = MR = $1.00. The price is $2.50 per bottle. If the firm produces 150 bottles of water per week, its average total cost is $1.30 per bottle. So the economic profit per bottle is $2.50 - $1.30, or $1.20 per bottle. So the total economic profit is $1.20 per bottle × 150 bottles per week = $180 per week. d) The firm does not use resources efficiently. At the output level that it produces, the marginal social benefit, $2.50 from the demand curve, exceeds the marginal social cost, $1.00 from the marginal cost curve. Topic: Single-Price Monopoly's Output and Price Decisions Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

Quantity Price demanded (dollars per copy) (copies per day) 0.40 500 0.50 400 0.60 300 0.70 200 0.80 100 0.90 0 Quantity Total cost produced (dollars per day) (copies per day) 0 100 100 105 200 120 300 145 400 180 500 225 3) Pinesboro Herald is the only local newspaper in the city of Pinesboro. The publisher faces the demand schedule shown in the first table above and has the cost schedule shown in the second table above. a) Calculate the marginal revenue schedule. In a figure, draw the demand curve and the marginal revenue curve. b) Calculate the publisher's marginal cost and average total cost schedules. In the same figure that you drew the demand and marginal revenue curves, draw the marginal and the average total cost curves. c) What are the publisher's profit-maximizing output and price? What is the publisher's economic profit per day? d) At the price charged, is the demand for newspapers elastic or inelastic? Explain your answer. e) Does the publisher use resources efficiently? What is the deadweight loss? Explain your answer. f) Will the publisher try to price discriminate? Why or why not? Answer: Quantity Price TR MR TC MC ATC (copies per day) (dollars) (dollars) (dollars) (dollars) (dollars) (dollars) 0 0.90 0 100 0.80 0.05 100 0.80 80 105 1.05 0.60 0.15 200 0.70 140 120 0.60 0.40 0.25 300 0.60 180 145 0.48 0.20 0.35 400 0.50 200 180 0.45 0.00 0.45 500 0.40 200 225 0.45

a) The publisher's marginal revenue schedule is shown in the table above. The figure below shows the demand curve faced by the firm and its marginal revenue curve.

b) The publisher's marginal cost and average total cost schedules are shown in the table above. The figure above shows the firm's marginal and average total cost curves. c) The publisher maximizes its profit by producing 300 copies per day. At this level of output MC = MR = $0.30. The market price is $0.60 per copy. If the publisher prints 300 copies per day, its average total cost is $0.48 per copy. So the economic profit per copy is $0.60 - $0.48 = $0.12 per copy. And the total economic profit is $0.12 profit per copy × 300 copies per day, or $36 per day. d) The demand for newspapers is elastic. At the price charged, the marginal revenue is positive, which means that means the total revenue increases if the quantity sold increases and decreases if the quantity sold decreases. e) The publisher does not use resources efficiently. At the profit-maximizing output level, the marginal benefit is $0.60, from the demand curve, which exceeds the marginal cost of $0.48. The efficient level of output is 450 copies per day. The deadweight loss is equal to the area of the darkened triangle in the figure above. This area equals ($0.60 - $0.30) × (450 - 300)/2 = $22.5 per day. f) The publisher will try to price discriminate if it can identify and separate different types of buyers and find a way to prevent resale of the newspaper. For example, the publisher can give a discount to its low-income subscribers such as students and senior citizens if the paper is delivered to their residences. Topic: Single-Price Monopoly's Output and Price Decisions Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

Price Quantity demanded (dollars per thousand (thousands of cubic feet cubic feet) per day) 10 80 30 60 50 40 70 20 90 0 4) West Coast Gas, Inc., is a natural gas supplier. The firm faces the demand schedule shown in the table above and cannot price discriminate. The company's fixed cost is $1,000 per month and its marginal cost is constant at $10 per thousand of cubic feet. a) Draw the demand curve faced by West Coast Gas and the marginal revenue curve. Draw the company's marginal cost and average cost curves. b) Is West Coast Gas a natural monopoly? Why or why not? c) What are the firm's profit-maximizing output and price? What is the firm's economic profit per month? d) If West Coast Gas maximizes its profit, does it also maximize total surplus? Why or why not? What is the deadweight loss (if any)? Answer:

a) The figure above shows the demand curve faced by the company and the firm's marginal revenue, marginal cost, and average cost curves. Because the marginal cost is constant, total variable cost equals marginal cost multiplied by the number of thousands of cubic feet of gas produced, and then TC = FC + VC. b) West Coast Gas is a natural monopoly. Because the marginal cost is constant, the industry experiences economies of scale at all levels of output. As shown in the figure, the average total cost curve slopes downward where it intersects the demand curve, which means one firm can supply the entire market at a lower average cost and price than could two or more firms.

c) The firm maximizes its profit by producing 40,000 cubic feet of natural gas per month. At this level of output MR = MC = $10. The profit-maximizing price is $50 per thousand cubic feet. If the firm supplies 40,000 cubic feet per month, its average total cost is $35 per thousand cubic feet. So its economic profit per thousand cubic feet of gas is $50 - $35 = $15 per thousand cubic feet. Thus its total economic profit is $15 × 40,000, which is $600,000 per month. d) At the profit-maximizing output level, the marginal benefit of $50, measured using the demand curve, exceeds the marginal cost of $10, measured using the marginal cost curve. Because the marginal benefit exceeds the marginal cost, total surplus is not maximized The deadweight loss is the area of the darkened triangle in the figure, which equals ($50 - $10) × (80,000 - 40,000)/2 = $800,000 per month. Topic: Natural Monopoly Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

5) West Coast Gas, Inc., is a natural gas supplier. The firm faces the demand schedule shown in the table above and cannot price discriminate. The company's fixed cost is $1,000 per month and its marginal cost is constant at $10 per thousand of cubic feet. The government imposes a marginal cost pricing rule on the company. a) What is the price of natural gas supplied by West Coast Gas? How many cubic feet does the company sell? What is the firm's economic profit per month? b) How does the regulation affect total surplus? c) Is the regulation in the social interest? Explain. Answer: a) Marginal cost pricing regulation sets the price equal to marginal cost, which is determined where the marginal cost curve intersects the demand curve. So the price is $10 per thousand cubic feet. At this price, the company sells 80,000 cubic feet of gas. The average total cost at this level of output is $22.50 per thousand cubic feet, so the company's economic profit per thousand cubic feet of natural gas is $10 - $22.50 = -$12.50 per thousand cubic feet, that is, the company incurs an economic loss of $12.50 per thousand cubic feet. The company produces 80,000 cubic feet, so its total economic loss is -$12.50 × 80,000 = -$1,000,000 per month. West Coast Gas incurs an economic loss of $1 million per month. b) If West Coast Gas is not regulated, the company maximizes its profit by producing 40,000 cubic feet of gas per month and charging $50 per thousand cubic feet. In this case, the consumer surplus is ($90 - $50) × 40,000/2 = $800,000 and the producer surplus is ($50 - $10) × 40,000 = $1,600,000. The total surplus is $800,000 + $1,600,000 = $2,400,000. With the marginal cost pricing, the total surplus equals the consumer surplus, which is ($90 - $10) × 80,000/2 = $3,200,000. So the regulation increases total surplus by $800,000. c) With no regulation, the marginal benefit ($50) exceeds the marginal cost ($10), the output produced is below the efficient level and the deadweight loss is $800,000 per month. With the regulation, MSB = MSC, so the output level is efficient and total surplus is maximized. The regulation is in the social interest. Topic: Regulating Natural Monopoly Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

Economics, 11e, Global Edition (Parkin) Chapter 14 Monopolistic Competition 1 What Is Monopolistic Competition? 1) In monopolistic competition A) firms face barriers to entry. B) a large number of firms compete. C) firms produce and sell an identical product. D) firms face perfectly elastic demand for their product. Answer: B Topic: Monopolistic Competition Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

2) Monopolistic competition is defined as a type of market structure where A) many firms produce the good. B) firms produce a homogeneous good. C) there are barriers to entry. D) firms can earn positive profit in the long run. Answer: A Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

3) ACME, Inc. operates in a market structure in which there are many other firms that find it easy to enter or exit. ACME is operating in ________ market. A) definitely a perfectly competitive B) either a perfectly competitive or a monopolistically competitive C) definitely a monopolistically competitive D) neither a perfectly competitive nor a monopolistically competitive Answer: B Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

4) Which of the following is a characteristic of monopolistic competition? A) many firms B) standardized product C) mutual interdependence D) barriers to entry Answer: A Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 1 Copyright © 2014 Pearson Education, Inc.

5) In a monopolistically competitive market there are A) many firms. B) one firm. C) a very small number of firms. D) two firms. Answer: A Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

6) Monopolistic competition is a market structure in which A) a large number of firms compete. B) each firm produces an identical product. C) firms only compete on product price. D) there are barriers to entry. Answer: A Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

7) Monopolistic competition is a market structure in which: A) A large number of firms compete. B) Firms produce identical products. C) Firms compete only on product price. D) Natural or legal barriers prevent the entry of new firms. Answer: A Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

8) Monopolistic competition is a market structure in which: A) A small number of firms compete. B) Each firm produces an identical product. C) Firms only compete on product price. D) Firms are free to enter or exit. Answer: D Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

9) Monopolistic competition is a market structure in which: A) A small number of firms compete. B) Firms produce identical products. C) Firms compete only on product price. D) Firms are free to enter and exit the market. Answer: D Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

10) In monopolistic competition: A) Each firm's price cannot deviate from the average price of other firms. B) Each firm supplies a small part of the total market output. C) One firm's actions directly affect the actions of the other firms. D) Collusion is possible. Answer: B Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

11) Which of the following is part of the market structure for monopolistic competition? A) barriers to entry B) a large number of firms compete C) each firm produces a differentiated product D) Both answers B and C are correct. Answer: D Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

12) Monopolistic competition is a market in which ________ firms produce ________ goods and services. A) many; identical B) many; differentiated C) few; differentiated D) few; identical Answer: B Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

13) In monopolistic competition, there are A) many firms making a differentiated product. B) a few firms making a differentiated product. C) many firms making an identical product. D) a few firms making an identical product. Answer: A Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

14) Which characteristic is associated with monopolistic competition? A) collusion B) product differentiation C) small number of firms D) awareness of rival firms in the market Answer: B Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

15) A characteristic of monopolistic competition is A) there is one firm in the industry. B) each firm is a price taker. C) each firm produces a differentiated product. D) the actions of one firm affect the choices and actions of another firm. Answer: C Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

16) Monopolistic competition is a market structure in which A) a small number of firms compete. B) each firm produces a differentiated product. C) firms only compete on product price. D) there are barriers to entry. Answer: B Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

17) The key feature of monopolistic competition that distinguishes it from perfect competition is A) many sellers. B) barriers to entry. C) interdependency. D) product differentiation. Answer: D Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

18) In monopolistic competition: A) Each firm's price can deviate from the average price of other firms. B) Each firm supplies a large part of the total market output. C) One firm's actions directly affect the actions of the other firms. D) Firms typically determine the amount they produce through agreements with competitors. Answer: A Topic: Monopolistic Competition Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

19) Firms in monopolistic competition charge prices that are ________ those of the other firms in the market. A) close to B) very different from C) the same as D) completely unrelated to Answer: A Topic: Monopolistic Competition Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

20) In monopolistic competition, the presence of a large number of firms making a differentiated product means that A) each firm has some ability to effect the price of its particular good or service. B) each firm must charge the same price. C) the price is established by agreements among the different firms. D) each firm must produce the same quantity. Answer: A Topic: Monopolistic Competition Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

21) In monopolistic competition, a firm has some ability to affect the price for its product because of A) easy entry and exit. B) economic profits. C) product differentiation. D) many competitors. Answer: C Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

22) Monopolistic competition is a market structure in which A) a small number of firms compete. B) each firm produces an identical product. C) firms compete on product quality, price, and marketing. D) there are barriers to entry. Answer: C Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

23) Monopolistic competition is a market structure in which: A) A small number of firms compete. B) Firms produce identical products. C) Firms compete on product quality, price, and marketing. D) Natural or legal barriers prevent the entry of new firms. Answer: C Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

24) Which of the following is NOT true of monopolistic competition? A) Firms produce a good that is a perfect substitute for their competitors' goods. B) There is free entry and exit. C) There are a large number of firms. D) Firms can compete on price and quality. Answer: A Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

25) All of the following characteristics apply to monopolistic competition EXCEPT A) a large number of firms compete. B) each firm produces the same identical product. C) firms compete on product quality, price, and marketing. D) there are no barriers to enter or exit the industry. Answer: B Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

26) Which of the following is NOT a characteristic of monopolistic competition? A) many firms B) price taking firms C) advertising D) product differentiation Answer: B Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

27) Which of the following statements is FALSE concerning monopolistic competition? A) There are many firms. B) Firms sell a differentiated product. C) Each firm's actions influence rival firms. D) Firms are free to enter and exit. Answer: C Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

28) Which of the following is NOT true of firms in monopolistic competition? A) They are price takers. B) They practice product differentiation. C) They have excess capacity in the long run. D) They earn a normal profit in the long run. Answer: A Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

29) Which of the following is NOT a characteristic of the market structure for monopolistic competition? A) Firms are free to enter and exit. B) Firms are price takers. C) Firms compete on product quality, price, and marketing. D) There are a large number of firms. Answer: B Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

30) Which of the following is NOT a characteristic of monopolistic competition? A) A large number of firms compete. B) Entry and exit is restricted. C) Firms compete on product quality. D) Firms compete on price. Answer: B Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

31) Which of the following statements is FALSE concerning monopolistic competition? A) There are many firms. B) Firms sell a differentiated product. C) There are no barriers to entry. D) Monopolistically competitive firms are price takers because of product differentiation. Answer: D Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

32) In monopolistic competition: A) Each firm's price cannot deviate from the average price of other firms. B) Each firm supplies a large part of the total industry output. C) No one firm's actions directly affect the actions of the other firms. D) Firms set their prices based on agreements with their competitors. Answer: C Topic: Monopolistic Competition Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

33) In monopolistic competition, each firm supplies a ________ part of the total market output and its actions ________ the actions of the other firms. A) small; do not directly affect B) small; directly affect C) large; do not directly affect D) large; directly affect Answer: A Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

34) Monopolistic competition differs from monopoly because in monopolistic competition, A) firms maximize profits. B) firms set marginal revenue equal to marginal cost to maximize profit. C) firms are free to enter and exit. D) All of the above are differences between monopoly and monopolistically competitive firms. Answer: C Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

35) Monopolistic competition differs from monopoly because in monopolistic competition, A) there are many firms. B) there are no close substitutes for each firm's product. C) the firms compete only on price. D) None of the above are differences between monopoly and monopolistically competitive firms. Answer: A Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

36) Dole Co. operates in a monopolistically competitive market. Which of the following characterizes Dole Co.'s market? A) Dole Co. supplies a small portion of the market's output. B) Dole Co.'s product is slightly different from its competitors. C) Dole Co. faced no barrier to entry when it decided to enter its market. D) All of the above describe Dole Co.'s market. Answer: D Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

37) In monopolistically competitive markets, products are ________ and there ________ barriers to entry. A) identical; are no B) differentiated; are no C) identical; are D) differentiated; are Answer: B Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

38) Within a monopolistically competitive industry, A) firms can freely enter and exit and economic profits are zero in the long run. B) firms can freely enter and exit and economic profits are greater than zero in the long run. C) there are some barriers to entry and exit and economic profits are zero in the long run. D) there are some barriers to entry and exit and economic profits are greater than zero in the long run. Answer: A Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

39) In monopolistic competition, when firms make an economic profit, A) the existing firms continue to make an economic profit in the long run because of product differentiation. B) new firms enter the industry so that the price falls and the economic profit eventually falls to zero. C) new firms enter the industry so that output decreases and the economic profit increases. D) new firms enter the industry so that output increases and the economic profit increases. Answer: B Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

40) A monopolistically competitive firm has ________ power to set the price of its product because ________. A) no; there are no barriers to entry B) some; there are barriers to entry C) no; of product differentiation D) some; of product differentiation Answer: D Topic: Monopolistic Competition Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

41) A monopolistically competitive firm and a monopoly are alike because both I. face downward sloping demand curves. II. have marginal revenue curves that lie beneath their demand curves. III. can make an economic profit in the long run. A) I only. B) I and II. C) I, II, and III. D) I and III. Answer: B Topic: Monopolistic Competition Skill: Conceptual Status: New AACSB: Reflective Thinking

42) Which of the following best explains why monopolistically competitive firms face a downward sloping demand curve while perfectly competitive firms do not? A) Monopolistically competitive firms sell a differentiated good. B) Monopolistically competitive industries have only a few firms. C) Monopolistically competitive firms have barriers to entry. D) Only industries with free entry and exit have firms that face horizontal demand curves. Answer: A Topic: Comparing Perfect Competition and Monopolistic Competition Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

43) Monopolistic competition and perfect competition share all of the following EXCEPT A) the type of good they sell. B) free entry and exit. C) a large number of firms. D) price competition among firms. Answer: A Topic: Comparing Perfect Competition and Monopolistic Competition Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

44) A monopolistically competitive firm and a perfectly competitive firm are alike because both types of firms I. face downward sloping demand curves. II. have marginal revenue curves that lie beneath their demand curves. III. can make only zero economic profit in the long run. A) I and II B) I and III C) III only D) I only Answer: C Topic: Comparing Perfect Competition and Monopolistic Competition Skill: Conceptual Status: New AACSB: Reflective Thinking

45) One difference between perfect competition and monopolistic competition is that A) a perfectly competitive industry has fewer firms. B) in perfect competition, firms produce slightly differentiated products. C) monopolistic competition has barriers to entry. D) firms in monopolistic competition face a downward-sloping demand curve. Answer: D Topic: Comparing Perfect Competition and Monopolistic Competition Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

46) When comparing perfect competition and monopolistic competition, we find that A) firms in monopolistic competition produce identical products just as do firms in perfect competition. B) firms in monopolistic competition face barriers to entry, unlike firms in perfect competition. C) advertising plays a large role in monopolistic competition, unlike in perfect competition. D) firms in monopolistic competition are price takers just as is the case for firms in perfect competition. Answer: C Topic: Comparing Perfect Competition and Monopolistic Competition Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

47) A product that is a close substitute but not a perfect substitute for the products of the other firms is called A) a homogeneous product. B) an efficient product. C) a differentiated product. D) an inelastic product. Answer: C Topic: Product Differentiation Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

48) Product differentiation exists within an industry if A) there are no substitutes for a product. B) there are close but not perfect substitutes for a product. C) the firm can sell all it wants at the chosen price. D) there is a monopoly. Answer: B Topic: Product Differentiation Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

49) Product differentiation A) is why a monopolistic competitor faces a downward-sloping demand curve. B) means that the monopolistic competitor's product is a close but not a perfect substitute for the products of its competitors. C) enables the monopolistic competitor to compete in product quality. D) All of the above answers are correct. Answer: D Topic: Product Differentiation Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

50) A characteristic of monopolistic competition is A) product differentiation. B) a high capital-output ratio. C) a low ratio of fixed costs to variable costs. D) the absence of advertising. Answer: A Topic: Product Differentiation Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

51) Product differentiation is a defining characteristic of A) perfectly elastic demand. B) oligopoly. C) perfect competition. D) monopolistic competition. Answer: D Topic: Product Differentiation Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

52) A monopolistically competitive industry has A) significant barriers to entry. B) differentiated products. C) mutually dependent firms. D) a small number of large firms. Answer: B Topic: Product Differentiation Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

53) Firms in monopolistic competition can achieve product differentiation by A) expanding plant size. B) exploiting economies of scale in production. C) advertising special characteristics. D) setting the price equal to average revenue. Answer: C Topic: Product Differentiation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

54) The Firefox, Internet Explorer, and Opera browsers are an example of ________. A) products produced in monopoly industries B) products produced in perfectly competitive industries C) product differentiation D) homogeneous products Answer: C Topic: Product Differentiation Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

55) A firm in monopolistic competition can determine what price to charge for its product because of A) barriers to entry. B) economies of scale. C) product differentiation. D) the fact there are many buyers. Answer: C Topic: Product Differentiation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

56) Brand names are an example of A) economies of scale. B) product differentiation. C) oligopoly. D) illegal barriers to entry. Answer: B Topic: Product Differentiation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

57) Brand name aspirin is chemically identical to store brand aspirin. Yet, consumers often prefer the brand name product to the store brand product. This preference is an example of A) product differentiation. B) perfect product competition. C) oligopolistic product competition. D) price taking behavior. Answer: A Topic: Product Differentiation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

58) Brand name drugs are chemically identical to their generic counterparts. Yet, consumers often prefer the brand name product to the generic product. Making consumers think that a brand name drug differs from its generic counterpart is an example of A) product differentiation. B) perfect competition. C) oligopolistic behavior. D) price taking behavior. Answer: A Topic: Product Differentiation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

59) In monopolistically competitive industries, A) non-price competition through product differentiation is actively pursued by firms. B) product variety is the same as in perfectly competitive industries. C) firms do not respond to changes in consumer demand. D) firms' economic profits are protected by barriers to entry. Answer: A Topic: Product Differentiation Skill: Analytical Status: Modified 10th edition AACSB: Reflective Thinking

60) Firms in monopolistic competition make products that are A) perfect complements. B) close but not perfect complements. C) perfect substitutes. D) close but not perfect substitutes. Answer: D Topic: Product Differentiation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

61) Firms in which type of market make zero economic profit in the long run? A) perfect competition and monopolistic competition B) monopoly C) perfect competition D) monopolistic competition Answer: A Topic: Monopolistic Competition, Long-Run Economic Profit Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

62) How is a monopolistically competitive firm similar to a perfectly competitive firm? A) Both will observe entry into the industry if economic profit is positive. B) Both produce where average total cost equals marginal cost. C) Both make a positive economic profit in the long run. D) Both produce a homogeneous good. Answer: A Topic: Monopolistic Competition, Long-Run Economic Profit Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

63) The monopolistically competitive firm A) cannot make a positive economic profit in the long run because of entry. B) can make a positive economic profit in the long run because it sells a differentiated good. C) can make a positive economic profit in the long run because there are only a few firms in the industry. D) cannot make a positive economic profit in the long run because it sells a homogeneous good. Answer: A Topic: Monopolistic Competition, Long-Run Economic Profit Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

64) Which of the following goods is best described as being sold in a monopolistically competitive market? A) automobiles B) wheat C) fast food D) postage stamps Answer: C Topic: Examples of Monopolistic Competition Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

65) The best example of a good sold in a monopolistically competitive market is A) pizza. B) the local newspaper. C) sewer services. D) peaches. Answer: A Topic: Examples of Monopolistic Competition Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

66) Small pizza parlors exist in just about every town. Anyone can open a pizza parlor, and the pizzas from one parlor typically have different tastes and sizes than pizzas from another parlor. Thus, the pizza industry is an example of A) perfect competition. B) monopoly. C) oligopoly. D) monopolistic competition. Answer: D Topic: Examples of Monopolistic Competition Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

67) Which of the following firms are in a monopolistically competitive market? A) the many retail firms such as JCPenney, Sears, The Gap, and so on B) the sole local providers of electricity, such as Kansas Power and Light, or Pacific Gas and Electric C) the many farmers that grow wheat D) None of the above are in a monopolistically competitive market. Answer: A Topic: Examples of Monopolistic Competition Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

68) A monopolistically competitive firm is like a monopoly firm insofar as A) both face perfectly elastic demand. B) both earn an economic profit in the long run. C) both have MR curves that lie below their demand curves. D) neither is protected by high barriers to entry. Answer: C Topic: Study Guide Question, Monopolistic Competition Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

69) A monopolistically competitive firm is like a perfectly competitive firm insofar as A) both face perfectly elastic demand. B) both earn an economic profit in the long run. C) both have MR curves that lie below their demand curves. D) neither is protected by high barriers to entry. Answer: D Topic: Study Guide Question, Monopolistic Competition Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

2 Price and Output in Monopolistic Competition 1) A characteristic of monopolistic competition is that each firm A) faces perfectly elastic demand. B) faces a downward-sloping demand curve. C) has a perfectly elastic supply. D) has a perfectly inelastic supply. Answer: B Topic: Monopolistic Competition, Demand Curve Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

2) In monopolistic competition, each firm has a demand curve with a ________ and there ________ barriers to entry into the market. A) negative slope; are no B) slope equal to zero; are no C) negative slope; are D) slope equal to zero; are Answer: A Topic: Monopolistic Competition, Demand Curve Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

3) If an industry lacks barriers to entry and each of the many firm faces a demand curve with a negative slope, the industry is A) perfectly competitive. B) monopolistically competitive. C) an oligopoly. D) a monopoly. Answer: B Topic: Monopolistic Competition, Demand Curve Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

4) One important difference between monopoly and monopolistic competition is the A) slope of the demand curve that the firms faces. B) point there are no barriers to entry in monopolistic competition. C) greater restriction of output in monopolistic competition. D) result that the marginal revenue and demand curves are the same for a monopoly. Answer: B Topic: Monopolistic Competition, Demand Curve Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

5) In monopolistic competition, a firm can determine what price to set for its good because A) the demand for its good is not perfectly elastic. B) the demand for its good is perfectly elastic. C) there are many buyers. D) there are many sellers. Answer: A Topic: Monopolistic Competition, Demand Curve Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

6) In monopolistic competition, the demand curve for a firm's product is negatively sloped because of A) barriers to entry. B) no barriers to entry. C) product differentiation. D) economies of scale. Answer: C Topic: Monopolistic Competition, Demand Curve Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

7) In monopolistic competition, each firm's marginal revenue curve lies ________ its demand curve because of ________. A) below; barriers to entry B) below; product differentiation C) above; barriers to entry D) above; product differentiation Answer: B Topic: Monopolistic Competition, Demand Curve Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

8) In monopolistic competition, each firm's marginal revenue curve has a ________ and its demand curve has a ________. A) slope equal to zero; slope equal to zero B) slope equal to zero; negative slope C) negative slope; a slope equal to zero D) negative slope; negative slope Answer: D Topic: Monopolistic Competition, Demand Curve Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

9) A firm in monopolistic competition has some degree of price-setting power because A) in the long run it earns a normal profit. B) it can never earn less than normal profit. C) the price it charges is never more than its marginal cost. D) if it raises its price, the quantity it can sell will not decrease to zero. Answer: D Topic: Monopolistic Competition, Demand Curve Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

10) Graphically we can illustrate a firm with price setting ability by drawing their demand curve ________. A) downward sloping B) upward sloping C) horizontal D) vertical Answer: A Topic: Monopolistic Competition, Demand Curve Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

11) For a firm in monopolistic competition, the marginal cost curve intersects the average total cost curve A) at the minimum average total cost. B) to the left of the minimum average total cost. C) to the right of the minimum average total cost. D) at no point. Answer: A Topic: Monopolistic Competition, Cost Curves Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

12) Firms in monopolistic competition always will A) make an economic profit. B) set their price equal to their marginal cost. C) set their price above their marginal cost. D) produce at the minimum average total cost. Answer: C Topic: Monopolistic Competition, Price Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

13) Which of the following is NOT a characteristic of monopolistic competition? A) There is easy entry and exit. B) Firms may earn an economic profit in the short run. C) There is product differentiation in the market. D) Firms set the price of their product equal to their marginal cost. Answer: D Topic: Monopolistic Competition, Price Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

14) Firms in monopolistic competition have rivals that A) match their price increases. B) match their price decreases. C) agree on a common price. D) set their prices according to the demand curves they face. Answer: D Topic: Monopolistic Competition, Price Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

15) In the short run, a monopolistically competitive firm chooses A) both its price and its quantity. B) its price but not its quantity. C) its quantity but not its price. D) neither its price nor its quantity. Answer: A Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

16) In monopolistic competition, in the short run a firm maximizes its profit by selecting an output at which marginal cost equals A) average total cost. B) marginal revenue. C) price. D) zero. Answer: B Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

17) In monopolistic competition, profit is maximized when the amount produced is such that A) marginal revenue equals marginal cost. B) marginal revenue is greater than marginal cost. C) total revenue equals total cost. D) total revenue is maximized. Answer: A Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

18) In the short run, a firm in monopolistic competition produces where A) MR = MC and economic profit is equal to zero. B) MR = MC. C) the given market price is equal to MC and economic profit is equal to zero. D) the given market price is equal to MC. Answer: B Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

19) The profit maximizing condition for a firm in monopolistic competition is to produce so that A) marginal cost equals marginal revenue. B) marginal cost equals price. C) average total cost equals price. D) price equals marginal revenue. Answer: A Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

20) Which of the following is always true regarding a profit maximizing monopolistically competitive firm in short-run equilibrium? A) P = ATC. B) P = MR. C) MR = MC. D) MC = ATC. Answer: C Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

21) Which of the following statements is correct for a monopolistically competitive firm in the short run? A) Its total revenue is maximized. B) Its total fixed cost is 0. C) Its marginal cost is equal to its marginal revenue. D) Its price is equal to its marginal cost. Answer: C Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

22) A monopolistically competitive firm will always choose to produce where A) marginal revenue equals marginal cost. B) marginal cost meets the demand curve. C) average total cost meets the demand curve. D) average total cost is minimized. Answer: A Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

23) How is a monopolistically competitive firm similar to a monopoly firm? A) Both produce where marginal revenue equals marginal cost. B) Both will observe entry into the industry if economic profit is positive. C) Both produce a unique good. D) Both produce where price equals marginal cost. Answer: A Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

24) In the short run, a firm in a monopolistic competition will produce the amount of output where its A) marginal revenue equals marginal cost and will set its price according to the demand for that output level. B) marginal revenue equals marginal cost and takes the market price as given. C) average revenue equals average cost and will set its price according to the demand for that output level. D) average revenue equals its average cost and takes the market price as given. Answer: A Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

25) In the short run, for a firm in monopolistic competition, A) the firm's economic profit must equal zero. B) marginal revenue exceeds marginal cost. C) price exceeds marginal cost. D) the firm is a price taker. Answer: C Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

26) Which of the following statements regarding a profit-maximizing monopolistically competitive firm is NOT true? A) The MR curve lies below the demand curve. B) A firm produces the quantity at which the MR curve intersects the MC curve. C) The MC curve intersects the ATC curve at the ATC curve's lowest point. D) A firm's price equals the price at which the MR curve intersects the MC curve. Answer: D Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Conceptual Status: New AACSB: Reflective Thinking

27) If a monopolistically competitive firm's marginal cost curve shifts upward, then the amount of output it produces A) increases. B) stays the same. C) decreases. D) could increase, decrease, or stay the same but more information is needed. Answer: C Topic: Monopolistic Competition, Profit Maximization Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

28) When firms in monopolistic competition incur an economic loss, some firms will A) enter the industry and produce more products. B) exit the industry, and demand will increase for the firms that remain. C) exit the industry, and demand will decrease for the firms that remain. D) enter the industry, and demand will become more elastic for the original firms. Answer: B Topic: Monopolistic Competition, Short-Run Economic Loss Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

29) If firms in a monopolistically competitive industry are making an economic profit, then A) some customers will exit the market. B) some workers will leave the industry's labor force. C) some firms will leave the industry. D) new firms will enter the industry. Answer: D Topic: Monopolistic Competition, Short-Run Economic Profit Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

30) When firms in monopolistic competition are making an economic profit, firms will A) enter the industry, and demand will increase for the original firms. B) exit the industry, and demand will increase for the firms that remain. C) exit the industry, and demand will decrease for the firms that remain. D) enter the industry, and demand will decrease for the original firms. Answer: D Topic: Monopolistic Competition, Short-Run Economic Profit Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

31) In monopolistic competition, firms can make an economic profit in A) the short run and in the long run. B) the short run but not in the long run. C) the long run but not in the short run. D) neither the long run nor the short run. Answer: B Topic: Monopolistic Competition, Long- & Short-Run Economic Profit Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

32) In the above figure, if the firm is in monopolistic competition, it will produce A) 40 units. B) 60 units. C) between 61 and 99 units. D) 100 units. Answer: A Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

33) In the above figure, if the firm is in monopolistic competition, its price will be A) $1. B) $2. C) $3. D) $4. Answer: C Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

34) In the above figure, the monopolistically competitive firm makes an economic profit of A) $0. B) between $0 and $50 per day. C) between $50.01 and $100 per day. D) greater than $100.01 per day. Answer: B Topic: Monopolistic Competition, Short-Run Economic Profit Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

35) The above figure is for a firm in monopolistic competition. The diagram represents the short run rather than the long run because the A) MR curve cuts the ATC curve from below. B) MR curve and the D curve do not coincide. C) firm is incurring an economic loss. D) firm is making an economic profit. Answer: D Topic: Monopolistic Competition, Long- & Short-Run Economic Profit Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Analytical Skills

36) The figure above shows a monopolistically competitive firm in the short run. During the transition to the long run, the demand curve will shift ________ and the MR curve will shift ________. A) leftward; leftward B) leftward; rightward C) rightward; leftward D) rightward; rightward Answer: A Topic: Monopolistic Competition, Long-Run Equilibrium Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

37) The figure above shows Bill's Hotdogs, a monopolistically competitive firm. If other firms enter the market and have hot dogs that are very close substitutes for Bill's Hotdogs, then the demand curve for Bill's Hotdogs will ________. A) shift leftward and become more elastic B) shift rightward and become more elastic C) shift rightward and be parallel to the original demand curve D) shift leftward and be parallel to the original demand curve Answer: A Topic: Monopolistic Competition, Demand Curve Skill: Conceptual Status: New 10th edition AACSB: Reflective Thinking

38) If all firms in a monopolistically competitive industry faced the same demand and cost curves pictured in the above figure, A) new firms will enter the industry. B) some firms will exit the industry. C) their economic profit would be zero. D) they would each produce 60 units. Answer: A Topic: Monopolistic Competition, Long-Run Equilibrium Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

39) In the above figure, the firm is a monopolistically competitive firm. In the long run, its economic profit will be A) zero. B) between zero and $50 per day. C) greater than $50 per day. D) some amount that cannot be determined without more information. Answer: A Topic: Monopolistic Competition, Long-Run Economic Profit Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

40) The figure above could represent the long-run equilibrium for a A) perfectly competitive firm. B) monopolistically competitive firm. C) monopoly. D) firm facing inelastic demand at all outputs. Answer: C Topic: Monopolistic Competition, Long-Run Profit Maximization Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Analytical Skills

41) The above figure shows the demand and cost curves for a firm in ________ in the ________. A) perfect competition; short run B) monopolistic competition; long run C) perfect competition; long run D) monopolistic competition; short run Answer: D Topic: Monopolistic Competition Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

42) The above figure shows the demand and cost curves for a firm in monopolistic competition. The firm maximizes its profit by A) producing 8 units at a price of $5 each. B) producing 8 units at a price of $15 each. C) producing 4 units at a price of $20 each. D) producing 12 units at a price of $10 each. Answer: B Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

43) The above figure shows the demand and cost curves for a firm in monopolistic competition. The firm earns total revenue of A) $120. B) $40. C) $160. D) $0. Answer: A Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

44) The above figure shows the demand and cost curves for a firm in monopolistic competition. The firm makes the maximum profit when the marginal cost of last item produced equals A) $5. B) $10. C) $15. D) $20. Answer: A Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

45) The above figure shows the demand and cost curves for a firm in monopolistic competition. The graph represents the firm's situation in A) only the short run. B) only the long run. C) either the short run or the long run. D) neither the short run nor the long run. Answer: A Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

46) The above figure shows the demand and cost curves for a firm in monopolistic competition. In the figure, the firm makes an economic profit of A) $0. B) $20. C) $40. D) $120. Answer: C Topic: Monopolistic Competition, Short-Run Economic Profit Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

47) The above figure shows the demand and cost curves for a firm. The figure shows a A) monopolistically competitive firm in the long run. B) perfectly competitive firm earning zero profit. C) monopolistically competitive firm in the short run. D) perfectly competitive firm in the short run. Answer: C Topic: Monopolistic Competition, Short-Run Economic Profit Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

48) The above figure shows the demand and cost curves for a firm in monopolistic competition. In the long run, the demand for this firm's product will A) decrease as other firms enter the industry. B) decrease as product differences disappear. C) become less elastic as firms exit the industry. D) become less elastic as other firms enter the industry. Answer: A Topic: Monopolistic Competition, Long-Run Economic Profit Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Analytical Skills

49) In a monopolistically competitive industry, the firms are currently making an economic profit. When this market moves to its long-run equilibrium, the firms' demand curves will have ________ and their economic profit will have ________. A) shifted leftward; decreased to zero B) shifted leftward; decreased but remain greater than zero C) shifted rightward; decreased to zero D) remained the same; decreased to zero Answer: A Topic: Monopolistic Competition, Long-Run Equilibrium Skill: Conceptual Status: New 10th edition AACSB: Reflective Thinking

50) The figure above shows the situation facing Smart Digit, Inc., a firm in monopolistic competition that produces calculators. What quantity does the firm produce? A) 200 calculators per day B) 300 calculators per day C) more than 300 calculators per day and less than 400 calculators per day D) 400 calculators per day Answer: B Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

51) The figure above shows the situation facing Smart Digit, Inc., a firm in monopolistic competition that produces calculators. What is the firm's profit-maximizing price? A) $12 B) $10 C) $8 D) $4 Answer: B Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

52) The figure above shows the situation facing Smart Digit, Inc., a firm in monopolistic competition that produces calculators. What is the firm's economic profit per day? A) zero B) between $1 and $700 C) between $701 and $900 D) more than $901 Answer: B Topic: Monopolistic Competition, Short-Run Economic Profit Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

53) The figure above shows the situation facing Smart Digit, Inc., a firm in monopolistic competition that produces calculators. The firm's markup is ________ per calculator. A) zero B) $2 C) $4 D) $6 Answer: D Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

54) The figure above shows the situation facing Smart Digit, Inc., a firm in monopolistic competition that produces calculators. The firm's economic profit in the long run is A) zero. B) $600. C) $900. D) $2,400. Answer: A Topic: Monopolistic Competition, Long-Run Economic Profit Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

The figure shows the demand curve for Nike shoes (D), and Nike's marginal revenue curve (MR), marginal cost curve (MC), and average total cost curve (ATC). 55) In the figure above, Nike maximizes its profit if it sells ________ pairs of shoes per day. A) 120 B) 87 C) 137 D) 150 Answer: A Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

56) In the figure above, Nike maximizes its profit if it charges ________ per pair of shoes. A) $75 B) $60 C) $72 D) $42 Answer: A Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

57) In the figure above, Nike's economic profit is ________. A) $3,000 B) $1,800 C) $9,000 D) zero Answer: A Topic: Monopolistic Competition, Short-Run Economic Profit Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

58) In the figure above, assuming that the firm does not shut down, the firm will produce A) fewer than 19 units. B) 20 units. C) 30 units. D) 40 units. Answer: B Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

59) In the figure above, assuming that the firm does not shut down, it will charge a price of A) $1. B) $2. C) $3. D) $4. Answer: C Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 35 Copyright © 2014 Pearson Education, Inc.

60) In the figure above, the firm's economic A) loss will be greater than $30 per day. B) loss will be $30 or less per day. C) profit will be between $0 and $30 per day. D) profit will be greater than $30.01 per day. Answer: B Topic: Monopolistic Competition, Short-Run Economic Loss Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

61) The figure above shows a firm in monopolistic competition. If all firms in the industry have the demand and cost curves illustrated in the figure, then in the long run A) some firms will have exited the industry. B) some firms will have entered the industry. C) firms will have neither entered nor exited the industry. D) we cannot tell if firms will either have entered or exited the industry. Answer: A Topic: Monopolistic Competition, Long-Run Equilibrium Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

The figure shows the demand curve for Gap jackets (D), and Gap's marginal revenue curve (MR), marginal cost curve (MC), and average total cost curve (ATC). 62) In the figure above, Gap maximizes its profit if it sells ________ jackets per day. A) 200 B) 240 C) 275 D) 140 Answer: A Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

63) In the figure above, Gap maximizes its profit if it charges ________ per jacket. A) $100 B) $95 C) $75 D) $120 Answer: A Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

64) In the figure above, Gap's economic ________ is ________. A) loss; $8,000 B) loss; $13,000 C) profit; $7,200 D) profit; $13,000 Answer: A Topic: Monopolistic Competition, Short-Run Economic Loss Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

65) If the market served by a monopolistically competitive industry expands, a likely result in the long run will be A) less elastic demand curves facing each firm. B) a higher ratio of price to average cost. C) a larger number of firms producing a similar product. D) a transition from monopolistic competition to oligopoly. Answer: C Topic: Monopolistic Competition, Long-Run Equilibrium Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

66) Which of the following is FALSE regarding the long run for a firm in monopolistic competition? A) The firm's economic profit equals zero. B) Marginal cost equals average total cost. C) Price exceeds marginal cost. D) Price equals average total cost. Answer: B Topic: Monopolistic Competition, Long-Run Equilibrium Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

67) Which of the following statements regarding the long run for a profit-maximizing monopolistically competitive firm is FALSE? A) The firm is making zero economic profit. B) The firm produces the quantity of output for which marginal revenue equals marginal cost. C) The average total cost equals the price. D) The firm produces the quantity at which the marginal revenue curve intersects the demand curve. Answer: D Topic: Monopolistic Competition, Long-Run Profit Maximization Skill: Conceptual Status: New AACSB: Reflective Thinking

68) Which of the following is FALSE regarding the long run for a firm in monopolistic competition? A) The firm makes zero economic profit. B) Price equals average total cost. C) Output is not produced at minimum average total cost. D) None of the above is a false statement. Answer: D Topic: Monopolistic Competition, Long-Run Equilibrium Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

69) Which of the following is true regarding the long run for a firm in monopolistic competition? A) The firm can make an economic profit because of product differentiation. B) Marginal cost equals average total cost. C) Output is produced at minimum average total cost. D) Price equals average total cost. Answer: D Topic: Monopolistic Competition, Long-Run Equilibrium Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

70) Consider a monopolistically competitive industry which is in long-run equilibrium. Which of the following is true? A) All firms charge a price equal to average total cost. B) All firms charge a price equal to marginal cost. C) All firms earn positive economic profit. D) Demand, average total cost, and marginal cost all intersect. Answer: A Topic: Monopolistic Competition, Long-Run Equilibrium Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

71) In the long run, a firm in monopolistic competition has its price equal to ________ and also has its price ________. A) marginal cost; exceeding its average total cost. B) marginal cost; equal to its average total cost C) average total cost; exceeds its marginal cost D) average total cost; less than its marginal cost Answer: C Topic: Monopolistic Competition, Long-Run Equilibrium Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

72) In the long run, a firm in a monopolistically competitive industry produces where its marginal cost A) is less than its average cost. B) equals its average cost. C) exceeds its average cost. D) equals its price. Answer: A Topic: Monopolistic Competition, Long-Run Equilibrium Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

73) Freedom of entry and exit in monopolistic competition A) means that firms' price and average total cost of producing are always equal. B) never allows firms to earn economic profits. C) leads to falling prices when new firms enter the market. D) forces firms to abandon product differentiation but only in the long run. Answer: C Topic: Monopolistic Competition, Long-Run Equilibrium Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

74) In the long run, a firm in monopolistic competition produces where the slope of the average total cost curve is A) negative. B) zero. C) positive. D) equal to the marginal cost. Answer: A Topic: Monopolistic Competition, Long-Run Profit Maximization Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

75) In the long-run, a firm in monopolistic competition produces at an output level where A) P > ATC and MR = MC. B) P > ATC and MR > MC. C) P = ATC and MR = MC. D) P = ATC and MR > MC. Answer: C Topic: Monopolistic Competition, Long-Run Profit Maximization Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

76) Which of the following is true regarding the long run for a firm in monopolistic competition? A) P = ATC = MC = MR B) P = ATC C) ATC = MC D) P = MC Answer: B Topic: Monopolistic Competition, Long-Run Profit Maximization Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

77) Which of the following is true regarding the long run for a firm in monopolistic competition? A) P = MC = ATC B) P = MC = MR C) ATC = MC = MR D) P = ATC Answer: D Topic: Monopolistic Competition, Long-Run Profit Maximization Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

78) In the long run, a monopolistically competitive firm ________ make an economic profit and a monopoly ________ make an economic profit. A) can; can B) can; cannot C) cannot; can D) cannot; cannot Answer: C Topic: Monopolistic Competition, Long-Run Economic Profit Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

79) In monopolistically competitive industries, A) entry and exit push economic profits toward zero. B) there is no diversity of products. C) firms do not respond to changes in demand. D) firms produce where marginal cost equals the marginal benefit to the consumers. Answer: A Topic: Monopolistic Competition, Long-Run Economic Profit Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

80) In a monopolistically competitive industry, A) firms can earn an economic profit in the long run because of barriers to entry. B) the firms can never earn an economic profit. C) if firms are earning an economic profit, new firms enter the industry. D) firms can earn an economic profit in the long run because of product differentiation. Answer: C Topic: Monopolistic Competition, Long-Run Economic Profit Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

81) When new firms enter a monopolistically competitive industry, each existing firm's A) demand curve shifts rightward. B) demand curve shifts leftward. C) marginal cost curve shifts rightward. D) marginal cost curve shifts leftward. Answer: B Topic: Monopolistic Competition, Long-Run Economic Profit Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

82) If firms in a monopolistically competitive industry are making an economic profit, then definitely there is A) a leftward shift in each firm's demand curve as new firms enter the market. B) a rightward shift in each firm's marginal revenue curve as new firms enter the market. C) an upward shift in each firm's cost curves as new firms enter the market. D) All of the above answers are correct. Answer: A Topic: Monopolistic Competition, Long-Run Economic Profit Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

83) If firms monopolistically competitive firms are making an economic profit, as new firms enter the market, each of the existing firms' demand curve shifts ________, the marginal curve shifts ________, and the profit-maximizing quantity ________. A) leftward; leftward; decreases B) rightward; leftward; increases C) leftward; rightward; decreases D) leftward; leftward; increases Answer: A Topic: Monopolistic Competition Skill: Conceptual Status: New AACSB: Reflective Thinking

84) A monopolistically competitive firm is making a positive economic profit. In the long run, which of the following is most likely? A) It will produce less output and it will charge a lower price. B) It will produce the same output and charge the same price. C) It will produce less output but keep price the same. D) It will keep output the same but will charge a higher price. Answer: A Topic: Monopolistic Competition, Long-Run Economic Profit Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

85) In the long run, monopolistically competitive firms make zero economic profit because of A) excess capacity. B) product variety. C) easy entry and exit. D) government regulation. Answer: C Topic: Monopolistic Competition, Long-Run Economic Profit Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

86) If in monopolistic competition in the short run, firms make ________ profits, then in the long run, new firms will enter the market. The ________ each individual firm's product will ________. In the new longrun equilibrium firms will make ________ profit. A) economic; demand for; decrease; zero economic B) normal; demand for; increase; zero economic C) economic; supply of; decrease; an economic D) economic; supply of; increase; zero economic Answer: A Topic: Monopolistic Competition, Long-Run Economic Profit Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

87) In long-run equilibrium, a firm in monopolistic competition makes A) an economic profit but the economic profit is less than it would be if the firm was a monopoly. B) an economic profit that is higher than what it would be if the firm was a monopoly. C) zero economic profit. D) an economic profit that is the same amount as it would be if the firm was a monopoly. Answer: C Topic: Monopolistic Competition, Long-Run Economic Profit Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

88) Which of the following is true regarding the long run for a firm in monopolistic competition? A) The firm's price equals its marginal cost. B) The firm's economic profit equals zero. C) The firm's average total cost is minimized. D) The firm's marginal cost equals its average total cost. Answer: B Topic: Monopolistic Competition, Long-Run Economic Profit Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

89) In the long run, all firms in a monopolistically competitive industry make A) negative accounting profit. B) zero accounting profit. C) an economic profit. D) zero economic profit. Answer: D Topic: Monopolistic Competition, Long-Run Economic Profit Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

90) In the long run, a firm in monopolistic competition will A) make a negative economic profit, that is, an economic loss. B) make zero economic profit, that is, a normal profit. C) make a positive economic profit. D) None of the above answers is necessarily correct because the amount of the profit or loss depends on the slope of the demand curve. Answer: B Topic: Monopolistic Competition, Long-Run Economic Profit Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

91) In the long run, in monopolistic competition A) a firm's price equals its marginal cost. B) firms make an economic profit. C) firms make zero economic profit. D) Both answers A and C are correct. Answer: C Topic: Monopolistic Competition, Long-Run Economic Profit Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

92) Which of the following is true regarding the long run for a firm in monopolistic competition? A) The firm's economic profit equals zero. B) There are barriers to entry. C) Price exceeds average total cost. D) Marginal revenue is less than marginal cost. Answer: A Topic: Monopolistic Competition, Long-Run Economic Profit Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

93) In the long run, monopolistically competitive firms are ________ to perfectly competitive firms because ________. A) similar; both firms produce at the minimum ATC B) similar; both firms make zero economic profit C) not similar; monopolistically competitive firms set P = MC to maximize profits D) not similar; monopolistically competitive firms can make an economic profit and perfectly competitive firms cannot Answer: B Topic: Monopolistic Competition, Long-Run Economic Profit Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

94) Which one of the following statements is TRUE for BOTH perfect competition and monopolistic competition? A) Each type of firm faces a downward sloping demand curve. B) Each type of firm produces a homogeneous product. C) In the long run, firms in both industries make zero economic profit. D) Each type of firm competes on product quality and price. Answer: C Topic: Monopolistic Competition, Long-Run Economic Profit Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

95) Which of the following is true regarding the long run for a firm in monopolistic competition? A) The firm's economic profit equals zero. B) Marginal revenue equals marginal cost. C) Price exceeds marginal cost. D) All of the above are true. Answer: D Topic: Monopolistic Competition, Long-Run Economic Profit Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

96) A monopolistically competitive firm is similar to A) a monopoly in the short run because it can make an economic profit in the short run and is similar to a perfectly competitive firm in the long run because it cannot make a positive economic profit. B) a perfectly competitive firm in the short run because it cannot make an economic profit in the short run and is similar to a monopoly in the long run because it can make an economic profit. C) a monopoly because it can make an economic profit in both the short run and long run. D) a perfectly competitive firm because its economic profit is equal to zero in both the short run and long run. Answer: A Topic: Monopolistic Competition, Long-Run Economic Profit Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

97) In monopolistic competition, in the long run customers pay a price that is A) less than the minimum ATC. B) more than the minimum ATC. C) equal to both the minimum ATC and the minimum AVC. D) equal to the minimum ATC, but not equal to the minimum AVC. Answer: B Topic: Monopolistic Competition, Long-Run Price Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

98) In the long run, a monopolistically competitive firm's price equals A) its average total cost and its marginal cost. B) its average total cost but not its marginal cost. C) its marginal cost but not its average total cost. D) neither marginal cost nor its average total cost. Answer: B Topic: Monopolistic Competition, Long-Run Price Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

99) In the long run, a firm in a monopolistically competitive industry has its price equal to its A) average total cost. B) marginal cost. C) marginal revenue. D) elasticity of demand. Answer: A Topic: Monopolistic Competition, Long-Run Price Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

100) In the long-run, a firm in monopolistic competition has A) a price that exceeds its average total cost. B) a price that exceeds its marginal cost. C) an average total cost that exceeds its price. D) a marginal cost that exceeds its price. Answer: B Topic: Monopolistic Competition, Long-Run Price Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

101) In the long-run equilibrium, a firm's price definitely equals its average total cost in A) both monopoly and monopolistic competition. B) neither monopoly nor monopolistic competition. C) monopoly but not monopolistic competition. D) monopolistic competition but not monopoly. Answer: D Topic: Monopolistic Competition, Long-Run Price Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

102) In monopolistic competition in the long run, firms ________. A) make zero economic profit and require more capacity B) incur an economic loss and require more capacity C) make an economic profit and have excess capacity D) make zero economic profit and have excess capacity Answer: D Topic: Monopolistic Competition, Long-Run Excess Capacity Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

103) Excess capacity is the A) difference between a perfectly competitive firm's and a monopolistically competitive firm's output. B) difference between a perfectly competitive firm's and a monopoly's output. C) output at the maximum point of the ATC curve. D) None of the above answers is correct. Answer: D Topic: Monopolistic Competition, Long-Run Excess Capacity Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

104) In the long run, firms in monopolistic competition produce at a level that is ________ the efficient scale of output. A) less than B) equal to C) more than D) All of the above are possible depending on market conditions. Answer: A Topic: Monopolistic Competition, Long-Run Excess Capacity Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

105) A firm is said to have excess capacity when it produces the amount of output A) such that price is greater than marginal cost. B) such that marginal revenue is greater than marginal cost. C) smaller than that which minimizes average total cost. D) larger than that which minimizes average total cost. Answer: C Topic: Monopolistic Competition, Long-Run Excess Capacity Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

106) The efficient scale of a firm is defined as the point where A) average total cost is minimized. B) marginal revenue equals marginal cost. C) price equals marginal cost. D) marginal revenue equals zero. Answer: A Topic: Monopolistic Competition, Long-Run Excess Capacity Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

107) In the long run, monopolistically competitive firms produce where A) excess capacity exists. B) the markup is equal to zero. C) the demand curve has shifted so that it intersects the minimum average total cost point. D) average total cost is minimized. Answer: A Topic: Monopolistic Competition, Long-Run Excess Capacity Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

108) In monopolistic competition, in the long run firms have A) a capacity shortage. B) excess capacity. C) an economic profit. D) an economic loss. Answer: B Topic: Monopolistic Competition, Long-Run Excess Capacity Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

109) In monopolistic competition, in the long run firms produce A) less output than that which minimizes their ATC. B) more output than that which minimizes their ATC. C) the amount of output that minimizes their ATC and their AVC. D) the amount of output that minimizes their ATC but not their AVC. Answer: A Topic: Monopolistic Competition, Long-Run Excess Capacity Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

110) A monopolistically competitive firm in the long run ________. A) is inefficient because it makes zero economic profit B) produces a profit-maximizing amount of output that is less than capacity output C) is efficient because it makes zero economic profit D) sets its price equal to its marginal cost Answer: B Topic: Monopolistic Competition, Long-Run Excess Capacity Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

111) A firm has excess capacity if its output is A) less than the quantity at which marginal cost is minimized. B) less than the quantity at which economic profit is maximized. C) less than the quantity at which average total cost is minimized. D) more than the quantity at which average total cost is minimized. Answer: C Topic: Monopolistic Competition, Long-Run Excess Capacity Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

112) In monopolistic competition, excess capacity results from A) the presence of a large number of buyers. B) the mobility of firms into and out of the industry. C) imperfect information about price. D) product differentiation. Answer: D Topic: Monopolistic Competition, Long-Run Excess Capacity Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

113) In its long-run equilibrium, a firm in monopolistic competition A) makes zero economic profit and operates with excess capacity. B) makes zero economic profit and produces above capacity output. C) makes a positive economic profit and operates with excess capacity. D) makes a positive economic profit and produces above capacity output. Answer: A Topic: Monopolistic Competition, Long-Run Excess Capacity Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

114) A firm's markup is the amount by which ________ exceeds ________. A) price; average total cost B) price; marginal cost C) average total cost; marginal cost D) price; average variable cost Answer: B Topic: Markup Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

115) A monopolistically competitive firm will end up selling its output for a price such that A) price is greater than marginal cost. B) price is equal to marginal cost. C) price is equal to marginal revenue. D) price is equal to average total cost. Answer: A Topic: Markup Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

116) A positive markup is earned by a firm if A) its price exceeds its marginal cost. B) marginal revenue equals marginal cost. C) price equals marginal cost. D) price equals average total cost. Answer: A Topic: Markup Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

117) Which of the following statements regarding the efficiency of monopolistic competition is FALSE? A) Compared to a situation with total product uniformity, monopolistic competition might be efficient. B) Resources are used efficiently when marginal social benefits equals marginal social cost. C) Monopolistic competition is definitely inefficient because price exceeds marginal cost. D) A greater degree of product variety creates a loss because the quantity produced is less than the efficient quantity. Answer: C Topic: Efficiency of Monopolistic Competition Skill: Conceptual Status: New AACSB: Reflective Thinking

The figure shows the demand curve for Gap jackets (D), and Gap's marginal revenue curve (MR), marginal cost curve (MC), and average total cost curve (ATC). 118) In the figure above, Gap maximizes its profit if it sells ________ jackets per day. A) 100 B) 64 C) 129 D) 133 Answer: A Topic: Monopolistic Competition, Long-Run Equilibrium Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

119) In the figure above, Gap maximizes its profit if it charges ________ per jacket. A) $130 B) $80 C) $115 D) $100 Answer: A Topic: Monopolistic Competition, Long-Run Price Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

120) In the figure above, what is Gap's economic profit? A) zero B) $5,000 C) -$5,000 D) -$1,160 Answer: A Topic: Monopolistic Competition, Long-Run Economic Profit Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

121) In the figure above, the market for jackets ________ in long-run equilibrium, and there is ________ for new firms to enter. A) is; no incentive B) is; an incentive C) is not; an incentive D) is not; no incentive Answer: A Topic: Monopolistic Competition, Long-Run Equilibrium Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

122) In the figure above, if the market for jackets were perfectly competitive, in long-run equilibrium, each firm would sell ________ jackets per day at ________ per jacket. A) 132; $122 B) 100; $130 C) 100; $80 D) 128; $114 Answer: A Topic: Monopolistic Competition, Long-Run Equilibrium Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

123) In the figure above, what is Gap's excess capacity? A) 32 jackets per day B) zero C) 4 jackets per day D) 132 jackets per day Answer: A Topic: Monopolistic Competition, Long-Run Excess Capacity Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

124) In the figure above, what is Gap's markup? A) $50 B) $15 C) $35 D) zero Answer: A Topic: Markup Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

125) The firm in the figure above is in monopolistic competition. It will set a price equal to A) $1. B) $2. C) $3. D) more than $3. Answer: C Topic: Monopolistic Competition, Long-Run Profit Maximization Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

126) The firm in the figure above is in monopolistic competition. It will produce A) 10 units. B) 20 units. C) 30 units. D) 40 units. Answer: B Topic: Monopolistic Competition, Long-Run Profit Maximization Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 54 Copyright © 2014 Pearson Education, Inc.

127) The firm in the figure above is in monopolistic competition. The firm has A) no excess capacity. B) excess capacity of 10 units. C) excess capacity of 20 units. D) excess capacity of 30 units. Answer: C Topic: Monopolistic Competition, Long-Run Excess Capacity Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

128) Fresh Taste, Inc. produces organic breakfast cereals. The market for breakfast cereals is monopolistically competitive. The figure above shows the demand curve that Fresh Taste faces (D), the company's marginal revenue curve (MR), its marginal cost curve (MC), and its average total cost curve (ATC). Fresh Taste produces ________ thousand boxes of cereals per day and sets a price of ________ a box. A) 12; between $3.00 and $2.01 B) 8; $1.00 C) 8; $3.00 D) 12; $2.00 Answer: C Topic: Monopolistic Competition, Long-Run Equilibrium Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

129) Fresh Taste, Inc. produces organic breakfast cereals. The market for breakfast cereals is monopolistically competitive. The figure above shows the demand curve that Fresh Taste faces (D), the company's marginal revenue curve (MR), its marginal cost curve (MC), and its average total cost curve (ATC). Fresh Taste's economic profit is A) $16,000 per day. B) zero, that is, it earns only a normal profit C) $8,000 per day. D) None of the above answers is correct. Answer: B Topic: Monopolistic Competition, Long-Run Equilibrium Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

130) Fresh Taste, Inc. produces organic breakfast cereals. The market for breakfast cereals is monopolistically competitive. The figure above shows the demand curve that Fresh Taste faces (D), the company's marginal revenue curve (MR), its marginal cost curve (MC), and its average total cost curve (ATC). If Fresh Taste and other firms in the market are currently producing their profit maximizing quantities of cereals, then the market is A) in both short-run equilibrium and long-run equilibrium. B) in short-run equilibrium but not in long-run equilibrium. C) in long-run equilibrium but not in short-run equilibrium. D) neither in short-run equilibrium nor in long-run equilibrium. Answer: A Topic: Monopolistic Competition, Long-Run Equilibrium Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

131) Fresh Taste, Inc. produces organic breakfast cereals. The market for breakfast cereals is monopolistically competitive. The figure above shows the demand curve that Fresh Taste faces (D), the company's marginal revenue curve (MR), its marginal cost curve (MC), and its average total cost curve (ATC). Fresh Taste's excess capacity is A) 12,000 boxes per day. B) 4,000 boxes per day. C) 8,000 boxes per day. D) zero. Answer: B Topic: Monopolistic Competition, Long-Run Excess Capacity Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

132) Fresh Taste, Inc. produces organic breakfast cereals. The market for breakfast cereals is monopolistically competitive. The figure above shows the demand curve that Fresh Taste faces (D), the company's marginal revenue curve (MR), its marginal cost curve (MC), and its average total cost curve (ATC). Fresh Taste's markup is A) more than zero but less than $1.00 B) $3.00 C) $2.00 D) zero. Answer: C Topic: Markup Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

133) The above figure shows a firm in monopolistic competition. What is the profit maximizing level of output the firm will produce? A) 4 units per day B) 8 units per day C) 10 units per day D) 16 units per day Answer: B Topic: Monopolistic Competition, Long-Run Profit Maximization Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Analytical Skills

134) The above figure shows a firm in monopolistic competition. What price will the firm charge? A) $12 B) $24 C) $36 D) None of the above answers is correct. Answer: C Topic: Monopolistic Competition, Long-Run Profit Maximization Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Analytical Skills

135) The above figure shows a firm in monopolistic competition. At the profit maximizing level of output, A) the firm is making a positive economic profit. B) the firm incurs an economic loss. C) the firm is making zero economic profit. D) this firm would choose to shut down in the short run. Answer: C Topic: Monopolistic Competition, Long-Run Economic Profit Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Analytical Skills

136) The above figure shows a firm in monopolistic competition. At the profit maximizing level of output, excess capacity for the firm is equal to A) 0 units per day. B) 4 units per day. C) 8 units per day. D) 16 units per day. Answer: C Topic: Monopolistic Competition, Long-Run Excess Capacity Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Analytical Skills

137) The above figure shows the demand and cost curves for a firm in monopolistic competition in the long run. The firm maximizes its profit by A) producing 4 units and charging a price of $15. B) producing 8 units and charging a price of $5. C) producing 16 units and charging a price of $10. D) None of the above answers is correct. Answer: D Topic: Monopolistic Competition, Long-Run Profit Maximization Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

138) The above figure shows the demand and cost curves for a monopolistically competitive firm in the long run. The firm maximizes its profit by A) producing 8 units and charging a price of $5. B) producing 8 units and charging a price of $15. C) producing 16 units and charging a price of $10. D) producing 20 units and charging a price of $25. Answer: B Topic: Monopolistic Competition, Long-Run Profit Maximization Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

139) The above figure shows the demand and cost curves for a monopolistically competitive firm in the long run. The maximum economic profit this firm can earn equal equals A) $0. B) $80. C) $120. D) $160. Answer: A Topic: Monopolistic Competition, Long-Run Economic Profit Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

140) The above figure shows the demand and cost curves for a monopolistically competitive firm in the long run. The firm has excess capacity of A) 4 units. B) 8 units. C) 16 units. D) $10. Answer: B Topic: Monopolistic Competition, Long-Run Excess Capacity Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

141) The figure above shows the cost, marginal revenue, and demand curves of Golden Chow, a producer of dog food. The market for dog food is monopolistic competition. In the short run, Golden Chow sells 400 cans of dog food per day and makes ________. Other firms have ________ incentive to enter the industry. A) an economic profit of $200 a day; an B) an economic profit of $400 a day; an C) a normal profit of $200 a day; no D) an economic profit of $400 a day; no Answer: A Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

142) The figure above shows the cost, marginal revenue, and demand curves of Golden Chow, a producer of dog food. The market for dog food is monopolistic competition. In the long run as new firms enter, Golden Chow cuts its output to 200 cans per day. Its excess capacity is ________ cans per day. A) 0 B) between 0 and 200 C) between 201 and 400 D) more than 401 Answer: C Topic: Monopolistic Competition, Long-Run Excess Capacity Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

143) In the above figure, the monopolistically competitive firm produces A) Q3 and sets the price at P3. B) Q2 and sets the price at P2. C) Q1 and sets the price at P1. D) Q1 and sets the price at P5. Answer: D Topic: Monopolistic Competition, Profit Maximization Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

144) In the above figure of a monopolistically competitive firm, the marginal cost of the last unit produced is equal to ________ and is ________ marginal revenue. A) P2; greater than B) P3; greater than C) P1; greater than D) P1; equal to Answer: D Topic: Monopolistic Competition, Profit Maximization Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

145) In the above figure of a monopolistically competitive firm, the area of economic profit is A) ADB. B) ABC. C) P2AD P4. D) P2FEP5. Answer: D Topic: Monopolistic Competition, Economic Profit Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

146) The above figure shows a monopolistically competitive firm. The figure A) is only a short-run illustration because the firm is making an economic profit. B) could be either a short-run or long-run illustration because monopolistically competitive firms can make an economic profit in the long-run. C) is only a long-run illustration because the firm is making zero economic profit. D) is neither a short- nor a long-run illustration. Answer: A Topic: Monopolistic Competition, Long-Run Economic Profit Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Analytical Skills

147) In the above figure of a monopolistically competitive firm, in the long run after all industry adjustments have taken place, assuming that this firm's costs have not changed the firm will A) produce more output at a higher price. B) produce less output at a lower price. C) produce the same quantity at the same price. D) Any of the above are possible. Answer: B Topic: Monopolistic Competition, Long-Run Economic Profit Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

148) When the monopolistically competitive firm shown in the above figure is at its long-run equilibrium, it will be A) producing the efficient scale of output and is at point A on the ATC curve. B) producing more than the efficient scale of output and is at point C on the ATC curve. C) producing at less than the efficient scale of output and is at a point such as F on the ATC curve. D) producing the efficient scale of output and is at point B on the MC curve. Answer: C Topic: Monopolistic Competition, Long-Run Excess Capacity Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

149) A monopolistically competitive firm has excess capacity because in the A) short run its MR exceeds its MC. B) short run its ATC is less than its AVC. C) long run its ATC exceeds its minimum ATC. D) long run it makes an economic profit. Answer: C Topic: Study Guide Question, Excess Capacity Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

150) A monopolistically competitive firm is like a perfectly competitive firm insofar as both A) have negatively sloping demand curves. B) can make zero economic profit in the long run. C) have horizontal MR curves. D) are protected by high barriers to entry. Answer: B Topic: Study Guide Question, Monopolistic Comp., Long-Run Economic Profit Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

151) A monopolistically competitive firm has excess capacity because in the A) short run its MR exceeds its MC. B) short run its ATC is less than its AVC. C) long run its ATC exceeds its minimum ATC. D) long run it earns an economic profit. Answer: C Topic: Study Guide Question, Excess Capacity Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

3 Product Development and Marketing 1) Dole Co. operates in a monopolistically competitive market. To try to earn an economic profit, Dole Co. will A) prevent other firms from entering the market. B) increase its product's price. C) continually seek to differentiate its product. D) increase output. Answer: C Topic: Innovation and Product Development Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

2) A firm in ________ will engage in ________ to try to earn an economic profit. A) perfect competition; advertising B) monopolistic competition; product differentiation C) perfect competition; price wars D) monopolistic competition; price wars Answer: B Topic: Innovation and Product Development Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

3) In monopolistic competition, product improvement and development A) are valued by the consumer at an amount equal to the costs the producers have incurred. B) yields a marginal benefit to the producer equal to price of the good. C) is less than its efficient amount. D) None of the above answers are correct. Answer: C Topic: Innovation and Product Development Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

4) A monopolistically competitive firm can increase its economic profit by ________. A) developing new products B) producing at the efficient quantity C) eliminating excess capacity D) advertising less Answer: A Topic: Innovation and Product Development Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

5) At a monopolistically competitive firm's current level of product development, marginal revenue of product development is greater than its marginal cost. The firm will ________. A) sell only new products B) increase product development only if the consumer benefits C) decrease product development D) increase product development Answer: D Topic: Innovation and Product Development Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

6) "It is clear from the theory of monopolistic competition that product development is not pushed to its efficient level." This statement is A) false because there is so much product differentiation in monopolistic competition. B) true because there is little incentive to innovate in monopolistic competition. C) false because there are so many wasteful innovations in monopolistic competition that are merely cosmetic. D) true because price exceeds marginal revenue in monopolistic competition. Answer: D Topic: Innovation and Product Development Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

7) The decision to undertake product development in monopolistic competition is made by comparing the A) marginal benefit of product development to the marginal cost of product development. B) average revenue of product development to the average total cost of product development. C) total revenue of product development to the total cost of product development. D) firm's expenditure on product development to expenditures by competing firms. Answer: A Topic: Innovation and Product Development Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

8) Product development is efficient if the A) new product actually brings great benefits to the consumer. B) producer's marginal cost of product development equals the consumer's marginal benefit. C) producer surplus from selling the product equals the consumer surplus. D) average cost of the product development equals the average revenue generated. Answer: B Topic: Innovation and Product Development Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

9) In monopolistic competition, advertising costs A) are fixed costs. B) can result in the firm producing an amount of output such that its average total costs are lower than if it did not advertise. C) shift the ATC curve upward. D) All of the above answers are correct. Answer: D Topic: Marketing Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

10) Advertising costs affect a firm in a monopolistic competition by increasing the firm's A) total fixed cost. B) marginal cost. C) total variable cost. D) average variable cost. Answer: A Topic: Marketing Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

11) In monopolistic competition, a firm's advertising A) has no effect on its average cost curves. B) has no effect on demand. C) increases the firm's average total cost. D) increases the firm's marginal cost. Answer: C Topic: Marketing Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

12) If a firm spends $600 on advertising, its A) ATC and MC curves shift upward. B) MC curve shifts upward and its ATC curve does not shift. C) ATC curve shifts upward and its MC curve does not shift. D) ATC curve shifts upward and its MC curve shifts downward. Answer: C Topic: Marketing Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

13) Advertising costs are ________ costs and the per unit cost of advertising ________ as production increases. A) fixed; increases B) variable; increases C) fixed; decreases D) variable; does not change Answer: C Topic: Marketing Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

14) Expenditures on advertising ________. A) can lower average total cost if the advertising increases the quantity sold by a large enough amount B) cannot lower average total cost because when a firm advertises it increases its costs C) always lower average total cost because whenever a firm advertises, it increases the quantity sold D) are variable costs so do not affect the average total cost Answer: A Topic: Marketing Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

15) Monopolistically competitive firms engaging in advertising will definitely achieve which of the following? A) shift their average total cost curve up B) shift their demand curve to the right C) increase their economic profit D) shift their demand curve to the right and shift their average total cost curve up Answer: A Topic: Monopolistic Competition; Advertising Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

16) If a firm spends $600 on advertising, its goal is for the demand curve for its product to shift ________ and its marginal revenue curve to shift ________. A) leftward; rightward B) leftward; leftward C) rightward; leftward D) rightward, rightward Answer: D Topic: Marketing Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

17) Selling costs, such as advertising, are likely to be a large share of total cost in an industry that is A) perfectly competitive. B) monopolistically competitive. C) a monopoly. D) non-profit. Answer: B Topic: Marketing Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

18) Excess capacity and high advertising expenditures are encountered in A) perfect competition. B) monopolistic competition. C) monopoly. D) non-profit competition. Answer: B Topic: Marketing Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

19) Advertising costs of a monopolistically competitive firm are ________. A) greater than a monopoly and the same as a perfectly competitive firm B) greater than a perfectly competitive firm C) less than a perfectly competitive firm D) the same as a monopoly Answer: B Topic: Marketing Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

20) Advertising by firms in monopolistic competition A) provides consumers with no useful information. B) does not occur. C) can persuade customers that product differentiation exists. D) wastes resources because the entry of rivals forces firms to be price takers. Answer: C Topic: Marketing Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

21) A textbook publisher is in monopolistic competition. The firm can sell no books at $100 a book, but for each $10 cut in price, the quantity of books it can sell increases by 20 books a day. The firm's average variable cost and marginal cost is a constant $20 per book. What is the publisher's profit-maximizing level of output? A) 60 books per day B) 80 books per day C) 100 books per day D) 120 books per day Answer: B Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

22) A textbook publisher is in monopolistic competition. The firm can sell no books at $100 a book, but for each $10 cut in price, the quantity of books it can sell increases by 20 books a day. The firm's average variable cost and marginal cost is a constant $20 per book. What is the publisher's profit-maximizing price? A) $40 B) $50 C) $60 D) $70 Answer: C Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

23) A textbook publisher is in monopolistic competition. The firm can sell no books at $100 a book, but for each $10 cut in price, the quantity of books it can sell increases by 20 books a day. The firm's average variable cost and marginal cost is a constant $20 per book. What is the firm's markup? A) zero B) $20 C) $40 D) $60 Answer: C Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

24) A textbook publisher is in monopolistic competition. The firm can sell no books at $100 a book, but for each $10 cut in price, the quantity of books it can sell increases by 20 books a day. The firm's total fixed cost is $2,400 a day. Its average variable cost and marginal cost is a constant $20 per book. What is the firm's maximum economic profit? A) zero B) $800 C) -$400 D) $1,000 Answer: B Topic: Monopolistic Competition, Short-Run Profit Maximization Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

25) A textbook publisher is in monopolistic competition. If the firm spends nothing on advertising, it can sell no books at $100 a book, but for each $10 cut in price, the quantity of books it can sell increases by 20 books a day. The firm's total fixed cost is $2,400 a day. Its average variable cost and marginal cost is a constant $20 per book. If the firm spends $1,200 a day on advertising, it can increase the quantity of books sold at each price by 50 percent. If the publisher advertises, its profit maximizing level of output is A) 120 books per day. B) 80 books per day. C) 160 books per day. D) 100 books per day. Answer: A Topic: Marketing Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

26) A textbook publisher is in monopolistic competition. If the firm spends nothing on advertising, it can sell no books at $100 a book, but for each $10 cut in price, the quantity of books it can sell increases by 20 books a day. The firm's total fixed cost is $2,400 a day. Its average variable cost and marginal cost is a constant $20 per book. If the firm spends $1,200 a day on advertising, it can increase the quantity of books sold at each price by 50 percent. Compared to the situation if it does not advertise, if the firm advertises, the profit-maximizing output A) doubles. B) increases by 40 books per day. C) decreases by 40 books per day. D) is the same as without advertising. Answer: B Topic: Marketing Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

27) A textbook publisher is in monopolistic competition. If the firm spends nothing on advertising, it can sell no books at $100 a book, but for each $10 cut in price, the quantity of books it can sell increases by 20 books a day. The firm's total fixed cost is $2,400 a day. Its average variable cost and marginal cost is a constant $20 per book. If the firm spends $1,200 a day on advertising, it can increase the quantity of books sold at each price by 50 percent. If the publisher advertises, its profit maximizing price is A) $40. B) $50. C) $60. D) $70. Answer: C Topic: Marketing Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

28) A textbook publisher is in monopolistic competition. If the firm spends nothing on advertising, it can sell no books at $100 a book, but for each $10 cut in price, the quantity of books it can sell increases by 20 books a day. The firm's total fixed cost is $2,400 a day. Its average variable cost and marginal cost is a constant $20 per book. If the firm spends $1,200 a day on advertising, it can increase the quantity of books sold at each price by 50 percent. Compared to the situation if it does not advertise, if the firm advertises, the profit-maximizing price A) rises by $10. B) falls by $10. C) rises by $5. D) does not change. Answer: D Topic: Marketing Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

29) A textbook publisher is in monopolistic competition. If the firm spends nothing on advertising, it can sell no books at $100 a book, but for each $10 cut in price, the quantity of books it can sell increases by 20 books a day. The firm's total fixed cost is $2,400 a day. Its average variable cost and marginal cost is a constant $20 per book. If the firm spends $1,200 a day on advertising, it can increase the quantity of books sold at each price by 50 percent. If the firm advertises, its maximum economic profit is A) zero. B) $800. C) $1,200. D) -$400. Answer: C Topic: Marketing Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

30) A textbook publisher is in monopolistic competition. If the firm spends nothing on advertising, it can sell no books at $100 a book, but for each $10 cut in price, the quantity of books it can sell increases by 20 books a day. The firm's total fixed cost is $2,400 a day. Its average variable cost and marginal cost is a constant $20 per book. If the firm spends $1,200 a day on advertising, it can increase the quantity of books sold at each price by 50 percent. Compared to the situation if it does not advertise, if the firm advertises, its economic profit A) increases by $400. B) decreases by $400. C) doubles. D) is the same as with no advertising. Answer: A Topic: Marketing Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

31) A textbook publisher is in monopolistic competition. If the firm spends nothing on advertising, it can sell no books at $100 a book, but for each $10 cut in price, the quantity of books it can sell increases by 20 books a day. The firm's total fixed cost is $2,400 a day. Its average variable cost and marginal cost is a constant $20 per book. If the firm spends $1,200 a day on advertising, it can increase the quantity of books sold at each price by 50 percent. The firm will A) advertise because advertising will increase its economic profit. B) not advertise because advertising will lower its economic profit. C) advertise because advertising will decrease its economic loss. D) not advertise because advertising will increase its economic loss. Answer: A Topic: Marketing Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

Suppose that at one of the Talbot's shops, marginal cost of a coat is constant at $150, and total fixed cost is $3,000 a day. The shop maximizes its profit by selling 15 coats a day at $500 per coat. Then the shops nearby increase their advertising. The Talbot shop responds by spending $1,500 a day more on advertising its coats. As a result, its profit-maximizing number of coats sold increases to 25 a day at $400 per coat. 32) In the scenario above, as a result of increased advertising, Talbot's average total cost: A) Falls by $20 per coat. B) Rises by $50 per coat. C) Rises by $30 per coat. D) Falls by $40 per coat. Answer: A Topic: Marketing Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

33) In the scenario above, as a result of increased advertising, Talbot's markup: A) Decreases by $100. B) Increases by $50. C) Increases by $75. D) Decreases by $60. Answer: A Topic: Marketing Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

34) In the scenario above, as a result of increased advertising, Talbot's economic profit: A) Decreases by $500. B) Increases by $170. C) Increases by $750. D) Decreases by $100. Answer: A Topic: Marketing Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

35) Product variety and information for consumers are gains from A) perfect competition. B) monopolistic competition. C) monopoly. D) oligopoly. Answer: B Topic: Efficiency of Monopolistic Competition Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

36) The loss of efficiency that occurs in monopolistic competition has to be weighed against the gain of A) higher wages for employees. B) an increase in employment. C) greater product variety. D) reduced environmental damage. Answer: C Topic: Efficiency of Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

37) One benefit of monopolistic competition over perfect competition is A) economic profit. B) product variety. C) excess capacity. D) efficiency. Answer: B Topic: Efficiency of Monopolistic Competition Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

38) Because consumers value product variety, A) society must be more efficient with monopolistic competition than with perfect competition. B) the inefficiency and deadweight loss created by monopolistic competition is offset. C) in the long run, monopolistically competitive firms earn an economic profit. D) monopolistically competitive industries are efficient. Answer: B Topic: Efficiency of Monopolistic Competition Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

39) Monopolistically competitive firms constantly develop new products in an effort to A) make the demand for their product more elastic. B) increase the demand for their product. C) increase the marginal cost of their product. D) None of the above are correct. Answer: B Topic: Study Guide Question, Innovation and Product Development Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

4 News Based Questions 1) Lee, J Brand, Joe's Jeans, Paper Denim & Cloth, Levi's, Wrangler, and many others are all producers of jeans. In what type of market does Lee operate? A) Monopolistic Competition B) Monopoly C) Oligopoly D) Perfect Competition Answer: A Topic: Monopolistic Competition Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

2) Lee, J Brand, Joe's Jeans, Paper Denim & Cloth, Levi's, Wrangler, and many others are all producers of jeans. J Brand jeans sell for about $200 a pair. What would happen if J Brand priced their jeans at $220 per pair? A) They would sell fewer jeans because demand is elastic. B) They would not sell any jeans. C) They would sell more jeans. D) They would sell fewer jeans because demand is perfectly elastic. Answer: A Topic: Monopolistic Competition, Price Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Communication

3) Lee, J Brand, Joe's Jeans, Paper Denim & Cloth, Levi's, Wrangler, and many others are all producers of jeans. J Brand jeans sell for $200 a pair. Suppose at the short-run profit maximizing quantity, J Brand's ATC was $180 and AVC was $100, which statement is true? A) J Brand will produce in the short and long run. B) J Brand will produce in the short run but go out of business in the long run. C) J Brand will shut down in the short run and go out of business in the long run. D) J Brand will produce in the short run and shut down in the long run. Answer: A Topic: Monopolistic Competition, Long-Run Equilibrium Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Communication

4) Lee, J Brand, Joe's Jeans, Paper Denim & Cloth, Levi's, Wrangler, and many others are all producers of jeans. J Brand jeans sell for $200 a pair. Suppose at the profit maximizing quantity, J Brand's ATC was $220 and AVC was $110, which statement is true? A) J Brand will shut down in the short run and go out of business in the long run. B) J Brand will produce in the short run but go out of business in the long run. C) J Brand will produce in the short run and shut down in the long run. D) J Brand will produce in the short and long run. Answer: B Topic: Monopolistic Competition, Short-Run Economic Loss Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

5) Agave, Six Feet Under, Globe, Silk, Sotto Sotto and Zocalo are all restaurants in Atlanta. In this monopolistic market, economic profit would encourage ________, which decreases the ________ for each firm's meals. A) entry; demand B) entry; supply C) exit; demand D) exit; supply Answer: A Topic: Monopolistic Competition, Entry Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

6) Agave, Six Feet Under, Globe, Silk, Sotto Sotto and Zocalo are all restaurants in Atlanta. In the short run, Globe could experience I. economic profit. II. zero economic profit. III. economic loss. A) Only I B) Only II C) I, II, and III D) Only I and II Answer: C Topic: Monopolistic Competition, Short Run Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

7) Agave, Six Feet Under, Globe, Silk, Sotto Sotto and Zocalo are all restaurants in Atlanta. In the long run, Globe could I. make a positive economic profit. II. make zero economic profit. III. incur an economic loss. A) Only I B) Only II C) I, II, and III D) Only I and II Answer: B Topic: Monopolistic Competition, Long-Run Equilibrium Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

8) Agave, Six Feet Under, Globe, Silk, Sotto Sotto and Zocalo are all restaurants in Atlanta. Suppose at the profit maximizing quantity, Zocalo charges $22 for each dinner entrée, and its ATC is equal to $24. What should Zocalo do? A) Cannot determine whether Zocalo should stay open or shut down in short run, but Zocalo should go out of business in the long run B) Produce in the short run and go out of business in the long run C) Shut down in the short run and go out of business in the long run D) Cannot determine whether Zocalo's should stay open or shut down in the short or long run Answer: A Topic: Monopolistic Competition, Short-Run Economic Loss Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

9) Which of the following four firms would most likely be part of a monopolistically competitive market? A) Lee, J Brand, Joe's Jeans, Paper Denim & Cloth, Levi's, and Wrangler are all producers of jeans. B) Mark sells the tomatoes he grew in his backyard at the local farmers market. C) The WaveHouse is the only place in San Diego where you can ride an indoor 10 foot wave. D) Amara Massage is the only firm which specializes in pre- and post-natal massage. Answer: A Topic: Monopolistic Competition Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

10) The Karaoke Channel Online streams professional-grade karaoke for $9.95 a month. Suppose Karaoke Channel Online has a constant marginal cost of $1 per customer and total fixed cost is $20,000. The profit maximizing number of customers is 10,000. Several competitors start to advertise online. Karaoke Channel Online now spends $5,000 a month on advertising and the profit maximizing number of customers increases to 12,000. What is Karaoke Channel Online's average total cost before the advertising begins? A) $3 B) $2 C) $1 D) $2.66 Answer: A Topic: Marketing Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

11) The Karaoke Channel Online streams professional-grade karaoke for $9.95 a month. Suppose Karaoke Channel Online has a constant marginal cost of $1 per customer and total fixed cost is $20,000. The profit maximizing number of customers is 10,000. Several competitors start to advertise online. Karaoke Channel Online now spends $5,000 a month on advertising and the profit maximizing number of customers increases to 12,000. What is Karaoke Channel Online's average total cost after the advertising begins? A) $3.08 B) $3 C) $2.08 D) $2.50 Answer: A Topic: Marketing Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

12) The Karaoke Channel Online streams professional-grade karaoke for $9.95 a month. Suppose Karaoke Channel Online has a constant marginal cost of $1 per customer and total fixed cost is $20,000. The profit maximizing number of customers is 10,000. Several competitors start to advertise online. Karaoke Channel Online now spends $5,000 a month on advertising and the profit maximizing number of customers increases to 12,000 and the streaming price remains constant. What is Karaoke Channel Online's total profit before the advertising begins? A) $66,500 B) $99,500 C) $64,500 D) $76,500 Answer: A Topic: Marketing Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

13) The Karaoke Channel Online streams professional-grade karaoke for $9.95 a month. Suppose Karaoke Channel Online has a constant marginal cost of $1 per customer and total fixed cost is $20,000. The profit maximizing number of customers is 10,000. Several competitors start to advertise online. Karaoke Channel Online now spends $5,000 a month on advertising and the profit maximizing number of customers increases to 12,000 and the streaming price remains constant. What is Karaoke Channel Online's total profit after the advertising begins? A) $84,400 B) $66,500 C) $119,400 D) $89,400 Answer: A Topic: Marketing Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

14) In the December edition of Runner's World magazine, Karhu, Adidas, The North Face, and Brooks have full page running shoe advertisements. Which of the following is correct? I. Advertising increases Oris's total cost. II. Advertising increases Oris's fixed costs. III. All the advertising makes the demand curve faced by Oris more elastic. A) Only I B) Only II C) I, II, and III D) Only I and II Answer: C Topic: Marketing Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

15) Which of the following is NOT a true statement about perfectly competitive and monopolistically competitive firms? A) Both monopolistically competitive and perfectly competitive firms have perfectly elastic demands. B) In the long run, only monopolistically competitive firms have excess capacity. C) Perfectly competitive firms produce at their efficient scale. D) There are a large number of firms in both monopolistically competitive and perfectly competitive markets. Answer: A Topic: Monopolistic Competition, Demand Curve Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

16) The market for wheat can be described at perfectly competitive while the market for pizza is better described as monopolistically competitive. Which of the following is a NOT a similarity between perfectly competitive and monopolistically competitive firms? A) Both monopolistically competitive and perfectly competitive firms produce at their efficient scale. B) Both monopolistically competitive and perfectly competitive firms are free to enter and exit the market. C) Both monopolistically competitive and perfectly competitive firms have a small market share. D) There are a large number of firms in both monopolistically competitive and perfectly competitive markets. Answer: A Topic: Monopolistic Competition, Long-Run Excess Capacity Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

17) La Super Rica is a taco stand in Santa Barbara, California. It is popular with the locals and even the late Julia Child found the food delicious. If La Super Rica is making an economic profit, what is the probable outcome in the taco market? A) The number of firms will increase, decreasing La Super Rica's demand. B) The number of firms will decrease, decreasing La Super Rica's demand. C) The number of firms will increase, increasing La Super Rica's demand. D) The number of firms will decrease, increasing La Super Rica's demand. Answer: A Topic: Monopolistic Competition, Entry Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

18) La Super Rica is a taco stand in Santa Barbara, California. It is popular with the locals and even the late Julia Child found the food delicious. Suppose La Super Rica maximizes its profit. If La Super Rica's lunch price is greater than its average total cost, which of the following statements is NOT true? A) La Super Rica is producing at its efficient scale. B) La Super Rica is making an economic profit. C) La Super Rica is producing a quantity where marginal revenue equals marginal cost. D) La Super Rica has excess capacity. Answer: A Topic: Monopolistic Competition, Long-Run Excess Capacity Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

19) La Super Rica is a taco stand in Santa Barbara, California. It is popular with the locals and even the late Julia Child found the food delicious. If La Super Rica is currently producing where marginal revenue is greater than marginal cost, to increase its profit La Super Rica should A) increase production. B) decrease production. C) not change its production because it is maximizing its profit. D) Not enough information is given to determine what La Super Rica should do. Answer: A Topic: Monopolistic Competition, Profit Maximization Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

5 Essay Questions 1) List four characteristics of monopolistic competition. Answer: There are a large number of firms; each produces a slightly different product; firms compete on price, quality and marketing; and firms are free to enter and exit. As a result of these characteristics, there are no dominant firms and each firms have a small market share. Because the firms produce differentiated products, firms can charge a markup and, in the long run, firms have excess capacity. Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Communication

2) "One of the defining features of monopolistic competition is product variety." Is the previous statement correct or incorrect? Answer: The statement is correct. In monopolistic competition firms compete by producing similar but slightly differentiated products. Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Communication

3) How do the characteristics of perfect competition and monopolistic competition differ? Answer: In monopolistic competition, the products sold are similar but differentiated, thereby enabling firms to compete on the basis of product development and marketing to further differentiate their products. In perfect competition the products are identical, thereby eliminating the opportunity for firms to compete by differentiating their product. Topic: Monopolistic Competition Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Communication

4) What is product differentiation? What market structure is characterized by product differentiation? Answer: A firm practices product differentiation if it makes a product that is slightly different from the products of competing firms. A differentiated product has close substitutes, but not perfect substitutes. Product differentiation is a distinguishing feature of monopolistic competition. Topic: Product Differentiation Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Communication

5) What do demand and marginal revenue curves look like in monopolistic competition? How do they compare to the demand and marginal revenue curves in perfect competition and monopoly? Answer: In monopolistic competition, the product is differentiated. This fact gives each firm some control over price, so each firm's demand curve is downward sloping. Because there are many close substitutes for these firms' goods, demand is elastic. These firms must lower their price to sell more; therefore the marginal revenue curve is beneath the demand curve. In perfect competition, the product is homogeneous, which makes firms price-takers, able to sell as much as they wish at the market price. Therefore, marginal revenue equals price so that the marginal revenue curve and the demand curve are the same and are horizontal. In monopoly, there is only one firm. The firm faces the market demand curve, which is downward sloping. The firm must lower its price to sell more output, so for a single-price monopoly, the marginal revenue curve is beneath the demand curve. Topic: Monopolistic Competition, Demand Curve Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

6) "A firm in monopolistic competition maximizes its profit by producing where its price is equal to its marginal cost." Is the previous statement correct or incorrect? Answer: The statement is incorrect. A firm in monopolistic competition maximizes its profit by producing where its marginal revenue equals its marginal cost. Because the marginal revenue is less than the price for a firm in monopolistic competition, it definitely is not the case that the firm produces where its price equals its marginal cost! Topic: Monopolistic Competition, Profit Maximization Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

7) How does a firm in monopolistic competition determine its price and quantity? What type of profit can it make in the short run and the long run? Answer: The firm produces where its marginal cost equals its marginal revenue. Then the price is determined from the demand curve and is the highest price at which people will buy the quantity produced. The firm can make a positive economic profit, zero economic profit, or incur an economic loss in the short run. In the long run, the firm cannot make an economic profit; it can only make zero economic profit, that is, its owners make a normal profit. Topic: Monopolistic Competition, Profit Maximization Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

8) What type of profit can a firm in monopolistic competition make in the long run? Explain your answer. Answer: In the long run, a firm in monopolistic competition can make only zero economic profit. It cannot make an economic profit because there are no barriers to entry. If a firm in monopolistic competition is making an economic profit, in the long run new firms enter the market, produce a similar product, and decrease the demand for the initial firm's product. Entry continues until the firms make zero economic profit, that is, their owners make a normal profit. Topic: Monopolistic Competition, Long-Run Economic Profit Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

9) Why are firms in monopolistic competition unable to make an economic profit in the long run? Answer: While firms in monopolistic competition do not produce an identical product, such as perfectly competitive firms do, they face the same problem other competitive firms face: freedom of entry. When firms in monopolistic competition are making an economic profit, other firms enter the market. Entry decreases the demand for the products of the existing firms and thereby decreases their economic profit. Firms will continue to enter the market until the economic profit equals zero. Topic: Monopolistic Competition, Long-Run Economic Profit Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

10) What is excess capacity? What industry has excess capacity in the long run: perfect competition or monopolistic competition? Answer: The efficient scale of output is the level that minimizes the average total cost. Excess capacity occurs if the firm produces less than the efficient scale. In this case, the firm could boost its output and lower its average total cost. Firms in monopolistic competition have excess capacity. Firms in perfect competition produce at the minimum of the average total cost. They produce at the efficient scale of output and so do not have excess capacity. Topic: Monopolistic Competition, Long-Run Excess Capacity Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

11) Define the efficient scale of production. For the situation of a firm in monopolistic competition, discuss its excess capacity. Answer: The efficient scale is the quantity produced when average total cost is at its minimum. In the long run, a firm in monopolistic competition operates below the efficient scale when maximizing profits. 83 Copyright © 2014 Pearson Education, Inc.

The difference between the efficient scale and the quantity produced by a firm is the excess capacity. Because the firm is not producing at the efficient scale, its average total cost is higher than if it produced at the efficient scale. Topic: Monopolistic Competition, Long-Run Excess Capacity Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

12) Explain why firms in monopolistic competition have excess capacity in the long run. Answer: A firm's efficient scale of production is the level of production where average total cost is at a minimum. In the long run, monopolistically competitive firms do not produce where ATC is at the minimum. They would need to increase output to reach this point. But if they did so, their profit would decrease. So for firms in monopolistic competition, the profit-maximizing output is less than the efficient scale. Topic: Monopolistic Competition, Long-Run Excess Capacity Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

13) In monopolistic competition, firms sell a differentiated product. In perfect competition, firms sell an identical product. How do these markets differ as a result? Answer: Because of this difference, firms in monopolistic competition face a downward sloped demand curve and have price setting power. Firms in perfect competition do not—their demand curves are horizontal. Because of this difference, in the long run, perfectly competitive firms produce at minimum average cost while monopolistically competitive firms have excess capacity. Topic: Output and Price in Monopolistic Competition Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

14) A monopoly firm can make economic profit in the long run. A firm in monopolistic competition cannot. What creates this difference? Answer: The key to long-run economic profits is a barrier to entry. The monopoly firm has a barrier to entry that protects its economic profit from the entry of new firms. A monopolistically competitive firm's industry features easy entry and exit and so there is nothing to protect any economic profit. Topic: Output and Price in Monopolistic Competition Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

15) How do product development and marketing affect a firm in monopolistic competition? Answer: Product development and marketing have two effects on a firm. First, because these activities are costly, they increase the firm's costs and shift its costs curves upward. Second, they can increase the demand for the firm's products. Topic: Innovation and Product Development Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

16) Why would a firm in a monopolistically competitive industry ever advertise? Answer: Similar to virtually every other business decision, advertising carries with it benefits and costs. 84 Copyright © 2014 Pearson Education, Inc.

While advertising causes the fixed costs to increase, and thereby shifts the average total cost curve upward, advertising also might increase the demand for the company's product by temporarily making people believe that the product is better than some other firm's product. Firms in monopolistic competition frequently advertise extensively in order to differentiate their product from those of their competitors and thereby increase the demand for their particular version of the product. Topic: Marketing Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

17) Explain the role of advertising in monopolistic competition. Describe how advertising by all firms in a monopolistically competitive industry impacts a firm's ATC curve, its MC curve, its demand curve, and its MR curve. Answer: In order to maintain (or regain) economic profit, a firm in monopolistic competition must continually develop new products that are unique and/or of high quality (or make consumers believe this). Advertising lets firms signal this information. So all firms in monopolistic competition tend to advertise extensively. Advertising is a fixed cost and it shifts the ATC curve upward. Even though advertising shifts to the ATC curve upward, the total average cost might be lower if it increases the amount sold by enough. Because advertising is a fixed cost, it has no effect on the marginal cost, so the MC curve does not change. Because all firms advertise, advertising might or might not increase demand for a specific firm. When all firms advertise, the demand curve and marginal revenue curve for a specific firm become more elastic. Topic: Marketing Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

18) Why are selling costs high in monopolistic competition? Answer: In monopolistic competition, there are a large number of small firms producing differentiated products. Each firm's output is a substitute for other firms' output; therefore demand for any firm's product is very elastic. If firms can further differentiate their product in the eyes of the consumer, they might be able to both increase demand and decrease demand elasticity, at least temporarily. In this case, the firm could then charge a higher price and, temporarily at least, earn an economic profit. This differentiation occurs through innovation, product development and marketing, which contribute to selling costs. Topic: Marketing Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

19) Explain how selling costs in monopolistic competition affect the efficiency of monopolistic competition. Answer: The additional selling costs from product differentiation and marketing increase consumer choice by providing variety. This benefits society and weighs in favor of the efficiency of monopolistic competition. However, selling costs can add to the product's price. Also, at times the product differentiation is more apparent than real. These factors harm society and count against the efficiency of monopolistic competition. Topic: Efficiency of Monopolistic Competition Skill: Conceptual Status: Previous edition, Chapter 14 85 Copyright © 2014 Pearson Education, Inc.

AACSB: Communication

20) What is a firm's markup? What does it show? Answer: A firm's markup is the amount by which price exceeds marginal cost. A markup shows that buyers pay more than the firm's marginal cost. Topic: Markup Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

6 Numeric and Graphing Questions

Price (dollars per unit) 26 24 22 20 18 16 14 12 10 Quantity produced (units) 0 1 2 3 4 5 6 7 8

Quantity demanded (units) 0 1 2 3 4 5 6 7 8

Average total cost (dollars)

Marginal cost (dollars)

18.00 12.00 10.66 10.50 11.20 12.66 15.14 23.25

8.00 6.00 8.00 10.00 14.00 20.00 30.00 80.00

1) The demand and cost schedules for a firm in monopolistic competition are in the above tables. What is the profit-maximizing level of output and price? What amount of profit is the firm earning? Is this firm in a short-run or long-run equilibrium? Why? Answer: To determine the quantity produced, the firm will set marginal cost equal to marginal revenue. Therefore it is necessary to determine the marginal revenue. The marginal revenue going from 3 to 4 units is $12 and the marginal revenue going from 4 to 5 units is $8. Thus the marginal revenue at 4 units is $10, which equals the marginal cost. Therefore the firm produces 4 units. The demand schedule shows that for 4 units, the price will be $16 per unit. The firm's economic profit per unit equals the price, $16, minus its average total cost, $10.50, or an economic profit of $5.50 per unit. The firm produces 4 units, so 86 Copyright © 2014 Pearson Education, Inc.

its total economic profit is $22.00. The firm is in a short-run equilibrium because it is able to make an economic profit. In the long run, entry will decrease its demand so that it no longer can make an economic profit. Topic: Monopolistic Competition, Profit Maximization Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

2) The above figure represents Tony's Pizza Parlor, a firm in monopolistic competition. a) What quantity will be produced? b) What price will be charged? c) What is Tony's total cost? d) What is Tony's total revenue? e) What is Tony's economic profit or loss? f) Is this a long-run equilibrium? Why or why not? Answer: a) 40 pizzas per day b) $12 per pizza c) $320 d) $480 e) Tony has an economic profit of $160. f) This is not a long-run equilibrium because Tony is earning an economic profit. In the long run, new firms will enter and Tony's economic profit will be eliminated. Topic: Monopolistic Competition, Profit Maximization Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

3) Draw an example of a firm in monopolistic competition that is earning an economic profit. Be sure to label all the curves. Indicate the area that equals the firm's economic profit. Answer: 87 Copyright © 2014 Pearson Education, Inc.

The completed figure is above. The economic profit equals the area of the grey rectangle. Topic: Monopolistic Competition, Short-Run Economic Profit Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

4) The above figure represents a restaurant operating in monopolistic competition. a) What is the profit-maximizing level of output? b) What price will the firm charge? c) What is the firm's economic profit (or loss)? d) Is this a long-run equilibrium? Why or why not? e) Is this firm producing its capacity output? Answer: a) The quantity is 20 meals a day. 88 Copyright © 2014 Pearson Education, Inc.

b) The price is $12 per meal. c) The firm is making zero economic profit, that is, the firm is earning a normal profit. d) This is a long-run equilibrium because the firm is making zero economic profit so there is no incentive for either entry or exit. e) No, the firm is not producing its capacity output. It is producing less than the capacity. The capacity, where the average total cost is at is minimum, is 50 meals a day. Hence the firm has excess capacity. Topic: Monopolistic Competition, Long-Run Equilibrium Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

7 True or False 1) In monopolistic competition, barriers to entry give the firms the power to set their price. Answer: FALSE Topic: Product Differentiation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

2) In monopolistic competition, product differentiation gives the firms the power to set their prices. Answer: TRUE Topic: Product Differentiation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

3) In monopolistic competition, firms compete on product quality, price and marketing. Answer: TRUE Topic: Product Differentiation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

4) Firms in monopolistic competition maximize their profit by setting their price equal to their marginal revenue. Answer: FALSE Topic: Monopolistic Competition, Profit Maximization Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

5) In the short run, a firm in monopolistic competition produces where P = MC. Answer: FALSE Topic: Monopolistic Competition, Profit Maximization Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

Topic: Monopolistic Competition, Profit Maximization Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

7) In monopolistic competition, free entry and free exit mean that in the long run firms in the industry make zero economic profit. Answer: TRUE Topic: Monopolistic Competition, Long-Run Profit Maximization Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

8) Firms in monopolistic competition can make an economic profit in the long run. Answer: FALSE Topic: Monopolistic Competition, Long-Run Profit Maximization Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

9) In the long run, firms in monopolistic competition become price takers. Answer: FALSE Topic: Monopolistic Competition, Long-Run Profit Maximization Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

10) In the long-run equilibrium in monopolistic competition, price equals marginal cost. Answer: FALSE Topic: Monopolistic Competition, Long-Run Profit Maximization Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

11) Under monopolistic competition, firms make zero economic profit in the long run and produce at the minimum ATC. Answer: FALSE Topic: Monopolistic Competition, Long-Run Profit Maximization Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

12) In the long run, monopolistically competitive firms make zero economic profits because of government regulations. Answer: FALSE Topic: Monopolistic Competition, Long-Run Profit Maximization Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

Answer: FALSE Topic: Monopolistic Competition, Long-Run Profit Maximization Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

14) Excess capacity refers to any unsold output due to insufficient demand. Answer: FALSE Topic: Monopolistic Competition, Long-Run Excess Capacity Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

15) In the long run, firms in monopolistic competition have excess capacity. Answer: TRUE Topic: Monopolistic Competition, Long-Run Excess Capacity Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

16) In monopolistic competition, firms do not have to produce innovative products because they have downward-sloping demand curves. Answer: FALSE Topic: Innovation and Product Development Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

8 Extended Problems 1) Shower Power, Inc., a firm in monopolistic competition, produces shower radios. The company's economists know that it can sell no radios at $80, and for each $10 cut in price, the quantity of radios it can sell increases by 50 a day. This relationship continues to hold until the price falls to $20. The firm's total fixed cost is $3,000 a day. Its marginal cost is constant at $20 per radio. a) Draw the demand curve faced by the firm and its marginal revenue curve. Also draw Shower Power's marginal cost and average total cost curves. b) What quantity of radios should Shower Power produce to maximize its profit? What price should it charge? c) What is the firm's short-run economic profit or loss? d) In the long run, what will happen to the demand for Shower Power's radios, the quantity of radios sold, the price charged, and the firm's economic profit?' Answer:

a) The figure above shows Shower Power's demand curve, marginal revenue curve, average total cost curve, and marginal cost curve. b) Shower Power will produce 150 radios per day. At this level of output MC = MR. Given the demand for the firm's radios, the price at which 150 radios will be sold is $50. c) When the firm produces 150 radios per day, its average total cost is $40 per radio. So its economic profit per radio is $50 - $40 = $10 per radio. Because it produces 150 radios, its total economic profit is $10 × 150, which is $1,500 per day. d) Because Shower Power is making an economic profit, other firms have an incentive to enter the industry. As other firms start to make shower radios similar to Shower Power radios, the demand for Shower Power radios decreases. The demand curve for Shower Power radios and the marginal revenue curve shift leftward. The profit maximizing quantity decreases and the price falls. Firms continue to enter the industry until the economic profit disappears. So in the long run, Shower Power is making zero economic profit on its shower radios. Topic: Monopolistic Competition, Profit Maximization Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

2) Shower Power, Inc., a firm in monopolistic competition, produces shower radios. The company's economists know that it if it does not advertise, it can sell no radios at $80, and for each $10 cut in price, the quantity of radios it can sell increases by 50 a day. This relationship continues to hold until the price falls to $20. The firm's total fixed cost is $3,000 a day. Its marginal cost is constant at $20 per radio. Shower Power's economists have determined that if the firm spends $3,500 a day on advertising, it can double the quantity of radios sold at each price. a) Draw the new demand curve faced by the firm and its new marginal revenue curve. Also draw Shower Power's marginal cost and average total cost curves. b) If Shower Power does not advertise, what quantity of radios sold maximizes its profit? What is the profit-maximizing price? What is the firm's economic profit? c) If Shower Power does advertise, what quantity of radios sold maximizes its profit? What is the profitmaximizing price? What is the maximum economic profit that the firm can make on its shower radios? Draw a diagram to show the effects of advertising. 92 Copyright © 2014 Pearson Education, Inc.

d) Will Shower Power advertise? Why or why not? Answer:

a) The figure above shows Shower Power's new demand curve, new marginal revenue curve, average total cost curve, and marginal cost curve. The old (pre-advertising) demand and marginal cost curves are shown in the answer to problem 1. Notice that the quantity scale along the horizontal axis differs between the two figures. b) As problem 1 demonstrated, Shower Power firm maximizes its profit by producing 150 radios per day and selling the radios at $50 per radio. The total economic profit is $1,500 per day. c) As the figure above shows, if Shower Power advertises, its fixed cost increases by $3,500 per day, shifting the average total cost curve upward. The demand curve for Shower Power radios and the marginal revenue curve shift rightward (or rather rotate outward). So the firm maximizes its profit by producing 300 radios per day. At this level of output, MC = MR = $20. The price at which the firm will be able to sell 300 radios per day is $50 per radio. If the firm produces 300 radios a day, its average total cost is $41.67 per radio. So the economic profit per radio is $50 - $41.67, or $8.33 per radio and the total economic profit is $8.33 × 300 = $2,500 per day. d) Shower Power will advertise because advertising increases its economic profit from $1,500 to $2,500 per day. Topic: Monopolistic Competition; Advertising Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

3) Shower Power, Inc., a firm in monopolistic competition, produces shower radios. The company's economists know that it can sell no radios at $80, and for each $10 cut in price, the quantity of radios it can sell increases by 50 a day. This relationship continues to hold until the price falls to $20. The firm's total fixed cost is $3,000 a day. Its marginal cost is constant at $20 per radio. Shower Power's managers are considering some quality improvements in their shower radios, which would raise the firm's total fixed cost by $200 per day and double its marginal cost. Shower Power's economists report that if the firm undertakes these quality improvements, from the demand relationship given above Shower Power will be able to increase the quantity of radios sold by 20 percent at each price. 93 Copyright © 2014 Pearson Education, Inc.

a) Draw the new demand curve faced by the firm and its new marginal revenue curve. Draw Shower Power's new marginal cost and new average total cost curves. b) With no quality improvements, what quantity of radios maximizes Shower Power's profit? What is the profit-maximizing price? What is the firm's economic profit? c) If Shower Power undertakes the quality improvements, what quantity of radios should it sell to maximize its profit? What is the profit-maximizing price? What is its economic profit? d) Should Shower Power implement the quality improvements? Why or why not? Answer:

a) The figure above shows Shower Power's new demand curve, new marginal revenue curve, new average total cost curve, and new marginal cost curve. Once again, notice that the quantity scale along the horizontal axis differs from the other figures. b) As problem 1 demonstrated, Shower Power firm maximizes its profit by producing 150 radios per day and selling the radios at $50 per radio. The total economic profit is $1,500 per day. c) If Shower Power undertakes the quality improvements, its marginal cost and average total cost curves shift upward and are as illustrated above. The demand curve for Shower Power radios and the marginal revenue curve shift rightward (or rather rotate outward). The firm maximizes its profit by producing 120 radios per day. At this level of output MC = MR = $40. The price at which the firm will be able to sell 120 radios per day is $60 per radio. If the firm produces 120 radios a day, its average total cost is $66.67 per radio. So the economic profit per radio is $60.00 - $66.67, which is -$6.67 per radio. In other words, Shower Power has an economic loss of $6.67 per radio. So Shower Power's total economics loss is $6.67 × 120 = -$800 per day. The firm incurs an economic loss of $800 a day. d) Shower Power will not implement the quality improvements because they will result in an economic loss.

Topic: Monopolistic Competition; Advertising Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

Economics, 11e, Global Edition (Parkin) Chapter 15 Oligopoly 1 What Is Oligopoly? 1) An oligopoly is a market structure in which there are A) only a few buyers but many sellers. B) only a few sellers selling either an identical or differentiated product. C) many sellers selling a differentiated product. D) a few products sold by many sellers. Answer: B Topic: Oligopoly Skill: Definition Status: Old AACSB: Analytical Skills

2) Which of the following is a distinguishing characteristic of oligopoly? A) A small number of firms compete. B) No one firm's actions directly affect the actions of the other firms. C) Firms are free to enter and exit the industry. D) Natural barriers cannot prevent the entry of new firms. Answer: A Topic: Oligopoly Skill: Definition Status: Old AACSB: Analytical Skills

3) When only a small number of producers compete with each other is a defining characteristic of A) inelastic supply. B) monopolistic competition. C) efficient competition. D) oligopoly. Answer: D Topic: Oligopoly Skill: Definition Status: Old AACSB: Analytical Skills

4) In oligopolistic markets, A) there are many firms. B) there are no barriers to entry. C) there are only a few firms. D) all firms are price takers. Answer: C Topic: Oligopoly Skill: Definition Status: Old AACSB: Analytical Skills

5) A market structure in which a small number of firms compete is called ________. A) a monopoly B) a small-number market C) an oligopoly D) monopolistic competition Answer: C Topic: Oligopoly Skill: Definition Status: Old AACSB: Analytical Skills

6) The key feature of an oligopoly is that there A) are many buyers and sellers. B) is one seller. C) exists product differentiation. D) are only a few sellers. Answer: D Topic: Oligopoly Skill: Definition Status: Old AACSB: Analytical Skills

7) In an oligopoly, A) there are only a few firms. B) there is no product differentiation. C) there is free entry and exit. D) firms' decisions are unrelated to each other. Answer: A Topic: Oligopoly Skill: Definition Status: Old AACSB: Analytical Skills

8) A market structure in which a small number of producers compete against each other is A) monopolistic competition. B) oligopoly. C) monopoly. D) perfect competition. Answer: B Topic: Oligopoly Skill: Definition Status: Old AACSB: Analytical Skills

9) If firms in an industry differentiated their products and made economic profits in the short-run, what other characteristic would be important to determine if this is an oligopoly or a monopolistically competitive market? A) the number of firms in the market B) the number of close substitutes for the good being produced C) the number of buyers in the market D) if the good being sold is a normal or inferior good Answer: A Topic: Oligopoly Skill: Definition Status: Old AACSB: Analytical Skills

10) The distinguishing features of oligopoly are ________ and a ________ in the industry. A) barriers to entry; large number of firms B) no barriers to entry; few firms C) barriers to entry; few firms D) no barriers to entry; large number of firms Answer: C Topic: Oligopoly Skill: Definition Status: Old AACSB: Analytical Skills

11) Oligopoly is A) like monopoly because there are barriers to entry. B) like perfect competition because oligopoly firms all sell homogeneous goods. C) like monopolistic competition because oligopoly firms all sell differentiated goods. D) like perfect competition because there are many firms in the industry. Answer: A Topic: Oligopoly Skill: Definition Status: Old AACSB: Analytical Skills

12) Which of the following is a distinguishing characteristic of oligopoly? A) A large number of firms compete. B) No one firm's actions directly affect the actions of the other firms. C) Firms are free to enter and exit the industry. D) Natural or legal barriers prevent the entry of new firms. Answer: D Topic: Oligopoly Skill: Definition Status: Old AACSB: Analytical Skills

13) Which of the following is a defining characteristic of oligopoly? A) barriers to entry B) selling a homogeneous good C) selling a differentiated good D) collusion Answer: A Topic: Oligopoly Skill: Definition Status: Old AACSB: Analytical Skills

14) Natural oligopoly is a situation where A) the level of demand can support only a few firms. B) there is only one firm. C) there are only two firms. D) there are legal barriers to entry. Answer: A Topic: Natural Oligopoly Skill: Definition Status: Old AACSB: Analytical Skills

15) A natural oligopoly can form A) if there are economies of scale. B) only if firms sell a differentiated good. C) only if firms sell a homogeneous good. D) if there is only one firm in the industry. Answer: A Topic: Natural Oligopoly Skill: Definition Status: Old AACSB: Analytical Skills

16) In a small town the level of demand is capable of supporting only two gas stations. This market is A) a natural duopoly. B) perfectly competitive because a homogeneous good is being sold. C) operating as if it was a monopoly. D) an example of monopolistic competition. Answer: A Topic: Natural Oligopoly Skill: Definition Status: Old AACSB: Analytical Skills

17) Suppose that all pizza companies have the same costs and the minimum average total cost is $12 per pizza. The pizza companies have an efficient scale of 100 pies per night. In the small town of Coatsville, at the price of $12 per pizza the quantity demanded is approximately 300 pizzas per night. This market, therefore, can best be characterized as A) perfectly competitive. B) a natural monopoly. C) a natural duopoly. D) a natural oligopoly. Answer: D Topic: Natural Oligopoly Skill: Analytical Status: New AACSB: Analytical Skills

18) One difference between oligopoly and monopolistic competition is that A) a monopolistically competitive industry has fewer firms. B) in monopolistic competition, the products are identical. C) monopolistic competition has barriers to entry. D) fewer firms compete in oligopoly than in monopolistic competition. Answer: D Topic: Oligopoly Skill: Definition Status: Old AACSB: Analytical Skills

19) Which of the following is a distinguishing characteristic of oligopoly? A) A large number of firms compete. B) Each firm's actions influence the profits of all the other firms. C) Firms are free to enter and exit the industry. D) Natural barriers cannot prevent the entry of new firms. Answer: B Topic: Oligopoly Skill: Definition Status: Old AACSB: Analytical Skills

20) Consider a market in which each firm must predict the price and quantity decisions of other firms, as well as how those price and quantity decisions will affect the first firm's revenue and profit. This market is best described as A) an oligopoly. B) monopolistic competition. C) a monopoly. D) perfect competition. Answer: A Topic: Oligopoly Skill: Definition Status: Old AACSB: Analytical Skills

21) In ________ market structure, a firm's output depends ________. A) an oligopoly; only on its own marginal revenue and marginal cost curves B) a monopolistically competitive; in part on its competitors' price and quantity decisions C) an oligopoly; in part on its competitors' price and quantity decisions D) a monopolistically competitive; only on its marginal revenue curve Answer: C Topic: Oligopoly Skill: Conceptual Status: Old AACSB: Analytical Skills

22) If firms in an industry make output decisions that are partially based on the price and output decisions of their competitors, then these firms are in ________ market have ________ with the other firms in the market. A) an oligopoly; interdependence B) an oligopoly; no interdependence C) an oligopoly or monopolistically competitive; interdependence D) a monopolistically competitive; no interdependence Answer: A Topic: Oligopoly Skill: Conceptual Status: Old AACSB: Analytical Skills

23) The small town of Narberth has two pizza stores. Which of the following statements are correct? I. The profits of each store depend on the price of the pizza at the other store. II. Both stores would increase their profit if they cooperated in setting their prices. A) I only B) II only C) Both I and II D) Neither I nor II Answer: C Topic: Oligopoly Skill: Conceptual Status: New AACSB: Analytical Skills

24) Of the following market structures, which has the fewest number of firms competing against each other? A) monopolistic competition B) oligopoly C) perfect competition D) Both answers A and C are correct. Answer: B Topic: Oligopoly Skill: Definition Status: Old AACSB: Analytical Skills

25) A duopoly occurs when ________. A) there are only two producers of a particular good competing in the same market B) there are two producers of two goods competing in an oligopoly market C) there are numerous producers of two goods competing in a competitive market D) the one producer of two goods sells the goods in a monopoly market Answer: A Topic: Duopoly Skill: Definition Status: Old AACSB: Analytical Skills

26) A duopoly is a form of A) perfect competition. B) monopolistic competition. C) oligopoly. D) monopoly. Answer: C Topic: Duopoly Skill: Definition Status: Old AACSB: Analytical Skills

In the figure, D is the demand curve for taxi rides in a town, and ATC is the average total cost curve of a taxi company. 27) In the scenario above, the market is: A) A natural duopoly. B) A natural oligopoly with three firms. C) A natural monopoly. D) Monopolistically competitive. Answer: A Topic: Duopoly Skill: Analytical Status: Old AACSB: Analytical Skills

28) In an oligopoly market, the Herfindahl-Hirschman Index is usually: A) Greater than 1,000. B) Below 1,000. C) Between 100 and 1,000. D) Between 200 and 2,000. Answer: A Topic: Oligopoly Skill: Definition Status: Old AACSB: Analytical Skills

29) An market in which the Herfindahl-Hirschman Index (HHI) is 1,250 is considered to be A) an oligopoly. B) monopolistically competitive. C) a monopoly. D) perfectly competitive. Answer: A Topic: Oligopoly Skill: Definition Status: Old AACSB: Analytical Skills

30) In the market for batteries, the four largest firms earn 90% of the total revenue and there are 35 firms in the industry. This industry is best described as A) oligopoly. B) monopoly. C) monopolistic competition. D) perfect competition. Answer: A Topic: Oligopoly Skill: Analytical Status: Old AACSB: Analytical Skills

31) Of the following, the best example of oligopoly is A) wheat farming. B) the restaurant industry. C) the cigarette industry. D) the clothing industry. Answer: C Topic: Oligopoly Skill: Analytical Status: Old AACSB: Analytical Skills

32) When producers agree to restrict output, raise the price, and increase profits, the agreement is called ________. A) a pricing agreement B) an oligopoly agreement C) a collusive agreement D) a monopoly agreement Answer: C Topic: Cartel Skill: Definition Status: Old AACSB: Analytical Skills

33) ________ is a group of firms that have colluded to limit their output and raise their price. A) A cartel B) An oligopoly C) A strategy D) A duopoly Answer: A Topic: Cartel Skill: Definition Status: Old AACSB: Analytical Skills

34) Which of the following is characteristic of oligopoly, but NOT of monopolistic competition? A) The choices made by one firm have a significant effect on other firms. B) Each firm faces a downward-sloping demand curve. C) Firms are profit-maximizers. D) There is more than one firm in the industry. Answer: A Topic: Study Guide Question, Oligopoly Skill: Conceptual Status: Old AACSB: Analytical Skills

35) A monopolistically competitive firm is like an oligopolistic firm insofar as A) both face perfectly elastic demand. B) both can earn an economic profit in the long run. C) both have MR curves that lie beneath their demand curves. D) neither is protected by high barriers to entry. Answer: C Topic: Study Guide Question, Oligopoly Skill: Conceptual Status: Old AACSB: Analytical Skills

2 Oligopoly Games 1) Game theory is most useful for analyzing A) perfect competition. B) monopolistic competition. C) oligopoly. D) monopoly. Answer: C Topic: Game Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

2) Game theory can be used for studying which of the following types of market structure? A) monopoly B) monopolistic competition C) oligopoly D) perfect competition Answer: C Topic: Game Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

3) Game theory is most useful for determining the outcome when ________. A) the market structure is oligopoly B) monopolistic competition exists C) prison terms are involved D) the market is dominated by a monopoly Answer: A Topic: Game Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

4) Game theory is used to explain firms' decisions in A) a monopoly. B) an oligopoly. C) a perfectly competitive market. D) a monopolistically competitive market. Answer: B Topic: Game Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

5) Game theory is applicable to oligopoly behavior because oligopolists A) use strategic behavior. B) ignore rival firms. C) are price takers. D) can only be profitable if they collude. Answer: A Topic: Game Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

6) Game theory is distinctive in that its elements are A) costs, prices, and profits. B) revenues, elasticity, and profits. C) rules, strategies, payoffs, and outcomes. D) patents, copyrights, and barriers to entry. Answer: C Topic: What Is a Game? Skill: Definition Status: Old AACSB: Analytical Skills

7) Which group of features is shared by all games? A) rules, strategies, payoffs, outcome B) rules, profit, payoffs, outcome C) profit, strategies, payoffs, cheating D) rules, cheating, payoffs, outcome Answer: A Topic: What Is a Game? Skill: Definition Status: Old AACSB: Analytical Skills

8) Game theory is a tool for studying ________. A) Nash behavior B) payoff dilemmas C) rational dilemmas D) strategic behavior Answer: D Topic: Game Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

9) In game theory, strategies include ________. A) all possible actions of each player B) only the winning action of each player C) all possible actions and payoffs of each player D) the payoff matrix Answer: A Topic: Game Theory Skill: Definition Status: Old AACSB: Analytical Skills

10) The prisoners' dilemma describes a single-play game that features A) an outcome in which the participants collude. B) a large number of rivals cooperating with each other. C) a situation in which one player has better odds than the other. D) two players who are unable to communicate with each other. Answer: D Topic: Prisoners' Dilemma Skill: Definition Status: Old AACSB: Analytical Skills

11) The simplest prisoners' dilemma is a game that, in part, requires A) two players who are able to communicate with each other. B) two players who are unable to communicate with each other. C) monopolistic competition. D) an oligopoly with one very large firm. Answer: B Topic: Prisoners' Dilemma Skill: Definition Status: Old AACSB: Analytical Skills

12) In the prisoners' dilemma game, each player A) has only one possible strategy. B) can choose from two strategies. C) can choose from three strategies. D) can choose from four strategies. Answer: B Topic: Prisoners' Dilemma Skill: Definition Status: Old AACSB: Analytical Skills

13) In a prisoner's dilemma game, each person will pick A) their best outcome given what the other person will do B) their best outcome. C) their worse outcome. D) their best outcome after consulting with the other person. Answer: A Topic: Nash Equilibrium Skill: Conceptual Status: Old AACSB: Analytical Skills

14) In the prisoners' dilemma game, when each player takes the best possible action given the action of the other player, ________. A) a competitive equilibrium is reached B) one player denies and one player confesses C) both players deny D) a Nash equilibrium is reached Answer: D Topic: Prisoners' Dilemma Skill: Conceptual Status: Old AACSB: Analytical Skills

15) The outcome of a prisoners' dilemma game with a Nash equilibrium is that ________. A) both players deny B) one player denies and one player confesses C) both players confess D) there is no equilibrium Answer: C Topic: Prisoners' Dilemma Skill: Conceptual Status: Old AACSB: Analytical Skills

16) In a prisoner's dilemma, the Nash equilibrium occurs where A) neither person ends up with their best outcome. B) both end up with their best outcome. C) only one ends up with his best outcome. D) the one who goes first ends up with his best outcome. Answer: A Topic: Prisoners' Dilemma Skill: Conceptual Status: Old AACSB: Analytical Skills

17) The prisoners' dilemma has an equilibrium in which A) both players deny. B) both players confess. C) the player who confesses wins. D) the player who denies wins. Answer: B Topic: Prisoners' Dilemma Skill: Conceptual Status: Old AACSB: Analytical Skills

18) In a prisoners' dilemma game, which of the following strategies gives the best outcome for both prisoners? A) Both deny (collusion). B) Both confess (not collude). C) One confesses while the other denies. D) none of the above Answer: A Topic: Prisoners' Dilemma Skill: Conceptual Status: Old AACSB: Analytical Skills

19) In a prisoners' dilemma game, in the Nash equilibrium A) both players have another outcome that does not occur but is more favorable. B) neither player has another outcome that does not occur and is more favorable. C) one player has another outcome that does not occur and is more favorable. D) collusion would not alter the outcome. Answer: A Topic: Prisoners' Dilemma Skill: Conceptual Status: Old AACSB: Analytical Skills

20) The prisoners' dilemma has an equilibrium that is A) a Nash equilibrium and both players confess. B) not a Nash equilibrium and both players confess. C) a Nash equilibrium and both players deny. D) not a Nash equilibrium and both players deny. Answer: A Topic: Prisoners' Dilemma Skill: Conceptual Status: Old AACSB: Analytical Skills

21) Ann and Lynn have been arrested by the police, who have evidence that will convict them of robbing a bank. If convicted, each will receive a sentence of 6 years for the robbery. During questioning, the police suspect that Ann and Lynn are responsible for a series of bank robberies. If both confess to the series, each will receive 12 years in jail. If only one confesses, she will receive 4 years and the one who does not confess will receive 14 years. What is the equilibrium for this game? A) Both confess. B) Ann confesses and Lynn does not confess. C) Lynn confesses and Ann does not confess. D) Neither confess. Answer: A Topic: Prisoners' Dilemma Skill: Analytical Status: Old AACSB: Analytical Skills

22) Consider the prisoner's dilemma model where two criminals have two options (confess or deny), and each criminal must make their decision without speaking to the other criminal first. If they both confess they each get 3 years, if only one confesses then he gets 1 and his partner gets 10, and if neither confesses then they each get 0. They are in fact both guilty. In this game, the Nash equilibrium is where A) both confess. B) neither one confesses. C) only one will confess. D) It is impossible to say. Answer: A Topic: Prisoners' Dilemma Skill: Analytical Status: Old AACSB: Analytical Skills

B: 10 years J: 10 years

Bob Don't Confess B: 20 years J: 1 year

B: 1 year J: 20 years

B: 2 years J: 2 years

Confess Confess Joe Don't Confess

23) The table above displays the possible outcomes for Bob and Joe, who have been arrested for armed robbery and car theft. Which of the following is true? A) If Joe confesses, Bob should not confess. B) If Bob confesses, Joe should confess. C) The dominant equilibrium is that Joe and Bob both serve 2 years. D) If Joe does not confess, Bob should not confess. Answer: B Topic: Prisoners' Dilemma Skill: Analytical Status: Old AACSB: Analytical Skills

Confess

Confess A: 3 years B: 3 years

Player A Don't confess A: 10 years B: 1 year

A: 1 year B: 10 years

A: 2 years B: 2 years

Player B Don't confess

24) The table above shows the payoff matrix for a prisoners' dilemma game. The Nash equilibrium is that A) both prisoners do not confess. B) both prisoners confess. C) prisoner A confesses while prisoner B does not confess. D) prisoner A does not confess while prisoner B confesses. Answer: B Topic: Prisoners' Dilemma Skill: Analytical Status: Old AACSB: Analytical Skills

25) The table above shows the payoff matrix for a prisoners' dilemma. In the Nash equilibrium, A) both prisoners get 3 years in jail. B) both prisoners get 2 years in jail. C) both prisoners get 1 year in jail. D) both prisoners get 10 years in jail. Answer: A Topic: Prisoners' Dilemma Skill: Analytical Status: Old AACSB: Analytical Skills

26) The problem for the prisoners in the prisoners' dilemma game in the above table is that A) the Nash equilibrium is not the best outcome. B) there is no equilibrium outcome. C) neither prisoner has a workable strategy. D) None of the above answers is correct. Answer: A Topic: Prisoners' Dilemma Skill: Conceptual Status: Old AACSB: Analytical Skills

Sell

Sell 1: $3 2: $3

Firm 1 Give away 1: $4 2: -$1

1: -$1 2: $4

1: $2 2: $2

Firm 2 Give away

27) Two software firms have developed an identical new software application. They are debating whether to give the new application away free and then sell add-ons or sell the application at $30 a copy. The payoff matrix is above and the payoffs are profits in millions of dollars. What is Firm 1's best strategy? A) Give away the application regardless of what Firm 2 does. B) Sell the application at $30 a copy regardless of what Firm 2 does. C) Give away the application only if Firm 2 sells the application. D) Give away the application only if Firm 2 gives away the application. Answer: A Topic: Game Theory Skill: Analytical Status: Old AACSB: Analytical Skills

28) Two software firms have developed an identical new software application. They are debating whether to give the new application away free and then sell add-ons or sell the application at $30 a copy. The payoff matrix is above and the payoffs are profits in millions of dollars. What is the Nash equilibrium of the game? A) Both Firm 1 and 2 will sell the software application at $30 a copy. B) Both Firm 1 and 2 will give the software application away free. C) Firm 1 will give the application away free and Firm 2 will sell it at $30. D) There is no Nash equilibrium to this game. Answer: B Topic: Game Theory, Nash Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

Advertise

Advertise J: $6,000 B: $10,000

Jane Don't advertise J: $3,000 B: $20,000

J: $12,000 B: $5,000

J: $10,000 B: $15,000

Bob Don't advertise

29) The payoff matrix of economic profits above displays the possible outcomes for Bob and Jane who are involved in game of whether or not to advertise. After each player chooses his or her best strategy and sees the result, A) only Bob would like to change his decision. B) neither player would be willing to change his or her decision unless the other player also changes his or her decision. C) if Jane does not change her decision, Bob would like to change his. D) if Bob does not change his decision, Jane would like to change hers. Answer: B Topic: Game Theory, Nash Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

R&D

R&D A: $25 B: $15

Firm A No R&D A: -$3 B: $60

A: $60 B: -$3

A: $50 B: $35

Firm B No R&D

30) Firms A and B can conduct research and development (R&D) or not conduct it. R&D is costly but can increase the quality of the product and increase sales. The payoff matrix is the economic profits of the two firms and is given above, where the numbers are millions of dollars. A's best strategy is to A) conduct R&D regardless of what B does. B) not conduct R&D regardless of what B does. C) conduct R&D only if B conducts R&D. D) conduct R&D only if B does not conduction R&D. Answer: A Topic: Game Theory Skill: Analytical Status: Old AACSB: Analytical Skills

31) Firms A and B can conduct research and development (R&D) or not conduct it. R&D is costly but can increase the quality of the product and increase sales. The payoff matrix is the economic profits of the two firms and is given above, where the numbers are millions of dollars. The Nash equilibrium occurs when A) both A and B conduct R&D. B) only A conducts R&D. C) only B conducts R&D. D) neither A nor B conduct R&D. Answer: A Topic: Game Theory, Nash Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

Thanksgiving release

Thanksgiving release D: $100 F: $80

Disney Christmas release D: $105 F: $95

D: $110 F: $100

D: $95 F: $85

Fox Christmas release

32) Disney and Fox must decide when to release their next films. The revenues received by each studio depend in part on when the other studio releases its film. Each studio can release its film at Thanksgiving or at Christmas. The revenues received by each studio, in millions of dollars, are depicted in the payoff matrix above. Which of the following statements correctly describes Fox's strategy given what Disney's release choice may be? A) If Disney chooses a Thanksgiving release, Fox should choose a Christmas release. B) If Disney chooses a Christmas release, Fox should choose a Thanksgiving release. C) Fox should release on Christmas regardless of what Disney does. D) Both answers A and B are correct. Answer: D Topic: Game Theory Skill: Analytical Status: Old AACSB: Analytical Skills

33) Disney and Fox must decide when to release their next films. The revenues received by each studio depend in part on when the other studio releases its film. Each studio can release its film at Thanksgiving or at Christmas. The revenues received by each studio, in millions of dollars, are depicted in the payoff matrix above. Which of the following statements correctly describes Disney's strategy given what Fox's release choice may be? A) If Fox chooses a Thanksgiving release, Disney should choose a Christmas release. B) If Fox chooses a Christmas release, Disney should choose a Thanksgiving release. C) Disney should release on Thanksgiving regardless of what Fox does. D) Both answers A and B are correct. Answer: D Topic: Game Theory Skill: Analytical Status: Old AACSB: Analytical Skills

Advertise

Advertise S: $80 J: $70

Dr. Smith Don't advertise S: $60 J: $110

S: $120 J: $60

S: $100 J: $90

Dr. Jones Don't advertise

34) Libertyville has two optometrists, Dr. Smith and Dr. Jones. Each optometrist can choose to advertise his service or not. The incomes of each optometrist, in thousands of dollars, are given in the payoff matrix above. Which of the following statements correctly describes Dr. Smith's strategy given what Dr. Jones may do? A) Dr. Smith should advertise no matter what Dr. Jones does. B) Dr. Smith should not advertise no matter what Dr. Jones does. C) Dr. Smith should advertise only if Dr. Jones doesn't advertise. D) Dr. Smith should advertise only if Dr. Jones advertises. Answer: A Topic: Game Theory Skill: Analytical Status: Old AACSB: Analytical Skills

35) Libertyville has two optometrists, Dr. Smith and Dr. Jones. Each optometrist can choose to advertise his service or not. The incomes of each optometrist, in thousands of dollars, are given in the payoff matrix above. Which of the following statements correctly describes Dr. Jones' strategy given what Dr. Smith may do? A) Dr. Jones should advertise no matter what Dr. Smith does. B) Dr. Jones should not advertise no matter what Dr. Smith does. C) Dr. Jones should advertise only if Dr. Smith doesn't advertise. D) Dr. Jones should advertise only if Dr. Smith advertises. Answer: A Topic: Game Theory Skill: Analytical Status: Old AACSB: Analytical Skills

36) Libertyville has two optometrists, Dr. Smith and Dr. Jones. Each optometrist can choose to advertise his service or not. The incomes of each optometrist, in thousands of dollars, are given in the payoff matrix above. Which of the following statements correctly categorizes the Nash equilibrium for the game? A) The game has a Nash equilibrium in which both optometrists advertise. B) The game has a Nash equilibrium in which both optometrists do not advertise. C) The game has a Nash equilibrium in which Dr. Smith advertises and Dr. Jones does not advertise. D) The game has a Nash equilibrium in which Dr. Smith does not advertise and Dr. Jones does advertise. Answer: A Topic: Nash Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

Work

Work 1: +10 2: +10

Student 1 Don't work 1: +5 2: +5

1: +5 2: +50

1: 0 2: 0

Student 2 Don't work

37) Two students are assigned a group project. Each has the option to work or not work to achieve a high grade. The payoffs are shown in the above table. Student 1 should A) work only if student 2 works. B) work regardless of the decision made by student 2. C) not work if student 2 works. D) not work regardless of what student 2 decides. Answer: B Topic: Game Theory Skill: Analytical Status: Old AACSB: Analytical Skills

38) For a Nash equilibrium to be possible, all players must ________. A) be able to predict their outcomes associated with all possible actions of the other players B) have a way to communicate with the other players C) have a strategy which allows for collusion D) Both A and B Answer: A Topic: Nash Equilibrium Skill: Conceptual Status: Old AACSB: Analytical Skills

39) In an oligopoly price-fixing game, each player tries to A) minimize the market shares of its opponents. B) maximize its own market share. C) minimize the profits of its opponents. D) maximize its own profit. Answer: D Topic: Price-Fixing Game Skill: Conceptual Status: Old AACSB: Analytical Skills

40) In the oligopoly price-fixing game, the payoffs are the A) profits of the firms. B) market shares of the firms. C) sales of the firms. D) reputations of the firms. Answer: A Topic: Price-Fixing Game Skill: Definition Status: Old AACSB: Analytical Skills

41) A group of firms that has entered into a collusive agreement to restrict output and increase prices and profits is called A) a compliance. B) a cartel. C) an oligopoly. D) a duopoly. Answer: B Topic: Cartel Skill: Definition Status: Old AACSB: Analytical Skills

42) In what type of market is a cartel possible? A) a market in which there are only a few firms and barriers to entry exist B) a market in which firms sell a homogeneous good C) a market in which firms sell a differentiated good D) a market in which there are many firms Answer: A Topic: Cartel Skill: Definition Status: Old AACSB: Analytical Skills

43) A cartel usually has a collusive agreement to A) restrict output. B) boost output. C) lower the price. D) increase the number of firms in the industry. Answer: A Topic: Cartel Skill: Definition Status: Old AACSB: Analytical Skills

44) A cartel is a group of firms that A) produce differentiated products. B) produce products that are complements. C) agree to restrict output to boost their profit. D) agree to boost output to boost their profit. Answer: C Topic: Cartel Skill: Definition Status: Old AACSB: Analytical Skills

45) A cartel is a group of firms which agree to A) behave competitively. B) raise the price of their product. C) lower the price of their product. D) increase the amount they produce. Answer: B Topic: Cartel Skill: Definition Status: Old AACSB: Analytical Skills

46) A cartel is an arrangement A) to flood the market and eliminate competition. B) to steal industrial processes from rival firms. C) among firms to decrease output and raise price. D) by the government to restrict imports. Answer: C Topic: Cartel Skill: Definition Status: Old AACSB: Analytical Skills

47) In the United States, a collusive agreement to restrict output and increases prices is A) legal. B) the key tool used by oligopolists. C) illegal. D) the key tool used by monopolistic competitors. Answer: C Topic: Cartel Skill: Definition Status: Old AACSB: Analytical Skills

48) Which of the following is true regarding a collusive agreement? I. It is illegal in the United States. II. Two or more producers agree to restrict output or raise prices. III. Firms' profits are never maximized under this sort of agreement. A) I and II B) I and III C) II and III D) I, II and III Answer: A Topic: Cartel Skill: Definition Status: Old AACSB: Analytical Skills

49) If two duopolists can collude successfully, then both will A) earn greater profits than if they did not collude. B) price at marginal cost. C) price below average total cost. D) lower their economic profits. Answer: A Topic: Colluding to Maximize Profits Skill: Conceptual Status: Old AACSB: Analytical Skills

50) If firms in a duopoly can successfully collude, A) each firm can earn an economic profit. B) the industry, that is, both firms taken together, can earn the maximum economic profit. C) the firms achieve a cooperative equilibrium. D) All of the above answers are true. Answer: D Topic: Colluding to Maximize Profits Skill: Conceptual Status: Old AACSB: Analytical Skills

51) If there is a collusive agreement in a duopoly to maximize profit, then the price will A) equal the marginal cost of production. B) equal the average total cost of production. C) be the same as the price set by a monopoly. D) be the same as the price set by a competitive industry. Answer: C Topic: Colluding to Maximize Profits Skill: Conceptual Status: Old AACSB: Analytical Skills

52) The maximum economic profit that can be made by a duopoly that colludes is equal to the ________. A) economic profit made by duopolists who cheat B) normal profit made by an oligopoly C) economic profit made by a monopoly D) normal profit made by firms in perfect competition Answer: C Topic: Colluding to Maximize Profits Skill: Conceptual Status: Old AACSB: Analytical Skills

53) Two firms, Alpha and Beta, produce identical computer hard drives. They have identical costs, and the hard drives they produce are identical. The industry is a natural duopoly. Alpha and Beta enter into a collusive agreement, according to which they split the market equally. If both firms comply with the agreement, A) together they will operate in a way indistinguishable from a monopoly. B) the price of a hard drive will be equal to marginal cost. C) each firm will make zero economic profit. D) the oligopoly will produce more hard drives than a profit-maximizing monopoly would produce. Answer: A Topic: Colluding to Maximize Profits Skill: Conceptual Status: Old AACSB: Analytical Skills

54) Two firms, Alpha and Beta, produce identical computer hard drives. They have identical costs, and the hard drives they produce are identical. The industry is a natural duopoly. Alpha and Beta enter into a collusive agreement, according to which they split the market equally. If both firms cheat on the agreement so the market is the same as a competitive market, A) they will operate in a way indistinguishable from a monopoly. B) each firm will make zero economic profit. C) each firm will increase its economic profit. D) the price of a hard drive will be above marginal cost. Answer: B Topic: Colluding to Maximize Profits Skill: Conceptual Status: Old AACSB: Analytical Skills

55) When two firms collude to maximize profit the total quantity produced by both firms taken together is determined at the quantity where ________. A) excess capacity is minimized B) industry marginal cost equals industry marginal revenue C) the price equals the industry's marginal cost D) excess capacity is as large as possible zero Answer: B Topic: Colluding to Maximize Profits Skill: Conceptual Status: Old AACSB: Analytical Skills

56) The maximum total economic profit that can be made by colluding duopolists A) is less than the economic profit made by a monopolist. B) equals the economic profit made by a monopolist. C) exceeds the economic profit made by a monopolist. D) bears no necessary relation to the economic profit made by a monopolist. Answer: B Topic: Colluding to Maximize Profits Skill: Analytical Status: Old AACSB: Analytical Skills

57) Two duopoly firms that sell an identical good form a cartel. They decide to collude and fix the price of their good. In this prisoners' dilemma type situation, the likely outcome is A) both will cheat. B) neither one will cheat. C) only one will cheat. D) It is impossible to say. Answer: A Topic: Colluding to Maximize Profits Skill: Conceptual Status: Old AACSB: Analytical Skills

58) Two duopoly firms form a cartel. They decide to collude and fix the price of their good. Each individual firm will earn the highest profit if A) it cheats and the other sticks with the agreement. B) both stick with the agreement. C) it sticks with the agreement and the other cheats. D) they both cheat. Answer: A Topic: Cartel; Incentive To Cheat Skill: Conceptual Status: Old AACSB: Analytical Skills

59) Cartels are typically subject to cheating by their members because A) if the other firms stick to the agreement, a firm can increase its profits by cutting its price. B) barriers to entry do not exist so new entrants will join. C) the U.S. Justice Department will punish any cartel agreement before the cartel has had a chance to operate. D) product differentiation allows the firms in the cartel to cheat. Answer: A Topic: Cartel; Incentive To Cheat Skill: Conceptual Status: Old AACSB: Analytical Skills

60) Once a cartel determines the profit-maximizing price, A) each firm faces the temptation to cheat by raising its price. B) each firm faces the temptation to cheat by lowering its price. C) changes in the output of any member firm will not affect the market price. D) entry into the industry by rival firms will not affect the profit of the cartel. Answer: B Topic: Cartel; Incentive To Cheat Skill: Conceptual Status: Old AACSB: Analytical Skills

61) In a cartel, A) each firm has an incentive to decrease its own production below the level set by the cartel. B) the firms' marginal cost equals the price set by the cartel. C) each firm has an incentive to lower its price below the level set by the cartel. D) each firm has an incentive to raise its price above the level set by the cartel. Answer: C Topic: Cartel; Incentive To Cheat Skill: Conceptual Status: Old AACSB: Analytical Skills

62) In a collusive agreement between two duopolists in an oligopoly, each firm has an incentive to cheat on the agreement because the firm's price A) exceeds its marginal cost. B) exceeds its marginal revenue. C) is less than its average total cost. D) None of the above answers is correct. Answer: A Topic: Cartel; Incentive To Cheat Skill: Conceptual Status: Old AACSB: Analytical Skills

63) A firm might be tempted to cheat on a collusive price-fixing agreement by setting a ________ price and producing ________ than agreed upon. A) lower; more B) lower; less C) higher; more D) higher; less Answer: A Topic: Cartel; Incentive To Cheat Skill: Analytical Status: Old AACSB: Analytical Skills

64) If both firms in a duopoly cheat on a collusive agreement, the price ________ and both firms are ________. A) falls; better off B) rises; worse off C) falls; worse off D) rises; better off Answer: C Topic: Cartel; Incentive To Cheat Skill: Analytical Status: Old AACSB: Analytical Skills

65) In a duopoly with a collusive agreement and in a one-time only game, a firm's profit is largest if it ________ the agreement and if the other firm ________ the agreement. A) complies with; complies with B) complies with; cheats on C) cheats on; complies with D) cheats on; cheats on Answer: C Topic: Cartel; Incentive To Cheat Skill: Conceptual Status: Old AACSB: Analytical Skills

66) The ABC Nail Company has entered into a collusive agreement with the other firm in the industry, the DC Nail Company. What occurs in the nail industry if ABC decides to cheat on the agreement? A) ABC lowers the price of its nails. B) The total industry output increases. C) The total profits in the nail industry will decrease. D) All of the above answers are correct. Answer: D Topic: Cartel; Incentive To Cheat Skill: Conceptual Status: Old AACSB: Analytical Skills

67) In a duopoly game we observe the following payouts: if the two firms collude they will each earn $50,000. If one firm cheats then he earns $60,000 and the other firm earns -$10,000. If both firms cheat then they each earn zero economic profit. In this game what is the Nash equilibrium? A) Both firms cheat. B) Only one firm will cheat. C) Neither firm will cheat. D) It is impossible to say. Answer: A Topic: Nash Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

Suppose two firms, FastNet and SmartCast are the only fast Internet providers in a city. They have identical costs and one firm's service is a perfect substitute for the other's. The industry is a natural duopoly. Suppose that FastNet and SmartCast collude and agree to share the market equally. 68) In the scenario above, which of the following actions will maximize the industry's economic profit? A) Both firms comply with the agreement. B) Both firms cheat on the agreement, producing more than the agreed amount. C) One of the firms complies with the agreement while the other firm cheats, producing more than the agreed amount. D) Because the firms are colluding, the profit does not change regardless of whether the firms comply with agreement or cheat on the agreement. Answer: A Topic: Colluding to Maximize Profits Skill: Analytical Status: Old AACSB: Analytical Skills

69) In the scenario above, if both firms cheat on the agreement, producing more than the agreed amount, then: A) Each firm makes zero economic profit. B) The outcome is identical to a monopoly. C) The industry's economic profit is the maximum profit that can be made by the duopoly. D) Each firm makes a greater economic profit than it would make if it complied with the agreement. Answer: A Topic: Nash Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

70) In the scenario above, in Nash equilibrium: A) Both firms cheat to produce more than the agreed amount. B) Both firms comply with the agreement. C) One firm complies with the agreement while the other cheats to produce more than the agreed amount. D) Both firms cheat to produce less than the agreed amount. Answer: A Topic: Nash Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

M&M Regular Candy Holiday Candy M&M: $1250 M&M: $1400 Regular Candy Dove: $1250 Dove: $650 Dove Holiday Candy

M&M: $650 Dove: $1400

M&M: $1000 Dove: $1000

71) M&M and Dove are both considering issuing themed holiday candy. The profits for each strategy, Regular Candy or Holiday Candy, are summarized in the payoff matrix above. The Nash Equilibrium in this game is that Dove produces ________ and M&M produces ________. A) Holiday Candy; Regular Candy B) Regular Candy; Holiday Candy C) Regular Candy; Regular Candy D) Holiday Candy; Holiday Candy Answer: D Topic: Duopoly Payoff Matrix Skill: Analytical Status: New AACSB: Analytical Skills

Orange

Gap Pink Gap: $50M AT: $70M

Orange Gap: $120M AT: $100M

Ann Taylor Gap: $70M AT: $50M

Pink

Gap: $100M AT: $120M

72) Ann Taylor and Gap are two clothing companies that must decide on the leading color palette for next season. Their sales depend on the choice of color they make as well as the choice their competitor makes. Their sales are summarized in the payoff matrix above. Using the payoff matrix, A) the only Nash Equilibrium is for both companies to choose pink. B) the only Nash Equilibrium is for both companies to choose orange. C) the Nash Equilibrium is for one company to choose pink while the other company chooses orange. D) there are two Nash Equilibria: either both companies choose pink or both choose orange. Answer: A Topic: Nash Equilibrium Skill: Analytical Status: New AACSB: Analytical Skills

Cheat

Cheat A: $0 N: $0

American Comply A: -$2,000 N: $4,000

A: $4,000 N: -$2,000

A: $3,000 N: $3,000

National Comply

73) There are two can companies, American and National, which have entered into a collusive agreement. The payoff matrix of economic profits is above. If both firms cheat on the collusive agreement, what amount of economic profit is made by American? A) $0 B) $3,000 C) $4,000 D) -$2,000 Answer: A Topic: Duopoly Payoff Matrix Skill: Analytical Status: Old AACSB: Analytical Skills

74) There are two can companies, American and National, which have entered into a collusive agreement. The payoff matrix of economic profits is above. If National is able to cheat on the agreement but American complies with the agreement, what amount of economic profit is made by National? A) $2,000 B) $3,000 C) $4,000 D) $6,000 Answer: C Topic: Duopoly Payoff Matrix Skill: Analytical Status: Old AACSB: Analytical Skills

Lower prices

Sears Don't lower Lower prices prices S: $5 million S: $1 million W: $5 million W: $30 million

Wal-Mart Don't lower prices

S: $30 million W: $1 million

S: $20 million W: $20 million

75) Sears and Wal-Mart must decide whether to lower their prices, based on the economic profits shown in the table above. Which of the following is true? A) This situation is not a prisoners' dilemma. B) If Sears lowers its prices and Wal-Mart does not, Sears will make a $20 million economic profit. C) If Wal-Mart lowers its prices, Sears should keep its prices high. D) Both Sears and Wal-Mart would jointly be better off if they could each keep their prices high. Answer: D Topic: Colluding to Maximize Profits Skill: Analytical Status: Old AACSB: Analytical Skills

76) Refer to the payoffs in the table above. Sears and Wal-Mart must decide whether to lower their prices based on the profits shown in the table. This game has A) no Nash equilibrium. B) a Nash equilibrium: Sears keeps its prices high and Wal-Mart lowers its prices. C) a Nash equilibrium: both Sears and Wal-Mart keep prices high. D) a Nash equilibrium: both Sears and Wal-Mart lower prices. Answer: D Topic: Equilibrium of the Duopolists' Dilemma Skill: Analytical Status: Old AACSB: Analytical Skills

Firm A Competitive Monopoly price price A: $5 A: $8 Monopoly price B: $5 B: -$1 Firm B Competitive price

A: -$1 B: $8

A: $0 B: $0

77) The above payoff matrix shows the economic profits (in millions of dollars) of two firms in a duopoly that have agreed to a cartel agreement to restrict their output and set their prices equal to the monopoly price. Assuming the game is played once, the equilibrium outcome is where A) both choose the monopoly price. B) both choose the competitive price. C) firm A chooses the monopoly price and firm B chooses the competitive price. D) firm B chooses the monopoly price and firm A chooses the competitive price. Answer: B Topic: Game Theory, Nash Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

Cheat

Cheat O: $1 M F: $1 M

Oscar Comply O: -$2 M F: $12 M

O: $12 M F: -$2 M

O: $10 M F: $10 M

Felix Comply

78) Oscar and Felix are the only firms that clean offices in a large city. They agree to operate as a cartel. The payoff matrix above gives the economic profit that each firm can make. If Felix cheats on the agreement but Oscar complies, Felix makes an economic profit of ________ and Oscar makes an economic profit of ________. A) $10 million; $10 million B) $1 million; $1 million C) -$2 million; $12 million D) $12 million; -$2 million Answer: D Topic: Game Theory Skill: Analytical Status: Old AACSB: Analytical Skills

79) Oscar and Felix are the only firms that clean offices in a large city. They agree to operate as a cartel. The payoff matrix above shows the economic profit that each firm can make. If the game is played only once, then ________. A) Felix and Oscar will each make $10 million economic profit B) Felix will comply and Oscar will make $12 million economic profit C) Felix and Oscar will each make $1 million economic profit D) Felix will cheat and Oscar will make -$2 million economic profit Answer: C Topic: Game Theory, Nash Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

80) Oscar and Felix are the only firms that clean offices in a large city. They agree to operate as a cartel. The payoff matrix shows the economic profit that each firm can make. If the game is played repeatedly and Felix and Oscar both use a tit-for-tat strategy, then ________. A) Felix will make $10 million of economic profit and Oscar will cheat B) Felix and Oscar will each make $1 million of economic profit C) Felix will make -$2 million economic of profit and Oscar will cheat D) Felix and Oscar will each make $10 million of economic profit Answer: D Topic: Game Theory Skill: Analytical Status: Old AACSB: Analytical Skills

Cut price

Cut price G: $10 D: $10

Gateway Hold price G: $5 D: $20

G: $20 D: $5

G: $15 D: $15

Dell Hold price

81) Dell and Gateway must decide whether to lower their prices, based on the potential economic profits shown in the payoff matrix above. (The profits are in millions of dollars.) In the Nash equilibrium, A) Dell keeps its prices high and Gateway lowers its prices. B) both Dell and Gateway lower prices. C) Gateway keeps its prices high and Dell lowers its prices. D) both Dell and Gateway keep prices high. Answer: B Topic: Game Theory, Nash Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

82) Dell and Gateway must decide whether to lower their prices, based on the potential economic profits shown in the payoff matrix above. (The profits are in millions of dollars.) In the Nash equilibrium, Dell's profit is ________ million and Gateway's profit is ________ million. A) $10; $10 B) $15; $15 C) $5; $20 D) $20; $5 Answer: A Topic: Game Theory, Nash Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

83) Dell and Gateway must decide whether to lower their prices, based on the potential economic profits shown in the payoff matrix above. (The profits are in millions of dollars.) If the firms collude and don't cheat, Dell's profit is ________ million and Gateway's profit is ________ million. A) $10; $10 B) $15; $15 C) $5; $20 D) $20; $5 Answer: B Topic: Colluding to Maximize Profits Skill: Analytical Status: Old AACSB: Analytical Skills

84) A collusive agreement between two duopolists is similar to the prisoners' dilemma because in both games, A) the best outcome is always achieved. B) each players strategy depends on what the other player does. C) the Nash equilibrium is not the best outcome for the players. D) All of the above answers are correct. Answer: C Topic: Equilibrium of the Duopolists' Dilemma Skill: Conceptual Status: Old AACSB: Analytical Skills

85) Suppose two firms are trying to decide how much to budget for research and development. Once a new discovery is made, each firm benefits regardless of which firm developed the innovation. In this R&D game of chicken, the Nash equilibrium will be that A) either both firms conduct the R&D or neither firm conducts the R&D. B) only one firm conducts the R&D but which firm conducts the R&D cannot be determined. C) both firms conduct the R&D. D) neither firm conducts the R&D. Answer: B Topic: Game Theory, An R&D Game Skill: Conceptual Status: Revised AACSB: Analytical Skills 36 Copyright © 2014 Pearson Education, Inc.

86) There are two firms that compete against each other and each needs to decide if they will undertake research and development to improve their product. The payoffs are as follows: If Firm 1 does undertake R&D then Firm 2 will earn $25 million if they also do R&D or $50 million if not If Firm 1 does not undertake R&D then Firm 2 will earn $2 million if they do R&D or $0 million if not If Firm 2 does undertake R&D then Firm 1 will earn $10 million if they also do R&D or $20 million if not If Firm 2 does not undertake R&D then Firm 1 will earn $2 million if they do R&D or $0 million if not Regarding this game, which of the following is true? A) Only one will do R&D but we cannot say which one. B) Both firms will do R&D. C) Both firms will not do R&D. D) Firm 1 will do R&D and Firm 2 will not. Answer: A Topic: R & D Game Skill: Analytical Status: Old AACSB: Analytical Skills

87) In an oligopoly with a collusive agreement, the total industry profits will be smallest when A) all firms comply with the agreement. B) one firm cheats on the agreement and the other firms do not cheat. C) all firms cheat on the agreement. D) the firms act as a monopoly. Answer: C Topic: Study Guide Question, Equilibrium of the Duopolists' Dilemma Skill: Analytical Status: Old AACSB: Analytical Skills

88) When a cartel maximizes its profit, A) each firm necessarily produces the same amount. B) the industry level of output is efficient. C) industry marginal revenue equals industry marginal cost at the level of total output. D) total output is greater than it would be without collusion. Answer: C Topic: Study Guide Question, Colluding to Maximize Profits Skill: Conceptual Status: Old AACSB: Analytical Skills

3 Repeated Games and Sequential Games 1) In a repeated game, punishments that result in heavy damages are an incentive for players to adopt the strategies that result in a ________ equilibrium. A) contestable B) strategic C) cooperative D) winner-share-all Answer: C Topic: Cooperative Equilibrium Skill: Definition Status: Old AACSB: Analytical Skills

2) An equilibrium in game theory in which the players make and share the monopoly profit is called A) the Nash equilibrium. B) the cooperative equilibrium. C) a contestable market equilibrium. D) limit pricing. Answer: B Topic: Cooperative Equilibrium Skill: Definition Status: Old AACSB: Analytical Skills

3) From the social perspective, a major criticism of oligopolies is that A) successful collusion leads to a monopoly-like outcome. B) price wars usually break out. C) advertising hardly ever occurs. D) cartels are unstable. Answer: A Topic: Repeated Games Skill: Conceptual Status: Old AACSB: Analytical Skills

4) If a duopolist's collusive price-fixing game can be played repeatedly, A) one possible equilibrium is that both firms cheat. B) players can signal their willingness to cooperate. C) players can punish cheaters in the following game. D) All of the above answers are correct. Answer: D Topic: Repeated Games Skill: Conceptual Status: Old AACSB: Analytical Skills

5) A tit-for-tat strategy can be used in A) a single-play game or a repeated game. B) a single-play game but not a repeated game. C) a repeated game but not a single-play game. D) neither a repeated game nor a single-play game. Answer: C Topic: Repeated Games Skill: Conceptual Status: Old AACSB: Analytical Skills

6) A trigger strategy can be used in A) a single-play game or a repeated game. B) a single-play game but not a repeated game. C) a repeated game but not a single-play game. D) neither a single-play game nor a repeated game. Answer: C Topic: Repeated Games Skill: Definition Status: Old AACSB: Analytical Skills

7) A strategy in which a player cooperates in the current period if the other player cooperated in the previous period, but the player cheats in the current period if the other player cheated in the previous period is called a A) tit-for-tat strategy. B) trigger strategy. C) duopoly strategy. D) dominant firm strategy. Answer: A Topic: Repeated Games Skill: Definition Status: Old AACSB: Analytical Skills

8) A trigger strategy is one in which a player A) cooperates in the current period if the other player cooperated in the previous period, but cheats in the current period only if the other player cheated in the previous period. B) cheats in the current period if the other player cooperated in the previous period, but cooperates in the current period if the other player cheated in the previous period. C) cooperates in the current period if the other player has always cooperated, but cheats forever if the other player ever cheats. D) cheats in the current period if the other player has always cheated, but cooperates forever if the other player has ever cooperated. Answer: C Topic: Repeated Games Skill: Definition Status: Old AACSB: Analytical Skills

9) Sarah's Soothing Diapers, Inc. and Orville's Odorless Diapers, Inc. are duopolists, who have agreed to collude. Orville has decided that he will comply with the collusive agreement as long as Sarah cooperated in the previous period. But if Sarah cheated in the previous period, Orville will punish Sarah by cheating in the current period. Orville's strategy is referred to as a A) Nash strategy. B) tit-for-tat strategy. C) trigger strategy. D) monkey-see, monkey-do strategy. Answer: B Topic: Repeated Games Skill: Conceptual Status: Old AACSB: Analytical Skills

10) A cooperative equilibrium is most likely to arise in a A) single-play game with a large number of players. B) single-play game without communication. C) repeated game with a large number of players. D) repeated game with a small number of players. Answer: D Topic: Repeated Games Skill: Conceptual Status: Old AACSB: Analytical Skills

11) Which of the following models is the best to explain price wars? A) a repeated duopoly game B) a game of chicken C) dominant firm oligopoly D) a sequential entry game in a contestable market Answer: A Topic: Games and Price Wars Skill: Conceptual Status: Old AACSB: Analytical Skills

12) With barriers to the entry of new firms, A) a cartel is guaranteed to earn an economic profit. B) a cartel's members have no incentive to cheat. C) the cartel might earn an economic profit. D) industry supply will expand if the firms form a cartel. Answer: C Topic: Games and Price Wars Skill: Analytical Status: Old AACSB: Analytical Skills

13) Price wars are A) most likely when there is a monopoly. B) most likely when there is oligopoly. C) most likely when there is perfect competition. D) equally likely in the cases of monopoly, oligopoly, and perfect competition. Answer: B Topic: Games and Price Wars Skill: Conceptual Status: Old AACSB: Analytical Skills

14) A contestable market is similar to a perfectly competitive market in that there A) are barriers to entry. B) are no barriers to entry. C) can be only one firm in the market. D) will be no entry if the existing firm earns an economic profit. Answer: B Topic: Contestable Market Skill: Definition Status: Old AACSB: Analytical Skills

15) A market with one or a small number of firms but no barriers to entry is known as A) a natural monopoly. B) a contestable market. C) a perfectly competitive market. D) monopolistic competition. Answer: B Topic: Contestable Market Skill: Definition Status: Old AACSB: Analytical Skills

16) A market in which firms can enter and leave so easily that firms in the market face competition from potential entrants is called a A) contestable market. B) cartel. C) limit pricing market. D) monopolistic competition market. Answer: A Topic: Contestable Market Skill: Definition Status: Old AACSB: Analytical Skills

17) Which of the following statements is TRUE about contestable markets? A) There are significant barriers to entry. B) Firms earn large economic profits. C) Each firm faces a perfectly elastic demand. D) There are few firms in the industry. Answer: D Topic: Contestable Market Skill: Definition Status: Old AACSB: Analytical Skills

18) A contestable market is one in which A) one dominant firm sets the market price, and all other firms are price takers. B) if a firm cuts its price, all other firms will follow the price cut. C) one or a small number of firms operate, but faces competition from potential entrants. D) a group of firms enter into an agreement to restrict output and raise prices. Answer: C Topic: Contestable Market Skill: Definition Status: Old AACSB: Analytical Skills

19) A contestable market is one in which there are A) one or a few firms, and entry into the market is costly. B) one or a few firms, and entry into the market is not costly. C) many firms, and entry into the market is costly. D) many firms, and entry into the market is not costly. Answer: B Topic: Contestable Market Skill: Definition Status: Old AACSB: Analytical Skills

20) Of the following, the best example of firm that might operate in a contestable market is a A) cable TV company. B) wheat farmer. C) ship owner operating on a major waterway. D) private college operating in a state with many public colleges. Answer: C Topic: Contestable Market Skill: Conceptual Status: Old AACSB: Analytical Skills

21) In a contestable market the Herfindahl-Hirschman Index is ________ and the market behaves as if it is ________. A) low; perfectly competitive B) low; a monopoly C) high; perfectly competitive D) high; a monopoly Answer: C Topic: Contestable Market Skill: Conceptual Status: Old AACSB: Analytical Skills

22) In a sequential contestable market game: A) A small number of firms can behave like firms in perfect competition. B) The outcome is always a monopoly equilibrium. C) The dominant firm always makes a monopoly profit, while other firms make zero economic profits. D) A firm that enters the market first is protected from potential entrants by natural barriers. Answer: A Topic: Contestable Market Skill: Definition Status: Old AACSB: Analytical Skills

23) A single firm in a contestable market is limited in the amount of economic profit it can earn because there A) are barriers to entry. B) are no barriers to entry. C) is collusion. D) are government regulations limiting its profit. Answer: B Topic: Contestable Market Skill: Conceptual Status: Old AACSB: Analytical Skills

24) In a contestable market with one firm in the market, the existing firm will A) set its price equal to the monopoly price. B) set its price lower than the monopoly price. C) set its price higher than the monopoly price. D) have a demand curve that is horizontal at the price that will attract new firms to enter the market. Answer: B Topic: Contestable Market Skill: Conceptual Status: Old AACSB: Analytical Skills

25) The price in a contestable market is similar to that in a perfectly competitive market because A) there are barriers to entry. B) there are no barriers to entry. C) there are many firms in the market. D) the firm can earn an economic profit in the long run. Answer: B Topic: Contestable Market Skill: Conceptual Status: Old AACSB: Analytical Skills

26) In a contestable market, A) two or more firms are competing. B) the Herfindahl-Hirschman Index exceeds 1,800. C) the four-firm concentration ratio exceeds 50 percent. D) potential entry holds down prices. Answer: D Topic: Contestable Market Skill: Conceptual Status: Old AACSB: Analytical Skills

27) One of the reasons that concentration ratios are not a perfect measure of competitiveness is that they A) do not measure how high the industry's prices are. B) cannot be measured. C) ignore potential competition. D) tell nothing about how high prices were in the past. Answer: C Topic: Contestable Market Skill: Conceptual Status: Old AACSB: Analytical Skills

28) The Herfindahl-Hirschman Index will indicate that a contestable market is ________. A) a sequential market B) competitive C) uncompetitive D) a prisoners' dilemma Answer: C Topic: Contestable Market Skill: Conceptual Status: Old AACSB: Analytical Skills

29) In a contestable market, A) the HHI is usually quite low. B) the firm in the market usually earns a large economic profit. C) the firm in the market may play an entry-deterrence game. D) there are high barriers to entry. Answer: C Topic: Contestable Market Skill: Conceptual Status: Old AACSB: Analytical Skills

30) Adkins Air is the only seller offering service directly from Milwaukee to Greensboro. The market is contestable. Thus the Nash Equilibrium for a game between Adkins Air and a potential entrant is when the potential entrant A) enters and Adkins earns a normal profit. B) enters and Adkins earns an economic profit. C) does not enter and Adkins earns a normal profit. D) does not enter and Adkins earns an economic profit. Answer: C Topic: Entry-Deterrence Game Skill: Analytical Status: Old AACSB: Analytical Skills

31) The practice of the only seller in a market charging a price at the highest level that would still inflict a loss on a new entrant into the market is called A) limit pricing. B) collusive pricing. C) agile pricing. D) trigger pricing. Answer: A Topic: Limit Pricing Skill: Definition Status: Old AACSB: Analytical Skills

32) Limit pricing in a contestable market sets the price at the highest level that ________. A) maximizes the profit of an entrant B) maximizes the profit of the existing firm C) maximizes the profit of both the existing firm and the entering firm D) inflicts a loss on an entrant Answer: D Topic: Limit Pricing Skill: Definition Status: Old AACSB: Analytical Skills

33) A strategy of setting price below the monopoly profit-maximizing price but at the highest level that will still result in a loss for a potential entrant into the market is known as A) entry pricing. B) contestable pricing. C) limit pricing. D) unlimited pricing. Answer: C Topic: Limit Pricing Skill: Definition Status: Old AACSB: Analytical Skills

34) A strategy called "limit pricing" sets the price A) below the competitive level. B) at the monopoly level. C) at the lowest level that inflicts a loss on the entrant. D) at the highest level that inflicts a loss on the entrant. Answer: D Topic: Limit Pricing Skill: Definition Status: Old AACSB: Analytical Skills

35) Limit pricing is a strategy used by a firm to A) deter entry. B) enhance short run profits. C) raise its prices. D) lower its costs. Answer: A Topic: Limit Pricing Skill: Conceptual Status: Old AACSB: Analytical Skills

36) Price wars can be the result of A) a cooperative equilibrium. B) a firm playing a tit-for-tat strategy in which last period the competitors complied with a collusive agreement. C) new firms entering the industry and immediately agreeing to abide by a collusive agreement. D) new firms entering an industry and all firms then finding themselves in a prisoners' dilemma. Answer: D Topic: Study Guide Question, Price Wars Skill: Conceptual Status: Old AACSB: Analytical Skills

37) Limit pricing refers to A) the fact that a monopoly firm always sets the highest price possible. B) how the price is determined in a kinked demand curve model of oligopoly. C) a situation in which a firm might lower its price to keep potential competitors from entering its market. D) none of the above Answer: C Topic: Study Guide Question, Limit Pricing Skill: Conceptual Status: Old AACSB: Analytical Skills

4 Antitrust Law 1) Antitrust law is law that A) does not allow individuals to open trust savings accounts. B) prohibits competition in certain industries. C) prohibits certain kinds of market behavior by firms. D) allows firms under special circumstances to be a monopoly. Answer: C Topic: Antitrust Law Skill: Definition Status: Old AACSB: Analytical Skills

2) When the government prohibits certain kinds of market behavior such as monopoly and monopolistic practices it generally does so through A) regulatory agencies such as the Interstate Commerce Commission or the Federal Communications Commission. B) antitrust law. C) the police powers of the states. D) use of the capture theory of regulation. Answer: B Topic: Antitrust Law Skill: Definition Status: Old AACSB: Analytical Skills

3) A law that prohibits certain kinds of market behavior such as monopoly and monopolistic practices is ________. A) a consumer surplus law B) a trust law C) an antitrust law D) an anti-monopoly law Answer: C Topic: Antitrust Law Skill: Definition Status: Old AACSB: Analytical Skills 47 Copyright © 2014 Pearson Education, Inc.

4) Antitrust laws attempt to A) support prices at high levels so firms can earn profits. B) establish minimum wages. C) prevent monopolies or collusion. D) enforce fair trade laws. Answer: C Topic: Antitrust Law Skill: Conceptual Status: Old AACSB: Analytical Skills

5) In part, an antitrust laws A) provide for strict product liability. B) prohibit charging prices that customers think are too high. C) require firms with profits to pay dividends. D) prohibit monopolistic practices. Answer: D Topic: Antitrust Law Skill: Conceptual Status: Old AACSB: Analytical Skills

6) Antitrust law is the law that regulates ________ and prevents them from becoming ________. A) oligopolies; monopolies B) monopolies; oligopolies C) monopolistically competitive firms; oligopolies D) oligopolies; monopolistically competitive firms Answer: A Topic: Antitrust Law Skill: Conceptual Status: Old AACSB: Analytical Skills

7) The main purpose of antitrust law is to A) prohibit monopoly practices such as restricting output. B) regulate advertising. C) encourage the formation of cartels. D) regulate the stock and bond markets. Answer: A Topic: Antitrust Law Skill: Conceptual Status: Old AACSB: Analytical Skills

8) The first antitrust law passed was the ________. A) Federal Trade Commission Act B) Sherman Act C) Clayton Act D) Robinson-Patman Amendment Answer: B Topic: Sherman Act Skill: Definition Status: Old AACSB: Analytical Skills

9) The Sherman Act, A) which deregulated banking, was enacted in 1890. B) which deregulated banking, was enacted in 1980. C) the first antitrust law, was enacted in 1890. D) the first antitrust law, was enacted in 1980. Answer: C Topic: Sherman Act Skill: Definition Status: Old AACSB: Analytical Skills

10) The beginning of antitrust law is found in the A) 1914 Clayton Act. B) 1890 Sherman Act. C) 1947 Taft-Hartley Act. D) 1950 Cellar-Kefauver Act. Answer: B Topic: Sherman Act Skill: Definition Status: Old AACSB: Analytical Skills

11) The Sherman Act A) was the first federal tariff. B) prohibited attempts to monopolize. C) outlawed natural monopolies. D) abolished tariffs. Answer: B Topic: Sherman Act Skill: Definition Status: Old AACSB: Analytical Skills

12) The Sherman Act of 1890 was passed to prohibit A) combinations, trusts, or conspiracies to restrict interstate or international trade. B) monopolization or attempts to monopolize interstate or international trade. C) Both of the above. D) Neither of the above. Answer: C Topic: Sherman Act Skill: Definition Status: Old AACSB: Analytical Skills

13) The Sherman Act makes it illegal to A) increase market share. B) merge firms in the same industry. C) attempt to monopolize an industry. D) price below competitors. Answer: C Topic: The Sherman Act Skill: Definition Status: Old AACSB: Analytical Skills

14) The second federal antitrust law was passed in 1914. This antitrust law is the A) Clayton Act. B) Robinson-Patman Amendment. C) Cellar-Kefauver Amendment. D) Taft-Hartley Act. Answer: A Topic: Clayton Act Skill: Definition Status: Old AACSB: Analytical Skills

15) The Clayton Act of 1914 was passed to prohibit, in part, A) price discrimination if the effect is to substantially lessen competition or create monopoly. B) unfair methods of competition and unfair or deceptive business practices. C) combinations, trusts, or conspiracies that restrict interstate or international trade. D) business practices that allow one firm to profit at the expense of another whenever the first firm is a monopoly. Answer: A Topic: Clayton Act Skill: Definition Status: Old AACSB: Analytical Skills

16) The Clayton Act of 1914 prohibits ________ if it substantially lessens competition or creates a monopoly. A) people from serving on the board of directors of competing firms B) contracts that force other goods to be bought from the same firm C) both of the above D) neither of the above Answer: C Topic: Clayton Act Skill: Definition Status: Old AACSB: Analytical Skills

17) The iPhone 5 no longer comes pre-loaded with Google Maps and uses the Apple map application instead. Regulators might be concerned with this requirement because they might see it as an example of A) resale price maintenance. B) a tying arrangement. C) predatory pricing. D) collusion to create a monopoly. Answer: B Topic: Clayton Act Skill: Conceptual Status: New AACSB: Analytical Skills

18) The Federal Trade Commission is an agency charged with A) regulating interstate commerce. B) enforcing product safety laws. C) regulating international commerce. D) enforcing antitrust laws. Answer: D Topic: Antitrust Law Skill: Definition Status: Old AACSB: Analytical Skills

19) Which of the following business practices, if proven to exist, is always illegal under U.S. antitrust law? A) tying arrangements B) price fixing among competitors C) exclusive dealing D) all of the above Answer: B Topic: Price Fixing Skill: Definition Status: Old AACSB: Analytical Skills

20) Which of the following is always a violation of the antitrust law? A) price fixing among competitors B) resale price maintenance C) tying arrangements D) predatory pricing Answer: A Topic: Price Fixing Skill: Definition Status: Old AACSB: Analytical Skills

21) When is price fixing among competitors not a violation of the antitrust laws? A) Price fixing among competitors is always a violation of the antitrust law. B) When a cartel can maximize profit without behaving like a monopoly C) When price fixing leads to a more efficient outcome D) When price fixing does not result in predatory pricing Answer: A Topic: Price Fixing Skill: Conceptual Status: Old AACSB: Analytical Skills

22) Suppose that two soft drink manufacturers, Fizzy Pop and Spritzy Soda, agree to charge the same prices for their soft drinks. This practice is A) always legal under the antitrust laws. B) legal as long as Herfindahl-Hirschman index is less than 1,000. C) legal as long as the firms had a cost justification for setting prices. D) always illegal under the antitrust laws. Answer: D Topic: Price Fixing Skill: Conceptual Status: Old AACSB: Analytical Skills

23) If McDonald's, Wendy's, and Burger King agree with each other not to sell hamburgers for less than $2.95 apiece, all three could be found guilty of A) an interlocking directorship under the Clayton Act. B) price fixing under the Sherman Act. C) a deceptive business practice under the Clayton Act. D) None of the above answers is correct. Answer: B Topic: Price Fixing Skill: Conceptual Status: Old AACSB: Analytical Skills

24) Which of the following is illegal under the Sherman Act? I. A competitor agrees with another competitor on the price at which the product will be sold. II. A manufacturer refuses to supply a retailer who does not accept the manufacturer's guidance on the price. A) only I B) only II C) both I and II D) neither I nor II Answer: A Topic: Resale Price Maintenance Skill: Conceptual Status: Old AACSB: Analytical Skills

25) Under current guidelines, the Federal Trade Commission will likely challenge A) all mergers if the Herfindahl-Hirschman index (HHI) is 2500 or higher. B) a merger if the HHI is 2500 or higher and the merger increases the HHI by more than 200 points. C) a merger if the HHI is 2500 or higher and the merger increases the HHI by more than 50 points. D) a merger if the HHI is 1500 or higher and the merger increases the HHI by more than 100 points. Answer: B Topic: Current Merger Rules Skill: Definition Status: Old AACSB: Analytical Skills

26) Under current guidelines, the Federal Trade Commission will likely challenge A) all mergers if the Herfindahl-Hirschman index (HHI) is greater than 1500. B) a merger if the HHI is between 1500 and 2500 and the merger increases the HHI by 50 points or more. C) a merger if the HHI is between 1500 and 2500 and the merger increases the HHI by 100 points or more. D) a merger if the HHI is below 1500 and the merger increases the HHI by less than 100 points. Answer: C Topic: Current Merger Rules Skill: Definition Status: Old AACSB: Analytical Skills

27) A merger will be challenged by the FTC in a market where the Herfindahl-Hirschman Index (HHI) is ________, and the merger would increase it to ________. A) 2,900; 3,100. B) 1,700; 1,760 C) 800; 950 D) 2,000; 2,040 Answer: A Topic: Current Merger Rules Skill: Definition Status: Old AACSB: Analytical Skills

28) Under Federal Trade Commission merger guidelines, an industry with a Herfindahl-Hirschman index (HHI) of 800 points is considered A) unconcentrated. B) moderately concentrated. C) concentrated. D) a monopoly. Answer: A Topic: Current Merger Rules Skill: Definition Status: Old AACSB: Analytical Skills

29) As the Federal Trade Commission currently interprets the Herfindahl-Hirschman index (HHI), an industry is considered to be moderately concentrated if the HHI value is A) between 100 and 1,500. B) between 1,500 and 2,500. C) between 1,000 and 3,500. D) between 3,000 and 6,000. Answer: B Topic: Current Merger Rules Skill: Definition Status: Old AACSB: Analytical Skills

30) A market in which the Herfindahl-Hirschman Index is 1,000 is regarded by the Federal Trade Commission as A) moderately concentrated. B) concentrated. C) unconcentrated. D) monopolistic. Answer: C Topic: Current Merger Rules Skill: Definition Status: Old AACSB: Analytical Skills

31) As the Federal Trade Commission currently interprets the Herfindahl-Hirschman index (HHI), an industry is considered to be highly concentrated if the HHI value is above A) 100. B) 1,000. C) 2,500. D) 5,000. Answer: C Topic: Current Merger Rules Skill: Definition Status: Old AACSB: Analytical Skills

32) In 1986, PepsiCo announced its intention to buy 7-Up for $380 million and Coca-Cola said it would buy Dr Pepper for $470 million. Because the Herfindahl-Hirschman index for carbonated soft drinks is ________, the Federal Trade Commission ________ the mergers. A) low; allowed B) low; blocked C) high; allowed D) high; blocked Answer: D Topic: Current Merger Rules Skill: Definition Status: Old AACSB: Analytical Skills

33) In the market for bottled water, Fresh Springs has a 30 percent share of the market, Swiss Springs has a 27 percent share, L'eau de France has a 13 percent share, and Mountain Water has a 10 percent share. The rest of the market consists of 20 firms with a 1 percent share of the market each. What is the value of the Herfindahl-Hirschman index? A) 2,418 B) 80 C) 1,918 D) 2,818 Answer: C Topic: Current Merger Rules Skill: Analytical Status: Old AACSB: Analytical Skills

34) An industry is made up of 8 firms with the following percent market shares: 29, 20, 11, 10, 9, 8, 7, 6. What is the Herfindahl-Hirschman index in this industry? A) 70 B) 100 C) 1462 D) 1692 Answer: D Topic: Current Merger Rules Skill: Analytical Status: Old AACSB: Analytical Skills

35) An industry is made up of 8 firms with the following percent market shares: 29, 20, 11, 10, 9, 8, 7, 6. The firms with 8 and 7 percent market share are proposing to merge. What is the new HerfindahlHirschman index if the merger takes place? A) 225 B) 1462 C) 1692 D) 1804 Answer: D Topic: Current Merger Rules Skill: Analytical Status: Old AACSB: Analytical Skills

36) Suppose that two clothing manufacturers, Frederick's Fashions and Stephan's Styles, announce that they plan to merge. The Herfindahl-Hirschman index is currently 1,500. After the merger, the HHI will rise to 1,560. This market is A) highly concentrated and so the government will definitely challenge the merger. B) moderately concentrated and because the merger increases the HHI by more than 50 points, the government will definitely challenge the merger. C) moderately concentrated, but because the merger increases the HHI by less than 100 points, the government will probably not challenge the merger. D) competitive and so the government will not challenge the merger. Answer: C Topic: Current Merger Rules Skill: Conceptual Status: Old AACSB: Analytical Skills

37) There are twenty five dealers in the local market for new cars. The largest dealership has a market share of 12 percent; the second and third largest have 10 percent and 9 percent, respectively; the fourth and fifth largest have 5 percent and 4 percent, respectively; and the remaining twenty dealerships each have a 2 percent market share. What is value of the Herfindahl-Hirschman index (HHI) for this market? A) 42 B) 82 C) 266 D) 446 Answer: D Topic: Current Merger Rules Skill: Conceptual Status: Old AACSB: Analytical Skills

38) There are twenty five dealers in the local market for new cars. The largest dealership has a market share of 12 percent; the second and third largest have 10 percent and 9 percent, respectively; the fourth and fifth largest have 5 percent and 4 percent, respectively; and the remaining twenty dealerships each have a 2 percent market share. If the second largest dealership merged with the fifth largest, that would increase the Herfindahl-Hirschman index (HHI) by A) 14 points. B) 60 points. C) 80 points. D) 196 points. Answer: C Topic: Current Merger Rules Skill: Analytical Status: Old AACSB: Analytical Skills

39) If the Herfindahl-Hirschman index (HHI) among the firms in the long distance telecommunications market were equal to 1755, when would the Federal Trade Commission probably challenge a proposed merger between any two of the firms? A) It would challenge if the HHI would increase by more than 50 points. B) It would challenge if the HHI would increase by more than 100 points. C) It would challenge no matter what happened to the HHI because the market has so few firms. D) It would not challenge because the HHI is less than 1800. Answer: B Topic: Current Merger Rules Skill: Definition Status: Old AACSB: Analytical Skills

40) If the Herfindahl-Hirschman Index (HHI) among the firms in the long distance telecommunications market is equal to 855, when would the Federal Trade Commission probably challenge a proposed merger between any two of the firms? A) It would challenge if the HHI would increase by more than 50 points. B) It would challenge if the HHI would increase by more than 100 points. C) It would challenge no matter what happened to the HHI because the market has so few firms. D) It would not challenge because the HHI is less than 1500. Answer: D Topic: Current Merger Rules Skill: Definition Status: Old AACSB: Analytical Skills

41) The local pizza delivery industry currently has a Herfindahl-Hirschman index (HHI) value of 999 and two of the competing pizza shops have considered merging. Because the merger would raise the HHI by 55 points, the Federal Trade Commission would likely A) not challenge the merger. B) challenge the merger. C) allow the merger under the condition that HHI does not rise by more than 55 points as promised. D) allow the merger under the condition that the HHI remain at the premerger level of 999. Answer: A Topic: Current Merger Rules Skill: Conceptual Status: Old AACSB: Analytical Skills

42) The local banking industry currently has a Herfindahl-Hirschman index (HHI) value of 1575 and two of the competing banks have considered merging. Because the merger would raise the HHI by 55 points, the Federal Trade Commission would likely A) challenge the merger. B) not challenge the merger. C) allow the merger under the condition that HHI does not rise by more than 55 points as promised. D) allow the merger under the condition that the HHI remain at the premerger level of 1575. Answer: B Topic: Current Merger Rules Skill: Conceptual Status: Old AACSB: Analytical Skills

43) The local banking industry currently has a Herfindahl-Hirschman index (HHI) value of 1575 and two of the competing banks have considered merging. Because the merger would raise the HHI by 215 points, the Federal Trade Commission would likely A) challenge the merger. B) not challenge the merger. C) allow the merger under the condition that HHI does not rise by more than 215 points as promised. D) allow the merger under the condition that the HHI remain at the premerger level of 1575. Answer: A Topic: Current Merger Rules Skill: Conceptual Status: Old AACSB: Analytical Skills

44) The local banking industry currently has a Herfindahl-Hirschman index (HHI) value of 2175 and two of the competing banks have considered merging. Because the merger would raise the HHI by 25 points, the Federal Trade Commission would likely A) challenge the merger. B) not challenge the merger. C) allow the merger under the condition that HHI does not rise by more than 25 points as promised. D) allow the merger under the condition that the HHI remain at the premerger level of 2175. Answer: B Topic: Current Merger Rules Skill: Conceptual Status: Old AACSB: Analytical Skills

45) The local banking industry currently has a Herfindahl-Hirschman index (HHI) value of 1945 and two of the competing banks have considered merging. Because the merger would raise the HHI by 155 points, the Federal Trade Commission would likely A) challenge the merger. B) not challenge the merger. C) allow the merger as long as the HHI did not increase by more than 155 points as promised. D) allow the merger under the condition that the HHI remain at the premerger level of 1875. Answer: A Topic: Current Merger Rules Skill: Conceptual Status: Old AACSB: Analytical Skills

46) Suppose the Herfindahl-Hirschman Index (HHI) in the market for chocolate is 3,200. Two companies want to merge. The FTC definitely will challenge the merger if it increases the HHI by more than A) 150 points. B) 100 points. C) 40 points. D) 200 points. Answer: D Topic: Current Merger Rules Skill: Conceptual Status: Old AACSB: Analytical Skills

Market share in the Widget industry Firm name Market share Big W 50 Widico 40 Widgotech 9 Widgette 1 47) In the table above, the Herfindahl-Hirschman Index in the widget industry is A) 100 points. B) 742 points. C) 2842 points. D) 4182 points. Answer: D Topic: Current Merger Rules Skill: Analytical Status: Old AACSB: Analytical Skills

48) Using the market shares in the table above, if Widgotech buys Widgette the HHI will A) stay the same. B) rise by 1 point. C) rise by 10 points. D) rise by 18 points. Answer: D Topic: Current Merger Rules Skill: Analytical Status: Old AACSB: Analytical Skills

49) Using the market shares in the table above, if Big W wants to buy Widgette, the Federal Trade Commission will probably A) approve the merger because the industry is moderately concentrated and the increase in the Herfindahl-Hirschman index (HHI) is small enough. B) block the merger because the industry is moderately concentrated (HHI between 1,500 and 2,500) and the increase in the HHI is too much. C) approve the merger because the industry is highly concentrated (HHI exceeds 2,500) but the increase in the HHI is small enough. D) block the merger because the industry is highly concentrated (HHI exceeds 2,500) and the increase in the HHI is too much. Answer: D Topic: Current Merger Rules Skill: Analytical Status: Old AACSB: Analytical Skills

50) Which of the following statements about the Sherman Act is correct? A) The Sherman Act was the second federal antitrust law. B) The Sherman act legalized monopolization if the company behaved "reasonably" once it became a monopoly. C) The Sherman Act outlawed natural monopolies. D) The Sherman Act made restriction of interstate trade illegal. Answer: D Topic: Study Guide Question, Sherman Act Skill: Definition Status: Old AACSB: Analytical Skills

51) The Hirschman-Herfindahl index (HHI) in an industry is 50. A merger is proposed that will raise the HHI to 100. In this case, the A) Sherman Act will prohibit the merger. B) Federal Trade Commission will challenge the merger. C) Federal Trade Commission will not challenge the merger. D) rule of reason will prevent the merger if it represents a horizontal merger. Answer: C Topic: Study Guide Question, Current Merger Rules Skill: Definition Status: Old AACSB: Analytical Skills

52) The iPhone 5 no longer comes pre-loaded with Google Maps and uses the Apple map application instead. Regulators might be concerned with this requirement because they might see it as an example of A) resale price maintenance. B) a tying arrangement. C) predatory pricing. D) collusion to create a monopoly. Answer: B Topic: Antitrust Law Skill: Conceptual Status: New AACSB: Analytical Skills

5 News Based Questions 1) Two firms make most of the consumer alkaline batteries in the country: Duracell and Energizer. The market for batteries is most likely A) a monopoly. B) an oligopoly. C) perfectly competitive. D) monopolistically competitive. Answer: B Topic: Oligopoly Skill: Conceptual Status: Old AACSB: Communication 61 Copyright © 2014 Pearson Education, Inc.

2) Kellogg's and General Mills are two of the dominant breakfast cereal manufactures in the U.S. Each firm can either sign or not sign an exclusive contract with an Olympian gold-medal athlete to appear on the cover of a cereal box. Both Kellogg's and General Mills have signed athletes in 2008, Michael Phelps and Nastia Liukin, respectively. What does this suggest about the outcome of the oligopoly game? A) The highest profits are when both companies sign. B) The best outcome, in terms of profit, is where both companies sign. C) The Nash equilibrium must be that both companies sign. D) The Nash equilibrium must be that both companies sign and this always leads to the highest profits. Answer: C Topic: Nash Equilibrium Skill: Conceptual Status: Old AACSB: Communication

3) Kellogg's and General Mills are two of the dominant breakfast cereal manufactures in the U.S. Each firm can either sign or not sign an exclusive contract with an Olympian gold-medal athlete to appear on the cover of a cereal box. If both companies sign an athlete, they will each make $5 million in economic profit. If only firm signs, they earn $8 million in economic profit and the other firm incurs an economic loss of $1 million. If neither firm signs, they break even. What are the strategies in this game? A) Do not sign exclusive contract with an Olympian gold-medal athlete to appear on the cover of a cereal box and make $8 million in profit B) Sign an exclusive contract with an Olympian gold-medal athlete to appear on the cover of a cereal box and do not sign exclusive contract with an Olympian gold-medal athlete to appear on the cover of a cereal box C) Sign an exclusive contract with an Olympian gold-medal athlete to appear on the cover of a cereal box and make $8 million in profit D) Make $5 million or $8 million in profit Answer: B Topic: Game Theory Skill: Analytical Status: Old AACSB: Analytical Skills

4) Kellogg's and General Mills are two of the dominant breakfast cereal manufactures in the U.S. Each firm can either sign or not sign an exclusive contract with an Olympian gold-medal athlete to appear on the cover of a cereal box. If both companies sign an athlete, they will each make $5 million in economic profit. If only firm signs, they earn $8 million in economic profit and the other firm incurs an economic loss of $1 million. If neither firm signs, they break even. Which of the following pairs of payoffs would NOT appear together in a square of the payoff matrix? A) $5 million; $5 million B) $0 million; $0 million C) $8 million; $5 million D) -$1 million; $8 million Answer: C Topic: Game Theory Skill: Analytical Status: Old AACSB: Analytical Skills

5) Kellogg's and General Mills are two of the dominant breakfast cereal manufactures in the U.S. Each firm can either sign or not sign an exclusive contract with an Olympian gold-medal athlete to appear on the cover of a cereal box. If both companies sign an athlete, they will each make $5 million in economic profit. If only firm signs, they earn $8 million in economic profit and the other firm incurs an economic loss of $1 million. If neither firm signs, they break even. What is the outcome of this game if it is only played once? A) Neither Kellogg's nor General Mills will sign an athlete. B) Kellogg's will sign an athlete and General Mills will not sign an athlete. C) Both Kellogg's and General Mills will sign an athlete. D) General Mills will sign an athlete and Kellogg's will not sign an athlete. Answer: C Topic: Game Theory, Nash Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

6) In 2008, a former Intel engineer has been charged with stealing trade secrets worth $1 billion. Intel owns 80 percent of the worldwide market for microprocessors, AMD has the rest. Conducting R&D is very expensive so suppose that each of these firms can either steal R&D or develop their own R&D. If both firms develop their own R&D, economic profit will be $50 million each. If one company steals R&D, that firm earns $100 million in economic profit while the other firm earns $10 million. If both firms steal R&D, each firm breaks even. What is the outcome of this game? A) Both firms will conduct R&D. B) Both firms will steal R&D. C) The outcome will be a dominant strategy equilibrium. D) Only one firm will conduct R&D, but we cannot predict which firm will conduct R&D. Answer: D Topic: Game Theory, An R&D Game Skill: Conceptual Status: Old AACSB: Analytical Skills

7) In 2008, a former Intel engineer has been charged with stealing trade secrets worth $1 billion. Intel owns 80 percent of the worldwide market for microprocessors, AMD has the rest. The microprocessor market is most like an example of: A) Monopoly. B) Oligopoly. C) Perfect competition. D) Monopolistic competition. Answer: B Topic: Oligopoly Skill: Conceptual Status: Old AACSB: Reflective Thinking

8) In 2008, a former Intel engineer has been charged with stealing trade secrets worth $1 billion. Intel owns 80 percent of the worldwide market for microprocessors, AMD has the rest. Conducting R&D is very expensive so suppose that each of these firms can either steal R&D or develop their own R&D. If both firms develop their own R&D, economic profit will be $50 million each. If one company steals R&D, that firm earns $100 million in economic profit while the other firm earns $10 million. If both firms steal R&D, each firm breaks even. What is NOT true about this game? A) The outcome will not be a dominant strategy equilibrium. B) A strategy is to steal R&D. C) A firm will make more profit if it steals R&D. D) A strategy is to conduct R&D. Answer: C Topic: Game Theory, An R&D Game Skill: Conceptual Status: Old AACSB: Analytical Skills

9) Russia, Iran and Qatar made the first serious moves in October 2008 toward forming an OPEC-style cartel on natural gas. What is the goal of a cartel? A) restrict output B) raise prices C) increase sales D) increase profits Answer: D Topic: Cartel Skill: Conceptual Status: Old AACSB: Communication

10) Russia, Iran and Qatar made the first serious moves in October 2008 toward forming an OPEC-style cartel on natural gas. Each of the countries can comply with the cartel agreement or to cheat on the cartel agreement. If all countries comply, the economic profit for each will be $140 million. If one country cheats, that country earns $200 million in economic profit and the other countries will have economic losses of $10 million. If all countries cheat, they break even. What are the strategies in this game? A) Comply with the cartel agreement or to cheat on the cartel agreement. B) Comply with the agreement and earn $140 million in profit. C) Cheat on the cartel agreement and earn -$10 million in profits. D) Earn between $140 and $200 million in profits. Answer: A Topic: Game Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

11) Russia and Qatar made the first serious moves in October 2008 toward forming an OPEC-style cartel on natural gas. The two strategies these countries face are to comply with the cartel agreement or to cheat on the cartel agreement. If both countries comply, the economic profit for each will be $140 million. If one country cheats, that country earns $200 million in economic profit and the other country will have an economic loss of $10 million. If all countries cheat, they break even. What is the outcome of this game if it is only played once? A) Each country will comply with the cartel agreement. B) Two countries will comply and one will cheat, but we cannot predict which one will cheat. C) One country will comply and two will cheat, but we cannot predict which ones will cheat. D) None of the countries will comply with the cartel agreement. Answer: D Topic: Game Theory, Nash Equilibrium Skill: Conceptual Status: Old AACSB: Analytical Skills

12) Russia and Qatar made the first serious moves in October 2008 toward forming an OPEC-style cartel on natural gas. The two strategies these countries face are to comply with the cartel agreement or to cheat on the cartel agreement. If all countries comply, the economic profit for both will be $140 million. If one country cheats, that country earns $200 million in economic profit and the other country has an economic loss of $10 million. If all countries cheat, they break even. What is the the likely outcome of this game if it is repeated as a tit-for-tat game? A) If there are periods of cheating and colluding, then the countries' profits will be more than if they always colluded. B) If the countries never collude, the outcome will be the monopoly outcome. C) The countries will collude. D) If the countries always collude, the outcome will be the perfectly competitive outcome. Answer: C Topic: Repeated Games Skill: Conceptual Status: Old AACSB: Communication

13) The EU's antitrust chief in November 2008 fined car glass producers Asahi, Pilkington, Saint-Gobain and Soliver more than 1.3 billion euros ($1.66 billion) for price-fixing, the largest sum ever levied by the EU for a cartel. What is the reason why Asahi, Pilkington, Saint-Gobain and Soliver would price fix? A) restrict output B) increase profits C) raise prices D) increase sales Answer: B Topic: Price Fixing Skill: Conceptual Status: Old AACSB: Communication

14) The EU's antitrust chief in November 2008 fined car glass producers Asahi, Pilkington, Saint-Gobain and Soliver more than 1.3 billion euros ($1.66 billion) for price-fixing, the largest sum ever levied by the EU for a cartel. What are the economic justifications of making price fixing illegal? A) Consumers suffer because of decreased consumer surplus and the outcome is inefficient because of deadweight loss. B) An oligopoly cartel can maximize profit and behave like a natural monopoly. C) The cartel increases quantity supplied in the market causing a shortage. D) The cartel increases quantity supplied in the market causing a surplus and therefore harming other producers. Answer: A Topic: Price Fixing Skill: Conceptual Status: Old AACSB: Communication

15) The EU's antitrust chief in November 2008 fined car glass producers Asahi, Pilkington, Saint-Gobain and Soliver more than 1.3 billion euros ($1.66 billion) for price-fixing, the largest sum ever levied by the EU for a cartel. Price fixing is a violation of ________. A) price fixing legislation B) antitrust law C) Federal Trade Commission D) Division of the U.S. Department of Justice Answer: B Topic: Antitrust Law Skill: Conceptual Status: Old AACSB: Communication

16) The EU's antitrust chief in November 2008 fined car glass producers Asahi, Pilkington, Saint-Gobain and Soliver more than 1.3 billion euros ($1.66 billion) for price-fixing, the largest sum ever levied by the EU for a cartel. Cartels tend to arise in ________ markets. A) monopolistic B) perfectly competitive C) oligopolistic D) monopolistically competitive Answer: C Topic: Cartel Skill: Conceptual Status: Old AACSB: Communication

17) Iran called on OPEC in November 2008 to cut production by a further 1 million to 1.5 million barrels per day when it meets in Cairo later this month. Why would OPEC, a cartel, restrict production? A) to decrease demand B) to increase supply C) to decrease quantity supplied D) to increase profits Answer: D Topic: Cartel Skill: Conceptual Status: Old AACSB: Communication

6 Essay Questions 1) Describe the characteristics of an oligopoly. Answer: There are a small number of firms that act interdependently. They are tempted to form a cartel and collude to increase profits. They can compete on price only (if they produce identical products) or compete on price, product quality and marketing (if they produce slightly different products). Natural or legal barriers prevent the entry of new firms. Topic: Oligopoly Skill: Recognition Status: Old AACSB: Communication

2) What is a natural oligopoly? How does it arise? Give an example. Answer: A natural oligopoly is an industry in which a small number of large firms can supply the entire market at a lower price than could a larger number of smaller firms. Natural oligopoly arises when economies of scale and limited market demand create natural barriers to entry. For example, suppose the minimum efficient scale for a taxi company is 30 rides per day and the ATC at this level of output is $10 per ride. If the quantity of taxi rides demanded at $10 is 60 rides per day, there is only room in the market for two taxi companies. With more taxi companies, either the price would have to fall below $10 per ride or the ATC would have to rise above $10 per ride. In both cases the firms would incur an economic loss and would exit until only two firms are left. Topic: Natural Oligopoly Skill: Recognition Status: Old AACSB: Communication

3) "Because firms in an oligopoly are so large, they do not need to consider each other's actions." Is the previous statement correct or incorrect? Explain your answer. Answer: The statement is incorrect. Oligopoly is an industry in which only a few firms compete. Because there are only a few firms, the hallmark of oligopoly is mutual interdependence, that is, one firm's action will affect the other firms. The fact that in oligopoly each firm's actions affect its rivals is unlike the case in perfect competition or monopolistic competition, in which there are so many firms that one firm's actions have no effect on its rivals, or monopoly, in which there is only one firm and hence no rivals. Topic: Oligopoly Skill: Conceptual Status: Old AACSB: Communication 67 Copyright © 2014 Pearson Education, Inc.

4) What market structures other than oligopoly have the characteristic of one firm's actions affecting the actions of its competitors? Explain your answer. Answer: No other market structure has the characteristic that one firm's actions can affect the actions of its competitors. In monopoly, there are no competitors to affect. And in perfect competition and monopolistic competition, there are so many competitors that any one firm's actions have no measurable impact on its competitors. Oligopoly is unique in that it is the only market structure in which one firm's actions affect the actions of its competitors. Topic: Oligopoly Skill: Conceptual Status: Old AACSB: Communication

5) What is a cartel? Answer: A cartel is a group of firms acting together to limit output, raise price and increase economic profit. Cartels are illegal in the United States. Cartels operate in a market structure with oligopolies. If firms can stick to the cartel agreement, the firms can earn an economic profit. However, cartels tend to break down because firms are tempted to cheat on their cartel partners and increase their own profit at the expense of their partners. Topic: Cartel Skill: Recognition Status: Old AACSB: Communication

6) Is collusion possible in monopolistic competition? Why or why not? Answer: Collusion is not possible in monopolistic competition. It is not possible because there are many firms in monopolistic competition, reaching an agreement to restrict output and boost price is impossible. Topic: Colluding to Maximize Profits Skill: Conceptual Status: Old AACSB: Communication

7) Explain what a cartel is and the difficulties faced in maintaining a cartel. Answer: A cartel is a group of firms acting together to decrease output, raise price, and increase economic profit. The difficulty faced by a cartel is the fact that each member has the incentive to cheat on the cartel and increase its output. If a member increases its output and the rest of the cartel members do not, the cheating member's profits will increase substantially. Each member reasons that if it is the only cheater, it can significantly increase its profit and so each firm has an incentive to cheat. Topic: Cartel Skill: Conceptual Status: Old AACSB: Communication

8) In the United States, why are cartels among firms usually kept secret? Answer: Cartels are typically kept secret because they are illegal. In the United States and many other countries, it is illegal for firms to collude to form a cartel. It is illegal because firms collude in order to restrict output, raise prices, and capture consumer surplus so that they increase their economic profit. Topic: Cartel Skill: Conceptual Status: Old AACSB: Communication 68 Copyright © 2014 Pearson Education, Inc.

9) "If firms in an oligopoly enter into a collusive agreement to operate as a monopoly, the industry produces the most output and if they operate as perfect competitors, the industry produces the least output." Is the previous statement correct or incorrect? Why? Answer: The statement is incorrect; it reverses the outcomes. If the firms in an oligopoly operate as a monopoly, the industry produces the least output and if they operate as perfect competitors, the industry produces the most output. Topic: Colluding to Maximize Profits Skill: Conceptual Status: Old AACSB: Communication

10) "If firms in duopoly collude and operate as a monopoly, the industry produces more output compared to the Nash equilibrium." True or false? Explain. Answer: The statement is false. In the Nash equilibrium, both firms cheat and output is the same as in perfect competition. If the firms operate as a monopoly, the industry's profit-maximizing level of output is below the competitive level. Topic: Colluding to Maximize Profits Skill: Conceptual Status: Old AACSB: Communication

11) What is the best outcome for society: when firms in an oligopoly enter into a collusive agreement to operate as a monopoly or when they act as perfect competitors? Briefly explain your answer. Answer: The best outcome for society is when the firms act as perfect competitors. Perfect competition produces the efficient quantity of output. A monopoly restricts the quantity of output it produces and creates a deadweight loss, which harms society So society is better off if the firms compete rather than collude and operate as a monopoly. Topic: Colluding to Maximize Profits Skill: Conceptual Status: Old AACSB: Communication

12) What is game theory and what light does it shed on the issues faced by duopolists? Answer: Game theory is a tool economists use to analyze the behavior of oligopolistic firms because game theory is a tool to study strategic behavior. Game theory shows that because these firms are interdependent, the decisions they make to promote their own self-interest can wind up harming all the firms. The dilemma faced by duopolists is illustrated using game theory: Firms looking to earn for themselves the maximum possible profit can wind up earning less profit than if they had behaved less self-interestedly and more cooperatively. Topic: Game Theory Skill: Conceptual Status: Old AACSB: Communication

13) What is a Nash equilibrium? Is this equilibrium necessarily the best outcome for the players? Give an example. Answer: John Nash proposed the concept of an equilibrium in a game where each player takes the best possible action given the action of other players. A Nash equilibrium is not necessarily the best one for the players. This result can be seen in the prisoners' dilemma. Typically the prisoners' dilemma is a game where two prisoners are given rules and payoffs to encourage them to confess to a crime. The prisoners, acting in their own self-interest, confess to the crime to minimize their jail time and so confession is the Nash equilibrium. But if the players can communicate with each other, they can improve their position. If they can communicate, they both deny the crime and so both wind up doing less time in jail. Topic: Nash Equilibrium Skill: Conceptual Status: Old AACSB: Communication

14) "A Nash equilibrium occurs when both parties to a game end up worse off as a result of the decisions that are made." Is the previous definition of a Nash equilibrium correct or incorrect? Answer: The definition is incorrect. A Nash equilibrium is an equilibrium in which each player takes the best possible action given the action of the other player. Topic: Nash Equilibrium Skill: Conceptual Status: Old AACSB: Communication

15) What is the real dilemma facing the prisoners in the prisoners' dilemma game? Answer: The real dilemma facing the prisoners in the prisoners' dilemma game is that when each prisoner plays his or her best strategy, the best outcome is not achieved. Topic: Equilibrium of the Prisoners' Dilemma Skill: Conceptual Status: Old AACSB: Communication

16) OPEC, the Organization of Petroleum Exporting Countries, was formed in Baghdad in 1960. Since its formation, this cartel has suffered from a major problem with respect to the quota (limit) of output it assigns each member nation. What is OPEC's goal and what sort of quota do you think the cartel assigns? How and why do nations cheat on their quota? What happens when a nation cheats on its quota? Answer: In order to keep oil prices high, as has been the case since 2003, OPEC creates a target level of output designed to achieve a particular high price. OPEC's goal is to set a price high enough so that its member nations earn the maximum economic profit. Once the target output is set, OPEC assigns a production quota to each member. As long as each member adheres to its quota the price will remain high and stable. However, from time to time, individual nations cheat on the agreement by producing more oil than they are allowed. Nations cheat because they realize that if they alone cheat, the impact on oil prices will be slight but the impact on their profit will be large. Once this oil shows up on world markets, the supply of oil increases and prices begin to fall. Then, once prices begin to fall other members might begin to start selling more oil too in order to get the highest price they can before a collapse takes place. If every nation cheats, the supply will increase more than if just a few do and the collapse in price becomes a self-realizing prophecy. Topic: Cartel; Incentive To Cheat Skill: Conceptual Status: Old AACSB: Communication 70 Copyright © 2014 Pearson Education, Inc.

17) Why do most collusive agreements have difficulty surviving? Answer: Most collusive agreements have difficulty surviving because each firm individually can increase its profits by lowering its price and increasing its output. Because of this fact, the incentive to cheat on the agreement is great for all firms. Topic: Cartel; Incentive To Cheat Skill: Conceptual Status: Old AACSB: Communication

18) Why do firms in an oligopoly find it difficult to cooperate and not cheat on a cartel agreement? Answer: Firms in an oligopoly have large market shares. When they change their output or price, the firm affects not only its own revenue and profit but also the revenue and profit of other firms. For example, if a firm cheats on a cartel agreement by lowering its price, it will capture a larger market share. The competitors' total revenue and profit decrease, but the cheating firm's profit increases. If the firms cooperate, they could act like a monopoly and have the maximum joint profit but each firm has the temptation to cheat and produce more than its share. This temptation is strong because cheating will increase the cheater's revenue and profit substantially. Topic: Cartel; Incentive To Cheat Skill: Conceptual Status: Old AACSB: Communication

19) What is the dilemma faced by firms in collusive agreement to restrict output and boost price? Answer: Because there are just a few large firms in an oligopoly, output and pricing decisions made by one firm affect the demand for other firms' goods. To maximize the total joint profit, the firms must cooperate, act like a monopoly so as to restrict output and earn monopoly profits. Each firm, though, has an incentive to cheat on an agreement to restrict output because if it increases production it can (temporarily, at least) earn higher profits. But if all firms increase production, total profits will fall and the market will move toward the competitive equilibrium. Topic: Cartel; Incentive To Cheat Skill: Conceptual Status: Old AACSB: Communication

20) Does an oligopoly produce the efficient quantity of output or does it create a deadweight loss? Do the firms want to produce the efficient quantity of output? Explain your answer. Answer: An oligopoly might or might not produce the efficient quantity of output. It produces the efficient quantity if the firms cheat on any agreement to collude by increasing their output so that it winds up the same as the perfectly competitive amount. In this case, price equals marginal cost and the outcome is efficient. There is no deadweight loss. From the firms' perspectives, this outcome is undesirable because the firms make zero economic profit, that is, only a normal profit. If the firms can play repeated games, detecting and punishing overproduction, the oligopoly is more likely to restrict output to the monopoly level. This outcome is inefficient because marginal cost does not equal marginal benefit. A deadweight loss is created. From the firms' perspective, this outcome is more desirable because the firms make an economic profit. The firms' goal is to maximize their economic profit. Because their profit is higher if they successfully collude and limit their production, the firms do not want to produce the efficient quantity of output. Topic: Efficiency of Oligopoly Skill: Conceptual Status: Old AACSB: Communication

21) Why would a profit maximizing monopolist in a contestable market set its price at a level below that which maximizes short run profits? Answer: A firm in a contestable market is not protected by barriers to entry. Thus while it is currently the only firm in the market, it might worry that other firms will enter the market. In this case, setting a relatively lower price is known as limit pricing. It is a pricing strategy that deters entry by sending a signal to potential entrants that entering the industry would result in economic losses. Topic: Contestable Market Skill: Conceptual Status: Old AACSB: Communication

22) How is a contestable market similar to a perfectly competitive one? Answer: A contestable market is similar to a perfectly competitive market in that there is free entry and exit. As a result, the active firm(s) cannot earn an economic profit in the long-run because potential entrants will enter any time economic profits exceed zero. Topic: Contestable Market Skill: Conceptual Status: Old AACSB: Communication

23) What is the Sherman Act and what is its purpose? Answer: The Sherman Act of 1890 was the first major piece of federal antitrust legislation. It prohibits two things. First, it prohibits any combination, trust, or conspiracy to restrict interstate or international trade. Second, it prohibits monopolization or any attempt to monopolize interstate or international trade. Topic: Sherman Act Skill: Conceptual Status: Old AACSB: Communication

24) Does section 2 of the Sherman Act make it a felony to "attempt" to monopolize an industry or must the attempt succeed before it is a felony? Answer: Section 2 of the Sherman Act makes attempting to monopolize an industry a felony. It is not necessary for the attempt to succeed. Topic: Sherman Act Skill: Conceptual Status: Old AACSB: Communication

25) "The Clayton Act repealed the Sherman Act so that only the Clayton Act remains in force." Is the previous statement correct or incorrect? Answer: The statement is incorrect. The Sherman Act remains part of the law of the land. Topic: Clayton Act Skill: Recognition Status: Old AACSB: Communication

26) What are the actions that are prohibited according to the Clayton Act and its amendments? What conditions must be met for these actions to be prohibited? Answer: The Clayton Act prohibits certain practices only if they substantially lessen competition or create monopoly. These practices are: 1) Price discrimination. 2) Tying arrangements. 4) Requirements contracts. 5) Exclusive dealing. 6) Territorial confinement. 7) Acquiring a competitor's shares or assets. 8) Becoming a director of a competing firm. Topic: Clayton Act Skill: Recognition Status: Old AACSB: Communication

27) What is meant by the term "exclusive dealing"? Give an example of an exclusive deal. When is it illegal? Answer: Exclusive dealing is a contract that prevents a firm from selling competing items. For instance, Taco Bell has a contract with Pepsi that only Pepsi products will be sold at Taco Bell. Hence Pepsi has arranged an exclusive deal with Taco Bell. Exclusive deals are illegal under the Clayton Act only if they substantially lessen competition or create a monopoly. Topic: Clayton Act Skill: Conceptual Status: Old AACSB: Communication

28) If Sony required all its retailers not to sell televisions from other companies, Sony would be engaging in what kind of activity? Is Sony's requirement legal or does it violate the Clayton Act? Answer: Sony is engaged in an exclusive deal. The question of whether Sony's requirement is legal depends on whether it substantially lessens competition or creates a monopoly. If it does either, it is illegal under the Clayton Act. If it does neither, it is legal under the Clayton Act. Topic: Clayton Act Skill: Conceptual Status: Old AACSB: Communication

29) Explain how the courts have ruled on price fixing. Answer: Price fixing among competitors is always a violation of the antitrust law. This type of price fixing, in and of itself, is a violation of the law. If the government can prove the existence of price fixing, the accused firms are guilty because there are no mitigating circumstances allowed. Price fixing in the form of resale price maintenance is legal as long as it is not anticompetitive. Topic: Price Fixing Skill: Recognition Status: Old AACSB: Communication

30) If price fixing by competitors is necessary because without it a firm will go bankrupt, is the price fixing legal? Answer: No, price fixing by competitors is always illegal. Regardless of whether a firm will go bankrupt or not, this sort of price fixing is illegal. Topic: Price Fixing Skill: Conceptual Status: Old AACSB: Communication

31) What is resale price maintenance? Is resale price maintenance legal in the United States? Answer: Resale price maintenance occurs when a manufacturer agrees with a distributor on the price at which the product will be resold. For instance, Sony could arrange with Best Buy the price for which Sony televisions are sold. Resale price maintenance (also called vertical price fixing) agreements are illegal under the Sherman Act. But it isn't illegal for a manufacturer to refuse to supply a retailer who doesn't accept guidance on what the price should be. Topic: Resale Price Maintenance Skill: Recognition Status: Old AACSB: Communication

32) What are the current merger guidelines as developed and administered by the Federal Trade Commission? Answer: The current merger guidelines are based on the Herfindahl-Hirschman index, which is the sum of the squares of the market shares of the fifty largest firms in an industry. If the HHI is less than 1500, the market is considered unconcentrated and mergers will usually go unchallenged. If the HHI is greater than 1500 but less than 2500, the market is considered moderately concentrated and mergers may be challenged if the HHI would rise by more than 100 points. If the HHI exceeds 2500, the market is considered highly concentrated and mergers may be challenged if the HHI rises by more than 100 points and will be challenged if the HHI rises by more than 200 points. Topic: Current Merger Rules Skill: Recognition Status: Revised AACSB: Communication

33) In a market with a Herfindahl-Hirschman Index of 2,000, according to their guidelines will the Department of Justice challenge a merger that would increase the index by 100? Answer: Yes, according to their guidelines the Department of Justice will challenge a merger that increases the Herfindahl-Hirschman Index by more than 100 points if the initial index is greater than 1,500. Topic: Current Merger Rules Skill: Conceptual Status: Revised AACSB: Communication

34) "If an industry's Herfindahl-Hirschman Index is below 1,000, a merger between any two firms in that industry will be disallowed." Comment on the accuracy of the previous statement. Answer: The statement is incorrect in at least three dimensions. First, the lower the HerfindahlHirschman Index, the more competitive the industry and hence the more likely the government will allow a merger to occur. Second, even if the Herfindahl-Hirschman Index is high, a merger that increases it only a small bit will not be challenged. And third, the Herfindahl-Hirschman Index is only part of the information considered when the government is determining whether to challenge a merger. Topic: Current Merger Rules Skill: Conceptual Status: Old AACSB: Communication

7 Numeric and Graphing Questions

Price (dollars per unit) 30 25 20 15 10 5 0

Quantity demanded (units) 0 10 20 30 40 50 60

1) The table above has the market demand schedule in an industry that has two firms in it. The marginal cost of this product is zero because these two firms have exclusive ownership of the resource and it does not cost any additional amount to produce additional units. a) If the firms cooperate with each other so that they operate as a monopoly, what price will they charge and what (total) output will they produce? b) If the firms cannot cooperate but instead behave as perfect competitors, what will be the price and the (total) output they produce? Answer: a) As a monopoly, the price will be $15 and the total output will be 30 units. This price and output combination is where they maximize their total profit because it is here that the marginal revenue equals zero. (The marginal revenue equals zero because this is the price and output combination for which total revenue is maximized and marginal revenue equals zero when total revenue is maximized.) b) The perfectly competitive price is equal to marginal cost. Because marginal cost is equal to zero, the price will be $0 and the output will be 60 units. Topic: Cartel Skill: Analytical Status: Old AACSB: Analytical Skills

2) Suppose the industry for washing machines has only four firms. The market shares are: Firm A, 40 percent; Firm B, 20 percent; Firm C 20, percent; and Firm D, 20 percent. a) What is the Herfindahl-Hirschman Index (HHI)? b) If Firms C and D were to announce a merger, would the Department of Justice oppose the merger? Answer: a) The HHI is 2,800. b) Yes, the Department of Justice would oppose the merger. If the merger occurred, the new HHI would be 3,600. The merger would increase the HHI by 800 points. The Department of Justice's guidelines are to challenge a merger if the initial HHI exceeds 1,800 and the merger raises the HHI by more than 50 points. The merger considered in the problem easily falls under these guidelines. Topic: Current Merger Rules Skill: Analytical Status: Old AACSB: Analytical Skills

Firm A B C D E F G H I J

Marginal share (percent) 15 15 15 10 10 10 10 5 5 5

3) A market has ten firms, whose market shares are given in the table above. a) If firms I and J wanted to merge, according to the Department of Justice guidelines, would the Department of Justice challenge the merger? b) If firms A and B wanted to merge, according to the Department of Justice guidelines, would the Department of Justice challenge the merger? Answer: a) The decision whether to challenge the merger depends, in part, on the market's HerfindahlHirschman Index (HHI). The HHI for the market initially is 1,150. Thus the Department of Justice guidelines say it will challenge a merger if the merger raises the HHI by 100 or more points. If firms I and J merge, the HHI becomes 1,200. The Department of Justice will not challenge this merger. b) If firms A and B merge, the HHI becomes 1,600. The Department of Justice will challenge this merger. Topic: Current Merger Rules Skill: Analytical Status: Old AACSB: Analytical Skills

4) The Herfindahl-Hirschman Index is used as a guideline to determine if a market is competitive or concentrated. Calculate the index value for each market described below. a) 100 firms, each of which produces 1 per cent of market output b) 50 firms, each of which produces 2 per cent of market output c) 25 firms, each of which produces 4 per cent of market output d) 20 firms, each of which produces 5 per cent of market output e) 10 firms, each of which produces 10 per cent of market output f) 5 firms, each of which produces 20 per cent of market output g) 2 firms, each of which produces 50 per cent of market output Answer: a) 100 × 1 = 100 b) 50 × 4 = 200 c) 25 × 16 = 400 d) 20 × 25 = 500 e) 10 × 100 = 1,000 f) 5 × 400 = 2,000 g) 2 × 2,500 = 5,000 Topic: Current Merger Rules Skill: Analytical Status: Old AACSB: Analytical Skills

8 True or False 1) Oligopoly differs from perfect competition because a single competitive firm's behavior does not affect the behavior of its competitors while the behavior of a single oligopolistic firm does affect the behavior of its rivals. Answer: TRUE Topic: Oligopoly Skill: Conceptual Status: Old AACSB: Reflective Thinking

2) Economies of scale and limited demand can form a natural barrier to entry that can create a natural oligopoly. Answer: TRUE Topic: Oligopoly Skill: Conceptual Status: Old AACSB: Reflective Thinking

3) Game theory is a tool for studying competitive behavior between firms in monopolistic competition because of the mutual interdependence among the firms. Answer: FALSE Topic: Game Theory Skill: Recognition Status: Old AACSB: Reflective Thinking

4) In the prisoners' dilemma game, each player has only one possible strategy. Answer: FALSE Topic: Prisoners' Dilemma Skill: Analytical Status: Old AACSB: Reflective Thinking

5) In a Nash equilibrium, each player takes the best possible action given the actions of the other players. Answer: TRUE Topic: Game Theory, Nash Equilibrium Skill: Recognition Status: Old AACSB: Reflective Thinking

6) In game theory, a Nash equilibrium is the equilibrium that always yields the best result. Answer: FALSE Topic: Game Theory, Nash Equilibrium Skill: Recognition Status: Old AACSB: Reflective Thinking

7) Collusive agreements tend to break apart because the incentive to cheat is so great. Answer: TRUE Topic: Cartel; Incentive To Cheat Skill: Conceptual Status: Old AACSB: Reflective Thinking

8) A contestable market is a market in which there are one or a few firms and entry into the market is not costly. Answer: TRUE Topic: Contestable Market Skill: Recognition Status: Old AACSB: Reflective Thinking

9) Limit pricing is a strategy which is intended to deter entry into an industry. Answer: TRUE Topic: Limit Pricing Skill: Recognition Status: Old AACSB: Reflective Thinking

10) The first federal antitrust law ever passed was the Sherman Act. Answer: TRUE Topic: Sherman Act Skill: Recognition Status: Old AACSB: Reflective Thinking

11) The Clayton Act of 1914 was passed to prohibit, in part, price discrimination if the effect is to substantially lessen competition or create monopoly. Answer: TRUE Topic: Clayton Act Skill: Recognition Status: Old AACSB: Reflective Thinking

12) Tying arrangements are always held to be illegal under U.S. antitrust law. Answer: FALSE Topic: Tying Contracts Skill: Recognition Status: Old AACSB: Reflective Thinking

13) The sum of the squares of the market share for the fifty largest firms in a market is the basis of the government's current merger guidelines. Answer: TRUE Topic: Current Merger Policies Skill: Conceptual Status: Old AACSB: Reflective Thinking

9 Extended Problems 1) Nimbus, Inc., and Cleansweep, Inc., are the only producers of flying brooms. Each firm has two strategies: Spend 30,000 galleons a year on research and development (R&D) or spend nothing on R&D. If neither firm spends on R&D, Nimbus' economic profit is 80, 000 galleons and Cleansweep's economic profit is 40,000 galleons. If each firm conducts R&D, market shares are maintained, but each firm's profit is lower by the amount spent on R&D. If Nimbus conducts R&D and Cleansweep does not, Nimbus makes an economic profit of 120,000 galleons, while Cleansweep incurs an economic loss of 20,000 galleons. If Cleansweep conducts R&D and Nimbus does not, Cleansweep makes a profit of 60,000 galleons while Nimbus loses 10,000 galleons. a) Construct a payoff matrix for the game that Nimbus and Cleansweep must play. b) Find the Nash equilibrium. In the Nash equilibrium, what is each firm's equilibrium profit? c) What is the cooperative outcome? Would the firms make more economic profit if they collude to achieve the cooperative outcome? Answer:

a) The payoff matrix is above. The profits are in thousands of galleons. b) The Nash equilibrium is for both firms to conduct R&D. Nimbus makes 50,000 galleons and Cleansweep makes 10,000 galleons. c) The cooperative outcome is for both firms not to conduct R&D. If Nimbus and Cleansweep collude and neither of them cheats, Nimbus makes 80,000 galleons and Cleansweep makes 40,000 galleons. So each firm makes more economic profit compared to the Nash equilibrium. Topic: Game Theory Skill: Analytical Status: Old AACSB: Analytical Skills

Economics, 11e, Global Edition (Parkin) Chapter 16 Public Choices and Public Goods 1 Public Choices 1) A public choice is A) a decision that affects one person. B) a decision that affects no one. C) a decision made in public. D) a decision that affects an entire society. Answer: D Topic: Public Choice Theory Skill: Definition Status: Old AACSB: Analytical Skills

2) When government action leads to inefficiency, it is known as A) government failure. B) government as usual. C) lack of government trust. D) politics. Answer: A Topic: Public Choice Theory Skill: Definition Status: Old AACSB: Analytical Skills

3) Government failure, when government actions lead to inefficiency, can result in either A) overprovision. B) underprovision. C) both A and B D) neither A nor B Answer: C Topic: Public Choice Theory Skill: Definition Status: Old AACSB: Analytical Skills

4) The political market place requires all EXCEPT A) diplomats. B) firms. C) voters. D) politicians. Answer: A Topic: Public Choice Theory Skill: Definition Status: Old AACSB: Analytical Skills

5) Governments exist to A) maintain property rights. B) provide non-market mechanisms for allocating scarce resources. C) implement arrangements that redistribute wealth and income. D) all of the above Answer: D Topic: Public Choice Theory Skill: Definition Status: Old AACSB: Analytical Skills

6) In the political marketplace, voters do all of the following EXCEPT A) benefit from public goods and services. B) pay some taxes. C) vote. D) evaluate policy proposals of bureaucrats. Answer: D Topic: Public Choice Theory Skill: Definition Status: Old AACSB: Analytical Skills

7) In the political marketplace, firms do all of the following EXCEPT A) vote. B) pay taxes. C) evaluate policy proposals of politicians. D) benefit from public goods and services. Answer: A Topic: Public Choice Theory Skill: Definition Status: Old AACSB: Analytical Skills

8) A political equilibrium can never be reached without voters, firms, politicians and ________. A) bureaucrats B) public costs C) indifference curves D) market prices Answer: A Topic: Public Choice Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

9) After Hurricane Sandy, FEMA (the Federal Emergency Management Agency) advertised in a New Jersey radio station how people affected by the hurricane could file for assistance. In the political marketplace, the decision makers in FEMA are best characterized as A) voters. B) firms. C) politicians. D) bureaucrats. Answer: D Topic: Public Choice Theory Skill: Conceptual Status: New AACSB: Analytical Skills

10) A good or service or a resource is nonexcludable if A) it is possible to prevent someone from enjoying its benefits. B) it is not possible to prevent someone from benefiting from it. C) its use by one person decreases the quantity available for someone else. D) its use by one person does not decrease the quantity available for someone else. Answer: B Topic: Nonexcludable Skill: Definition Status: Old AACSB: Analytical Skills

11) If it is impossible to prevent someone from benefiting from a good regardless of whether or not the person paid for it, then the good is A) nonrival. B) rival. C) nonexcludable. D) excludable. Answer: C Topic: Nonexcludable Skill: Definition Status: Old AACSB: Analytical Skills

12) If it is impossible or very costly to prevent someone from benefiting from a good even if the person does not pay for it, the good is A) nonrival. B) nonexcludable. C) pure. D) rival. Answer: B Topic: Nonexcludable Skill: Definition Status: Old AACSB: Analytical Skills

13) Education at a private university is NOT a public good because it is A) nonrival. B) excludable. C) both nonrival and nonexcludable. D) None of the above answers is correct. Answer: B Topic: Nonexcludable Skill: Conceptual Status: Old AACSB: Analytical Skills

14) If it possible to prevent a person from enjoying the benefits of a good unless the person pays for the good, the good is A) rival. B) excludable. C) pure. D) free. Answer: B Topic: Excludable Skill: Definition Status: Old AACSB: Analytical Skills

15) A good or service or a resource is excludable if A) it is possible to prevent someone from enjoying its benefits. B) it is not possible to prevent someone from enjoying its benefits. C) its use by one person decreases the quantity available for someone else. D) its use by one person does not decrease the quantity available for someone else. Answer: A Topic: Excludable Skill: Definition Status: Old AACSB: Analytical Skills

16) A good or service or a resource is nonrival if A) it is possible to prevent someone from enjoying its benefits. B) it is not possible to prevent someone from enjoying its benefits. C) its use by one person decreases the quantity available for someone else. D) its use by one person does not decrease the quantity available for someone else. Answer: D Topic: Nonrival Skill: Definition Status: Old AACSB: Analytical Skills

17) For a good to be nonrival, then A) one person's consumption of that good does not decrease another person's consumption of that good. B) a person cannot be prevented from consuming that good even if he or she did not pay for it. C) a person is willing to pay any price to ensure that the product is available. D) a person is not willing to pay for the good because even without paying for it, the person can consume the good anyway. Answer: A Topic: Nonrival Skill: Definition Status: Old AACSB: Analytical Skills

18) If the consumption of a good or service by one person does not decrease the quantity available for another person, the good or service is A) nonrival. B) nonexcludable. C) pure. D) free. Answer: A Topic: Nonrival Skill: Definition Status: Old AACSB: Analytical Skills

19) If the consumption of Good A by one person does not decrease the quantity of Good A available for another person's consumption, then the good is said to be A) nonrival. B) rival. C) nonexcludable. D) excludable. Answer: A Topic: Nonrival Skill: Definition Status: Old AACSB: Analytical Skills

20) If I increase my consumption of a good and this has no impact the quantity you can consume of the same good, then this good is A) nonrival. B) nonexclusive. C) both nonrival and nonexclusive. D) a free good. Answer: A Topic: Nonrival Skill: Definition Status: Old AACSB: Analytical Skills

21) Which of the following is the BEST example of a good that is nonrival and excludable? A) a can of Mountain Dew B) fish in the ocean C) cable television D) national defense Answer: C Topic: Nonrival Skill: Conceptual Status: Old AACSB: Analytical Skills

22) A movie shown on a pay-per-view cable station is an example of A) an excludable and rival good. B) a nonexcludable and rival good. C) an excludable and nonrival good. D) a nonexcludable and nonrival good. Answer: C Topic: Nonrival Skill: Analytical Status: Old AACSB: Analytical Skills

23) If the consumption of a good decreases the quantity available for another person, the good is A) rival. B) excludable. C) pure. D) free. Answer: A Topic: Rival Skill: Definition Status: Old AACSB: Analytical Skills

24) A good or service or a resource is rival if A) it is possible to prevent someone from enjoying its benefits. B) it is not possible to prevent someone from enjoying its benefits. C) its use by one person decreases the quantity available for someone else. D) its use by one person does not decrease the quantity available for someone else. Answer: C Topic: Rival Skill: Definition Status: Old AACSB: Analytical Skills

25) Food is an example of a ________ good. A) nonrival and nonexcludable B) rival and excludable C) nonrival and excludable D) rival and nonexcludable Answer: B Topic: Rival and Excludable Skill: Conceptual Status: Old AACSB: Analytical Skills

26) Private goods are those for which consumption is A) rival and excludable. B) rival and nonexcludable. C) nonrival and excludable. D) nonrival and nonexcludable. Answer: A Topic: Private Goods Skill: Definition Status: Old AACSB: Analytical Skills

27) A private good is ________ and ________. A) rival; excludable B) nonrival; excludable C) rival; nonexcludable D) nonrival; nonexcludable Answer: A Topic: Private Goods Skill: Definition Status: Old AACSB: Analytical Skills

28) When consumption is rival and excludable, the product is a A) public good. B) private good. C) mixed good. D) service, not a good. Answer: B Topic: Private Goods Skill: Definition Status: Old AACSB: Analytical Skills

29) Which of the following is the BEST example of a private good? A) a can of Mountain Dew B) fish in the ocean C) cable television D) national defense Answer: A Topic: Private Goods Skill: Conceptual Status: Old AACSB: Analytical Skills

30) Which of the following is the BEST example of a private good? A) a house B) a bridge during rush hour C) air traffic control D) fish in the ocean Answer: A Topic: Private Goods Skill: Conceptual Status: Old AACSB: Analytical Skills

31) Public goods are those for which A) individuals who do not pay can be excluded from consuming the good. B) individuals who do not pay cannot be excluded from consuming the good. C) external costs exist. D) no external costs exist. Answer: B Topic: Public Goods Skill: Definition Status: Old AACSB: Analytical Skills

32) When consumption of a good is nonrival and nonexcludable, the good is a A) public good. B) private good. C) mixed good. D) service. Answer: A Topic: Public Goods Skill: Definition Status: Old AACSB: Analytical Skills

33) Goods that are nonrival and nonexcludable are called A) external goods. B) public goods. C) private goods. D) free goods. Answer: B Topic: Public Goods Skill: Definition Status: Old AACSB: Analytical Skills

34) Which of the following is a necessary characteristic of a public good? The good is A) excludable. B) nonrival. C) nonexcludable. D) Both answers B and C are correct. Answer: D Topic: Public Goods Skill: Definition Status: Old AACSB: Analytical Skills

35) Nonrivalry is a feature of A) goods but not services. B) all nonexcludable goods. C) excludable goods. D) public goods. Answer: D Topic: Public Goods Skill: Definition Status: Old AACSB: Analytical Skills

36) Nonexcludability is a feature of A) goods but not services. B) all nonrival goods. C) goods with an external cost. D) public goods. Answer: D Topic: Public Goods Skill: Definition Status: Old AACSB: Analytical Skills

37) A public good is ________ and ________. A) rival; excludable B) nonrival; excludable C) rival; nonexcludable D) nonrival; nonexcludable Answer: D Topic: Public Goods Skill: Definition Status: Old AACSB: Analytical Skills

38) Public goods are I. nonexcludable. II. nonrival. A) I only B) II only C) both I and II D) neither I nor II Answer: C Topic: Public Goods Skill: Definition Status: Old AACSB: Analytical Skills

39) What are the two features of a public good? A) nonrival and excludable B) nonrival and nonexcludable C) rival and excludable D) rival and nonexcludable Answer: B Topic: Public Goods Skill: Definition Status: Old AACSB: Analytical Skills

40) A good which is nonrival and nonexcludable is A) a public good. B) a private good. C) a social good. D) an externality. Answer: A Topic: Public Goods Skill: Definition Status: Old AACSB: Analytical Skills

41) Which of the following is the BEST example of a public good? A) a can of Mountain Dew B) fish in the ocean C) cable television D) national defense Answer: D Topic: Public Goods Skill: Conceptual Status: Old AACSB: Analytical Skills

42) Which of the following is the BEST example a public good? A) a parking space B) a car C) a stop sign D) a toll road Answer: C Topic: Public Goods Skill: Conceptual Status: Old AACSB: Analytical Skills

43) Which of the following is the BEST example of a public good? A) public transportation by bus B) clean air C) community swimming pools for which the user must pay a fee D) postal services Answer: B Topic: Public Goods Skill: Conceptual Status: Old AACSB: Analytical Skills

44) Which of the following is the BEST example of a public good? A) a house B) the Internet C) Fourth of July fireworks D) fish in the ocean Answer: C Topic: Public Goods Skill: Conceptual Status: Old AACSB: Analytical Skills

45) An example of a public good is A) national defense services. B) a Ford truck. C) a loaf of bread. D) a home computer. Answer: A Topic: Public Goods Skill: Conceptual Status: Old AACSB: Analytical Skills

46) National defense is an example of a ________. A) public good B) natural monopoly good C) common resource D) private good Answer: A Topic: Public Goods Skill: Conceptual Status: Old AACSB: Analytical Skills

47) Long Beach Island, off the coast of New Jersey, is considering building a sand barrier to protect the houses on the island from future hurricanes. For residents of Long Beach Island, this barrier system would be a A) private good. B) natural monopoly. C) common resource. D) public good. Answer: D Topic: Public Goods Skill: Conceptual Status: New AACSB: Analytical Skills

48) A museum is NOT a public good if A) there can be no congestion. B) the museum receives donations from members of the public. C) an entry fee is charged and people are denied entry if they do not pay. D) the general public typically does not go to the museum. Answer: C Topic: Public Goods Skill: Conceptual Status: Old AACSB: Analytical Skills

49) An uncrowded toll road is ________ because it is ________. A) a public good; both nonrival and nonexcludable B) not a public good; nonrival but excludable C) not a public good; nonexcludable but rival D) not a public good; both rival and excludable Answer: B Topic: Public Goods Skill: Analytical Status: Old AACSB: Analytical Skills

50) A common resource is ________ and ________. A) rival; excludable B) nonrival; excludable C) rival; nonexcludable D) nonrival; nonexcludable Answer: C Topic: Common Resource Skill: Definition Status: Old AACSB: Analytical Skills

51) Which of the following is likely to be nonexcludable but rival? A) walking along a crowded hiking trail B) watching cable TV C) viewing flowers along the highway D) listening to a local radio station Answer: A Topic: Common Resource Skill: Conceptual Status: Old AACSB: Analytical Skills

52) A school of tuna swimming in the ocean is A) nonexcludable and rival. B) excludable and rival. C) nonexcludable and nonrival. D) excludable and nonrival. Answer: A Topic: Common Resource Skill: Conceptual Status: Old AACSB: Analytical Skills

53) Which of the following is the BEST example of a common resource? A) a house B) the Internet C) air traffic control D) fish in the ocean Answer: D Topic: Common Resource Skill: Conceptual Status: Old AACSB: Analytical Skills

54) Which of the following is the BEST example of a common resource? A) a can of Mountain Dew B) fish in the ocean C) cable television D) national defense Answer: B Topic: Common Resource Skill: Conceptual Status: Old AACSB: Analytical Skills

55) Natural monopolies are ________ and ________. A) rival; excludable B) nonrival; excludable C) rival; nonexcludable D) nonrival; nonexcludable Answer: B Topic: Natural Monopoly Skill: Definition Status: Old AACSB: Analytical Skills

56) An example of a natural monopoly is A) a house. B) the Internet. C) air traffic control. D) fish in the ocean. Answer: B Topic: Natural Monopoly Skill: Conceptual Status: Old AACSB: Analytical Skills

57) An externality can be a A) cost or a benefit. B) benefit but not a cost. C) cost but not a benefit. D) marginal cost but not a total cost. Answer: A Topic: Externalities, Definition Skill: Definition Status: Old AACSB: Analytical Skills

58) An externality occurs when A) the costs of producing a good are paid entirely by the producer. B) some of the costs of producing a good are paid by someone other than the producer. C) the marginal social cost of an activity increases as that activity is increased. D) Both answers A and C are correct. Answer: B Topic: Externalities, Definition Skill: Definition Status: Old AACSB: Analytical Skills

59) The external benefit of a good A) equals its consumer surplus. B) equals its producer surplus. C) equals its total surplus. D) is a benefit from the good falling on people who are not the consumers of the good. Answer: D Topic: Externalities, Definition Skill: Definition Status: Old AACSB: Analytical Skills

60) A cost that arises from the production of a good that is paid by someone who did not participate in the production is called A) a free rider. B) an externality. C) rent seeking. D) a public failure. Answer: B Topic: Externalities, Definition Skill: Definition Status: Old AACSB: Analytical Skills

61) Which of the following does NOT contain an externality? A) I sell you an ice cream and you drip it all over the person sitting next to you. B) I sell you an ice cream and it gives you a headache. C) I sell you an ice cream and you share it with your friend. D) I give you an ice cream and you share it with a friend. Answer: B Topic: Externalities, Definition Skill: Conceptual Status: Old AACSB: Analytical Skills

62) An example of an activity that generates an external cost is A) dumping soapsuds into a trout stream. B) national defense services. C) planting flowers along an interstate highway. D) eating an apple. Answer: A Topic: External Costs Skill: Conceptual Status: Old AACSB: Analytical Skills

63) An example of an externality occurs when a chemical factory A) is producing ethanol and dumps waste in a river upstream from a popular fishing spot. B) produces fertilizers that do not help plants grow. C) produces fertilizers that kill plants rather than feed them. D) overworks its employees. Answer: A Topic: External Costs Skill: Conceptual Status: Old AACSB: Analytical Skills

64) When people decorate the exteriors of their homes with colored lights, they create ________ for the motorists who pass by. A) an external benefit B) a competitive good C) a public good D) an excludable good Answer: A Topic: External Benefits Skill: Conceptual Status: Old AACSB: Analytical Skills

65) Which of the following episodes would most likely contain an externality? A) You cannot afford to buy groceries. B) You decide to grow your own vegetables in your backyard where no one else can see them. C) You decide to grow flowers in your front yard where everyone else can see them. D) You eat all the vegetables you grow yourself. Answer: C Topic: External Benefits Skill: Conceptual Status: Old AACSB: Analytical Skills

66) In which of the following markets are external benefits most likely to exist? A) in the market for gasoline B) in the market for ball pens C) in the market for flu shots D) in the market for cigarettes Answer: C Topic: External Benefits Skill: Conceptual Status: Old AACSB: Analytical Skills

67) Which of the following illustrates the concept of external benefit? A) Good weather increases the size of the wheat crop. B) A new pesticide increases the size of the wheat crop. C) A gardener enjoys his flowers. D) Neighbors enjoy a gardener's flowers. Answer: D Topic: External Benefits Skill: Conceptual Status: Old AACSB: Analytical Skills

68) Beautification of the national highways through the planting of shrubs and wildflowers will A) be profitable for a private landscaping company because they can charge passing drivers. B) benefit even people who do not help pay. C) provide a flow of services that are rival in consumption. D) provide a flow of services that involve excludable consumption. Answer: B Topic: External Benefits Skill: Conceptual Status: Old AACSB: Analytical Skills

69) To two hunters, a deer running in a forest is A) nonrival and nonexcludable. B) nonrival and excludable. C) rival and nonexcludable. D) rival and excludable. Answer: C Topic: Study Guide Question, Rival and Nonexcludable Skill: Analytical Status: Old AACSB: Analytical Skills

70) Which of the following is rival and excludable? A) a public good B) a natural monopoly C) a private good D) a common resource Answer: C Topic: Study Guide Question, Private Good Skill: Definition Status: Old AACSB: Analytical Skills

71) An example of a good that is both rival and excludable is A) the defense services provided by a new stealth bomber. B) a pair of pants. C) a beautiful sunset. D) an uncrowded theme park such as Walt Disney World. Answer: B Topic: Study Guide Question, Private Good Skill: Conceptual Status: Old AACSB: Analytical Skills

72) An externality can be a cost or benefit arising from the production of a good that falls upon A) consumers but not producers. B) producers but not consumers. C) both the consumer and the producer. D) someone other than the consumer or producer. Answer: D Topic: Study Guide Question, Externality Skill: Conceptual Status: Old AACSB: Analytical Skills

73) Long Beach Island, off the coast of New Jersey, is considering building a sand barrier to protect the houses on the island from future hurricanes. For residents of Long Beach Island, this barrier system would be a A) private good. B) natural monopoly. C) common resource. D) public good. Answer: D Topic: Public Goods Skill: Conceptual Status: New AACSB: Analytical Skills

2 Providing Public Goods 1) A free rider is someone who A) creates an external benefit. B) is irrational. C) consumes only the goods he or she pays for. D) enjoys the benefits of a good without paying for it. Answer: D Topic: The Free-Rider Problem Skill: Conceptual Status: Old AACSB: Analytical Skills

2) The free-rider problem is the absence of an incentive for A) firms to produce public goods. B) people to use common resources. C) people to pay for what they consume. D) people to vote. Answer: C Topic: The Free-Rider Problem Skill: Definition Status: Old AACSB: Analytical Skills

3) A free rider is someone who A) pays for a good and then does not consume the good. B) consumes a good without paying for it. C) pays the dollar value that he or she places on a given amount of a public good. D) pays the maximum amount that he or she is willing to pay for the good. Answer: B Topic: The Free-Rider Problem Skill: Definition Status: Old AACSB: Analytical Skills

4) The free-rider problem arises when consumption of a good is A) rival. B) excludable. C) nonrival but excludable. D) nonexcludable. Answer: D Topic: The Free-Rider Problem Skill: Definition Status: Old AACSB: Analytical Skills

5) Free riding A) is possible if the consumption of a good is characterized by excludability. B) is possible if the consumption of a good is characterized by nonexcludability. C) is characteristic of private goods. D) occurs when consumers pay too much for services provided by government. Answer: B Topic: The Free-Rider Problem Skill: Definition Status: Old AACSB: Analytical Skills

6) A free-rider problem occurs when the A) good is excludable. B) good is offered at no charge. C) good is rival. D) good is nonexcludable. Answer: D Topic: The Free-Rider Problem Skill: Conceptual Status: Old AACSB: Analytical Skills

7) A free rider problem is created by A) public goods. B) common resources. C) private goods. D) natural monopolies. Answer: A Topic: The Free-Rider Problem Skill: Conceptual Status: Old AACSB: Analytical Skills

8) A free-rider problem exists if A) those consuming the good pay more than the cost of providing the good so that the producer's profits increase ("free ride") as a result of the overpayment. B) those consuming the good pay nothing for it. C) two consumers can jointly consume a good, which lowers the price per person. D) a firm can obtain technology at a fair price. Answer: B Topic: The Free-Rider Problem Skill: Conceptual Status: Old AACSB: Analytical Skills

9) Because of the free-rider problem, ________. A) there is an efficient allocation of resources for common resources B) private provision leads to the production of more than the efficient quantity of a public good C) private provision leads to the production of less than the efficient quantity of a public good D) the public uses too little of a common resource Answer: C Topic: The Free-Rider Problem Skill: Analytical Status: Old AACSB: Analytical Skills

10) The free-rider problem is the inability of private markets to achieve the efficient level of production of A) rival goods. B) excludable goods. C) public goods. D) private goods. Answer: C Topic: The Free-Rider Problem Skill: Definition Status: Old AACSB: Analytical Skills

11) Public goods create a free-rider problem because the quantity of the good that a person consumes ________ for that good. A) does not depend on the amount that the person pays B) increases as that person pays less C) increases as that person pays more D) decreases as that person pays more Answer: A Topic: The Free-Rider Problem Skill: Definition Status: Old AACSB: Analytical Skills

12) Free riders are not a problem in the market for a private good because A) non-payers can be excluded from consuming the good. B) the good is a rival good. C) the good can be produced only at a positive marginal cost. D) the free rider will not get caught. Answer: A Topic: The Free-Rider Problem Skill: Conceptual Status: Old AACSB: Analytical Skills

13) Free riding is not a problem in the market for a private good because A) people who do not pay for the good can be excluded from consumption. B) the good is a rival good. C) the market eliminates the problem of externalities. D) The question errs because free riding is a problem in providing private goods. Answer: A Topic: The Free-Rider Problem Skill: Conceptual Status: Old AACSB: Analytical Skills

14) The economy's marginal social benefit curve for a public good is equal to the ________. A) horizontal sum of the individual demand curves B) vertical sum of the individual marginal benefit curves C) horizontal sum of the individual marginal benefit curves D) vertical sum of the individual supply curves Answer: B Topic: Benefit of a Public Good Skill: Definition Status: Old AACSB: Analytical Skills

15) The construction of the economy's marginal social benefit curve for a public good reflects the fact that A) all the individuals can consume the same unit of the good. B) more than one supplier can provide the good. C) the same unit of the good cannot be simultaneously shared by more than one person at a time. D) the government can supply a public good at a lower cost than can a private supplier. Answer: A Topic: Benefit of a Public Good Skill: Definition Status: Old AACSB: Analytical Skills

16) The economy's marginal social benefit curve for a public good is calculated by adding the A) marginal cost of all the suppliers at each quantity. B) quantities supplied by all the suppliers at each price. C) quantities demanded by all the individuals at each price. D) marginal benefits of all the individuals at each quantity. Answer: D Topic: Benefit of a Public Good Skill: Definition Status: Old AACSB: Analytical Skills

17) Long Beach Island, off the coast of New Jersey, is considering building a sand barrier to protect the houses on the island from future hurricanes. The marginal social benefit of the barrier is equal to the A) marginal private benefit of the person who benefits the most from the barrier. B) marginal private benefit of the person who benefits the least from the barrier. C) sum of the marginal private benefits for anyone who benefits from the barrier. D) difference between the marginal private benefit of the person who benefits the most and the person who benefits the least from the barrier. Answer: C Topic: Benefit of a Public Good Skill: Conceptual Status: New AACSB: Analytical Skills

18) To find the economy's marginal benefit curve for a public good, you would A) average the individual marginal benefit curves horizontally. B) average the individual marginal benefit curves vertically. C) sum the individual marginal benefit curves horizontally. D) sum the individual marginal benefit curves vertically. Answer: D Topic: Benefit of a Public Good Skill: Definition Status: Old AACSB: Analytical Skills

19) The economy's marginal benefit curve for a public good is found by ________ for all individuals. A) vertically summing the marginal benefit curves B) vertically summing the total benefit curves C) horizontally summing the total benefit curves D) horizontally summing the marginal benefit curves Answer: A Topic: Benefit of a Public Good Skill: Definition Status: Old AACSB: Analytical Skills

20) The economy's marginal social benefit curve for a public good is obtained by A) horizontally summing each individual's demand curve. B) horizontally summing each individual's marginal benefit curve. C) vertically summing each individual's marginal benefit curve. D) averaging each individual's marginal benefit curve. Answer: C Topic: Benefit of a Public Good Skill: Definition Status: Old AACSB: Analytical Skills

21) For a public good, the marginal social benefit curve is the ________ summation of all the individual marginal benefit curves. For a private good, the marginal social benefit curve is the ________ summation of all the individual marginal benefit curves. A) horizontal; vertical B) vertical; horizontal C) vertical; vertical D) horizontal; horizontal Answer: B Topic: Benefit of a Public Good Skill: Conceptual Status: Old AACSB: Analytical Skills

22) John receives a marginal benefit of $80 from one missile. Nick receives a marginal benefit of $50 from one missile. Christina receives a marginal benefit of $65 from one missile. John, Nick, and Christina are the only people in the economy. What is the economy's marginal social benefit from one missile? A) $50 B) $65 C) $80 D) $195 Answer: D Topic: Benefit of a Public Good Skill: Analytical Status: Old AACSB: Analytical Skills

23) The efficient quantity of a public good is provided when the economy's A) total benefit from the good equals its total cost. B) total benefit from the good is less than its total cost. C) marginal social benefit from the good equals its marginal social cost. D) marginal social benefit from the good is greater than its marginal social cost. Answer: C Topic: The Efficient Quantity of a Public Good Skill: Definition Status: Old AACSB: Analytical Skills

24) Efficiency in the provision of a public good is achieved when its A) total social benefit equals its total social cost. B) average social benefit equals its average social cost. C) marginal social benefit equals its marginal social cost. D) marginal social benefit equals zero. Answer: C Topic: Efficient Quantity of a Public Good Skill: Definition Status: Old AACSB: Analytical Skills

25) Long Beach Island, off the coast of New Jersey, is considering building a system of satellite towers that will enhance communication during emergencies such as hurricanes. The efficient quantity of satellite towers is definitely the quantity of such that the A) marginal social cost is equal to the marginal social benefit. B) marginal private cost is equal to the marginal social benefit. C) marginal social cost is less than the marginal social benefit. D) marginal private cost is less than the marginal social benefit. Answer: A Topic: Efficient Quantity of a Public Good Skill: Analytical Status: New AACSB: Analytical Skills

26) There are four lighthouses on the island of Sand. If this is the efficient quantity of lighthouses, ________. A) the marginal social benefit of the fourth lighthouse equals its marginal social cost B) total social benefit is zero C) marginal social benefit minus marginal social cost is a maximum D) Both answers A and C are correct. Answer: A Topic: Efficient Quantity of a Public Good Skill: Conceptual Status: Old AACSB: Analytical Skills

27) If the marginal social benefit of a city's sewage system is less than the marginal social cost, then the city will achieve an efficient use of resources if it ________. A) decreases the capacity of the sewage system B) does not change the capacity of the sewage system C) increases the capacity of the sewage system D) increases the sewerage charge that the residents pay Answer: A Topic: Efficient Quantity of a Public Good Skill: Analytical Status: Old AACSB: Analytical Skills

28) Long Beach Island, off the coast of New Jersey, is considering enhancing its system of satellite towers to help communication during emergencies such as hurricanes. A study showed that in Superstorm Sandy the existing number of satellite towers resulted in the marginal social cost of a satellite tower being less than the marginal social benefit. To achieve efficiency, this study indicates that the A) system should be left as is because the quantity of satellite towers is efficient. B) system should be reduced in size because the quantity of satellite towers is more than the efficient quantity. C) system should be expanded because the quantity of satellite towers is less than the efficient quantity. D) None of the above because the study erred in comparing the marginal social cost to the marginal social benefit since it should have compared the marginal private cost to the marginal private benefit. Answer: C Topic: Efficient Quantity of a Public Good Skill: Analytical Status: New AACSB: Analytical Skills

29) Public goods are A) under provided by the private market because the marginal cost of production is too high. B) under provided by the private market because the marginal benefits of consumption are too low. C) under provided by the private market because people's willingness to pay for the good is less than the marginal benefit of the good. D) over provided by the private market because the marginal benefits of consumption are too high. Answer: C Topic: Private Provision of a Public Good Skill: Conceptual Status: Old AACSB: Analytical Skills

30) Which of the following is TRUE about public goods? A) Consumption is rival and nonexcludable. B) Consumption is nonrival and excludable. C) Efficient provision occurs at the level of output at which total benefit is equal to total cost. D) Unregulated private markets produce less than the efficient quantity of a public good. Answer: D Topic: Private Provision of a Public Good Skill: Conceptual Status: Old AACSB: Analytical Skills

31) Why will a private market be unable to produce the efficient quantity of public goods? A) because the good's marginal cost is too low B) because the good is nonexcludable, so there is the free rider problem C) because the good is rival, so no one will want to pay the producer for it D) All of the above answers are correct. Answer: B Topic: Private Provision of a Public Good Skill: Conceptual Status: Old AACSB: Analytical Skills

32) Private markets will not provide the efficient quantity of a public good because A) of the principle of minimum differentiation. B) public goods are rival and excludable. C) of rational ignorance. D) of the free-rider problem. Answer: D Topic: Private Provision of a Public Good Skill: Conceptual Status: Old AACSB: Analytical Skills

33) If a public good was left to be provided by the private sector, A) more than the efficient quantity would be produced. B) less than the efficient quantity would be produced C) the efficient quantity would be produced D) the good would be provided at a very low price. Answer: B Topic: Private Provision of a Public Good Skill: Conceptual Status: Old AACSB: Analytical Skills

34) The quantity of a public good supplied by a private market is A) smaller than the efficient quantity. B) equal to the efficient quantity. C) larger than the efficient quantity. D) the quantity that maximizes total public benefit. Answer: A Topic: Private Provision of a Public Good Skill: Conceptual Status: Old AACSB: Analytical Skills

35) The free-rider problem with a public good leads to A) inefficiency if the good is provided by only private markets with no government action. B) overproduction if the good is provided by private markets. C) underproduction if the good is provided by the government. D) None of the above answers is correct. Answer: A Topic: Private Provision of a Public Good Skill: Conceptual Status: Old AACSB: Analytical Skills

Quantity

Pat's marginal benefit (dollars)

1 2 3 4 5 6

10.00 7.00 4.00 2.00 1.00 0.00

Al's marginal benefit (dollars) 4.00 3.00 2.00 1.00 0.00 0.00

Marginal cost (dollars) 0.50 1.00 1.50 2.00 2.50 3.00

36) If the good in the table above is a public good and Pat and all are the only members of society, then the efficient quantity to produce is A) 2 units. B) 3 units. C) 4 units. D) 5 units. Answer: C Topic: Efficient Quantity of a Public Good Skill: Analytical Status: Old AACSB: Analytical Skills

Quantity (lamps) 0 1 2 3 4 5

Marginal Marginal Marginal benefit for Mike benefit for Joe benefit for Sam 4 3 2 1 0

8 6 4 2 0

5 4 3 2 0

37) Mike, Joe, and Sam are roommates. They need lamps for their common living room. Lamps in their living room are a public good for these roommates. The marginal benefit that each individual receives from varying numbers of lamps in the living room is given in the table above. The marginal benefit for the second lamp to this group of roommates taken as a whole is A) 10. B) 13. C) 9. D) 17. Answer: B Topic: Benefit of a Public Good Skill: Analytical Status: Old AACSB: Analytical Skills

38) Mike, Joe, and Sam are roommates. They need lamps for their common living room. Lamps in their living room are a public good for these roommates. The marginal benefit that each individual receives from varying numbers of lamps in the living room is given in the table above. If the marginal cost of a lamp is 9, what is the efficient number of lamps for the roommates to purchase? A) 1 B) 2 C) 3 D) 4 Answer: C Topic: Efficient Quantity of a Public Good Skill: Analytical Status: Old AACSB: Analytical Skills

39) Mike, Joe, and Sam are roommates. They need lamps for their common living room. Lamps in their living room are a public good for these roommates. The marginal benefit that each individual receives from varying numbers of lamps in the living room is given in the table above. If the marginal cost of a lamp is 13, what is the efficient number of lamps for the roommates to purchase? A) 2 B) 5 C) 0 D) 1 Answer: A Topic: Efficient Quantity of a Public Good Skill: Analytical Status: Old AACSB: Analytical Skills

Quantity (hours Marginal cost per day) (dollars per hour) 0 1 2 3 4 5

Marginal benefit for Marginal benefit for Pooh Piglet (dollars per hour) (dollars per hour)

6 12 18 24 30

10 8 6 4 2

20 16 12 8 4

40) Suppose two individuals, Pooh and Piglet, desire protection (provided by Tigger) for their community, The Hundred Acre Wood, from heffalumps. Protection is a public good. The marginal cost of protection as well as Piglet's and Pooh's marginal benefits from protection are in the table above. What is the quantity of protection that achieves the maximum net benefit? A) 1 hour per day B) 2 hours per day C) 3 hours per day D) 4 hours per day Answer: C Topic: Efficient Quantity of a Public Good Skill: Analytical Status: Old AACSB: Analytical Skills

Quantity 1 2 3 4 5

Katie Marginal benefit (dollars per submarine) 100 75 50 25 0

Quantity 1 2 3 4 5

Bobby Marginal benefit (dollars per submarine) 150 100 50 10 0

41) The above table shows the marginal benefit from submarines for the only two citizens of a country. Submarines are a public good. If submarines cost $100 a piece to produce, what is the efficient quantity of submarines? A) 0 B) 1 C) 2 D) 3 Answer: D Topic: Efficient Quantity of a Public Good Skill: Analytical Status: Old AACSB: Analytical Skills 30 Copyright © 2014 Pearson Education, Inc.

42) The above table shows the marginal benefit from submarines for the only two citizens of a country. Submarines are a public good. If submarines cost $175 a piece to produce, what is the efficient quantity of submarines? A) 0 B) 1 C) 2 D) 3 Answer: C Topic: Efficient Quantity of a Public Good Skill: Analytical Status: Old AACSB: Analytical Skills

43) The above table shows the marginal benefit from submarines for the only two citizens of a country. Submarines are a public good. If submarines cost $300 a piece, what is the efficient quantity to produce? A) 0 B) 1 C) 2 D) 3 Answer: A Topic: Efficient Quantity of a Public Good Skill: Analytical Status: Old AACSB: Analytical Skills

44) The above table shows the marginal benefit from submarines for the only two citizens of a country. Submarines are a public good. If submarines cost $25 a piece to produce, who would vote for the purchase of four submarines? A) both Katie and Bobby B) Katie only C) Bobby only D) nobody Answer: B Topic: Public Provision of a Public Good Skill: Analytical Status: Old AACSB: Analytical Skills

45) The above table shows the marginal benefit from submarines for the only two citizens of a country. Suppose submarines cost $175 a piece. Politician A proposes 2 submarines while politician B proposes 4. Assuming that both Bobby and Katie pay one half of the resulting taxes and neither is rationally ignorant, which politician will win the election? A) A because she offers voters a lower tax bill. B) A because she offers voters a greater net benefit. C) B because she offers voters a greater total benefit. D) B because she offers voters more submarines. Answer: B Topic: Public Provision of a Public Good Skill: Analytical Status: Old AACSB: Analytical Skills

Number of police officers 1 2 3 4 5 6 7

Marginal benefit (dollars from the last officer) 8.00 7.20 6.40 5.60 4.80 4.00 3.20

46) Broomfield city council is deciding how many police officers the city needs. Broomfield's population is 10,000 people. The marginal cost of a police officer is $60,000 per year. The marginal benefit schedule of an average city resident from police protection is shown in the table above. Police protection is a public good. The marginal benefit for all of Broomfield from hiring the 4th police officer is A) $56,000. B) $5.60. C) $8,000. D) $6.00. Answer: A Topic: Marginal Benefit Skill: Analytical Status: Old AACSB: Analytical Skills

47) Broomfield city council is deciding how many police officers the city needs. Broomfield's population is 10,000 people. The marginal cost of a police officer is $60,000 per year. The marginal benefit schedule of an average city resident from police protection is shown in the table above. Police protection is a public good. The efficient number of police officers in Broomfield is A) 2. B) 3. C) 4. D) 6. Answer: B Topic: Efficient Quantity of a Public Good Skill: Analytical Status: Old AACSB: Analytical Skills

48) Broomfield city council is deciding how many police officers the city needs. Broomfield's population is 10,000 people. The marginal cost of a police officer is $60,000 per year. The marginal benefit schedule of an average city resident from police protection is shown in the table above. Police protection is a public good. To support the efficient number of police officers, each resident of Broomfield will have to pay ________ per year in taxes. A) $36 B) $6.40 C) $18 D) $60 Answer: C Topic: Efficient Quantity of a Public Good Skill: Analytical Status: Old AACSB: Analytical Skills

49) Broomfield city council is deciding how many police officers the city needs. Broomfield's population is 10,000 people. The marginal cost of a police officer is $60,000 per year. The marginal benefit schedule of an average city resident from police protection is shown in the table above. Police protection is a public good. If voters in Broomfield are well informed and know what is best for them, the political equilibrium is that ________ police officers will be hired. A) 2 B) 4 C) 6 D) 3 Answer: D Topic: Public Provision of a Public Good Skill: Analytical Status: Old AACSB: Analytical Skills

50) Broomfield city council is deciding how many police officers the city needs. Broomfield's population is 10,000 people. The marginal cost of a police officer is $60,000 per year. The marginal benefit schedule of an average city resident from police protection is shown in the table above. Police protection is a public good. If voters in Broomfield are rationally ignorant and the police department achieves the highest attainable budget, the political equilibrium is ________ police officers. A) 6 B) 7 C) 4 D) 3 Answer: A Topic: Public Provision of a Public Good Skill: Analytical Status: Old AACSB: Analytical Skills

51) Broomfield city council is deciding how many police officers the city needs. Broomfield's population is 10,000 people. The marginal cost of a police officer is $60,000 per year. The marginal benefit schedule of an average city resident from police protection is shown in the table above. Police protection is a public good. If voters in Broomfield are rationally ignorant and the police department achieves the highest attainable budget, each resident of Broomfield will pay ________ per year in taxes. A) $18 B) $36 C) $4 D) $60 Answer: B Topic: Public Provision of a Public Good Skill: Analytical Status: Old AACSB: Analytical Skills

Quantity (satellites) 1 2 3 4 5

Tom's marginal Jerry's marginal benefit benefit (dollars) (dollars) 50 40 40 32 30 24 20 16 10 8

52) Tom and Jerry are the only members of society. The table above shows their marginal benefits from defense satellites, a public good. What is the marginal benefit to society from the third satellite? A) $30 B) $27 C) $54 D) $6 Answer: C Topic: Benefit of a Public Good Skill: Analytical Status: Old AACSB: Analytical Skills

53) Tom and Jerry are the only members of society. The table above shows their marginal benefits from defense satellites, a public good. What is the marginal benefit to society from the fourth satellite? A) $36 B) $20 C) $18 D) $4 Answer: A Topic: Benefit of a Public Good Skill: Analytical Status: Old AACSB: Analytical Skills

54) Tom and Jerry are the only members of society. The table above shows their marginal benefits from defense satellites, a public good. If the marginal social cost of a satellite is $36, the efficient quantity of satellites is A) 1. B) 2. C) 3. D) 4. Answer: D Topic: Efficient Quantity of a Public Good Skill: Analytical Status: Old AACSB: Analytical Skills

55) Tom and Jerry are the only members of society. The table above shows their marginal benefits from defense satellites, a public good. If the marginal social cost of a satellite is $54, the efficient quantity of satellites is A) 0. B) 1. C) 2. D) 3. Answer: D Topic: Efficient Quantity of a Public Good Skill: Analytical Status: Old AACSB: Analytical Skills

56) Tom and Jerry are the only members of society. The table above shows their marginal benefits from defense satellites, a public good. If the marginal social cost of a satellite is $54, the quantity of satellites provided by a competitive market is A) 0. B) 1. C) 2. D) 3. Answer: A Topic: Private Provision of a Public Good Skill: Analytical Status: Old AACSB: Analytical Skills

57) Tom and Jerry are the only members of society. The table above shows their marginal benefits from defense satellites, a public good. If the marginal social cost of a satellite is $95, the efficient quantity of satellites is A) 0. B) 1. C) 2. D) 3. Answer: A Topic: Efficient Quantity of a Public Good Skill: Analytical Status: Old AACSB: Analytical Skills

58) The figure above illustrates the marginal benefit and marginal cost of different quantities of national defense. What is the political equilibrium if voters are well informed? A) 0 units B) between 0 and 3 units C) 3 units D) 5 units Answer: C Topic: Efficient Quantity of a Public Good Skill: Analytical Status: Old AACSB: Analytical Skills

59) The above figure shows the marginal benefit and marginal cost curves for a public good. The efficient quantity is A) A. B) B. C) C. D) zero units supplied. Answer: B Topic: Efficient Quantity of a Public Good Skill: Analytical Status: Old AACSB: Analytical Skills

60) The above figure shows the marginal benefit and marginal cost curves for a public good. The quantity that has the best prospect of winning in an election by well-informed voters is A) A. B) B. C) C. D) zero units supplied. Answer: B Topic: Public Provision, Informed Voters Skill: Analytical Status: Old AACSB: Analytical Skills

61) The principle of minimum differentiation reflects the A) tendency for firms to produce at minimum marginal cost in order to compete with one another. B) tendency for political parties to make themselves identical to appeal to the median voter. C) concept of minimizing the difference between total benefit and total cost to produce efficiently. D) attempt to minimize the free-rider problem. Answer: B Topic: Principle of Minimum Differentiation Skill: Definition Status: Old AACSB: Analytical Skills

62) The principle of minimum differentiation suggests that competitors A) try to distinguish themselves by offering highly different products. B) try to gain the largest market share by differentiating a popular product. C) tend to make identical goods in order to appeal to the largest number of consumers. D) try to decrease costs by minimizing the differences in the types of resources used. Answer: C Topic: Principle of Minimum Differentiation Skill: Definition Status: Old AACSB: Analytical Skills

63) The principle of minimum differentiation A) results in political parties proposing very similar or possibly identical policies. B) refers to the tendency of competitors to make themselves different in order appeal to the maximum number of clients or voters. C) explains why Burger King, Wendy's, and other fast food restaurants tend to locate far away from each other. D) None of the above answers are correct. Answer: A Topic: Principle of Minimum Differentiation Skill: Conceptual Status: Old AACSB: Analytical Skills

64) Two candidates are running for election as mayors of New York City that was recently impacted by Superstorm Sandy. In their election platforms, both candidates supported spending very similar amounts on hurricane protection. This similarity is most likely the result of A) both candidates necessarily having the same preferences towards risk and protection. B) the Principle of Minimum Differentiation. C) both the candidates realize that hurricane protection is a public good. D) politicians only take efficiency into account and hence all candidates will suggest the efficient outcome. Answer: B Topic: Efficient Quantity of a Public Good Skill: Conceptual Status: New AACSB: Analytical Skills

65) Rational ignorance says that voters will A) understand the technology before voting on defense. B) vote on issues without having complete information. C) gather information on issues that are not important. D) not vote on issues that they do not understand. Answer: B Topic: Rational Ignorance Skill: Definition Status: Old AACSB: Analytical Skills

66) The decision not to acquire information because the cost of acquiring the information exceeds the expected benefit from the information is known as A) rational ignorance. B) the principle of minimum differentiation. C) public choice theory. D) inefficient provision. Answer: A Topic: Rational Ignorance Skill: Definition Status: Old AACSB: Analytical Skills

67) Rational ignorance means A) ignorance is rationed. B) the benefit from some information is not worth the cost of collecting it. C) some people do not understand rationality. D) the information is unavailable. Answer: B Topic: Rational Ignorance Skill: Definition Status: Old AACSB: Analytical Skills

68) "I know that my vote alone will not influence whether or not any new foreign trade legislation is enacted, so I have decided not to spend the time learning about various legislative proposals." This quote reflects an example of A) the free-rider problem. B) government failure. C) rational ignorance. D) voter inefficiency. Answer: C Topic: Rational Ignorance Skill: Conceptual Status: Old AACSB: Analytical Skills

69) Rational ignorance about the efficient quantity of a public good can result in A) the principle of minimum differentiation. B) excludable goods. C) bureaucratic overprovision of a good. D) the vertical summation of individual's marginal benefit curves. Answer: C Topic: Rational Ignorance Skill: Conceptual Status: Old AACSB: Analytical Skills

70) Rational ignorance suggests that voters will A) be ignorant about all issues. B) be ignorant about issues that are of no special interest to them. C) pursue information on all issues before voting. D) avoid voting if they have no information. Answer: B Topic: Rational Ignorance Skill: Conceptual Status: Old AACSB: Analytical Skills

71) Bureaucratic overprovision of a public good could occur because A) of a failure of minimum differentiation. B) of rational ignorance among voters. C) voters want more of the good than do bureaucrats. D) bureaucrats attempt to maximize efficiency. Answer: B Topic: Rational Ignorance Skill: Conceptual Status: Old AACSB: Analytical Skills

72) Suppose that the marginal social benefit from another unit of a public good is less than the marginal social cost of producing it. Then A) the principle of minimum differentiation means that production should be decreased. B) the number of free riders is at its efficient amount. C) less of the product should be produced because its provision exceeds the efficient level. D) more of the product should be produced because its provision is less than the efficient level. Answer: C Topic: Study Guide Question, Efficient Quantity of a Public Good Skill: Conceptual Status: Old AACSB: Analytical Skills

73) In the political market place, typical voters A) support policies that they think will make the poor better off. B) fire bureaucrats who support efficient policies. C) are fully informed. D) are sometimes rationally ignorant about a policy. Answer: D Topic: Study Guide Question, Rational Ignorance Skill: Conceptual Status: Old AACSB: Analytical Skills

74) The fact that you may not know who your congressional representative is represents A) rational ignorance on your part. B) the rival nature of information. C) inefficient oversupply of public servants. D) the use of the median voter theorem. Answer: A Topic: Study Guide Question, Rational Ignorance Skill: Definition Status: Old AACSB: Analytical Skills

3 Positive Externalities: Education and Health Care 1) ________ is the benefit that a consumer of a good or service receives. A) Marginal private benefit B) Marginal external benefit C) Marginal social benefit D) Both answers A and B are correct. Answer: A Topic: Marginal Private Benefit Skill: Definition Status: Old AACSB: Analytical Skills

2) The benefit from an additional unit of a good or service that the consumer of that good or service receives is the A) marginal private benefit. B) marginal external benefit. C) marginal social benefit. D) opportunity cost. Answer: A Topic: Marginal Private Benefit Skill: Definition Status: Old AACSB: Analytical Skills

3) The benefit from an additional unit of a good or service that people other than the consumer of that good or service receives is the A) marginal private benefit. B) marginal external benefit. C) marginal social benefit. D) opportunity cost. Answer: B Topic: Marginal External Benefit Skill: Definition Status: Old AACSB: Analytical Skills

4) Suppose your neighbor has a beautiful garden. The benefit that she enjoys from her garden is called ________ and the benefit the rest of the neighborhood enjoys is called ________. A) marginal private benefit; marginal external benefit B) private cost; external cost C) marginal social benefit; marginal external benefit D) marginal external benefit; marginal social benefit Answer: A Topic: Marginal Private Benefit and Marginal External Benefit Skill: Conceptual Status: Old AACSB: Analytical Skills

5) The benefit from an additional unit of a good or service that society receives from the consumption of that good or service is the A) marginal private benefit. B) marginal external benefit. C) marginal social benefit. D) opportunity cost. Answer: C Topic: Marginal Social Benefit Skill: Definition Status: Old AACSB: Analytical Skills

6) The HPV vaccine protects against human papillomavirus (HPV) that causes cancer. It protects both the person getting the vaccine and the sexual partners of that person. When calculating the marginal social benefit of the vaccine, it is necessary to include A) only the marginal private benefit. B) only the marginal external benefit. C) both the marginal private benefit and the marginal external benefit. D) either the marginal private benefit or the marginal external benefit, whichever is larger. Answer: C Topic: Marginal Social Benefit Skill: Analytical Status: New AACSB: Analytical Skills

7) The marginal private benefit of education is A) less than the marginal social benefit. B) equal to the marginal social benefit. C) greater than the marginal social benefit. D) equal to the marginal social cost. Answer: A Topic: Economics of Knowledge Skill: Analytical Status: Old AACSB: Analytical Skills

8) If the marginal social benefit of a good equals the marginal private benefit of the good, then the marginal external benefit of the good A) is zero. B) equals the marginal social benefit. C) equals the marginal social cost. D) equals the marginal private cost. Answer: A Topic: Marginal Social Benefit Skill: Analytical Status: Old AACSB: Analytical Skills

9) When individuals make decisions about how much schooling to obtain, they A) do not take account of the personal benefits that it creates. B) do not take account of the external benefits that it creates. C) overvalue the personal benefits that it creates. D) overvalue the external benefits that it creates. Answer: B Topic: Economics of Knowledge Skill: Conceptual Status: Old AACSB: Analytical Skills

10) Individuals making decisions about how much to purchase of a product with an external benefit base their decisions on which of the following? A) the price and marginal private benefit B) the economically efficient output C) the price and the marginal social benefit D) the size of the deadweight loss Answer: A Topic: Marginal External Benefit Skill: Conceptual Status: Old AACSB: Analytical Skills

11) When people determine the quantity of education they will undertake, they ________ the external benefits. As a result, if education were left to an unregulated market, people would undertake too ________ education. A) overvalue; much B) ignore; much C) ignore; little D) overvalue; little Answer: C Topic: Economics of Knowledge Skill: Analytical Status: Old AACSB: Analytical Skills

12) When external benefits are present, A) competitive markets are efficient. B) competitive markets are inefficient. C) a tax is required to eliminate the inefficiency. D) property rights have already been established. Answer: B Topic: Marginal External Benefit Skill: Conceptual Status: Old AACSB: Analytical Skills

13) In an unregulated, competitive market, less than the efficient quantity of education is produced and consumed because A) the decisions to produce and consume education are based on marginal private costs and marginal private benefits. B) the decisions to produce and consume education are based on marginal social costs and marginal social benefits. C) the decisions to produce and consume education are based on marginal private benefits and marginal social costs. D) marginal private costs are consistently greater than marginal private benefits. Answer: A Topic: Economics of Knowledge Skill: Conceptual Status: Old AACSB: Analytical Skills

14) Most governments subsidize basic education because A) there are external costs associated with well educated citizens. B) the marginal social benefit of education is greater than the marginal private benefit. C) of the existence of private schools. D) None of the above answers are correct. Answer: B Topic: Economics of Knowledge Skill: Conceptual Status: Old AACSB: Analytical Skills

15) Education in the United States is heavily subsidized by the government. This fact suggest that I. less than the efficient amount of education would be provided by an unregulated market. II. the marginal social benefit of education is greater than marginal social cost of education. A) I only B) II only C) both I and II D) neither I nor II Answer: A Topic: Economics of Knowledge Skill: Conceptual Status: Old AACSB: Analytical Skills

16) One reason that education has external benefits is that A) knowledge has diminishing marginal productivity. B) education creates job opportunities for teachers. C) education creates better citizens. D) property owners pay taxes to support the school system. Answer: C Topic: Economics of Knowledge Skill: Conceptual Status: Old AACSB: Analytical Skills

17) The concept of externalities means that subsidizing education can be justified on the grounds that as a student becomes better educated, the student will A) earn a higher income. B) enhance the lives of people around the student. C) make contributions to the student's alma mater. D) none of the above Answer: B Topic: Economics of Knowledge Skill: Conceptual Status: Old AACSB: Analytical Skills

18) When the marginal social benefit of Good A is greater than the marginal private benefit of Good A, then A) competitive, unregulated markets will produce a quantity of Good A that is less than the efficient quantity. B) competitive, unregulated markets will produce the quantity of Good A that is equal to the efficient quantity. C) competitive, unregulated markets will produce a quantity of Good A that is greater than the efficient quantity. D) the government should levy a tax on the production of Good A that is equal to the horizontal distance between the two marginal cost curves. Answer: A Topic: An Unregulated Market Skill: Conceptual Status: Old AACSB: Analytical Skills

19) When the consumption of a good creates an external benefit, A) the marginal social cost curve lies below the marginal private cost curve. B) the marginal social benefit curve lies above the marginal private benefit curve. C) the quantity produced in an unregulated, competitive market is greater than the efficient quantity. D) None of the above answers is correct. Answer: B Topic: An Unregulated Market Skill: Conceptual Status: Old AACSB: Analytical Skills

20) Consider a market in which there is an external benefit. The inefficient market equilibrium is such that A) too little output is produced. B) too much output is produced. C) price is too high. D) marginal social cost is greater than marginal social benefit. Answer: A Topic: An Unregulated Market Skill: Conceptual Status: Old AACSB: Analytical Skills

21) Suppose a good has an external benefit and no external cost. When a competitive, unregulated market is at its equilibrium, then the A) marginal private benefit is less than the marginal social benefit. B) marginal private benefit is greater than the marginal social benefit. C) marginal private cost is less than the marginal social cost. D) marginal private cost is greater than the marginal social cost. Answer: A Topic: An Unregulated Market Skill: Conceptual Status: Old AACSB: Analytical Skills

22) The HPV vaccine protects against human papillomavirus (HPV) that causes cancer. It protects both the person getting the vaccine and the sexual partners of that person. In a private market with no government intervention, the equilibrium will be A) overprovision of the HPV vaccine and a deadweight loss. B) overprovision of the HPV vaccine but no deadweight loss. C) underprovision of the HPV vaccine but no deadweight loss. D) underprovision of the HPV vaccine and a deadweight loss. Answer: D Topic: An Unregulated Market Skill: Analytical Status: New AACSB: Analytical Skills

23) Which of the following methods is used by the government to ensure that an efficient level of college education is achieved? I. Below-cost provision II. Allowing everyone to free ride A) I only B) II only C) both I and II D) neither I nor II Answer: A Topic: Government Policies Toward Knowledge Skill: Conceptual Status: Old AACSB: Analytical Skills

24) If production of a good produces an external benefit, in order for the marginal social cost to equal the marginal social benefit, A) the good should be taxed. B) permits should be required to purchase the good. C) the good could be subsidized. D) the government needs to take no action. Answer: C Topic: Government Policies Toward External Benefits Skill: Conceptual Status: Old AACSB: Analytical Skills

25) All of the following are devices that governments can use to achieve a more efficient allocation of resources in the presence of external benefits EXCEPT A) vouchers. B) private subsidies. C) marketable permits. D) public provision. Answer: C Topic: Government Policies Toward External Benefits Skill: Conceptual Status: Old AACSB: Analytical Skills 48 Copyright © 2014 Pearson Education, Inc.

26) One way that government can increase the production of goods that have external benefits is to A) tax the activity. B) subsidize the activity. C) use marketable permits. D) Both answers B and C are correct Answer: B Topic: Subsidies Skill: Conceptual Status: Old AACSB: Analytical Skills

27) Governments can use subsidies ________. A) as a means of increasing government spending B) when they want to increase taxes C) to achieve an efficient outcome if there are external costs D) to achieve an efficient outcome if there are external benefits Answer: D Topic: Subsidies Skill: Conceptual Status: Old AACSB: Analytical Skills

28) A government subsidy for a good A) is similar to a tax insofar as it decreases the production of the good being subsidized. B) increases production of the subsidized goods. C) punishes those who consume or produce the subsidized good. D) has no effect on the quantity of the good produced. Answer: B Topic: Subsidies Skill: Conceptual Status: Old AACSB: Analytical Skills

29) Consider a market in which there is an external benefit. A private subsidy paid to producers can be used to arrive at the efficient market equilibrium because the subsidy will A) increase the quantity produced. B) decrease the supply of the good. C) increase the price demanders pay. D) decrease demand. Answer: A Topic: Subsidies Skill: Conceptual Status: Old AACSB: Analytical Skills

30) If a good has an external benefit, efficiency can be achieved by A) leaving the market unregulated. B) monopolizing the market. C) offering a private subsidy on the good equal to the external benefit. D) imposing a tax on the good equal to the external benefit. Answer: C Topic: Subsidies Skill: Conceptual Status: Old AACSB: Analytical Skills

31) If a local fishing club spends time each year cleaning up local streams by removing trash thrown by motorists, efficiency would be improved if A) motorists were fined and fishing club activities were taxed. B) the fishing club's activities were subsidized. C) the fishing club was taxed. D) motorists were subsidized. Answer: B Topic: Subsidies Skill: Analytical Status: Old AACSB: Analytical Skills

32) Public universities, by charging tuition ________ the marginal cost of education, ________ the number of students. A) below; decrease B) below; increase C) above; decrease D) above; increase Answer: B Topic: Subsidies Skill: Analytical Status: Old AACSB: Analytical Skills

33) When external benefits exist, which of the following can produce the efficient amount of output? I. vouchers II. private subsidies III. taxes IV. marketable permits. A) I and II only B) I and III only C) II and IV only D) III and IV only Answer: A Topic: Subsidies and Vouchers Skill: Conceptual Status: Old AACSB: Analytical Skills

34) School vouchers can be used to arrive at the efficient market equilibrium because vouchers A) increase demand for schooling. B) increase supply of schooling. C) decrease the cost of schooling. D) decrease supply of schooling. Answer: A Topic: Vouchers Skill: Conceptual Status: Old AACSB: Analytical Skills

35) The outcome from a voucher scheme is efficient when the government makes the value of the voucher equal to ________. A) marginal external cost B) marginal external benefit C) external cost D) external benefit Answer: B Topic: Vouchers Skill: Conceptual Status: Old AACSB: Analytical Skills

36) Vouchers create the efficient outcome only if production is such that the marginal social cost A) exceeds the marginal private benefit. B) equals the marginal external benefit. C) equals the marginal social benefit. D) is decreased so it equals the marginal private cost. Answer: C Topic: Vouchers Skill: Analytical Status: Revised AACSB: Analytical Skills

37) Food stamps provided by the U.S. Department of Agriculture are an example of A) a positive externality. B) a private subsidy. C) vouchers. D) an external benefit. Answer: C Topic: Vouchers Skill: Conceptual Status: Old AACSB: Analytical Skills

38) A voucher can eliminate the deadweight loss and lead to an efficient outcome if the value of the voucher equals the ________ of the good. A) marginal external benefit B) marginal social benefit C) marginal private benefit D) marginal social cost Answer: A Topic: Vouchers Skill: Conceptual Status: Old AACSB: Analytical Skills

39) The HPV vaccine protects against human papillomavirus (HPV) that causes cancer. It protects both the person getting the vaccine and the sexual partners of that person. To encourage the efficient number of people to be vaccinated the government could A) give producers a subsidy equal to the private marginal benefit. B) give consumers a voucher equal to the marginal external benefit. C) impose a tax equal to the marginal social benefit. D) impose a tax equal to the marginal external benefit. Answer: B Topic: Government Policies Toward External Benefits Skill: Analytical Status: New AACSB: Analytical Skills

Marginal Quantity private benefit (thousands of (dollars) student-years) 24,000 0 20,000 20 16,000 40 12,000 60 8,000 80 4,000 100 0 120 40) The table above provides information about the marginal private benefit of education. The marginal private cost, which also equals the marginal social cost, of educating a student is $16,000 per year and does not change as more students are educated. There is an external benefit from education that is equal to $12,000 per student year and does not change as more students are educated. If the market for education is competitive and unregulated, the equilibrium quantity of education will be ________ and the tuition will be ________. A) 20,000 student-years; $20,000 B) 40,000 student-years; $16,000 C) 60,000 student-years; $12,000 D) 80,000 student-years; $8,000 Answer: B Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

41) The table above provides information about the marginal private benefit for education. The marginal private cost, which also equals the marginal social cost, of educating a student is $16,000 per year and does not change as more students are educated. There is an external benefit from education that is equal to $12,000 per student year and does not change as more students are educated. What is the efficient amount of education? A) 40,000 student-years B) 60,000 student-years C) 80,000 student-years D) 100,000 student-years Answer: D Topic: Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills

42) The table above provides information about the marginal private benefit for education. The marginal private cost, which also equals the marginal social cost, of educating a student is $16,000 per year and does not change as more students are educated. There is an external benefit from education that is equal to $12,000 per student year and does not change as more students are educated. If the government subsidizes education, how much should the subsidy be in order to attain the efficient level of enrollment? A) $4,000 B) $8,000 C) $12,000 D) $16,000 Answer: C Topic: Subsidies and External Benefits Skill: Analytical Status: Old AACSB: Analytical Skills

43) The table above provides information about the marginal private benefit for education. The marginal private cost, which also equals the marginal social cost, of educating a student is $16,000 per year and does not change as more students are educated. There is an external benefit from education that is equal to $12,000 per student year and does not change as more students are educated. If the government undertakes public provision of the efficient amount of education, how much will the government charge for tuition? A) $4,000 B) $8,000 C) $12,000 D) $16,000 Answer: A Topic: Below-Cost Provision Skill: Analytical Status: Old AACSB: Analytical Skills

Marginal private cost and marginal Quantity (millions Marginal private Marginal social social cost of students per benefit (thousands benefit (thousands (thousands of year) of dollars per of dollars per dollars per student student per year) student per year) per year) 4 20 28 8 8 18 25 10 12 16 22 12 16 14 19 14 20 12 16 16 24 10 13 18 44) The table above shows the marginal costs and marginal benefits of college education. If the market for college education is perfectly competitive and unregulated, how many students are enrolled in college? A) 12 million B) 20 million C) 16 million D) 24 million Answer: C Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

45) The table above shows the marginal costs and marginal benefits of college education. If the market for college education is perfectly competitive and unregulated, what is the price of college education? A) $8,000 per year B) $12,000 per year C) $14,000 per year D) $16,000 per year Answer: C Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

46) The table above shows the marginal costs and marginal benefits of college education. If 8 million students are enrolled, the marginal external benefit is A) zero. B) $4,000. C) $5,000. D) $7,000. Answer: D Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills 55 Copyright © 2014 Pearson Education, Inc.

47) The table above shows the marginal costs and marginal benefits of college education. If 20 million students are enrolled, the marginal external benefit is A) zero. B) $4,000. C) $5,000. D) $7,000. Answer: B Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

48) The table above shows the marginal costs and marginal benefits of college education. If the market for college education is perfectly competitive and unregulated, at the equilibrium quantity, the marginal external benefit is A) zero. B) $5,000. C) $4,000. D) $8,000. Answer: B Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

49) The table above shows the marginal costs and marginal benefits of college education. If the market for college education is perfectly competitive and unregulated, at the equilibrium quantity, the marginal social benefit is A) zero. B) $14,000. C) $19,000. D) $16,000. Answer: C Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

50) The table above shows the marginal costs and marginal benefits of college education. If the market for college education is perfectly competitive and unregulated, at the equilibrium quantity, the marginal private benefit is A) zero. B) $14,000. C) $19,000. D) $16,000. Answer: B Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills 56 Copyright © 2014 Pearson Education, Inc.

51) The table above shows the marginal costs and marginal benefits of college education. If the market for college education is perfectly competitive and unregulated, at the equilibrium quantity, the marginal private cost is A) zero. B) $14,000. C) $19,000. D) $16,000. Answer: B Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

52) The table above shows the marginal costs and marginal benefits of college education. The efficient amount of enrollment is A) 12 million. B) 20 million. C) 16 million. D) 24 million. Answer: B Topic: Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills

53) The table above shows the marginal costs and marginal benefits of college education. If the market for college education is perfectly competitive and unregulated, the amount of enrollment is A) efficient. B) inefficient because marginal social cost exceeds marginal social benefit. C) inefficient because marginal social benefit exceeds marginal social cost. D) inefficient because the quantity of education demanded exceeds the quantity of education supplied. Answer: C Topic: Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills

54) The table above shows the marginal costs and marginal benefits of college education. The marginal private cost of college education at the efficient quantity of enrollment is A) $8,000 per year. B) $12,000 per year. C) $14,000 per year. D) $16,000 per year. Answer: D Topic: Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills

55) The table above shows the marginal costs and marginal benefits of college education. The marginal private benefit of college education at the efficient amount of enrollment is A) $20,000 per year. B) $16,000 per year. C) $12,000 per year. D) $14,000 per year. Answer: C Topic: Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills

56) The table above shows the marginal costs and marginal benefits of college education. The marginal social benefit of college education at the efficient amount of enrollment is A) $20,000 per year. B) $16,000 per year. C) $12,000 per year. D) $14,000 per year. Answer: B Topic: Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills

57) The table above shows the marginal costs and marginal benefits of college education. With public provision of the efficient level of college education, tuition is A) $10,000 per year. B) $12,000 per year. C) $14,000 per year. D) $16,000 per year. Answer: B Topic: Public Provision Skill: Analytical Status: Old AACSB: Analytical Skills

58) The table above shows the marginal costs and marginal benefits of college education. With public provision of the efficient amount of college education, the cost paid by the taxpayers is A) zero. B) $8,000 per student. C) $4,000 per student. D) $12,000 per student. Answer: C Topic: Public Provision Skill: Analytical Status: Old AACSB: Analytical Skills

Quantity (millions of vaccinations) 1 2 3 4 5 6

Marginal Marginal private benefit external benefit (dollars) (dollars) 12 6 11 5 10 4 9 3 8 2 7 1

59) Vaccinations provide both private benefits and external benefits. The table above gives information on the marginal private benefit and marginal external benefit associated with vaccination against varicella (chicken pox).The marginal social benefit of the 4 millionth varicella vaccination is A) $6. B) $12. C) $48. D) $2. Answer: B Topic: Marginal Social Benefit Skill: Analytical Status: Old AACSB: Analytical Skills

60) Vaccinations provide both private benefits and external benefits. The table above gives information on the marginal private benefit and marginal external benefit associated with vaccination against varicella (chicken pox). If the marginal cost of a varicella vaccination is $10, then the unregulated competitive equilibrium will have A) 2 million vaccinations. B) 3 million vaccinations. C) 4 million vaccinations. D) 5 million vaccinations. Answer: B Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

61) Vaccinations provide both private benefits and external benefits. The table above gives information on the marginal private benefit and marginal external benefit associated with vaccination against varicella (chicken pox). If the marginal cost of a varicella vaccination is $10, then the efficient quantity of vaccinations is A) 3 million vaccinations. B) 4 million vaccinations. C) 5 million vaccinations. D) 6 million vaccinations. Answer: C Topic: Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills

62) Vaccinations provide both private benefits and external benefits. The table above gives information on the marginal private benefit and marginal external benefit associated with vaccination against varicella (chicken pox). If the marginal cost of a varicella vaccination is $10, to achieve an efficient quantity of vaccinations, the government could provide a subsidy of A) $4 per vaccination. B) $3 per vaccination. C) $2 per vaccination D) $1 per vaccination. Answer: C Topic: Subsidies and External Benefits Skill: Analytical Status: Old AACSB: Analytical Skills

Marginal private cost = Marginal Marginal social marginal social Quantity (units) private benefit benefit cost (dollars per (dollars per (dollars per unit) unit) unit) 1,000 70 90 30 2,000 60 80 40 3,000 50 70 50 4,000 40 60 60 5,000 30 50 70 6,000 20 40 80 63) In the above table, if the market is perfectly competitive and unregulated, the equilibrium output will be A) 1,000 units. B) 2,000 units. C) 3,000 units. D) 4,000 units. Answer: C Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

64) In the above table, if the market is perfectly competitive and unregulated, the equilibrium price will be A) $50 per unit. B) $60 per unit. C) $70 per unit. D) $110 per unit. Answer: A Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

65) In the above table, if the market is perfectly competitive and unregulated, at the equilibrium output level, A) marginal private cost equals the marginal private benefit. B) marginal private cost is less than the marginal private benefit. C) marginal social cost equals the marginal private benefit. D) marginal social cost is greater than the marginal private benefit. Answer: A Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills 61 Copyright © 2014 Pearson Education, Inc.

66) In the above table, if the market is perfectly competitive and unregulated, at the equilibrium output level, A) resource allocation is efficient. B) resource allocation is inefficient. C) too many units of output are produced. D) consumers pay too low a price. Answer: B Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

67) In the above table, if the market is perfectly competitive and unregulated, at the equilibrium level of output, the marginal external benefit per unit is A) zero. B) $20 per unit. C) $50 per unit. D) $70 per unit. Answer: B Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

68) In the above table, if the market is perfectly competitive and unregulated, at the equilibrium level of output, the marginal social benefit per unit is A) zero. B) $20 per unit. C) $50 per unit. D) $70 per unit. Answer: D Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

69) Based on the data in the above table, the product exhibits A) external benefits. B) external costs. C) no externalities. D) increasing returns. Answer: A Topic: External Benefits Skill: Analytical Status: Old AACSB: Analytical Skills

70) In the above table, the efficient level of output can be achieved through a per unit subsidy of A) zero. B) $20. C) $60. D) $120. Answer: B Topic: Subsidies Skill: Analytical Status: Old AACSB: Analytical Skills

71) In the above table, the efficient level of output can be achieved through a per unit A) subsidy of $20. B) tax of $20. C) subsidy of $60. D) tax of $60. Answer: A Topic: Subsidies Skill: Analytical Status: Old AACSB: Analytical Skills

72) In the above table, the efficient level of output is A) 2,000 units. B) 3,000 units. C) 4,000 units. D) 5,000 units. Answer: C Topic: Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills

Quantity (number of students) 1,000 2,000 3,000 4,000 5,000

Marginal Marginal social private benefit benefit (dollars per (dollars per student) student) 1,000 3,400 800 3,200 600 3,000 400 2,800 200 2,600

Marginal private cost (dollars per student) 1,000 1,600 2,200 2,800 3,400

73) The table above shows the marginal private benefit, marginal social benefit, and marginal cost of education at the College of Epsilon. What is the equilibrium number of students at the college if the market is unregulated? A) 1,000 B) 3,000 C) 4,000 D) 5,000 Answer: A Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

74) The table above shows the marginal private benefit, marginal social benefit, and marginal cost of education at the College of Epsilon. What is the efficient number of students at the college? A) 1,000 B) 3,000 C) 4,000 D) 5,000 Answer: C Topic: Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills

75) The table above shows the marginal private benefit, marginal social benefit, and marginal cost of education at the College of Epsilon. What is the tuition that will make the number of students equal to the efficient number? A) $400 B) $800 C) $2,800 D) $3,200 Answer: A Topic: Tuition Skill: Analytical Status: Old AACSB: Analytical Skills

76) The table above shows the marginal private benefit, marginal social benefit, and marginal cost of education at the College of Epsilon. What subsidy per student will the college require to take in the efficient number of students? A) $2,400 B) $400 C) $2,800 D) $3,400 Answer: A Topic: Subsidies Skill: Analytical Status: Old AACSB: Analytical Skills

77) In the above figure, the unregulated, competitive market equilibrium is tuition of ________ and the equilibrium quantity is ________ students in college. A) $18,000; 30 million B) $12,000; 40 million C) $6,000; 50 million D) $18,000; 50 million Answer: A Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

78) In the above figure, what amount of subsidy per student would government have to provide to colleges if its desired objective was to achieve an efficient level of education, 50 million students per year? A) $6,000 per year B) $12,000 per year C) $18,000 per year D) $27,000 per year Answer: C Topic: Subsidies Skill: Analytical Status: Old AACSB: Analytical Skills

79) In the above figure, if the market is competitive and unregulated, output will be A) zero. B) 50 units per week. C) 150 units per week. D) 250 units per week. Answer: C Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

80) In the above figure, if the market is competitive and unregulated, the price will be A) $20 per unit. B) $15 per unit. C) $10 per unit. D) $5 per unit. Answer: C Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

81) In the above figure, if the market is competitive and unregulated, then at the equilibrium amount of output the marginal social benefit is A) less than the marginal cost to producers. B) greater than the marginal social cost. C) equal to the marginal cost to producers. D) equal to the marginal private benefit from consumption. Answer: B Topic: Marginal Social Benefit Skill: Analytical Status: Old AACSB: Analytical Skills

82) In the above figure, if the market is competitive and unregulated, A) more than the efficient amount of output will be produced. B) less than the efficient amount of output will be produced. C) the efficient amount of output will be produced. D) the distribution of income will be fair. Answer: B Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

83) In the above figure, in order to promote an efficient allocation of resources, the government could grant a subsidy equal to A) zero. B) $5 per unit. C) $10 per unit. D) $15 per unit. Answer: C Topic: Subsidies Skill: Analytical Status: Old AACSB: Analytical Skills

84) In the above figure, if a subsidy is granted that generates an efficient allocation of resources, then the output level will be A) zero. B) 50 units per week. C) 150 units per week. D) 250 units per week. Answer: D Topic: Subsidies Skill: Analytical Status: Old AACSB: Analytical Skills

85) In the above figure, if a subsidy is granted to producers that generates an efficient level of production, then the deadweight loss will be A) zero. B) $500 C) $1,000. D) $2,000. Answer: A Topic: Subsidies Skill: Analytical Status: Old AACSB: Analytical Skills

86) In the above figure, if a subsidy is granted to producers that generates an efficient allocation of resources, then consumers will pay a price of A) $20 per unit. B) $15 per unit. C) $10 per unit. D) $5 per unit. Answer: D Topic: Subsidies Skill: Analytical Status: Old AACSB: Analytical Skills

87) In the above figure, if a subsidy is granted to producers that generates an efficient allocation of resources, then producers will receive a total amount (price plus subsidy) equal to A) $20 per unit. B) $15 per unit. C) $10 per unit. D) $5 per unit. Answer: B Topic: Subsidies Skill: Analytical Status: Old AACSB: Analytical Skills

88) The above figure shows the marginal private benefit and marginal social cost of a college education. If society's external benefits from college graduates is $10,000 each, then the A) marginal social cost curve lies $10,000 to the left of the private marginal benefit curve. B) marginal social cost curve lies $10,000 to the right of the private marginal benefit curve. C) marginal social benefit curve lies $10,000 below the private marginal benefit curve. D) marginal social benefit curve lies $10,000 above the private marginal benefit curve. Answer: D Topic: Marginal Social Benefit Skill: Analytical Status: Old AACSB: Analytical Skills

89) The above figure shows the marginal private benefit and marginal social cost of a college education. If society's external benefits from college graduates is $10,000 each, then without government intervention, A) no students will go to college. B) less than 10 million students will go to college. C) 10 million students will go to college. D) more than 10 million students will go to college. Answer: C Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

90) The above figure shows the marginal private benefit and marginal social cost of a college education. If society's external benefits from college graduates is $10,000 each, then the private market outcome is inefficient because A) no students will go to college. B) society places less value on educating the next student than it will cost society to educate that student. C) society places greater value on educating the next student than it will cost society to educate that student. D) the marginal cost will shift upward. Answer: C Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

91) The above figure shows the marginal private benefit and marginal social cost of a college education. If society's external benefits from college graduates is $10,000 each, then A) a subsidy of $10,000 per student paid to colleges will achieve efficiency. B) a tax of $10,000 per student imposed on the colleges will achieve efficiency. C) 10 million students per year is the efficient number students. D) None of the above answers are correct. Answer: A Topic: Subsidies Skill: Analytical Status: Old AACSB: Analytical Skills

92) The above figure shows the marginal private benefit and marginal social cost of a college education. A $10,000 subsidy to colleges results in a college charging tuition of A) $0. B) $10,000. C) $20,000. D) $30,000. Answer: B Topic: Subsidies Skill: Analytical Status: Old AACSB: Analytical Skills

93) The above figure shows the marginal private benefit and marginal social cost of a college education. If students receive a $10,000 voucher, A) no students will go to college. B) less than 10 million students will go to college. C) 10 million students will go to college. D) more than 10 million students will go to college. Answer: D Topic: Vouchers Skill: Analytical Status: Old AACSB: Analytical Skills

94) In the above figure, if no government intervention occurs, at the unregulated competitive market equilibrium, there is an A) external marginal benefit of $2. B) external marginal cost of $2. C) external marginal benefit of $1. D) external marginal cost of $3. Answer: A Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

95) In the above figure, the efficient amount of output is ________ units. A) 25 B) 50 C) 75 D) 100 Answer: C Topic: Subsidies and External Benefits Skill: Analytical Status: Old AACSB: Analytical Skills

96) In the above figure, to achieve efficiency, the government should A) impose a tax of $2 per unit. B) impose a tax of $3 per unit. C) offer a subsidy of $2 per unit. D) offer a subsidy of $3 per unit. Answer: C Topic: Subsidies and External Benefits Skill: Analytical Status: Old AACSB: Analytical Skills

97) The marginal cost of educating a student is $30,000, and this cost is independent of the number of students. The figure above shows the marginal private benefit that a student receives from education. If schools are competitive, how many students are enrolled? A) zero B) 20,000 C) 50,000 D) It depends on the demand. Answer: B Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

98) The marginal cost of educating a student is $30,000, and this cost is independent of the number of students. The figure above shows the marginal private benefit that a student receives from education. An independent government agency determines that the efficient number of students is 40,000. What is the marginal social benefit from education? A) It depends on the demand. B) $20,000 C) $10,000 D) $40,000 Answer: B Topic: Marginal External Benefit Skill: Analytical Status: Old AACSB: Analytical Skills

99) The marginal cost of educating a student is $30,000, and this cost is independent of the number of students. The figure above shows the marginal private benefit that a student receives from education. An independent government agency determines that the efficient number of students is 40,000. What subsidy per student must be given to colleges to make the efficient number of students undertake education? A) It depends on the demand. B) $20,000 C) $30,000 D) $10,000 Answer: B Topic: Subsidies Skill: Analytical Status: Old AACSB: Analytical Skills

100) The above figure shows the marginal benefits and marginal costs of a college education. What is the amount of the external benefit in the figure? A) $0 B) $5,000 C) $10,000 D) $15,000 Answer: B Topic: External Benefits Skill: Analytical Status: Old AACSB: Analytical Skills

101) The above figure shows the marginal benefits and marginal costs of a college education. If no subsidies are paid, colleges charge tuition of A) $0. B) $5,000. C) $10,000. D) $15,000. Answer: C Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

102) The above figure shows the marginal benefits and marginal costs of a college education. If no subsidies are paid, enrollment equals A) 0. B) 10 million. C) 15 million. D) 25 million. Answer: B Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

103) The above figure shows the marginal benefits and marginal costs of a college education. The efficient number of students is A) 0. B) 10 million. C) 15 million. D) 25 million. Answer: C Topic: Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills

104) The above figure shows the marginal benefits and marginal costs of a college education. If a subsidy of $5,000 is paid to the colleges, then colleges charge tuition of A) $0. B) $5,000. C) $10,000. D) $15,000. Answer: B Topic: Subsidies Skill: Analytical Status: Old AACSB: Analytical Skills

105) The above figure shows the marginal benefits and marginal costs of a college education. If colleges receive a $5,000 subsidy, then enrollment equals A) 0. B) 10 million. C) 15 million. D) 25 million. Answer: C Topic: Subsidies Skill: Analytical Status: Old AACSB: Analytical Skills

106) The above figure shows the marginal benefits and marginal costs of a college education. If a voucher for $5,000 is given to the students, then colleges charge tuition of A) $0. B) $5,000. C) $10,000. D) $15,000. Answer: C Topic: Vouchers Skill: Analytical Status: Old AACSB: Analytical Skills

107) From the figure above showing the market for vaccinations, we can infer that there is an A) external cost associated with the production of vaccinations. B) external benefit associated with the production of vaccinations. C) external cost associated with the consumption of vaccinations. D) external benefit associated with the consumption of vaccinations. Answer: D Topic: External Benefits Skill: Analytical Status: Old AACSB: Analytical Skills

108) In the above figure, the competitive unregulated equilibrium is producing and consuming ________ vaccinations per year at a price of ________. A) 30 thousand; $40 B) 30 thousand; $30 C) 30 thousand; $20 D) 50 thousand; $30 Answer: C Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

109) If the government regulates the market in the above figure in a way to achieve efficiency, then ________ vaccinations will be produced and consumed. A) 0 B) 30 thousand C) 50 thousand D) None of the above answers is correct. Answer: C Topic: Subsidies and External Benefits Skill: Analytical Status: Old AACSB: Analytical Skills

110) In the above figure, to achieve efficiency the government could offer a subsidy to producers of ________ per vaccination so that consumers would pay ________ per vaccination. A) $20; $20 B) $30; $10 C) $20; $10 D) $30; $40 Answer: C Topic: Subsidies and External Benefits Skill: Analytical Status: Old AACSB: Analytical Skills

The figure shows the supply curve (S) and the demand curve (D) for college education. The external benefit from college education is $6,000 per student per year and is constant. 111) In the figure above, with no government involvement and if the colleges are competitive, how many students are enrolled? A) 8 million per year B) 12 million per year C) 10 million per year D) 4 million per year Answer: A Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

112) In the figure above, with no government involvement and if the colleges are competitive, what is the tuition? A) $10,000 per year B) $14,000 per year C) $8,000 per year D) $16,000 per year Answer: A Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

113) In the figure above, with no government involvement and if the colleges are competitive, what is the deadweight loss? A) $12 billion per year B) $6 billion per year C) $4 billion per year D) Zero Answer: A Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

114) In the figure above, if the government provides the efficient amount of education, how many students will be accepted? A) 8 million per year B) 12 million per year C) 10 million per year D) 16 million per year Answer: B Topic: Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills

115) In the figure above, if the government provides the efficient amount of education, what is the tuition? A) $10,000 per year B) $14,000 per year C) $8,000 per year D) $6,000 per year Answer: C Topic: Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills

116) In the figure above, if the government provides a subsidy to colleges of $6,000 per student per year, how many students will be accepted? A) 8 million per year B) 12 million per year C) 10 million per year D) 16 million per year Answer: B Topic: Subsidies Skill: Analytical Status: Old AACSB: Analytical Skills

117) In the figure above, if the government provides a subsidy to colleges of $6,000 per student per year, what is the tuition? A) $10,000 per year B) $12,000 per year C) $8,000 per year D) $6,000 per year Answer: C Topic: Subsidies Skill: Analytical Status: Old AACSB: Analytical Skills

118) In the figure above, if the government gives a voucher equal to $3,000 per year to each college student, how many students will be accepted? A) 8 million per year B) 12 million per year C) 10 million per year D) 14 million per year Answer: C Topic: Vouchers Skill: Analytical Status: Old AACSB: Analytical Skills

119) The figure above shows the marginal social costs (MSC), marginal private benefits (MB), and marginal social benefits (MSB) of college education in Inland. If Inland's government does not intervene, and the colleges are competitive, ________ million students are enrolled, and the tuition is ________ per year. A) 0.8; $7,000 B) 0.6; $6,000 C) 0.6; $9,000 D) 0.8; $5,000 Answer: B Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

120) The efficient level of college enrollment in Inland is A) 0.6 million students per year. B) 0.7 million students per year. C) 0.8 million students per year. D) 0.5 million students per year. Answer: C Topic: Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills

121) The figure above shows the marginal social costs (MSC), marginal private benefits (MB), and marginal social benefits (MSB) of college education in Inland. If Inland's government does not intervene, and the colleges are competitive, the deadweight loss is A) zero. B) $100 million per year. C) $200 million per year. D) $300 million per year. Answer: D Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

122) The figure above shows the marginal social costs (MSC), marginal private benefits (MB), and marginal social benefits (MSB) of college education in Inland. If Inland's government wants to provide the efficient level of education, it must set tuition at ________ per year to ensure that ________ million students are enrolled. A) $5,000; 0.8 B) $6,000; 0.6 C) $7,000; 0.8 D) $5,000; 0.6 Answer: A Topic: Subsidies and External Benefits Skill: Analytical Status: Old AACSB: Analytical Skills

123) The figure above shows the marginal social costs (MSC), marginal private benefits (MB), and marginal social benefits (MSB) of college education in Inland. Suppose Inland's government is considering subsidizing private colleges to ensure the efficient level of enrollment. What should be the amount of the subsidy (if any)? A) The government should not subsidize private colleges. B) $2,000 per student per year C) $1,000 per student per year D) $4,000 per student per year Answer: B Topic: Subsidies and External Benefits Skill: Analytical Status: Old AACSB: Analytical Skills

124) The figure above shows the marginal social costs (MSC), marginal private benefits (MB), and marginal social benefits (MSB) of college education in Inland. If Inland's government provides a voucher per student equal to the marginal external benefit of college education, then ________ million students will attend college, and colleges will collect ________ per student from the voucher. A) 0.6; $3,000 B) 0.8; $5,000 C) 0.8; $2,000 D) 0.6; $1,000 Answer: C Topic: Vouchers Skill: Analytical Status: Old AACSB: Analytical Skills

125) Suppose that recycling rubber for sneakers creates an external benefit of $2.00 per ton of rubber. There are no external costs. The efficient amount of rubber will be recycled when the government creates a A) subsidy of more than $2.00 per ton of rubber. B) subsidy of $2.00 per ton of rubber. C) tax of more than $2.00 per ton of rubber. D) tax of $2.00 per ton of rubber. Answer: B Topic: Study Guide Question, Subsidies Skill: Analytical Status: Old AACSB: Analytical Skills

126) Which of the following is a possible government solution to the problem posed by a good with an external benefit? A) Give a voucher to buyers of the good. B) Tax the consumption of the good. C) Tax the production of the good. D) All of the above are possible solutions. Answer: A Topic: Study Guide Question, Vouchers Skill: Analytical Status: Old AACSB: Analytical Skills

4 News Based Questions 1) Which of the following would most likely be a public good? A) Sirius Satellite Radio is accessed through a subscription B) iTunes sells songs through their website C) a Mariah Carey CD D) Michigan Radio is the state's most listened-to public radio service Answer: D Topic: Public Goods Skill: Conceptual Status: Old AACSB: Reflective Thinking

2) Michigan Radio is the state's most listened-to public radio service, attracting approximately 400,000 listeners each week. How would Michigan public radio best be classified? A) as a private good B) as a common resource C) as a natural monopoly D) as a public good Answer: D Topic: Public Goods Skill: Conceptual Status: Old AACSB: Reflective Thinking

3) Which of the following would most likely be a private good? A) a Mariah Carey CD B) Sirius Satellite Radio is accessed through a subscription C) Michigan Radio is the state's most listened-to public radio service D) iTunes sells songs through their website Answer: A Topic: Private Goods Skill: Conceptual Status: Old AACSB: Reflective Thinking

4) Rock climbing areas are often on public lands. These areas, which are often crowded, are classified as A) rival and excludable. B) non-rival and excludable. C) rival and non-excludable. D) non-rival and non-excludable. Answer: C Topic: Common Resource Skill: Conceptual Status: Old AACSB: Reflective Thinking

5) Every year as the clock nears midnight on December 31st, the eyes of the world turn to Times Square in New York City to watch the famous ball drop at midnight. The event is open to everyone, but it is advised you arrive early to participate because the square quickly becomes crowded with no space left for latecomers. This celebration can be classified as A) rival and excludable. B) non-rival and non-excludable. C) non-rival and excludable. D) rival and non-excludable. Answer: D Topic: Common Resource Skill: Conceptual Status: Old AACSB: Reflective Thinking

6) Every year as the clock nears midnight on December 31st, the eyes of the world turn to Times Square in New York City to watch the famous ball drop at midnight. The event is open to everyone, but it is advised you arrive early to be able to participate because the square quickly becomes crowded with no space left for latecomers. This celebration is most like a A) common resource. B) public good. C) private good. D) natural monopoly. Answer: A Topic: Common Resource Skill: Conceptual Status: Old AACSB: Reflective Thinking

7) Which of the following would most likely be provided by a natural monopoly? A) Michigan Radio is the state's most listened-to public radio service B) Sirius Satellite Radio is accessed through a subscription C) X96 is an alternative radio station out of Salt Lake City D) a Mariah Carey CD Answer: B Topic: Natural Monopoly Skill: Conceptual Status: Old AACSB: Reflective Thinking

8) Michigan Radio is the state's most listened-to public radio service, attracting approximately 400,000 listeners each week and is funded through listener donations. Listeners can access Sirius satellite radio through a subscription to the service. Michigan Radio is a ________ and Sirius satellite radio is a ________. A) common resource; natural monopoly B) public good; natural monopoly C) natural monopoly; private good D) public good; common resource Answer: B Topic: Public Goods Skill: Conceptual Status: Old AACSB: Reflective Thinking

9) Michigan Radio is the state's most listened-to public radio service, attracting approximately 400,000 listeners each week. The on-air fundraiser, which ran during October 2010, generated over 7400 pledges from donors. The money raised helps pay for programming costs at the station, with membership support being the single largest source of income. The 392,600 listeners who did not call and donate can be classified as what? A) free riders B) marginal beneficiaries C) rival consumers D) rationally ignorant Answer: A Topic: Free-Rider Problem Skill: Conceptual Status: Old AACSB: Reflective Thinking

10) Michigan Radio is the state's most listened-to public radio service, attracting approximately 400,000 listeners each week and is funded through listener donations. If Michigan Radio suffers from the freerider problem then the market would provide an ________ quantity of the public good. A) efficiently small B) efficiently large C) inefficiently small D) inefficiently large Answer: C Topic: Free-Rider Problem Skill: Conceptual Status: Old AACSB: Reflective Thinking

11) Because Jess didn't have the time to understand the issue, she did not vote on the amendment about clean energy. Jess's behavior demonstrates the economic principle of ________. A) diminishing marginal utility B) voting preferences C) rational ignorance D) minimum differentiation Answer: C Topic: Rational Ignorance Skill: Conceptual Status: Old AACSB: Reflective Thinking

12) To ensure that all families are protected from influenza, Berkeley's Public Health division is giving free flu vaccines at a Free Flu Clinic on October 28, 2010. What is NOT true about the externality that exists in this example? A) Marginal social cost for flu vaccines will decrease when there is a subsidy. B) Marginal social benefit for flu vaccines is greater than marginal private benefit for flu vaccines. C) To increase the quantity consumed of flu vaccines, there will be public provision of the flu vaccines. D) Being vaccinated against the flu creates an external benefit. Answer: A Topic: Government Policies Toward External Benefits Skill: Conceptual Status: Old AACSB: Reflective Thinking

13) To ensure that all families are protected from influenza, Berkeley's Public Health division is giving free flu vaccines at a Free Flu Clinic on October 28, 2010. Dr. Berreman states,"By protecting ourselves from flu, we also protect our families and neighbors." What does Berreman mean? A) The production of flu vaccines creates an external benefit. B) When you have the flu, you are an external cost. C) When the government provides free flu vaccines, they minimize an external cost. D) The consumption of flu vaccines creates an external benefit. Answer: D Topic: External Benefits Skill: Conceptual Status: Old AACSB: Reflective Thinking

14) In 2010, the Center for Disease Control has recommended that every child between the ages of 6 months and 18 years be vaccinated, except those with a serious egg allergy. Dr. Berreman states,"By protecting ourselves from flu, we also protect our families and neighbors." Which is a solution that could be used to achieve a more efficient allocation of resources in the presence of this externality? A) The government could tax the producers of the flu vaccine. B) The government could tax the consumers of the flu vaccine. C) The government could offer a free flu vaccine clinic. D) The government could increase the price of flu vaccines. Answer: C Topic: Government Policies Toward External Benefits Skill: Conceptual Status: Old AACSB: Reflective Thinking

5 Essay Questions 1) What does it mean for a good to be "nonexcludable"? Are private goods nonexcludable? Are public goods nonexcludable? Are common resources nonexcludable? Answer: A good is nonexcludable if everyone benefits from it regardless of whether they pay for it. Private goods are excludable, not nonexcludable. Public goods are nonexcludable. Common resources are nonexcludable. Topic: Nonexcludable Skill: Recognition Status: Old AACSB: Reflective Thinking

2) What is a nonrival good? Give an example. Answer: A good is nonrival if its use by one person does not decrease the quantity available for someone else. An example of a nonrival good is the Internet. Topic: Nonrival Skill: Recognition Status: Old AACSB: Reflective Thinking

3) When describing goods and services, what is meant by the terms "rival" and "nonrival?" Are private goods rival or nonrival? Are public goods rival or nonrival? Are common resources rival or nonrival? Answer: A good is rival if its use by one person decreases the quantity available for other people. A good is nonrival if its use by one person does not decrease the quantity available for other people. Private goods are rival. Public goods are nonrival. Common resources are rival. Topic: Nonrival Skill: Recognition Status: Old AACSB: Reflective Thinking

4) Some years ago The Wall Street Journal reported that the government of Thailand "plans to launch a chain of more than 3,000 Thai restaurants world-wide over the next five years, with the largest number, more than 1,000, slated for the United States." The Thai government will have a 30 percent minority stake in the restaurants and the rest will be given to Thai owners. The country's deputy commerce minister explains that the government will play an active role in drawing up menus, making sure that genuine Thai food is served and ensuring that 70 percent of supplies for the restaurants are imported from Thailand. Because the Thai government will be part owner of these restaurants, are these restaurants public goods? Answer: Although the government of Thailand has a minority stake in these restaurants, these restaurants are both rival and excludable. Hence these restaurants are like all restaurants, specifically, they are private goods. In defining a public good, the source of financing is irrelevant. To be a public good, the good must be nonrival and nonexcludable and a restaurant is neither. Topic: Public Goods Skill: Conceptual Status: Old AACSB: Communication

5) Is a sailboat purchased in Victoria, British Columbia, a private good or a public good? Answer: The sailboat is a private good. The sailboat has none of the characteristics of a public good. First, people can easily be excluded from using the boat. Basically, the only people allowed on the boat are the people the owner allows on the boat. Second, the owner's use of the boat prevents other people from simultaneously using the boat. That is, the owner's consumption of the boat decreases the quantity available for other consumers. Topic: Public Goods Skill: Conceptual Status: Old AACSB: Communication

6) What are the differences between public goods and private goods? Answer: Public goods are • nonrival, which means that consumption by one person doesn't decrease the quantity available for others people, and • nonexcludable, so that a good is nonexcludable if everyone benefits from it regardless of whether they pay for it. In contrast, private goods are • rival, so that consumption by one person decreases the quantity available for other people and • excludable, which means that only the people who pay for the good are able to enjoy its benefits. Topic: Public Goods Skill: Conceptual Status: Old AACSB: Communication

7) You are studying with a friend and your friend says, "Private goods are excludable and nonrival, while public goods are nonexcludable and rival." Do you agree? Answer: No, private goods are excludable and rival, while public goods are nonexcludable and nonrival. Contrary to what your friend asserted, it is common resources rather than public goods that are nonexcludable and rival. Topic: Public Goods Skill: Conceptual Status: Old AACSB: Reflective Thinking

8) Some resources are private and others are common. Define a common resource, explain the definition, and provide an example of a private resource and a common resource. Answer: A common resource is rival and nonexcludable. Because the resource is rival, if one person uses some of the resource, the person decreases the quantity available for other people to use. And because the resource is nonexcludable, it is not possible to prevent someone from using the resource. An example of a private resource is a gold mine: This resource is rival but is excludable. It is rival because one persons' use of the gold decreases the quantity available for other people. And it is excludable because the owner of the gold mine can keep anyone out of the mine that he or she wants to keep out of the mine. An example of a common resource is fish in the ocean. This resource is rival and nonexcludable. It is rival because one person's catch of a fish decreases the catch of other people. And it is nonexcludable because a fisherman cannot keep anyone from fishing in the river, lake, or ocean. Topic: Common Resource Skill: Recognition Status: Old AACSB: Communication

9) "The Internet is nonrival, which means it's a public good." Do you agree or disagree? Explain. Answer: The statement is incorrect. A public good is both nonrival and nonexcludable. Although the Internet is nonrival, it is excludable, which means that the Internet is a natural monopoly, rather than a public good. Topic: Natural Monopoly Skill: Conceptual Status: Old AACSB: Reflective Thinking

10) What is the free-rider problem? What results from the free-rider problem? What is a solution to the free-rider problem? Answer: The free-rider problem occurs when people enjoy the benefits from a good or service without paying for it. The free-rider problem occurs with public goods because no one can be excluded from using them without paying for them. As a result, the free-rider problem is that the private market produces too little of these goods. To produce the efficient quantity, the government can intervene by taxing people and using those funds to pay for the public good. Topic: The Free-Rider Problem Skill: Recognition Status: Old AACSB: Communication

11) "To find the economy's marginal social benefit curve for a public good, we sum the individual marginal benefit curves horizontally." True or false? Explain. Answer: The statement is false. To find the economy's marginal social benefit curve of a public good, we sum the individual marginal benefit curves vertically because we need to obtain the sum of what everyone together is willing to pay for each unit of a public good. Topic: Benefit of a Public Good Skill: Conceptual Status: Old AACSB: Analytical Skills

12) Why is society's marginal social benefit curve for a public good found by vertically summing individual marginal benefit curves and not by horizontal summation as is the case for private goods? Answer: In the case of a private good, producers must supply one different item to all individuals who demand one; that is, if 10,000 pizzas are demanded, 10,000 must be produced. Horizontal summation tells how much in total is demanded at a certain price. Because public goods are nonrival, producers need only supply one unit in total to all individuals who demand one. Vertical summation tells how much society is willing to pay for each unit produced. Topic: Benefit of a Public Good Skill: Conceptual Status: Old AACSB: Analytical Skills

13) "The principle of increasing marginal cost does not apply to public goods." Is this statement correct or not? Answer: The statement is false. For both public goods and private goods, the marginal cost increases as more of the good is produced. Topic: Cost of a Public Good Skill: Conceptual Status: Old AACSB: Reflective Thinking

14) Why isn't national defense provided by free markets? Answer: National defense is a public good. This fact means that it is hard to exclude anyone from consuming the benefits of national defense. If left to the free market, it would be very difficult for private companies to charge people for protection. People would be unwilling to pay for the service because they can get it without paying. The free-rider problem would make the ability to earn a profit a difficult or impossible prospect and hence little or no defense would be provided. Topic: Private Provision of a Public Good Skill: Conceptual Status: Old AACSB: Communication

15) Protection of rivers in Idaho is a public good. If the marginal social cost of protecting rivers in Idaho exceeds the marginal social benefit of river protection, is there more than, less than, or the efficient amount of river protection taking place? Answer: If the marginal social cost exceeds the marginal social benefit, there is more than the efficient amount of protection taking place. The efficient amount is the quantity such that the marginal social benefit equals the marginal social cost. Any other amount creates a deadweight loss. Topic: Efficient Quantity of a Public Good Skill: Conceptual Status: Old AACSB: Communication

16) How is the efficient quantity of public goods determined? Answer: The efficient quantity of a public good is determined in the same way as the efficient quantity of any good: by comparing marginal social cost and marginal social benefit, and producing where one equals the other. The marginal social cost of a public good is calculated similarly as the marginal social cost for a private good. It is based on the cost of producing one more unit of the good. The marginal social benefit, however, is calculated differently for a public good than for a private good. For a public good, the economy's marginal social benefit is determined by summing the individual marginal benefits at each quantity of the public good. Once the marginal social cost and marginal social benefits are known, the efficient quantity is equal to the quantity such that the marginal social cost equals the marginal social benefit. Topic: Efficient Quantity of a Public Good Skill: Conceptual Status: Old AACSB: Communication

17) What is the principle of minimum differentiation? Answer: The principle of minimum differentiation is the tendency for competitors to make themselves identical to appeal to the maximum number of clients or voters. This principle describes the behavior of political parties as well as that of business firms. Topic: Principle of Minimum Differentiation Skill: Recognition Status: Old AACSB: Reflective Thinking

18) How does the principle of minimum differentiation relate to the free-rider problem? Answer: The free-rider problem requires that the government intervene so that an efficient level of a public good is produced. Often the government itself provides the public good. In this case, politicians are the government officials that are responsible for deciding which and what amounts of public goods are produced. In order to collect the most votes, politicians choose policies proposing the provision of certain public goods that are similar to competing politicians. The tendency for competitors to choose similar policies is the principle of minimum differentiation. In this case, the principle of minimum differentiation means that political parties propose to produce similar quantities of public goods because these proposals attract the maximum number of votes. Topic: Principle of Minimum Differentiation Skill: Conceptual Status: Old AACSB: Communication

19) What is rational ignorance? Answer: Rational ignorance is the voter's decision not to acquire information about an issue because the marginal cost of doing so exceeds the expected marginal benefit. Thus the voter remains (rationally) ignorant about the issue. Topic: Rational Ignorance Skill: Conceptual Status: Old AACSB: Reflective Thinking

20) Explain why some amount of ignorance can be rational. Answer: Acquiring information is not costless. The rational voter will acquire information only if the expected benefit of the information exceeds the cost of acquiring the information. Often the expected benefit is less than the cost, so the person is "rationally ignorant" about some issues. Topic: Rational Ignorance Skill: Conceptual Status: Old AACSB: Communication

21) Why is it rational for individuals to be ignorant about public goods but not about private goods? Answer: In the case of a private good, the individual enjoys all of the benefits and pays all of the costs so it is important to gather product information. In the case of a public good, the individual receives only a fraction of the benefits and pays only a fraction of the costs. Moreover, it is uncertain whether one individual's gathering information will have any impact on the public goods provided anyway. Topic: Rational Ignorance Skill: Recognition Status: Old AACSB: Communication

22) Under what conditions will the political process provide an inefficient amount of a public good? Answer: The government will provide an inefficient amount of a public good when voters are rationally ignorant of the marginal social benefits and marginal social costs of the good. In this case, bureaucrats, intent on maximizing the size of their budgets, will provide an inefficiently large quantity of the good. Topic: Inefficient Overprovision Skill: Conceptual Status: Old AACSB: Communication

23) Explain the difference between marginal social benefit and marginal external benefit. Answer: Marginal social benefit equals the marginal benefit enjoyed by society (by consumers of the good plus others). It equals marginal benefit plus marginal external benefit. Marginal external benefit is the benefit from an additional unit of a good that is enjoyed by someone other than the consumer. Topic: Marginal Private Benefit and Marginal External Benefit Skill: Conceptual Status: Old AACSB: Communication

24) Does vaccination against chicken pox have both private and external benefits? Answer: Yes, vaccination against chicken pox has both private and external benefits. The individual who is vaccinated benefits because he or she will not catch chicken pox. In addition, everyone who interacts with that person will benefit because they will not catch chicken pox from him or her. Topic: Marginal External Benefit Skill: Conceptual Status: Old AACSB: Communication

25) "Education in elementary and high schools has external benefits because families who have a lot of children do not pay any more than families without children." Is this statement correct or incorrect? Explain your answer. Answer: The statement is incorrect. Education has external benefits because educated people create benefits for everyone else. Who pays for the education is not an external benefit. Topic: Marginal External Benefit Skill: Conceptual Status: Old AACSB: Communication

26) Describe some of the external benefits associated with education. What can government do to encourage production of the efficient amount of education? Answer: External benefits to education include the facts that college graduates: • communicate more effectively with others, • tend to be better citizens, • have lower crime rates, • are more tolerant of others' views. To insure that the efficient amount of education is produced, the government could: • provide education, as it does with public schools, • subsidize education, as it does with state universities, or • give consumers vouchers to reduce the cost of private schooling, as is happening in some states or with various college grant programs. Topic: Marginal External Benefit Skill: Conceptual Status: Old AACSB: Communication

27) Does the existence of the University of Oklahoma affect citizens who do not attend the University? Answer: Education creates an external benefit. Hence people who do not attend the University of Oklahoma benefit from the education received by its students because this education has external benefits. For instance, the presence of hundreds of thousands of educated graduates from the University of Oklahoma raises public discourse on certain topics and makes the provision of high quality social activities, such as live theater, more common. Topic: Marginal External Benefit Skill: Conceptual Status: Old AACSB: Communication

28) "External benefits lead to overproduction so that more than the efficient quantity is produced." Is the previous statement true or false? Answer: The statement is false. External benefits lead to underproduction so that less than the efficient quantity is produced. Topic: Inefficiency Skill: Conceptual Status: Old AACSB: Communication

29) Why does the existence of an external benefit lead to the production of less than the efficient quantity? Answer: Buyers ignore the presence of an external benefit because the benefit they receive is the private benefit. As a result, buyers do not take account of all the benefits from a good or service. Because buyers do not take account of all the benefits, their demand for the good or service, which reflects their private benefit, is less than the marginal social benefit, is less than the marginal social benefit. So, with the demand being less than the marginal social benefit, the equilibrium quantity is less than the efficient quantity. Topic: Inefficiency Skill: Conceptual Status: Old AACSB: Communication

30) Why would the amount of education provided be inefficient if subsidies to education were not provided? Answer: Private decision makers consider only private benefits and costs when purchasing education. As a result, the value that all of society places on the last unit of education purchased exceeds the cost of that education. This is not efficient because more education would generate social benefits that exceed social costs. Subsidies can overcome this problem by reducing the private cost of education, thereby leading to a greater quantity of education being provided. Topic: Inefficiency Skill: Conceptual Status: Old AACSB: Communication

31) Why should people without children pay some tax to support local schools? Answer: Education generates an external benefit. Society as a whole, including people without children, benefits from having better educated citizens. Such a tax provides the funding for a subsidy that helps achieve the efficient amount of education. Topic: Inefficiency Skill: Conceptual Status: Old AACSB: Communication

32) Why does government provide educational opportunities in the form of vouchers, subsidies, and public provision? Answer: Education generates external benefits. With a better educated population, everyone is better off. The more educated the population, the more productive it is. Educated individuals need less social services than uneducated individuals. Crime rates are lower the more educated the population. And a more educated population makes it more likely to provide other goods with external benefits, such as high quality newspapers. But because part of the social benefit from education is an external benefit, an unregulated market will create less than the efficient amount of education. Hence government policies such as vouchers, subsidies, and public provision are attempts to overcome inefficiency and move the market to the efficient amount of education. Topic: Government Policies Skill: Conceptual Status: Old AACSB: Communication

33) A private subsidy has what effect on the amount of a good or service produced? Is a private subsidy an appropriate policy to offset the inefficiency from an external cost or an external benefit? Answer: A private subsidy increases the production of the good or service that is subsidized. A good or service with an external benefit is underproduced by a competitive, unregulated market. Because it increases the production, a private subsidy is the appropriate policy to overcome the inefficiency that is the result of an external benefit. Topic: Subsidies Skill: Conceptual Status: Old AACSB: Communication

6 Numeric and Graphing Questions

Quantity (cars on duty) 1 2 3 4 5

Paul's marginal benefit (dollars per car) 50 40 30 20 10

Art's marginal benefit (dollars per car) 90 75 60 45 30

1) The table above shows the marginal benefit that arises from providing police protection in an economy of two people, Paul and Art. Police protection is a public good. a) Construct a table of the economy's marginal social benefit from providing police protection. b) What is the economy's marginal social benefit from having 3 police cars on duty? Answer: Marginal social Quantity benefit (cars on duty) (dollars per car) 1 50 2 40 3 30 4 20 5 10 a) The table showing the economy's marginal social benefit from providing police protection is above. At each quantity, the marginal social benefit is the sum of Paul's marginal benefit plus Art's marginal benefit. b) The marginal social benefit from having three cars on duty is $90. Topic: Marginal Benefit Skill: Analytical Status: Old AACSB: Analytical Skills

Number of Jake's marginal police cars on benefit duty (dollars) 1 2 3 4 5

45 35 25 15 5

Elwood's marginal benefit (dollars) 20 16 12 8 4

2) The table above shows the marginal benefit from providing police protection in a community of two people, Jake and Elwood. Police protection is a public good. a) What is the marginal social benefit to community from the 4th police car on duty? b) If the marginal social cost of a police car on duty is $37, what is the efficient number of cars on duty? c) If the marginal social cost of a police car on duty is $70, what is the efficient number of cars on duty? Answer: a) The community's marginal social benefit is the sum of Jake's marginal benefit and Elwood's marginal benefit. So the marginal social benefit from the 4th police car is $15 + $8 = $23. b) The number of cars on duty is efficient if the community's marginal social benefit equals the marginal social cost. The marginal social benefit is the sum of Jake's marginal benefit and Elwood's marginal benefit. When three cars are on duty, the marginal social benefit is $25 + $12 = $37, which is the same as the marginal social cost. So the efficient number of cars is 3. c) As before, the number of cars on duty is efficient if the marginal social benefit equals the marginal social cost. And also as before, the marginal social benefit is the sum of Jake's marginal benefit and Elwood's marginal benefit. But in this case, because for any number of police cars on duty marginal social cost exceeds marginal social benefit, the efficient number Topic: Efficient Quantity of a Public Good Skill: Analytical Status: Old AACSB: Analytical Skills

Level of Marginal social Marginal social contaminates benefit cost (parts per (dollars per (dollars per million) year) year) 20 2 0 15 7 4 10 12 7 5 16 16 0 20 24 3) Ten homeowners live around Lake Alice. Unfortunately, the lake is contaminated with various chemicals and the level of contamination is currently 20 parts per million. All the homeowners benefit equally if the level of contamination is reduced. The table above gives the marginal social cost and marginal social benefit for removing the contaminants from the lake. Cleaning the lake is a public good. a) What will be the parts per million if the homeowners alone are in charge of reducing the contaminants? b) What is the efficient amount of contamination? Answer: a) Homeowners will not reduce the contaminants at all because a free-rider problem prevails. The level of contamination will be 20 parts per million. b) The efficient level of contamination is 10 parts per million, because that is the level for which the marginal social cost is equal to the marginal social benefit. Topic: Efficient Quantity of a Public Good Skill: Analytical Status: Old AACSB: Analytical Skills

Quantity (street lights per block) 0 1 2 3 4 5 6

Marginal social Marginal social benefit cost (dollars per (dollars per year) year) 0 0 14 4 12 7 10 10 8 13 6 16 4 19

4) The table above provides information about the marginal social cost and marginal social benefit of street lights, which are a public good. a) What quantity would a private company provide? Why? b) What is the efficient quantity? Answer: a) Street lights are a public good, so a private company would provide zero street lights. The company would provide zero because everyone would free ride, that is, no one would voluntarily pay for the street lighting. Because the company knows that no one will pay, it will not provide any street lights. b) The efficient quantity is 3 street lights per block because that is the quantity that equates the marginal social benefit to the marginal social cost. Topic: Efficient Quantity of a Public Good Skill: Analytical Status: Old AACSB: Analytical Skills

Marginal social cost (dollars per course) 100 80 60 40 20

Quantity of students 4,500 4,000 3,500 3,000 2,500

Marginal Marginal social private benefit benefit (dollars per (dollars per course) course) 20 60 40 80 60 100 80 120 100 140

5) The table above gives the marginal social cost (which equals the price), marginal private benefit, and marginal social benefit of students attending Diablo Valley College (DVC) in Concord, California. a) When 4,500 students attend DVC, what does the marginal external benefit equal? b) If the market is competitive and left without government intervention, what is the quantity of students that will attend DVC and what will be the price of a course? c) What is the efficient quantity of students attending DVC? d) If the government can set the price per course, in order to have the efficient quantity of students attending DVC, what should the government set as the price? Answer: a) The marginal external benefit equals $40, the difference between the marginal social benefit ($60) and the marginal private benefit ($20). b) 3,500 students will attend and the price of a course will be $60. c) The efficient quantity is 4,000 students because at this quantity the marginal social benefit equals the marginal social cost. d) In order to have 4,000 students attend DVC, the government must set the price at $40 per course. Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

6) The figure above shows the market for polio vaccination in Africa. Polio vaccination confers an external benefit because one person's vaccination makes it less likely that other people will catch polio. a) If the market is competitive and left unregulated, how many doses of vaccine will be administered? b) If the Melinda and Bill Gates Foundation underwrites the cost of the vaccine by paying for a large fraction of the preparation and delivery cost, what will happen to the number of doses administered? Why? Answer: a) If the market is competitive and left unregulated, 4 million doses will be administered. b) If the Foundation underwrites the cost of the vaccine, the marginal cost of the vaccine will drop. The result will be similar to a government subsidy: part of the price of the vaccine will be paid for by the Foundation.. The market's efficiency will be increased. Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

7) Attractive landscaping increases the property values of surrounding homes, creating a marginal benefit. The figure above represents the market for monthly landscaping contracts. a) What is the marginal social benefit of the 40th contract? Of the 60th contract? b) What is the marginal private benefit of the 40th contract? c) What is the marginal external benefit of the 40th contract? d) What is the unregulated competitive equilibrium price and quantity? e) What is the efficient quantity? f) What is the amount of the deadweight loss? Answer: a) The marginal social benefit of the 40th contract is $100. The marginal social benefit of the 60th contract is $80. b) The marginal private benefit of the 40th contract is $60. c) The marginal external benefit of the 40th contract is $40. d) The equilibrium price is $60 per contract and the equilibrium quantity is 40 contracts a month. e) The efficient quantity is 60 contracts a month. f) The deadweight loss equals $400 per month. Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

8) The figure above shows the market for education. Education has an external benefit. a) If the market is competitive and left unregulated, how many students will be enrolled per year? b) What is the efficient number of students? c) In the figure, show the effect of a government private subsidy that moves the market to the efficient number of students. What is the amount of the subsidy and what tuition must the students pay? Answer: a) If the market is competitive and left unregulated, 4 million students will be enrolled. b) The efficient number of students enrolled is 6 million students.

c) The above figure shows the effect of the government subsidy and how the supply curve shifts. The subsidy is $6,000 and students pay tuition of $10,000. Topic: Subsidies Skill: Analytical 104 Copyright © 2014 Pearson Education, Inc.

Status: Old AACSB: Analytical Skills

7 True or False 1) If the consumption of a good decreases the quantity available for another person, the good is rival. Answer: TRUE Topic: Rival Skill: Recognition Status: Old AACSB: Reflective Thinking

2) If people can benefit from a good even if they do not pay for it, the good is nonrival. Answer: FALSE Topic: Nonexcludable Skill: Recognition Status: Old AACSB: Reflective Thinking

3) Cable television is an example of a public good. Answer: FALSE Topic: Public Goods Skill: Recognition Status: Old AACSB: Reflective Thinking

4) An example of a public good is national defense services. Answer: TRUE Topic: Public Goods Skill: Recognition Status: Old AACSB: Reflective Thinking

5) A common resource is nonrival but excludable. Answer: FALSE Topic: Common Resource Skill: Recognition Status: Old AACSB: Reflective Thinking

6) Free riding is possible if the good is nonexcludable. Answer: TRUE Topic: Free-Rider Problem Skill: Recognition Status: Old AACSB: Reflective Thinking

7) A free rider is a person who consumes a good without paying for it. Answer: TRUE Topic: The Free-Rider Problem Skill: Recognition Status: Old AACSB: Reflective Thinking

8) A free rider problem is created by private goods. Answer: FALSE Topic: The Free-Rider Problem Skill: Recognition Status: Old AACSB: Reflective Thinking

9) Because of free riders, a private, unregulated market would not produce the efficient quantity of a public good. Answer: TRUE Topic: The Free-Rider Problem Skill: Conceptual Status: Old AACSB: Reflective Thinking

10) The marginal social benefit curve from a public good is found by horizontally summing the marginal benefit curves of all individuals. Answer: FALSE Topic: Benefit of a Public Good Skill: Recognition Status: Old AACSB: Reflective Thinking

11) The efficient quantity of a public good is the quantity that has the highest possible marginal social benefit. Answer: FALSE Topic: Efficient Quantity of a Public Good Skill: Conceptual Status: Old AACSB: Reflective Thinking

12) The efficient quantity of a public good is the quantity that sets the marginal social benefit from the good equal to the good's marginal social cost. Answer: TRUE Topic: Efficient Quantity of a Public Good Skill: Conceptual Status: Old AACSB: Reflective Thinking

13) If a voter is ignorant of some of the issues that affect public policy, then the voter is definitely behaving irrationally. Answer: FALSE Topic: Rational Ignorance Skill: Conceptual Status: Old AACSB: Reflective Thinking

14) The concept of rational ignorance can explain why the government might provide more than the efficient quantity of a public good. Answer: TRUE Topic: Rational Ignorance Skill: Conceptual Status: Old AACSB: Reflective Thinking

15) Because of voter rational ignorance, the government might not produce the efficient quantity of a public good. Answer: TRUE Topic: Rational Ignorance Skill: Conceptual Status: Old AACSB: Reflective Thinking

16) If voters are rationally ignorant, then the interest of the bureaucracy to maximize its budget will result in an oversupply of a public good. Answer: TRUE Topic: Rational Ignorance Skill: Conceptual Status: Old AACSB: Reflective Thinking

17) If there are externalities present in a market, resources are allocated efficiently when marginal social cost equals marginal social benefit. Answer: TRUE Topic: Efficiency Skill: Conceptual Status: Old AACSB: Reflective Thinking

18) The marginal social benefit is the sum of the benefit enjoyed by the consumer of an additional unit of a good or service plus the marginal benefit enjoyed by others. Answer: TRUE Topic: Marginal Social Benefit Skill: Recognition Status: Old AACSB: Reflective Thinking

19) When people make decisions about the quantity of education to undertake, they balance the marginal social benefit against the marginal private cost. Answer: FALSE Topic: An Unregulated Market Skill: Conceptual Status: Old AACSB: Reflective Thinking

20) In an unregulated competitive market, the presence of marginal external benefit from a good or service results in less than the efficient quantity being produced. Answer: TRUE Topic: An Unregulated Market Skill: Conceptual Status: Old AACSB: Reflective Thinking

21) In an unregulated competitive market, the presence of marginal external benefit from a good or service results in overproduction. Answer: FALSE Topic: An Unregulated Market Skill: Conceptual Status: Old AACSB: Reflective Thinking

22) One way that government can encourage the production of goods or services that have external benefits is to subsidize the good or service. Answer: TRUE Topic: Subsidies Skill: Recognition Status: Old AACSB: Reflective Thinking

23) If an activity has an external benefit, such as education, a tax on that activity can lead to the efficient level of output being produced. Answer: FALSE Topic: Government Policies Toward Education Skill: Recognition Status: Old AACSB: Reflective Thinking

24) In the case of an external benefit generated by an activity, such as education, a private subsidy for that activity can achieve an efficient outcome. Answer: TRUE Topic: Positive Externalities: Education Skill: Recognition Status: Old AACSB: Reflective Thinking

25) Subsidizing education can lead an efficient level of production because education has external benefits. Answer: TRUE Topic: Education Skill: Conceptual Status: Old AACSB: Reflective Thinking

8 Extended Problems

1) The graph shows costs and benefits of a mosquito control program, which is a public good: a) What is the quantity of spraying that achieves efficiency? b) What is the political equilibrium if voters are well informed? Answer: a) Efficiency is reached at the quantity where marginal social benefit equals marginal social cost, i.e. at 5 square miles per day. b) If voters are well informed, the political equilibrium will be the efficient quantity of spraying, 5 square miles per day. Topic: Public Goods Skill: Analytical Status: Old AACSB: Analytical Skills

Capacity Total cost (millions of gallons (thousands of per month) dollars per month) 1.5 3.0 4.5 6.0 7.5 9.0

550 1,060 1,630 2,260 2,950 3,700

Marginal benefit to a resident (cents per 1,000 gallons) 1.2 1.0 0.8 0.6 0.4 0.2

2) A city of 50,000 people is considering installing a sewage disposal system. The total fixed cost of the system is $100,000 per month. The marginal benefit to an average city resident from the first thousand gallons of capacity is 1.4 cents. The table shows the relationship between the system's capacity, its total cost, and the marginal benefit received by an average city resident: a) Draw the marginal social cost curve of the sewage system and the residents' marginal social benefit curve. What is the capacity that achieves maximum net benefit? b) How much will each person have to pay in taxes to support the efficient capacity level? c) What is the political equilibrium if voters are well informed? Answer:

a) See the figure above. The marginal costs at each capacity are calculated using the average of the marginal costs of the sewage system at for two consecutive levels of capacity. For instance, the marginal cost between 1.5 million gallons per month to 3.0 million gallons per month is $0.36 per gallon and between 3.0 million gallons per month and 4.5 million gallons per month is $0.40. So the marginal cost at 3.0 million gallons per month is the average, $0.38 per gallon. The rest of the marginal costs are calculated similarly. The city's marginal social benefits are calculated by multiplying the marginal benefit of a resident by the city's population. Net social benefit is maximized at the capacity where the city residents' marginal benefit equals the marginal cost of the system, which is $0.40. So that the efficient capacity is 4.5 million gallons per month. 110 Copyright © 2014 Pearson Education, Inc.

b) The efficient capacity is the one that maximizes the city residents' net benefit, 4.5 million gallons per month. At this level of capacity the total cost of the sewage system is $1,630,000 per month. Because 50,000 people live in the city, each person must pay $1,630,000/50,000 = $32.60. c) If voters are well informed, the political equilibrium will be the efficient capacity, that is, 4.5 million gallons per month. Topic: Public Goods Skill: Analytical Status: Old AACSB: Analytical Skills

Marginal social Marginal private Marginal external Enrollment cost benefit benefit (millions of (thousands of (thousands of (thousands of students per year) dollars per student dollars per student dollars per student per year) per year) per year) 4 4 16 8 8 6 14 7 12 8 12 6 16 10 10 5 20 12 8 4 24 14 6 3 3) The table above shows costs and benefits arising from college education. There is no government involvement and the schools are competitive. a) Draw the marginal social cost, marginal private benefit, and marginal social benefit curves. b) How many students are enrolled and what is the tuition? c) What is the efficient level of enrollment? d) What is the deadweight loss? Why does it arise? e) If the government provides the efficient amount of education, how many school places does it offer and what is the tuition? Explain your answer. f) If the government provides the efficient amount of education, of the tuition paid by a student what does the government pay and what does what a student pay?

Answer:

a) The figure above shows the marginal social cost curve, MSC, the marginal private benefit curve, MB, and the marginal social benefit curve, MSB. b) If the market for college education is competitive, the marginal social cost curve is the supply curve and the private marginal benefit curve is the demand curve. The market equilibrium occurs at a tuition of $10,000 per student per year and 16 million students per year. c) The efficient level of enrollment is the one at which marginal social benefit of college education equals marginal social cost. So the efficient level of enrollment is 20 million students per year. d) The deadweight loss is illustrated in the figure above as the darkened triangular area. This area equals ($5,000 × 4,000,000)/2, which is $10 billion. The deadweight loss arises because too few students are enrolled. At the equilibrium level of enrollment, marginal social benefit exceeds marginal cost and society loses the value that it could gain if more students enrolled. e) The efficient quantity occurs where marginal social benefit equals marginal social cost. This quantity is 20 million students. Tuition is set at the level that equals the marginal private benefit at the efficient level of enrollment, so tuition is $8,000 a year. f) The government pays the cost of college education not covered by tuition. At the efficient level of enrollment, 20 million, the marginal private benefit is $8,000, so this is the amount of tuition paid by a student. The remaining $4,000, which is the marginal external benefit, is paid by the government. Topic: External Benefits Skill: Analytical Status: Old AACSB: Analytical Skills

Microeconomics, 11e (Parkin) Chapter 17 Externalities and the Environment 1 Negative Externalities: Pollution 1) Air pollution caused by lead A) has never been a pollution problem. B) is currently a major pollution problem. C) has mostly been eliminated as a pollution problem. D) is the number one source of pollution today. Answer: C Topic: Sources of Environmental Problems Skill: Definition Status: Old AACSB: Analytical Skills

2) A private cost is a cost of production that is A) borne by the producer of a good. B) measured in marginal terms. C) borne by someone other than the producer of a good. D) measured in total terms. Answer: A Topic: Marginal Private Cost Skill: Definition Status: Old AACSB: Analytical Skills

3) A private cost is a cost of production that is borne by the A) consumer of the good. B) producer of the good. C) government. D) consumer of the good and the government. Answer: B Topic: Marginal Private Cost Skill: Definition Status: Old AACSB: Analytical Skills

4) The cost of producing one more unit of a good or service that is paid by the producer A) has to be equal to the benefit that the consumer derives from that good. B) is equal to the cost borne by people other than the producer. C) is the marginal private cost. D) is the marginal external cost. Answer: C Topic: Marginal Private Cost Skill: Definition Status: Old AACSB: Analytical Skills

5) The cost of producing an additional unit of a good or service that is borne by the producer of that good or service is the A) marginal external cost. B) marginal private cost. C) marginal social cost. D) None of the above answers is correct. Answer: B Topic: Marginal Private Cost Skill: Definition Status: Old AACSB: Analytical Skills

6) Suppose a firm produces pollution when it generates electricity. The cost of the pollution is called the A) marginal cost. B) marginal private cost. C) marginal external cost. D) marginal social cost. Answer: C Topic: Marginal External Cost Skill: Definition Status: Old AACSB: Analytical Skills

7) Which of the following is an example of an external cost? A) taxes B) the price of a car wash C) pollution D) an electricity bill Answer: C Topic: Marginal External Cost Skill: Conceptual Status: Old AACSB: Analytical Skills

8) If an external cost exists, who bears it in an unregulated, competitive market transaction? A) nobody B) the federal government C) someone other than the producers D) the buyers of the product Answer: C Topic: Marginal External Cost Skill: Conceptual Status: Old AACSB: Analytical Skills

9) The cost of producing an additional unit of a good or service that falls on people other than the producer of that good or service is the A) marginal external cost. B) marginal private cost. C) marginal social cost. D) None of the above answers is correct. Answer: A Topic: Marginal External Cost Skill: Definition Status: Old AACSB: Analytical Skills

10) The cost of producing a good or service that is paid by people other than the producers is A) the marginal cost. B) represented by the demand curve. C) represented by the supply curve. D) an external cost. Answer: D Topic: Marginal External Cost Skill: Definition Status: Old AACSB: Analytical Skills

11) An external cost is a cost of producing a good or service that is A) not paid by the producers B) paid by the producers. C) paid by the government. D) paid by the consumer and the government. Answer: A Topic: Marginal External Cost Skill: Definition Status: Old AACSB: Analytical Skills

12) The marginal cost of production that is borne by the entire society is the A) marginal private cost. B) marginal social cost. C) marginal external cost. D) None of the above answers is correct. Answer: B Topic: Marginal Social Cost Skill: Definition Status: Old AACSB: Analytical Skills

13) The ________ is the cost of paid by the producer plus any cost paid by everyone else when another unit of a good or service is produced. A) marginal external cost. B) marginal private cost. C) marginal social cost. D) None of the above answers is correct. Answer: C Topic: Marginal Social Cost Skill: Definition Status: Old AACSB: Analytical Skills

14) The marginal social cost is A) equal to the marginal private cost plus the marginal external cost. B) equal to the marginal private cost minus the marginal external cost. C) the same as the marginal private cost. D) the same as the marginal external cost. Answer: A Topic: Marginal Social Cost Skill: Definition Status: Old AACSB: Analytical Skills

15) If the marginal private cost of producing one kilowatt of power in California equals five cents and the marginal social cost of each kilowatt equals nine cents, then the marginal external cost equals ________ per kilowatt. A) five cents B) nine cents C) four cents D) fourteen cents Answer: C Topic: Marginal Social Cost Skill: Analytical Status: Old AACSB: Analytical Skills

16) The difference between the marginal social cost and the marginal private cost equals the A) cost of producing an additional unit of a good. B) marginal external benefit. C) marginal external cost. D) marginal private benefit. Answer: C Topic: Marginal Social Cost Skill: Conceptual Status: Old AACSB: Analytical Skills

17) If the marginal social cost of a good equals the marginal private cost of the good, then the marginal external cost of the good A) is zero. B) equals the marginal social cost. C) equals the marginal social benefit. D) equals the marginal private benefit. Answer: A Topic: Marginal Social Cost Skill: Analytical Status: Old AACSB: Analytical Skills

18) If a good has zero external costs, then A) marginal social cost equal marginal private cost. B) marginal social cost is greater than marginal private cost. C) marginal social cost is less than marginal private cost. D) we need more information to determine the relationship between private and social costs. Answer: A Topic: Marginal Social Cost Skill: Analytical Status: Old AACSB: Analytical Skills

19) Marginal social cost is the A) difference between the marginal social benefit and the marginal private cost. B) sum of the marginal private benefit and the marginal private cost. C) difference between the marginal external cost and the marginal private cost. D) sum of the marginal external cost and the marginal private cost. Answer: D Topic: Marginal Social Cost Skill: Definition Status: Old AACSB: Analytical Skills

20) The marginal social cost of production is the A) marginal private cost plus the marginal external cost. B) same as the marginal cost of any externality. C) total cost of any externality. D) marginal private cost minus the marginal external cost. Answer: A Topic: Marginal Social Cost Skill: Definition Status: Old AACSB: Analytical Skills

21) Marginal social cost is equal to the A) sum of marginal private cost and marginal external cost. B) sum of marginal private cost and marginal private benefit. C) marginal cost incurred by the producer of the good. D) marginal cost imposed on others. Answer: A Topic: Marginal Social Cost Skill: Definition Status: Old AACSB: Analytical Skills

22) Marginal social cost is equal to ________. A) marginal private cost plus the marginal external cost B) the marginal external cost C) the value of the tax that will make the market efficient D) the marginal cost imposed on people other than the producer of the good Answer: A Topic: Marginal Social Cost Skill: Definition Status: Old AACSB: Analytical Skills

23) Which of the following is true? A) MSC = MC + Marginal external cost B) MC = Marginal external cost - MSC C) MC = Marginal external benefit + MSC D) MSC = Marginal external cost + marginal external benefit Answer: A Topic: Marginal Social Cost Skill: Definition Status: Old AACSB: Analytical Skills

24) The marginal social cost, MSC, of producing a good or service equals A) MC + MB. B) MB + marginal external cost. C) MB + marginal external benefit. D) MC + marginal external cost. Answer: D Topic: Marginal Social Cost Skill: Definition Status: Old AACSB: Analytical Skills

25) For a good with an external cost, the supply curve A) represents the various quantities people can buy. B) is the same as the marginal private cost curve. C) is the same as the marginal social cost curve. D) is the same as the marginal external cost curve. Answer: B Topic: Marginal Social Cost Skill: Conceptual Status: Old AACSB: Analytical Skills

26) If the marginal external cost of building a children's playground equals zero, then the A) marginal private cost equals the marginal social cost. B) marginal social cost equals zero. C) marginal private cost equals zero. D) None of the above answers is correct. Answer: A Topic: Marginal Social Cost Skill: Analytical Status: Old AACSB: Analytical Skills

27) If a good has an external cost, then the marginal private cost curve A) lies below the marginal social cost curve. B) lies above the marginal social cost curve. C) is negative. D) is the same as the marginal external cost curve. Answer: A Topic: Marginal Social Cost Skill: Conceptual Status: Old AACSB: Analytical Skills

28) If the production of a good creates pollution, then the A) marginal social benefit curve lies above the marginal private benefit curve. B) marginal social cost curve lies above the marginal private cost curve. C) marginal social benefit curve lies below the marginal private benefit curve. D) marginal social cost curve lies below the marginal private cost curve. Answer: B Topic: Marginal Social Cost Skill: Conceptual Status: Old AACSB: Analytical Skills

29) Consider an industry that produces an output Q with marginal private cost (MC) and marginal social cost (MSC) as given in the table: Q 1 2 3 4 5

MC 2 4 6 8 10

MSC 4 7 10 13 16

Which of the following is true? A) The production of each additional unit results in a larger marginal external cost. B) The production of each additional unit results in the same marginal external cost. C) The production of each additional unit results in a lower marginal external cost. D) There are no marginal external costs associated with the production of this good. Answer: A Topic: Marginal External Cost Skill: Analytical Status: Old AACSB: Analytical Skills

30) Consider an industry that produces an output Q with marginal private cost (MC) and marginal social cost (MSC) as given in the table: Q 1 2 3 4 5

MC 2 4 6 8 10

MSC 4 7 10 13 16

The marginal external cost associated with the production of unit 3 is A) 4. B) 6. C) 10. D) 16. Answer: A Topic: Marginal External Cost Skill: Analytical Status: Old AACSB: Analytical Skills

31) When production of a good results in an external cost, the unregulated competitive market equilibrium is inefficient because ________. A) MSC = MC B) MSC = MSB C) MSC > MSB D) MSC < MSB Answer: C Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

32) If production of a good creates an external cost, the amount of output where the marginal social benefit equals the marginal private cost is A) inefficient. B) inequitable. C) unattainable. D) efficient. Answer: A Topic: An Unregulated Market Skill: Conceptual Status: Old AACSB: Analytical Skills

33) If a good has an external cost, the A) competitive market outcome is efficient. B) marginal private cost reflects the external cost. C) competitive market outcome is inefficient. D) marginal private benefit is equal to the marginal social cost. Answer: C Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

34) Pollution occurs when lumber is produced. If the lumber market is unregulated, there would be A) overproduction of lumber compared to the efficient amount. B) underproduction of lumber compared to the efficient amount. C) sometimes overproduction and sometimes underproduction of lumber compared to the efficient amount. D) an external benefit to producing lumber. Answer: A Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

35) When the marginal social cost of the production of Good A is greater than the marginal private cost of the production of Good A, then A) a competitive, unregulated market produces less than the efficient quantity of Good A. B) a competitive, unregulated market produces the efficient quantity of Good A. C) a competitive, unregulated market produces more than the efficient quantity of Good A. D) the government should levy a tax on the production of Good A that is equal to the horizontal distance between the two marginal cost curves. Answer: C Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

36) When the production of a good has an external cost, the A) marginal social cost curve lies below the marginal private cost curve. B) marginal social benefit curve lies above the marginal private benefit curve. C) equilibrium quantity in an unregulated, competitive market has a marginal social cost greater than the marginal social benefit. D) equilibrium quantity in an unregulated, competitive market has a marginal social cost less than the marginal social benefit. Answer: C Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

37) Generating electricity creates air pollution. This industry, if left unregulated, will produce A) more than the efficient level of output. B) the efficient level of output. C) less than the efficient level of output. D) sometimes more and sometimes less than the efficient level of output. Answer: A Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

38) Generating electricity creates air pollution. This industry, if left unregulated, will produce at an inefficient market equilibrium because A) there is a deadweight loss. B) supply is not equal to demand. C) too little output is produced. D) the marginal social benefit is greater than the marginal social cost. Answer: A Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

39) Generating electricity creates air pollution. This industry, if left unregulated, will produce at an inefficient market equilibrium where A) marginal private cost equals marginal social benefit. B) marginal social cost equals marginal social benefit. C) marginal social cost equals marginal private cost. D) marginal social benefit is greater than marginal social cost. Answer: A Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

40) In the absence of property rights, factories will dump waste into a waterway up to the point where ________ equals ________. A) marginal social cost; marginal social benefit B) marginal social cost; marginal private cost C) marginal private cost; marginal private benefit D) marginal private cost; marginal social cost Answer: C Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

41) For a good whose production creates a pollution, when marginal social cost equals marginal social benefit, then I there is no pollution. II resources are utilized efficiently. A) I only B) II only C) neither I nor II D) both I and II Answer: B Topic: Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills

42) Resources are efficiently utilized when production is such that marginal social benefit A) is equal to marginal social cost. B) exceeds marginal social cost by as much as possible. C) is less than marginal social cost. D) None of the above because efficiency has to do with property rights and has nothing to do with marginal social benefit or marginal social cost. Answer: A Topic: Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills

43) The efficient quantity of output of a product with external costs of production is A) where the demand curve and the producer's supply curve intersect. B) where the marginal social cost curve and marginal social benefit curve intersect. C) as low as possible. D) zero. Answer: B Topic: Efficiency Skill: Definition Status: Old AACSB: Analytical Skills

44) Producing paper creates pollution. There is no externality in the consumption of paper. The efficient quantity of paper is when the A) marginal social benefit of paper is equal to zero. B) marginal social cost of the pollution from making paper is equal to zero. C) marginal social benefit of paper is equal to the marginal social cost of paper. D) marginal private cost of the pollution from making paper is equal to zero. Answer: C Topic: Efficiency Skill: Definition Status: Old AACSB: Analytical Skills

Quantity of steel Marginal social (millions of tons per benefit week) (dollars per ton) 5 40 10 35 15 30 20 25 25 20

Marginal social cost (dollars per ton) 20 25 30 35 40

45) The table above shows information about the costs and benefits of a steel smelter that pollutes the air of a city. The market is efficient when the quantity of steel produced is ________ tons per week. A) 5 B) 10 C) 15 D) 25 Answer: C Topic: Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills

46) The table above shows information about the costs and benefits of a steel smelter that pollutes the air of a city. If the marginal external cost is $10 per ton at every quantity of steel produced, the equilibrium quantity when the steel industry is unregulated is ________ tons per week. A) 5 B) 15 C) 20 D) 25 Answer: C Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

47) The above figure shows the marginal social benefit, marginal private cost and marginal social cost of producing steel. There is a marginal external ________ of ________ per ton. A) benefit; $200 B) benefit; $100 C) cost; $200 D) cost; $100 Answer: D Topic: Externalities Skill: Analytical Status: Old AACSB: Analytical Skills

48) The above figure shows the marginal social benefit, marginal private cost and marginal social cost of producing steel. If the market is competitive and unregulated, how much steel will be produced? A) 0 tons B) 2 tons C) 4 tons D) 8 tons Answer: C Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

49) The above figure shows the marginal social benefit, marginal private cost and marginal social cost of producing steel. What is the efficient quantity of steel? A) 0 tons B) 2 tons C) 4 tons D) 8 tons Answer: B Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

50) The above figure shows the marginal social benefit, marginal private cost and marginal social cost of producing steel. If the market is competitive and unregulated, the equilibrium quantity of steel is ________ tons and the efficient quantity of steel is ________ tons. A) 2; 2 B) 2; 4 C) 4; 2 D) None of the above answers is correct. Answer: C Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

51) The above figure shows the marginal social benefit, marginal private cost and marginal social cost of producing steel. If the market is competitive, what government policy might move the market closer to efficiency? A) The government could subsidize the production of steel. B) The government could tax the production of steel. C) The government could issue vouchers to steel consumers. D) None of the above answers is correct. Answer: B Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

52) A chemical factory and a fishing club share a lake. Producing chemicals creates water pollution that harms the fish. The marginal social cost, private marginal cost, and marginal social benefit from producing chemicals are in the figure above. If polluting is legal and no one owns the lake into which waste is dumped, then the amount of chemicals produced each week will be A) 0 tons. B) 4 tons. C) 8 tons. D) None of the above answers is correct. Answer: C Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

53) A chemical factory and a fishing club share a lake. The marginal social costs, private marginal costs, and marginal benefits from producing chemicals are in the figure above. The chemicals dumped into the lake have always harmed the fish, but now they begin to damage the fishing boats as well. As a result, the A) marginal social cost curve shifts leftward. B) marginal social cost curve shifts rightward. C) marginal benefit curve shifts leftward. D) marginal benefit curve shifts rightward. Answer: A Topic: Marginal Social Cost Skill: Analytical Status: Old AACSB: Analytical Skills

54) In the above figure, the efficient level of chemicals produced per week is A) 0 tons. B) 4 tons. C) between 5 and 7 tons. D) 8 tons. Answer: B Topic: Efficient Level of Pollution Skill: Analytical Status: Old AACSB: Analytical Skills

55) A chemical factory and a fishing club share a lake. Producing chemicals creates water pollution that harms the fish. The marginal social cost, private marginal cost, and marginal benefit from producing chemicals are in the figure above. Initially the lake is owned by no one. Keeping in mind the Coase theorem, if transactions costs are low then if the chemical factory owns the lake ________ tons of chemicals will be produced and if the fishing club owns the lake, ________ tons of chemicals will be produced. A) 4; 4 B) 4; 8 C) 8; 4 D) 8; 8 Answer: A Topic: Coase Theorem Skill: Analytical Status: Old AACSB: Analytical Skills

56) Legally established titles to the ownership, use, and disposal of factors of production are referred to as A) property rights. B) Coase rights. C) pollution rights. D) emission rights. Answer: A Topic: Property Rights Skill: Definition Status: Old AACSB: Analytical Skills

57) Property rights A) apply to factors of production and to goods and services. B) are legally established titles of ownership that are enforceable in the courts. C) can be part of a solution to the problems of an externality. D) All of the above answers are correct. Answer: D Topic: Property Rights Skill: Conceptual Status: Old AACSB: Analytical Skills

58) The Coase Theorem is the proposition that private transactions are efficient if property rights exist, if only a ________ number of parties are involved, and if transactions costs are ________. A) large; low B) large; high C) small; low D) small; high Answer: C Topic: Coase Theorem Skill: Definition Status: Old AACSB: Analytical Skills

59) The Coase Theorem is the proposition that if the number of involved parties is low, if property rights ________ and transactions costs are ________, then private transactions are efficient. A) are nonexistent; low B) exist; high C) are nonexistent; high D) exist; low Answer: D Topic: Coase Theorem Skill: Definition Status: Old AACSB: Analytical Skills

60) The Coase Theorem points out that externality problems can be eliminated if the number of parties involved is small and if property rights A) are granted solely to consumers. B) are granted solely to producers. C) are eliminated. D) are granted to either consumers or producers and transactions costs are low. Answer: D Topic: Coase Theorem Skill: Definition Status: Old AACSB: Analytical Skills

61) The Coase Theorem says that which of the following is necessary to lead to an efficient use of resources? A) presence of transaction costs B) existence of property rights C) government intervention D) All of the above answers are correct. Answer: B Topic: Coase Theorem Skill: Definition Status: Old AACSB: Analytical Skills

62) According to the Coase theorem, which of the following are necessary for the efficient levels of pollution to be achieved? I. Property rights are defined. II. Transactions costs are low. A) I only B) II only C) both I and II D) neither I nor II Answer: C Topic: Coase Theorem Skill: Conceptual Status: Old AACSB: Analytical Skills

63) Which condition(s) must exist for the Coase theorem to hold? I. Property rights must exist. II. Transactions costs must be measurable. III. A small number of parties must be involved. A) I and II only B) I and III only C) II and III only D) I, II and III Answer: B Topic: Coase Theorem Skill: Definition Status: Old AACSB: Analytical Skills

64) The Coase theorem is the proposition that if property rights exist, the number of parties is small, and transactions costs are low, A) external costs result in deadweight losses. B) external benefits result in deadweight losses. C) private transactions are efficient. D) public transactions are efficient. Answer: C Topic: Coase Theorem Skill: Definition Status: Old AACSB: Analytical Skills

65) The Coase theorem is the proposition that private economic transactions are efficient if the number of involved parties is small, if property rights _______, and transactions costs are ________. A) exist; high B) exist; low C) do not exist; high D) do not exist; low Answer: B Topic: Coase Theorem Skill: Definition Status: Old AACSB: Analytical Skills

66) According to the Coase theorem, part of what is needed for private transactions to be efficient is that property rights A) must be defined, but it does not matter who owns the property. B) must be defined, and it is crucial as to who owns the property. C) need not be defined as long as there are no transactions costs present. D) need to be defined by the government to avoid producers from exploiting high transactions costs. Answer: A Topic: Coase Theorem Skill: Definition Status: Old AACSB: Analytical Skills

67) A key contribution of Ronald Coase is that he pointed out that private transactions are efficient when the number of parties involved is small A) and when property rights are well defined and transactions costs are low. B) and when property rights do not exist. C) and that property rights are irrelevant to the existence of externalities. D) and when corporations are not greedy. Answer: A Topic: Coase Theorem Skill: Conceptual Status: Old AACSB: Analytical Skills

68) The Coase theorem states that if transaction costs are low, the number of parties is small, and property rights are well established, A) the government must intervene to eliminate any externalities in the market. B) private transactions are efficient. C) there will be no pollution. D) Both answers B and C are correct. Answer: B Topic: Coase Theorem Skill: Definition Status: Old AACSB: Analytical Skills

69) A large farming operation which uses a potent fertilizer is located up river from a trout farmer. If property rights of the river exist and transactions costs are low, the amount of pollution will be ________. A) efficient only if the trout farmer owns the river B) inefficient if the farming operation owns the river C) efficient if either the farming operation or the trout farmer own the river D) always inefficient Answer: C Topic: Coase Theorem Skill: Conceptual Status: Old AACSB: Analytical Skills

70) The Coase theorem applies when property rights are given A) to the victim of pollution but not to the polluter. B) to the polluter but not to the victim. C) to either the polluter or the victim. D) neither to the polluter nor to the victim. Answer: C Topic: Coase Theorem Skill: Conceptual Status: Old AACSB: Analytical Skills

71) When property rights are assigned and transactions costs are low, A) all costs and benefits are taken into account by the transacting parties so the transaction is efficient. B) externalities will lead to market failure. C) the marginal social benefit curve shifts leftward. D) the marginal social cost curve shifts rightward. Answer: A Topic: Coase Theorem Skill: Conceptual Status: Old AACSB: Analytical Skills

72) A chemical factory and a fishing club share a lake. Producing chemicals creates water pollution that harms the fish. Initially the lake is owned by no one. Keeping in mind the Coase theorem, suppose transactions costs are low and the chemical factory is given ownership of the lake. Compared to the situation with no property rights, the quantity of chemicals produced A) will decrease. B) will stay the same. C) will increase. D) changes, but the direction of the change is ambiguous. Answer: A Topic: Coase Theorem Skill: Analytical Status: Old AACSB: Analytical Skills

73) A chemical factory and a fishing club share a lake. Producing chemicals creates water pollution that harms the fish. Initially the lake is owned by no one. Keeping in mind the Coase theorem, suppose transactions costs are low and the fishing club is given ownership of the lake. Compared to the situation with no property rights, the quantity of chemicals produced A) will decrease. B) will stay the same. C) will increase. D) changes, but the direction of the change is ambiguous. Answer: A Topic: Coase Theorem Skill: Analytical Status: Old AACSB: Analytical Skills

74) A polluted river has 20 homes on it that rent for $1,000 each per month. Homes on a similar river that is not polluted rent for $2,000 each per month. The river is polluted because there are two factories on the river that dump polluted water in the river. Each factory could install a filter that would cost $5,000 each and would reduce the pollution in the water to a negligible level. The external cost in this problem is A) $20,000. B) $5,000. C) $10,000. D) $30,000. Answer: A Topic: Marginal External Cost Skill: Analytical Status: Old AACSB: Analytical Skills

75) A polluted river has 20 homes on it that rent for $1,000 each per month. Homes on a similar river that is not polluted rent for $2,000 each per month. The river is polluted because there are two factories on the river that dump polluted water in the river. Each factory could install a filter that would cost $5,000 each and would reduce the pollution in the water to a negligible level. In this case, A) assigning property rights to the river to either party will result in an efficient outcome. B) neither party is willing to bargain with the other. C) if property rights to the river are assigned to the factory, then all the homes will be abandoned. D) if property rights to the river are assigned to the homeowners, then the factories will be closed. Answer: A Topic: Coase Theorem Skill: Analytical Status: Old AACSB: Analytical Skills

76) The figure above provides information for a factory that produces chemicals that pollute a waterway. The waterway is used by water skiers. If no property rights exist on the waterway and if there is no regulation of pollution, then the factory produces ________ of chemicals a week. A) 1 ton B) as many tons as possible C) 3 tons D) 5 tons Answer: C Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

77) The figure above provides information for a factory that produces chemicals that pollute a waterway. The waterway is used by water skiers. The efficient quantity of chemicals to produce is ________ tons of chemicals a week. A) 1 ton B) as many tons as possible C) 3 tons D) 5 tons Answer: C Topic: Coase Theorem Skill: Analytical Status: Old AACSB: Analytical Skills

78) The figure above provides information for a factory that produces chemicals that pollute a waterway. The waterway is used by water skiers. If the waterway is owned by a water ski club and the Coase theorem applies, then the factory will produce ________ tons of chemicals a week. A) 1 ton B) as many tons as possible C) 3 tons D) 5 tons Answer: A Topic: Coase Theorem Skill: Analytical Status: Old AACSB: Analytical Skills

79) The figure above provides information for a factory that produces chemicals that pollute a waterway. The waterway is used by water skiers. If the waterway is owned by the factory and the Coase theorem applies, then the factory will produce ________ tons of chemicals a week. A) 1 ton B) as many tons as possible C) 3 tons D) 5 tons Answer: A Topic: Coase Theorem Skill: Analytical Status: Old AACSB: Analytical Skills

The figure shows the unregulated market for a pesticide, where S is the supply curve and D is the demand curve. The demand curve is the same as the MSB curve. When factories produce the pesticide, they also create waste, which they dump into a lake on the outskirts of the town. The marginal external cost of the dumped waste is equal to the marginal private cost of producing the pesticide. 80) In the figure above, if the output is 180 tons per month, what is the marginal social cost of producing the pesticide? A) $60 B) $30 C) $40 D) $50 Answer: A Topic: Marginal Social Cost Skill: Analytical Status: Old AACSB: Analytical Skills

81) In the figure above, what is the efficient quantity of pesticide to produce? A) 300 tons per month B) 240 tons per month C) 180 tons per month D) 360 tons per month Answer: C Topic: Efficient Level of Pollution Skill: Analytical Status: Old AACSB: Analytical Skills

82) In the figure above, if no one owns the lake, what is the quantity of pesticide produced? A) 300 tons per month B) 240 tons per month C) 180 tons per month D) 360 tons per month Answer: A Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

83) In the figure above, if no one owns the lake, at the equilibrium quantity what is the marginal social cost of producing the pesticide? A) $80 B) $40 C) $60 D) $30 Answer: A Topic: Marginal Social Cost Skill: Analytical Status: Old AACSB: Analytical Skills

84) In the figure above, if no one owns the lake, what is the equilibrium price of the pesticide? A) $80 per ton B) $40 per ton C) $60 per ton D) $30 per ton Answer: B Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

85) In the figure above, if no one owns the lake, the market does what? A) overproduces 120 tons of pesticide B) underproduces 120 tons of pesticide C) overproduces 60 tons of pesticide D) produces the efficient quantity of pesticide Answer: A Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

86) In the figure above, if no one owns the lake, what is the deadweight loss in the market? A) $2,400 per month B) $1,800 per month C) $3,600 per month D) zero Answer: A Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

87) Keeping in mind the Coase theorem, in the figure above if the pesticide factories own the lake, how much pesticide is produced? A) 300 tons per month B) 240 tons per month C) 180 tons per month D) 360 tons per month Answer: C Topic: Coase Theorem Skill: Analytical Status: Old AACSB: Analytical Skills

88) Keeping in mind the Coase theorem, in the figure above, if the pesticide factories own the lake, the market does what? A) overproduces 120 tons of pesticide B) underproduces 120 tons of pesticide C) overproduces 60 tons of pesticide D) produces the efficient quantity of pesticide Answer: D Topic: Coase Theorem Skill: Analytical Status: Old AACSB: Analytical Skills

89) Keeping in mind the Coase theorem, in the figure above, if the residents of the town own the lake, the market does what? A) overproduces 120 tons of pesticide B) underproduces 120 tons of pesticide C) overproduces 60 tons of pesticide D) produces the efficient quantity of pesticide Answer: D Topic: Coase Theorem Skill: Analytical Status: Old AACSB: Analytical Skills

90) Keeping in mind the Coase theorem, in the figure above, if the residents of the town own the lake, how much do they charge the factories to dump waste? A) $30 per ton of pesticide produced B) $40 per ton of pesticide produced C) $20 per ton of pesticide produced D) Nothing Answer: A Topic: Coase Theorem Skill: Analytical Status: Old AACSB: Analytical Skills

91) In the figure above, if no one owns the lake the tax that achieves the efficient outcome is ________ per ton of pesticide produced. A) $30 B) $40 C) $20 D) $10 Answer: A Topic: Coase Theorem Skill: Analytical Status: Old AACSB: Analytical Skills

92) A country has several factories that emit sulfur dioxide. The main methods that the government can use to overcome the accompanying environment externalities include all of the following EXCEPT A) cap-and-trade. B) mandating clean technology. C) subsidies. D) taxes. Answer: C Topic: Government Policies for External Costs Skill: Conceptual Status: Old AACSB: Analytical Skills

93) The three main methods that governments use to cope with an external cost of production include all of the following EXCEPT A) taxes. B) mandating clean technology. C) cap-and-trade D) price floors. Answer: D Topic: Government Policies Skill: Conceptual Status: Old AACSB: Analytical Skills

94) When external costs are present, A) competitive, unregulated markets are efficient. B) transaction costs will be high. C) a tax might be able to create efficiency. D) property rights have already been established. Answer: C Topic: Taxes and External Costs Skill: Conceptual Status: Old AACSB: Analytical Skills

95) The government can use taxes to A) change production in a market with an external cost to the efficient amount. B) change production in a market with an external benefit to the efficient amount. C) increase production. D) decrease price. Answer: A Topic: Taxes and External Costs Skill: Conceptual Status: Old AACSB: Analytical Skills

96) Consider a market in which there is an external cost. A tax can be used to arrive at the efficient market equilibrium because the tax will A) decrease supply of the good. B) increase supply of the good. C) decrease demand for the good. D) increase demand for the good. Answer: A Topic: Taxes and External Costs Skill: Conceptual Status: Old AACSB: Analytical Skills

97) Taxes can yield the efficient level of pollution if the tax is set equal to the A) marginal benefit of pollution. B) marginal external cost of the pollution. C) marginal social cost of the pollution. D) equilibrium price of the pollution. Answer: B Topic: Taxes and External Costs Skill: Conceptual Status: Old AACSB: Analytical Skills

98) When the production of a good creates an external cost, by setting the tax rate equal to the ________, firms can be made to behave in the same way as they would if they bore the cost of the externality directly. A) marginal external cost B) marginal social benefit C) marginal private benefit D) marginal social cost Answer: A Topic: Taxes and External Costs Skill: Conceptual Status: Old AACSB: Analytical Skills

99) When the production of a good creates an external cost, one method of achieving the efficient allocation is to impose a tax such that A) MC + tax = MSC. B) MC - tax = MSB. C) MB + tax = MSC. D) MB - tax = MSB. Answer: A Topic: Taxes and External Costs Skill: Conceptual Status: Old AACSB: Analytical Skills

100) When the production of a good creates an external cost, in order for taxes to be effective in achieving the efficient allocation of resources, the tax must be set equal to the A) marginal private cost. B) marginal external cost. C) marginal social cost. D) marginal benefit of polluting. Answer: B Topic: Taxes and External Costs Skill: Conceptual Status: Old AACSB: Analytical Skills

101) To eliminate the inefficiency resulting from an external cost of production, the government can impose a tax on producers that is equal to the A) MSB. B) MC. C) marginal external cost. D) MSC. Answer: C Topic: Taxes and External Costs Skill: Conceptual Status: Old AACSB: Analytical Skills

102) When the production of a good creates an external cost, to achieve the efficient quantity governments can set taxes (T) such that ________. A) MSC = MC + T B) MC = MSC + T C) T = MC + MSC D) MSC = MC - T Answer: A Topic: Taxes and External Costs Skill: Conceptual Status: Old AACSB: Analytical Skills

103) Let MC be the marginal private cost per megawatt hour (Mwh) of producing electricity using coal. Let MSC be the marginal social cost per Mwh and T be the tax per Mwh. To achieve efficiency, the tax should be set so that A) MC = MSC + T. B) MSC = MC + T. C) MC + MSC = T D) MC = T. Answer: B Topic: Taxes and External Costs Skill: Conceptual Status: Old AACSB: Analytical Skills

104) When external costs are present and the government imposes a tax equal to the marginal external cost, then A) efficiency can be achieved. B) transaction costs will be high. C) the marginal benefit of the external cost will fall. D) property rights must have already been established. Answer: A Topic: Taxes and External Costs Skill: Conceptual Status: Old AACSB: Analytical Skills

105) When producing a good creates pollution, an external cost, and the government imposes a tax equal to the marginal external cost, then A) the amount of output moves farther away from the efficient amount. B) transaction costs will be high. C) the efficient amount of the good will be produced. D) property rights must have already been established. Answer: C Topic: Taxes and External Costs Skill: Conceptual Status: Old AACSB: Analytical Skills

106) A tax equal to the external marginal cost of an activity yields the efficient level of production because the tax A) achieves the competitive equilibrium. B) forces producers to face all costs of production including the external cost. C) ensures greater profits for the firm. D) eliminates all pollution. Answer: B Topic: Taxes and External Costs Skill: Conceptual Status: Old AACSB: Analytical Skills

Those opposed to fracking, a method of extracting natural gas through breaking up underground rocks with chemicals and water, warn that this method might pollute nearby sources of drinking water. 107) Any such pollution is A) an external benefit. B) an external cost. C) a private cost. D) a private benefit. Answer: B Topic: Marginal External Cost Skill: Conceptual Status: New AACSB: Analytical Skills

108) If this pollution occurs, the marginal social cost equals the A) marginal external cost. B) private marginal cost. C) sum of the private marginal cost and the marginal external cost. D) private marginal cost minus the marginal external cost. Answer: C Topic: Marginal Social Cost Skill: Analytical Status: New AACSB: Analytical Skills

109) If this pollution occurs, the market equilibrium with no government intervention extracts ________ natural gas than the efficient quantity and ________ a deadweight loss. A) less; does not create B) more; does not create C) less; creates D) more; creates Answer: D Topic: An Unregulated Market Skill: Analytical Status: New AACSB: Analytical Skills

110) If this pollution occurs, one way of reaching efficient production levels is by setting a Pigovian Tax. To achieve efficiency with this tax means that the tax must equal the A) marginal social cost. B) marginal private cost. C) marginal private benefit. D) marginal external cost. Answer: D Topic: Taxes and External Costs Skill: Analytical Status: New AACSB: Analytical Skills

111) Consider the production of some industrial good that creates air pollution. The table below gives the marginal social cost (MSC), the marginal cost (MC), and the marginal social benefit (MSB) for each level of output (Q). Q 1 2 3 4 5 6

MSC 3 6 9 12 15 18

MC 2 4 6 8 10 12

MSB 11 10 9 8 7 6

The inefficient market quantity is ________ and the efficient market quantity is ________. A) 4; 3 B) 6; 3 C) 3; 4 D) 4; 6 Answer: A Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

112) Consider the production of some industrial good that involves air pollution. The table below gives the marginal social cost (MSC), the marginal cost (MC), and the marginal social benefit (MSB) for each level of output (Q). Q 1 2 3 4 5 6

MSC 3 6 9 12 15 18

MC 2 4 6 8 10 12

MSB 11 10 9 8 7 6

To arrive at the efficient market equilibrium the government could impose a tax of A) $3. B) $4. C) $8. D) $9. Answer: A Topic: Taxes and External Costs Skill: Analytical Status: Old AACSB: Analytical Skills

Number of bus rides per week 100 200 300 400 500

Marginal cost of bus company (dollars per bus ride) 0.25 0.50 1.00 1.50 1.75

Marginal social cost (dollars per bus ride) 1.00 1.50 2.25 3.00 5.00

113) The demand for bus service is perfectly elastic at a price of $1.00 a ride. The table above shows the bus company's marginal cost and the marginal social cost of the bus service. The competitive quantity of bus rides per week is ________. A) 100 B) 200 C) 300 D) 500 Answer: C Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

114) The demand for bus service is perfectly elastic at a price of $1.25 a ride. The table above shows the bus company's marginal cost and the marginal social cost of the bus service. If the government levies a tax on bus rides so that the bus company takes into account the marginal social cost, the tax will be ________ a ride. A) $0.75 B) $1.60 C) $1.25 D) $3.25 Answer: A Topic: Taxes and External Costs Skill: Analytical Status: Old AACSB: Analytical Skills

Quantity (tons per week) 10 20 30 40 50 60

Marginal private cost (dollars per ton) 50 60 70 80 90 100

Marginal social Marginal cost private benefit (dollars per (dollars per ton) ton) 70 150 100 140 130 130 160 120 190 110 220 100

115) The table above describes the market for paper. The production of paper produces pollution. There are no external benefits. What is the quantity produced if the market for paper is unregulated? A) 10 tons per week B) 60 tons per week C) 40 tons per week D) 30 tons per week Answer: B Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

116) The table above describes the market for paper. The production of paper produces pollution. There are no external benefits. What is the efficient amount of paper? A) 10 tons per week B) 60 tons per week C) 40 tons per week D) 30 tons per week Answer: D Topic: Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills 34 Copyright © 2014 Pearson Education, Inc.

117) The table above describes the market for paper. The production of paper produces pollution. There are no external benefits. What amount of tax per ton of paper is necessary to produce the efficient quantity of paper? A) $60 B) zero C) $40 D) $100 Answer: A Topic: Taxes and External Costs Skill: Analytical Status: Old AACSB: Analytical Skills

118) The table above describes the market for paper. The production of paper produces pollution. There are no external benefits. Now suppose a Pigovian tax is successfully implemented and the efficient quantity of paper is produced. What is the total tax revenue collected by the government per week? A) $120 B) $840 C) $1,200 D) $1,800 Answer: D Topic: Taxes and External Costs Skill: Analytical Status: Old AACSB: Analytical Skills

Marginal Marginal social Quantity private benefit benefit (tons of paper (dollars per ton (dollars per ton per year) of paper) of paper) 800 100 100 1,600 90 90 2,400 80 80 3,200 70 70 4,000 60 60 4,800 50 50 Marginal Marginal social Quantity private cost cost (tons of paper (dollars per ton (dollars per ton per year) of paper) of paper) 800 40 60 1,600 50 70 2,400 60 80 3,200 70 90 4,000 80 100 4,800 90 110 119) The tables above show the marginal costs and benefits from production of paper. If the market is perfectly competitive and unregulated, the equilibrium output is ________ of paper. A) 1,600 tons B) 2,400 tons C) 3,200 tons D) 4,000 tons Answer: C Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

120) The tables above show the marginal costs and benefits from production of paper. If the market is perfectly competitive and unregulated, the equilibrium price is ________ per ton. A) $60 B) $70 C) $80 D) $90 Answer: B Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

121) The tables above show the marginal costs and benefits from production and consumption of paper. From this information we can see that there are A) external costs of producing paper. B) external benefits of producing paper. C) no externalities in production of paper. D) external costs from consuming paper. Answer: A Topic: External Costs Skill: Analytical Status: Old AACSB: Analytical Skills

122) The tables above show the marginal costs and benefits from production of paper. If the market is perfectly competitive and unregulated, at the equilibrium level of output, the marginal external cost is A) zero B) $10 C) $20 D) $30 Answer: C Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

123) The tables above show the marginal costs and benefits from production of paper. The efficient level of output is ________ of paper. A) 1,600 tons B) 2,400 tons C) 3,200 tons D) 4,000 tons Answer: B Topic: Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills

124) The tables above show the marginal costs and benefits from production of paper. If the market is perfectly competitive and unregulated, the A) allocation of resources is efficient. B) market equilibrium produces 800 tons more than the efficient amount. C) market equilibrium produces 1,600 tons more than the efficient amount. D) market equilibrium produces 800 tons less than the efficient amount. Answer: B Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

125) The tables above show the marginal costs and benefits from production of paper. If the market is perfectly competitive and unregulated, the efficient level of output A) is achieved. B) can be achieved by giving paper producers a subsidy. C) can be achieved by imposing a Pigovian tax on paper producers. D) cannot be achieved. Answer: C Topic: Taxes and External Costs Skill: Analytical Status: Old AACSB: Analytical Skills

126) The tables above show the marginal costs and benefits from production of paper. If the market is perfectly competitive and unregulated, the efficient amount of paper will be produced by setting a Pigovian tax of A) $5 per ton. B) $10 per ton. C) $20 per ton. D) $40 per ton. Answer: C Topic: Taxes and External Costs Skill: Analytical Status: Old AACSB: Analytical Skills

127) The tables above show the marginal costs and benefits from production of paper. If the efficient level of output is achieved by imposing a tax on paper producers, the government collects tax revenue equal to A) $64,000. B) $56,000. C) $72,000. D) $48,000. Answer: D Topic: Taxes and External Costs Skill: Analytical Status: Old AACSB: Analytical Skills

128) In the figure above showing the costs and benefits of paper production, there is an A) external cost associated with paper production. B) external benefit associated with paper production. C) external cost associated with paper consumption. D) external benefit associated with paper consumption. Answer: A Topic: External Costs Skill: Analytical Status: Old AACSB: Analytical Skills

129) In the above figure, the competitive unregulated equilibrium is producing and consuming ________ tons of paper at a price of ________ per ton. A) 100; $150 B) 100; $100 C) 100; $50 D) 200; $100 Answer: D Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

130) If the government regulates the market in the above figure in a way to achieve efficiency, then ________ tons of paper will be produced and consumed. A) 0 B) 100 C) 200 D) None of the above answers is correct. Answer: B Topic: Taxes and External Costs Skill: Analytical Status: Old AACSB: Analytical Skills

131) The government can aid in reducing pollution by using a policy of cap-and-trade, which means that A) polluters are taxed on the amount of pollution they discharge. B) emission charges are established by the government. C) each polluter is assigned a pollution limit and is given tradable permits that allow this amount of pollution. D) only some producers pollute and the others go out of business. Answer: C Topic: Cap-and-Trade Skill: Definition Status: Old AACSB: Analytical Skills

132) ________ played a large role is removing lead from the atmosphere in the United States. A) Pigovian taxes B) The Coase Theorem C) Emissions charges D) Marketable permits Answer: D Topic: Cap-and-Trade Skill: Definition Status: Old AACSB: Analytical Skills

133) There are two industries that emit sulfur dioxide. The government decides to use a cap-and-trade policy by issuing permits for pollution. If Harry's industry has a higher marginal cost of reducing sulfur dioxide than does Joe's industry, ________. A) the cap-and-trade policy will not make the amount of pollution efficient B) Joe's industry will sell permits to Harry's industry C) Harry's industry will sell permits to Joe's industry D) Harry's industry and Joe's industry will emit the same quantity of sulfur dioxide Answer: B Topic: Cap-and-Trade Skill: Conceptual Status: Old AACSB: Analytical Skills

134) With marketable permits to pollute, efficiency can be obtained if A) the regulator knows the marginal cost schedule of every firm. B) firms with low marginal costs of eliminating pollution sell their permits. C) firms with low marginal costs of eliminating pollution buy up more permits. D) only one firm gets the permits to pollute. Answer: B Topic: Cap-and-Trade Skill: Conceptual Status: Old AACSB: Analytical Skills

135) Both firm A and firm B emit 300 tons of pollution. Suppose both firm A and firm B have permits that allow each to emit 100 tons of pollution. If it costs $5,000 for firm A to eliminate 100 tons of pollution and it costs firm B $6,000 to eliminate 100 tons of pollution, then A) firm B will sell its permits to firm A for a price above $6,000. B) firm A will sell its permits to firm B for a price below $6,000. C) firm A will sell its permits to firm B for a price above $6,000. D) firm B will sell its permits to firm A for a price below $6,000. Answer: B Topic: Cap-and-Trade Skill: Analytical Status: Old AACSB: Analytical Skills

136) If the government creates a system of pollution permits, firms with low marginal costs of reducing pollution will A) buy permits from other firms. B) sell permits to other firms. C) hold on to the permits they have been issued and not attempt to buy more. D) not be issued permits. Answer: B Topic: Cap-and-Trade Skill: Analytical Status: Old AACSB: Analytical Skills

Quantity (tons) 1,000 2,000 3,000 4,000 5,000 6,000

Marginal private benefit (dollars per ton) 140 120 100 80 60 40

Marginal private cost (dollars per ton) 50 60 70 80 90 100

Marginal social cost (dollars per ton) 80 90 100 110 120 130

137) The above table shows the marginal benefits and costs from production of fertilizer. There are no external benefits. Based on the data in the table, production of fertilizer has A) external benefits. B) external costs. C) no externalities. D) constant returns to scale. Answer: B Topic: Marginal Social Cost Skill: Analytical Status: Old AACSB: Analytical Skills

138) The above table shows the marginal benefits and costs from production of fertilizer. There are no external benefits. If the market is perfectly competitive and unregulated, the equilibrium output will be A) 2,000 tons. B) 3,000 tons. C) 4,000 tons. D) 5,000 tons. Answer: C Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

139) The above table shows the marginal benefits and costs from production of fertilizer. There are no external benefits. If the market is perfectly competitive and unregulated, at the equilibrium level of output, A) resource allocation is efficient. B) resource allocation is inefficient. C) too few tons of fertilizer are produced. D) consumers must pay too high a price for fertilizer. Answer: B Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

140) The above table shows the marginal benefits and costs from production of fertilizer. There are no external benefits. If the market is perfectly competitive and unregulated, the equilibrium price per ton will be A) $70. B) $80. C) $90. D) $100. Answer: B Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

141) The above table shows the marginal benefits and costs from production of fertilizer. There are no external benefits. If the market is perfectly competitive and unregulated, at the equilibrium output, the A) marginal private cost exceeds the marginal private benefit. B) marginal private cost is less than the marginal private benefit. C) marginal social cost equals the marginal private benefit. D) marginal social cost is greater than the marginal private benefit. Answer: D Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

142) The above table shows the marginal benefits and costs from production of fertilizer. There are no external benefits. If the market is perfectly competitive and unregulated, at the equilibrium level of output, the marginal external cost per ton is A) zero. B) $30. C) $80. D) $110. Answer: B Topic: Marginal Social Cost Skill: Analytical Status: Old AACSB: Analytical Skills

143) The above table shows the marginal benefits and costs from production of fertilizer. There are no external benefits. The efficient level of output is A) 2,000 tons. B) 3,000 tons. C) 4,000 tons. D) 5,000 tons. Answer: B Topic: Efficient Level of Pollution Skill: Analytical Status: Old AACSB: Analytical Skills

144) The above table shows the marginal benefits and costs from production of fertilizer. There are no external benefits. If the market is perfectly competitive and unregulated, the efficient level of output could be achieved by setting a per ton tax of A) zero. B) $30. C) $80. D) $110. Answer: B Topic: Taxes and External Costs Skill: Analytical Status: Old AACSB: Analytical Skills

145) In the figure above, if the market is unregulated, the output will be A) zero. B) 50 units. C) 150 units. D) 250 units. Answer: D Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

146) In the figure above, if the market is unregulated, A) more than the efficient amount of output will be produced. B) less than the efficient amount of output will be produced. C) the allocation of resources will be efficient because the efficient amount of output will be produced. D) the deadweight loss will be zero. Answer: A Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

147) In the figure above, if the market is unregulated, the price will be A) $250 per unit. B) $200 per unit. C) $150 per unit. D) $100 per unit. Answer: C Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

148) In the figure above, if the market is unregulated, then at the equilibrium output level, the marginal social cost of production A) is less than the marginal benefit to consumers. B) exceeds the marginal benefit to consumers. C) equals the marginal benefit to consumers. D) equals the marginal private cost of production. Answer: B Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

149) In the figure above, if the market is unregulated, at the equilibrium output the marginal external cost is A) zero. B) $250 per unit. C) $150 per unit. D) $100 per unit. Answer: D Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

150) In the figure above, in order to promote an efficient allocation of resources, the government could impose a tax equal to A) zero. B) $250 per unit. C) $150 per unit. D) $100 per unit. Answer: D Topic: Taxes and External Costs Skill: Analytical Status: Old AACSB: Analytical Skills

151) In the figure above, if an excise tax is imposed that generates an efficient allocation of resources, then the amount of output will be A) zero. B) 50 units. C) 150 units. D) 250 units. Answer: C Topic: Taxes and External Costs Skill: Analytical Status: Old AACSB: Analytical Skills

152) In the figure above, if a tax is imposed that generates an efficient allocation of resources, then consumers will pay a price of A) $250 per unit. B) $200 per unit. C) $150 per unit. D) $100 per unit. Answer: B Topic: Taxes and External Costs Skill: Analytical Status: Old AACSB: Analytical Skills

153) In the figure above, S is the supply curve and D is the demand curve in the unregulated, competitive market for gasoline in Motorland. The external cost of gasoline is constant at $1.50 per gallon. The unregulated, competitive market for gasoline in Motorland A) produces the efficient quantity of gasoline. B) overproduces by 0.2 million gallons of gasoline a month. C) underproduces by 0.1 million gallons of gasoline a month. D) overproduces by 0.1 million gallons of gasoline a month. Answer: D Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

154) The efficient quantity of gasoline to sell in Motorland is A) 1.7 million gallons per month. B) 1.8 million gallons per month. C) 1.6 million gallons per month. D) 1.9 million gallons per month. Answer: A Topic: Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills

155) When the market for gasoline in Motorland is in equilibrium, the market price of gasoline is ________ the marginal social cost. A) $1.50 above B) $1.50 below C) equal to D) $1.20 above Answer: B Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

156) When the market for gasoline in Motorland is in equilibrium, the deadweight loss is A) $37,500 per month. B) $150,000 per month. C) $75,000 per month. D) zero. Answer: C Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

157) Suppose Motorland's government imposes a tax of $1.50 per gallon of gasoline sold. With the tax, the market will A) underproduce by 0.2 million gallons of gasoline a month. B) underproduce by 0.1 million gallons of gasoline a month. C) overproduce by 0.1 million gallons of gasoline a month. D) produce the efficient quantity of gasoline. Answer: D Topic: Taxes and External Costs Skill: Analytical Status: Old AACSB: Analytical Skills

158) Suppose Motorland's government imposes a tax of $1.50 per gallon of gasoline sold. With the tax, when the market is in equilibrium, the deadweight loss is A) zero. B) $37,500 per month. C) $150,000 per month. D) $75,000 per month. Answer: A Topic: Taxes and External Costs Skill: Analytical Status: Old AACSB: Analytical Skills

159) The figure above shows the costs associated with producing paper. When paper is produced, there is some pollution runoff into a lake. The marginal private cost when output equals 2 tons of paper per week equals A) $50 per ton B) $100 per ton. C) $150 per ton. D) None of the above answers is correct. Answer: A Topic: Marginal Private Cost Skill: Analytical Status: Old AACSB: Analytical Skills

160) The figure above shows the costs associated with producing paper. When paper is produced, there is some pollution runoff into a lake. The marginal private cost borne by the firms plus the people who enjoy a clean lake when output equals 2 tons of paper per week equals A) $50 per ton. B) $100 per ton. C) $150 per ton. D) None of the above answers is correct. Answer: B Topic: Marginal Social Cost Skill: Analytical Status: Old AACSB: Analytical Skills

161) The figure above shows the costs associated with producing paper. When paper is produced, there is some pollution runoff into a lake. Without regulation, ________ tons of paper will be produced and the price will be ________ per ton. A) 3; $150 B) 4 ;$100 C) 4; $200 D) None of the above answers is correct. Answer: B Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

162) The figure above shows the costs associated with producing paper. When paper is produced, there is some pollution runoff into a lake. If paper production is 4 tons per week, the outcome is ________. A) efficient because marginal benefit equals marginal private cost B) efficient because private and external costs are accounted for C) inefficient because only marginal external benefits are accounted for D) inefficient because marginal social cost exceeds marginal social benefit Answer: D Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

163) The figure above shows the costs associated with producing paper. When paper is produced, there is some pollution runoff into a lake. According to the Coase Theorem, if the transactions costs are low and there are only a few people involved, the output will equal ________ tons of paper if ________ own the lake. A) 3; only the lakeside residents B) 3; either the firms or lakeside residents C) 4; the firms D) 4; either the firms or lakeside residents Answer: B Topic: Coase Theorem Skill: Analytical Status: Old AACSB: Analytical Skills

164) The figure above illustrates the problem of overcrowding and external costs experienced during the summer months in the state park. If the market is unregulated, in equilibrium the external cost of visiting the state park is given by the distance between A) points H and G. B) points I and F. C) points F and G. D) points G and K. Answer: C Topic: Marginal Social Cost Skill: Analytical Status: Old AACSB: Analytical Skills

165) The figure above illustrates the problem of overcrowding and external costs experienced during the summer months in the state park. The competitive equilibrium is at A) point G. B) point H. C) point I. D) point J. Answer: A Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

166) The figure above illustrates the problem of overcrowding and external costs experienced during the summer months in the state park. An efficient allocation of resources occurs at A) point F. B) point G. C) point H. D) point I. Answer: D Topic: Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills

167) In the above figure, if no government intervention occurs, at the unregulated competitive market equilibrium, the marginal cost of the externality is ________ per unit. A) $3 B) $4 C) $6 D) $7 Answer: A Topic: An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

168) In the above figure, if the market is unregulated, the equilibrium quantity is A) 0 units. B) 70 units. C) 80 units. D) 100 units. Answer: D Topic: Taxes and External Costs Skill: Analytical Status: Old AACSB: Analytical Skills

169) In the above figure, the efficient quantity is A) 0 units. B) 70 units. C) 80 units. D) 100 units. Answer: C Topic: Taxes and External Costs Skill: Analytical Status: Old AACSB: Analytical Skills

170) In the above figure, in order to achieve efficiency, a tax of ________ per unit is needed. A) $3 B) $6 C) $0 D) $2 Answer: D Topic: Taxes and External Costs Skill: Analytical Status: Old AACSB: Analytical Skills

171) The figure above shows the market for transportation services, which produces an external cost due to the air pollution that is created. If the market for transportation services is competitive and unregulated, the equilibrium quantity is ________ and the equilibrium price is ________. A) 120; $14 B) 120; $8 C) 80; $12 D) 80; $6 Answer: B Topic: An Unregulated Market Skill: Recognition Status: Old AACSB: Analytical Skills

172) The figure above shows the market for transportation services, which produces an external cost due to the air pollution that is created. The efficient quantity of transportation services is ________ and the corresponding price is ________. A) 120; $14 B) 120; $8 C) 80; $12 D) 80; $6 Answer: C Topic: Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills

173) The figure above shows the market for transportation services, which produces an external cost due to the air pollution that is created. Suppose that the government decides to introduce a pollution tax. What is the tax per vehicle mile that will achieve the efficient outcome? A) $2 B) $4 C) $6 D) $8 Answer: C Topic: Taxes and External Costs Skill: Analytical Status: Old AACSB: Analytical Skills

Quantity (units) 500 550 600 650 700

Marginal private cost (dollars per unit) 5 6 7 8 9

Marginal private benefit (dollars per unit) 11 10 9 8 7

Marginal social cost (dollars per unit) 7 8 9 10 11

Marginal social benefit (dollars per unit) 11 10 9 8 7

174) Based on the data in the above table, the table shows a market for a good with A) an external cost. B) an external benefit. C) a mixed externality. D) no externalities. Answer: A Topic: Study Guide Question, External Cost Skill: Analytical Status: Old AACSB: Analytical Skills

175) Left unregulated, the equilibrium amount produced in the market described in the table above is A) 550 units. B) 600 units. C) 650 units. D) 700 units. Answer: C Topic: Study Guide Question, An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

176) Based on the data in the table above, the efficient level of output equals A) 550 units. B) 600 units. C) 650 units. D) 700 units. Answer: B Topic: Study Guide Question, Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills

177) Based on the data in the above table, to assure that the efficient amount is produced the government can A) subsidize the suppliers $8 per unit. B) subsidize the suppliers $2 per unit. C) tax suppliers $2 per unit. D) tax suppliers $8 per unit. Answer: C Topic: Study Guide Question, Taxes and External Costs Skill: Analytical Status: Old AACSB: Analytical Skills

178) A copper ore refiner pollutes the water upstream from a brewery. These are the only two parties involved. The transactions costs of reaching an agreement between the refinery and the brewery are low. The amount of water pollution will be at the efficient level A) only when the property right to the stream is assigned to the ore refinery. B) only when the property right to the stream is assigned to the brewery. C) when the property right to the stream is assigned to either the refinery or to the brewery. D) when no one has clear property rights. Answer: C Topic: Study Guide Question, Coase Theorem Skill: Analytical Status: Old AACSB: Analytical Skills

179) The amount of the external marginal cost per ton illustrated in the above figure is A) $8.00 per ton. B) $12.00 per ton. C) $16.00 per ton. D) zero because no external cost is illustrated. Answer: A Topic: Study Guide Question, External Cost Skill: Analytical Status: Old AACSB: Analytical Skills

180) Using the above figure, in the absence of any government intervention, the number of tons of paper produced will be A) 60 million tons. B) 80 million tons. C) 100 million tons. D) 120 million tons. Answer: C Topic: Study Guide Question, An Unregulated Market Skill: Analytical Status: Old AACSB: Analytical Skills

181) Using the above figure, the efficient amount of paper produced is A) 60 million tons. B) 80 million tons. C) 100 million tons. D) 120 million tons. Answer: A Topic: Study Guide Question, Efficiency Skill: Analytical Status: Old AACSB: Analytical Skills

182) In the above figure, to achieve the efficient amount of paper production, the government could impose a tax of A) $2 per ton. B) $8 per ton. C) $26 per ton. D) zero, because the efficient amount is produced with no government intervention. Answer: B Topic: Study Guide Question, Taxes and External Costs Skill: Analytical Status: Old AACSB: Analytical Skills

2 The Tragedy of the Commons 1) The tragedy of commons is the A) underuse of a common resource. B) absence of incentives for people to pay for what they consume. C) fact that common resources are nonrival. D) overuse of a common resource. Answer: D Topic: Tragedy of the Commons Skill: Definition Status: Old AACSB: Analytical Skills

2) Which of the following applies to the tragedy of the commons? I. In the absence of government action, there is an absence of incentives to prevent the overuse of the common resource. II. When consumers take account of the marginal social benefit and marginal social cost, overuse of the resource occurs. III. Even with government action, it is impossible for an efficient level of output to be achieved. A) I only B) I and II C) II and III D) I, II and III Answer: A Topic: Tragedy of the Commons Skill: Definition Status: Old AACSB: Analytical Skills

3) The tragedy of the commons is the absence of incentives to A) correctly measure the marginal social benefit from a common resource. B) prevent under use of the common resource. C) prevent overuse and depletion of a common resource. D) discover the common resource. Answer: C Topic: Tragedy of the Commons Skill: Definition Status: Old AACSB: Analytical Skills

4) The tragedy of the commons is the absence of incentives to A) use commonly owned resources. B) prevent the overuse of commonly owned resources. C) use privately owned resources. D) have commonly owned resources. Answer: B Topic: Tragedy of the Commons Skill: Conceptual Status: Old AACSB: Analytical Skills

5) In which of the following cases does the tragedy of the commons occur? I. Cattle grazing on private ranches. II. Catching lobsters off the coast of Florida. III. Raising salmon on salmon farms. IV. Using legal services provided by the courts. A) I only B) II only C) II and III only D) I and IV only Answer: B Topic: Tragedy of the Commons Skill: Conceptual Status: Old AACSB: Analytical Skills

6) The Atlantic City Expressway is a highway that runs from outside Philadelphia to Atlantic City, New Jersey. It is notoriously congested during the summer weekends when many people are driving to the beach about the same time. The marginal private cost for a driver of driving on the Expressway includes I. the cost of gasoline. II. the cost of increasing congestion for everyone else. A) I only B) II only C) Both I and II D) Neither I nor II Answer: A Topic: Marginal Private Cost Versus Marginal Social Cost Skill: Conceptual Status: New AACSB: Analytical Skills

7) For a common resource, the marginal private cost curve slopes ________ and the marginal social cost curve slopes ________. A) upward; upward B) upward; downward C) downward; upward D) downward; downward Answer: A Topic: Marginal Private Cost Versus Marginal Social Cost Skill: Definition Status: Old AACSB: Analytical Skills

8) For a common resource, the marginal social cost of the resource is ________ the marginal private cost. A) greater than B) equal to C) less than D) not comparable to Answer: A Topic: Marginal Private Cost Versus Marginal Social Cost Skill: Definition Status: Old AACSB: Analytical Skills

9) For a common resource, the equilibrium with no government intervention is such that ________ is less than ________. A) marginal private cost; marginal social benefit B) marginal social benefit; marginal social cost C) marginal private benefit; marginal social benefit D) total social benefit; total social cost Answer: A Topic: Inefficient Equilibrium Skill: Conceptual Status: Revised AACSB: Analytical Skills

10) For a common resource, efficiency requires that the ________ equals the ________. A) marginal private benefit; marginal social cost B) marginal social benefit; marginal social cost C) marginal private benefit; marginal social benefit D) marginal social cost; marginal private cost Answer: B Topic: Efficient Use of the Commons Skill: Definition Status: Old AACSB: Analytical Skills

11) A common resource is used efficiently if A) the output is maximized. B) marginal social benefit equals marginal social cost. C) marginal private benefit equals marginal private cost. D) marginal social benefit is maximized. Answer: B Topic: Efficient Use of the Commons Skill: Definition Status: Old AACSB: Analytical Skills

12) To achieve the efficient amount of use of a common resource, the use should be such that ________ equals ________. A) marginal social cost; marginal private cost B) marginal social cost; marginal social benefit C) marginal social benefit; marginal private cost D) marginal private cost; marginal private benefit Answer: B Topic: Efficient Use of the Commons Skill: Definition Status: Old AACSB: Analytical Skills

13) The problem of the commons arises because ________ exceeds ________ when the resource is used. A) marginal social cost; marginal private cost B) marginal private benefit; marginal social benefit C) marginal private benefit; marginal private cost D) marginal private cost; marginal social cost Answer: A Topic: Tragedy of the Commons Skill: Conceptual Status: Old AACSB: Analytical Skills

14) The Atlantic City Expressway is a highway that runs from outside Philadelphia to Atlantic City, New Jersey. It is notoriously congested during the summer weekends when many people are driving to the beach about the same time. Because drivers who decide to take this road ignore the impact of their driving on overall traffic congestion the result is ________ cars on the road than the efficient number of cars and a deadweight loss is ________. A) fewer; not created B) fewer; created C) more; not created D) more; created Answer: D Topic: Inefficient Use of a Common Resource Skill: Analytical Status: New AACSB: Analytical Skills

15) One way to overcome the problem of the commons is to A) assign property rights so that someone owns the resource. B) take away property rights so that no one owns the resource. C) leave the market alone because the market will reach an equilibrium in which the efficient amount of the resource is used. D) None of the above answers is correct. Answer: A Topic: Property Rights Skill: Conceptual Status: Old AACSB: Analytical Skills

16) The catch of American lobster off the shores of New England is regulated using quotas. If the quota is set correctly, then at this quantity, the marginal social benefit ________ the marginal social benefit. A) is less than B) is greater than C) is not comparable to D) equals Answer: D Topic: Production Quotas Skill: Analytical Status: New AACSB: Analytical Skills

17) When a production quota is used to remedy the problem of the commons, then A) the production quota is set so that use of the resource is where marginal private benefit equals marginal private cost. B) the production quota is set so that use of the resource is where marginal social benefit equals marginal private cost. C) the market equilibrium, but not the efficient outcome, is achieved. D) all users of the resource have an incentive to cheat on the quota quantity. Answer: D Topic: Production Quotas Skill: Conceptual Status: Old AACSB: Analytical Skills

18) If the government assigns private property rights to a common resource, then the A) resource is under-utilized. B) marginal private cost becomes equal to the marginal social cost. C) government needs to set a quota to achieve efficiency. D) None of the above answers is correct. Answer: B Topic: Property Rights Skill: Conceptual Status: Old AACSB: Analytical Skills

19) The market price of an individual transferable quota is equal to the A) marginal private benefit. B) marginal social benefit. C) marginal social benefit minus the marginal cost. D) marginal private benefit minus the marginal cost. Answer: C Topic: Individual Transferable Quota Skill: Definition Status: Old AACSB: Analytical Skills

20) An individual transferable quota can be used to achieve the A) equilibrium for a public good. B) efficient use of a common resource. C) equilibrium for a private good. D) equilibrium for a common resource. Answer: B Topic: Individual Transferable Quota Skill: Conceptual Status: Old AACSB: Analytical Skills

21) When producers are hard to monitor and marginal costs differ across producers, ________ are an effective method to achieve efficient use of a ________. A) individual transferable quotas; public good B) marginal private benefits; public good C) individual transferable quotas; common resource D) individual transferable quotas; excludable good Answer: C Topic: Individual Transferable Quota Skill: Conceptual Status: Old AACSB: Analytical Skills

22) The above figure shows the marginal private cost curve, marginal social cost curve, and marginal social benefit curve for cod, a common resource. The market equilibrium with no government intervention is ________. A) 0 tons per week B) 400 tons per week C) 300 tons per week D) None of the above answers is correct. Answer: B Topic: Inefficient Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

23) The above figure shows the marginal private cost curve, marginal social cost curve, and marginal social benefit curve for cod, a common resource. The efficient outcome is ________. A) 0 tons per week B) 300 tons per week C) 400 tons per week D) None of the above answers is correct. Answer: B Topic: Efficient Use of the Commons Skill: Analytical Status: Old AACSB: Analytical Skills

24) The above figure shows the marginal private cost curve, marginal social cost curve, and marginal social benefit curve for cod, a common resource. A quota to prevent the overuse of the cod sets the catch equal to ________. A) 0 tons per week B) 300 tons per week C) 400 tons per week D) None of the above answers is correct. Answer: B Topic: Quotas Skill: Analytical Status: Old AACSB: Analytical Skills

25) The above figure shows the marginal private cost curve, marginal social cost curve, and marginal social benefit curve for cod, a common resource. The market equilibrium with no government intervention is ________. A) 0 tons per week B) 400 tons per week C) 300 tons per week D) None of the above answers is correct. Answer: B Topic: Inefficient Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

26) The above figure shows the marginal private cost curve, marginal social cost curve, and marginal social benefit curve for raising goats on a common pasture. The market equilibrium with no government intervention is raising ________. A) 0 goats B) 40 goats C) 50 goats D) 55 goats Answer: C Topic: Individual Transferable Quota Skill: Analytical Status: Old AACSB: Analytical Skills

27) The above figure shows the marginal private cost curve, marginal social cost curve, and marginal social benefit curve for raising goats on a common pasture. The efficient outcome is raising ________. A) 0 goats B) 40 goats C) 50 goats D) 55 goats Answer: B Topic: Individual Transferable Quota Skill: Analytical Status: Old AACSB: Analytical Skills

28) The above figure shows the marginal private cost curve, marginal social cost curve, and marginal social benefit curve for raising goats on a common pasture. A quota to prevent the overuse of the common pasture sets the number of goats to be raised equal to ________. A) 0 goats B) 40 goats C) 50 goats D) 55 goats Answer: B Topic: Individual Transferable Quota Skill: Analytical Status: Old AACSB: Analytical Skills

29) The above figure shows the marginal private cost curve, marginal social cost curve, and marginal social benefit curve for raising goats on a common pasture. If property rights to the pasture are granted to a farmer so that the farmer owns the pasture, the farmer raises ________. A) 0 goats B) 40 goats C) 50 goats D) 55 goats Answer: B Topic: Individual Transferable Quota Skill: Analytical Status: Old AACSB: Analytical Skills

30) The above figure shows the marginal private cost curve, marginal social cost curve, and marginal social benefit curve for raising goats on a common pasture. Suppose the government assigns individual transferable quotas (ITQ) set to achieve the efficient outcome. The market price of an ITQ is ________ per pound. A) $4.20 B) $2.00 C) $6.00 D) $4.00 Answer: A Topic: Individual Transferable Quota Skill: Analytical Status: Old AACSB: Analytical Skills

31) For a common resource, efficiency requires that the ________ equals the ________. A) marginal private benefit; marginal private cost B) marginal social benefit; marginal social cost C) marginal private benefit; marginal social benefit D) marginal social cost; marginal private cost Answer: B Topic: Study Guide Question, Efficient Use of the Commons Skill: Conceptual Status: Old AACSB: Analytical Skills

32) If the government assigns private property rights to a common resource, then the A) resource is under-utilized. B) marginal private cost becomes equal to the marginal social cost. C) government needs to set a quota to achieve efficiency. D) None of the above answers is correct. Answer: B Topic: Study Guide Question, Efficient Use of the Commons Skill: Conceptual Status: Old AACSB: Analytical Skills

3 News Based Questions 1) The Loma Linda City Council made it official in June 2008, passing the most restrictive smoking ordinance yet in the Inland area. Dr. Linda Ferry, who counsels veterans on quitting smoking at Jerry L. Pettis Memorial VA Medical Center, said that the smoking ordinance would protect children from exposure to secondhand smoke and discourage teenagers and adults from taking up smoking. What is true about this situation? A) Marginal external costs are negative. B) Marginal external benefits are positive. C) Marginal external costs are positive. D) Marginal external benefits are negative. Answer: C Topic: Marginal External Cost Skill: Conceptual Status: Old AACSB: Reflective Thinking

2) When CSU sophomore Cody Clow and his housemates chose not to heed the city's ordinance against unreasonable noise and host a loud party at their off-campus residence last fall, they were confronted and ticketed by police. Fort Collins city code describes unreasonable noise as any sound that will "unreasonably interfere with the enjoyment of life or property." What is true about this situation? A) Marginal external costs are positive. B) Marginal external costs are negative. C) Marginal external benefits are positive. D) Marginal external benefits are negative. Answer: A Topic: Marginal External Cost Skill: Conceptual Status: Old AACSB: Reflective Thinking

3) When CSU sophomore Cody Clow and his housemates chose not to heed the city's ordinance against unreasonable noise and host a loud party at their off-campus residence last fall, they were confronted and ticketed by police. Fort Collins city code describes unreasonable noise as any sound that will "unreasonably interfere with the enjoyment of life or property." The method the local government used cope with the externality most closely resembles a ________. A) tax B) voucher C) subsidy D) cap-and-trade policy Answer: A Topic: Emission Charges Skill: Conceptual Status: Old AACSB: Reflective Thinking

4) In 2008, a man was charged with one count of illegally stocking wild animals, a civil offense. State investigators had accused him of bringing 31 wild hogs from Texas to Wisconsin to hunt on his private land in 2002, spawning a feral hog population that has caused thousands of dollars in crop damage to hundreds of farms in the region. Can the Coase theorem apply in this example? Why or why not? A) No; because a large number of parties are involved B) Yes C) No; because transaction costs are low D) No; because all property rights are clearly defined Answer: A Topic: Coase Theorem Skill: Conceptual Status: Old AACSB: Reflective Thinking

5) In 2008, a man was charged with one count of illegally stocking wild animals, a civil offense. State investigators had accused him of bringing 31 wild hogs from Texas to Wisconsin to hunt on his private land in 2002, spawning a feral hog population that has caused thousands of dollars in crop damage to hundreds of farms in the region. What is the externality in this example? A) Bringing 31 wild hogs from Texas to Wisconsin to hunt on his private land B) Spawning a feral hog population C) Illegally stocking wild animals D) Crop damage Answer: D Topic: Marginal External Cost Skill: Conceptual Status: Old AACSB: Reflective Thinking

6) In 2008, a man was charged with one count of illegally stocking wild animals, a civil offense. State investigators had accused him of bringing 31 wild hogs from Texas to Wisconsin to hunt on his private land in 2002, spawning a feral hog population that has caused thousands of dollars in crop damage to hundreds of farms in the region. The marginal external ________ of the man's movement of feral pigs is ________. A) costs; negative. B) benefits; positive C) costs; positive. D) benefits; negative Answer: C Topic: Externalities, Negative Production Skill: Conceptual Status: Old AACSB: Reflective Thinking

7) Scientists have said for years cod was so seriously overfished in European Union waters that there was a risk of extinction due to stock collapse. "To ensure this recovery… Ministers agreed a 10 percent cut in days at sea (for North Sea cod)," EU Fisheries Commissioner Joe Borg stated in 2008. What is the goal of this policy? A) To reduce the number of fishing days to the point where marginal cost per day equals marginal benefit B) To reduce the number of fishing days to the point where marginal social cost per day equals marginal benefit C) To reduce the number of fishing days to the point where marginal social benefit per day equals marginal benefit D) To reduce the number of fishing days to the point where marginal social cost per day equals marginal social benefit Answer: D Topic: Efficient Use of the Commons Skill: Conceptual Status: Old AACSB: Reflective Thinking

8) Scientists have said for years cod was so seriously overfished in European Union waters that there was a risk of extinction due to stock collapse. Why would cod be on the risk of extinction? A) Fishing in the sea for cod is an example of a public good. B) Fishing in the sea for cod is an example of a common resource. C) Fishing in the sea for cod is an example of a private good. D) Fishing in the sea for cod is an example of a natural monopoly. Answer: B Topic: Tragedy of the Commons Skill: Conceptual Status: Old AACSB: Reflective Thinking

9) Scientists have said for years cod was so seriously overfished in European Union waters that there was a risk of extinction due to stock collapse. Why would overfishing occur in this common market? A) Fishing occurs until marginal cost per boat equals marginal social benefit which is inefficient. B) Fishing occurs until marginal social cost per boat equals marginal social benefit which is inefficient. C) Fishing occurs until marginal cost per boat equals marginal benefit which is inefficient. D) Fishing occurs until marginal social cost per boat equals marginal cost which is inefficient. Answer: C Topic: Marginal Private Benefit Versus Marginal Social Benefit Skill: Conceptual Status: Old AACSB: Reflective Thinking

10) Scientists have said for years cod was so seriously overfished in European Union waters that there was a risk of extinction due to stock collapse. In October 2008, they called for the EU to set the 2008 number of days fishermen are allowed to fish at less than half of 2006 levels. This policy is most like A) a production quota. B) property right. C) an individual transferable quota. D) marginal social benefit right. Answer: A Topic: Production Quotas Skill: Conceptual Status: Old AACSB: Reflective Thinking

11) With the debris of more than 50 years of climbing on the beautiful high slopes — oxygen canisters, tents, backpacks and even some bodies — Mount Everest has been called the world's highest garbage dump. If Everest is a common resource, currently there is an ________ of the mountain. A) inefficient underuse B) efficient overuse C) efficient underuse D) inefficient overuse Answer: D Topic: Inefficient Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking

12) With the debris of more than 50 years of climbing on the beautiful high slopes – oxygen canisters, tents, backpacks and even some bodies – Mount Everest has been called the world's highest garbage dump. It has been suggested that there should be a limited number of climbers allowed on the mountain each year to limit the environmental degradation that occurs. This method of achieving efficient use of a common resource is most like A) a property right. B) an individual transferable quota. C) a production quota. D) a marginal social benefit right. Answer: C Topic: Production Quotas Skill: Conceptual Status: Old AACSB: Reflective Thinking

13) With the debris of more than 50 years of climbing on the beautiful high slopes – oxygen canisters, tents, backpacks and even some bodies – Mount Everest has been called the world's highest garbage dump. Currently climbers must pay only a $3,000 trash-collection fee, which is woefully less than the actual cost of collecting trash. If climbers had to pay a higher trash-collection fee, the use of this common resource would A) become less efficient. B) become more efficient. C) not deviate from the current level of efficiency. D) More information about who would collect the trash is needed Answer: B Topic: Emission Charges Skill: Conceptual Status: Old AACSB: Reflective Thinking

14) The granite boulders in Rocky Mountain National Park are a favored place among talented climbers who specialize in the art of bouldering, or climbing harder (but shorter) routes without tying into a rope. Climbers have taken to (illegally) stashing foam crash pads underneath the boulders but marmots and other rodents chew up the pads and the litter is spread by the wind. To limit overuse of this park, suppose a limited number of permits are sold each year to climbers who can sell them at any time to other climbers. This method of achieving efficient use of a common resource is most like what government policy? A) Production quota B) Property right C) Individual transferable quota D) Marginal social benefit right Answer: C Topic: Individual Transferable Quota Skill: Conceptual Status: Old AACSB: Reflective Thinking

15) The granite boulders in Rocky Mountain National Park are a favored place among talented climbers who specialize in the art of bouldering, or climbing harder (but shorter) routes without tying into a rope. Climbers have taken to (illegally) stashing foam crash pads underneath the boulders but marmots and other rodents chew up the pads and the litter is spread by the wind. The pristine National Park is most like a A) public good. B) private good. C) common resource. D) natural monopoly. Answer: C Topic: Common Resource Skill: Conceptual Status: Old AACSB: Reflective Thinking

16) The granite boulders in Rocky Mountain National Park are a favored place among talented climbers who specialize in the art of bouldering, or climbing harder (but shorter) routes without tying into a rope. Climbers have taken to (illegally) stashing foam crash pads underneath the boulders but marmots and other rodents chew up the pads and the litter is spread by the wind. Why would the park be overused in this manner? A) Because the marginal private benefit of using the park is greater than the marginal social benefit of using the park B) Because the marginal social benefit of using the park is greater than the marginal private benefit of using the park C) Because there are no external costs to using the park D) Because the marginal private cost of using the park is less than the marginal social cost of using the park Answer: D Topic: Tragedy of the Commons Skill: Conceptual Status: Old AACSB: Reflective Thinking

4 Essay Questions 1) What is marginal external cost? Give an example. Answer: Marginal external cost is the additional cost that is imposed on someone other than the producer of the good or service. An example is the sulfur dioxide and other chemicals emitted by utility companies in the Midwest. These pollutants travel north with the winds, causing acid rain that harms vegetation and kills fish in the Northeast of the United States. Topic: External Costs Skill: Recognition Status: Old AACSB: Communication

2) Discuss the difference between a private cost and a social cost. Answer: A private cost is the cost of producing a good or service that is borne by the producers. In certain instances, however, some of the costs of production are borne by someone other than the producer. This cost is called an external cost. The social cost is the total cost borne by all of society. Thus the social cost equals the private cost, the costs borne by the producers, plus the external cost, the costs borne by everyone else. Topic: Marginal External Cost Skill: Recognition Status: Old AACSB: Communication

3) What is marginal external cost of production? Answer: Marginal external cost of production is the cost of producing an additional unit of a good or service that falls on people other than the producer. Topic: Marginal External Cost Skill: Recognition Status: Old AACSB: Communication

4) When a forest is logged, it is possible for the logging to create "soil runoff," a situation in which the soil, no longer protected by trees, erodes and silts a river miles downstream from the logging area. Is soil runoff created by logging in Montana that ruins a river an example of a private cost to the lumbering company or an external cost? Answer: The soil runoff is an external cost. The lumber company does not pay the cost of the ruined river, so the cost is not a private cost to the company. Instead, the cost is borne by fishermen or other users of the river who can no longer use the river, or by society, which pays to clean up the river so that the fishermen and other users can utilize it once again. Topic: Marginal External Cost Skill: Conceptual Status: Old AACSB: Communication

5) Why do firms ignore external costs when they pollute? Answer: Firms have no incentive to incorporate external costs into their decision making. They do not bear the costs—the costs are external to them—and so these costs have no effect on their profits. Topic: Marginal External Cost Skill: Conceptual Status: Old AACSB: Communication

6) Explain why a producer who is causing external costs does not have the incentive to reduce these costs. Answer: The answer lies in the fact that the costs are external. These are not costs borne by the producer. The producer responds to the costs he or she must pay and external costs are paid by someone else. Hence the producer has no incentive to decrease the activity that is creating the external cost because the activity costs the producer nothing. Topic: Marginal External Cost Skill: Conceptual Status: Old AACSB: Communication

7) The marginal social cost of burning garbage in Houston is the sum of the marginal private cost and the marginal external cost." Is this assertion correct or incorrect? Answer: The statement is correct. The marginal social cost of any activity is the sum of the marginal private cost plus the marginal external cost. Topic: Marginal Social Cost Skill: Recognition Status: Old AACSB: Communication

8) If the production of a good creates an external cost, is the supply curve the same as the marginal social cost or the same as the marginal private cost curve or both? Answer: The supply curve is always the same as the marginal private cost curve. In the case of an external cost, however, the marginal private cost curve is not the same as the marginal social cost curve. In this case, the supply curve is the same as only the marginal private cost curve and is not the same as the marginal social cost curve. Topic: Marginal Social Cost Skill: Recognition Status: Old AACSB: Communication 75 Copyright © 2014 Pearson Education, Inc.

9) Why does an external cost lead to inefficient overproduction? Answer: If there is an external cost, then the market supply curve represents only the private costs rather than the total costs of production. Private producers respond only to the costs that they pay. In the case of an external cost, because producers are not paying all of the costs, they produce too much of the good from the social perspective, that is, there is overproduction. Thus government policies, such as taxes, emission charges, or marketable permits, that mean the producers pay all the costs of their production move the market toward efficiency. Topic: An Unregulated Market Skill: Conceptual Status: Old AACSB: Communication

10) If the production of a good causes pollution (an external cost) is the unregulated competitive market equilibrium of that product efficient? Answer: The presence of pollution means that the supply curve of the firm, which is also the firm's marginal cost curve, only represents the firm's private costs and ignores all external costs. The equilibrium between supply and demand curves leads to overproduction of this good. The amount produced, therefore, is not efficient because the level of production occurs where the marginal private cost equals the marginal social benefit rather than where the marginal social cost equals the marginal social benefit. Topic: An Unregulated Market Skill: Conceptual Status: Old AACSB: Communication

11) Burning coal to generate electricity can create pollution. If the market for generating electricity is competitive and is allowed to operate without any government intervention, is the equilibrium quantity of coal burned equal to, more than, or less than the efficient quantity? Answer: The equilibrium quantity of coal burned is more than the efficient quantity. In a market for a good with an external cost, an unregulated competitive market will have an equilibrium quantity that exceeds the efficient quantity. Topic: An Unregulated Market Skill: Conceptual Status: Old AACSB: Communication

12) "Suppose the market for aluminum is perfectly competitive and unregulated. If aluminum factories emit pollution, the marginal social cost of aluminum is less than the market price." True or false? Explain. Answer: The statement is false. Pollution is an external cost, and marginal social cost equals marginal private cost plus marginal external cost. In an unregulated competitive market, the market price equals marginal private cost. As a result, the marginal social cost of aluminum is its market price, which equals its marginal cost, plus the marginal external cost of pollution. So the marginal social cost of aluminum is higher than the market price. Topic: An Unregulated Market Skill: Conceptual Status: Old AACSB: Communication

13) "If production of a good creates an external cost, then, when production is such that the marginal private costs are equal to the marginal private benefits, the market outcome will be inefficient." Explain whether this assertion is correct or incorrect. Answer: The assertion is correct. Efficiency requires that the marginal social benefit equal the marginal social cost. If the production of a good creates an external cost, then the marginal private cost does not equal the marginal social cost. So, even if the marginal private benefit equals the marginal social benefit, setting the marginal private cost equal to the marginal private benefit creates inefficiency because the marginal social benefit does not equal the marginal social cost. Topic: Efficiency Skill: Conceptual Status: Old AACSB: Communication

14) Why is it not efficient to eliminate all pollution? Answer: Eliminating pollution is a task that uses resources, so there is an opportunity cost. If the marginal social cost of eliminating another unit of pollution is greater than the marginal social benefit, it would not be an efficient use of resources to eliminate the pollution because there are other activities with a higher value to society. In other words, pollution elimination is similar to any other good: pollution should be eliminated until the marginal social benefit of pollution reduction equals the marginal social cost of pollution reduction. Topic: Efficiency Skill: Conceptual Status: Old AACSB: Communication

15) What do we mean by "property rights" and why are they important? Answer: Property rights are legally established titles to ownership, use, and disposal of factors of production and goods and services that are enforceable in the courts. Property rights are important because ownership of a resource provides a strong incentive to its owner to see that the resource they own is not damaged, overused, or degraded. Topic: Property Rights Skill: Recognition Status: Old AACSB: Communication

16) What is the Coase theorem? What conditions need to be present for this theorem to work? Answer: The Coase theorem states that if property rights over a resource are clearly defined and are enforceable, then private transactions are efficient and the outcome is not affected by who is as-signed the property right. The conditions that need to be present for the Coase theorem to work are: • property rights are clearly defined; • the transactions costs of the negotiations must be small, e.g., there are a small number of parities involved. If these conditions are met, then the Coase theorem applies and there are no externalities. Topic: Coase Theorem Skill: Recognition Status: Old AACSB: Communication

17) "According to the Coase theorem, if Gabriel wants the local television station to cease having helicopters fly over his house at night, he will be more likely to be able to reach an agreement with the station if the property right to the airspace is clearly defined and the transaction costs of negotiating are high." Is this statement true or false? Explain your answer. Answer: The statement is false. The first part of the statement is correct, insofar as the property right to the airspace needs to be clearly defined. However, the second part is incorrect. In particular, if the costs of negotiating are high, Gabriel and the television station are less likely to be able to come to an agreement. Topic: Coase Theorem Skill: Conceptual Status: Old AACSB: Communication

18) Using the Coase theorem, why might a firm that currently pollutes a river no one owns pollute the river less if it owned the river? Answer: The firm would pollute less if it owned the river because its neighbors could compensate the firm if it limits its pollution. If the firm pollutes beyond this limit, it would lose that payment from neighbors and, thereby, incur the cost of polluting. Topic: Coase Theorem Skill: Conceptual Status: Old AACSB: Communication

19) Use the idea of external costs to explain why some cities have laws against late-night rock concerts. Answer: While many people might like to see a midnight show featuring AC/DC or Creed, many others argue that a rock concert blaring away early in the morning imposes external costs on many nearby residents who do not want to be disturbed late at night. Therefore regulations on the time that music can be "emitted" are common. To the extent that the regulations are motivated by the externality, such regulations increase efficiency. Topic: Government Policies Toward External Costs Skill: Conceptual Status: Old AACSB: Communication

20) List and briefly define the three methods government can use to cope with an external cost, such as pollution. Answer: The three methods are emission charges, cap-and-trade, and taxes. Emission charges set a price per unit of pollution that the firm pays to the government. With a cap-and-trade policy, the government issues marketable permits to firms that allow them to pollute by an amount assigned by the permit. The permits can be bought and sold among firms. Taxes can be imposed on polluting firms. If this tax equals the marginal external cost, efficiency can be attained. Topic: Government Policies Toward Pollution Skill: Recognition Status: Old AACSB: Communication

21) The production of paper creates pollution, an external cost. What happens to the production of paper if the government imposes a tax on paper producers equal to the marginal external cost of the pollution? Answer: When the government imposes a tax equal to the marginal external cost of the pollution, the production of paper decreases. Prior to the tax being imposed, the external cost was ignored by the producers because they did not pay this cost. However, once the tax is in place, the external cost now becomes a cost that the producer must pay. As a result, the producers' costs increase and so the supply of paper decreases. Topic: Pigovian Tax Skill: Conceptual Status: Old AACSB: Communication

22) Explain how a Pigovian tax works. Answer: A Pigovian tax is a method of dealing with externalities. The government sets the tax rate equal to the marginal external cost, making polluting firms behave in the same way as they would if they bore the cost of the externality directly because their costs are the same as if they paid for the pollution directly. In this case, the amount of pollution is reduced to the efficient level. Topic: Pigovian Tax Skill: Conceptual Status: Old AACSB: Communication

23) What is a cap-and-trade policy? (Be certain to mention marketable permits.) Suppose there are two firms in an area, each emitting tons of sulfur. The government decides on a target level of 200 tons of sulfur, and gives each firm a permit to emit 100 tons of sulfur. Suppose Firm A is very efficient and can reduce pollution by 100 tons with an abatement cost of $500. Firm B has an older plant, so it will cost Firm B $1,000 to reduce emissions by 100 tons. What will occur with marketable permits? Answer: A cap-and-trade policy involves the government issuing marketable permits to firms that allow a firm to emit a certain amount of pollution. Firms are allowed to buy and sell these permits. Firm A can reduce pollution by 100 tons with an abatement cost of $500, while it costs Firm B $1,000 for the same reduction. Marketable permits can be bought and sold. Hence Firm A can reduce its emissions at the cost of $500 and sell its permit to Firm B for some price higher than $500. Firm B has an incentive to buy the permit for any price less than $1,000 rather than reduce its emissions at the cost of $1,000. Hence with marketable permits, Firm A will sell its permit to Firm B. Topic: Cap-and-Trade Skill: Conceptual Status: Old AACSB: Communication

24) What is the tragedy of the commons? Answer: The tragedy of the commons is the absence of incentives to prevent the overuse and depletion of a commonly owned resource like fish in the oceans and open pasture land upon which anyone can graze sheep. A common resource is rival, so that one person's use of the resource decreases other people's use, but nonexcludable, so no one can be prevented from using the common resource. Topic: Tragedy of the Commons Skill: Recognition Status: Old AACSB: Communication

25) "The problem with a common resource is that no one gets to use the resource." Comment on the preceding assertion. Answer: The assertion is totally false; the problem with a common resource is that too many people use the resource so that it is overused and depleted. A common resource is rival, so that one person's use of the resource decreases other people's use, but nonexcludable, so that no one can be prevented from using the common resource. As a result, everyone has the incentive to use the resource and no one has the incentive to conserve the resource. Topic: Tragedy of the Commons Skill: Recognition Status: Old AACSB: Communication

26) Why are fish in the ocean an example of a resource that suffers from the tragedy of the commons but cattle grazing in a farmer's pasture do not suffer from the tragedy of the commons? Answer: Fish in the ocean are a common resource because they are rival, so that one person catching a fish prevents others from catching the same fish, and they are nonexcludable, so that no one can be prevented from fishing. As a result, over-fishing is likely to occur. But cattle grazing in a farmer's pasture are not a common resource. The cattle are rival, so that one person butchering a steer prevents others from butchering the same steer, but the cattle are excludable, so that no one can butcher a steer unless the cattle's owner is compensated. As a result, the owner has the incentive to conserve the resource, that is, the owner has the incentive to insure that the cattle are not overused. Topic: Tragedy of the Commons Skill: Conceptual Status: Old AACSB: Communication

27) How does the government determine the quota amount that will produce an efficient use of a common resource? Answer: The government must determine the marginal social benefit and the marginal social cost of the common resource. By equating marginal social benefit to marginal social cost, the efficient use of a common resource is determined. A quota is set to this level of production. Producers are assigned a portion of this quota. As long as no one cheats on his or her quota, the efficient outcome occurs. Topic: Quotas Skill: Conceptual Status: Old AACSB: Communication

28) What are ITQs? Where are they used? Answer: An ITQ, or individual transferable quota, is a production limit that is assigned to an individual who is free to transfer the quota to someone else. ITQs are used to deal with the problem of commons where producers are hard to monitor and where marginal costs differ across producers. Topic: Individual Transferable Quota Skill: Recognition Status: Old AACSB: Reflective Thinking

29) What is an individual transferable quota (ITQ)? Answer: An ITQ is a production limit that is assigned to an individual who is free to transfer the quota to someone else. An ITQ is used in a market where there are common resources that might otherwise be overused. Topic: Individual Transferable Quota Skill: Recognition Status: Old AACSB: Reflective Thinking

30) If the number of ITQs issued equals the efficient production level, what is the price of an ITQ? Answer: The price of an ITQ equals the marginal social benefit at the quota quantity minus the marginal private cost. Topic: Individual Transferable Quota Skill: Recognition Status: Old AACSB: Reflective Thinking

5 Numeric and Graphing Questions 1) If the marginal social cost of a good is $70 and the marginal external cost is $20, what does the marginal private cost equal? Answer: The marginal social cost equals the marginal private cost plus the marginal external cost. Hence, substituting in the numbers from the problem gives $70 = marginal private cost + $20, so that the marginal private cost = $50. Topic: Marginal Social Cost Skill: Analytical Status: Old AACSB: Analytical Skills

2) The marginal private cost of a chemical is $100 per ton and its marginal external cost is $20 per ton. What is the marginal social cost of the chemical? Answer: Marginal social cost equals marginal private cost plus marginal external cost. So the marginal social cost of the chemical is $100 + $20 = $120 per ton. Topic: Marginal Social Cost Skill: Analytical Status: Old AACSB: Analytical Skills

3) The marginal social cost of a chemical is $100 per ton and its marginal private cost is $85 per ton. What is the marginal external cost of the chemical? Answer: Marginal external cost equals marginal social cost minus marginal private cost. So the marginal external cost of the chemical is $100 - $85 = $15 per ton. Topic: Marginal External Cost Skill: Analytical Status: Old AACSB: Analytical Skills

Quantity (tons of paper) 100 200 300 400 500

Marginal private cost (dollars) 10 20 30 40 50

Marginal external cost (dollars) 5 10 15 20 25

Marginal social cost (dollars) ____ ____ ____ ____ ____

4) The table above gives the private costs and external costs of producing paper. a) Complete the table by finding the marginal social cost at each level of production. b) If the market is competitive and is left unregulated and 400 tons of paper are produced, what is the price of a ton of paper? c) If the government imposes a tax equal to the external cost at each level of production, what price would be charged if 400 tons are produced? Answer: Marginal Marginal Marginal social Quantity private cost external cost cost (tons of paper) (dollars) (dollars) (dollars) 100 10 5 15 200 20 10 30 300 30 15 50 400 40 20 60 500 50 25 75 a) The table above completes the marginal social cost column. At any level of output, the marginal social cost equals the sum of the marginal private cost plus the marginal external cost. b) The price will equal the marginal private cost of $40 a ton. c) If a tax is imposed equal to the marginal external cost, when 400 tons of paper are produced this tax will be $20 a ton. Hence the price will rise by $20, to $60 a ton, which is the same as the marginal social cost. Topic: Marginal Social Cost Skill: Analytical Status: Old AACSB: Analytical Skills

5) Suppose unregulated production of pesticides results in an equilibrium price and quantity of $400 and 1,000 tons per day, respectively, and a marginal external cost of $10 a ton. a) If the government were to eliminate the external cost by using taxes, what should the tax equal? b) Would the government action described above affect the quantity of pesticides produced? If yes, how? If no, why not? Answer: a) $10 a ton b) Yes, with the tax the output of pesticides would be decreased to the efficient level. Topic: Government Policies Skill: Analytical Status: Old AACSB: Analytical Skills 82 Copyright © 2014 Pearson Education, Inc.

6) Use the figure above to answer this question. Explain what the marginal social cost curve and the marginal external cost mean. In the figure, if the market is competitive and unregulated, what is the equilibrium price and quantity? What is the efficient amount of output? Illustrate the deadweight loss. Answer:

The marginal social cost curve shows the sum of marginal private cost and marginal external cost. Marginal external cost is the cost of producing an extra unit of a good that falls on people other than the firm. The (inefficient) market equilibrium is 8 units with a price of $150 per unit. The efficient quantity is 6 units. The deadweight loss is illustrated in the figure. Topic: External Costs Skill: Analytical Status: Old AACSB: Analytical Skills 83 Copyright © 2014 Pearson Education, Inc.

7) The above figure shows the market for fertilizer. When fertilizer is applied to lawns, it runs off into neighboring streams and ponds, killing fish and creating an external cost. a) What is the equilibrium price and quantity of fertilizer in an unregulated, competitive market? b) What is the efficient quantity of fertilizer? c) Suppose government imposes a tax equal to the marginal external cost. What is the equilibrium price paid by consumers and the equilibrium quantity after implementation of the tax? d) At the output level in part (c), how much is the tax? e) How much tax revenue does government collect? f) What is the deadweight loss borne by society if the externality is left uncorrected? Answer: a) The equilibrium price is $1,000 a ton and the equilibrium quantity is 6 tons per day. b) The efficient quantity is 4 tons per day. c) The price paid by consumers after the tax is $1,200 a ton and the equilibrium quantity is the efficient quantity, 4 tons per day. d) The tax is $400 a ton. e) The government collects $1,600 a day in taxes. f) The deadweight loss with no government action is $600 a day. Topic: Government Policies Skill: Analytical Status: Old AACSB: Analytical Skills

8) The figure above shows the market for steel, the production of which creates pollution. a) What point represents the equilibrium price and what point represents the equilibrium quantity in an unregulated, competitive market? b) What area represents the deadweight loss of the unregulated, competitive market outcome? c) What point represents the efficient quantity? d) If the output level in part (c) was achieved through the use of a government imposed tax, what price would consumers pay? What price would the producers receive? What distance represents the amount of the tax? e) If government successfully uses marketable permits issued under a cap-and-trade policy to eliminate the external cost, what point represents how much output would be produced? Answer: a) The price is given by point c and the quantity is given by point f. b) The deadweight loss is area gij. c) The efficient quantity is given by point e. d) Consumers would pay a price represented by point b. Producers would receive a price represented by point d. The amount of the tax is the distance bd (which is the same as gh). e) The amount of output would be the efficient quantity, represented by point e. Topic: Cap-and-Trade Skill: Analytical Status: Old AACSB: Analytical Skills

6 True or False 1) A marginal external cost is the cost of producing an additional unit of a good that falls on the producer. Answer: FALSE Topic: Marginal External Cost Skill: Recognition Status: Old AACSB: Reflective Thinking

2) The marginal social cost is the cost of producing an additional unit of a good or service that falls on people other than the producer of the good or service. Answer: FALSE Topic: Marginal External Cost Skill: Recognition Status: Old AACSB: Reflective Thinking

3) If a product has zero external costs, then marginal social cost equal marginal private cost. Answer: TRUE Topic: Marginal Social Cost Skill: Conceptual Status: Old AACSB: Reflective Thinking

4) In an unregulated competitive market, the presence of marginal external cost of a good or service results in overproduction. Answer: TRUE Topic: An Unregulated Market Skill: Conceptual Status: Old AACSB: Reflective Thinking

5) If property rights for air and water exist, then polluters bear the costs of pollution. Answer: TRUE Topic: Coase Theorem Skill: Conceptual Status: Old AACSB: Reflective Thinking

6) The Coase Theorem points out that for an efficient outcome to result, it is irrelevant which party receives the property rights. Answer: TRUE Topic: Coase Theorem Skill: Conceptual Status: Old AACSB: Reflective Thinking

7) The Coase Theorem states that externalities can always be eliminated by the market as long as property rights exist, the number of parties involved is small, and transactions costs are low. Answer: TRUE Topic: Coase Theorem Skill: Conceptual Status: Old AACSB: Reflective Thinking

8) Mandating clean technology, cap-and-trade, and taxes are tools that government can use to limit pollution. Answer: TRUE Topic: Government Policies Toward Pollution Skill: Recognition Status: Old AACSB: Reflective Thinking

9) When external costs are present and government imposes a tax equal to the external marginal cost, then efficiency can be achieved. Answer: TRUE Topic: Taxes and External Costs Skill: Conceptual Status: Old AACSB: Reflective Thinking

10) The government can aid in reducing pollution by using a policy of cap-and-trade, which means that polluters are taxed on the amount of pollution they discharge. Answer: FALSE Topic: Cap-and-Trade Skill: Recognition Status: Old AACSB: Reflective Thinking

11) The problem of the commons is the absence of incentives to prevent overuse and depletion of the common resource. Answer: TRUE Topic: Problem of the Commons Skill: Recognition Status: Old AACSB: Reflective Thinking

12) For a common resource, the marginal private benefit of the resource is greater than the marginal social benefit. Answer: FALSE Topic: Marginal Private Benefit Versus Marginal Social Benefit Skill: Analytical Status: Old AACSB: Reflective Thinking

13) For a common resource, the marginal private cost of the resource is equal to the marginal social cost. Answer: FALSE Topic: Marginal Private Cost Versus Marginal Social Cost Skill: Analytical Status: Old AACSB: Reflective Thinking

14) A common resource is used efficiently if marginal social benefit equals marginal social cost. Answer: TRUE Topic: Efficient Use of the Commons Skill: Recognition Status: Old AACSB: Reflective Thinking

15) One way of overcoming the problem of the commons is to make it private property. Answer: TRUE Topic: Efficient Use of the Commons Skill: Recognition Status: Old AACSB: Reflective Thinking

7 Extended Problems

Quantity of paper produced (tons per week) 10 20 30 40 50 60

Catfish farmers' Paper mill's Marginal social marginal cost from marginal cost benefit of paper pollution (dollars per ton) (dollars per ton) (dollars per ton) 10 5 55 15 10 45 20 15 35 25 20 25 30 25 15 35 30 5

1) A paper mill dumps waste into a lake used by a catfish farmer. The table above shows costs and benefits arising from the production of paper. a) Draw the paper mill's marginal private cost curve, the marginal social cost curve, and the marginal social benefit of paper curve. b) What is the efficient level of paper production? If no one owns the lake and there is no regulation of pollution, what is the quantity of paper produced per week? Illustrate the deadweight loss in your figure. c) If the government introduces a Pigovian tax, what is the tax per ton of paper produced that achieves an efficient outcome? What is the amount of the tax? d) If the catfish farmer owns the lake, how much paper is produced per week and what does the paper mill pay the farmer per ton? Explain you answer. e) If the paper mill owns the lake, how much paper is produced per week? Explain. f) Compare the quantities of paper produced in (c) and (d) and explain the relationship between these quantities. Answer:

b) The efficient level of paper production is the one at which marginal social cost equals marginal social benefit, which is 30 tons of paper per week. If no one owns the lake, the market equilibrium occurs at the quantity of paper for which the marginal private cost equals the marginal social benefit, which is 40 tons per week. The deadweight loss is illustrated as the darkened triangle. c) A Pigovian tax equals the marginal external cost. If a Pigovian tax is imposed, the paper mill's marginal private cost curve, which is its supply curve, becomes the same as the marginal social cost curve. In this case the market equilibrium quantity of paper becomes the same as the efficient, quantity $30 tons of paper. At the 30th ton of paper the marginal external cost is $15 per ton, so the tax per ton of paper produced is $15. d) If the catfish farmer owns the lake, the transacting parties take all the costs into account because the catfish farmer charges the paper mill for the mill's pollution. With this charge the marginal social cost curve becomes the paper mill's marginal private cost curve and therefore its supply curve. The equilibrium now occurs at the quantity of paper for which marginal social cost equals marginal social benefit, which is at 30 tons per week. At this level of production the catfish farmer's marginal cost from pollution is $15 per ton, the farmer charges the paper mill $15 per ton of paper produced for using the lake. e) If the paper mill owns the lake, again the transacting parties take all the costs into account because the catfish farmer pays the paper mill not to produce paper. With this payment the marginal social cost curve becomes the paper mill's marginal private cost curve and therefore its supply curve. For example, for the 60th ton of paper, the catfish farmer is willing to pay $30, the marginal external cost of this ton, for the mill not to produce the 60th ton. So if the paper mill produces this ton, the mill's marginal cost is $35, the marginal cost of production, plus $30 of forgone revenue from the farmer, for a total marginal cost of $65, which is the same as the marginal social cost. The equilibrium occurs at the quantity of paper for which marginal social cost equals marginal social benefit, which is again at 30 tons per week. f) The quantities of paper produced in the answers to parts (d) and (e) are equal because the Coarse theorem applies. Topic: External Costs Skill: Analytical Status: Old AACSB: Analytical Skills

Economics, 11e, Global Edition (Parkin) Chapter 18 Markets for Factors of Production 1 The Anatomy of Factor Markets 1) Which of the following groups lists the four factors of production? A) labor, capital, land, entrepreneurship B) labor, capital, land, money C) labor, money, land, entrepreneurship D) labor, capital, money, entrepreneurship Answer: A Topic: Factors of Production Skill: Definition Status: Old AACSB: Analytical Skills

2) Profit is the factor price for ________. A) capital B) land C) entrepreneurship D) labor Answer: C Topic: Factor Prices and Incomes Skill: Definition Status: Old AACSB: Analytical Skills

3) Coal is an example of A) a nonrenewable natural resource. B) a renewable natural resource. C) capital. D) a casual resource. Answer: A Topic: Study Guide Question, Nonrenewable Natural Resource Skill: Conceptual Status: Old AACSB: Analytical Skills

4) Water from the Mississippi river is an example of A) a nonrenewable natural resource. B) a renewable natural resource. C) capital. D) a static resource. Answer: B Topic: Study Guide Question, Nonrenewable Natural Resource Skill: Conceptual Status: Old AACSB: Analytical Skills

2 The Demand for a Factor of Production 1) The demand for a productive resource, not for its own sake, but for use in the production of goods and services is called a ________. A) goods and services demand B) production demand C) derived demand D) resource demand Answer: C Topic: Derived Demand Skill: Definition Status: Old AACSB: Analytical Skills

2) The demand for factor is driven by the demand for goods and services produced by that factor of production. This phenomenon is referred to as A) elastic demand. B) joint demand. C) inverse demand. D) derived demand. Answer: D Topic: Derived Demand Skill: Definition Status: Old AACSB: Analytical Skills

3) The demand for labor is a derived demand because it is derived from A) the supply of labor. B) union pressure. C) the demand for the output the labor produces. D) natural law. Answer: C Topic: Derived Demand Skill: Definition Status: Old AACSB: Analytical Skills

4) Consider the demand for labor in the computer chip industry. The demand for labor A) is derived from the demand for computer chips. B) is shown by a perfectly elastic demand for labor. C) is shown by a perfectly inelastic demand for labor. D) has a demand curve that is backward bending. Answer: A Topic: Derived Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

5) The demand for the services of labor ________ a derived demand and the demand for the services of land ________ a derived demand. A) is; is B) is; is not C) is not; is D) is not; is not Answer: A Topic: Derived Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

6) The marginal product of labor is the A) change in total product produced by hiring an additional unit of labor. B) total revenue divided by units of labor. C) extra revenue gained by selling one more unit of output produced by hiring additional units of labor. D) extra revenue gained by employing one more unit of labor. Answer: A Topic: Marginal Product Skill: Definition Status: Old AACSB: Analytical Skills

7) The value of an additional baker to a bakery is equal to the A) price of bread. B) value of marginal product of the baker. C) baker's marginal productivity in terms of loaves of bread. D) marginal cost of making an additional loaf of bread. Answer: B Topic: Value of Marginal Product Skill: Conceptual Status: New AACSB: Analytical Skills

8) The change in total revenue that results from employing one more unit of labor is called the A) wage rate. B) value of marginal product of labor. C) average revenue. D) marginal product of labor. Answer: B Topic: Value of Marginal Product Skill: Definition Status: Old AACSB: Analytical Skills

9) The value of marginal product (VMP) of an input such as labor is the A) additional output produced by the last unit of an input. B) total revenue divided by the units of the input employed. C) extra revenue gained by selling one more unit of output. D) extra revenue gained by employing one more unit of the input. Answer: D Topic: Value of Marginal Product Skill: Definition Status: Old AACSB: Analytical Skills

10) The value of marginal product (VMP) of labor is the extra revenue generated by A) selling one additional unit of output. B) raising the price of the good by one dollar. C) hiring one additional unit of labor. D) price discrimination. Answer: C Topic: Value of Marginal Product Skill: Definition Status: Old AACSB: Analytical Skills

11) The value of marginal product of labor is the increase in A) revenue created by producing one more unit of output. B) revenue created by hiring one more unit of labor. C) total product necessary to make revenue increase by one dollar. D) total product generated by hiring one more unit of labor. Answer: B Topic: Value of Marginal Product Skill: Definition Status: Old AACSB: Analytical Skills

12) The value of marginal product of labor is the change in A) profit from hiring one more worker. B) output from hiring one more worker. C) total revenue from hiring one more worker. D) profit from producing one more unit of output. Answer: C Topic: Value of Marginal Product Skill: Definition Status: Old AACSB: Analytical Skills

13) The increase in revenue created by hiring one more unit of labor is the A) marginal product of labor. B) marginal revenue of labor. C) marginal product revenue of labor. D) value of marginal product of labor. Answer: D Topic: Value of Marginal Product Skill: Definition Status: Old AACSB: Analytical Skills

14) Jose owns a local coffee shop. When Jose calculates how his total revenue changes in response to hiring an extra worker, Jose is calculating the A) marginal revenue. B) value of marginal product of labor. C) marginal product of labor. D) total revenue. Answer: B Topic: Value of Marginal Product Skill: Definition Status: Old AACSB: Analytical Skills

15) The value of marginal product of labor A) is the change in total product that results from selling one more unit of a good. B) is equal to the price multiplied by the marginal product of labor. C) is equal to marginal revenue multiplied by the quantity. D) increases as the amount of labor employed increases. Answer: B Topic: Value of Marginal Product Skill: Definition Status: Old AACSB: Analytical Skills

16) Value of marginal product equals marginal product A) multiplied by the quantity of labor. B) divided by the quantity of labor. C) multiplied by the price. D) divided by the good's price. Answer: C Topic: Value of Marginal Product Skill: Definition Status: Old AACSB: Analytical Skills

17) The value of marginal product equals A) total revenue divided by total product (output). B) marginal revenue divided by marginal product. C) total revenue multiplied by total product (output). D) price multiplied by marginal product. Answer: D Topic: Value of Marginal Product Skill: Definition Status: Old AACSB: Analytical Skills

18) The value of marginal product equals ________ multiplied by ________. A) price; marginal cost B) price; marginal product C) marginal cost; marginal product D) marginal revenue; total product Answer: B Topic: Value of Marginal Product Skill: Definition Status: Old AACSB: Analytical Skills

19) Value of marginal product of labor is the ________ when one additional unit of a labor is employed, all other things remaining the same. A) change in marginal revenue B) change in marginal product C) change in total revenue D) total revenue Answer: C Topic: Value of Marginal Product Skill: Definition Status: Old AACSB: Analytical Skills

20) As the quantity of labor employed by a firm decreases , labor's ________ increases. A) marginal cost B) value of marginal product C) marginal revenue D) average cost Answer: B Topic: Value of Marginal Product Skill: Conceptual Status: Old AACSB: Analytical Skills

21) As a competitive firm hires increasing amounts of labor, the value of marginal product of labor A) decreases. B) increases. C) remains constant. D) decreases then increases. Answer: A Topic: Value of Marginal Product Skill: Conceptual Status: Old AACSB: Analytical Skills

22) A firm that can sell its output for $40 per unit. When it increases its labor force from 4 workers to 5 workers its output increases from 15 to 17 units. The value of marginal product of the 5th worker is A) $680. B) $340. C) $80. D) $40. Answer: C Topic: Value of Marginal Product Skill: Analytical Status: Old AACSB: Analytical Skills

23) For a perfectly competitive firm, the value of marginal product diminishes as employment increases because the A) price falls as the firm's production increases. B) marginal revenue decreases as the firm's production increases. C) marginal product decreases as the firm's production increases. D) None of the above answers is correct. Answer: C Topic: Value of Marginal Product Skill: Conceptual Status: Old AACSB: Analytical Skills

24) As the quantity of labor increases, value of marginal product for a perfectly competitive firm A) decreases because the firm must lower its price to sell a larger quantity. B) decreases because the marginal product of labor decreases. C) decreases because marginal revenue decreases. D) is constant because marginal revenue is constant. Answer: B Topic: Value of Marginal Product Skill: Conceptual Status: Old AACSB: Analytical Skills

25) Intel hired a consultant who found that the value of marginal product of Intel's workers decreased as more workers were hired. Suppose Intel is a monopolistically competitive firm. Then the value of marginal product decreases because the I. workers' marginal product of labor decreased as more workers were hired. II. marginal revenue of Intel's chips decreased as more chips were sold. A) I only B) II only C) Both I and II D) Neither I nor II Answer: C Topic: Demand for Labor Skill: Conceptual Status: New AACSB: Analytical Skills

26) Joe manages a company that produces lawn mowers. Joe knows that the value of marginal product A) decreases as he hires more labor to produce lawn mowers. B) does not change as he sells more lawn mowers. C) increases as he hires more labor to produce lawn mowers. D) increases as he sells more lawn mowers. Answer: A Topic: Value of Marginal Product Skill: Conceptual Status: Old AACSB: Analytical Skills

27) Sam's Scarves has 2 knitting machines and employs 2 people. They produce 15 scarves a day. If the firm hires an additional person, the 3 workers can produce 19 scarves a day other things remaining the same. The market for scarves is perfectly competitive and the price of a scarf is $20. The value of marginal product of the third worker is ________. A) $80 B) $300 C) $380 D) 4 scarves Answer: A Topic: Value of Marginal Product Skill: Analytical Status: Old AACSB: Analytical Skills

28) When Sam's Scarves uses 2 knitting machines and employs 3 people, total revenue is $330 a day. When Sam's Scarves uses 2 knitting machines and employs 4 people, total revenue is $360 a day. The value of marginal product of the third worker is ________. A) $110 B) $30 C) $360 D) $90 Answer: B Topic: Value of Marginal Product Skill: Analytical Status: Old AACSB: Analytical Skills

Labor (workers) 0 1 2 3 4 5

Output (gallons of gasoline) 0 100 180 240 280 300

29) Sun's Gas Station is a firm operating in a perfectly competitive industry. Sun's Gas Station sells each gallon of gas for $3. What is the total revenue earned by selling 180 gallons of gas? A) $240 B) $540 C) $840 D) $3,300 Answer: B Topic: Total Revenue Skill: Analytical Status: Old AACSB: Analytical Skills

30) Sun's Gas Station is a firm operating in a perfectly competitive industry. Sun's Gas Station sells each gallon of gas for $3. What is the marginal product from hiring the fourth worker? A) 70 gallons of gasoline B) 280 gallons of gasoline C) 40 gallons of gasoline D) 80 gallons of gasoline Answer: C Topic: Value of Marginal Product Skill: Analytical Status: Old AACSB: Analytical Skills

31) Sun's Gas Station is a firm operating in a perfectly competitive industry. Sun's Gas Station sells each gallon of gas for $3. What is the value of marginal product from hiring the fourth worker? A) $2,400 B) $840 C) $120 D) $60 Answer: C Topic: Value of Marginal Product Skill: Analytical Status: Old AACSB: Analytical Skills

Quantity of labor (workers) 0 1 2 3 4 5

Total revenue Total product (units (dollars) of output) 0 20 36 48 56 60

0 5 9 12 14 15

32) In the table above, the marginal product of the first unit of labor is ________ units of output. A) 4 B) 5 C) 16 D) 20 Answer: B Topic: Marginal Product Skill: Analytical Status: Old AACSB: Analytical Skills

33) In the table above, the marginal product of the third unit of labor is ________ units of output. A) 3 B) 4 C) 12 D) 16 Answer: A Topic: Marginal Product Skill: Analytical Status: Old AACSB: Analytical Skills

34) In the table above, the value of marginal product of the third unit of labor is A) $3. B) $4. C) $12. D) $16. Answer: C Topic: Value of Marginal Product Skill: Analytical Status: Old AACSB: Analytical Skills

35) In the table above, the firm producing the product is A) a monopoly. B) an oligopoly. C) a duopoly. D) perfectly competitive. Answer: D Topic: Value of Marginal Product Skill: Analytical Status: Old AACSB: Analytical Skills

36) In the table above, if the wage rate is $8.00 per hour, the profit-maximizing number of workers is A) 1. B) 2. C) 4. D) 5. Answer: C Topic: Profit Maximization Skill: Analytical Status: Old AACSB: Analytical Skills

37) In the table above, if the wage rate is $12.00 per hour, the profit-maximizing number of workers is A) 2. B) 3. C) 4. D) 5. Answer: B Topic: Profit Maximization Skill: Analytical Status: Old AACSB: Analytical Skills

38) A firm in a competitive labor market will hire labor until the value of marginal product of labor equals the A) firm's marginal revenue. B) firm's marginal cost. C) firm's average cost. D) wage rate. Answer: D Topic: Profit Maximization Skill: Analytical Status: Old AACSB: Analytical Skills

39) The quantity of labor demanded by the firm is such that the A) wage rate equals the marginal cost. B) wage rate equals the value of marginal product of labor. C) wage rate equals the marginal product of labor. D) marginal revenue equals the marginal product. Answer: B Topic: Profit Maximization Skill: Conceptual Status: Old AACSB: Analytical Skills

40) To maximize profit, a firm hires the quantity of labor that makes the ________ of labor equal to the ________. A) value of marginal product; wage rate B) total revenue; total cost of labor C) marginal product; total cost of labor D) marginal product; marginal revenue Answer: A Topic: Profit Maximization Skill: Conceptual Status: Old AACSB: Analytical Skills

41) Which of the following is a condition for maximum profit? A) VMP = W. B) VMP = MC. C) MP = W. D) MC = W. Answer: A Topic: Profit Maximization Skill: Conceptual Status: Old AACSB: Analytical Skills

42) To maximize its profit, a firm will hire more workers as long as A) marginal revenue exceeds the wage rate. B) marginal revenue is less than the wage rate. C) value of marginal product exceeds the wage rate. D) marginal product exceeds the wage rate. Answer: C Topic: Profit Maximization Skill: Conceptual Status: Old AACSB: Analytical Skills

43) If the wage that a competitive firm must pay its workers exceeds their value of marginal product, the firm will A) decrease the quantity of labor it employs. B) increase the quantity of labor it employs. C) lower the price of the good. D) raise the price of the good. Answer: A Topic: Profit Maximization Skill: Conceptual Status: Old AACSB: Analytical Skills

44) If a firm finds that, at its current level of employment, VMP > W, it will A) be maximizing profits. B) be minimizing profits. C) increase the amount of labor it hires. D) decrease the amount of labor it hires. Answer: C Topic: Profit Maximization Skill: Conceptual Status: Old AACSB: Analytical Skills

45) If a firm finds that, at its current level of employment, VMP < W, then it has A) reached maximum profits. B) reached minimum profits. C) not hired enough labor to maximize its profit. D) hired too much labor to maximize its profit. Answer: D Topic: Profit Maximization Skill: Conceptual Status: Old AACSB: Analytical Skills

46) If the wage rate is ________ the value of marginal product, a firm can increase its profit by ________. A) greater than; selling an extra unit of output B) less than; selling one less unit of output C) less than; hiring an extra worker D) less than; hiring one less worker Answer: C Topic: Profit Maximization Skill: Conceptual Status: Old AACSB: Analytical Skills

47) If the value of marginal product of the last worker hired is $24 and the wage rate is $25, then A) more workers should be hired. B) the worker should be fired. C) the firm has hired the profit maximizing number of workers. D) the firm is earning $1 of profit from this worker. Answer: B Topic: Profit Maximization Skill: Conceptual Status: Old AACSB: Analytical Skills

48) If the value of marginal product of a factor of production exceeds the price of the factor, the A) firm should hire more of that factor. B) firm should hire less of that factor. C) firm is maximizing profits. D) firm should shut down. Answer: A Topic: Profit Maximization Skill: Conceptual Status: Old AACSB: Analytical Skills

49) If a firm finds that the wage rate (W) is less than the value of marginal product (VMP), then to maximize its profit the firm should hire A) less labor, which will increase the VMP. B) more labor, which will decrease the VMP. C) no more or less labor, because profits are greatest when W < VMP. D) more labor, because hiring more labor will increase both W and VMP until they are equal. Answer: B Topic: Profit Maximization Skill: Conceptual Status: Old AACSB: Analytical Skills

50) A perfectly competitive firm in a competitive labor market will hire more labor whenever A) its average revenue product of labor exceeds the wage rate. B) the wage rate exceeds its average revenue product of labor. C) its value of marginal product of labor exceeds the wage rate. D) the wage rate exceeds its value of marginal product of labor. Answer: C Topic: Profit Maximization Skill: Conceptual Status: Old AACSB: Analytical Skills

Labor (workers) 0 1 2 3 4 5

Total Product (car washes per day) 0 25 45 60 70 75

51) Winnie's Car Wash is a perfectly competitive firm. The table above shows Winnie's total product schedule. What is the marginal product of labor when the 5th worker is hired? A) 72.5 car washes B) 75 car washes C) 5 car washes D) 3 car washes Answer: C Topic: Marginal Product Skill: Analytical Status: Old AACSB: Analytical Skills

52) Winnie's Car Wash is a perfectly competitive firm. The table above shows Winnie's total product schedule. If the price of a car wash is $4, what is the value of marginal product of the 4th worker? A) $240 B) $70 C) $10 D) $40 Answer: D Topic: Value of Marginal Product Skill: Analytical Status: Old AACSB: Analytical Skills

53) Winnie's Car Wash is a perfectly competitive firm. The table above shows Winnie's total product schedule. If the price of a car wash is $4, what is the value of marginal product of the second worker? A) $80 B) $20 C) $30 D) $180 Answer: A Topic: Value of Marginal Product Skill: Analytical Status: Old AACSB: Analytical Skills

54) Winnie's Car Wash is a perfectly competitive firm. The table above shows Winnie's total product schedule. If the price of a car wash is $5, what is the value of marginal product of the 4th worker? A) $300 B) $50 C) $70 D) $10 Answer: B Topic: Value of Marginal Product Skill: Analytical Status: Old AACSB: Analytical Skills

55) Winnie's Car Wash is a perfectly competitive firm. The table above shows Winnie's total product schedule. If the price of a car wash is $5, what is the value of marginal product of the second worker? A) $100 B) $20 C) $30 D) $125 Answer: A Topic: Value of Marginal Product Skill: Analytical Status: Old AACSB: Analytical Skills

56) Winnie's Car Wash is a perfectly competitive firm. The table above shows Winnie's total product schedule. If the price of a car wash is $4 and the wage rate is $50 per day, how many workers should Winnie employ to maximize his profit? A) 1 B) 2 C) 3 D) 4 Answer: C Topic: Profit Maximization Skill: Analytical Status: Old AACSB: Analytical Skills

57) Winnie's Car Wash is a perfectly competitive firm. The table above shows Winnie's total product schedule. If the price of a car wash is $4 and the wage rate is $70 per day, how many workers should Winnie employ to maximize his profit? A) 1 B) 2 C) 3 D) 4 Answer: B Topic: Profit Maximization Skill: Analytical Status: Old AACSB: Analytical Skills

58) Winnie's Car Wash is a perfectly competitive firm. The table above shows Winnie's total product schedule. If the price of a car wash is $5 and the wage rate is $62.50 per day, how many workers should Winnie employ to maximize his profit? A) 2 B) 3 C) 4 D) 5 Answer: B Topic: Profit Maximization Skill: Analytical Status: Old AACSB: Analytical Skills

59) Winnie's Car Wash is a perfectly competitive firm. The table above shows Winnie's total product schedule. If the price of a car wash is $5 and the wage rate is $37.50 per day, how many workers should Winnie employ to maximize his profit? A) 2 B) 3 C) 4 D) 5 Answer: C Topic: Profit Maximization Skill: Analytical Status: Old AACSB: Analytical Skills

60) Winnie's Car Wash is a perfectly competitive firm. The table above shows Winnie's total product schedule. If the price of a car wash is $4, and Winnie maximizes his profit when he employs 3 workers, the wage rate is A) $25 per day. B) $30 per day. C) $70 per day. D) $50 per day. Answer: D Topic: Profit Maximization Skill: Analytical Status: Old AACSB: Analytical Skills

61) Winnie's Car Wash is a perfectly competitive firm. The table above shows Winnie's total product schedule. If the price of a car wash is $4, and Winnie maximizes his profit when he employs 4 workers, the wage rate is A) $90 per day. B) $30 per day. C) $70 per day. D) $50 per day. Answer: B Topic: Profit Maximization Skill: Analytical Status: Old AACSB: Analytical Skills

Labor (workers) 0 1 2 3 4 5

Output (haircuts per day) 0 24 36 44 48 50

62) The above table has the total product schedule for Joe's Barber Shop. Joe charges $6 per haircut. The firm's value of marginal product of labor for the third worker is equal to A) $264. B) $48. C) $8. D) $6. Answer: B Topic: Value of Marginal Product Skill: Analytical Status: Old AACSB: Analytical Skills

63) The above table has the total product schedule for Joe's Barber Shop. Joe charges $6 per haircut. If the wage rate is $24 per worker, what quantity of labor will maximize profits? A) 1 worker B) 2 workers C) 4 workers D) 5 workers Answer: C Topic: Profit Maximization Skill: Analytical Status: Old AACSB: Analytical Skills

64) The above table has the total product schedule for Joe's Barber Shop. Joe charges $6 per haircut. If the wage rate falls from $24 per worker to $12 per worker, the quantity of labor hired ________ and the new number of workers employed is ________. A) increases; 2 B) decreases; 2 C) increases; 5 D) increase; 3 Answer: C Topic: Profit Maximization Skill: Analytical Status: Old AACSB: Analytical Skills

Quantity of labor (workers) 0 1 2 3 4 5

Output (units) 0 10 18 24 28 30

Value of marginal product (dollars) 0 100 80 60 40 20

Total revenue (dollars) 0 100 180 240 280 300

65) Based on the production and revenue data in the above table, what is the marginal product of the 4th worker? A) 28 B) 6 C) 4 D) 2 Answer: C Topic: Marginal Product Skill: Analytical Status: Old AACSB: Analytical Skills

66) Based on the production and revenue data in the above table, what is the price of the product? A) $100 B) $10 C) $1 D) More information is needed to determine the price of the product. Answer: B Topic: Value of Marginal Product Skill: Analytical Status: Old AACSB: Analytical Skills

67) Based on the production and revenue data in the above table, if the wage rate is $20 per worker, how many workers will be hired? A) 5 B) 4 C) 3 D) 2 Answer: A Topic: Profit Maximization Skill: Analytical Status: Old AACSB: Analytical Skills

68) Based on the production and revenue data in the above table, if the wage rate is $35 per worker, how many workers will be hired? A) 5 B) 4 C) 3 D) 2 Answer: B Topic: Profit Maximization Skill: Analytical Status: Old AACSB: Analytical Skills

Quantity of labor (workers) 0 1 2 3 4 5

Output (groomings) 0 12 20 25 28 30

Marginal product (groomings) 12 8 5 3 2

69) Doug's Dog Grooming is a perfectly competitive firm charging $5 per dog grooming. Doug's Dog Grooming has the total and marginal product of labor schedules in the above table and can hire workers from a perfectly competitive labor market for $15 per hour. What is the value of marginal product of the third worker? A) $5 B) $25 C) $15 D) $375 Answer: B Topic: Value of Marginal Product Skill: Analytical Status: Old AACSB: Analytical Skills

70) Doug's Dog Grooming is a perfectly competitive firm charging $5 per dog grooming. Doug's Dog Grooming has the total and marginal product of labor schedules in the above table and can hire workers from a perfectly competitive labor market for $15 per hour. The profit-maximizing level of employment for Doug's Dog Grooming is A) 1 worker. B) 2 workers. C) 4 workers. D) 6 workers. Answer: C Topic: Profit Maximization Skill: Analytical Status: Old AACSB: Analytical Skills

Labor (workers) 0 1 2 3 4 5

Output (pounds of bricks per hour) 0 10 16 19 21 22

71) The table above shows the number of pounds of bricks that can be produced by the Red Brick Company as the number of workers hired increases. The brick market is perfectly competitive and each pound of bricks sells for $20. The labor market is competitive and the wage rate is $30 an hour. When the Red Brick Company maximizes its profit, it produces ________ bricks an hour. A) 19 B) 21 C) 22 D) 10 Answer: B Topic: Profit Maximization Skill: Analytical Status: Old AACSB: Analytical Skills

72) The firm's demand for labor is derived directly from ________. A) the wage rate B) the supply of labor C) labor's cost D) labor's value of marginal product Answer: D Topic: Value of Marginal Product and the Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills

73) A firm's demand for labor curve is the same as the firm's A) marginal product curve. B) marginal cost curve. C) marginal revenue curve. D) value of marginal product curve. Answer: D Topic: Value of Marginal Product and the Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills

74) Which answer below correctly describes the relationship between the demand for labor curve and the value of marginal product curve? A) The curves intersect to determine the equilibrium quantity of labor. B) The value of marginal product curve lies to the right and above the demand for labor curve. C) The curves are the same. D) The value of marginal product curve lies to the left of the demand for labor curve. Answer: C Topic: Value of Marginal Product and the Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills

75) A firm's demand for labor curve A) is the same as its value of marginal product curve. B) is steeper than its value of marginal product curve. C) is flatter than its value of marginal product curve. D) intersects its value of marginal product curve at the profit-maximizing quantity of employment. Answer: A Topic: Value of Marginal Product and the Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills

76) A firm's value of marginal product of labor curve A) is flatter than its demand for labor curve. B) is steeper than its demand for labor curve. C) is its demand for labor curve. D) bends backward. Answer: C Topic: Value of Marginal Product and the Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills

77) A firm's demand for labor curve A) is the same as its value of marginal product of labor curve. B) shows how many jobs the firm demands at different wage rates. C) shifts rightward when the price of the firm's output falls. D) None of the above answers are correct. Answer: A Topic: Demand for Labor Curve Skill: Conceptual Status: Old AACSB: Analytical Skills

78) Because the value of marginal product diminishes as the quantity of labor employed increases, the ________ the wage rate, the ________ workers the firm hires. A) lower; more B) higher; more C) lower; fewer D) None of the above answers is correct because there is no relationship between the wage rate and the number of workers hired. Answer: A Topic: Value of Marginal Product and the Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills

79) In the short run, ________ increases the quantity of labor demanded by the firm. A) a decrease in the price of the firm's output B) an increase in the prices of other factors of production used by the firm C) a technological advance that decreases the marginal product of labor D) a decrease in the wage rate Answer: D Topic: Demand for Labor Curve Skill: Conceptual Status: Old AACSB: Analytical Skills

80) A decrease in the wage rate A) shifts the firm's demand for labor curve rightward. B) shifts the firm's demand for labor curve leftward. C) leads to a movement along the demand for labor curve but does not shift the curve. D) None of the above answers is correct. Answer: C Topic: Demand for Labor Curve Skill: Conceptual Status: Old AACSB: Analytical Skills

81) The demand for labor depends on I. technology. II. the prices of other factors of production. III. the price of the product. A) I and II B) II and III C) I and III D) I, II and III Answer: D Topic: Changes in the Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills

82) A firm's demand for labor A) increases when the price of the firm's output falls. B) decreases when the price of the firm's output falls. C) decreases when the wage rate decreases. D) always increases when the prices of other factors fall. Answer: B Topic: Changes in the Demand for Labor Skill: Analytical Status: Old AACSB: Analytical Skills

83) A fall in the price of a firm's output A) decreases the firm's demand for labor. B) increases the firm's demand for labor. C) decreases the firm's supply of labor. D) increases the firm's supply of labor. Answer: A Topic: Changes in the Demand for Labor; Price of the Product Skill: Analytical Status: Old AACSB: Analytical Skills

84) The demand for labor increases (that is, the demand for labor curve shifts rightward) if the A) wage rate increases. B) wage rate decreases. C) price of the firm's output rises. D) price of the firm's output falls. Answer: C Topic: Changes in the Demand for Labor; Price of the Product Skill: Analytical Status: Old AACSB: Analytical Skills

85) If the price of hair styling increases, then A) hair styling salons hire fewer workers but makes more profit. B) hair stylists demand an increase in wages and the salons hire fewer workers. C) the value of marginal product of each hair stylist increases and the demand curve for hair stylists shifts leftward. D) the value of marginal product of each hair stylist increases and the demand curve for hair stylists shifts rightward. Answer: D Topic: Changes in the Demand for Labor; Price of Output Skill: Analytical Status: Old AACSB: Analytical Skills

86) An increase in the price of a firm's output A) raises the value of marginal product of each unit of labor. B) shifts the firm's demand for labor curve rightward. C) results in the firm increasing the amount of output it produces. D) All of the above answers are correct. Answer: D Topic: Changes in the Demand for Labor; Price of Output Skill: Analytical Status: Old AACSB: Analytical Skills

87) A decrease in the price of a firm's output A) raises the value of marginal product of each unit of labor. B) shifts the firm's demand for labor curve rightward. C) results in the firm increasing the amount of output it produces. D) None of the above is correct. Answer: D Topic: Changes in the Demand for Labor; Price of Output Skill: Analytical Status: Old AACSB: Analytical Skills

88) If the price of a firm's output rises, its A) marginal product of labor increases. B) value of marginal product decreases. C) demand for labor increases. D) demand for labor decreases. Answer: C Topic: Changes in the Demand for Labor; Price of Output Skill: Analytical Status: Old AACSB: Analytical Skills

89) An increase in the price of a firm's product A) decreases its value of marginal product of labor. B) increases its demand for labor. C) increases its supply of labor. D) None of the above answers is correct. Answer: B Topic: Changes in the Demand for Labor; Price of Output Skill: Analytical Status: Old AACSB: Analytical Skills

90) When the price of the good or service it produces rises, the firm's A) demand for labor curve shifts rightward. B) demand for labor curve shifts leftward. C) demand for labor curve remains unchanged. D) output decreases. Answer: A Topic: Changes in the Demand for Labor; Price of Output Skill: Analytical Status: Old AACSB: Analytical Skills

91) If the price of dog grooming increased, then number of workers hired by Doug's Dog Grooming would A) decrease. B) increase. C) remain unchanged. D) Any of the above answers are possible. Answer: B Topic: Changes in the Demand for Labor; Price of Output Skill: Analytical Status: Old AACSB: Analytical Skills

92) Which of the following would explain why Josh's Limo Service might increase its demand for limo drivers? A) a rise in the price of a limo ride B) a decrease in the demand for limo rides C) a fall in the price of a taxi ride D) a rise in the wage paid to limo drivers Answer: A Topic: Changes in the Demand for Labor; Price of Output Skill: Analytical Status: Old AACSB: Analytical Skills

93) An increase in the price of a firm's output increases the firm's demand for labor because the A) marginal product of each worker increases. B) value of marginal product of each worker increases. C) value of marginal product curve becomes steeper. D) value of marginal product curve becomes flatter. Answer: B Topic: Changes in the Demand for Labor; Price of Output Skill: Analytical Status: Old AACSB: Analytical Skills

94) Due to a recession, Hostess Bakeries found that the demand for its products decreased. The demand for products ________ the demand for bakers and ________ the equilibrium wage rate paid to bakers. A) increased; raised B) decreased; raised C) increased; lowered D) decreased; lowered Answer: D Topic: Changes in the Demand for Labor Skill: Analytical Status: New AACSB: Analytical Skills

Quantity of labor (workers) 0 1 2 3 4

Output (pounds) 0 1000 1800 2400 2800

95) The preceding table gives monthly production information for Peter's Peanuts, a firm in a perfectly competitive industry. The market price of peanuts is $2.00 per pound. What is the marginal product from employing the fourth worker? A) 7 pounds of peanuts B) 100 pounds of peanuts C) 400 pounds of peanuts D) 2,800 pounds of peanuts Answer: C Topic: Marginal Product Skill: Analytical Status: Old AACSB: Analytical Skills

96) The preceding table gives monthly production information for Peter's Peanuts, a firm in a perfectly competitive industry. The market price of peanuts is $2.00 per pound. What is the value of marginal product from employing the third worker? A) $800 B) $1,200 C) $2,000 D) $4,800 Answer: B Topic: Value of Marginal Product Skill: Analytical Status: Old AACSB: Analytical Skills

97) The preceding table gives monthly production information for Peter's Peanuts, a firm in a perfectly competitive industry. The market price of peanuts is $2.00 per pound. If a worker costs $800 per month, how many workers will Peter employ to maximize profit? A) zero B) one C) two D) four Answer: D Topic: Profit Maximization Skill: Analytical Status: Old AACSB: Analytical Skills

98) The preceding table gives monthly production information for Peter's Peanuts, a firm in a perfectly competitive industry. Initially the market price of peanuts is $2.00 per pound. If the market price of peanuts fall to $1 per pound and a worker costs $800 per month, how many workers will Peter employ to maximize his profit? A) zero B) two C) three D) four Answer: B Topic: Profit Maximization Skill: Analytical Status: Old AACSB: Analytical Skills

99) The preceding table gives monthly production information for Peter's Peanuts, a firm in a perfectly competitive industry. The market price of peanuts is $2.00 per pound. A worker costs $1,200 per month. How many workers does Peter hire to maximize his profit? A) zero B) one C) three D) four Answer: C Topic: Profit Maximization Skill: Analytical Status: Old AACSB: Analytical Skills

100) The preceding table gives monthly production information for Peter's Peanuts, a firm in a perfectly competitive industry. An increase in the wage rate for labor leads to A) an increase in the quantity of labor demanded. B) a decrease in the quantity of labor demanded. C) an increase in the demand for labor. D) a decrease in the demand for labor. Answer: B Topic: Changes in the Demand for Labor; Wage Rate Skill: Analytical Status: Old AACSB: Analytical Skills

101) The figure above shows a local lawn cutting service's demand for labor curve when the price of cutting an acre of lawn is $50 per acre. If the market wage is $300 per day, the firm will NOT hire a fourth worker because the fourth worker would create A) an economic loss and the firm would shut down. B) additional revenue that exceeds the worker's wage. C) additional revenue that exceeds the worker's value of marginal product. D) additional revenue that falls short of the worker's wage. Answer: D Topic: Demand for Labor Curve Skill: Analytical Status: Old AACSB: Analytical Skills

102) The figure above shows a local lawn cutting service's demand for labor curve when the price of cutting an acre of lawn is $50 per acre. How much labor will the firm hire if the market wage is $300 per day? A) 0 workers B) 1 worker C) 2 workers D) 3 workers Answer: D Topic: Demand for Labor Curve Skill: Analytical Status: Old AACSB: Analytical Skills

103) The figure above shows a local lawn cutting service's demand for labor curve when the price of cutting an acre of lawn is $50 per acre. If the wage rate rises from $100 per day to $200 per day, the firm's demand for labor curve A) shifts leftward. B) shifts rightward. C) does not shift at all, but the firm moves upward along the curve. D) None of the above because this change shifts the supply of labor curve. Answer: C Topic: Changes in the Demand for Labor; Wage Rate Skill: Analytical Status: Old AACSB: Analytical Skills

104) The figure above shows a local lawn cutting service's demand for labor curve when the price of cutting an acre of lawn is $50 per acre. If the price of lawn cutting rises to $60 per acre of lawn cut, the firm's demand for labor curve A) shifts rightward. B) shifts leftward. C) does not shift at all, but the firm moves upward along the curve. D) None of the above because this change shifts the supply of labor curve. Answer: A Topic: Changes in the Demand for Labor; Price of Output Skill: Analytical Status: Old AACSB: Analytical Skills

105) Usually the demand for labor decreases (that is, the demand for labor curve shifts leftward) if the A) wage rate increases. B) wage rate decreases. C) price of the firm's output rises. D) prices of other factors fall. Answer: D Topic: Changes in the Demand for Labor; Prices of Other Factors Skill: Analytical Status: Old AACSB: Analytical Skills

106) A firm's demand for labor increases and its demand curve for labor shifts rightward if A) the wage rate falls. B) the price of its product falls. C) its value of marginal product decreases. D) an advance in technology increases the marginal product of labor. Answer: D Topic: Changes in the Demand for Labor; Technology Skill: Analytical Status: Old AACSB: Analytical Skills

107) New technology A) definitely increases a firm's demand for labor. B) definitely decreases a firm's demand for labor. C) definitely does not change a firm's demand for labor. D) could increase or decrease a firm's demand for labor. Answer: D Topic: Changes in the Demand for Labor; Technology Skill: Conceptual Status: Old AACSB: Analytical Skills

108) A company finds that for the next worker hired, the worker's VMP is less than the cost of the worker. In this case, to maximize its profit the company should A) definitely hire the worker. B) perhaps hire the worker, depending on the relationship between the company's MC and MR. C) definitely not hire the worker. D) None of the above answers is correct. Answer: C Topic: Study Guide Question, Profit Maximization Skill: Analytical Status: Old AACSB: Analytical Skills

109) A firm's price rises. As a result, the A) supply of labor to the firm decreases, that is, the labor supply curve shifts leftward. B) supply of labor to the firm increases, that is, the labor supply curve shifts rightward. C) demand for labor by the firm increases, that is, the labor demand curve shifts rightward. D) demand for labor by the firm decreases, that is, the labor demand curve shifts leftward. Answer: C Topic: Study Guide Question, Changes in the Demand for Labor Skill: Analytical Status: Old AACSB: Analytical Skills

110) Suppose the price of oranges rises. As a result, the A) supply of orange pickers increases. B) supply of orange pickers decreases. C) demand for orange pickers increases. D) demand for orange pickers decreases. Answer: C Topic: Study Guide Question, Changes in the Demand for Labor Skill: Analytical Status: Old AACSB: Analytical Skills

3 Labor Markets 1) A household's reservation wage is the ________. A) lowest wage rate at which the household will supply labor B) wage at which the household's labor supply curve bends backward C) wage rate at which the household's income is largest D) highest wage rate at which the household will supply labor Answer: A Topic: The Supply of Labor, Reservation Wage Skill: Definition Status: Old AACSB: Analytical Skills

2) The reservation wage is the A) highest wage for which a person is willing to supply labor. B) lowest wage for which a person is willing to supply labor. C) wage for which a person is willing to work full time. D) wage for which a person is willing to work overtime. Answer: B Topic: The Supply of Labor, Reservation Wage Skill: Definition Status: Old AACSB: Analytical Skills

3) The lowest wage for which a person is willing to supply labor is known as the A) substitution wage. B) income effect. C) derived wage. D) reservation wage. Answer: D Topic: The Supply of Labor, Reservation Wage Skill: Definition Status: Old AACSB: Analytical Skills

4) A worker supplies labor to the market if the A) wage is less than the reservation wage. B) wage is greater than the reservation wage. C) minimum wage is less than the reservation wage. D) demand for labor exceeds the supply of labor. Answer: B Topic: The Supply of Labor, Reservation Wage Skill: Conceptual Status: Old AACSB: Analytical Skills

5) If Sam decides to work, his A) reservation wage is greater than his wage rate. B) reservation wage is less than his wage rate. C) value of marginal product is greater than his wage rate. D) value of marginal product equals his wage rate. Answer: B Topic: The Supply of Labor, Reservation Wage Skill: Conceptual Status: Old AACSB: Analytical Skills

6) John's reservation wage is $10 per hour. This means that A) John will not supply labor in the market until he receives a wage of at least $10 per hour. B) John will supply labor in the market at a wage of $10 and lower. C) John will work 10 hours per day. D) John will decrease the hours he works when his wage rate exceeds $10 per hour. Answer: A Topic: The Supply of Labor, Reservation Wage Skill: Conceptual Status: Old AACSB: Analytical Skills

7) If the wage rate paid in the fast-food outlets in a small town is greater than the reservation wage of all the teenagers in the town and less than the reservation wage of all the adults, then the fast-food outlets will hire ________. A) mostly adults and a few teenagers B) some adults and some teenagers C) only adults D) only teenagers Answer: D Topic: The Supply of Labor, Reservation Wage Skill: Conceptual Status: Old AACSB: Analytical Skills

8) The ________ effect means that, other things remaining the same, the higher the wage rate, the less time people will spend working and the more time people will spend at leisure. A) price B) labor C) income D) substitution Answer: C Topic: The Supply of Labor, Income Effect Skill: Definition Status: Old AACSB: Analytical Skills

9) With respect to the labor supply curve, the income effect A) reinforces the substitution effect. B) lowers the opportunity cost of labor. C) raises the opportunity cost of labor. D) influences a person to work less as the wage rate increases. Answer: D Topic: The Supply of Labor, Income Effect Skill: Definition Status: Old AACSB: Analytical Skills

10) Because of the income effect, a higher wage rate A) shifts the supply of labor curve leftward. B) shifts the supply of labor curve rightward. C) leads to a decrease in quantity of labor supplied. D) leads to an increase in quantity of labor supplied. Answer: C Topic: The Supply of Labor, Income Effect Skill: Definition Status: Old AACSB: Analytical Skills

11) Because of the income effect, the labor supply curve is A) backward bending. B) positively sloped. C) horizontal. D) vertical. Answer: A Topic: The Supply of Labor, Income Effect Skill: Analytical Status: Old AACSB: Analytical Skills

12) The income effect means that at a high enough wage rate labor supply curve has a A) positive slope because an increase in the wage rate increases income. B) positive slope because an increase in income increases the demand for leisure. C) negative slope because an increase in income increases the demand for leisure. D) negative slope because an increase in the wage rate increases hours worked to earn more income. Answer: C Topic: The Supply of Labor, Income Effect Skill: Analytical Status: Old AACSB: Analytical Skills

13) The income effect of a higher wage rate results in a I. higher income as people work more. II. person choosing to decrease work hours as income increases. III. backward-bending labor supply curve. A) I and II B) II and III C) I and III D) II only Answer: B Topic: The Supply of Labor, Income Effect Skill: Conceptual Status: Old AACSB: Analytical Skills

14) A professional tennis player enters fewer tournaments each year as the prize money she won increased. This observation indicates that the tennis player A) is irrational. B) has shifted her labor demand curve leftward. C) has shifted her labor supply curve rightward. D) has a backward bending labor supply curve. Answer: D Topic: The Supply of Labor, Income Effect Skill: Conceptual Status: Old AACSB: Analytical Skills

15) As wages rise, the substitution effect induces households to A) choose leisure rather than supplying labor in the labor market. B) choose supplying labor in the labor market rather than engage in leisure. C) reduce the opportunity cost of leisure. D) reduce the economic rent from leisure. Answer: B Topic: The Supply of Labor, Substitution Effect Skill: Conceptual Status: Old AACSB: Analytical Skills

16) The opportunity cost of leisure is A) the substitution effect. B) the income effect. C) a person's income. D) a person's wage rate. Answer: D Topic: The Supply of Labor, Substitution Effect Skill: Analytical Status: Old AACSB: Analytical Skills

17) The hourly wage rate is the opportunity cost of one hour of leisure because A) the person's substitution effect exceeds his or her income effect. B) that is what a person gives up to enjoy the hour of leisure time. C) the person must work for a living. D) the person prefers leisure to work regardless of the wage. Answer: B Topic: The Supply of Labor, Substitution Effect Skill: Conceptual Status: Old AACSB: Analytical Skills

18) With respect to labor supply, the substitution effect means a A) person increases his or her hours of labor in response to a higher wage rate. B) person decreases his or her hours of labor in response to a higher wage rate. C) person substitutes high paying work for low paying work. D) firm substitutes capital for labor. Answer: A Topic: The Supply of Labor, Substitution Effect Skill: Conceptual Status: Old AACSB: Analytical Skills

19) With respect to labor supply, the substitution effect takes account of the point that at higher wage rates, A) a person can afford to take more leisure. B) leisure has become less expensive and so a person consumes less leisure. C) there are no factors inducing a person to work less. D) leisure has become more expensive and so a person consumes less leisure. Answer: D Topic: The Supply of Labor, Substitution Effect Skill: Conceptual Status: Old AACSB: Analytical Skills

20) Meredith receives a wage hike. If Meredith decides to work an extra hour, A) her reservation wage rate exceeds her value of marginal product. B) her opportunity cost of leisure is high. C) her substitution effect is greater than her income effect. D) she operates on the backward-bending portion of her labor supply curve. Answer: C Topic: The Supply of Labor, Substitution Effect Skill: Conceptual Status: Old AACSB: Analytical Skills

21) For the past year, Teddy has had a part-time job at which he is willing to work 10 hours each week. During Teddy's annual review, his boss grants him an 8 percent increase in his wage. As a result of the wage increase, Teddy is now willing to work 15 hours each week. Teddy's opportunity cost of ________ has risen and because for Teddy the substitution effect of the wage hike is ________ than the income effect. A) work; greater B) work; less C) leisure; greater D) leisure; less Answer: C Topic: The Supply of Labor, Substitution Effect Skill: Analytical Status: Old AACSB: Analytical Skills

22) For the past year, Teddy has had a part-time job at which he is willing to work 30 hours each week. During Teddy's annual review, his boss grants him an 8 percent increase in his wage. As a result of the wage increase, Teddy is now willing to work 25 hours each week. Teddy's opportunity cost of ________ has risen and because for Teddy the substitution effect of the wage hike is ________ than the income effect. A) work; greater B) work; less C) leisure; greater D) leisure; less Answer: D Topic: The Supply of Labor, Income Effect Skill: Analytical Status: Old AACSB: Analytical Skills

23) At high wage rates, the labor supply curve bends backward because the ________ effect dominates the ________ effect. A) income; price B) substitution; income C) substitution; price D) income; substitution Answer: D Topic: The Supply of Labor, Substitution Effect and Income Effect Skill: Analytical Status: Old AACSB: Analytical Skills

24) As the wage rate rises, the income effect influences workers to choose ________ leisure, and the substitution effect influences workers to choose ________ leisure. A) more; less B) more; more C) less; less D) less; more Answer: A Topic: The Supply of Labor, Substitution Effect and Income Effect Skill: Analytical Status: Old AACSB: Analytical Skills

25) The labor supply curve is backward bending because A) as the wage rate rises, the substitution effect becomes larger than the income effect. B) as the wage rate rises, the income effect becomes larger than the substitution effect. C) an increase in the wage rate shifts the supply of labor curve leftward at higher wages. D) an increase in the wage rate shifts the supply of labor curve rightward at higher wages. Answer: B Topic: The Supply of Labor, Substitution Effect and Income Effect Skill: Conceptual Status: Old AACSB: Analytical Skills

26) If your labor supply increases when you get a raise, which of the following is true? A) Your substitution effect is greater than your income effect. B) Your substitution effect is less than your income effect. C) Your substitution effect equals your income effect. D) None of the above answers is correct. Answer: A Topic: The Supply of Labor, Substitution Effect and Income Effect Skill: Analytical Status: Old AACSB: Analytical Skills

27) If Joe receives an increase in his wage rate and decides to decrease his hours worked, the A) substitution effect and the income effect must be equal. B) substitution effect must exceed the income effect. C) income effect must exceed the substitution effect. D) substitution effect must be zero. Answer: C Topic: The Supply of Labor, Substitution Effect and Income Effect Skill: Analytical Status: Old AACSB: Analytical Skills

28) In order for there to be a backward-bending supply of labor curve, it must be the case that A) at low wage rates, the income effect of a wage increase exceeds the substitution effect, but at high wage rates the substitution effect of a wage increase exceeds the income effect. B) at low wage rates, the substitution effect of a wage increase exceeds the income effect, but at high wage rates the income effect of a wage increase exceeds the substitution effect. C) the income effect of a wage increase exceeds the substitution effect at all wage rates. D) the substitution effect of a wage increase exceeds the income effect at all wage rates. Answer: B Topic: The Supply of Labor, Substitution Effect and Income Effect Skill: Analytical Status: Old AACSB: Analytical Skills

29) An individual's labor supply curve will have a A) positive slope if the income effect exceeds the substitution effect. B) negative slope if the substitution effect exceeds the income effect. C) positive slope if the substitution effect exceeds the income effect. D) negative slope regardless of whether the substitution effect or income effect is larger. Answer: C Topic: The Supply of Labor, Substitution Effect and Income Effect Skill: Analytical Status: Old AACSB: Analytical Skills

30) The labor supply curve has a A) positive slope always. B) negative slope if the income effect is greater than the substitution effect. C) positive slope if the income effect is greater than the substitution effect. D) negative slope always. Answer: B Topic: The Supply of Labor, Substitution Effect and Income Effect Skill: Analytical Status: Old AACSB: Analytical Skills

31) When the ________ effect dominates the ________ effect, the labor supply curve is ________. A) income; substitution; vertical B) substitution; income; positively sloped C) income; substitution; negatively sloped D) substitution; income; horizontal Answer: C Topic: The Supply of Labor, Substitution Effect and Income Effect Skill: Analytical Status: Old AACSB: Analytical Skills

32) The labor supply curve has a positive slope if the A) substitution effect outweighs the income effect. B) income effect outweighs the substitution effect. C) demand for labor is elastic. D) demand for labor is inelastic. Answer: A Topic: The Supply of Labor, Substitution Effect and Income Effect Skill: Analytical Status: Old AACSB: Analytical Skills

33) For many jobs, as wages increase, the quantity supplied of labor increases. This set of facts is evidence that the A) substitution effect is larger than the income effect and the supply of labor curve is upward sloping. B) income effect is larger than the substitution effect and the supply of labor curve is upward sloping. C) substitution effect is larger than the income effect and the supply of labor curve is backward bending. D) income effect is larger than the substitution effect and the supply of labor curve is backward bending. Answer: A Topic: The Supply of Labor, Substitution Effect and Income Effect Skill: Analytical Status: New AACSB: Analytical Skills

34) In the figure above, the substitution effect outweighs the income effect in all segments EXCEPT A) 0a. B) 0c. C) bc. D) cd. Answer: D Topic: The Supply of Labor, Substitution Effect and Income Effect Skill: Analytical Status: Old AACSB: Analytical Skills

35) In the figure above, the segment of the curve showing where the income effect outweighs the substitution effect is A) 0a. B) bd. C) 0c. D) cd. Answer: D Topic: The Supply of Labor, Substitution Effect and Income Effect Skill: Analytical Status: Old AACSB: Analytical Skills

36) The market supply of labor curve has a positive slope if higher wages induce households to choose A) leisure rather than supplying labor in the labor market. B) supplying labor in the labor market rather than leisure. C) demanding labor rather than supplying it. D) None of the above answers is correct. Answer: B Topic: Market Supply Skill: Analytical Status: Old AACSB: Analytical Skills

37) Which of the following will increase the wage rate? A) an increase in the adult population B) an increase in the retirement age C) an improvement in technology that increases the marginal product of labor D) Both answers A and B are correct. Answer: C Topic: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

38) Which of the following will increase the wage rate? A) The price of the output produced by the workers increases. B) New technology increases the marginal product of labor. C) an increase in labor supply D) Both answers A and B are correct. Answer: D Topic: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

39) You observe that more labor is employed and the wage rate increases. This set of events could have been the result of a A) rightward shift of the labor demand curve. B) leftward shift of the labor supply curve. C) rightward shift of the labor supply curve. D) leftward shift of the labor demand curve. Answer: A Topic: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

Wage rate (dollars per hour) 5 10 15 20 25

Quantity of Quantity of labor labor supplied demanded (hours per day) (hours per day) 200 600 300 500 400 400 500 300 600 200

40) The table above gives information about the labor market in Lantis, a community in which the labor market is perfectly competitive. The equilibrium wage rate is ________ an hour and the quantity of labor employed is ________ hours per day. A) $5; 600 B) $25; 200 C) $15; 400 D) None of the above answers is correct. Answer: C Topic: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

41) The table above gives information about the labor market in Lantis, a community in which the labor market is perfectly competitive. If the demand for labor decreases by 200 hours per day, the equilibrium wage rate falls to ________ an hour and the quantity of labor employed ________ hours per day. A) $10; remains at 400 B) $10; decreases to 300 C) $20; increases to 400 D) $5; remains at 200 Answer: B Topic: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

42) The table above gives information about the labor market in Lantis, a community in which the labor market is perfectly competitive. If the price of the good increases and increases the value of marginal product of labor by $10 an hour, the equilibrium wage rate ________ an hour and the quantity of labor employed ________. A) rises to $10; increases to 600 B) stays at $15; decreases to 300 hours C) rises to $20; increases to 500 hours D) None of the above answers is correct. Answer: C Topic: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 44 Copyright © 2014 Pearson Education, Inc.

43) The figure above shows the labor demand and labor supply curves for workers in local fast-food restaurants. The fast-food restaurant industry is competitive. A decrease in the supply of labor shifts the labor supply curve from LS0 to LS1. Fast-food restaurants hire ________ and total labor income earned by the fast-food workers ________. A) 40 hours of labor a day; increases B) 30 hours of labor a day; decreases C) 40 hours of labor a day; decreases D) 30 hours of labor a day; increases Answer: D Topic: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

44) The figure above shows the labor demand and labor supply curves for workers in local fast-food restaurants. The fast-food restaurant industry is competitive. A decrease in the supply of labor shifts the labor supply curve from LS0 to LS1. The wages of fast-food workers ________. A) decrease by $4 per hour B) decrease by $10 per hour C) increase by $4 per hour D) remain the same Answer: C Topic: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

45) The existence of a union A) has no effect on labor supply and demand. B) affects labor supply only. C) affects labor demand only. D) can affect both labor supply and labor demand. Answer: D Topic: Union Objectives and Constraints Skill: Analytical Status: Old AACSB: Analytical Skills

46) If a union is able to decrease the supply of workers in a competitive labor market but the union cannot affect the demand for its members' labor, then A) wages and the quantity of labor hired will both increase. B) wages will increase but the quantity of labor hired will decrease. C) wages will decrease but the quantity of labor hired will increase. D) wages and the quantity of labor hired will both decrease. Answer: B Topic: Union Objectives and Constraints Skill: Analytical Status: Old AACSB: Analytical Skills

47) If a union restricts the supply of labor but cannot change the demand for labor, the union ________ the wage rate and ________ the level of employment. A) raises; decreases B) raises; increases C) lowers; decreases D) lowers; increases Answer: A Topic: Union Objectives and Constraints Skill: Analytical Status: Old AACSB: Analytical Skills

48) If a union successfully restricts the supply of labor to the firm but the union has no effect on the demand for labor, then the A) wage increases and there is no change in employment. B) wage increases and employment increases. C) wage increases and employment decreases. D) wage increases and there is an unambiguous effect on employment. Answer: C Topic: Union Objectives and Constraints Skill: Analytical Status: Old AACSB: Analytical Skills

49) On the supply side of the labor market, the union's success is limited by how much A) nonunion labor is available in the same market. B) employment union members will accept. C) capital the firm utilizes. D) all of the above Answer: A Topic: Union Objectives and Constraints Skill: Conceptual Status: Old AACSB: Analytical Skills

50) If a union is unable to increase the demand for its workers, then success at raising the wage rate paid its members means that A) all union members receive a higher wage. B) some union members will lose their jobs. C) more union members will be hired. D) the union will push for a decrease in the minimum wage. Answer: B Topic: Unions in a Competitive Labor Market Skill: Analytical Status: Old AACSB: Analytical Skills

51) If a union can successfully shift the demand curve for union labor rightward, the union can achieve A) an increase in wages and employment. B) an increase in wages but a decrease in employment. C) an increase in employment but a decrease in wages. D) a decrease in both employment and wages. Answer: A Topic: Unions in a Competitive Labor Market Skill: Analytical Status: Old AACSB: Analytical Skills

52) Unions tend to ________ import restrictions and ________ a higher minimum wage. A) favor; favor B) favor; oppose C) oppose; favor D) oppose; oppose Answer: C Topic: How Unions Try to Change the Demand for Labor Skill: Analytical Status: Old AACSB: Analytical Skills

53) Which of the following methods is used by unions to increase the demand for the labor of its members? A) Decrease the marginal product of union members. B) Support minimum wage laws. C) Oppose import restrictions. D) Decrease demand for the good produced. Answer: B Topic: How Unions Try to Change the Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills

54) Which of the following increases the demand for U.S. union labor? A) an increase in the minimum wage B) an increase in the demand for imported goods C) new laws that ease immigration restrictions D) All of the above cause an increase in the demand for union labor. Answer: A Topic: How Unions Try to Change the Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills

55) Unions support minimum wage laws because an increase in the minimum wage A) increases the supply of union labor. B) decreases the supply of union labor. C) increases the demand for union labor. D) decreases the demand for union labor. Answer: C Topic: How Unions Try to Change the Demand for Labor Skill: Analytical Status: Old AACSB: Analytical Skills

56) A rise in the minimum wage increases the demand for union labor because this policy change A) lowers the wage rate paid to union labor. B) raises the productivity of union labor. C) lowers the cost of a substitute for union labor. D) raises the cost of a substitute for union labor. Answer: D Topic: How Unions Try to Change the Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills

57) Unions support minimum wage laws, because A) union workers are typically paid the minimum wage. B) an increase in the minimum wage paid to low-skilled labor increases the opportunity cost of employing high-skilled union labor and, hence, increases the demand for union labor. C) an increase in the minimum wage paid to low-skilled labor increases the opportunity cost of employing low-skilled labor and, hence, increases the demand for union labor. D) an increase in the minimum wage paid to low-skilled labor causes the supply curve of low-skilled labor to shift leftward and, hence, increases the demand for union labor. Answer: C Topic: How Unions Try to Change the Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills

58) Which of the following is a method used by unions to increase the demand for their members' labor? A) Support import restrictions. B) Decrease the marginal product of union members. C) Oppose immigration restrictions. D) Oppose minimum wage laws. Answer: A Topic: How Unions Try to Change the Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills

59) Which of the following activities increases the demand for union labor? A) a decrease in the minimum wage B) a decrease in immigration C) an increase in the union wage D) an increased desire by consumers to buy imports Answer: B Topic: How Unions Try to Change the Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills

60) Which of the following decreases the supply of labor that competes with union labor? A) an increase in the minimum wage B) an increase in the demand for imported goods C) new laws that restrict immigration D) All of the above would cause a decrease in the supply of labor that competes with union labor. Answer: C Topic: How Unions Try to Change the Demand for Labor Skill: Analytical Status: Old AACSB: Analytical Skills

61) An advertisement campaign that successfully convinces consumers to buy union-made products has the direct effect of shifting the A) demand curve for union labor rightward. B) demand curve for union labor leftward. C) supply curve of union labor rightward. D) supply curve of union labor leftward. Answer: A Topic: How Unions Try to Change the Demand for Labor Skill: Analytical Status: Old AACSB: Analytical Skills

62) Which of the following activities increases the demand for union labor? A) a decrease in the minimum wage B) an increase in immigration C) additional job training for union members D) an increased desire by consumers to buy imports Answer: C Topic: How Unions Try to Change the Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills

63) Many autoworkers are unionized. Which of the following methods can help them achieve higher wages? I. Training that increases union members' marginal product II. A publicity campaign promoting purchase of union-made automobile A) I only B) II only C) I and II D) Neither I nor II Answer: C Topic: How Unions Try to Change the Demand for Labor Skill: Analytical Status: New AACSB: Analytical Skills

64) Which of the following is NOT a method by which unions try to increase the demand for the labor of their members? A) increasing the marginal product of union members B) increasing the supply of the goods produced by union labor C) supporting minimum wage laws D) supporting immigration restrictions Answer: B Topic: How Unions Try to Change the Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills

65) In order to change the demand for union labor, unions favor all of the following EXCEPT increasing A) the minimum wage. B) import restrictions. C) immigration. D) job training for members. Answer: C Topic: How Unions Try to Change the Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills

66) A monopsony is A) a market in which there is only a single seller. B) a market in which there is only a single buyer. C) a monopoly sanctioned by law. D) an illegal monopoly. Answer: B Topic: Monopsony Skill: Definition Status: Old AACSB: Analytical Skills

67) A monopsony is a market structure in which there is a A) single seller. B) single buyer. C) price floor set by a regulatory agency. D) price ceiling set by a regulatory agency. Answer: B Topic: Monopsony Skill: Definition Status: Old AACSB: Analytical Skills

68) A market structure in which there is only one buyer is A) a monopoly. B) a monopsony. C) an oligopoly. D) a competitive market. Answer: B Topic: Monopsony Skill: Definition Status: Old AACSB: Analytical Skills

69) A monopsony is A) a market in which there is only one producer of a good or service. B) a market in which there is only one producer and one consumer of a good or service. C) a market in which there is only one buyer of a good or service. D) a temporary situation in labor markets when prices are adjusted through the use of collective bargaining. Answer: C Topic: Monopsony Skill: Definition Status: Old AACSB: Analytical Skills

70) In which of the following situations is there most likely to be a monopsony? A) the market for farm workers in a large rural area B) the market for advertising executives in New York City C) the market for accountants in New York City D) the market for NBA players drafted out of college by one NBA team Answer: D Topic: Monopsony Skill: Conceptual Status: Old AACSB: Analytical Skills

71) The marginal cost of labor is defined as the A) total cost of producing a certain amount of output. B) total cost of hiring an additional worker. C) additional cost of hiring an additional worker. D) additional fixed cost of producing an additional unit of output. Answer: C Topic: Monopsony Skill: Definition Status: Old AACSB: Analytical Skills

72) Because a monopsony is the only buyer in a particular market, the A) supply of labor to the monopsony is perfectly elastic. B) supply of labor to the monopsony is perfectly inelastic. C) supply of labor curve faced by the monopsony is upward sloping. D) supply of labor curve faced by the monopsony is downward sloping. Answer: C Topic: Monopsony Skill: Conceptual Status: Old AACSB: Analytical Skills

73) For a monopsony, the labor supply curve is A) above the MCL curve. B) always below the VMP curve. C) downward sloping. D) upward sloping. Answer: D Topic: Monopsony Skill: Conceptual Status: Old AACSB: Analytical Skills

74) For a monopsony the labor supply curve A) does not exist. B) is the marginal product of labor curve. C) is the marginal cost of labor curve. D) lies below the marginal cost of labor curve. Answer: D Topic: Monopsony Skill: Conceptual Status: Old AACSB: Analytical Skills

75) Because a monopsony must raise the wage on all labor hired in order to hire more labor, A) the MCL curve is horizontal at the market wage. B) the MCL curve is negatively sloped. C) MCL = W. D) MCL > W. Answer: D Topic: Monopsony Skill: Conceptual Status: Old AACSB: Analytical Skills

76) For a monopsony, the marginal cost of labor is ________ the wage rate. A) greater than B) less than C) equal to D) first greater than and later less than Answer: A Topic: Monopsony Skill: Conceptual Status: Old AACSB: Analytical Skills

77) A labor market monopsony A) has a marginal cost of labor curve that lies above the labor supply curve. B) has a marginal cost of labor curve that lies below the labor supply curve. C) is a labor market in which the firm has an elastic demand for labor. D) is a labor market in which the firm has an inelastic demand for labor. Answer: A Topic: Monopsony Skill: Conceptual Status: Old AACSB: Analytical Skills

78) For a monopsony, the marginal cost of labor curve lies above the labor supply curve because A) to hire one more unit of labor requires that the wage be raised for all units of labor. B) to hire one more unit of labor requires that the wage be raised for just the last unit of labor hired. C) to hire one more unit of labor, the firm uses its monopsony power to not raise the wage it pays. D) to hire one more unit of labor requires that the firm offer a lower wage. Answer: A Topic: Monopsony Skill: Conceptual Status: Old AACSB: Analytical Skills

79) If a firm faces a labor supply curve that is positively sloped, then the marginal cost of labor curve A) equals the wage rate. B) equals the minimum wage. C) lies above the value of marginal product curve. D) lies above the labor supply curve. Answer: D Topic: Monopsony Skill: Conceptual Status: Old AACSB: Analytical Skills

80) When a firm faces a labor supply curve that is upward sloping, the firm must A) offer a higher wage if it wishes to hire more workers. B) pay a wage that exceeds the value of marginal product. C) pay a wage that does not exceed the minimum wage. D) maximize the amount of labor that it hires. Answer: A Topic: Monopsony Skill: Conceptual Status: Old AACSB: Analytical Skills

81) A monopsony will hire another worker if the A) marginal cost of labor exceeds the value of marginal product. B) marginal cost of labor is less than the value of marginal product. C) marginal cost of labor is less than the wage rate. D) wage rate exceeds the value of marginal product. Answer: B Topic: Monopsony Skill: Conceptual Status: Old AACSB: Analytical Skills

82) A monopsony maximizes its profit by hiring the level of employment that sets A) labor supply equal to labor demand. B) the value of marginal product equal to the wage. C) the value of marginal product equal to the marginal cost of labor. D) the value of marginal product equal to the demand for labor. Answer: C Topic: Monopsony Labor Market Skill: Conceptual Status: Old AACSB: Analytical Skills

83) The monopsony will hire the amount of labor so that the A) demand for labor equals supply for labor. B) value of marginal product of labor equals the wage rate. C) value of marginal product of labor equals the marginal cost of labor. D) supply for labor equals the wage rate. Answer: C Topic: Monopsony Skill: Conceptual Status: Old AACSB: Analytical Skills

84) A monopsony pays a wage rate ________ the marginal cost of labor and ________ the value of marginal product of labor. A) equal to; equal to B) lower than; lower than C) equal to; lower than D) lower than; equal to Answer: B Topic: Monopsony Labor Market Skill: Conceptual Status: Old AACSB: Analytical Skills

85) Because the marginal cost of labor curve lies above the labor supply curve, a monopsony will pay a wage that is A) equal to the wage paid in a competitive market. B) equal to value of marginal product. C) greater than value of marginal product. D) less than the wage paid in a competitive market. Answer: D Topic: Monopsony Labor Market Skill: Conceptual Status: Old AACSB: Analytical Skills

86) A monopsony pays a wage rate that is A) greater than value of marginal product. B) equal to the marginal cost of labor. C) less than value of marginal product. D) unacceptable to the workers hired. Answer: C Topic: Monopsony Labor Market Skill: Conceptual Status: Old AACSB: Analytical Skills

87) A monopsony will never pay a wage that is A) equal to the minimum wage. B) less than the value of marginal product. C) more than the value of marginal product. D) negotiated with the union. Answer: C Topic: Monopsony Labor Market Skill: Conceptual Status: Old AACSB: Analytical Skills

88) In comparison to an employer in a competitive labor market, a monopsony employer hires ________ workers and produces ________ output. A) fewer; less B) fewer; more C) more; less D) more; more Answer: A Topic: Monopsony Labor Market Skill: Conceptual Status: Old AACSB: Analytical Skills

89) In comparison to an employer in a competitive labor market, a monopsony employer pays a ________ wage rate and hires ________ workers. A) lower; fewer B) lower; more C) higher; more D) higher; fewer Answer: A Topic: Monopsony Labor Market Skill: Conceptual Status: Old AACSB: Analytical Skills

90) In a monopsony labor market, the employer hires the quantity of labor where the ________ equals the ________. A) marginal revenue of labor; marginal cost of labor B) marginal cost of labor; marginal product of labor C) marginal product of labor; value of marginal product of labor D) marginal cost of labor; value of marginal product of labor Answer: D Topic: Monopsony Labor Market Skill: Conceptual Status: Old AACSB: Analytical Skills

91) In a labor market, employment A) and the wage rate are higher when the market is a monopsony than when the market is competitive. B) is higher and the wage rate is lower when the market is a monopsony than when the market is competitive. C) is lower and the wage rate is higher when the market is a monopsony than when the market is competitive. D) and the wage rate are lower when the market is a monopsony than when the market is competitive. Answer: D Topic: Monopsony Labor Market Skill: Conceptual Status: Old AACSB: Analytical Skills

92) Compared to a monopsony, a perfectly competitive labor market results in a A) higher wage rate and more workers hired. B) higher wage rate and fewer workers hired. C) lower wage rate and more workers hired. D) lower wage rate and fewer workers hired. Answer: A Topic: Monopsony Labor Market Skill: Analytical Status: Old AACSB: Analytical Skills

93) If a labor market that was previously competitive becomes controlled by a monopsony, the wage rate ________ and employment ________. A) rises; increases B) falls; decreases C) rises; decreases D) falls; increase Answer: B Topic: Monopsony Labor Market Skill: Analytical Status: Old AACSB: Analytical Skills

Wage (dollars per hour) 5 10 15 20 25 30 35

Quantity of labor demanded (workers) 9 8 7 6 5 4 3

Quantity of labor supplied (workers) 3 4 5 6 7 8 9

94) Anthony's Accountants is the only employer of accountants in the island of Fairisle. The table gives the demand and supply of accountants on Fairisle. The marginal cost of hiring a sixth accountant is ________ an hour. A) $20 B) $15 C) $25 D) $45 Answer: D Topic: Monopsony Skill: Analytical Status: Old AACSB: Analytical Skills

Wage (dollars per week)

Quantity of labor supplied (naturalists)

200 250 300 350 400 450 500

0 1 2 3 4 5 6

Value of marginal product (dollars) 850 750 650 550 450 350

95) Pointy Stone State Park is the sole employer of naturalists in the area. The table above provides information about the supply of naturalists and the value of marginal product of labor for naturalists. The marginal cost of labor for the third naturalist is A) $650. B) $450. C) $350. D) $525. Answer: B Topic: Monopsony Skill: Analytical Status: Old AACSB: Analytical Skills

96) Pointy Stone State Park is the sole employer of naturalists in the area. The table above provides information about the supply of naturalists and the value of marginal product of labor for naturalists. How many naturalists will Pointy Stone State Park hire? A) 2 B) 3 C) 4 D) 5 Answer: C Topic: Monopsony Labor Market Skill: Analytical Status: Old AACSB: Analytical Skills

97) Pointy Stone State Park is the sole employer of naturalists in the area. The table above provides information about the supply of naturalists and the value of marginal product of labor for naturalists. What weekly wage will Pointy Stone State Park pay naturalists? A) $550 per week B) $500 per week C) $450 per week D) $400 per week Answer: D Topic: Monopsony Labor Market Skill: Analytical Status: Old AACSB: Analytical Skills

98) Pointy Stone State Park is the sole employer of naturalists in the area. The table above provides information about the supply of naturalists and the value of marginal product of labor for naturalists. On the last naturalist hired, Pointy Stone State Park will earn a profit of A) zero. B) $100 per week. C) $150 per week. D) $200 per week. Answer: C Topic: Monopsony Labor Market Skill: Analytical Status: Old AACSB: Analytical Skills

99) Pointy Stone State Park is the sole employer of naturalists in the area. The table above provides information about the supply of naturalists and the value of marginal product of labor for naturalists. If as a result of a minimum wage law Pointy Stone State Park were required to pay its naturalists $450 per week then the employment of naturalists by Pointy Stone State Park will A) increase. B) decrease. C) not change. D) Any of the above are possible results. Answer: A Topic: Monopsony and the Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

100) In the above figure, the competitive wage rate is ________ and the quantity of labor is ________. A) $7.00; 150 hours B) $8.00; 200 hours C) $6.00; 100 hours D) $8.00; 100 hours Answer: A Topic: Competitive Labor Market Skill: Analytical Status: Old AACSB: Analytical Skills

101) In the above figure, the monopsony wage rate is ________ and the quantity of labor is ________. A) $7.00; 150 hours B) $8.00; 200 hours C) $6.00; 100 hours D) $8.00; 100 hours Answer: C Topic: Monopsony Labor Market Skill: Analytical Status: Old AACSB: Analytical Skills

102) Consider the labor market depicted in the above figure. The competitive equilibrium would be for ________ hours of employment. A) 200 B) 400 C) 600 D) None of the above answers is correct. Answer: B Topic: Competitive Labor Market Skill: Analytical Status: Old AACSB: Analytical Skills

103) Consider the labor market depicted in the above figure. The competitive equilibrium would be for workers to be paid an hourly wage equal to A) $10. B) $15. C) $20. D) None of the above answers is correct. Answer: B Topic: Competitive Labor Market Skill: Analytical Status: Old AACSB: Analytical Skills

104) Consider the monopsony in the above figure. The monopsony will hire ________ hours per week. A) 200 B) 400 C) 600 D) None of the above answers is correct. Answer: A Topic: Monopsony Labor Market Skill: Analytical Status: Old AACSB: Analytical Skills

105) Consider the monopsony in the above figure. The monopsony will pay a hourly wage rate equal to A) $10. B) $15. C) $20. D) None of the above answers is correct. Answer: A Topic: Monopsony Labor Market Skill: Analytical Status: Old AACSB: Analytical Skills

106) Consider the monopsony in the above figure. The 200th hour of labor creates how much added revenue per hour for the monopsony? A) $10 B) $15 C) $20 D) None of the above answers is correct. Answer: C Topic: Monopsony Labor Market Skill: Analytical Status: Old AACSB: Analytical Skills

107) Consider the labor market depicted in the above figure. What wage rate must be paid to have the 200th hour of labor supplied? A) $10 B) $15 C) $20 D) None of the above answers is correct. Answer: A Topic: Monopsony Labor Market Skill: Analytical Status: Old AACSB: Analytical Skills

108) City-Mart is the only employer of sales clerks in Panburg. In the figure above S is the labor supply curve faced by City-Mart, VMP is City-Mart's value of marginal product curve, and MCL is its marginal cost of labor curve. The lowest wage rate at which City-Mart can hire 40 hours of labor per day is A) $8 per hour. B) $12 per hour. C) $4 per hour. D) $9 per hour. Answer: C Topic: Monopsony Labor Market Skill: Analytical Status: Old AACSB: Analytical Skills

109) City-Mart is the only employer of sales clerks in Panburg. In the figure above S is the labor supply curve faced by City-Mart, VMP is City-Mart's value of marginal product curve, and MCL is its marginal cost of labor curve. City-Mart maximizes its profit if it hires ________ hours of labor and pays ________ per hour. A) 90; $9 B) 60; $12 C) 90; $6 D) 60; $6 Answer: D Topic: Monopsony Labor Market Skill: Analytical Status: Old AACSB: Analytical Skills

110) City-Mart is the only employer of sales clerks in Panburg. In the figure above S is the labor supply curve faced by City-Mart, VMP is City-Mart's value of marginal product curve, and MCL is its marginal cost of labor curve. If the market for sales clerks' labor in Panburg were competitive, the wage rate would be ________ per hour, and ________ hours of labor would be hired. A) $9; 90 B) $12; 60 C) $6; 90 D) $6; 60 Answer: A Topic: Competitive Labor Market Skill: Analytical Status: Old AACSB: Analytical Skills

111) City-Mart is the only employer of sales clerks in Panburg. In the figure above S is the labor supply curve faced by City-Mart, VMP is City-Mart's value of marginal product curve, and MCL is its marginal cost of labor curve. City-Mart sales clerks' wage is ________ it would be if the labor market were competitive. A) $3 per hour higher than B) $3 per hour lower than C) $6 per hour lower than D) the same as Answer: B Topic: Competitive Labor Market Skill: Analytical Status: Old AACSB: Analytical Skills

112) City-Mart is the only employer of sales clerks in Panburg. In the figure above S is the labor supply curve faced by City-Mart, VMP is City-Mart's value of marginal product curve, and MCL is its marginal cost of labor curve. If a minimum wage law is passed that requires employers to pay at least $7 per hour, City-Mart will employ ________ hours of sales clerk labor per day. A) 35 B) 110 C) 90 D) 70 Answer: D Topic: Monopsony and the Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

113) The above figure shows the market for labor. The employer is a monopsony. The firm maximizes its profit by hiring A) 800 hours of labor at a wage of $5 per hour. B) 600 hours of labor at a wage of $10 per hour. C) 400 hours of labor at a wage of $5 per hour. D) 200 hours of labor at a wage of $5 per hour. Answer: C Topic: Monopsony Labor Market Skill: Analytical Status: Old AACSB: Analytical Skills

114) The above figure shows the market for labor. The employer is a monopsony. At the equilibrium level of employment, which of the following is correct? A) MCL = VMP B) VMP > W C) W < MCL D) All of the above are correct. Answer: D Topic: Monopsony Labor Market Skill: Analytical Status: Old AACSB: Analytical Skills

115) The above figure shows the market for labor. The employer is a monopsony. The firm will maximize its profit by hiring 400 hours of labor because at that point A) MCL > W. B) VMP > W. C) MCL > VMP. D) MCL = VMP. Answer: D Topic: Monopsony Labor Market Skill: Analytical Status: Old AACSB: Analytical Skills

116) The above figure shows the market for labor. The employer is a monopsony. The firm will not hire 800 hours of labor because at that point A) VMP > MCL. B) VMP = MCL. C) VMP < MCL. D) VMP = W. Answer: C Topic: Monopsony Labor Market Skill: Analytical Status: Old AACSB: Analytical Skills

117) The above figure shows the market for labor. The employer is a monopsony. If the workers are unionized, the wage will be A) $5 per hour. B) between $5 per hour and $15 per hour. C) above $15 per hour. D) less than if the workers were not unionized. Answer: B Topic: Bilateral Monopoly Skill: Analytical Status: Old AACSB: Analytical Skills

118) The above figure shows the market for labor. The employer is a monopsony. If a minimum wage is set at $10 per hour, which of the following will occur? A) The firm will pay $5 per hour. B) The firm will pay $10 per hour. C) The firm will pay $15 per hour. D) The firm will hire less than 400 hours of labor. Answer: B Topic: Monopsony and the Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

119) The above figure shows the market for labor. The employer is a monopsony. If a minimum wage of $10 is imposed, the equilibrium level of employment is A) 200 hours per day. B) 400 hours per day. C) 600 hours per day. D) 800 hours per day. Answer: C Topic: Monopsony and the Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

120) The figure above shows a labor market. If this labor market is perfectly competitive, the wage rate is A) $4 per hour. B) $6 per hour. C) $8 per hour. D) $10 per hour. Answer: B Topic: Competitive Labor Market Skill: Analytical Status: Old AACSB: Analytical Skills

121) The figure above shows a labor market. If this labor market is perfectly competitive, employment is A) 0 hours per week. B) 50 hours per week. C) 100 hours per week. D) 150 hours per week. Answer: C Topic: Competitive Labor Market Skill: Analytical Status: Old AACSB: Analytical Skills

122) The figure above shows a labor market. If there is a monopsony in this labor market, the wage rate is A) $4 per hour. B) $6 per hour. C) $8 per hour. D) $10 per hour. Answer: A Topic: Monopsony Labor Market Skill: Analytical Status: Old AACSB: Analytical Skills

123) The figure above shows a labor market. If there is a monopsony in this labor market, employment is A) 0 hours per week. B) 50 hours per week. C) 100 hours per week. D) 150 hours per week. Answer: B Topic: Monopsony Labor Market Skill: Analytical Status: Old AACSB: Analytical Skills

124) The figure above shows a labor market. If there is a monopsony in this labor market, the monopsony pays a wage rate A) greater than the value of marginal product of labor. B) equal to the value of marginal product of labor. C) less than the value of marginal product of labor. D) equal to the average revenue product of labor. Answer: C Topic: Monopsony Labor Market Skill: Analytical Status: Old AACSB: Analytical Skills

125) The figure above shows a labor market. If there is a monopsony in this labor market, then increasing the minimum wage from $3 per hour to $5 per hour A) will increase the quantity of labor employed. B) will leave unchanged the quantity of labor employed. C) will decrease the quantity of labor employed. D) could increase, decrease, or leave unchanged the quantity of labor employed. Answer: A Topic: Monopsony and the Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

126) If the labor market in the above figure is competitive, what is the equilibrium wage and quantity of labor hired? A) $10 and 100 hours B) $10 and 50 hours C) $5 and 100 hours D) $15 and 50 hours Answer: A Topic: Competitive Labor Market Skill: Analytical Status: Old AACSB: Analytical Skills

127) If there is a monopsony operating in the labor market illustrated in the figure above, the equilibrium wage and quantity of labor hired is A) $15 and 50 hours. B) $10 and 100 hours. C) $10 and 50 hours. D) $5 and 50 hours. Answer: D Topic: Monopsony Labor Market Skill: Analytical Status: Old AACSB: Analytical Skills

128) If there is a monopsony operating in the labor market illustrated in the figure above and the federal government decides to institute a minimum wage of $8 an hour then the wage paid will ________ and the quantity of labor hired will ________. A) increase; decrease B) increase; increase C) decrease; increase D) decrease; decrease Answer: B Topic: Monopsony and the Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

129) Hank's Propane Storage Company is a profit-maximizing monopsony in the local labor market for propane handling, delivery, and other associated services. The supply and marginal cost of labor curves are shown in the figure above. Hank's demand for labor curve is the curve labeled VMP = D. Hank will employ ________ hours of labor per week and pay a wage rate of ________ per hour. A) 100; $12 B) 100; $8 C) 100; $6 D) 120; $8 Answer: C Topic: Monopsony Skill: Analytical Status: Old AACSB: Analytical Skills

130) Hank's Propane Storage Company is a profit-maximizing monopsony in the local labor market for propane handling, delivery, and other associated services. The supply and marginal cost of labor curves are shown in the figure above. Hank's demand for labor curve is the curve labeled VMP = D. What is Hank's total cost of labor at the profit-maximizing quantity of labor employed? A) $1,200 B) $960 C) $800 D) $600 Answer: D Topic: Monopsony Skill: Analytical Status: Old AACSB: Analytical Skills

131) Hank's Propane Storage Company is a profit-maximizing monopsony in the local labor market for propane handling, delivery, and other associated services. The supply and marginal cost of labor curves are shown in the figure above. Hank's demand for labor curve is the curve labeled VMP = D. At what level should a minimum wage be set in order to achieve the wage rate and quantity of employment that would be attained in a competitive labor market? A) $4 per hour B) $6 per hour C) $8 per hour D) $12 per hour Answer: C Topic: Monopsony and the Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

132) In the above figure, the curve labeled MCL is the marginal cost of labor curve and is used in a A) competitive situation in which individual firms cannot influence the wage rate they must pay. B) competitive situation in which skill differentials create a difference between what a firm must pay labor versus the wage at which households are willing to supply labor. C) monopsony situation in which the firm can influence wages by how much labor it hires, so that the wage rate received by workers is less than the marginal cost of labor. D) monopsony situation in which the firm can influence wages by how much labor it hires, so that the wage rate received by workers is greater than the marginal cost of labor. Answer: C Topic: Monopsony Skill: Analytical Status: Old AACSB: Analytical Skills

133) In the above figure, what would be the wage paid and quantity of labor employed under competitive market conditions compared to monopsony conditions? A) W1 and L1 with competition versus W2 and L2 with monopsony B) W2 and L2 with competition versus W1 and L1 with monopsony C) W2 and L2 with competition versus W3 and L1 with monopsony D) W3 and L3 with competition versus W3 and L1 with monopsony Answer: B Topic: Monopsony Skill: Analytical Status: Old AACSB: Analytical Skills

134) The above figure illustrates the case of a monopsony in the labor market. If the current wage paid is W1 and new wage legislation is passed that increases the minimum wage in this market to W2, the firm will A) hire less labor at the higher wage and, according to the law of demand, moving from point D to B. B) hire the same amount of labor as before the law was passed because it cannot adjust to wage changes. C) hire more labor, moving from point C to B. D) pay a higher wage, moving from point C to A. Answer: C Topic: Monopsony and the Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

135) In a monopsony labor market, a minimum wage set equal to the competitive market equilibrium wage rate can ________ the wage rate and ________ employment. A) raise; increase B) raise; decrease C) lower; increase D) lower; decrease Answer: A Topic: Monopsony and the Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

136) The union representing the bread makers at the Hostess Bread Company went on strike and demanded higher wages than what the firm wanted to pay. I. If the firm is in a competitive labor market the union can only raise wages by decreasing employment. II. If the firm is a monopsony in the labor market the union can only raise wages by decreasing employment. III. If the firm is a monopsony in the labor market the union can both raise wages and increase employment. A) I only B) II only C) I and II D) I and III Answer: D Topic: Monopsony and the Minimum Wage Skill: Analytical Status: New AACSB: Analytical Skills

137) When a union faces a monopsony buyer, a ________ exists. A) dual-monopoly B) monopoly C) bilateral monopoly D) monopolistic monopsony Answer: C Topic: Bilateral Monopoly Skill: Definition Status: Old AACSB: Analytical Skills

138) An example of a bilateral monopoly would be when a union A) bargains with many different employers. B) deals directly with the final consumers. C) bargains with a monopoly. D) bargains with a monopsony. Answer: D Topic: Bilateral Monopoly Skill: Conceptual Status: Old AACSB: Analytical Skills

139) A situation where a union bargains with a monopsony employer is termed a A) bilateral monopsony. B) bilateral monopoly. C) bilateral agreement. D) unilateral agreement. Answer: B Topic: Bilateral Monopoly Skill: Definition Status: Old AACSB: Analytical Skills

140) A bilateral monopoly is a A) firm that is a monopsony in a resource market and a monopoly in a product market. B) firm that is a monopoly in two product markets. C) market in which a monopoly discriminates, setting a higher price for affluent customers. D) market in which a monopsony bargains with a monopoly. Answer: D Topic: Bilateral Monopoly Skill: Definition Status: Old AACSB: Analytical Skills

141) If a monopsony must negotiate with a union, then the wage will probably be A) more than the value of marginal product. B) more than the marginal cost of labor. C) the same as if there had been no union. D) more than what it would have been without a union but not more than the value of marginal product. Answer: D Topic: Bilateral Monopoly Skill: Conceptual Status: Old AACSB: Analytical Skills

142) In a bilateral monopoly, the wage rate is likely to be ________ than the value of marginal product of labor and ________ than in a pure monopsony. A) lower; lower B) lower; higher C) higher; lower D) higher; higher Answer: B Topic: Bilateral Monopoly Skill: Analytical Status: Old AACSB: Analytical Skills

143) A minimum wage might increase employment by a monopsony if it makes the supply of labor curve to that firm A) steeper, that is, makes supply more elastic. B) steeper, that is, makes supply less elastic. C) flatter, that is, makes supply more elastic. D) flatter, that is, makes supply less elastic. Answer: C Topic: Monopsony and the Minimum Wage Skill: Analytical Status: Old AACSB: Analytical Skills

144) Which of the following is a recent trend in the labor market? A) Low-skilled workers have lost jobs. B) The demand for high-skilled labor has increased as technology has increased. C) The wages of high-skilled labor have decreased. D) The marginal productivity of low-skilled workers has increased. Answer: B Topic: Trends in the Labor Market Equilibrium Skill: Conceptual Status: Old AACSB: Analytical Skills

145) If the substitution effect from a higher wage rate exceeds the income effect, then a higher wage rate A) increases the quantity of labor supplied. B) decreases the quantity of labor supplied. C) shifts the supply of labor curve leftward. D) shifts the supply of labor curve rightward. Answer: A Topic: Study Guide Question, Substitution Effect and Income Effect Skill: Analytical Status: Old AACSB: Analytical Skills

146) The demand for a product produced by a union becomes more elastic. After this change, how does an increase in the wage rate paid its members affect their employment? A) It does not decrease employment at all. B) It decreases employment by less than it would have before. C) It decreases employment by more than it would have before. D) It increases employment. Answer: C Topic: Study Guide Q, How Unions Try to Change the Demand for Labor Skill: Analytical Status: Old AACSB: Analytical Skills

147) Which of the following would unions be most likely to support? A) decreasing the legal minimum wage B) restricting immigration C) encouraging imports D) increasing the elasticity of demand for the goods their workers produce Answer: B Topic: Study Guide Q, How Unions Try to Change the Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills

148) For a monopsony, the labor supply curve A) lies above the MCL curve. B) is the same as the MCL curve. C) lies below the MCL curve. D) is the same as the labor demand curve. Answer: C Topic: Study Guide Question, Monopsony Skill: Conceptual Status: Old AACSB: Analytical Skills

149) In order to hire an additional worker, a monopsony must pay A) a higher wage rate than it paid before. B) the same wage rate it paid before. C) a lower wage rate than it paid before. D) a wage rate that is sometimes higher, sometimes lower, and sometimes the same as before, depending on the elasticity of the supply of labor. Answer: A Topic: Study Guide Question, Monopsony Skill: Conceptual Status: Old AACSB: Analytical Skills

4 Capital and Natural Resource Markets 1) Changes in which of the following change the demand for capital and shifts the demand curve for capital? A) current income B) expected future income C) the rental rate D) the marginal product of capital Answer: D Topic: Changes in the Demand for Capital Skill: Conceptual Status: Old AACSB: Analytical Skills

2) A technological change that raises the value of marginal product of capital ________ the rental rate of capital because the ________. A) raises; supply curve of capital shifts leftward B) lowers; supply curve of capital shifts rightward C) raises; demand curve for capital shifts rightward D) lowers; demand curve for capital shifts leftward Answer: C Topic: Capital Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

3) Other things being equal, a technological change that raises the value of marginal product of capital raises the rental rate of capital because the A) supply curve of capital shifts leftward. B) supply curve of capital shifts rightward. C) demand curve for capital shifts rightward. D) demand curve for capital shifts leftward. Answer: C Topic: Capital Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 78 Copyright © 2014 Pearson Education, Inc.

4) The supply of land is A) perfectly elastic. B) elastic, but not perfectly elastic. C) perfectly inelastic. D) inelastic, but not perfectly inelastic. Answer: C Topic: Market for Land Skill: Conceptual Status: Old AACSB: Analytical Skills

5) If the supply of a factor is perfectly inelastic, then A) no more than the existing quantity can be supplied. B) the supply curve is horizontal. C) sellers will provide whatever quantity is demanded at the going price. D) a fall in price results in no quantity being supplied. Answer: A Topic: Market for Land Skill: Conceptual Status: Old AACSB: Analytical Skills

6) The loan market is in equilibrium. If the demand for land decreases, the rental rate of land ________. A) might rise or fall B) rises C) falls D) remains unchanged Answer: C Topic: Market for Land Skill: Conceptual Status: Old AACSB: Analytical Skills

7) In the above figure, which curve depicts the supply of land for Chicago's "Magnificent Mile"? A) curve F B) curve G C) curve H D) curve I Answer: A Topic: The Supply of Land Skill: Conceptual Status: Old AACSB: Analytical Skills

8) Starbucks sells coffee in both New York City and in rural upstate New York. The price of coffee is higher in New York City. This fact means that the value of marginal product of land is ________ in New York City and so Starbucks is willing to pay a ________ rent in New York City. A) lower; lower B) higher; lower C) lower; higher D) higher; higher Answer: D Topic: Market for Land Skill: Analytical Status: New AACSB: Analytical Skills

9) ________ natural resources are natural resources that can be used repeatedly, and ________ natural resources are natural resources that can be used only once. A) Nonrenewable; renewable B) Renewable; hydrocarbon C) Renewable; nonrenewable D) Non-fossil; fossil Answer: C Topic: Renewable and Nonrenewable Resources Skill: Definition Status: Old AACSB: Analytical Skills

10) Which of the following is a nonrenewable resource? A) residential land B) sunshine C) a machine tool D) oil Answer: D Topic: Nonrenewable Resources Skill: Conceptual Status: Old AACSB: Analytical Skills

11) The proposition that the price of a resource is expected to rise at a rate equal to the interest rate is called the A) discounted present value. B) derived demand for productive resources. C) diminishing marginal revenue product. D) Hotelling Principle. Answer: D Topic: Hotelling Principle Skill: Definition Status: Old AACSB: Analytical Skills

12) According to the Hotelling Principle, the price of an nonrenewable resource A) falls slowly over time. B) falls at a rate equal to the interest rate. C) rises at a rate equal to the interest rate. D) remains constant over time. Answer: C Topic: Hotelling Principle Skill: Definition Status: Old AACSB: Analytical Skills

13) According to the Hotelling Principle, the price of a nonrenewable resource is expected to A) rise at a rate higher than the interest rate. B) rise at a rate lower than the interest rate. C) rise at a rate equal to the interest rate. D) fall at a rate equal to the interest rate. Answer: C Topic: Hotelling Principle Skill: Definition Status: Old AACSB: Analytical Skills

14) The price of an nonrenewable resource is expected to rise at a rate equal to the A) rate of supply. B) rate of population growth. C) rate of demand. D) interest rate. Answer: D Topic: Hotelling Principle Skill: Conceptual Status: Old AACSB: Analytical Skills

15) Next year's expected price of oil is $88 per barrel and the interest rate is 10 percent per year. According to the Hotelling Principle the price of oil this year is A) $80 per barrel. B) $88 per barrel. C) $96 per barrel. D) None of the above answer is correct. Answer: A Topic: Hotelling Principle Skill: Analytical Status: Old AACSB: Analytical Skills

16) If a nonrenewable natural resource's price is expected to increase at a rate faster than the interest rate, then the supply today will A) the supply today will increase. B) the supply today will decrease. C) the demand today will decrease. D) the price today will fall. Answer: B Topic: Hotelling Principle Skill: Conceptual Status: Old AACSB: Analytical Skills

17) Next year's expected price of oil is $90 per barrel. If the interest rate climbs from 5 percent to 20 percent per year and nothing else changes, then according to the Hotelling Principle the price of oil this year A) will rise. B) will fall. C) will not change. D) could rise, fall, or stay the same. Answer: B Topic: Hotelling Principle Skill: Analytical Status: Old AACSB: Analytical Skills

18) An increase in the marginal product of capital shifts the A) supply of capital curve rightward. B) supply of capital curve leftward. C) demand for capital curve rightward. D) demand for capital curve leftward. Answer: C Topic: Study Guide Question, Capital Market Skill: Conceptual Status: Old AACSB: Analytical Skills

19) Which of the following lowers the current price of an nonrenewable natural resource? A) an increase in the interest rate B) a decrease in the stock of the resource C) an increase in the marginal revenue product of the resource D) an increase in the price of a substitute resource Answer: A Topic: Study Guide Question, Market for Nonrenewable Natural Resources Skill: Conceptual Status: Old AACSB: Analytical Skills

20) For a nonrenewable natural resource, such as oil, the equilibrium price ________ the market fundamentals price. A) is always the same as B) can be greater than but not less than C) can be less than but not greater than D) can be less than, greater than, or equal to Answer: D Topic: Study Guide Question, Market for Nonrenewable Natural Resources Skill: Conceptual Status: Old AACSB: Analytical Skills

21) If people suddenly start to expect the price of oil to rise less rapidly than the interest rate, the demand for oil ________ and the supply of oil ________. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases Answer: D Topic: Study Guide Question, Market for Nonrenewable Natural Resources Skill: Analytical Status: Old AACSB: Analytical Skills

22) If the price of a barrel of oil is $100 this year and the interest rate is 10 percent, then according to the Hotelling Principle the price next year is expected to be ________ per barrel. A) $90 B) $110 C) $100 D) None of the above is correct. Answer: B Topic: Study Guide Question, Hotelling Principle Skill: Analytical Status: Old AACSB: Analytical Skills

5 News Based Questions 1) Lynn owns Dust Bunnies, a cleaning company. In one week, she is able to clean 9 houses. If she hires an employee, together they are able to clean 15 houses per week. If Lynn charges $100 to clean a house, what is the marginal product of her employee? A) 9 houses B) 15 houses C) $1,500 D) 6 houses Answer: D Topic: Marginal Product of Labor Skill: Analytical Status: Old AACSB: Analytical Skills

2) Lynn owns Dust Bunnies, a cleaning company. In one week, she is able to clean 9 houses. If she hires an employee, together they are able to clean 15 houses per week. If Lynn charges $100 to clean a house, what is the value of marginal product of her employee? A) 6 houses B) 9 houses C) $600 D) $900 Answer: C Topic: Value of Marginal Product Skill: Analytical Status: Old AACSB: Analytical Skills

3) Lynn owns Dust Bunnies, a cleaning company. In one week, she is able to clean 9 houses. If she hires an employee, together they are able to clean 15 houses per week. If Lynn charges $100 to clean a house, and she pays her employee $400 a week, should she hire this employee? A) Yes, because the value of marginal product of the worker is less than the wage. B) Yes, because the value of marginal product of the worker is greater than the wage. C) No, because the value of marginal product of the worker is greater than the wage. D) No, because the value of marginal product of the worker is less than the wage. Answer: B Topic: Profit Maximization Skill: Analytical Status: Old AACSB: Analytical Skills

4) Linda Evangelista, a supermodel, once said that she "won't get out of bed for less than $10,000 a day." This fee is an example of A) a reservation wage. B) the demand for Linda's labor. C) a competitive labor market. D) the substitution effect. Answer: A Topic: Reservation Wage Skill: Conceptual Status: Old AACSB: Reflective Thinking

5) Pennsylvania's largest grower of fresh-to-market tomatoes announced in March 2009 he will no longer produce the crop because he can't find enough workers to harvest it. Though his tomato pickers made an average of $16.59 per hour last year, he said the relatively high wage is not enough to attract local labor to work the fields. In the market for tomato workers, what is true? A) $16.59 is above the equilibrium wage rate B) $16.59 is the equilibrium wage rate C) $16.59 is below the equilibrium wage rate D) Cannot determine where the equilibrium wage rate is in comparison to $16.59 without more information. Answer: C Topic: Labor Market Equilibrium Skill: Conceptual Status: Old AACSB: Communication

6) Pennsylvania's largest grower of fresh-to-market tomatoes announced in March 2009 he will no longer produce the crop. The acreage he previously devoted to tomatoes and pumpkins will be converted to field corn that is harvested by machines. Of the following, which could have led to the shift from labor intensive tomato production to field corn? A) The market price of tomatoes increased. B) Farm workers' reservation wage fell. C) The wage rate for farm workers increased. D) All of the answers are true. Answer: C Topic: Labor Market Equilibrium Skill: Conceptual Status: Old AACSB: Communication

7) In November 2008, the air traffic controllers who work at Guam became unionized. What would NOT be a way for the union to influence labor demand? A) Have monthly training which improves the marginal productivity of the air traffic controllers. B) Support minimum wage laws. C) Creating job certification which limits the number of newly certified air traffic controllers. D) Lobby the government to limit who can apply to be an air traffic controller in Guam to those who are certified through the union. Answer: C Topic: Unions in a Competitive Labor Market Skill: Conceptual Status: Old AACSB: Reflective Thinking

8) Americans are always connected today, talking on the phone at home, while driving down the road and while shopping for groceries. But that wasn't always the case. In fact, it wasn't that long ago people had to go through an operator in order to get connected with the person they were trying to reach. How do cell phones impact the labor market for telephone operators? A) Decreased telephone operators' value of marginal product B) Increased the demand for telephone operators C) Increased the supply for telephone operators D) Decreased the marginal productivity of telephone operators Answer: A Topic: Value of Marginal Product and the Demand for Labor Skill: Conceptual Status: Old AACSB: Reflective Thinking

9) According to a 1963 edition of the Effingham Daily News, Illinois Consolidated Telephone Co. switched from the switchboard system to the dial system at 12:01 a.m. Sunday, Aug. 18, 1963. Thirty miles of cable supported the new high-tech system. It took four weeks to lay the telephone lines that allowed Effingham residents to directly connect to each other through the telephone. How does the switch from the switchboard system to the dial system impact the labor market for switchboard operators? A) Increased the demand for telephone operators B) Increased the supply for telephone operators C) Decreased the marginal productivity of telephone operators D) Decreased telephone operators' value of marginal product Answer: D Topic: Value of Marginal Product and the Demand for Labor Skill: Analytical Status: Old AACSB: Reflective Thinking

10) S & S Backhoe Service in Ozark, Arkansas rents backhoes and other heavy equipment to local construction companies. What determines the demand for backhoes in Arkansas? A) The rental rate for backhoes B) The equilibrium quantity of backhoes C) The value of marginal product of backhoes D) The maximum number of backhoes available to rent Answer: C Topic: Value of Marginal Product and Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking

11) An auction of the leases to drill for natural gas on about 55,000 acres on the Roan Plateau in western Colorado in August 2008 generated nearly $114 million, a record for onshore energy lease sales in the lower 48 states. Is natural gas a renewable or non-renewable resource? Why? A) Renewable, because the resource can be recycled B) Non-renewable, because the used resource cannot be reused C) Non-renewable, because the value of marginal product for natural gas is diminishing D) Renewable, because oil, natural gas, and coal are traded in global community markets Answer: B Topic: Nonrenewable Resources Skill: Conceptual Status: Old AACSB: Reflective Thinking

12) An auction of the leases to drill for natural gas on about 55,000 acres on the Roan Plateau in western Colorado in August 2008 generated nearly $114 million, a record for onshore energy lease sales in the lower 48 states. What is the most likely reason companies are leasing this land? A) Increasing natural gas prices lead to an increased value of marginal product for an acre on the Roan Plateau. B) Increasing natural gas prices lead to an increased supply of acres on the Roan Plateau. C) The future price of natural gas is expected to increase leading to an increased supply of acres on the Roan Plateau, D) The value of marginal product of natural gas is diminishing. Answer: A Topic: Value of Marginal Product and Demand Skill: Analytical Status: Old AACSB: Communication

13) An auction of the leases to drill for natural gas on about 55,000 acres on the Roan Plateau in western Colorado in August 2008 generated nearly $114 million, a record high for onshore energy lease sales in the lower 48 states. What is going on in the rental market for land? A) There is a decrease in the value of marginal product for an acre on the Roan Plateau, leading to an increase in the equilibrium rental rate. B) There is an increase in the value of marginal product for an acre on the Roan Plateau, leading to a decrease in the equilibrium rental rate. C) There is an increase in the supply of acreage on the Roan Plateau, leading to an increase in the equilibrium rental rate. D) There is an increase in the value of marginal product for an acre on the Roan Plateau, leading to an increase in the equilibrium rental rate. Answer: D Topic: Value of Marginal Product and Demand Skill: Analytical Status: Old AACSB: Reflective Thinking

6 Mathematical Note: Present Value and Discounting 1) The present value of a future sum of money is the amount that, if invested today, will grow A) as large as that future sum, given the interest rate. B) at a constant rate forever. C) as large as that future sum, less taxes payable. D) as large as that future sum, if the interest rate is zero. Answer: A Topic: Present Value Skill: Definition Status: Old AACSB: Analytical Skills

2) Discounting is the process whereby A) present values are adjusted to their future value, using the interest rate. B) future values are converted to their value today, using the interest rate. C) product prices are reduced (discounted) to increase sales and profits today. D) future values are adjusted for inflation. Answer: B Topic: Present Value Skill: Definition Status: Old AACSB: Analytical Skills

3) The process of converting a future amount of money into its value today is called A) trending. B) depreciation. C) discounting. D) compounding. Answer: C Topic: Discounting Skill: Definition Status: Old AACSB: Analytical Skills

4) Whenever you discount a future sum of money into its present value, you must know I. the interest rate. II. the number of years in the future in which the money will be received. A) only I B) only II C) both I and II D) neither I nor II Answer: C Topic: Present Value Skill: Conceptual Status: Old AACSB: Analytical Skills

5) Assuming r is the interest rate, to compute the present value of a dollar to be received a year from today, you A) multiply the dollar by r. B) divide the dollar by (1 - r). C) multiply the dollar by (1 + r). D) divide the dollar by (1 + r). Answer: D Topic: Present Value Skill: Conceptual Status: Old AACSB: Analytical Skills

6) If the interest rate falls, the present value of $100 to be received in one year A) rises. B) falls. C) is unaffected. D) might rise, fall, or not change. Answer: A Topic: Present Value Skill: Conceptual Status: Old AACSB: Analytical Skills

7) If the interest rate increases from 5 percent to 7 percent, the present value of a future payment A) rises. B) falls. C) is unaffected. D) might either rise or fall. Answer: B Topic: Present Value Skill: Conceptual Status: Old AACSB: Analytical Skills

8) An increase in the interest rate A) lowers the present value of future revenue. B) increases the present value of future revenue. C) has no effect on the present value of future revenue. D) shifts the demand curve for capital leftward. Answer: A Topic: Present Value Skill: Conceptual Status: Old AACSB: Analytical Skills

9) The present value of a stream of future revenues varies ________ with the future revenues and ________ with the interest rate. A) inversely; inversely B) directly; directly C) inversely; directly D) directly; inversely Answer: D Topic: Present Value Skill: Analytical Status: Old AACSB: Analytical Skills

10) The present value of $100 to be received in a year is A) less than $100 and falls as the interest rate rises. B) less than $100 and rises as the interest rate rises. C) more than $100 and falls as the interest rate rises. D) more than $100 and rises as the interest rate rises. Answer: A Topic: Present Value Skill: Analytical Status: Old AACSB: Analytical Skills

11) The present value of $100 to be received in the year 2014 is A) less than the present value of $100 to be received in 2015. B) greater than the present value of $100 to be received in 2015. C) the same as the present value of $100 to be received in 2015. D) greater than the present value of $100 to be received in 2015 if the interest rate in 2015 exceeds the interest rate in 2014; otherwise, it is less. Answer: B Topic: Present Value Skill: Analytical Status: Old AACSB: Analytical Skills

12) If the interest rate is 20 percent, $100 to be received four years from today has a present value of approximately A) $48. B) $69. C) $80. D) $100. Answer: A Topic: Present Value Skill: Analytical Status: Old AACSB: Analytical Skills

13) A rational individual would be indifferent between ________ today and ________ four years from today if the interest is 20 percent. A) $100, $100 B) $48, $100 C) $30, $100 D) $100, $48 Answer: B Topic: Present Value Skill: Analytical Status: Old AACSB: Analytical Skills

14) Suppose the interest rate is 5 percent per year. The present value of $210 to be received one year from today is A) $200.00. B) $210.00. C) $215.00. D) $220.50. Answer: A Topic: Present Value Skill: Analytical Status: Old AACSB: Analytical Skills

15) The present value of $50 to be received next year is $40. The interest rate is A) 10 percent. B) 20 percent. C) 25 percent. D) 50 percent. Answer: C Topic: Present Value Skill: Analytical Status: Old AACSB: Analytical Skills

16) The value in one year of $25 invested today at an annual interest rate of 5 percent will be A) $25.00. B) $26.25. C) $27.50. D) $30.00. Answer: B Topic: Present Value Skill: Analytical Status: Old AACSB: Analytical Skills

17) If the interest rate is 10 percent, the present value of a payment of $1,000 one year from today is A) $900. B) $909. C) $1,000. D) $1,100. Answer: B Topic: Present Value Skill: Analytical Status: Old AACSB: Analytical Skills

18) At an interest rate of 5 percent, the present value of $1,000 to be received two years from today is A) less than $875. B) between $875 and $925. C) between $925 and $975. D) more than $975. Answer: B Topic: Present Value Skill: Analytical Status: Old AACSB: Analytical Skills

19) At an interest rate of 5 percent, the present value of $1,000 to be received three years from today is A) less than $875. B) between $875 and $925. C) between $925 and $975. D) more than $975. Answer: A Topic: Present Value Skill: Analytical Status: Old AACSB: Analytical Skills

20) An investment pays $100 at the end of each of the three next years. No additional payments will ever be made. If the annual interest rate is 5 percent, the present value of the investment is approximately A) $250. B) $272. C) $288. D) $300. Answer: B Topic: Present Value Skill: Analytical Status: Old AACSB: Analytical Skills

21) St. Mary's Church has a balloon payment of $100,000 due on its mortgage in two years. If the interest rate is 8 percent, the present value of St. Mary's balloon mortgage payment is A) $100,000.00. B) $116,640.00. C) $85, 733.88. D) None of the above answers is correct. Answer: C Topic: Present Value Skill: Analytical Status: Old AACSB: Analytical Skills

22) The interest rate is 8 percent. The present value of $110 three years from now equals A) $101.85. B) $94.31. C) $118.80. D) $128.30. Answer: B Topic: Present Value Skill: Analytical Status: Old AACSB: Analytical Skills

23) The present value of a $5,000 cash gift to be received four years in the future, given an annual interest rate of 6 percent, is (to the nearest dollar) A) $4700. B) $4717. C) $6312. D) $3960. Answer: D Topic: Present Value Skill: Analytical Status: Old AACSB: Analytical Skills

24) If the interest rate is 10 percent, the present value of $400 to be received one year from today is about A) $440. B) $390. C) $364. D) $377. Answer: C Topic: Present Value Skill: Analytical Status: Old AACSB: Analytical Skills

25) If the interest rate is 4 percent, the present value of $10,000 to be received one year from today is about A) $9,246. B) $9,615. C) $10,816. D) $10,400. Answer: A Topic: Present Value Skill: Analytical Status: Old AACSB: Analytical Skills

26) If the interest rate is 10 percent, the present value of $400 to be received two years from today is about A) $331. B) $484. C) $364. D) $440. Answer: A Topic: Present Value Skill: Analytical Status: Old AACSB: Analytical Skills

27) Homer has been saving to buy a new car in five years and expects that the car of his dreams will cost $35,000. If the interest rate is 8 percent per year, how much money should Homer have in his bank account today in order to have enough money to buy the car in 5 years? A) $1,852.28 B) $22,055.94 C) $23,820.41 D) $25,726.04 Answer: C Topic: Present Value Skill: Analytical Status: Old AACSB: Analytical Skills

28) If the interest rate is 5 percent, what is the present value of $100 that will be received 3 years from now? A) $90.70 B) $86.38 C) $115.00 D) $13.62 Answer: B Topic: Present Value Skill: Analytical Status: Old AACSB: Analytical Skills

29) What is the present value of $200 one year from now when the interest rate is 6 percent? A) $125.00 B) $188.68 C) $212.00 D) $320.00 Answer: B Topic: Present Value Skill: Analytical Status: Old AACSB: Analytical Skills

30) What is the present value of $1,000 to be received 2 years in the future with an interest rate of 8 percent? A) $857.34 B) $925.93 C) $1080.00 D) $1166.40 Answer: A Topic: Present Value Skill: Analytical Status: Old AACSB: Analytical Skills

31) If the interest rate is 4 percent, the present value of $10,000 to be received two years from today is about A) $9,246. B) $9,615. C) $10,816. D) $10,400. Answer: A Topic: Present Value Skill: Analytical Status: Old AACSB: Analytical Skills

32) If the interest rate is 8 percent, the present value of $10,000 to be received 10 years from today is about A) $21,589. B) $9,259. C) $4,632. D) $10,800. Answer: C Topic: Present Value Skill: Analytical Status: Old AACSB: Analytical Skills

33) If the interest rate is 20 percent, the present value of $10,000 to be received 20 years from today is about A) $6,944. B) $14,400. C) $383,376. D) $261. Answer: D Topic: Present Value Skill: Analytical Status: Old AACSB: Analytical Skills

34) If Delores wanted to make sure that she had $3,000 a year from now, how much would she need to save now if the interest rate is 7 percent? A) $3000 B) $2804 C) $2790 D) $2666 Answer: B Topic: Present Value Skill: Analytical Status: Old AACSB: Analytical Skills

35) A company is considering the purchase or the rental of a new machine. An increase in the interest rate A) increases the likelihood the company will buy the machine. B) increases the likelihood the company will rent the machine. C) has no effect on the likelihood that the company will buy the machine. D) has no effect on the likelihood that the company will rent the machine. Answer: B Topic: Buy Versus Rent Skill: Analytical Status: Old AACSB: Analytical Skills

36) Starbucks is considering opening a new store on the Drexel University Campus in Philadelphia. To analyze this decision Starbucks must compare the costs of starting the new store, which will be incurred today, with the profit the store will create in the future. When making this decision, the higher is the interest rate, the ________ is the discounted present value of the profits and the ________ likely Starbucks will be to open the store. A) higher; more B) higher; less C) lower; more D) lower; less Answer: D Topic: Discounting Skill: Analytical Status: New AACSB: Analytical Skills

7 Essay Questions 1) Why is the demand for labor a "derived demand?" Answer: The demand for labor arises because we need to use labor to produce a good or service. The demand for a good, for example an apple, is a direct demand. However, the demand for an apple picker is a derived demand. It is derived from our need to use labor to produce the good we demand, the apple. Topic: Derived Demand Skill: Conceptual Status: Old AACSB: Communication

2) What is the value of marginal product of labor? What is the formula that can be used to calculate it? How does the value of marginal product affect how much labor a firm hires? Answer: The value of marginal product of labor tells the additional amount of revenue the firm earns by hiring an extra unit of labor, so it is the value to a firm of hiring one more unit of labor. The value of marginal product equals the price of a unit of output multiplied by the marginal product of labor. The firm maximizes its profit by hiring up to the point where the value of marginal product equals the wage rate. Topic: Value of Marginal Product Skill: Conceptual Status: Old AACSB: Communication

3) "As the quantity of labor hired increases, the value of marginal product stays constant as long as the wage rate is constant for all workers." Is the previous statement correct or incorrect? Explain your answer. Answer: The statement is incorrect. The value of marginal product equals the price of a unit of output multiplied by the marginal product. As more workers are employed, the marginal product decreases, so the value of marginal product decreases. Topic: Value of Marginal Product Skill: Conceptual Status: Old AACSB: Communication

4) "The decision to employ an additional unit of labor depends on whether the value of marginal product is greater than or smaller than the wage rate." Is the previous statement correct or incorrect? Answer: The statement is correct. If the value of marginal product exceeds the wage rate, the worker is hired; if the value of marginal product is less than the wage rate, the worker is not hired. Topic: Value of Marginal Product Skill: Conceptual Status: Old AACSB: Communication

5) What is the relationship between a firm's value of marginal product curve for labor and its demand for labor curve? Explain why this relationship exists. Answer: The value of marginal product curve for labor is the same as the demand for labor curve. The curves are the same because of the firm's profit-maximizing decisions. In order to maximize its profit, a firm hires the number of workers that sets the wage rate equal to the value of marginal product. So at any wage rate, the firm uses its value of marginal product curve to determine how many workers to hire. But that is what the demand for labor curve shows: how many workers the firm hires at any wage rate. As a result, the value of marginal product for labor is the same as the firm's demand for labor curve. Topic: Value of Marginal Product and the Demand for Labor Skill: Conceptual Status: Old AACSB: Communication

6) Why does a firm maximize its profits by hiring so that VMP = W? Answer: The VMP represents the additional revenue generated by the last worker. The wage is the cost of the last worker. If VMP > W, then an additional worker adds more to revenue than to cost and so hiring the worker boosts the firm's profit. Conversely, if VMP < W, then decreasing labor reduces costs more than it reduces revenue and thereby decreasing the quantity of labor it employs raises the firm's profit. Only when VMP = W can no other level of labor create a greater profit. Topic: Profit Maximization Skill: Conceptual Status: Old AACSB: Communication

7) Why does a profit-maximizing firm hire labor up to the point where the value of marginal product equals the wage rate? Answer: If a company stopped adding workers at the point where the wage rate was less than the value of marginal product of labor, the firm could hire more workers and its profit would increase. Why? Because the return from the workers, the value of marginal product, exceeds the cost of hiring the workers. Since the marginal product of labor decreases as more workers are employed, as more workers are added, the marginal product of labor and hence the value of marginal product decreases. Eventually the firm will reach the point at which the value of marginal product equals the wage rate. If still more workers are employed, then the wage the firm must pay the workers exceeds the value of marginal product. These workers would contribute losses to the firm. So only when the value of marginal product equals the wage rate can the firm not increase its profit by changing the quantity of workers it employs. Topic: Profit Maximization Skill: Conceptual Status: Old AACSB: Communication

8) "In order for Charlie Trotter's, an upscale restaurant in Chicago, to maximize profit from the employment of chefs, the restaurant should hire chefs up to the point where the value of marginal product equals the wage rate for chefs." Is the statement correct or incorrect? Answer: The statement is correct. In order for any firm to maximize its profit, it hires workers until the wage rate equals the value of marginal product. Topic: Profit Maximization Skill: Conceptual Status: Old AACSB: Reflective Thinking

9) What factors other than the wage rate influence the demand for labor? How is demand affected by changes in these factors? Answer: The demand for labor is influenced by changes in the price of the firm's output, the prices of other factors of production, and technology. The demand for labor is based on the value of marginal product, which is equal to the marginal product times the price. When the price of the firm's output increases, the value of marginal product increases, making hiring more workers profitable. So when the price of the firm's output increases, so does its demand for labor. The prices of other factors of production also influence the demand for labor. The different factors of production can be substitutes for each other. For instance, if the price of capital falls relative to the wage rate, a firm will substitute capital for labor, which will decrease the demand for labor. However, if the cheaper capital results in a large increase in production, it is possible that the demand for labor will increase. Technology can either increase or decrease the demand for labor, depending on whether the technology allows firms to replace workers with capital (which decreases the demand for labor) or makes the labor more productive (which increases the demand for labor). Topic: Changes in the Demand for Labor Skill: Conceptual Status: Old AACSB: Communication

10) What factors shift the demand for labor curve? Briefly describe the effect of each. Answer: Three factors shift the demand for labor curve: the price of the firm's output, the prices of other factors of production, and technology. When the price of the firm's output rises, the firms' demand for labor increases and its demand for labor curve shifts rightward. These changes occur because when the price of output rises, the value of marginal product increases, which means the value to the firm of hiring additional workers rises. When the prices of other factors of production change, the demand for labor changes. When the price of capital rises, the firm is motivated to use more labor and less capital. The firm's demand for labor increases and the demand for labor curve shifts rightward. When the price of capital falls, more capital is demanded and, unless the fall in the price of capital increases the scale of the firm's operations, less labor is demanded. The demand for labor curve shifts leftward. Changes in technology affect the demand for labor in a more complex way. Depending on the type of advance in technology, the demand for different types of labor might increase or decrease. If the demand for a type of labor increases, its demand curve shifts rightward; if the demand for another type of labor decreases, its demand curve shifts leftward. Topic: Changes in the Demand for Labor Skill: Conceptual Status: Old AACSB: Communication

11) What effect does an increase in the price of the firm's output have on its demand curve for labor? Why? Answer: An increase in the price of its output shifts the labor demand curve rightward. This shift occurs because the value of the additional output produced by each unit of labor has become more valuable as a result of the price hike. Topic: Changes in the Demand for Labor; Price of the Product Skill: Conceptual Status: Old AACSB: Communication 100 Copyright © 2014 Pearson Education, Inc.

12) Why does the labor supply curve eventually bend backwards? Answer: The wage rate represents the opportunity cost of leisure. Starting from a relatively low wage, as the wage increases, leisure becomes more expensive and so workers substitute labor for leisure. As a result, a higher wage means less leisure and more labor and the supply curve is positively sloped. At a sufficiently high wage, however, the worker's income is high enough that, even though leisure has gone up in price, the worker can afford to "buy" more leisure by working less. So, at a high wage, the labor supply curve becomes negatively sloped. Topic: Labor Supply Curve Skill: Conceptual Status: Old AACSB: Communication

13) In order to spend more time with her children, a young mother decides to work less hours as her pay increases. What does her labor supply curve look like? Answer: The young mother's labor supply curve is backward bending. In other words, her labor supply curve is positively sloped at lower wage rates, indicating that a higher wage increases the quantity of labor she supplies. But when her wage reaches a certain amount, further increases in the wage decrease the quantity of labor she supplies and her labor supply curve becomes negatively sloped. Topic: The Supply of Labor Skill: Conceptual Status: Old AACSB: Communication

14) What tools can unions use to increase the demand for union labor? Answer: The main tools that unions use to increase the demand for union labor are: increased training and education for its members; lobbying for import restrictions; supporting minimum wage laws; supporting immigration restrictions; and increasing the demand for the goods produced. Topic: How Unions Try to Change the Demand for Labor Skill: Conceptual Status: Old AACSB: Reflective Thinking

15) Why does an increase in the minimum wage increase the demand for union labor? Answer: An increase in the minimum wage raises the cost of unskilled labor, which is typically nonunionized. By making this type of labor, which can be substituted for union labor, more expensive, an increase in the minimum wage increases the demand for union labor. Topic: How Unions Try to Change the Demand for Labor Skill: Conceptual Status: Old AACSB: Reflective Thinking

16) Explain why a monopsony's marginal cost of labor is greater than the wage rate. Answer: If the monopsony wants to hire more labor, it must offer a higher wage to the additional unit of labor PLUS it must offer that same higher wage to all units of labor that were previously hired at a lower wage. Topic: Monopsony Skill: Conceptual Status: Old AACSB: Reflective Thinking

17) Why does a monopsony increase employment when faced with an effective minimum wage law? Answer: A monopsony hires the quantity of labor so that the value of marginal product of labor (VMP) is equal to the marginal cost of labor (MCL). This condition means that initially the VMP is above the wage (W). When a minimum wage is imposed, the marginal cost of labor decreases because it becomes equal to the minimum wage. Thus, the firm will hire more workers up to the point at which VMP = W. Topic: Monopsony and the Minimum Wage Skill: Conceptual Status: Old AACSB: Communication

18) Discuss the difference between renewable and nonrenewable resources. Given an example of each. Answer: A renewable natural resource can be used repeatedly; a nonrenewable natural resource can be used only once, and once a particular unit is used, it cannot be used again. Forestland, cropland, rivers, lakes, and wind power are examples of renewable natural resources. Examples of nonrenewable resources include coal and oil. Topic: Renewable and Nonrenewable Resources Skill: Conceptual Status: Old AACSB: Communication

19) What is the Hotelling Principle? Have resource prices behaved as the principle predicts? Answer: The Hotelling Principle states that the price of a nonrenewable natural resource will rise at a rate equal to the interest rate. In reality, resource prices have not behaved this way. In addition to interest rates, technology and cost of extracting the resources affect the price of resources and so in reality, the prices of nonrenewable natural resources have generally fallen during some past years and risen during others. Topic: Hotelling Principle Skill: Conceptual Status: Old AACSB: Communication

20) The interest rate is 5 percent. How does $500 to be received a year from today compare in value to $500 right now? Answer: With an interest rate of 5 percent, $500 deposited in the bank right now will be worth $525 one year from today. (To calculate this amount, the future value is $500(1 + r) = $500(1 + .05) = $525.) The $500 received one year from today, however, has a present value of $500/(1 + r) = $500/(1 + .05) = $476.19. So, $500 today is worth more than $500 a year from now. Topic: REQUIRES MATHEMATICAL NOTE Skill: Analytical Status: Old AACSB: Analytical Skills

8 Numeric and Graphing Questions

Quantity of labor (workers) 1 2 3 4

Marginal product (units per hour) 10 8 6 4

Value of marginal product (dollars) ____ ____ ____ ____

1) The above table has the marginal product schedule for a firm. If the firm is a perfect competitor and the price of the product is constant at $2 a unit, complete the table. If the wage rate is $8 an hour, how many workers does the firm hire? Answer: Quantity of Value of marginal Marginal product labor product (units per hour) (workers) (dollars) 1 10 20 2 8 16 3 6 12 4 4 8 If the wage rate is $8 an hour, the firm hires 4 workers because that is the quantity that sets the value of marginal product equal to the wage rate. Topic: Value of Marginal Product Skill: Analytical Status: Old AACSB: Analytical Skills

Quantity of labor (workers) 1 2 3 4 5

Cars washed (cars per day) 8 23 33 40 45

2) The table above shows the total product schedule for Shines Car Wash. The market for car washes is perfectly competitive and car washes sell for $5 each. The labor market is competitive and the wage rate is $50 per day. What is the value of marginal product for each worker? How many workers does the firm hire to maximize profit? Answer: Quantity of Value of marginal Cars washed labor product (cars per day) (workers) (dollars per day) 1 8 2 23 75 3 33 50 4 40 35 5 45 25 The value of marginal product is the marginal product multiplied by the price of a car wash. The value of marginal product schedule is given in the table above. To maximize its profit, when the wage rate is $50 per day, Shines Car Wash hires 2 workers because at this point the value of marginal product equals the wage rate. Topic: Value of Marginal Product Skill: Analytical Status: Old AACSB: Analytical Skills

Quantity of labor (workers) 1 2 3 4 5

Marginal product (blouses cleaned per day) 4 4 3 2 1

Value of marginal product (dollars per day) ____ ____ ____ ____ ____

3) The above table has the marginal product schedule for Nick's Dry Cleaners, a perfectly competitive dry cleaning firm. a) If the price to dry clean a blouse is $8 each, complete the last column of the table. b) If Nick can hire workers at the going wage rate of $16 an hour, how many workers does Nick hire? Answer: Quantity of Marginal product Value of marginal labor (blouses cleaned product (workers) per day) (dollars per day) 1 4 32 2 4 32 3 3 24 4 2 16 5 1 8 a) The completed table is above. b) Nick hires 4 workers because that is the quantity of workers that sets the value of marginal product equal to the wage rate. Topic: Value of Marginal Product Skill: Analytical Status: Old AACSB: Analytical Skills

Quantity of labor (workers)

Marginal product (pounds per hour)

1 2 3 4 5

8 10 7 5 4

Value of Value of marginal marginal product, $2 per product, $1 per pound pound (dollars) (dollars) ____ ____ ____ ____ ____ ____ ____ ____ ____ ____

4) Tom and Mary own a perfectly competitive tomato farm. They can hire different numbers of college students to help plant, cultivate, and harvest the tomatoes. The above table gives their marginal product schedule. a) If the price of a pound of tomatoes is $2 a pound, complete the first value of marginal product column in the table. If Tom and Mary must pay their workers $10 an hour, how many workers do they hire? b) If the price of a pound of tomatoes falls to $1 a pound, complete the second value of marginal product column in the table. If Tom and Mary still must pay their workers $10 an hour, how many workers do they hire? c) When the price of a pound of tomatoes falls, what happens to Tom and Mary's demand for labor curve? Answer: Value of Value of Marginal Quantity of marginal marginal product labor product, $2 per product, $1 per (pounds per (workers) pound pound hour) (dollars) (dollars) 1 8 16 8 2 10 20 10 3 7 14 7 4 5 10 5 5 4 8 4 a) The completed table is above. Tom and Mary hire 4 workers because that is the number of workers that sets the value of marginal product equal to the wage rate. b) The completed table is above. Tom and Mary hire 2 workers because that is the number of workers that sets the value of marginal product equal to the wage rate. c) When the price of a pound of tomatoes falls, Tom and Mary's demand for labor decreases and their demand for labor curve shifts leftward. Topic: Value of Marginal Product Skill: Analytical Status: Old AACSB: Analytical Skills

5) A worker has a marginal product of 15 units a day, each of which can be sold for $10. Is it profitable to hire this worker if the wage rate is $100 a day? Briefly explain your answer. Answer: It is profitable to hire this worker because the worker's value of marginal product is $150 a day (the price, $10, times the marginal product, 15 units), which exceeds the wage rate of $100 a day. The worker creates $150 more revenue for the firm at a cost of only $100. Hence it is profitable to hire this worker. Topic: Profit Maximization Skill: Analytical Status: Old AACSB: Analytical Skills

6) The above figure represents the market for professional minor-league baseball umpires. a) If umpires are offered $90 a game, what is the quantity of umpires supplied? b) If umpires are offered $90 a game, is there a surplus or shortage of games umpired? What does the shortage or surplus equal? c) What is the equilibrium wage rate and quantity of umpires? Answer: a) The quantity of umpires supplied is 20 umpires. b) At $90 a game, there is a shortage of umpires. The shortage equals the quantity demanded, 50 umpires, minus the quantity supplied, 20 umpires, for a shortage of 30 umpires. c) The equilibrium wage rate is $120 a game and the equilibrium quantity is 40 umpires. Topic: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

7) The above figure represents the market for teenage workers at fast-food restaurants in Kansas City. a) What is the equilibrium wage rate and employment? b) Describe the market at a wage rate of $6 per hour. c) Describe the market at a wage rate of $12 an hour. d) How would an increase in the number of young, married college graduates, who tend to eat at fastfood restaurants, affect the figure, the equilibrium wage rate, and employment? Answer: a) The equilibrium wage rate is $8 an hour and the equilibrium quantity of employment is 4,000 workers. b) If the wage rate is $6 an hour, the quantity of labor supplied is less than the quantity of labor demanded. There is a shortage in the market. c) If the wage rate is $12 an hour, the quantity of labor supplied is greater than the quantity of labor demanded. There is a surplus in the market. d) An increase in the number of people who eat in fast-food restaurants will increase the demand for workers at fast-food restaurants. As a result the demand for labor curve will shift rightward and the equilibrium wage rate and equilibrium quantity of employment will both increase. Topic: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

9 True or False 1) The demand for a good or service is called a derived demand because it is derived from the demand for the factors of production that produce this good or service. Answer: FALSE Topic: Derived Demand Skill: Recognition Status: Old AACSB: Reflective Thinking

2) The marginal product of labor equals the value of marginal product of labor multiplied by the price of the output produced. Answer: FALSE Topic: Marginal Product Skill: Recognition Status: Old AACSB: Reflective Thinking

3) As the quantity of labor employed decreases, the value of marginal product diminishes. Answer: FALSE Topic: Value of Marginal Product Skill: Conceptual Status: Old AACSB: Reflective Thinking

4) The demand curve for labor is negatively sloped only because the firm must lower its price if it wishes to sell more output. Answer: FALSE Topic: Labor Demand Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking

5) An increase in the price of a firm's good or service shifts its demand curve for labor leftward. Answer: FALSE Topic: Changes in the Demand for Labor Skill: Conceptual Status: Old AACSB: Reflective Thinking

6) As a person's wage rate increases, the substitution effect motivates an increase in work and the income effect motivates a decrease in work. Answer: TRUE Topic: Substitution Effect and Income Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking

7) The labor supply curve is backward bending because at higher wages the income effect eventually dominates the substitution effect. Answer: TRUE Topic: Substitution Effect and Income Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking

8) If the income effect is larger than the substitution effect, then a wage hike will be accompanied by an increase in the quantity of labor supplied. Answer: FALSE Topic: Substitution Effect and Income Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking

9) With respect to labor supply, the income effect leads a person to want to work more in order to raise his or her income. Answer: FALSE Topic: Income Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking

10) If a union cannot increase the demand for union labor, then an increase in union wages will result in a decrease in union employment. Answer: TRUE Topic: Unions in a Competitive Labor Market Skill: Conceptual Status: Old AACSB: Reflective Thinking

11) One reason unions might support an increase in the minimum wage is because such a policy would cause a leftward shift in the demand curve for union labor. Answer: FALSE Topic: How Unions Try to Change the Demand for Labor Skill: Conceptual Status: Old AACSB: Reflective Thinking

12) For a monopsony, the marginal cost of labor exceeds the wage rate because the firm must increase the wage it pays to all of its workers if it wishes to increase its employment. Answer: TRUE Topic: Monopsony Skill: Conceptual Status: Old AACSB: Reflective Thinking

13) If a monopsony paid its workers a wage equal to their value of marginal product, it would be maximizing its profit. Answer: FALSE Topic: Monopsony Labor Market Skill: Conceptual Status: Old AACSB: Reflective Thinking

14) Land is an example of a renewable resource. Answer: TRUE Topic: Renewable Resources Skill: Recognition Status: Old AACSB: Reflective Thinking

15) Land is an example of an nonrenewable resource. Answer: FALSE Topic: Nonrenewable Resources Skill: Recognition Status: Old AACSB: Reflective Thinking

16) The supply of a renewable resource is perfectly elastic. Answer: FALSE Topic: Supply of Renewable Natural Resources Skill: Conceptual Status: Old AACSB: Reflective Thinking

17) Discounting is converting a future amount of money to a present value. Answer: TRUE Topic: REQUIRES MATHEMATICAL NOTE Skill: Recognition Status: Old AACSB: Reflective Thinking

18) If the interest rate is 7.5 percent, the present value of $500 to be received three years from today is $477.50. Answer: FALSE Topic: REQUIRES MATHEMATICAL NOTE Skill: Analytical Status: Old AACSB: Analytical Skills

10 Extended Problems Quantity of labor (workers) 0 2 4 6 8 10

Total product (car washes per day) 0 48 88 120 144 160

Sandy's Shiny Car is a perfectly competitive car wash service. The table above shows Sandy's total product schedule. Sandy can sell as many washes as she chooses at $5, and the wage rate of her workers is $60 a day. 1) a) Draw Sandy's workers' marginal product of labor curve. b) Draw Sandy's workers' value of marginal product curve. c) Find Sandy's demand for labor curve. d) How many workers does Sandy employ? Answer:

a) See the figure above. The marginal product of labor, MP, is the increase in total product that results from hiring an additional worker. For example, if Sandy increases the number of workers hired from 2 to 4, her total product increases from 48 to 88 car washes. The marginal product of 2 additional workers is 88 - 48 = 40 washes, or 20 washes per worker. The marginal product of labor is plotted at the midpoint so that, for example, when the number of workers increases from 2 to 4, the point for 20 car washes is plotted at 3 workers.

b) See the figure above. The value of marginal product of labor, VMP, is the increase in total revenue that results from hiring one additional worker. VMP equals price multiplied by the MP. For example, when the number of workers increases from 2 to 4, MP = 20 washes and the price is $5 per wash, and so VMP = $5 × 20, which is $100. The value of marginal product of labor is also plotted at the midpoint, so that the VMP of $100 is plotted at the midpoint between 2 and 4 workers, which is 3 workers. c) The demand for labor curve is the same as the value of marginal product curve. So the figure above that shows the value of marginal product curve also shows Sandy's demand for labor curve. d) Sandy hires the number of workers for which the value of marginal product equals the wage rate. The wage rate is $60 per day. The figure above shows that this wage rate equals the value of marginal product when Sandy hires 7 workers. Topic: Demand for Labor Curve Skill: Analytical Status: Old AACSB: Analytical Skills

2) Suppose the price of a car wash falls to $3. The wage rate remains $60 per day. a) What happens to the marginal product of labor? To the value of marginal product? To Sandy's demand for labor curve? b) When the price of a car wash falls to $3, how many workers does Sandy employ? Answer:

a) The marginal product of labor depends on Sandy's production function, not on the price of her product. So marginal product of labor does not change. Because VMP = P × MP, a fall in price decreases the VMP. The VMP curve shifts downward as illustrated in the figure above by the shift from VMP0 to VMP1. The demand for labor curve is the same as the value of marginal product curve. So when Sandy's VMP decreases, her demand for labor shifts leftward. b) Sandy hires the number of workers for which the value of marginal product equals the wage rate. When the price of a car wash is $3, the figure above shows that she hires 3 workers. Topic: Demand for Labor Curve Skill: Analytical Status: Old AACSB: Analytical Skills

3) Suppose the price of car wash returns to $5 but the wage rate increases to $80 per day. a) What happens to the marginal product of labor? What happens to the value of marginal product? What happens to Sandy's demand for labor curve? b) What happens to the number of workers Sandy employs? How does this number compare with the number Sandy employs when the wage rate is $60 per day? Answer:

a) The marginal product of labor depends on Sandy's production function, not on the wage rate. So marginal product of labor does not change. Because VMP = P × MP and neither the price nor the marginal product change, the VMP is unaffected. So as the figure above shows, Sandy's "new" VMP curve is the same as her VMP curve in the first problem. The demand for labor curve is the same as the value of marginal product curve. So Sandy's demand for labor curve remains the same as in the first problem. b) Sandy hires the number of workers for which the value of marginal product equals the wage rate. When the wage rate is $80, the figure above indicates that she hires 5 workers. When the wage rate rises, the quantity of labor Sandy demands decreases. Topic: Demand for Labor Curve Skill: Analytical Status: Old AACSB: Analytical Skills

Economics, 11e, Global Edition (Parkin) Chapter 19 Economic Inequality 1 Economic Inequality in the United States 1) Market income is A) profit earned in factor markets. B) interest earned in factor markets. C) wages, interest, rent, and profit earned in factor markets. D) wages, interest, rent, and profit earned in factor markets plus cash payments made to households by government. Answer: C Topic: Market Income Skill: Definition Status: Old AACSB: Analytical Skills

2) Market income is A) wage, interest, rent, and profit earned in factor markets. B) wage income. C) wage and salary income. D) money income. Answer: A Topic: Money Income Skill: Definition Status: Old AACSB: Analytical Skills

3) Money income is A) market income plus cash payments from government. B) equal to market income. C) market income plus cash payments from government minus taxes. D) market income minus taxes. Answer: A Topic: Money Income Skill: Definition Status: Old AACSB: Analytical Skills

4) The mode household income is A) the income that separates households into two equal groups. B) the most common household income. C) the mean household income. D) the average household income. Answer: B Topic: Mode Income Skill: Definition Status: Old AACSB: Analytical Skills 1 Copyright © 2014 Pearson Education, Inc.

5) Mode income is A) the most common income. B) the average income. C) the middle income level. D) the same as money income. Answer: A Topic: Mode Income Skill: Definition Status: Old AACSB: Analytical Skills

6) The median household income is A) the income that separates households into two equal groups. B) the most common household income. C) the mean household income. D) the average household income. Answer: A Topic: Median Income Skill: Definition Status: Old AACSB: Analytical Skills

7) The mean household income is A) the income that separates households into two equal groups. B) the most common household income. C) the percentage of total income received by the richest 20 percent of households. D) the average household income. Answer: D Topic: Mean Income Skill: Definition Status: Old AACSB: Analytical Skills

8) In the United States A) there are more households with incomes below the mean income than above the mean income. B) there are more households with incomes above the mean income than below the mean income. C) the mode income equals the mean income. D) the income distribution is bell shaped. Answer: A Topic: Economic Inequality in the United States Skill: Conceptual Status: Old AACSB: Analytical Skills

9) In the United States, the median household income is ________ than the mean income, which means there are ________ households with low incomes than with high incomes. A) less; more B) greater; more C) greater; fewer D) less; fewer Answer: A Topic: Economic Inequality in the United States Skill: Conceptual Status: Old AACSB: Analytical Skills

10) The distribution of income in the United States is characterized by the following relationship between the mean, median, and mode incomes: A) mean income < median income < mode income. B) mode income < median income < mean income. C) median income < mean income < mode income. D) mode income < mean income < median income. Answer: B Topic: Distribution of Income Skill: Conceptual Status: Old AACSB: Analytical Skills

11) The distribution of income in the United States is skewed so that the mode level of household income is ________ the median household income and the median household income is ________ than the mean household income. A) less than; less than B) less than; greater than C) greater than; greater than D) greater than; less than Answer: A Topic: Distribution of Income Skill: Conceptual Status: Old AACSB: Analytical Skills

12) The income distribution in the United States is A) positively skewed. B) negatively skewed. C) bell-shaped D) uniform. Answer: A Topic: Distribution of Income Skill: Conceptual Status: Old AACSB: Analytical Skills

13) The distribution of U.S. income is not bell-shaped because A) there are more households with incomes below the mean income than above the mean income. B) there are more households with incomes above the mean income than below the mean income. C) the mode income equals the mean income. D) the income distribution is bell shaped. Answer: A Topic: Distribution of Income Skill: Conceptual Status: Old AACSB: Analytical Skills

14) In the United States, the percentage of households that have incomes below the mean income is A) 50 percent. B) less than 50 percent. C) more than 50 percent. D) 0 percent. Answer: C Topic: Distribution of Income Skill: Conceptual Status: Old AACSB: Analytical Skills

15) In the United States the richest 20 percent of households receive about ________ of total income. A) 10 percent B) 20 percent C) 50 percent D) 80 percent Answer: C Topic: Economic Inequality in the United States Skill: Conceptual Status: Old AACSB: Analytical Skills

16) In the United States the poorest 20 percent of households receive about ________ of total income. A) 1 percent B) 4 percent C) 10 percent D) 15 percent Answer: B Topic: Economic Inequality in the United States Skill: Conceptual Status: Old AACSB: Analytical Skills

Percent of households (percent) Lowest 20 Second 20 Third 20 Fourth 20 Highest 20

Percent of income (percent) 15 15 20 20 30

17) An economy has the income shares information in the table above. Which of the following is true? A) The information in the table represents the income distribution in the United States. B) Income in the U.S. economy is more equally distributed than that represented in the table. C) Income in the U.S. economy is less equally distributed than that represented in the table. D) The information in the table represents the wealth distribution in the United States. Answer: C Topic: Economic Inequality in the United States Skill: Conceptual Status: Old AACSB: Analytical Skills

18) As a tool that is used to measure inequality in the distribution of income, the Lorenz curve graphs A) the cumulative percentage of income against the cumulative percentage of households. B) the percentage of total income received by each given percentage of households. C) the mean income, median income, and mode income against the percentage of households. D) the mean income received by households over time. Answer: A Topic: Lorenz Curve Skill: Definition Status: Old AACSB: Analytical Skills

19) The Lorenz curve graphs the A) cumulative percentage of spending against the cumulative percentage of households. B) marginal percentage of income against the marginal percentage of households. C) cumulative percentage of income against the cumulative percentage of households. D) cumulative percentage of spending against the marginal percentage of households. Answer: C Topic: Lorenz Curve Skill: Definition Status: Old AACSB: Analytical Skills

20) A Lorenz curve graphs the A) percentage of income or wealth against the percentage of households. B) cumulative percentage of income or wealth against the cumulative percentage of households. C) cumulative value of income against the cumulative percentage of households. D) percentage of wealth against the percentage of income. Answer: B Topic: Lorenz Curve Skill: Definition Status: Old AACSB: Analytical Skills

21) A Lorenz curve measures A) the benefits received through welfare programs. B) the actual income distribution and compares it to an equal income distribution. C) the degree to which income taxes are regressive. D) the effect of flat taxes on income distribution. Answer: B Topic: Lorenz Curve Skill: Definition Status: Old AACSB: Analytical Skills

22) A Lorenz curve can be used to illustrate A) the supply of labor. B) the substitution effect. C) the income effect. D) the distribution of income. Answer: D Topic: Lorenz Curve Skill: Definition Status: Old AACSB: Analytical Skills

23) The Lorenz curve A) explains why some households have different incomes. B) explains why income is equally distributed. C) graphically shows the degree of income inequality. D) graphically shows the amount of wealth in a country. Answer: C Topic: Lorenz Curve Skill: Definition Status: Old AACSB: Analytical Skills

24) From left to right, the horizontal axis of the Lorenz curve ranks households from A) smallest to largest. B) largest to smallest. C) poorest to richest. D) richest to poorest. Answer: C Topic: Lorenz Curve Skill: Definition Status: Old AACSB: Analytical Skills

25) Country A has a more equal distribution of income than country B if A) country A's Lorenz curve is closer to the line of equality than is country B's Lorenz curve. B) country B's Lorenz curve is closer to the line of equality than is country A's Lorenz curve. C) country A's Lorenz curve is just as close to the line of equality as is country B's Lorenz curve. D) None of the above because it is impossible to compare income inequalities across countries. Answer: A Topic: Lorenz Curve Skill: Definition Status: Old AACSB: Analytical Skills

26) The farther the Lorenz curve for income is from the line of equality, the more ________ is distributed. A) equally wealth B) unequally income C) unequally wealth D) equally income Answer: B Topic: Lorenz Curve Skill: Definition Status: Old AACSB: Analytical Skills

27) If a Lorenz curve for a country's income bows more rightward over time, then the country's A) income is increasing. B) income is decreasing. C) income is becoming more unequally distributed. D) income is becoming more equally distributed. Answer: C Topic: Lorenz Curve Skill: Definition Status: Old AACSB: Analytical Skills

28) If a Lorenz curve for income moves rightward and becomes more bowed out over time, then A) the population is growing. B) income is growing. C) income is being more equally distributed. D) income is being more unequally distributed. Answer: D Topic: Lorenz Curve Skill: Conceptual Status: Old AACSB: Analytical Skills

29) If a Lorenz curve moves leftward and becomes closer to the line of equality over time, then A) the population is growing. B) income is growing. C) income is being more equally distributed. D) income is being more unequally distributed. Answer: C Topic: Lorenz Curve Skill: Conceptual Status: Old AACSB: Analytical Skills

Group Poorest 20% Poorest 40% Poorest 60% Poorest 80%

Percent of income 5 15 30 55

Percent of wealth 0 2 5 10

30) The above table shows the distribution of income and wealth in Miseria. What percent of income is earned by the richest twenty percent? A) 5 percent B) 20 percent C) 45 percent D) 55 percent Answer: C Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

31) The above table shows the distribution of income and wealth in Miseria. What percent of income is earned by the richest 40 percent of the population? A) 20 percent B) 30 percent C) 55 percent D) 70 percent Answer: D Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

32) The above table shows the distribution of wealth and income for Miseria. What percent of the wealth is owned by the wealthiest twenty percent of the population? A) 0 percent B) 2 percent C) 5 percent D) 83 percent Answer: D Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

33) The above table shows the distribution of wealth and income for Miseria. What percent of wealth is owned by the poorest forty percent of the population? A) 0 percent B) 2 percent C) 5 percent D) 10 percent Answer: B Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

34) The above table shows the distribution of wealth and income in Miseria. What percent of wealth is owned by the poorest twenty percent? A) 0 percent B) 2 percent C) 3 percent D) 5 percent Answer: A Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

35) The above table shows the distribution of wealth and income in Miseria. The Lorenz curve for wealth would A) be parallel to the line of equality. B) lie to the left of the Lorenz curve for income. C) become flatter when moving from left to right. D) intersect the horizontal axis at twenty percent. Answer: D Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

36) The above table shows the distribution of wealth and income in Miseria. The Lorenz curve for wealth would A) intersect the horizontal axis at 100 percent. B) bow outward more to the right than does the Lorenz curve for income. C) lie parallel to the line of equality. D) become flatter as one moves from left to right. Answer: B Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

37) The above table shows the distribution of wealth and income in Miseria. With respect to income, the richest twenty percent of the population earn A) 90 percent of the income. B) 11 times as much as the poorest twenty percent. C) 9 times as much as the poorest twenty percent. D) just as much as the second richest twenty percent. Answer: C Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

38) The above table shows the distribution of wealth and income in Miseria. Ninety-five percent of the wealth is owned by what percent of the population? A) 20 percent B) 40 percent C) 60 percent D) 95 percent Answer: B Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

39) In the above figure, the straight line between the lower left corner and the upper right corner shows A) perfect equality in income distribution. B) perfect inequality in income distribution. C) that wealth rises as income rises. D) that household size rises as income rises. Answer: A Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

40) In the figure above, income is most unequally distributed A) in Country A. B) in Country B. C) in Country C. D) in one of the nations, but without more information, it is not possible to determine in which country income is distributed most unequally. Answer: C Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

41) In the figure above, income A) is most equally distributed in country A. B) is most equally distributed in country B. C) is most equally distributed in country C. D) is equally distributed in all three countries. Answer: A Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

42) In the figure above, in which country do the lowest-income 30 percent of households have the highest fraction of the nation's income? A) Country A B) Country B C) Country C D) It is impossible to answer the question without more information. Answer: A Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

43) In the figure above, in which country do the highest-income 30 percent of households have the highest fraction of the nation's income? A) Country A B) Country B C) Country C D) It is impossible to answer the question without more information. Answer: C Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

44) In the figure above, 10 percent of income in country A is distributed to the A) richest 10 percent of the households. B) poorest 10 percent of the households. C) richest 30 percent of the households. D) poorest 30 percent of the households. Answer: D Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

45) In the figure above, 10 percent of income in country C is distributed to the A) richest 10 percent of the households. B) poorest 10 percent of the households. C) poorest 30 percent of the households. D) poorest 70 percent of the households. Answer: D Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

46) The above figure shows the Lorenz curves for four different countries. Which country has the most unequal distribution of income? A) country A B) country B C) country C D) country D Answer: D Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

47) The above figure shows the Lorenz curves for four different countries. In which country is income most equally distributed? A) country A B) country B C) country C D) country D Answer: A Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

48) The above figure shows the Lorenz curves for four different countries. If country C implemented a policy of redistribution from rich to poor, its Lorenz curve would A) move toward country B's. B) move toward country D's. C) become positively sloped. D) move above the line of equality. Answer: A Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

49) The above figure shows the Lorenz curves for four different countries. Which of the following statements CANNOT be made on the basis of the graph? A) Incomes are distributed unequally in all four countries. B) Income distribution in country D is the most unequal among the four countries. C) Incomes are higher in country A than in country B. D) Income distribution is more equal in country B than in country D. Answer: C Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

50) The above figure shows the Lorenz curves for four different countries. Which of the following statements is FALSE? A) Country A has an income distribution that is not perfectly equal. B) Country D's income distribution is the most unequal of the four countries. C) The distribution of income is more unequal in country A than in country B. D) The distribution of income is more unequal in country D than in country C. Answer: C Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

51) The above figure shows the Lorenz curves for four different countries. Which of the following statements CAN be made on the basis of the graph? A) Country C has the best balance between equity and efficiency. B) Country A is a socialist country. C) The income distribution is more equal in country B than in country D. D) all of the above Answer: C Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

52) In the figure above, the poorest 40 percent of all households receive what share of income? A) 10 percent B) 20 percent C) 40 percent D) 60 percent Answer: B Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

53) In the figure above, the third lowest 20 percent of all households receive what share of income? A) 10 percent B) 30 percent C) 20 percent D) 5 percent Answer: C Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

54) In the figure above, the Lorenz curve that shows the least inequality, but NOT perfect equality, is A) curve A. B) curve B. C) curve C. D) curve D. Answer: B Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

55) In the figure above, the line of equality is A) curve A. B) curve B. C) curve C. D) curve D. Answer: A Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

56) In the figure above, line A represents the A) the line of market income distribution. B) line of equality. C) line of equal number of people in each household. D) line of equal consumption in each household. Answer: B Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

57) In the figure above, the Lorenz curve that shows the richest 20 of households percent receiving 60 percent of all income is A) curve A. B) curve B. C) curve C. D) curve D. Answer: C Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

58) In the figure above, the Lorenz curve that shows the richest 20 percent of households receiving 40 percent of all income is A) curve A. B) curve B. C) curve C. D) curve D. Answer: B Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

59) In the figure above, the Lorenz curve that shows the richest 20 percent of households receiving 80 percent of all income is A) curve A. B) curve B. C) curve C. D) curve D. Answer: D Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

60) In the figure above, the lowest 20 percent of all households receive ________ percent of all income, the next lowest 20 percent receive ________ percent of all income and the richest 20 percent receive ________ percent of all income. A) 20; 20; 20 B) 20; 40; 100 C) 10; 20; 40 D) 10; 10; 40 Answer: D Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

61) In the figure above, the richest 20 percent of all households receive what share of all income? A) 10 percent B) 20 percent C) 30 percent D) 40 percent Answer: D Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

62) In the figure above, the poorest 20 percent of all households receive what share of all income? A) 10 percent B) 20 percent C) 30 percent D) 40 percent Answer: A Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

63) In the figure above, the second poorest fifth of all households receive what share of all income? A) 10 percent B) 20 percent C) 30 percent D) 40 percent Answer: A Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

64) In the figure above, the middle fifth of all households receive what share of all income? A) 10 percent B) 20 percent C) 30 percent D) 40 percent Answer: B Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

65) In the figure above, the curve going through point A represents A) an upward-sloping demand curve. B) the line of equality. C) the wage curve. D) the Lorenz curve. Answer: D Topic: Lorenz Curve Skill: Conceptual Status: Old AACSB: Analytical Skills

66) In the above figure, point ________ shows an equal distribution of income, while point ________ shows an unequal distribution of income. A) a, b B) b, c C) b, a D) a, d Answer: C Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

67) In the above figure, if the Lorenz curve were to move closer to the diagonal line containing points b and c, the income distribution would be A) more unequal. B) more equal. C) unchanged. D) More information is needed to determine how this change would affect the income distribution. Answer: B Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

68) In the above figure, the Lorenz curve for income is shown. If the data used are from the United States, and the U.S. Lorenz curve for wealth was added to the diagram, it would be A) further from the line of equality than the Lorenz curve for income. B) closer to the line of equality than the Lorenz curve for income. C) above the line of equality. D) the same as the Lorenz curve for income. Answer: A Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

69) The Lorenz curve in the above figure implies that A) income is equally distributed. B) the lowest fifth of households account for less than 20 percent of income. C) the highest fifth of households account for less than 20 percent of income. D) the lowest fifth of households account for more than 20 percent of income. Answer: B Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

70) In the figure above, the lowest 20 percent of all households own ________ percent of all wealth, the next lowest 20 percent own ________ percent of all wealth and the richest 20 percent own ________ percent of all wealth. A) 20; 20; 20 B) 20; 40; 100 C) 5; 15; 40 D) 5; 20; 60 Answer: C Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

71) The above figure shows the Lorenz curve for wealth for the nation of Rusha. What percent of wealth is owned by the poorest quintile? A) 0 percent B) 5 percent C) 20 percent D) 35 percent Answer: B Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

72) The above figure shows the Lorenz curve for wealth for the nation of Rusha. What percent of wealth is owned by the wealthiest quintile? A) 0 percent B) 5 percent C) 40 percent D) 60 percent Answer: C Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

73) The above figure shows the Lorenz curve for wealth for the nation of Rusha. The wealthiest forty percent of the population own what percent of wealth? A) 40 percent B) 50 percent C) 60 percent D) 100 percent Answer: C Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

74) The above figure shows the Lorenz curve for wealth for the nation of Rusha. The poorest forty percent of the population own what percent of wealth? A) 0 percent B) 10 percent C) 20 percent D) 40 percent Answer: C Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

75) The above figure shows the Lorenz curve for wealth for the nation of Rusha. If the government were to confiscate all of the wealth from the poorest twenty percent of the population and give it to the wealthiest twenty percent, the Lorenz curve would A) not change. B) shift farther away from the line of equality. C) shift closer to the line of equality. D) flip above the line of equality. Answer: B Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

76) The above figure shows the Lorenz curve for wealth for the nation of Rusha. If the government were to confiscate half of the wealth from the wealthiest twenty percent of the population and give it to the poorest twenty percent, then A) wealth distribution would be more equal. B) wealth distribution would be unchanged. C) wealth distribution would be more unequal. D) the Lorenz curve would shift rightward. Answer: A Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

77) In the figure above, the richest 20 percent of households receive ________ of total income. A) 55 percent B) 45 percent C) 80 percent D) 60 percent Answer: B Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

78) In the figure above, the poorest 20 percent of households receive ________ of total income. A) 20 percent B) 10 percent C) 5 percent D) 15 percent Answer: C Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

79) In the figure above, the poorest 40 percent of households receive ________ of total income. A) 20 percent B) 10 percent C) 30 percent D) 15 percent Answer: D Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

80) In the figure above, the richest 40 percent of households receive ________ of total income. A) 70 percent B) 30 percent C) 60 percent D) 80 percent Answer: A Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

81) In the figure above, the second poorest 20 percent of households receive ________ of total income. A) 5 percent B) 10 percent C) 15 percent D) 20 percent Answer: B Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

82) In the figure above, the second richest 20 percent of households receive ________ of total income. A) 55 percent B) 35 percent C) 25 percent D) 45 percent Answer: C Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

83) In the figure above, if income were distributed equally across all households, the richest 20 percent of households would receive ________ of total income. A) 45 percent B) 25 percent C) 20 percent D) 15 percent Answer: C Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

84) In the figure above, if income were distributed equally across all households, the poorest 10 percent of households would receive ________ of total income. A) 5 percent B) 10 percent C) 15 percent D) 20 percent Answer: B Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

85) The figure shows two Lorenz curves. Suppose both Lorenz curves measure income. Lorenz curve A shows ________ Lorenz curve B. A) income is more equally distributed than the income shown in B) income is less equally distributed than the income shown in C) the first quintile earns less income than the first quintile earned in D) the fifth quintile earns more income than the fifth quintile earned in Answer: A Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

86) The above figure shows two Lorenz curves. Suppose both Lorenz curves measure wealth. Then, the curves show that wealth is A) greater along Lorenz curve A. B) greater along Lorenz curve B. C) distributed more equally along Lorenz curve A. D) distributed more equally along Lorenz curve B. Answer: C Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

87) The above figure shows two Lorenz curves. Lorenz curve A shows the distribution of income and Lorenz curve B shows the distribution of wealth. Which statement below is correct? A) The Lorenz curve for wealth shows that wealth is distributed less equally because wealth does not include human capital. B) The Lorenz curve for income shows that income is distributed less equally because income does not include income from stocks and bonds. C) The Lorenz curves show wealth is greater than income. D) The Lorenz curves show income is greater than wealth. Answer: A Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

88) The Lorenz curves in the above figure imply that A) income is distributed more unequally than wealth. B) wealth is distributed more unequally than income. C) both wealth and income are distributed equally. D) both wealth and income are distributed at the same level of inequality. Answer: B Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

89) Which of the following statements is TRUE? A) Both wealth and income measure variables over a period of time. B) Wealth measures a variable at a point in time and income measures a variable over a period of time. C) Wealth measures a variable over a period of time, and income measures a variable at a point in time. D) Both wealth and income measure variables at a point in time. Answer: B Topic: Wealth Versus Income Skill: Definition Status: Old AACSB: Analytical Skills

90) Wealth differs from income in that A) income measures a variable at a point in time and wealth measures a variable over a period of time. B) income is what you earn and wealth is what you own. C) income is what you own and wealth is what you earn. D) wealth can be measured in dollars and income cannot. Answer: B Topic: Wealth Versus Income Skill: Definition Status: Old AACSB: Analytical Skills

91) Mr. Scrooge owns assets worth $100 million. The rate of return on his assets is 5 percent per year. Mr. Scrooge's wealth is ________, and his income is ________. A) $5 million a year; $100 million B) $100 million; $5 million a year C) $100 million; $105 million D) $5 million a year; $100 million a year Answer: B Topic: Wealth Versus Income Skill: Analytical Status: Old AACSB: Analytical Skills

92) In the United States, the wealthiest 20 percent of households own about ________ of total wealth. A) 44 percent B) 53 percent C) 62 percent D) 83 percent Answer: D Topic: Wealth Skill: Conceptual Status: Old AACSB: Analytical Skills

93) In the United States, the wealthiest 1 percent of households own about ________ of total wealth. A) 18 percent B) 12 percent C) 38 percent D) 5 percent Answer: C Topic: Wealth Skill: Conceptual Status: Old AACSB: Analytical Skills

94) In the United States, the poorest 50 percent of households own about ________ of total wealth. A) 1 percent B) 10 percent C) 20 percent D) 30 percent Answer: A Topic: Wealth Skill: Conceptual Status: Old AACSB: Analytical Skills

95) For the United States, Lorenz curves show that A) income is more equally distributed than wealth. B) income is less equally distributed than wealth. C) incomes have increased over time. D) blacks and Hispanics became better off in the 1990s. Answer: A Topic: Lorenz Curve Skill: Conceptual Status: Old AACSB: Analytical Skills

96) In the United States, the distribution of wealth, which is a ________, is ________ unequal than the distribution of income, which is a ________. A) stock of assets; less; flow of earnings B) stock of assets; more; flow of earnings C) flow of earnings; more; stock of assets D) flow of earnings; less; stock of assets Answer: B Topic: Wealth Versus Income Skill: Conceptual Status: Old AACSB: Analytical Skills

97) Income is distributed ________ equally than wealth and the Lorenz curve for ________ lies closer to the line of equality. A) more; income B) more; wealth C) less; income D) less; wealth Answer: A Topic: Lorenz Curve Skill: Conceptual Status: Old AACSB: Analytical Skills

98) In the United States, the Lorenz curve for wealth is ________ from the 45-degree line than is the Lorenz curve for income, which means that the distribution of wealth is more ________ than the distribution of income. A) farther away from; unequal B) farther away from; equal C) closer to; unequal D) closer to; equal Answer: A Topic: Measured Wealth Skill: Conceptual Status: Old AACSB: Analytical Skills

99) The measured distribution of ________ is a more accurate indicator of the degree of economic inequality than the measured distribution of ________ because ________ data does not include ________. A) income; wealth; wealth; human capital B) wealth; income; income; holdings of real estate C) wealth; income; income; human capital D) income; wealth; wealth; employment information Answer: A Topic: Measured Wealth Skill: Conceptual Status: Old AACSB: Analytical Skills

100) Measured wealth is a less accurate indicator of economic inequality than is measured income because measured wealth excludes A) owner-occupied housing. B) financial assets. C) depreciation. D) human capital. Answer: D Topic: Measured Wealth Skill: Conceptual Status: Old AACSB: Analytical Skills

101) Which of the following is true regarding the distribution of wealth and the distribution of income? A) The distribution of wealth is a less accurate measure of inequality because it excludes human capital. B) The distribution of wealth is a more accurate measure of inequality because it includes houses. C) The distribution of income is a less accurate measure of inequality because it excludes the value of things you own. D) The distribution of income is a less accurate measure of inequality because not everyone has a job. Answer: A Topic: Measured Wealth Skill: Conceptual Status: Old AACSB: Analytical Skills

102) If human capital was included in the measurement of wealth, the measurement of wealth would be A) more equal and more accurate. B) more equal and less accurate. C) less equal and more accurate. D) less equal and less accurate. Answer: A Topic: Measured Wealth Skill: Conceptual Status: Old AACSB: Analytical Skills

103) Measured distributions of wealth that do not consider the role of human capital A) are more equal than the distribution of income. B) overstate the inequality in wealth distribution. C) are more equal than the distribution of consumption. D) understate the inequality in wealth distribution. Answer: B Topic: Measured Wealth Skill: Conceptual Status: Old AACSB: Analytical Skills

104) Sue has human capital worth $500,000 and nonhuman capital of $100,000. Todd has human capital worth $10,000 and nonhuman capital of $50,000. The return on each type of capital is 10 percent a year. Sue's income is ________ and Todd's income is ________. A) $10,000; $5,000 B) $50,000; $1,000 C) $600,000; $60,000 D) $60,000; $6,000 Answer: D Topic: Measured Wealth Skill: Analytical Status: Old AACSB: Analytical Skills

105) Sue has human capital worth $500,000 and nonhuman capital of $100,000. Todd has human capital worth $10,000 and nonhuman capital of $50,000. The return on each type of capital is 10 percent a year. According to the Census Bureau in the national wealth and income survey, Sue is ________. A) as wealthy as Todd B) 10 times wealthier than Todd C) twice as wealthy as Todd D) 50 times wealthier than Todd Answer: C Topic: Measured Wealth Skill: Analytical Status: Old AACSB: Analytical Skills

106) Lifetime income is distributed A) less equally than annual income and less equally than measured wealth. B) less equally than annual income and more equally than measured wealth. C) more equally than annual income and less equally than measured wealth. D) more equally than annual income and more equally than measured wealth. Answer: D Topic: Distribution of Lifetime Income Skill: Conceptual Status: Old AACSB: Analytical Skills

107) Of the following, which is the most accurate indicator of the degree of inequality? A) distribution of annual income B) distribution of lifetime income C) distribution of wealth D) distribution of the sum of wealth and annual income Answer: B Topic: Distribution of Lifetime Income Skill: Conceptual Status: Old AACSB: Analytical Skills

108) The lifetime income distribution of income is a ________ accurate indicator of the degree of economic inequality than the distribution of ________. A) less; of annual income B) more; of annual income C) less; of wealth D) less; annual Lorenz curves Answer: B Topic: Distribution of Lifetime Income Skill: Conceptual Status: Old AACSB: Analytical Skills

109) In the country of Konswano there are 4 people. Each person lives for 40 years. In their first 10 years, they earn no income. In the next 20 years, they earn $40,000 per year and in the last 10 years they earn no income. Each year their consumption is $20,000. If everyone in Konswano is 25 years old, then the Lorenz curve for income is ________. A) above the Lorenz curve for wealth B) above the line of equality C) equal to the line of equality D) below the Lorenz curve for wealth Answer: C Topic: Distribution of Lifetime Income Skill: Analytical Status: Old AACSB: Analytical Skills

110) In the country of Konswano there are 4 people. Each person lives for 40 years. In their first 10 years, they earn no income. In the next 20 years, they earn $40,000 per year and in the last 10 years they earn no income. Each year their consumption is $20,000. If the people in Konswano are aged 5, 15, 25, and 35, then the distribution of annual income ________. A) is equal to the line of equality B) is above the line of equality C) has greater inequality than when everyone is 25 years old D) has greater equality than when everyone is 25 years old Answer: C Topic: Distribution of Lifetime Income Skill: Analytical Status: Old AACSB: Analytical Skills

111) Since 1970, the distribution of income in the United States A) generally has become more equal. B) generally has become less equal. C) has become more equal than the distribution of wealth. D) has shown no discernible trend. Answer: B Topic: Trends in the Distribution of Income Skill: Conceptual Status: Old AACSB: Analytical Skills

112) In recent years, average household income in the United States was highest for households headed by someone aged A) 35 to 44. B) 45 to 54. C) 55 to 64. D) 65 and over. Answer: B Topic: Who Are the Rich and the Poor? Skill: Conceptual Status: Old AACSB: Analytical Skills 35 Copyright © 2014 Pearson Education, Inc.

113) Which of the following correctly describes characteristics of people who earn high incomes? I. Older, retired households have the highest incomes. II. Married couples earned the highest incomes. III. Households with Bachelor's degrees have higher incomes than households with doctorate degrees. A) I and II B) I and III C) II and III D) II only Answer: D Topic: Who Are the Rich and the Poor? Skill: Conceptual Status: Old AACSB: Analytical Skills

114) Which of the following groups is the LEAST likely to be poor? A) college graduates B) minorities C) single females D) people without high school degrees Answer: A Topic: Who Are the Rich and the Poor? Skill: Conceptual Status: Old AACSB: Analytical Skills

115) Which household characteristic has the largest effect on household income distribution? A) the size of the household B) the age of householders C) the race of household members D) the level of educational attainment of household members Answer: D Topic: Who Are the Rich and the Poor? Skill: Conceptual Status: Old AACSB: Analytical Skills

116) ________ is the single biggest factor affecting income distribution in the United States. A) Location of household B) Type of household C) Education D) Age of household Answer: C Topic: Who Are the Rich and the Poor? Skill: Conceptual Status: Old AACSB: Analytical Skills

117) The biggest single factor affecting family income distribution is the A) householder's age. B) householder's marital status. C) household size. D) householder's education. Answer: D Topic: Who Are the Rich and the Poor? Skill: Conceptual Status: Old AACSB: Analytical Skills

118) Education A) does not really add to one's human capital. B) does not really affect one's income. C) is a major factor affecting one's income. D) explains all the differences in male-female incomes. Answer: C Topic: Who Are the Rich and the Poor? Skill: Conceptual Status: Old AACSB: Analytical Skills

119) The Gini ratio is a measure of A) income inequality. B) wealth distribution. C) income distribution. D) income as compared to wealth. Answer: A Topic: Gini Ratio Skill: Definition Status: Old AACSB: Analytical Skills

120) Since 1970, the U.S. Gini ratio has A) increased. B) decreased. C) increased and then decreased. D) decreased and then increased. Answer: A Topic: Gini Ratio Skill: Conceptual Status: Old AACSB: Analytical Skills

121) If the area between the line of equality and the Lorenz curve is 1,250, and the entire area beneath the line of equality is 5,000, the Gini ratio is A) 0.25 B) 4.00 C) 0.33 D) 0.80 Answer: A Topic: Gini Ratio Skill: Analytical Status: Old AACSB: Analytical Skills

122) If the area between the line of equality and the Lorenz curve is 1,000, the Gini ratio is A) 0.8 B) 0.2 C) 0.1 D) 0.5 Answer: B Topic: Gini Ratio Skill: Analytical Status: Old AACSB: Analytical Skills

123) The U.S. Gini ratio for income has ________ within recent decades, which means economic inequality has ________. A) decreased; increased B) decreased; decreased C) increased; decreased D) increased; increased Answer: D Topic: Gini Ratio Skill: Analytical Status: Old AACSB: Analytical Skills

124) Over the period from 1971 to 2011, the U.S. Gini ratio for household income ________, which means income inequality in the United States ________. A) increased; increased B) increased; decreased C) decreased; increased D) decreased; decreased Answer: A Topic: Gini Ratio Skill: Analytical Status: Old AACSB: Analytical Skills

125) Over the past decade, the incomes of the top 1 percent have increased while the incomes of the middle class declined. These changes mean that the Lorenz curve moved ________ the 45 degree line and the Gini ratio has ________. A) closer to; decreased B) closer to; increased C) further away from; decreased D) further away from; increased Answer: D Topic: Lorenz Curve Skill: Analytical Status: New AACSB: Analytical Skills

126) In the U.S. in 2012 the poverty level for a family of four was about A) $23,000. B) $34,000. C) $10,000. D) $15,000. Answer: A Topic: Poverty Skill: Conceptual Status: Old AACSB: Analytical Skills

127) In the U.S. in 2012 the percentage of the Americans living below the poverty line was about A) 15 percent. B) 20 percent. C) 5 percent. D) 27 percent. Answer: A Topic: Poverty Skill: Conceptual Status: Old AACSB: Analytical Skills

128) The mean (average) U.S. family income in 2011 was approximately A) $13,000. B) $70,000. C) $93,000. D) $150,000. Answer: B Topic: Study Guide Question, Economic Inequality in the U.S. Skill: Conceptual Status: Old AACSB: Analytical Skills

129) In a Lorenz diagram for income, the line of equality shows A) the most equitable income distribution. B) how unequally incomes are distributed. C) how much redistribution occurs. D) the income distribution if everyone received the same income. Answer: D Topic: Study Guide Questions, Lorenz Curve Skill: Definition Status: Old AACSB: Analytical Skills

130) The closer an income Lorenz curve is to the line of equality, the A) slower income is growing. B) more equally income is distributed. C) less equally income is distributed. D) faster income is growing. Answer: B Topic: Study Guide Questions, Lorenz Curve Skill: Conceptual Status: Old AACSB: Analytical Skills

131) Which of the following would show the LEAST amount of inequality? A) Measured annual income. B) Measured annual wealth. C) Lifetime income. D) Measured annual income and annual wealth are equally distributed and are more equally distributed than lifetime wealth. Answer: C Topic: Study Guide Questions, Measured Wealth Skill: Conceptual Status: Old AACSB: Analytical Skills

132) Of the approximate total population of 300 million people in America, about how many have incomes below the official poverty level? A) approximately 13 million B) approximately 46 million C) approximately 73 million D) approximately 104 million Answer: B Topic: Study Guide Question, Poverty Skill: Conceptual Status: Old AACSB: Analytical Skills

133) Over the past decade, the incomes of the top 1 percent have increased while the incomes of the middle class declined. These changes mean that the Lorenz curve moved ________ the 45 degree line and the Gini ratio has ________. A) closer to; decreased B) closer to; increased C) further away from; decreased D) further away from; increased Answer: D Topic: Lorenz Curve Skill: Analytical Status: New AACSB: Analytical Skills

2 Inequality in the World Economy 1) Income is distributed very unequally in ________ and very equally in ________. A) Finland and South Africa; Brazil and Sweden B) Brazil and South Africa; Finland and Sweden C) Finland and Sweden; Brazil and South Africa D) Brazil and Sweden; Finland and South Africa Answer: B Topic: World Distribution of Income Skill: Conceptual Status: Old AACSB: Analytical Skills

2) Among the United States, Finland, and South Africa, income is distributed most equally in ________ and least equally in ________. A) the United States; South Africa B) Finland; South Africa C) Finland; the United States D) South Africa; the United States Answer: B Topic: World Distribution of Income Skill: Conceptual Status: Old AACSB: Analytical Skills

3) The distribution of world income is ________ the distribution of U.S. income. A) more equal than B) less equal than C) the same as D) not comparable to Answer: B Topic: World Distribution of Income Skill: Conceptual Status: Old AACSB: Analytical Skills

4) Since 1970, the world Gini ratio has ________ indicating that the world distribution of income has ________. A) risen; become more equal B) fallen; become more equal C) risen; become less equal D) not changed; not changed Answer: B Topic: World Distribution of Income Skill: Conceptual Status: Old AACSB: Analytical Skills

5) The world distribution of income has become more equal since 1970 because A) the distribution of income within most countries has become more equal. B) foreign aid programs from rich nations have increased in size and especially in effectiveness. C) average incomes in poor nations, such as China, have risen faster than average incomes in rich nations, such as the United States. D) None of the above answers are correct. Answer: C Topic: World Distribution of Income Skill: Conceptual Status: Old AACSB: Analytical Skills

6) The Gini ratio in Brazil was over 0.6 in 1990 and fell to 0.5 in 2010. This change means that over this time inequality ________ and the Lorenz curve moved ________ the 45 degree line. A) increased; closer to B) increased; further away from C) decreased; closer to D) decreased; further away from Answer: C Topic: Gini Ratio Skill: Analytical Status: New AACSB: Analytical Skills

3 The Sources of Economic Inequality 1) By human capital, economists mean A) machines that replace humans. B) machines engineered to avoid operator injury. C) the accumulated skill and knowledge of humans. D) humans who perform repetitive tasks. Answer: C Topic: Human Capital Skill: Definition Status: Old AACSB: Analytical Skills

2) Which of the following is NOT an example of the opportunity cost of investing in human capital? A) lost wages while in school B) lost wages while in on-the-job training C) tuition payments D) apartment rent while working and going to school part-time Answer: D Topic: Human Capital Skill: Conceptual Status: Old AACSB: Analytical Skills

3) High-skilled workers have A) a lower value of marginal product because they have higher wages. B) the same labor supply curve as do low-skilled workers. C) more human capital than do low-skilled workers. D) None of the above answers is correct. Answer: C Topic: Human Capital Skill: Conceptual Status: Old AACSB: Analytical Skills

4) The median wage among physicians is over $166K a year, while the median salary for physician assistants is $86K a year. These salaries suggest that physicians have ________ human capital than physician assistants and hence the demand for labor for physicians is ________ than the demand for labor for physician assistants. A) more; less B) more; greater C) less; greater D) less; less Answer: B Topic: Human Capital Skill: Analytical Status: New AACSB: Analytical Skills

5) Relative to the demand curve for low-skilled workers, the demand curve for high-skilled workers lies A) to the right. B) to the left. C) below. D) in the same place. Answer: A Topic: Demand for High-Skilled and Low-Skilled Labor Skill: Conceptual Status: Old AACSB: Analytical Skills

6) Because of their higher value of marginal product, A) the demand curve for high-skilled workers lies to the right of the demand curve for low-skilled workers. B) the demand curve for high-skilled workers lies to the left of the demand curve for low-skilled workers. C) the supply curve for high-skilled workers lies to the right of the supply curve for low-skilled workers. D) the demand curve for high-skilled workers lies to the left of the supply curve for low-skilled workers. Answer: A Topic: Demand for High-Skilled and Low-Skilled Labor Skill: Conceptual Status: Old AACSB: Analytical Skills

7) The demand curve for high-skilled labor lies to the right of the demand curve for low-skilled labor because A) there are more high-skilled workers than low-skilled workers. B) high-skilled workers require more compensation to convince them to work than do low-skilled workers. C) high-skilled labor is more productive than low-skilled labor. D) firms need not be concerned with the minimum wage in the market for high-skilled labor. Answer: C Topic: Demand for High-Skilled and Low-Skilled Labor Skill: Conceptual Status: Old AACSB: Analytical Skills

8) The demand curve for low-skilled labor lies to the left of the demand curve for high-skilled labor because A) there are more high-skilled workers than low-skilled workers. B) high-skilled workers require more compensation than low-skilled workers. C) high-skilled workers are more productive than low-skilled labor. D) firms do not see any difference between high-skilled labor and low-skilled labor. Answer: C Topic: Demand for High-Skilled and Low-Skilled Labor Skill: Conceptual Status: Old AACSB: Analytical Skills

9) Relative to the supply curve of high-skilled workers, the supply curve of low-skilled workers is A) to the right. B) above. C) to the left. D) on top of the high-skilled worker supply curve. Answer: A Topic: Supply of High-Skilled and Low-Skilled Labor Skill: Conceptual Status: Old AACSB: Analytical Skills

10) The supply curve for high-skilled labor lies to the A) right of the supply curve for low-skilled labor because more people want a high-skilled job. B) left of the supply curve for low-skilled labor because more people want a high-skilled job. C) left of the supply curve for low-skilled labor because it is costly to acquire skills. D) right of the supply curve for low-skilled labor because fewer high-skilled people are willing to work for a low wage. Answer: C Topic: Supply of High-Skilled and Low-Skilled Labor Skill: Conceptual Status: Old AACSB: Analytical Skills

11) Because skills are costly to obtain, at a given wage rate, the A) quantity demanded of high-skilled labor is less than the quantity demanded of low-skilled labor. B) quantity demanded of high-skilled labor is greater than the quantity demanded of low-skilled labor. C) quantity supplied of high-skilled labor is less than the quantity supplied of low-skilled labor. D) quantity supplied of high-skilled labor is greater than the quantity supplier of low-skilled labor. Answer: C Topic: Supply of High-Skilled and Low-Skilled Labor Skill: Conceptual Status: Old AACSB: Analytical Skills

12) Suppose there are two types of labor, high skilled and low skilled. The demand curve for high skilled labor lies ________ the demand curve for low skilled labor and the supply curve of high skilled labor lies ________ the supply curve of low skilled labor. A) above; above B) above; below C) below; below D) below; above Answer: A Topic: High-Skilled and Low-Skilled Labor Markets Skill: Conceptual Status: Old AACSB: Analytical Skills

13) High-skilled workers earn more than low-skilled workers in part because A) high-skilled workers have higher value of marginal products. B) of government legislation. C) the supply of high-skilled workers is more elastic. D) the demand for high-skilled workers is more elastic. Answer: A Topic: High-Skilled and Low-Skilled Labor Markets Skill: Conceptual Status: Old AACSB: Analytical Skills

14) The wage rate for high-skilled labor is higher than that for low-skilled labor because A) both the demand for and the supply of high-skilled labor is greater than that for low-skilled labor. B) the demand for high-skilled labor is greater than the demand for low-skilled labor and the supply of high-skilled labor is less than the supply of low-skilled labor. C) the demand for high-skilled labor is less than the demand for low-skilled labor and the supply of highskilled labor is greater than the supply of low-skilled labor. D) both the demand for and the supply of high-skilled labor is less than that for low-skilled labor. Answer: B Topic: Wage Rates of High-Skilled and Low-Skilled Labor Skill: Conceptual Status: Old AACSB: Analytical Skills

15) Welding has changed dramatically over the last decade with more welding jobs dependent on the use of computers. This change increased the demand for welders with computer skills and decreased the demand for welders who lack these skills and is an example of when technology is a ________ to a highskilled job and a ________ to a low-skilled job. A) complement; substitute B) complement; complement C) substitute; complement D) substitute; substitute Answer: A Topic: Technological Change Skill: Analytical Status: New AACSB: Analytical Skills

16) Welding has changed dramatically over the last decade with more welding jobs dependent on the use of computers. Computers are a complement only for high-skilled welders, so as more welding companies buy computers the wages of high-skilled welders will ________ and the wages of low-skilled welders will ________. A) fall; rise B) rise; fall C) fall; fall D) rise; rise Answer: B Topic: Technological Change Skill: Analytical Status: New AACSB: Analytical Skills

17) Computers and laser scanners are ________ for low-skilled labor and ________ for high-skilled labor. The introduction of these technologies ________ the wage rate of high-skilled workers and ________ the wage rate of low-skilled workers. A) complements; substitutes; raises; lowers B) substitutes; complements; lowers; raises C) substitutes; complements; raises; lowers D) complements; substitutes; lowers; raises Answer: C Topic: Trends in the Distribution of Income Skill: Analytical Status: Old AACSB: Analytical Skills

18) Information technologies are a ________ for low-skilled labor and a ________ for high-skilled labor. A) substitute; substitute B) complement; complement C) substitute; complement D) complement; substitute Answer: C Topic: Trends in the Distribution of Income Skill: Conceptual Status: Old AACSB: Analytical Skills

19) One possible reason the U.S. income distribution has become more unequal is A) information technology has decreased the demand for unskilled labor. B) information technology has increased the demand for unskilled labor. C) information technology has increased the supply of unskilled labor. D) information technology has decreased the supply of unskilled labor. Answer: A Topic: Trends in the Distribution of Income Skill: Conceptual Status: Old AACSB: Analytical Skills

20) High skilled labor and information technology are ________ while low skilled labor and information technology are ________. A) complements; substitutes B) substitutes; substitutes C) substitutes; complements D) complements; complements Answer: A Topic: Trends in the Distribution of Income Skill: Conceptual Status: Old AACSB: Analytical Skills

21) Information technologies ________ the demand for low-skilled labor, increase the ________ highskilled labor, lower the wage rate of ________ labor, and raise the wage rate of ________ labor. A) decrease; demand for; low-skilled; high-skilled B) decrease; supply of; low-skilled; high-skilled C) do not change; supply of; high-skilled; low-skilled D) do not change; demand for; high-skilled; low-skilled Answer: A Topic: Trends in the Distribution of Income Skill: Conceptual Status: Old AACSB: Analytical Skills

22) The distribution of income in the United States became more unequal in the 1990s. One explanation for this trend is that advances in information technologies have ________ low-skilled labor and ________ high-skilled labor. A) decreased the demand for; increased the demand for B) increased the demand for; decreased the demand for C) decreased the supply of; increased the supply of D) increased the supply of; decreased the supply of Answer: A Topic: Trends in the Distribution of Income Skill: Conceptual Status: Old AACSB: Analytical Skills

23) In recent years, information technology such as computers and scanners have been a ________ for low-skilled labor and have led to ________ wage rates for low-skilled workers. A) substitute; higher B) substitute; lower C) complement; higher D) complement; lower Answer: B Topic: Trends in the Distribution of Income Skill: Conceptual Status: Old AACSB: Analytical Skills

24) The entry of China and other developing countries into the global economy ________ the value of marginal product of factory workers in the United States and ________ their wage rate. A) increases; lowers B) decreases; raises C) decreases; lowers D) increases; raises Answer: C Topic: Trends in the Distribution of Income Skill: Conceptual Status: Old AACSB: Analytical Skills

25) The entry of China and other developing countries into the global economy ________ the wages of low-skilled workers and ________ the wages of high-skilled workers in the United States. A) lowers; lowers B) raises; raises C) raises; lowers D) lowers; raises Answer: D Topic: Trends in the Distribution of Income Skill: Conceptual Status: Old AACSB: Analytical Skills

26) Globalization has ________ the price of many goods, which has caused the value marginal product of unskilled labor to ________ and the demand for unskilled labor to ________. A) decreased; decrease; decrease B) decreased; decrease; increase C) decreased; increase; increase D) increased; increase; increase Answer: A Topic: Trends in the Distribution of Income Skill: Conceptual Status: Old AACSB: Analytical Skills

27) In the United States, globalization has caused the demand for unskilled labor to ________ and the demand for skilled labor to ________. A) decrease; increase B) decrease; decrease C) increase; increase D) increase; decrease Answer: A Topic: Trends in the Distribution of Income Skill: Conceptual Status: Old AACSB: Analytical Skills

Wage rate (dollars per hour) 2 4 6 8 10

Quantity of labor Quantity of demanded labor supplied (hours per day) (hours per day) 80 50 70 55 60 60 50 65 40 70

28) The table above shows the demand for labor and supply of labor schedules for low-skilled labor. If the labor market is competitive, what is the wage rate of low-skilled labor and what is the quantity of low-skilled labor employed? A) $6 an hour; 60 hours a day B) $6 an hour; 65 hours a day C) $4 an hour; 70 hours a day D) $4 an hour; 55 hours a day Answer: A Topic: Wage Rates of High-Skilled and Low-Skilled Labor Skill: Analytical Status: Old AACSB: Analytical Skills

29) The above figure shows the demand and supply curves for high-skilled and low-skilled labor. The wage rate A) of high-skilled labor is $7.00 and of low-skilled labor is $6.00. B) of high-skilled labor is $9.00 and of low-skilled labor is $7.00. C) of high-skilled labor is $6.00 and of low-skilled labor is $4.00. D) of high-skilled labor is $9.00 and of low-skilled labor is $4.00. Answer: D Topic: Wage Rates of High-Skilled and Low-Skilled Labor Skill: Analytical Status: Old AACSB: Analytical Skills

30) The above figure shows the demand and supply curves for high-skilled and low-skilled labor. The wage differential between high-skilled and low-skilled labor is A) $4.00. B) $5.00. C) $6.00. D) $7.00. Answer: B Topic: Wage Rates of High-Skilled and Low-Skilled Labor Skill: Analytical Status: Old AACSB: Analytical Skills

31) The above figure shows the supply and demand curves for high-skilled and low-skilled labor. Lowskilled workers earn a wage rate of A) $15 per hour. B) $12 per hour. C) $9 per hour. D) $6 per hour. Answer: D Topic: Wage Rates of High-Skilled and Low-Skilled Labor Skill: Analytical Status: Old AACSB: Analytical Skills

32) The above figure shows the supply and demand curves for high-skilled and low-skilled labor. Highskilled workers earn a wage rate of A) $15 per hour. B) $12 per hour. C) $9 per hour. D) $6 per hour. Answer: A Topic: Wage Rates of High-Skilled and Low-Skilled Labor Skill: Analytical Status: Old AACSB: Analytical Skills

33) The above figure shows the supply and demand curves for high-skilled and low-skilled labor. The figure shows that high-skilled workers earn a wage rate greater than low-skilled workers because A) the supply of high-skilled labor is greater than the supply of low-skilled labor. B) high-skilled labor has a lower value of marginal product. C) of both the cost of acquiring skills and the differences in the value of marginal products. D) of discrimination. Answer: C Topic: Wage Rates of High-Skilled and Low-Skilled Labor Skill: Analytical Status: Old AACSB: Analytical Skills

34) In the figure above, the quantity of low-skilled labor employed is A) 2,000 hours per day. B) 4,000 hours per day. C) 5,000 hours per day. D) 7,000 hours per day. Answer: C Topic: Quantity of High-Skilled and Low-Skilled Labor Skill: Analytical Status: Old AACSB: Analytical Skills

35) In the figure above, the quantity of high-skilled labor employed is A) 2,000 hours per day. B) 4,000 hours per day. C) 5,000 hours per day. D) 7,000 hours per day. Answer: B Topic: Quantity of High-Skilled and Low-Skilled Labor Skill: Analytical Status: Old AACSB: Analytical Skills

36) In the figure above, in the market for low-skilled labor, the equilibrium wage rate is A) $8. B) $4. C) $10. D) $14. Answer: B Topic: Wage Rates of High-Skilled and Low-Skilled Labor Skill: Analytical Status: Old AACSB: Analytical Skills

37) In the figure above in the market for high-skilled labor, the equilibrium wage rate is A) $8. B) $4. C) $10. D) $14. Answer: D Topic: Wage Rates of High-Skilled and Low-Skilled Labor Skill: Analytical Status: Old AACSB: Analytical Skills

38) In the figure above, the difference in wage rate between low-skilled and high-skilled labor is A) $8. B) $4. C) $10. D) $14. Answer: C Topic: Wage Rates of High-Skilled and Low-Skilled Labor Skill: Analytical Status: Old AACSB: Analytical Skills

39) In the figure above, if information technologies are introduced that are complements for high-skilled workers and substitutes for low-skilled workers, the wage rate of high-skilled workers will ________ and the wage rate of low-skilled workers will ________. A) rise; fall B) fall; rise C) fall; fall D) rise; rise Answer: A Topic: Wage Rates of High-Skilled and Low-Skilled Labor Skill: Analytical Status: Old AACSB: Analytical Skills

40) In the figure above, if the government starts to provide university education at no charge, in the long run, the wage rate of high-skilled workers will ________ and the wage rate of low-skilled workers will ________. A) rise; fall B) fall; rise C) fall; fall D) rise; rise Answer: B Topic: Wage Rates of High-Skilled and Low-Skilled Labor Skill: Analytical Status: Old AACSB: Analytical Skills

41) In the above figure, an innovation that increases the demand for high-skilled workers and decreases the demand for low-skilled workers will A) reduce the amount by which WH exceeds WL. B) increase the amount by which WH exceeds WL. C) shift the SH curve leftward. D) shift the SL curve rightward. Answer: B Topic: Wage Rates of High-Skilled and Low-Skilled Labor Skill: Analytical Status: Old AACSB: Analytical Skills

42) In the above figure, the long-run effect of providing university education at no charge to all qualified applicants would be to shift the curve SH A) and the curve SL leftward. B) and the curve SL rightward. C) leftward and the curve SL rightward. D) rightward and the curve SL leftward. Answer: D Topic: Wage Rates of High-Skilled and Low-Skilled Labor Skill: Analytical Status: Old AACSB: Analytical Skills

43) Lee earns more than does Pat. Which of the following can explain why? A) Pat is discriminated against. B) Lee has more human capital. C) Lee has a greater degree of specialization in earning an income. D) All of the above could be a factor leading to the wage difference. Answer: D Topic: Sources of Economic Inequality Skill: Analytical Status: Old AACSB: Analytical Skills

44) When a group is discriminated against, its A) wages fall but its employment does not. B) employment and its wages decrease. C) employment decreases but its wages do not. D) employment and its wages are unaffected. Answer: B Topic: Discrimination Skill: Conceptual Status: Old AACSB: Analytical Skills

45) Customer discrimination against black investment advisers ________ the salaries of black investment advisors and ________ the number of black investment advisers. A) decreases; decreases B) decreases; does not change C) does not change; decreases D) does not change; does not change Answer: A Topic: Discrimination Skill: Conceptual Status: Old AACSB: Analytical Skills

46) Discrimination ________ the group being discriminated against and ________ the group being favored. A) decreases the demand for; increases the demand for B) increases the demand for; decreases the demand for C) decreases the supply of; increases the supply of D) increases the supply of; decreases the supply of Answer: A Topic: Discrimination Skill: Conceptual Status: Old AACSB: Analytical Skills

47) A firm that discriminates has ________ a nonprejudiced firm and ________. A) the same costs as; competes most often with imported goods and services B) the same costs as; can successfully maximize profit in a competitive industry C) lower costs than; drives other firms out of a competitive industry D) higher costs than; cannot survive in a competitive industry Answer: D Topic: Discrimination Skill: Conceptual Status: Old AACSB: Analytical Skills

48) If customer discrimination does not exist, firms that discriminate on the basis of race or sex will A) have higher costs than those that do not. B) have the same level of costs as those that do not. C) have lower costs than those that do not. D) tend to survive whereas firms that do not discriminate will tend to fail. Answer: A Topic: Discrimination Skill: Conceptual Status: Old AACSB: Analytical Skills

49) Discrimination by customers creates a wage differential between two groups by creating a difference in the two groups' perceived A) supply of labor. B) value of marginal product. C) marginal cost of labor. D) minimum wage. Answer: B Topic: Discrimination Skill: Conceptual Status: Old AACSB: Analytical Skills

50) Customer discrimination against female realtors ________ the number of female realtors and ________ their perceived value of marginal product. A) decreases; decreases B) decreases; increases C) increases; decreases D) increases; increases Answer: A Topic: Discrimination Skill: Conceptual Status: Old AACSB: Analytical Skills

51) Moe's Sweaters is a firm in perfect competition. Moe's customers don't know who the firm's workers are. If Moe is the only employer in the market who discriminates against women by paying them less than he pays to equally qualified men, his firm will A) lower its labor cost and receive a greater economic economic profit than its competitors. B) receive a positive economic profit while its competitors will only receive a normal profit. C) not maximize its economic profit and will not survive. D) be able to lower its price and undercut the competitors. Answer: C Topic: Discrimination Skill: Conceptual Status: Old AACSB: Analytical Skills

52) There is discrimination in the labor market on the planet of Yerk between two groups of people, the Mirks and the Morks. If the discrimination is against the Mirks, then the VMP curve for Mirks is ________ the VMP curve for Morks, and the Mirks receive ________ than the Morks. A) to the left of; the same wage rate, but fewer are employed B) to the right of; the same wage rate, but fewer are employed C) to the left of; a lower wage rate D) to the right of; a lower wage rate Answer: C Topic: Discrimination Skill: Conceptual Status: Old AACSB: Analytical Skills

53) With respect to market and nonmarket production, on average working women are ________ diversified than men and receive ________ pay as a result. A) less; lower B) less; higher C) more; lower D) more; higher Answer: C Topic: Differences in the Degree of Specialization Skill: Conceptual Status: Old AACSB: Analytical Skills

54) Specialization of productive activity between men and women might explain why A) a married woman earns less than a married man. B) a never-married man earns more than a never-married woman. C) a never-married man earns the same as a married man. D) None of the above answers is correct. Answer: A Topic: Differences in the Degree of Specialization Skill: Conceptual Status: Old AACSB: Analytical Skills

55) Economists who have compared the incomes of never-married men and women have found that with equal amounts of human capital, ________. A) the wages of these two groups are the same B) men earn significantly more than women C) women earn significantly more than men D) men specialize more in home production Answer: A Topic: Wage Differentials Between Sexes and Races Skill: Conceptual Status: Old AACSB: Analytical Skills

56) Globalization means that firms recruit top talent from the global talent pool. Globalization means that the payoffs won by the contest winners ________. A) increase in size B) do not change in size C) might increase, decrease, or not change depending on whether the demand for contests changes by more than, less than, or the same amount as the supply of contests. D) decrease in size Answer: A Topic: Contestable Market Skill: Conceptual Status: Old AACSB: Analytical Skills

57) Because of assortative mating, wealth becomes ________ and the distribution of wealth becomes more ________. A) more concentrated in a small number of families; equal B) more concentrated in a small number of families; unequal C) spread out among more families; equal D) spread out among more families; unequal Answer: B Topic: Assortative Mating Skill: Conceptual Status: Old AACSB: Analytical Skills

58) Assortative mating means that A) poor women and rich men tend to marry. B) rich women and rich men tend to marry. C) rich women and poor men tend to marry. D) there are limited incentives to marry anyone. Answer: B Topic: Assortative Mating Skill: Definition Status: Old AACSB: Analytical Skills

59) Assortative mating results in A) many people being able to marry their way out of poverty. B) wealth becoming more concentrated among families. C) the Lorenz curve moving rightward closer to the line of equality. D) people marrying at a later age. Answer: B Topic: Assortative Mating Skill: Conceptual Status: Old AACSB: Analytical Skills

60) The distribution of wealth is skewed in part because people with high wealth A) save very little. B) tend to marry people with similar wealth. C) have very little skills. D) do not earn much more than those with low incomes. Answer: B Topic: Assortative Mating Skill: Conceptual Status: Old AACSB: Analytical Skills

61) Making the distribution of wealth ________ equal is ________. A) more; differences in degrees of specialization B) less; differences in degrees of specialization C) more; assortative mating D) less; assortative mating Answer: D Topic: Assortative Mating Skill: Conceptual Status: Old AACSB: Analytical Skills

62) The higher the cost of acquiring skills, the ________ are the high-skilled and low-skilled labor ________ curves. A) closer together; demand B) farther apart; demand C) closer together; supply D) farther apart; supply Answer: D Topic: Study Guide Question, High- and Low-Skilled Labor Markets Skill: Conceptual Status: Old AACSB: Analytical Skills

63) Which of the following is a reason why the wage rate of high-skilled workers exceeds the wage rate of low-skilled workers? A) The market for high-skilled workers is more competitive than the market for low-skilled labor. B) The demand for high-skilled workers exceeds the demand for low-skilled workers. C) The number of high-skilled workers exceeds the number of low-skilled workers. D) Low-skilled workers often are in the process of acquiring more human capital. Answer: B Topic: High-Skilled and Low-Skilled Labor Markets Skill: Conceptual Status: Old AACSB: Analytical Skills

64) Which of the following is NOT a potential reason for wage differences by race or sex? A) discrimination B) differences in human capital C) differences in the degree of specialization D) All of the above are potential reasons for wage differences by race or sex. Answer: D Topic: Study Guide Question, Differences in the Wages Skill: Conceptual Status: Old AACSB: Analytical Skills

65) Which of the following will NOT increase a worker's human capital? A) more work experience B) more training C) more schooling D) a higher wage rate Answer: D Topic: Study Guide Question, Human Capital Skill: Conceptual Status: Old AACSB: Analytical Skills

4 Income Redistribution 1) A tax is progressive if the average tax rate A) increases as income increases. B) increases as income decreases. C) is negative. D) is positive. Answer: A Topic: Progressive Tax Skill: Definition Status: Old AACSB: Analytical Skills

2) An income tax in which the average tax rate increases with income is called a A) regressive income tax. B) proportional income tax. C) flat-rate income tax. D) progressive income tax. Answer: D Topic: Progressive Tax Skill: Definition Status: Old AACSB: Analytical Skills

3) A progressive income tax is one that A) taxes income so that the average tax rate decreases with the level of income. B) taxes all income above the guaranteed minimum at an average rate that decreases with income. C) taxes income so that the average tax rate increases with the level of income. D) taxes income at a constant rate, regardless of the level of income. Answer: C Topic: Progressive Tax Skill: Definition Status: Old AACSB: Analytical Skills

4) A progressive income tax is defined as a tax for which A) total taxes paid increase with the level of income. B) total taxes paid are independent of the level of income. C) the average tax rate increases with the level of income. D) the average tax rate decreases with the level of income. Answer: C Topic: Progressive Tax Skill: Definition Status: Old AACSB: Analytical Skills

5) The more that Clayton earns, the higher is his average tax rate. Clayton faces a ________ income tax. A) regressive B) proportional C) progressive D) flat-rate Answer: C Topic: Progressive Tax Skill: Conceptual Status: Old AACSB: Analytical Skills

6) The federal income tax in the United States is A) regressive. B) proportional. C) progressive. D) a flat-rate tax. Answer: C Topic: Progressive Tax Skill: Conceptual Status: Revised AACSB: Analytical Skills

7) Last year you earned $45,000 and paid $9,000 in income taxes. This year you earned $60,000 and paid $15,000 in income taxes. What kind of income tax do you face? A) regressive B) progressive C) proportional D) traditional Answer: B Topic: Progressive Tax Skill: Analytical Status: Old AACSB: Analytical Skills

8) Albert, Betty, and Cecile live in Norland. Their annual incomes and the amounts they pay in income tax are shown in the table below.

Albert Betty Cecile

Income 40,000 30,000 60,000

Tax 8,000 4,500 18,000

The income tax in Norland is A) proportional. B) fair. C) regressive. D) progressive. Answer: D Topic: Progressive Tax Skill: Analytical Status: Old AACSB: Analytical Skills

Income before tax (dollars) 0 20,000 40,000 60,000 80,000

Tax plan A (dollars)

Tax plan B (dollars)

Tax plan C (dollars)

0 2,000 5,000 10,000 20,000

0 1,000 2,000 3,000 4,000

3,000 3,000 3,000 3,000 3,000

9) The government in the country of Zappoo is trying to decide which tax plan to implement. The table above shows three alternative plans. If the government decides to implement a progressive income tax, it will implement tax plan ________. A) A B) B C) C D) A or B Answer: A Topic: Progressive Tax Skill: Analytical Status: Old AACSB: Analytical Skills

10) The government in the country of Zappoo is trying to decide which tax plan to implement. The table above shows three alternative plans. If the government decides to implement a proportional income tax, it will implement tax plan ________. A) A B) B C) C D) None of the above because none of the above are proportional taxes. Answer: B Topic: Proportional Tax Skill: Analytical Status: Old AACSB: Analytical Skills

11) An income tax for which the average tax rate decreases with income is called a A) regressive income tax. B) proportional income tax. C) flat-rate income tax. D) progressive income tax. Answer: A Topic: Regressive Tax Skill: Definition Status: Old AACSB: Analytical Skills

12) Consider the country of Inland. In Inland, people's average tax rates decrease with the level of income. Inland has a ________ tax structure. A) progressive B) regressive C) proportional D) flat-rate Answer: B Topic: Regressive Tax Skill: Conceptual Status: Old AACSB: Analytical Skills

13) A tax is regressive if the average tax rate A) increases as income increases. B) increases as income decreases. C) is negative. D) is less than one. Answer: B Topic: Regressive Tax Skill: Definition Status: Old AACSB: Analytical Skills

14) A regressive income tax is defined as a tax for which A) total taxes paid increase with the level of income. B) total taxes paid are independent of the level of income. C) the average tax rate increases with the level of income. D) the average tax rate decreases with the level of income. Answer: D Topic: Regressive Tax Skill: Definition Status: Old AACSB: Analytical Skills

15) An income tax system in which the average tax rate decreases with the level of income is called a A) progressive income tax system. B) proportional income tax system. C) regressive income tax system. D) flat-rate income tax system. Answer: C Topic: Regressive Tax Skill: Definition Status: Old AACSB: Analytical Skills

16) Regressive income taxes are A) an important form of income redistribution. B) present when the average tax rate decreases as income decreases. C) present when the average tax rate decreases as income increases. D) Both answers A and B are correct. Answer: C Topic: Regressive Tax Skill: Definition Status: Old AACSB: Analytical Skills

17) A worker pays a tax for Social Security at a constant rate up until a certain level of income is reached. Beyond that income level, no more Social Security tax is paid. The Social Security tax is an example of a A) progressive tax. B) regressive tax. C) proportional tax. D) sales tax. Answer: B Topic: Regressive Tax Skill: Analytical Status: Old AACSB: Analytical Skills

18) Joe earns $100,000 per year. He pays a tax rate of 28 percent on the first $60,000 of income and a tax rate of 15 percent on income above $60,000. This tax system is an example of a A) regressive income tax. B) negative income tax. C) progressive income tax. D) proportional income tax. Answer: A Topic: Regressive Tax Skill: Analytical Status: Old AACSB: Analytical Skills

Income (dollars) 12,000 20,000 50,000

Tax paid (dollars) 1,200 1,600 3,000

19) What type of income tax is reflected in the table above? A) regressive income tax B) proportional income tax C) progressive income tax D) negative income tax Answer: A Topic: Regressive Tax Skill: Analytical Status: Old AACSB: Analytical Skills

20) Alice, Bob, and Cody live in Wesland. Their annual incomes and the amounts they pay in income tax are shown in the table below.

Alice Bob Cody

Income 30,000 50,000 100,000

Tax 6,000 7,500 12,000

The income tax in Wesland is A) proportional. B) regressive. C) flat-rate. D) progressive. Answer: B Topic: Regressive Tax Skill: Analytical Status: Old AACSB: Analytical Skills

21) A proportional income tax is defined as a tax for which A) total taxes paid increase with the level of income. B) total taxes paid are independent of the level of income. C) the average tax rate increases with the level of income. D) the average tax rate is the same at all levels of income. Answer: D Topic: Proportional Tax Skill: Analytical Status: Old AACSB: Analytical Skills

22) An income tax for which the average tax rate is constant called a A) regressive income tax. B) proportional income tax. C) marginal income tax. D) progressive income tax. Answer: B Topic: Proportional Tax Skill: Definition Status: Old AACSB: Analytical Skills

23) A flat-rate income tax is also called ________. A) an excise tax B) a property tax C) a proportional income tax D) a constant rate tax Answer: C Topic: Proportional Tax Skill: Definition Status: Old AACSB: Analytical Skills

24) With a proportional tax, A) a poor household pays a larger percentage of its income in taxes than a rich one. B) a rich household pays a larger percentage of its income in taxes than a poor one. C) all households pay the same total amount of tax. D) all households pay the same percentage of their income as taxes. Answer: D Topic: Proportional Tax Skill: Conceptual Status: Old AACSB: Analytical Skills

25) If both rich and poor families pay 25 percent of their income in taxes, the tax scheme is ________. A) proportional B) regressive C) negative D) progressive Answer: A Topic: Proportional Tax Skill: Analytical Status: Old AACSB: Analytical Skills

26) Consider the country of Outland. In Outland, people pay 10 percent of their income as a tax whether they earn $10,000 or $100,000 annually. Outland has ________ tax structure. A) a progressive B) a regressive C) a proportional D) an excessive Answer: C Topic: Proportional Tax Skill: Analytical Status: Old AACSB: Analytical Skills

27) Alex, Bill, and Cid live in Souland. Their annual incomes and the amounts they pay in income tax are shown in the table below.

Alex Bill Cid

Income 30,000 20,000 40,000

Tax 6,000 4,000 8,000

The income tax in Souland is A) proportional. B) disproportional. C) regressive. D) progressive. Answer: A Topic: Proportional Tax Skill: Analytical Status: Old AACSB: Analytical Skills

Gross income (dollars) 0 1,000 2,000 4,000

Plan A: tax payment (dollars) 0 100 200 400

Plan B: tax payment (dollars) 0 100 400 1,600

Plan C: tax payment (dollars) 0 200 250 300

28) In the above table, which tax plan is progressive? A) only plan A B) only plan B C) only plan C D) both plan B and plan C Answer: B Topic: Progressive Tax Skill: Analytical Status: Old AACSB: Analytical Skills

29) In the above table, which tax plan is regressive? A) only plan A B) only plan B C) only plan C D) both plan A and plan C Answer: C Topic: Regressive Tax Skill: Analytical Status: Old AACSB: Analytical Skills

30) In the above table, which tax plan is proportional? A) only plan A B) only plan B C) only plan C D) both plan A and plan C Answer: A Topic: Proportional Tax Skill: Analytical Status: Old AACSB: Analytical Skills

31) In the above table, which plan is a flat-rate tax? A) only plan A B) only plan B C) only plan C D) both plan A and plan C Answer: A Topic: Proportional Tax Skill: Analytical Status: Old AACSB: Analytical Skills

32) Which of the following taxes causes the greatest shift of the Lorenz curve toward the line of equality? A) proportional income tax B) regressive income tax C) flat-rate income tax D) progressive income tax Answer: D Topic: Income Redistribution Skill: Analytical Status: Old AACSB: Analytical Skills

33) Social security provides payments A) for food so that the poor can obtain a basic diet. B) to aid married families with dependents. C) to unemployed able-bodied workers. D) to retired and disabled workers. Answer: D Topic: Income Maintenance Programs Skill: Conceptual Status: Old AACSB: Analytical Skills

34) The U.S. government provides monthly payments to retired workers under which program? A) the Old Age, Survivors, Disability and Health Insurance (OASDHI) B) the Temporary Assistance for Needy Households (TANF) C) the Supplementary Security Income (SSI) D) a series of income tax rebates Answer: A Topic: Income Maintenance Programs Skill: Conceptual Status: Old AACSB: Analytical Skills

35) An example of an income maintenance program is A) a proportional income tax. B) low-cost college tuition. C) unemployment compensation. D) rent control. Answer: C Topic: Income Maintenance Programs Skill: Conceptual Status: Old AACSB: Analytical Skills

36) Unemployment compensation is an example of A) a subsidized service. B) a regressive income program. C) a Social Security benefit. D) an income maintenance program. Answer: D Topic: Income Maintenance Programs Skill: Conceptual Status: Old AACSB: Analytical Skills

37) Which of the following is NOT a government-run income maintenance program? A) Social Security B) unemployment compensation C) temporary Assistance of Needy Households D) life insurance Answer: D Topic: Income Maintenance Programs Skill: Conceptual Status: Old AACSB: Analytical Skills

38) Social Security is an example of A) a progressive income tax. B) a subsidized service. C) an income maintenance program. D) an unemployment benefit. Answer: C Topic: Income Maintenance Programs Skill: Conceptual Status: Old AACSB: Analytical Skills

39) All of the following are programs that redistribute income by making direct payments to people in the lower part of the income distribution EXCEPT A) social security programs. B) welfare programs. C) Individual Retirement Accounts. D) unemployment compensation. Answer: C Topic: Income Maintenance Programs Skill: Conceptual Status: Old AACSB: Analytical Skills

40) The poor receive A) less in benefits than they pay in taxes, and so do the rich. B) more in benefits than they pay in taxes, and so do the rich. C) less in benefits than they pay in taxes, and the rich receive more in benefits than they pay in taxes. D) more in benefits than they pay in taxes, and the rich receive less in benefits than they pay in taxes. Answer: D Topic: Income Maintenance Programs Skill: Conceptual Status: Old AACSB: Analytical Skills

41) The public education system is an example of A) an income maintenance program. B) a negative income tax. C) the poor paying more than the market price for a service they receive. D) a subsidized service. Answer: D Topic: Subsidized Services Skill: Conceptual Status: Old AACSB: Analytical Skills

42) State colleges are an example of A) income maintenance programs. B) Social Security. C) welfare programs. D) subsidized services. Answer: D Topic: Subsidized Services Skill: Conceptual Status: Old AACSB: Analytical Skills

43) Which of the following is an example of a subsidized service? A) Social Security payments to retirees B) Social Security payments to widows C) welfare payments to the unemployed D) Medicare reimbursements to hospitals Answer: D Topic: Subsidized Services Skill: Conceptual Status: Old AACSB: Analytical Skills

44) The income that measures a household's earnings in the absence of government redistribution is called A) market income. B) real income. C) money income. D) cash income. Answer: A Topic: Scale of Income Redistribution Skill: Conceptual Status: Old AACSB: Analytical Skills

45) The income that includes a household's earnings in addition to cash transfers from the government is called A) market income. B) real income. C) money income. D) cash income. Answer: C Topic: Scale of Income Redistribution Skill: Definition Status: Old AACSB: Analytical Skills

46) In the country of Wilkes, taxes are $5 million and benefits are $4 million. Income from labor is $25 million and income from capital is $15 million. What is market income? A) $20 million B) $39 million C) $40 million D) $9 million Answer: C Topic: Market Income Skill: Analytical Status: Old AACSB: Analytical Skills

47) Market income in the United States is distributed A) more unequally than income after taxes and benefits. B) less unequally than income after taxes and benefits. C) the same as income after taxes and benefits. D) according to a big tradeoff between equity and equality Answer: A Topic: The Scale of Redistribution Skill: Conceptual Status: Old AACSB: Analytical Skills

48) The U.S. tax system at both the federal and state levels is ________. A) regressive B) proportional C) progressive D) negative Answer: C Topic: Scale of Income Redistribution Skill: Conceptual Status: Old AACSB: Analytical Skills

49) The U.S. tax system A) reduces inequality and shifts the Lorenz curve away from the line of equality. B) reduces inequality and shifts the Lorenz curve toward the line of equality. C) increases inequality and shifts the Lorenz curve toward the line of equality. D) increases inequality and shifts the Lorenz curve away from the line of equality. Answer: B Topic: The Scale of Redistribution Skill: Conceptual Status: Old AACSB: Analytical Skills

50) Taxes and transfers in the United States A) shift the Lorenz curve inward. B) shift the Lorenz curve outward. C) cancel out so that the Lorenz curve does not shift. D) shift the Lorenz curve inward at low incomes, outward at high incomes. Answer: A Topic: Scale of Income Redistribution Skill: Conceptual Status: Old AACSB: Analytical Skills

The table shows the distributions of market income and money income in the United States in 2007. Market income Money income (percent of (percent of Households total) total) Lowest 20% 1.1 3.4 Second 20% 7.1 8.6 Third 20% 13.9 14.6 Fourth 20% 22.8 23.0 Highest 20% 55.1 50.4

51) According to the table above, ________ percent of total income is redistributed from the highest income group. A) 4.7 B) 2.3 C) 1.5 D) 3.8 Answer: A Topic: Scale of Income Redistribution Skill: Analytical Status: Old AACSB: Analytical Skills

52) According to the table above, ________ percent of total income is redistributed to the lowest income group. A) 4.7 B) 2.3 C) 1.5 D) 3.8 Answer: B Topic: Scale of Income Redistribution Skill: Analytical Status: Old AACSB: Analytical Skills

53) According to the table above, income is redistributed from the ________ of households to the ________ of households. A) richest 20%; rest B) richest 20%; poorest 20% C) richest 40%; rest D) poorest 40%; richest 20% Answer: A Topic: Scale of Income Redistribution Skill: Analytical Status: Old AACSB: Analytical Skills

54) According to the table above, the money income distribution is ________ unequal than the market income distribution because ________ income reflects income redistribution through taxes and benefits. A) less; money B) less; market C) more; money D) more; market Answer: A Topic: Scale of Income Redistribution Skill: Analytical Status: Old AACSB: Analytical Skills

Household grouped by income Lowest 20 percent Second 20 percent Third 20 percent Fourth 20 percent Fifth 20 percent

Group income (dollars) 100,000 400,000 500,000 1,500,000 2,500,000

55) The table above shows the distribution of income in Swacko. The government of Swacko imposes a 20 percent tax on the people with the highest 40 percent of income. The government then distributes 50 percent of the tax collected to the lowest 20 percent and 25 percent to the second 20 percent and the middle 20 percent. Suppose that the before-tax group incomes remain as above. Before and after the distribution, what percentage of national income belongs to the lowest 20 percent? A) 2 percent; 10 percent B) 20 percent; 20 percent C) 5 percent; 25 percent D) 2 percent; 2 percent Answer: A Topic: Scale of Income Redistribution Skill: Analytical Status: Old AACSB: Analytical Skills

56) The table above shows the distribution of income in Swacko. The government of Swacko imposes a 20 percent tax on people with the highest 40 percent of income. The government then distributes 40 percent of the tax collected to the lowest 20 percent and 30 percent to the second 20 percent and the middle 20 percent. After the redistribution, the Lorenz curve for income ________. A) is equal to the line of equality B) equals the Lorenz curve for wealth C) is closer to the line of equality D) is above the line of equality Answer: C Topic: Scale of Income Redistribution Skill: Analytical Status: Old AACSB: Analytical Skills 77 Copyright © 2014 Pearson Education, Inc.

57) The figure above shows two Lorenz curves, one before income redistribution and one after income redistribution. Lorenz curve B represents A) market income. B) money income. C) money income before taxes. D) income after taxes. Answer: A Topic: Scale of Income Redistribution Skill: Analytical Status: Old AACSB: Analytical Skills

58) The figure above shows two Lorenz curves, one before income redistribution and one after income redistribution. The difference between the two curves equals A) market income. B) money income. C) the redistribution of income. D) the amount of taxes paid. Answer: C Topic: Scale of Income Redistribution Skill: Conceptual Status: Old AACSB: Analytical Skills

59) The "big tradeoff" refers to the tradeoff between A) work and leisure. B) equity and efficiency. C) public goods and private goods. D) taxes and transfers. Answer: B Topic: Big Tradeoff Skill: Definition Status: Old AACSB: Analytical Skills

60) The "big tradeoff" refers to the tradeoff between A) money and market income. B) equity and efficiency. C) progressive and regressive taxes. D) flat-rate and proportional taxes. Answer: B Topic: Big Tradeoff Skill: Definition Status: Old AACSB: Analytical Skills

61) The redistribution of income creates the big tradeoff, which is a tradeoff between ________. A) income and wealth B) equity and efficiency C) rich and poor D) Supplementary Security Income and the Food Stamp program Answer: B Topic: Big Tradeoff Skill: Definition Status: Old AACSB: Analytical Skills

62) Income redistribution ________. A) creates an income distribution that is less equal than the market distribution B) is efficient because it makes the distribution of income more equal. C) eliminates the big tradeoff between rich and poor D) creates a deadweight loss Answer: D Topic: Big Tradeoff Skill: Conceptual Status: Old AACSB: Analytical Skills

63) Redistribution programs create a disincentive to work among A) taxpayers only. B) benefit recipients only. C) both taxpayers and benefit recipients. D) neither taxpayers nor benefit recipients. Answer: C Topic: Big Tradeoff Skill: Conceptual Status: Old AACSB: Analytical Skills

64) The inefficiency created by income taxation occurs due to A) the cost of collecting taxes and making welfare payments. B) motivating welfare recipients to work less. C) motivating income earners to work less. D) All of the above answers are correct. Answer: D Topic: Big Tradeoff Skill: Conceptual Status: Old AACSB: Analytical Skills

65) Using the government as a means of redistribution generates equity at the cost of efficiency, in part because A) the process of redistribution uses up some of society's resources. B) the process of redistribution creates new resources for society. C) redistribution creates new incentives to work for both rich and poor. D) redistribution would not take place otherwise. Answer: A Topic: The Big Tradeoff Skill: Conceptual Status: Old AACSB: Analytical Skills

66) With respect to redistribution, one reason "The Big Tradeoff" exists is because A) government programs employ resources that could have been productive elsewhere. B) government policymakers must choose between funding the various programs. C) government programs only employ resources that had no value to society otherwise. D) government programs only pay workers their opportunity cost. Answer: A Topic: The Big Tradeoff Skill: Conceptual Status: Old AACSB: Analytical Skills

67) With respect to redistribution, one reason "The Big Tradeoff" exists is because A) low income households do not pay enough taxes. B) government policymakers must choose between funding the various programs. C) government programs only employ resources that had no value to society otherwise. D) redistribution weakens the incentive to work. Answer: D Topic: The Big Tradeoff Skill: Conceptual Status: Old AACSB: Analytical Skills

68) The decrease in the incentive to work created by welfare payments programs A) only affects low income taxpayers. B) only affects taxpayers but not welfare recipients. C) only affects high income executives. D) affects both taxpayers and welfare recipients. Answer: D Topic: The Big Tradeoff Skill: Conceptual Status: Old AACSB: Analytical Skills

69) The big tradeoff between equality and efficiency exists because A) redistribution uses resources and weakens incentives to work. B) redistribution uses resources and strengthens incentives to work. C) redistribution creates additional resources and weakens incentives to work. D) redistribution creates additional resources and strengthens incentives to work. Answer: A Topic: Big Tradeoff Skill: Conceptual Status: Old AACSB: Analytical Skills

70) If a tax was instituted such that every dollar collected in taxes from high income households resulted in a distribution of $.80 to low income households, A) efficiency and equality of incomes would both decrease. B) equality of incomes would increase but efficiency would decrease. C) efficiency would increase but equality of incomes would decrease. D) efficiency and equality of incomes would both increase. Answer: B Topic: The Big Tradeoff Skill: Analytical Status: Old AACSB: Analytical Skills

71) One way the United States has tried to encourage welfare recipients to acquire human capital is by A) providing a free college education. B) setting a 1-year limit on temporary assistance. C) tax rebates. D) requiring a adult member of the household to either work or perform community service. Answer: D Topic: Welfare Today Skill: Conceptual Status: Old AACSB: Analytical Skills

72) Which of the following REDUCES equality of income or wealth relative to the market distribution? A) government payments to the poor B) a regressive income tax C) high taxes on bequests D) non-assortative mating Answer: B Topic: Study Guide Questions, Regressive Tax Skill: Conceptual Status: Old AACSB: Analytical Skills

73) Suppose that the income tax in the United States was such that all households had to pay 20 percent of their income to the government as taxes. This tax is an example of A) a regressive tax. B) a proportional tax. C) a progressive tax. D) an efficient tax. Answer: B Topic: Study Guide Questions, Proportional Tax Skill: Conceptual Status: Old AACSB: Analytical Skills

74) The "big tradeoff" refers to the point that governmental redistribution of income causes A) less efficiency because it weakens incentives to work. B) less efficiency because it strengthens incentives to work. C) more efficiency because it weakens incentives to work. D) more efficiency because it strengthens incentives to work. Answer: A Topic: Study Guide Questions, Big Tradeoff Skill: Conceptual Status: Old AACSB: Analytical Skills

5 News Based Questions 1) According to an Asian Development Bank report in 2007, China's Gini coefficient, a statistical measure of wealth distribution in society, soared to 47.3 in 2004 from 40.7 in 1993, putting the country at a level more typical of Latin America. China experienced ________. A) a decrease in income inequality B) an increase in income inequality C) a decrease in income D) an increase in income Answer: B Topic: Gini Ratio Skill: Conceptual Status: Old AACSB: Reflective Thinking

2) When China embarked on market changes towards urbanization and manufacturing in 1978, urban disposable incomes were 2.6 times greater than rural net income. By 2008 they were 3.3 times bigger. These market changes have led to A) increased income inequality between rural and urban populations. B) a decreased Gini ratio. C) the Lorenz curve for income to move closer to the line of equality. D) a movement towards a bell-shaped distribution of income. Answer: A Topic: Distribution of Income Skill: Conceptual Status: Old AACSB: Reflective Thinking

3) When China embarked on market changes towards urbanization and manufacturing in 1978, urban disposable incomes were 2.6 times greater than rural net income. By 2008 they were 3.3 times bigger. Which of the following have the market changes sketched above have most likely NOT caused? A) Increased income inequality between rural and urban populations B) A movement towards a bell-shaped distribution of income C) An increased Gini ratio D) The Lorenz curve for income to move further away to the line of equality Answer: B Topic: Distribution of Income Skill: Conceptual Status: Old AACSB: Reflective Thinking

4) Pamela Michelle Scott, a low income single mom, had just finished her monthly shopping to purchase 30 days' worth of meat from Hollins Market. She's reared five healthy children and said that she made good use of the free health clinics and food stamps. Pamela benefits from free health clinics which are ________ and food stamps which is a ________. A) Social Security programs; subsidized service B) unemployment compensation programs; Social Security program C) subsidized services; welfare program D) welfare programs; unemployment compensation program Answer: C Topic: Subsidized Services Skill: Conceptual Status: Old AACSB: Reflective Thinking

5) The 2010 Federal Personal Income six tax brackets range from 10 percent for individuals earning less than $8,025 to 35 percent for those earning over $357,700. The personal income tax system is A) regressive. B) progressive. C) proportional. D) flat-rate. Answer: B Topic: Progressive Tax Skill: Recognition Status: Old AACSB: Reflective Thinking

6) The Lithuanian tax rate for all citizens' income is 24 percent and in Estonia, the tax rate is 21 percent. Lithuanian and Estonian income tax systems are examples of ________ taxes. A) proportional B) progressive C) regressive D) equality Answer: A Topic: Proportional Tax Skill: Conceptual Status: Old AACSB: Reflective Thinking

7) The 2010 U.S. Federal Personal Income six tax brackets range from 10 percent for individuals earning less than $8,025 to 35 percent for those earning over $357,700 whereas the Lithuanian tax rate for all citizens' income is 24 percent. The Lithuanian income tax system is a ________ tax and the U.S. income tax system is a ________ tax. A) progressive; proportional B) regressive; progressive C) proportional; regressive D) proportional; progressive Answer: D Topic: Progressive Tax Skill: Conceptual Status: Old AACSB: Reflective Thinking

8) The Lithuanian tax rate for all citizens' income is 24 percent. If the Lithuanian government was concerned about income inequality, they should change the tax system from a system that is currently ________ to a system that is ________. A) progressive; proportional B) regressive; progressive C) proportional; progressive D) proportional; regressive Answer: C Topic: Progressive Tax Skill: Conceptual Status: Old AACSB: Reflective Thinking

9) Netflix, an online DVD rental service, was established in 1997. In 2008, Netflix has more than 8.2 million subscribers. This technology has ________ in the labor market for video rental clerks. A) decreased demand B) increased demand C) increased supply D) decreased supply Answer: A Topic: Demand for Labor Skill: Conceptual Status: Old AACSB: Reflective Thinking

10) Netflix, an online DVD rental service, was established in 1997. In 2010, Netflix has more than 10 million subscribers. This technology has ________ in the labor market for computer software programmers. A) decreased demand B) increased supply C) decreased supply D) increased demand Answer: D Topic: Demand for Labor Skill: Conceptual Status: Old AACSB: Reflective Thinking

11) Median household income in the United States has increased from $38,771 in 1967 to $50,054 in 2011. Based only on this fact, we can conclude that: A) Inequality is increasing in the United States. B) Inequality is decreasing in the United States. C) Inequality is not changing in the United States. D) We cannot conclude anything about inequality in the United States without more information. Answer: D Topic: Distribution of Income Skill: Conceptual Status: Old AACSB: Reflective Thinking

Percent of total Percent of total Household percent income, 1990 income, 2011 Lowest 20 percent 3.8 3.4 Second 20 percent 9.6 8.7 Middle 20 percent 15.9 14.8 Next highest 20 percent 24.0 23.4 Highest 20 percent 46.6 49.7 12) Using the table provided above, what can be concluded about the Gini ratio and what does this mean for income equality? A) The Gini ratio is increasing which means there is greater income inequality. B) The Gini ratio is increasing which means there is greater income equality. C) The Gini ratio is decreasing which means there is greater income equality. D) The Gini ratio is decreasing which means there is greater income inequality. Answer: A Topic: Gini Ratio Skill: Conceptual Status: Previous edition, Chapter 19 AACSB: Analytical Skills

13) Using the table provided above, which of the following statements is true? A) Income inequality is decreasing. B) Incomes are increasing. C) Incomes are decreasing. D) Income inequality is increasing. Answer: D Topic: Distribution of Income Skill: Conceptual Status: Previous edition, Chapter 19 AACSB: Analytical Skills

14) Using the table provided above to construct Lorenz curves representing 1990 and 2011, what do you discover and how is this interpreted? A) The Lorenz curve for 1990 is further away from the line of equality than the curve for 2011. This means that inequality is decreasing. B) The Lorenz curve for 1990 is further away from the line of equality than the curve for 2011. This means that inequality is increasing. C) The Lorenz curve for 2011 is further away from the line of equality than the curve for 1990. This means that inequality is increasing. D) The Lorenz curve for 2011 is further away from the line of equality than the curve for 1990. This means that inequality is decreasing. Answer: C Topic: Lorenz Curve Skill: Analytical Status: Previous edition, Chapter 19 AACSB: Analytical Skills

15) According to the 2007/2008 United Nations Human Development Report, the Gini ratio for Portugal is 38.5, Norway is 25.8, the United States is 40.8, and Russia is 39.9. Which of these four countries has the highest level of income equality? A) Portugal B) United States C) Norway D) Russia Answer: C Topic: Gini Ratio Skill: Conceptual Status: Old AACSB: Reflective Thinking

16) According to the 2007/2008 United Nations Human Development Report, the Gini ratio for Portugal is 38.5, Norway is 25.8, the United States is 40.8, and Russia is 39.9. Which of these four countries has the lowest level of income equality? A) Portugal B) United States C) Norway D) Russia Answer: B Topic: Gini Ratio Skill: Conceptual Status: Old AACSB: Reflective Thinking

6 Essay Questions 1) In the United States, do the poorest 20 percent of the households receive more or less than 5 percent of total income? Answer: The poorest 20 percent of households receive less than 5 percent of total income. Topic: Economic Inequality in the United States Skill: Recognition Status: Old AACSB: Reflective Thinking

2) What is a Lorenz curve and what does it show? Answer: A Lorenz curve graphs the cumulative percentage of income (or wealth) against the cumulative percentages of households. The curve shows how equally income (or wealth) is distributed across households. Topic: Lorenz Curve Skill: Recognition Status: Old AACSB: Reflective Thinking

3) "If the distribution of income was equal, the Lorenz curve would be a straight, 45° line." Is the previous statement correct or incorrect? Answer: The statement is correct. Topic: Lorenz Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking

4) What do the Lorenz curves for wealth and income in the United States look like? Which is closer to the line of equality? Answer: Both the Lorenz curve for wealth and the Lorenz curve for income are bowed outward from the line of equality because neither wealth nor income is equally distributed. The Lorenz curve for income is closer to line of equality than the Lorenz curve for wealth because income, while unequally distributed, is more equally distributed than is wealth. Topic: Lorenz Curve Skill: Conceptual Status: Old AACSB: Communication 88 Copyright © 2014 Pearson Education, Inc.

5) What is the difference between wealth and income? Answer: Wealth is a stock of assets, that is, wealth is what is owned at a point in time. Income is a flow of earnings over time. Thus a person's wealth can be measured on, say December 31, 2013 whereas a person's income is measured over a time period, say during 2013. Topic: Wealth Versus Income Skill: Recognition Status: Revised AACSB: Reflective Thinking

6) Which is distributed more equally: income or wealth? Answer: The income distribution is much more equal than the wealth distribution. The poorest 50 percent of wealth holders own only 1.1 percent of wealth and the richest 10 percent own about 75 percent of wealth. For income, the poorest 40 percent of households receive about 12 percent of total income and the richest 20 percent of households receive about 50 percent of total income. Topic: Economic Inequality in the United States Skill: Recognition Status: Revised AACSB: Reflective Thinking

7) What is the main reason that the distribution of measured wealth is more unequal than the distribution of income? Answer: The distribution of income statistics include the returns from human capital, but the distribution of measured wealth statistics do not include the stock of human capital. Topic: Measured Wealth Skill: Conceptual Status: Old AACSB: Reflective Thinking

8) How do income and wealth change over a person's lifetime? How does this affect the distribution of income at a point in time? Answer: On the average, incomes start out low, increase as the household's workers gain experience and other human capital, peak when the household's workers reach retirement age, and then fall after retirement. On the average, wealth also starts out low, increases as income increases and workers save for retirement, peaks at the point of retirement, then falls after retirement. Because there are always people at all stages of life, the distribution of income at a point in time overstates the actual inequality. The discrepancy would be greater for countries with large percentages of young and retired workers. Topic: Wealth Versus Income Skill: Conceptual Status: Old AACSB: Communication

9) What effect does the age of a household have when estimating the degree of inequality in income among households? Answer: Household income changes over the life cycle of the household, which leads to an overestimation of inequality among households. At young ages, income is relatively low, peaks in middle ages, and then falls after retirement. The standard measures of income distribution do not account for age differences among households. They, therefore, overestimate the inequality because the distribution of lifetime income is more equal than the distribution of annual income. Topic: Distribution of Lifetime Income Skill: Conceptual Status: Old AACSB: Reflective Thinking

10) What is the Gini ratio? Answer: The Gini ratio is based on the Lorenz curve and equals the ratio of the area between the line of equality and the Lorenz curve to the entire area beneath the line of equality. Topic: Gini Ratio Skill: Recognition Status: Old AACSB: Reflective Thinking

11) "Over the past two decades, the distribution of income in the United States has become more equal." Is the previous statement correct or incorrect? Briefly explain your answer. Answer: The statement is incorrect. In recent years, higher income groups have gained relatively more than the lower income groups. The Gini ratio has increased, which means that the share of income going to the richest households has increased and the share of income going to the poorest households has decreased. Topic: Trends in the Distribution of Income Skill: Recognition Status: Old AACSB: Reflective Thinking

12) How has income inequality changed in recent years? What factors account for the changes? Answer: Over the last couple of decades, income inequality has increased. In recent years, higher income groups have gained relatively more than the lower income groups, perhaps because of rapid technological progress. These technological advances have benefited the better educated more than the less educated. Topic: Trends in the Distribution of Income Skill: Recognition Status: Old AACSB: Communication

13) Of age, marital status, family size, education, and race, which is the single biggest factor affecting the household income distribution? Answer: The single most important factor affecting the distribution of income is education, with more highly educated people earning significantly more than less-educated people. Topic: Who Are the Rich and the Poor? Skill: Recognition Status: Old AACSB: Reflective Thinking

14) Is the poverty rate the lowest among Hispanic households, black households, or white households? Answer: The poverty rate is lowest among white households. About 8.5 percent of white households live in poverty whereas about 22 percent of Hispanic and 25 percent of black households live in poverty. Topic: Poverty Skill: Recognition Status: Old AACSB: Reflective Thinking

15) What is "human capital"? How is it important in the determination of a worker's wage rate? Answer: Human capital is the skill, education, and training that a person acquires. The more human capital a person has, the higher the person's productivity and hence the higher the person's value of the marginal product. A higher value of the marginal product increases the demand for the worker and leads to a higher wage rate. Topic: Human Capital Skill: Recognition Status: Old AACSB: Reflective Thinking

16) How does the demand for high-skilled workers compare to the demand for low-skilled workers? Why does this difference exist? Answer: The demand for high-skilled workers exceeds the demand for low-skilled workers because the marginal revenue product of high-skilled workers exceeds the marginal revenue product of low-skilled workers. Topic: Demand for High-Skilled and Low-Skilled Labor Skill: Conceptual Status: Old AACSB: Communication

17) At any wage rate, the quantity of welders willing to work is less than the quantity of tomato pickers. Why? Answer: For the welder the cost of acquiring his or her skill is much higher than the cost incurred by the tomato picker. The cost of learning how to pick fruits and vegetables is so low that the supply of individuals who can do that activity is quite large. Welders must learn their trade on the job and/or through vocational training, which raises the costs of learning this skill and decreases the supply of welders. Topic: Supply of High-Skilled and Low-Skilled Labor Skill: Conceptual Status: Old AACSB: Communication

18) Describe the effect education and training have on outcomes in the labor market. Answer: Education and training affect both the supply and demand sides of the labor market. On the supply side, because education and training takes time and money to acquire, the number of people available for high-skilled work is less than those available for low-skilled work. As a result, the supply curve of high-skilled labor is left of the supply curve of low-skilled labor. On the demand side, education and training increases the productivity of workers, giving them a higher value of marginal product. The higher value of marginal product means that the demand curve for highskilled labor lies right of the demand curve for low-skilled labor. With a decrease in supply and an increase in demand, the wage rate for high-skilled workers is higher than the wage rate for low-skilled workers. The effect on the quantity of labor employed, however, is indeterminate.. Topic: Wage Rates of High-Skilled and Low-Skilled Labor Skill: Conceptual Status: Old AACSB: Communication

19) What factors explain why high-skilled workers are paid more than low-skilled workers? Answer: High-skilled workers have a higher value of marginal product than that of low-skilled workers. This fact causes the demand for high-skilled labor to exceed that of low-skilled labor and is one reason why high-skilled workers' wages are higher than low-skilled workers' wages. In addition, high-skilled workers require compensation for having acquired the skill. Thus, the supply of high-skilled labor is less than the supply of low-skilled labor, which also causes the wages paid high-skilled workers to exceed those paid low-skilled labor. Topic: Wage Rates of High-Skilled and Low-Skilled Labor Skill: Conceptual Status: Old AACSB: Communication

20) Some economists argue that discrimination based on race and sex cannot lead to persistent wage differentials. What is their argument? Answer: In short, wage differentials will lead to price differentials. The price of the output produced by workers suffering discrimination will be less than the price of output produced by favored workers. If the goods are the same, this price differential cannot persist. An increase in the demand for the good produced by the discriminated-against group will raise the demand for their labor and thereby increase their wage. Topic: Discrimination Skill: Conceptual Status: Old AACSB: Communication

21) What factors make inheritances a source of increased economic inequality? Answer: Two factors make inheritances a source of increased economic inequality: debts cannot be bequeathed and assortative mating. The law is that debts cannot be passed on to family members. As a result, only positive inheritances, which can add to a family's wealth increasing future generations' wealth, can be made. Most households receive either no inheritance or else a very small one; however, a few receive enormous inheritances. As a result, wealthy families tend to remain wealthy. In addition, assortative mating, the fact that people tend to marry within their own socioeconomic class, also leads to persisting inequality in wealth. In particular, wealthy people marry wealthy people, so that wealth is not passed to poorer families. As a result, inherited wealth becomes more concentrated in wealthy families. Topic: Bequests Skill: Conceptual Status: Old AACSB: Communication

22) What is meant by the term "assortative mating" and how does it affect the distribution of wealth? Answer: Assortative mating is the tendency for people to marry within their own socioeconomic class. Wealthy people tend to marry other wealthy people; wealth remains concentrated and this fact contributes to the skewed distribution of wealth. Topic: Assortative Mating Skill: Recognition Status: Old AACSB: Reflective Thinking

23) What are the three ways that the government redistributes income in the United States? Briefly discuss each. Answer: The government redistributes income using income taxes, income maintenance programs, and subsidized services. Income taxes redistribute income because they are generally progressive so that higher-income households pay more in income taxes than lower-income households. In addition, poor households receive money from the income tax through the earned income credit. Income maintenance programs are programs such as social security, unemployment compensation, and welfare. These programs tend to give more income to poorer households than richer households. Finally, the government provides subsidized services, such as below-cost health care and below-cost schooling. Topic: Income Redistribution Skill: Recognition Status: Old AACSB: Communication

24) What is the difference between market income and money income? Which is more equally distributed? Answer: Market income is the income the household earns in the market for factors of production, for example, the household's labor income. Money income is market income plus money benefits paid by the government to the household. Money income is distributed more equally than market income. Topic: Market Income and Money Income Skill: Conceptual Status: Old AACSB: Reflective Thinking

25) With respect to income redistribution programs, what is meant by "The Big Tradeoff," and what causes it? Answer: The big tradeoff refers to the tradeoff between equity and efficiency. A dollar collected from a rich person passes through a "leaky bucket" before getting to a poor person. The poor person doesn't receive all of that dollar. The cost of administering the program takes some of that money. More importantly, redistribution creates a disincentive to work, which decreases efficiency. Topic: Big Tradeoff Skill: Recognition Status: Old AACSB: Communication

26) Explain how redistributing income creates a deadweight loss. Answer: When income is redistributed from a richer person to a poorer person, both parties are affected. The richer person, who loses income, will pay a higher tax on earned income. This higher tax decreases the opportunity cost of leisure time (time spent not working) so the person will take more leisure time and work less. For the poorer person who gains income, the income transferred (say, welfare payments) will be reduced when the person earns more income. As a result, the poorer person also has less incentive to work. Because both the richer person and the poorer person have less incentive to work when the government administers income redistribution, there is created a deadweight loss, that is, a decrease in efficiency to society. Topic: Big Tradeoff Skill: Conceptual Status: Old AACSB: Communication

27) A government redistribution of income program is proposed with the aim of making the income distribution the same as the 45° line in a Lorenz curve diagram. What implications does the idea of the "big tradeoff" have for the program? Answer: If the distribution of income was the same as the 45° line in a Lorenz curve diagram, then there would be no income differences across all households; everyone would have the same income. While this proposition might be appealing on an emotional level, the big tradeoff points out a significant drawback with this program and this outcome. The problem with the program arises because to achieve the desired result, the government would need to remove income from people who otherwise would be in the upper end of the income distribution and give the income to people who otherwise would be near the bottom end of the income distribution. This redistribution would drastically reduce the incentives of successful people to create new products, technologies and jobs. It would tell people that education, skill and training, and hard work will not be rewarded. People would rationally assume that there is no relationship between effort and outcome and therefore work effort would decrease sharply. Topic: Big Tradeoff Skill: Conceptual Status: Old AACSB: Communication

7 Numeric and Graphing Questions

Percent of income Alpha 5 10 20 30 35

Household percentage Lowest 20 percent Second 20 percent Third 20 percent Fourth 20 percent Highest 20 percent

Percent of income Beta 3 6 12 24 55

1) The above table shows the distribution of income in two imaginary countries, Alpha and Beta. a) What does the table tell you about the second 20 percent group in each country? b) Calculate the cumulative percentage for both countries. c) Interpret the cumulative percentage for the third 20 percent group in both countries. Answer: a) The second 20 percent group earns 10 percent of the income in country Alpha and 6 percent of the income in country Beta.

Household percentage Lowest 20 percent Second 20 percent Third 20 percent Fourth 20 percent Highest 20 percent

Cumulative percentage of income Alpha 5 15 35 65 100

Cumulative percentage of income Beta 3 9 21 45 100

b) The table above has the cumulative percentages. c) In country Alpha, the poorest 60 percent of households earns 35 percent of income. In country Beta, the poorest 60 percent of households earns 21 percent of income. Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Reflective Thinking

Household percentage Lowest 20 percent Second 20 percent Third 20 percent Fourth 20 percent Highest 20 percent

Percent of income Alpha 5 10 20 30 35

Percent of income Beta 3 6 12 24 55

2) The above table shows the distribution of income in two imaginary countries, Alpha and Beta. a) In the figure above, draw the Lorenz curves for Alpha and Beta. b) Compare the distribution of income in Alpha with that in Beta. Which distribution is more unequal? c) What would be the distribution of income in a country with perfect income equality? Answer:

a) The Lorenz curves are above. b) The distribution of income in Beta is more unequal than the distribution of income in Alpha because the Beta Lorenz curve lies further from the line of equality. c) Each 20 percent group would earn 20 percent of the income, so the Lorenz curve would lie on the line of equality. Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Reflective Thinking

Household percentage Lowest 20 percent Second 20 percent Third 20 percent Fourth 20 percent Highest 20 percent

Average income (dollars) 10,000 26,000 38,000 55,000 140,000 Percent of income ___ ___ ___ ___ ___

Cumulative percentage of income ____ ___ ___ ___ ___

3) The first table above gives the average income received by each 20 percent group of households. Complete the second table. Label the axes above and then plot the Lorenz curve. Answer: Cumulative Percent of Household percentage percentage of income income Lowest 20 percent 3.72 3.72 Second 20 percent 9.67 13.39 Third 20 percent 14.13 27.52 Fourth 20 percent 20.45 47.97 Highest 20 percent 52.04 100.00 98 Copyright © 2014 Pearson Education, Inc.

The completed table and the resulting Lorenz curve are above. Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Reflective Thinking

Household percentage Lowest 20 percent Second 20 percent Third 20 percent Fourth 20 percent Highest 20 percent

Cumulative percentage of income Country A 10 25 45 70 100

Cumulative percentage of income Country B 4 9 18 40 100

4) The table above gives cumulative percent of income received by each 20 percent group of households. Label the axes in the figure above and then plot the Lorenz curves. In which nation is income more equally distributed?

Answer:

The Lorenz curves are above. Income is distributed more equally in Country A. Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Reflective Thinking

5) On a Lorenz curve graph, the area between the line of equality and the Lorenz curve is 2,000, and the entire area beneath the line of equality is 5,000. What does the Gini ratio equal? Answer: The Gini ratio is the ratio of the area between the line of equality and the Lorenz curve to the entire area beneath the line of equality. So the Gini ratio is 2,000/5,0000 = 0.4. Topic: Gini Ratio Skill: Analytical Status: Old AACSB: Reflective Thinking

6) On the Lorenz curve graph, the area between the line of equality and the Lorenz curve is 2,500, and the entire area beneath the line of equality is 5,000. What does the Gini ratio equal? Answer: The Gini ratio is the ratio of the area between the line of equality and the Lorenz curve to the entire area beneath the line of equality. So the Gini ratio is 2,500/5,0000 = 0.5. Topic: Gini Ratio Skill: Analytical Status: Old AACSB: Reflective Thinking

7) If Bianca earns 5 percent on her wealth and that income amounts to $40,000, what is Bianca's wealth? Answer: Bianca's wealth is $800,000. Topic: Comparing Like with Like Skill: Analytical Status: Old AACSB: Reflective Thinking

Human capital Nonhuman capital Total

Sam (dollars) 100,000 200,000 300,000

Janet (dollars) 400,000 10,000 410,000

8) The table shows the distribution of human and non-human capital for two people, Sam and Janet. a) Looking just at tangible assets (non-human capital), by how many times does Janet's wealth exceed Sam's? b) Assume that both human and non-human capital earn a 10 percent annual interest rate. Calculate Sam's and Janet's total income. c) By how many times does Janet's total income exceed Sam's? d) Which comparison results in a more equal distribution? e) Which comparison gives a better indication of each person's economic condition? Answer: a) Janet has 20 times as much wealth as Sam. b) Sam's income is $30,000 and Janet's is $41,000. c) Janet's income is 1.37 times Sam's. d) The comparison of income results in a more equal distribution. e) The comparison of income gives a better indication of each person's economic condition because it includes both human and non-human capital, while the comparison of wealth only includes non-human capital. Topic: Measured Wealth Skill: Analytical Status: Old AACSB: Reflective Thinking

8 True or False 1) Market income is defined as wages, interest, rent, and profit earned in factor markets plus cash payments to households by the government. Answer: FALSE Topic: Market Income Skill: Recognition Status: Old AACSB: Reflective Thinking

2) A Lorenz curve graphs the difference between money income and market income. Answer: FALSE Topic: Lorenz Curve Skill: Recognition Status: Old AACSB: Reflective Thinking

3) An increase in income equality causes the Lorenz curve to become more bowed away from the line of equality. Answer: FALSE Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Reflective Thinking

4) In the United States, income is more equally distributed than measured wealth. Answer: TRUE Topic: Measured Wealth Skill: Recognition Status: Old AACSB: Reflective Thinking

5) In the United States, measured wealth is distributed more unequally than income. Answer: TRUE Topic: Measured Wealth Skill: Recognition Status: Old AACSB: Reflective Thinking

6) The actual income distribution might be more equal than current official figures suggest because current official figures ignore the return on human capital. Answer: FALSE Topic: Measured Wealth Skill: Conceptual Status: Old AACSB: Reflective Thinking

7) The income distribution is a more accurate measure of economic inequality than the wealth distribution because income excludes human capital. Answer: FALSE Topic: Measured Wealth Skill: Conceptual Status: Old AACSB: Reflective Thinking

8) The distribution of wealth is skewed because more families are below the average level of wealth than are above. Answer: TRUE Topic: Distribution of Wealth Skill: Conceptual Status: Old AACSB: Reflective Thinking

9) If income is equally distributed, the Gini ratio is 1. Answer: FALSE Topic: Trends in the Distribution of Income Skill: Recognition Status: Old AACSB: Reflective Thinking 103 Copyright © 2014 Pearson Education, Inc.

10) If income is equally distributed, the Gini ratio is zero. Answer: TRUE Topic: Trends in the Distribution of Income Skill: Recognition Status: Old AACSB: Reflective Thinking

11) If one person has all the income and everyone else has none, the Gini ratio is 1. Answer: TRUE Topic: Trends in the Distribution of Income Skill: Recognition Status: Old AACSB: Reflective Thinking

12) If one person has all the income and everyone else has none, the Gini ratio is zero. Answer: FALSE Topic: Trends in the Distribution of Income Skill: Recognition Status: Old AACSB: Reflective Thinking

13) The data show that an individual's wealth tends to first increase and then to decrease over the person's lifetime. Answer: TRUE Topic: Annual or Lifetime Wealth? Skill: Conceptual Status: Old AACSB: Reflective Thinking

14) The biggest single factor affecting household income is the householder's age. Answer: FALSE Topic: Who Are the Rich and the Poor? Skill: Recognition Status: Old AACSB: Reflective Thinking

15) The demand curve for high-skilled workers lies to the right of the demand curve for low-skilled workers because of the costs associated with obtaining skills. Answer: FALSE Topic: Demand for High-Skilled and Low-Skilled Labor Skill: Conceptual Status: Old AACSB: Reflective Thinking

16) The demand curve for high-skilled workers lies to the right of the demand curve for low-skilled workers because of the higher productivity of high-skilled workers. Answer: TRUE Topic: Demand for High-Skilled and Low-Skilled Labor Skill: Conceptual Status: Old AACSB: Reflective Thinking 104 Copyright © 2014 Pearson Education, Inc.

17) Differences in human capital and discrimination can help explain economic inequality. Answer: TRUE Topic: Demand for High-Skilled and Low-Skilled Labor Skill: Conceptual Status: Old AACSB: Reflective Thinking

18) Wealth inequality persists across generations due, in part, to assortative mating. Answer: TRUE Topic: Assortative Mating Skill: Conceptual Status: Old AACSB: Reflective Thinking

19) A progressive tax is a tax that taxes income so that the average tax rate increases with income. Answer: TRUE Topic: Progressive Tax Skill: Recognition Status: Old AACSB: Reflective Thinking

20) A proportional income tax is a tax that taxes income at a constant rate. Answer: TRUE Topic: Proportional Tax Skill: Recognition Status: Old AACSB: Reflective Thinking

21) A proportional income tax is a tax for which the total amount paid does not increase with income. Answer: FALSE Topic: Proportional Tax Skill: Recognition Status: Old AACSB: Reflective Thinking

22) "The Big Tradeoff" refers to the effect of redistribution on efficiency. Answer: TRUE Topic: Big Tradeoff Skill: Conceptual Status: Old AACSB: Reflective Thinking

9 Extended Problems Income (percent of total) Households United States Italy Lowest 20 percent 3.6 8.7 Second 20 percent 8.9 14.0 Middle 20 percent 14.8 18.1 Next highest 20 percent 23.1 22.9 Highest 20 percent 49.6 36.3 1) The table above shows the income distribution in the United States and Italy in a recent year. a) Draw a Lorenz curve for the United States. According to your graph, what is the percentage of income received by the poorest 30 percent of households? The richest 10 percent? b) On the same graph, draw a Lorenz curve for Italy. According to your graph, what is the percentage of income received by the poorest 30 percent of households? The richest 10 percent? c) Draw the line of equality. How is it related to the Lorenz curve? d) Is income distributed more equally in the United States or in Italy? Which country's Gini ratio is closer to zero? Explain your answers. Answer:

a) See the figure above. The percentage of income received by the poorest 30 percent households is about 8 percent. The percentage of income received by the richest 10 percent households is about 27 percent. b) See the figure above. The percentage of income received by the poorest 30 percent households is about 16 percent. The percentage of income received by the richest 10 percent households is about 19 percent. c) The line of equality is in the figure above. If income is equally distributed, the Lorenz curve is the same as the line of equality. d) The closer the Lorenz curve is to the line of equality, the more equal is the income distribution. Italy's Lorenz curve is closer to the line of equality, so income distributed more equally in Italy than in the 106 Copyright © 2014 Pearson Education, Inc.

United States. The Gini ratio equals the ratio of the area between the line of equality and the Lorenz curve to the entire area beneath the line of equality. If income is equally distributed, the Gini ratio is zero. Because income in Italy is distributed more equally than in the United States, Italy's Gini ratio is closer to zero than the U.S. Gini ratio. Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

Income (percent of total) Households United States Canada Lowest 20 percent 3.6 7.4 Second 20 percent 8.9 13.2 Middle 20 percent 14.8 18.1 Next highest 20 percent 23.1 24.9 Highest 20 percent 49.6 36.4 2) The table shows income distributions in the United States and Canada in a recent year. a) Draw a Lorenz curve for the United States. According to your graph, what is the percentage of income received by the poorest 30 percent of households? The richest 10 percent? b) On the same graph, draw a Lorenz curve for Canada. According to your graph, what is the percentage of income received by the poorest 30 percent of households? The richest 10 percent? c) Draw the line of equality. How is it related to the Lorenz curve? d) Is income distributed more equally in the United States or in Canada? Which country's Gini ratio is closer to zero? Explain your answers. Answer:

a) See the figure above. The percentage of income received by the poorest 30 percent households is about 8 percent. The percentage of income received by the richest 10 percent households is about 27 percent. b) See the figure above. The percentage of income received by the poorest 30 percent households is about 14 percent. The percentage of income received by the richest 10 percent households is about 19 percent. c) The line of equality is in the figure above. If income is equally distributed, the Lorenz curve is the same as the line of equality. d) The closer the Lorenz curve is to the line of equality, the more equal is the income distribution. Canada's Lorenz curve is closer to the line of equality, so income distributed more equally in Canada than in the United States. The Gini ratio equals the ratio of the area between the line of equality and the Lorenz curve to the entire area beneath the line of equality. If income is equally distributed, the Gini ratio is zero. Because income in Canada is distributed more equally than in the United States, Canada's Gini ratio is 108 Copyright © 2014 Pearson Education, Inc.

closer to zero than the U.S. Gini ratio. Topic: Lorenz Curve Skill: Analytical Status: Old AACSB: Analytical Skills

3) The figure above shows the demand for and supply of low-skilled labor. High-skilled workers have twice the marginal product of low-skilled workers. The cost of acquiring the skill adds $5 an hour to the wage that must be offered to attract high-skilled labor at each employment level. a) What is the equilibrium wage rate of low-skilled labor and the equilibrium quantity of low-skilled labor employed? b) Draw and explain the demand curve for high-skilled labor. c) Draw and explain the supply curve of high-skilled labor. d) What is the equilibrium wage rate of high-skilled labor and the equilibrium quantity of high-skilled labor employed? Answer:

a) The figure above shows the supply of labor curve for low-skilled workers as SL and the demand curve for low-skilled workers as DL. The equilibrium wage rate for low-skilled workers is $5 and the quantity of labor employed is 5,000 hours per day. 110 Copyright © 2014 Pearson Education, Inc.

b) The figure above shows the demand curve, DH, for high-skilled workers. The demand curve for high-skilled labor is the value of marginal product, VMP, of high-skilled labor. Because the marginal product of high-skilled labor, MP, is twice the marginal product of low-skilled labor and because the VMP is the MP multiplied by the price, because the MP of high-skilled workers is twice that of lowskilled workers, the VMP of high-skilled workers is twice the VMP of low-skilled labor. So at each quantity of labor the wage rate for high-skilled workers is twice that of low-skilled workers. c) The figure above shows the supply curve, SH, for high-skilled workers. The position of the supply curve of high-skilled labor reflects the cost of acquiring human capital. This cost is the vertical distance between the supply curve of low-skilled labor and the supply curve of high-skilled labor, $5 per hour. d) The figure above shows that the equilibrium wage rate for high-skilled workers is $10 and the equilibrium quantity of high-skilled labor employed is 5,000 hours per day. Topic: High-Skilled and Low-Skilled Labor Markets Skill: Analytical Status: Old AACSB: Analytical Skills

Economics, 11e, Global Edition (Parkin) Chapter 20 Uncertainty and Information 1 Decisions in the Face of Uncertainty 1) Expected wealth is a weighted average in which the weights are A) average utilities. B) marginal utilities. C) total utilities. D) probabilities. Answer: D Topic: Expected Wealth Skill: Definition Status: Old AACSB: Analytical Skills

2) For a risk averse person, an increase in wealth brings ________ total utility of wealth and ________ marginal utility of wealth. A) higher; higher B) higher; lower C) lower; higher D) lower; lower Answer: B Topic: Utility of Wealth Skill: Conceptual Status: Old AACSB: Analytical Skills

3) A risk averse person's utility of wealth curve has a A) positive slope and becomes steeper to the right. B) positive slope and becomes flatter to the right. C) negative slope and becomes steeper to the right. D) negative slope and becomes flatter to the right. Answer: B Topic: Utility of Wealth Skill: Conceptual Status: Old AACSB: Analytical Skills

4) For a risk averse person, the marginal utility of wealth A) decreases as wealth increases. B) increases as wealth increases. C) decreases as wealth decreases. D) remains constant as wealth increases. Answer: A Topic: Utility of Wealth Skill: Definition Status: Old AACSB: Analytical Skills 1 Copyright © 2014 Pearson Education, Inc.

5) The assumption that the marginal utility of wealth diminishes implies that A) total utility falls when wealth increases. B) the marginal utility of wealth is negative. C) total utility increases with wealth and each additional unit of wealth increases total utility by a smaller amount. D) total utility increases with wealth and each additional unit of wealth increases total utility by the same amount. Answer: C Topic: Utility of Wealth Skill: Conceptual Status: Old AACSB: Analytical Skills

6) Assuming that the marginal utility of wealth diminishes implies that A) you have more total utility with $100 than with $1,000. B) you have more total utility with $1,000 than with $1,001. C) an additional dollar increases your total utility more if you only have $100 than if you have $1,000. D) an additional dollar does not increase your total utility regardless of your wealth. Answer: C Topic: Utility of Wealth Skill: Conceptual Status: Old AACSB: Analytical Skills

7) If Ringo is risk averse, at a wealth of $200,000 his utility of wealth curve has a ________ slope and his marginal utility of wealth is ________ than at a wealth of $100,000. A) negative; smaller B) negative; larger C) positive; smaller D) positive; larger Answer: C Topic: Utility of Wealth Skill: Analytical Status: Old AACSB: Analytical Skills

8) An increase in Meta's wealth from $3,000 to $6,000 raises her utility from 80 units to 100 units. If she is risk averse, with a wealth of $9,000 her utility might be A) 99 units. B) 114 units. C) 120 units. D) 126 units. Answer: B Topic: Utility of Wealth Skill: Analytical Status: Old AACSB: Analytical Skills

9) An increase in Todd's wealth from $2 million to $4 million raises his utility from 400 units to 500 units. If he has a utility of wealth curve with the typical shape showing risk aversion, then with a wealth of $6 million his utility might be A) 500 units. B) 570 units. C) 600 units. D) 620 units. Answer: B Topic: Utility of Wealth Skill: Analytical Status: Old AACSB: Analytical Skills

10) Diminishing marginal utility of wealth leads to risk aversion because at a given level of wealth a dollar gained A) is worth more in additional utility than a dollar lost. B) is worth less in additional utility than a dollar lost. C) is worth as much in additional utility as a dollar lost. D) does not add to total utility. Answer: B Topic: Utility of Wealth Skill: Conceptual Status: Old AACSB: Analytical Skills

11) George is considering buying shares of Intel. If the company does well, he will gain $100, but if the company does poorly, he will lose $100. George is risk averse, so for George the magnitude of the pain of losing $100 will ________ the pleasure of gaining $100. A) equal B) be less than C) be greater than D) None of the above answers are correct because we cannot compare the pain of losing to the pleasure of gaining. Answer: C Topic: Utility of Wealth Skill: Conceptual Status: New AACSB: Analytical Skills

12) For a risk-averse individual, as wealth increases, total utility ________ and marginal utility ________. A) increases; increases B) increases ; decreases C) decreases; increases D) decreases; decreases Answer: B Topic: Risk Aversion Skill: Conceptual Status: Old AACSB: Analytical Skills

13) For a risk-averse individual, as wealth increases, total utility A) increases at a decreasing rate. B) increases at a constant rate. C) increases at an increasing rate. D) is constant. Answer: A Topic: Risk Aversion Skill: Conceptual Status: Old AACSB: Analytical Skills

14) The slope of the utility of wealth curve of a risk-averse person A) increases as wealth increases. B) decreases as wealth increases. C) is constant. D) is negative. Answer: B Topic: Risk Aversion Skill: Conceptual Status: Old AACSB: Analytical Skills

15) A risk-averse person's marginal utility of wealth A) increases as wealth increases. B) decreases as wealth increases. C) is constant. D) is negative. Answer: B Topic: Risk Aversion Skill: Conceptual Status: Old AACSB: Analytical Skills

16) Expected utility is a weighted average in which the weights are A) average incomes. B) marginal incomes. C) total incomes. D) probabilities. Answer: D Topic: Expected Utility Skill: Definition Status: Old AACSB: Analytical Skills

17) Pedro's utility of wealth is 6 units for $10,000 and 10 units for $20,000. A friend gave him a lottery ticket for his birthday. The ticket won, giving him either $10,000 with probability 0.5 or $20,000 with probability 0.5. Pedro's expected utility from the lottery ticket is A) between 6 and 8 units. B) equal to 8 units. C) between 8 and 10 units. D) equal to 10 units. Answer: B Topic: Expected Utility and Risk Skill: Analytical Status: Old AACSB: Analytical Skills

18) You took a summer job as a salesperson in a shoe store with the knowledge that you will either make $2,000 or $3,500 with probabilities 0.4 and 0.6 respectively. What is your expected income for the summer job? A) $2,000 B) $3,000 C) $5,000 D) $2,900 Answer: D Topic: Expected Income Skill: Analytical Status: Old AACSB: Analytical Skills

19) If an individual has a 0.3 probability of receiving $10 and a 0.7 probability of receiving $20, the expected income is A) $20. B) $7. C) $14. D) $17. Answer: D Topic: Expected Income Skill: Analytical Status: Old AACSB: Analytical Skills

20) Jason is a Web page designer. He estimates that this summer, he has a 0.6 probability of making $10,000 and a 0.4 probability of making only $2,000. What is Jason's expected income this summer? A) $12,000 B) $6,800 C) $6,000 D) $10,000 Answer: B Topic: Expected Income Skill: Analytical Status: Old AACSB: Analytical Skills

21) Christy is a telemarketer. She estimates that this summer, she has a 0.2 probability of earning $10,000, a 0.5 probability of earning $5,000, and a 0.3 probability of earning only $1,000. What is Christy's expected income? A) $7,256 B) $5,333 C) $4,800 D) $4,000 Answer: C Topic: Expected Income Skill: Analytical Status: Old AACSB: Analytical Skills

22) Dana wants to try working as an independent contractor this summer. She has a 50 percent chance that she will make $10,000 and 50 percent chance that she will make nothing. What's Dana's expected income from taking this job? A) $10,000 B) $7,000 C) $5,000 D) zero Answer: C Topic: Expected Income Skill: Analytical Status: Old AACSB: Analytical Skills

23) Adriana wants to try working as an independent contractor this summer. She has a 50 percent chance that she will make $9,000 and 50 percent chance that she will make nothing. What's Adriana's expected income? A) $4,000 B) $4,500 C) $2,000 D) $3,000 Answer: B Topic: Expected Income Skill: Analytical Status: Old AACSB: Analytical Skills

24) Joe is contemplating a job where, with probability 0.6, he will make $100,000 and with probability 0.4 he will make $30,000. What is Joe's expected income from taking the job? A) $12,000 B) $60,000 C) $72,000 D) $90,000 Answer: C Topic: Expected Income Skill: Analytical Status: Old AACSB: Analytical Skills 6 Copyright © 2014 Pearson Education, Inc.

25) You took a job as a salesperson in an insurance company with the knowledge that you have 0.5 chance of making $2,000 a month or $3,000 a month. How much will you make each month? A) definitely $2,500 B) definitely $2,000 C) definitely $3,000 D) either $2,000 or $3,000 Answer: D Topic: Expected Income Skill: Analytical Status: Old AACSB: Analytical Skills

26) Hostess Brands is selling off its assets after liquidation. A potential buyer for the Twinkies brand has found that the total revenue will be $3 billion a year if the brand is managed well and $1 billion a year if the brand is managed poorly. There is .6 (or 60 percent) chance of managing the brand well and a .4 (or 40 percent) chance of managing the brand poorly. What is the expected total revenue? A) $0.4 billion B) $1.2 billion C) $1.8 billion D) $2.2 billion Answer: D Topic: Expected Wealth Skill: Analytical Status: New AACSB: Analytical Skills

Income (dollars) 0 100 200 300 400 500 600

Total utility 0 100 150 175 190 198 200

27) James has a utility of wealth schedule in the above table. He is offered a job selling video games at Games Galore. James' compensation depends on how much he sells. In a poor sales period, a salesperson makes $100 per month. In a good sales period, a salesperson makes $600 per month. James is told by the manager that, in any given month, there is a 25 percent chance of a poor sales period and a 75 percent chance of a good sales period. What is James' expected income from taking this job? A) $100 B) $350 C) $475 D) $600 Answer: C Topic: Expected Income Skill: Analytical Status: Old AACSB: Analytical Skills

28) James has a utility of wealth schedule in the above table. He is offered a job selling video games at Games Galore. James' compensation depends on how much he sells. In a poor sales period, a salesperson makes $100 per month. In a good sales period, a salesperson makes $600 per month. James is told by the manager that, in any given month, there is a 25 percent chance of a poor sales period and a 75 percent chance of a good sales period. What is James' expected utility from taking this job? A) 100 B) 150 C) 175 D) 200 Answer: C Topic: Expected Utility Skill: Analytical Status: Old AACSB: Analytical Skills

29) Nancy's utility of wealth curve is given in the above figure. Option A gives Nancy $100 for sure. Option B gives Nancy $50 half the time and $150 half the time. Nancy's expected utility of option A A) is greater than the expected utility of option B. B) is the same as the expected utility of option B. C) is less than the expected utility of option B. D) could be either greater or less than the expected utility of option B. Answer: A Topic: Expected Utility Skill: Analytical Status: Old AACSB: Analytical Skills

30) Nancy's utility of wealth curve is given in the above figure. She is faced with a risky proposition which yields an income of $50 one-third of the time, $100 one-third of the time, and $150 one-third of the time. Her expected utility is A) 100. B) 140. C) 150. D) 420. Answer: B Topic: Expected Utility Skill: Analytical Status: Old AACSB: Analytical Skills

31) Dana's utility of wealth is 65 units at $3,000, 80 units at $5,000, and 95 units at $9,000. Starting from zero wealth, he must choose between options A and B. Option A gives him $5,000 for sure. Option B gives him $3,000 with probability 0.5 or $9,000 with probability 0.5. Dana will A) choose option A. B) choose option B. C) be indifferent between option A and option B because they have the same risk. D) be indifferent between option A and option B because they have the same expected utility. Answer: D Topic: Choice Under Uncertainty Skill: Analytical Status: Old AACSB: Analytical Skills

32) Jessica must choose option A or option B. Option A gives her $10,000 for sure. Option B gives her $5,000 if a fair coin toss shows heads and $15,000 if it shows tails. If Jessica is risk averse her utility of wealth curve becomes A) flatter as her wealth increases and she will choose option A. B) flatter as her wealth increases and she will choose option B. C) steeper as her wealth increases and she will choose option A. D) steeper as her wealth increases and she will choose option B. Answer: A Topic: Choice Under Uncertainty Skill: Analytical Status: Old AACSB: Analytical Skills

33) Pablo must choose among options A, B, and C. Option A gives him $10,000 for sure. Option B gives him $4,000 with probability 0.5 or $16,000 with probability 0.5. Option C gives him $8,000 with probability 0.5 or $12,000 with probability 0.5. If he receives diminishing marginal utility from wealth, Pablo will A) choose option A. B) choose option B. C) choose option C. D) be indifferent among options A, B, and C. Answer: A Topic: Choice Under Uncertainty Skill: Analytical Status: Old AACSB: Analytical Skills

34) Nick has two job offers, one as a financial planner and one as an economist for a regional bank. The income that Nick would expect to earn as a financial planner depends how effective he is in getting clients. He estimates that he would receive either $80,000 and a utility of 75, with a probability of .50, or he would earn $30,000 and a utility of 35, with a probability of .50. The economist job would pay $45,000 per year and has a utility of 55. The expected income as a financial planner is ________ and as an economist is ________. A) $60,000; $45,000 B) 55; 55 C) $80,000 and $30,000; $45,000 D) $55,000; $45,000 Answer: D Topic: Expected Income Skill: Analytical Status: Old AACSB: Analytical Skills

35) Nick has two job offers, one as a financial planner and one as an economist for a regional bank. The income that Nick would expect to earn as a financial planner depends how effective he is in getting clients. He estimates that he would receive either $80,000 and a utility of 75, with a probability of .50, or he would earn $30,000 and a utility of 35, with a probability of .50. The economist job would pay $45,000 per year and has a utility of 55. To maximize his expected utility, which job should Nick take? A) Nick is indifferent between the two jobs. B) Nick is better off if he takes the economist job. C) Nick is better off if he takes the job of financial planner. D) Nick should look around for another job. Answer: A Topic: Choice Under Uncertainty Skill: Analytical Status: Old AACSB: Analytical Skills

Wealth (thousands of dollars) 0 10 20 30 40

Total utility 0 50 90 120 140

36) Gunnar can work as a campus security officer at a guaranteed salary of $20,000 per year or as a real estate agent. If Gunnar works as a real estate agent, there is a 50 percent chance that he will earn $10,000 per year and a 50 percent chance that he will earn $30,000 per year. Based on the table above, Gunnar's expected utility if he works as a real estate agent is A) 170. B) 85. C) 20. D) 90. Answer: B Topic: Expected Income Skill: Analytical Status: Old AACSB: Analytical Skills

37) Gunnar can work as a campus security officer at a guaranteed salary of $20,000 per year or as a real estate agent. If Gunnar works as a real estate agent, there is a 50 percent chance that he will earn $10,000 per year and a 50 percent chance that he will earn $30,000 per year. Based on the above table, to maximize his expected utility, Gunnar will A) choose to work as a campus security officer. B) choose to work as a real estate agent. C) be indifferent between being a campus security officer and being a real estate agent. D) It is impossible to tell which job he would prefer without additional information. Answer: A Topic: Choice Under Uncertainty Skill: Analytical Status: Old AACSB: Analytical Skills

Wealth (dollars) 5,000 10,000 15,000 20,000

Total utility 130 170 190 200

38) Andrew's utility of wealth schedule is given in the above table. The table indicates that his marginal utility of wealth ________ as his wealth increases. A) diminishes B) is constant C) increases D) increases first and then diminishes Answer: A Topic: Marginal Utility of Wealth Skill: Analytical Status: Old AACSB: Analytical Skills

39) Andrew's utility of wealth schedule is given in the above table. Andrew is offered a job as a cook which pays $10,000. He is also offered a job as a server which will pay $5,000 if tips are poor and $15,000 if tips are good. There is a 50 percent chance that tips will be poor and a 50 percent chance that tips will be good. The expected income from the job as a cook is ________ and from the job as a server is ________. A) $10,000; $15,000 B) $5,000; $5,000 C) $10,000; $5,000 D) $10,000; $10,000 Answer: D Topic: Expected Income Skill: Analytical Status: Old AACSB: Analytical Skills

40) Andrew's utility of wealth schedule is depicted in the above table. Andrew is offered a job as a cook which pays $10,000. He is also offered a job as a server which will pay $5,000 if tips are poor and $15,000 if tips are good. There is a 50 percent chance that tips will be poor and a 50 percent chance that tips will be good. Given the nature of Andrew's job offers and his utility of wealth schedule, Andrew's expected utility from working as a cook is ________ and from working as a server is ________. A) 170 units; 170 units B) 130 units; 190 units C) 170 units; 160 units D) 200 units; 190 units Answer: C Topic: Expected Utility Skill: Analytical Status: Old AACSB: Analytical Skills

41) Andrew's utility of wealth schedule is depicted in the above table. Andrew is offered a job as a cook which pays $10,000. He is also offered a job as a server which will pay $5,000 if tips are poor and $15,000 if tips are good. There is a 50 percent chance that tips will be poor and a 50 percent chance that tips will be good. Andrew will accept the offer that A) maximizes his expected income. B) maximizes his expected utility. C) maximizes both his expected income and expected utility. D) has the highest weighted average of income and utility. Answer: B Topic: Choice Under Uncertainty Skill: Analytical Status: Old AACSB: Analytical Skills

42) Andrew's utility of wealth schedule is depicted in the above table. Andrew is offered a job as a cook which pays $10,000. He is also offered a job as a server which will pay $5,000 if tips are poor and $15,000 if tips are good. There is a 50 percent chance that tips will be poor and a 50 percent chance that tips will be good. Given the nature of Andrew's job offers and his utility of wealth schedule, Andrew will A) accept the offer to work as a server. B) accept the offer to work as a cook. C) be indifferent between working as a cook or a server. D) be unable to reach a decision about which offer to accept. Answer: B Topic: Choice Under Uncertainty Skill: Analytical Status: Old AACSB: Analytical Skills

43) Lucy works as a college instructor for a fixed annual salary of $30,000. She is considering quitting this job and becoming a real estate broker. Lucy believes that as a realtor she has a 40 percent chance to make $60,000 per year and a 60 percent chance to make $25,000 a year. The figure above shows Lucy's total utility of wealth curve (U). Lucy's expected annual income from real estate brokerage is A) $39,000 B) $42,500 C) $33,000 D) $47,500 Answer: A Topic: Expected Income Skill: Analytical Status: Old AACSB: Analytical Skills

44) Lucy works as a college instructor for a fixed annual salary of $30,000. She is considering quitting this job and becoming a real estate broker. Lucy believes that as a realtor she has a 40 percent chance to make $60,000 per year and a 60 percent chance to make $25,000 a year. The figure above shows Lucy's total utility of wealth curve (U). Lucy's expected utility from real estate brokerage is A) 117 B) 103 C) 110 D) 93 Answer: B Topic: Expected Utility Skill: Analytical Status: Old AACSB: Analytical Skills

45) Lucy works as a college instructor for a fixed annual salary of $30,000. She is considering quitting this job and becoming a real estate broker. Lucy believes that as a realtor she has a 40 percent chance to make $60,000 per year and a 60 percent chance to make $25,000 a year. The figure above shows Lucy's total utility of wealth curve (U). Lucy will decide to ________ and she will definitely make this choice because it gives her a greater expected ________. A) keep her current job; income B) keep her current job; utility C) quit her job and become a realtor; utility D) quit her job and become a realtor; income Answer: C Topic: Choice Under Uncertainty Skill: Analytical Status: Old AACSB: Analytical Skills

46) Lucy works as a college instructor for a fixed annual salary of $30,000. She is considering quitting this job and becoming a real estate broker. Lucy believes that as a realtor she has a 40 percent chance to make $60,000 per year and a 60 percent chance to make $25,000 a year. The figure above shows Lucy's total utility of wealth curve (U). Of the following, what minimum salary raise (if any) should Lucy's current employer offer her to persuade her to stay? A) No raise is necessary as Lucy is better off with her current salary than with her expected income as a realtor. B) $8,000 C) $5,000 D) $3,000 Answer: D Topic: Choice Under Uncertainty Skill: Analytical Status: Old AACSB: Analytical Skills

47) Marylou, whose utility of wealth curve is shown in the figure above, faces two options. Option A yields her $200 for sure. Option B has a 0.4 probability of yielding $100 and a 0.6 probability of yielding $300. Marylou A) picks option A. B) picks option B. C) is indifferent between option A and option B. D) needs more information to make a choice. Answer: A Topic: Choice Under Uncertainty Skill: Analytical Status: Old AACSB: Analytical Skills

48) Marylou, whose utility of wealth curve is shown in the figure above, faces two options. Option A yields $200 for sure. Option B has a 0.3 probability of yielding $100, and a 0.7 probability of yielding $300. Marylou, who is A) picks option A. B) picks option B. C) is indifferent between option A and option B. D) needs more information to make a choice. Answer: B Topic: Choice Under Uncertainty Skill: Analytical Status: Old AACSB: Analytical Skills

49) Stan, who is risk averse, can invest in project A or project B. Project A returns $3,000 with probability 1/2 and $9,000 with probability 1/2. Project B returns nothing with probability 1/2 and $12,000 with probability 1/2. For Stan, project A has A) greater expected wealth and greater expected utility than project B. B) lower expected wealth and lower expected utility than project B. C) the same expected wealth and the same expected utility as project B. D) the same expected wealth but higher expected utility than project B. Answer: D Topic: Choice Under Uncertainty Skill: Analytical Status: Old AACSB: Analytical Skills

50) Mel's utility of wealth is 130 units at $3,000, 160 units at $5,000, and 190 units at $9,000. Starting from zero wealth, he must choose between options A and B. Option A gives him $5,000 for sure. Option B gives him $3,000 with probability 0.4 or $9,000 with probability 0.6. Mel A) will choose A. B) will choose B. C) is indifferent between A and B. D) needs more information to make a choice. Answer: B Topic: Choice Under Uncertainty Skill: Analytical Status: Old AACSB: Analytical Skills

51) Rhonda's utility of wealth is 65 units at $5,000, 80 units at $7,000, and 95 units at $10,000. Starting from zero wealth, she must choose between options A and B. Option A gives her $7,000 for sure. Option B gives her $5,000 with probability 0.6 or $10,000 with probability 0.4. Rhonda A) will choose A. B) will choose B. C) is indifferent between A and B. D) needs more information to make a choice. Answer: A Topic: Choice Under Uncertainty Skill: Analytical Status: Old AACSB: Analytical Skills

52) The cost of risk is the amount by which expected wealth must increase to give the same ________ as a no-risk situation. A) marginal wealth B) marginal utility C) expected utility D) expected wealth Answer: C Topic: Cost of Risk Skill: Analytical Status: Old AACSB: Analytical Skills 18 Copyright © 2014 Pearson Education, Inc.

53) If Shaniq is a risk averse, then A) her cost of risk exceeds $0. B) she has diminishing marginal utility of wealth. C) she is willing to buy insurance if the cost of insurance is low enough. D) all of the above Answer: D Topic: Cost of Risk Skill: Analytical Status: Old AACSB: Analytical Skills

54) If Pearl is a risk averse, then A) expected utility has nothing to do with her choices. B) she does not have diminishing marginal utility of wealth. C) she will not buy insurance. D) risk is costly to her. Answer: D Topic: Cost of Risk Skill: Analytical Status: Old AACSB: Analytical Skills

55) Option A provides $9,000 with probability 50 percent or $11,000 with probability 50 percent. Option B provides $8,000 with probability 50 percent or $12,000 with probability 50 percent. For most people the cost of risk associated with B is A) less than that associated with A. B) the same as that associated with A. C) exactly twice that associated with A. D) more than twice that associated with A. Answer: D Topic: Cost of Risk Skill: Analytical Status: Old AACSB: Analytical Skills

56) Kedran is indifferent between option A, which gives her $10,000 for sure, and option B, which gives her $5,000 with probability 0.4 or $15,000 with probability 0.6. Kedran's cost of risk for option B is A) zero. B) $1,000. C) $5,000. D) $10,000. Answer: B Topic: Cost of Risk Skill: Analytical Status: Old AACSB: Analytical Skills

57) Nicole is indifferent between option A, which gives her $20,000 for sure, and option B, which gives her $10,000 with probability 0.5 or $32,000 with probability 0.5. Nicole's cost of risk for option B is A) zero. B) $1,000. C) $2,000. D) $20,000. Answer: B Topic: Cost of Risk Skill: Analytical Status: Old AACSB: Analytical Skills

58) Goldie is indifferent between option A, which gives her $9,000 for sure, and option B, which gives her $3,000 with probability 1/3 or $18,000 with probability 2/3. Goldie's cost of risk for option B is A) zero. B) $1,000. C) $3,000. D) $4,000. Answer: D Topic: Cost of Risk Skill: Analytical Status: Old AACSB: Analytical Skills

Wealth (dollars) 0 100 200 300 400 500 600 700

Jimmy's total utility (units) 0 200 300 350 375 387 393 396

59) Of the choices given below, Jimmy, whose utility of wealth schedule is given above, prefers A) option A: $300 with certainty. B) option B: 50 percent chance of $200 and 50 percent chance of $400. C) option C: 50 percent chance of $200 and 50 percent chance of $700. D) option D: 90 percent chance of $400 and 10 percent chance of $0. Answer: A Topic: Choice Under Uncertainty Skill: Analytical Status: Old AACSB: Analytical Skills

60) Jimmy's utility of wealth schedule is given in the table above. Jimmy has a job with a one-third chance of earning $200 and a two-thirds chance of earnings $400. Jimmy's cost of risk is A) $0. B) $16.67. C) $33.33. D) Jimmy's cost of risk cannot be determined without more information. Answer: C Topic: Cost of Risk Skill: Analytical Status: Old AACSB: Analytical Skills

Wealth (dollars) 0 5,000 10,000 15,000 20,000

Total utility 0 90 140 180 190

61) George is considering investing in a frozen yogurt store. If the store does well he will make $20,0000, but if the store does poorly he will make only $10,000. There is a 50 percent chance of each outcome. His utility of wealth schedule is in the above table. The expected utility of this investment is A) 115 B) 140 C) 165 D) 180 Answer: C Topic: Expected Utility Skill: Analytical Status: New AACSB: Analytical Skills

62) Based on the table and information in the previous question, which of the following is true? A) George prefers to make $15,000 with certainty than make the investment. B) George prefers making the investment than to make $15,000 with certainty. C) George is indifferent between making $15,000 with certainty and making the investment. D) As the investment has risk George should not make it under any circumstances. Answer: A Topic: Expected Utility Skill: Analytical Status: New AACSB: Analytical Skills

Income (dollars) 0 100 200 300 400 500 600

Total utility 0 100 150 175 190 198 200

63) James has a utility of wealth schedule in the above table. He is offered a job selling video games at Games Galore. James' compensation depends on how much he sells. In a poor sales period, a salesperson makes $100 per month. In a good sales period, a salesperson makes $600 per month. James is told by the manager that, in any given month, there is a 25 percent chance of a poor sales period and a 75 percent chance of a good sales period. Suppose that one of James' professors offers him the opportunity to be a research assistant for a fixed and guaranteed amount each month. What amount must James' professor pay in order to make James indifferent between being a research assistant and working at Games Galore? A) $300 per month B) $350 per month C) $475 per month D) $600 per month Answer: A Topic: Choice Under Uncertainty Skill: Analytical Status: Old AACSB: Analytical Skills

64) James has a utility of wealth schedule in the above table. He is offered a job selling video games at Games Galore. James' compensation depends on how much he sells. In a poor sales period, a salesperson makes $100 per month. In a good sales period, a salesperson makes $600 per month. James is told by the manager that, in any given month, there is a 25 percent chance of a poor sales period and a 75 percent chance of a good sales period. Suppose that one of James' professors offers him the opportunity to be a research assistant for a fixed and guaranteed amount each month. Comparing the two opportunities, working at Games Galore versus being a research assistant, what is James' cost of risk? A) $125 per month B) $175 per month C) $375 per month D) $500 per month Answer: B Topic: Cost of Risk Skill: Analytical Status: Old AACSB: Analytical Skills

65) In the figure above, Lourdita faces a 0.5 probability of receiving $3,000 and a 0.5 probability of receiving $9,000. Her cost of bearing this risk is the distance from A) A to F. B) A to D. C) B to E. D) C to E. Answer: C Topic: Cost of Risk Skill: Analytical Status: Old AACSB: Analytical Skills

66) The above figure shows how an individual evaluates a bet in which he or she has a 0.5 probability of receiving $20 and a 0.5 probability of receiving $200. The individual would be indifferent between A) $110 with certainty or the expected value of the bet. B) $80 with certainty or the expected value of the bet. C) $200 with certainty or the expected value of the bet. D) $20 with certainty or the expected value of the bet. Answer: B Topic: Cost of Risk Skill: Analytical Status: Old AACSB: Analytical Skills

67) Adriana wants to try working as an independent contractor this summer. She has a 50 percent chance that she will make $9,000 and 50 percent chance that she will make nothing. Her utility of wealth curve is shown in the figure above. What's Adriana's expected utility from taking this job? A) 45 B) $4,500 C) $2,000 D) 40 Answer: D Topic: Expected Utility Skill: Analytical Status: Old AACSB: Analytical Skills

68) Adriana wants to try working as an independent contractor this summer. She has a 50 percent chance that she will make $9,000 and 50 percent chance that she will make nothing. Her utility of wealth curve is shown in the figure above. What minimum fixed salary should another employer offer Adriana to persuade her to work for his firm? A) $1,001 B) $2,001 C) $3,001 D) $4,501 Answer: B Topic: Choice Under Uncertainty Skill: Analytical Status: Old AACSB: Analytical Skills

69) Adriana wants to try working as an independent contractor this summer. She has a 50 percent chance that she will make $9,000 and 50 percent chance that she will make nothing. Her utility of wealth curve is shown in the figure above. What's Adriana's cost of risk? A) $2,500 B) $2,000 C) zero D) $40 Answer: A Topic: Cost of Risk Skill: Analytical Status: Old AACSB: Analytical Skills

70) Bobby is offered a job as a salesperson in which there is a 50 percent chance that he will make $2,000 and a 50 percent chance that he will make $10,000. Bobby's utility of wealth curve is shown in the figure above. What is Bobby's expected income from taking this job? A) $4,000 B) $6,000 C) $2,000 D) $10,000 Answer: B Topic: Expected Income Skill: Analytical Status: Old AACSB: Analytical Skills

71) Bobby is offered a job as a salesperson in which there is a 50 percent chance that he will make $2,000 and a 50 percent chance that he will make $10,000. Bobby's utility of wealth curve is shown in the figure above. What is Bobby's expected utility from taking this job? A) 40 B) 50 C) 60 D) 70 Answer: C Topic: Expected Utility Skill: Analytical Status: Old AACSB: Analytical Skills

72) Bobby is offered a job as a salesperson in which there is a 50 percent chance that he will make $2,000 and a 50 percent chance that he will make $10,000. Bobby's utility of wealth curve is shown in the figure above. What is Bobby's cost of risk? A) $1,000 B) $2,000 C) $3,000 D) $4,000 Answer: B Topic: Cost of Risk Skill: Analytical Status: Old AACSB: Analytical Skills

73) Bobby is offered two fulltime jobs. In the first job, as a salesperson, he has a 50 percent chance to make $2,000 a month and a 50 percent chance to make $10,000 a month. The second job, as a construction worker, pays $4,500 a month with certainty. Bobby's utility of wealth curve is shown in the figure above. Bobby will take the ________ job because his expected ________ from this job is greater. A) first; utility B) second; utility C) second; income D) first; income Answer: B Topic: Choice Under Uncertainty Skill: Analytical Status: Old AACSB: Analytical Skills

74) Erika's utility with $3,000 of wealth is 6,000 and her utility with $3,001 of wealth is 6,005. Her marginal utility from gaining the additional $1 of wealth is ________. A) 6,005 B) 3,001 C) 6,000 D) 5 Answer: D Topic: Study Guide Question, Marginal Utility of Wealth Skill: Analytical Status: Old AACSB: Analytical Skills

75) If Al is risk averse, as his wealth increases, his total utility of wealth ________ and his marginal utility of wealth ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: B Topic: Study Guide Question, Utility of Wealth Skill: Analytical Status: Old AACSB: Analytical Skills

76) Soran is risk averse. If her wealth rises by $100, her total utility increases by 300. If her wealth increases, her total utility will decrease A) by more than 300. B) by less than 300. C) by 300. D) by some amount that cannot be determined without more information. Answer: A Topic: Study Guide Question, Risk Aversion Skill: Analytical Status: Old AACSB: Analytical Skills

2 Buying and Selling Risk 1) Buying insurance is similar to A) selling risk. B) irrationally avoiding life's risks. C) being a free rider. D) buying risk. Answer: A Topic: Insurance Skill: Conceptual Status: Old AACSB: Analytical Skills

2) Insurance works by A) eliminating risks. B) decreasing risks. C) pooling risks. D) changing the individual's marginal utility of wealth. Answer: C Topic: How Insurance Works Skill: Conceptual Status: Old AACSB: Analytical Skills

3) Insurance works because A) all policyholders pay in according to risks and all then receive a pay out in return. B) all policyholders pay in according to risks and then receive a pay out only if they incur a loss. C) all policyholders pay in according to risks and nobody receives any pay out. D) only high risk policyholders pay in while everyone is entitled to a pay out. Answer: B Topic: How Insurance Works Skill: Conceptual Status: Old AACSB: Analytical Skills

4) You overhear the following in the hallway, "Everyone eventually dies, so how can a life insurance company make a profit? Isn't it a losing battle? You will always have to pay the death benefit to your clients!" You know that life insurance companies can be profitable. This is because A) the premiums you pay on a life insurance policy are always more than any death benefit, so the insurance company always comes out ahead. B) older people with a greater probability of dying during the term of a policy are denied any death benefits. C) the insurance company collects more than enough in premiums today to cover expected benefits payable today. D) life insurance companies are notorious for cheating clients with "fine print" policy clauses. Answer: C Topic: How Insurance Works Skill: Conceptual Status: Old AACSB: Analytical Skills

5) Insurance is possible and can be profitable because of A) private information. B) adverse selection. C) moral hazard. D) risk aversion. Answer: D Topic: How Insurance Works Skill: Conceptual Status: Old AACSB: Analytical Skills

6) Jon is risk averse. When he buys insurance against all risks, A) he knows his wealth with certainty. B) his utility exceeds his expected utility. C) his wealth exceeds his expected wealth. D) all of the above Answer: A Topic: How Insurance Works Skill: Conceptual Status: Old AACSB: Analytical Skills

7) Ashwini is thinking of buying travel insurance (which pays her if she needs to cancel her trip) for her trip to Cancun over spring break. There is a 5 percent chance that she will need to cancel her trip. Without insurance she would lose the full $2,000 price of the trip; with insurance she would get a full refund of $2,000. The premium for this insurance is $105. Which of the following is correct? I. The expected value of Ashwini's loss is $100. II. If Ashwini is risk averse she is willing to buy the insurance only if its price is less than $100. A) I only B) II only C) I and II D) neither I nor II Answer: A Topic: Insurance Skill: Analytical Status: New AACSB: Analytical Skills

8) Many residents of the city of Adelphia drive without automobile insurance. Assuming that Adelphia is just like any other city and these are risk averse individuals, which of the following is most likely true? A) Economic models do not work. B) These people maximize wealth. C) The price of automobile insurance exceeds their maximum value of insurance. D) There are no automobile accidents or thefts in the city of Adelphia. Answer: C Topic: Maximum Value of Insurance Skill: Conceptual Status: Old AACSB: Analytical Skills

9) Dane has a car valued at $20,000 that gives him a utility of 80. There is a 5 percent chance that he will have an accident that will make his car worthless, in which case his utility will be zero. His utility from a wealth of $15,000 is 76. The maximum amount Dane will be willing to pay for insurance is A) $1,000. B) $3,000. C) $5,000. D) $15,000. Answer: C Topic: Maximum Value of Insurance Skill: Analytical Status: Old AACSB: Analytical Skills

10) Dan has a car valued at $10,000 that gives him a utility of 50 units. There is a 10 percent chance that he will have an accident that will make his car worthless, in which case his utility will be zero. His utility from a wealth of $7,000 is 45 units. The maximum amount Dan will be willing to pay for car insurance is A) $1,000. B) $3,000. C) $7,000. D) zero. Answer: B Topic: Maximum Value of Insurance Skill: Analytical Status: Old AACSB: Analytical Skills

Wealth (dollars) 0 20,000 40,000 60,000 80,000 100,000

Total utility 0 200 245 270 287 300

11) Beachcomber Beatrice spent her entire wealth of $100,000 to build a beach house on the Gulf of Mexico. There is a 10 percent chance that the house will be totally destroyed by a hurricane. Beatrice's utility of wealth schedule is given in the table above. What is Beatrice's expected wealth? A) $10,000 B) $50,000 C) $90,000 D) $100,000 Answer: C Topic: Expected Wealth Skill: Analytical Status: Old AACSB: Analytical Skills

12) Beachcomber Beatrice spent her entire wealth of $100,000 to build a beach house on the Gulf of Mexico. There is a 10 percent chance that the house will be totally destroyed by a hurricane. Beatrice's utility of wealth schedule is given in the table above. What is Beatrice's expected utility of wealth? A) between 0 and 200 B) 245 C) 270 D) between 287 and 300 Answer: C Topic: Expected Utility of Wealth Skill: Analytical Status: Old AACSB: Analytical Skills

13) Beachcomber Beatrice spent her entire wealth of $100,000 to build a beach house on the Gulf of Mexico. There is a 10 percent chance that the house will be totally destroyed by a hurricane. Beatrice's utility of wealth schedule is given in the table above. What is the minimum amount that the insurance company would require Beatrice to pay for an insurance policy that pays $100,000 if her beach house is destroyed by a hurricane? (Assume the insurance company has no other costs.) A) $10,000 B) $30,000 C) $40,000 D) $60,000 Answer: A Topic: Minimum Cost of Insurance Skill: Analytical Status: Old AACSB: Analytical Skills

14) Beachcomber Beatrice spent her entire wealth of $100,000 to build a beach house on the Gulf of Mexico. There is a 10 percent chance that the house will be destroyed by a hurricane. Beatrice's utility of wealth schedule is given in the table above. What is the maximum amount that Beatrice would be willing to pay for an insurance policy that pays $100,000 if her beach house is destroyed by a hurricane? A) $10,000 B) $30,000 C) $40,000 D) $60,000 Answer: C Topic: Maximum Value of Insurance Skill: Analytical Status: Old AACSB: Analytical Skills

15) Van, whose utility of wealth curve is shown in the above figure, owns a home that is valued at $100,000. There is a 10 percent chance that the house will be destroyed by hurricane. The minimum cost of insurance in this case is A) $10,000. B) $20,000. C) $30,000. D) $40,000. Answer: A Topic: Minimum Cost of Insurance Skill: Analytical Status: Old AACSB: Analytical Skills

16) Van, whose utility of wealth curve is shown in the above figure, owns a home that is valued at $100,000. Initially there is a 10 percent chance that the house will be destroyed by hurricane. As the risk of destruction due to hurricane rises from 10 percent to 20 percent, the minimum cost of insurance A) stays the same. B) increases by $10,000. C) increases by $20,000. D) increases by $30,000. Answer: B Topic: Minimum Cost of Insurance Skill: Analytical Status: Old AACSB: Analytical Skills

17) Van, whose utility of wealth curve is shown in the above figure, owns a home that is valued at $100,000. There is a 10 percent chance that the house will be destroyed by hurricane. The value of insurance to Van is A) $10,000. B) $15,000. C) $20,000. D) $30,000. Answer: D Topic: Maximum Value of Insurance Skill: Analytical Status: Old AACSB: Analytical Skills

18) Bruce Copperwood's utility of wealth curve is illustrated in the above figure. Bruce is presently employed at a salary of $100,000. There is a 10 percent probability that Bruce will be totally disabled, in which case he will have no wealth. The maximum amount that Bruce is willing to pay for a disability insurance policy that would pay him $100,000 in the case of total disability is A) $10,000. B) $20,000. C) $80,000. D) None of the above answers is correct. Answer: B Topic: Maximum Value of Insurance Skill: Analytical Status: Old AACSB: Analytical Skills

19) Bruce Copperwood's utility of wealth curve is illustrated in the above figure. Bruce is presently employed at a salary of $100,000. There is a 10 percent probability that Bruce will be totally disabled, in which case he will have no wealth. An insurance company (with no operating expenses) would be willing to offer Bruce a disability insurance policy paying $100,000 in the case of total disability for a minimum premium of A) $1,000. B) $10,000. C) $20,000. D) None of the above answers is correct. Answer: B Topic: Minimum Cost of Insurance Skill: Analytical Status: Old AACSB: Analytical Skills

20) Steve owns a motorcycle valued at $5,000, and that is his only asset. There is a 5 percent chance that Steve will have an accident within a year. If he does have an accident, his motorcycle is worthless. Steve's utility of wealth curve is shown in the figure above. An insurance company agrees to pay Steve the full value of his motorcycle in case of an accident if he buys the company's insurance policy. The company's operating expenses are $500 per policy. With no insurance, Steve's expected wealth is A) $4,000. B) $4,500. C) $3,500. D) $5,000. Answer: B Topic: Expected Wealth Skill: Analytical Status: Old AACSB: Analytical Skills

21) Steve owns a motorcycle valued at $5,000, and that is his only asset. There is a 5 percent chance that Steve will have an accident within a year. If he does have an accident, his motorcycle is worthless. Steve's utility of wealth curve is shown in the figure above. An insurance company agrees to pay Steve the full value of his motorcycle in case of an accident if he buys the company's insurance policy. The company's operating expenses are $500 per policy. With no insurance, Steve's expected utility is A) 97. B) 84. C) 90. D) 100. Answer: C Topic: Expected Utility Skill: Analytical Status: Old AACSB: Analytical Skills

22) Steve owns a motorcycle valued at $5,000, and that is his only asset. There is a 5 percent chance that Steve will have an accident within a year. If he does have an accident, his motorcycle is worthless. Steve's utility of wealth curve is shown in the figure above. An insurance company agrees to pay Steve the full value of his motorcycle in case of an accident if he buys the company's insurance policy. The company's operating expenses are $500 per policy. What is the maximum insurance premium that Steve is willing to pay? A) $2,000 B) $500 C) $1,000 D) $1,500 Answer: D Topic: Maximum Value of Insurance Skill: Analytical Status: Old AACSB: Analytical Skills

23) Steve owns a motorcycle valued at $5,000, and that is his only asset. There is a 5 percent chance that Steve will have an accident within a year. If he does have an accident, his motorcycle is worthless. Steve's utility of wealth curve is shown in the figure above. An insurance company agrees to pay Steve the full value of his motorcycle in case of an accident if he buys the company's insurance policy. The company's operating expenses are $500 per policy. What is the minimum premium that the insurance company will accept? A) $1,000 B) $2,000 C) $500 D) $1,500 Answer: A Topic: Minimum Cost of Insurance Skill: Analytical Status: Old AACSB: Analytical Skills

24) Steve owns a motorcycle valued at $5,000, and that is his only asset. There is a 5 percent chance that Steve will have an accident within a year. If he does have an accident, his motorcycle is worthless. Steve's utility of wealth curve is shown in the figure above. An insurance company agrees to pay Steve the full value of his motorcycle in case of an accident if he buys the company's insurance policy. The company's operating expenses are $500 per policy. Both Steve and the insurance company will gain if the insurance premium is A) $900. B) $1,200. C) $1,600. D) $700. Answer: B Topic: Gains From Insurance Skill: Analytical Status: Old AACSB: Analytical Skills

25) Steve owns a motorcycle valued at $5,000, and that is his only asset. There is a 5 percent chance that Steve will have an accident within a year. If he does have an accident, his motorcycle is worthless. Steve's utility of wealth curve is shown in the figure above. An insurance company agrees to pay Steve the full value of his motorcycle in case of an accident if he buys the company's insurance policy. The company's operating expenses are $500 per policy. If Steve buys the insurance for $1,000, his expected wealth will be ________, and his expected utility will be ________ than with no insurance. A) greater; greater B) greater; less C) less; greater D) less; less Answer: C Topic: Gains From Insurance Skill: Analytical Status: Old AACSB: Analytical Skills

26) The above figure shows the utility of wealth curve for a homeowner whose only possession is a $50,000 house. Which of the following statements is TRUE? A) This person has diminishing marginal utility of wealth. B) This person is not risk averse. C) Risky situations cause this person no loss of utility. D) None of the above are correct. Answer: A Topic: Utility of Wealth Skill: Analytical Status: Old AACSB: Analytical Skills

27) The above figure shows the utility of wealth curve for a homeowner whose only possession is a $50,000 house. If there is a 20 percent chance that the home could be entirely destroyed, what is the person's expected wealth? A) $10,000 B) $20,000 C) $30,000 D) $40,000 Answer: D Topic: Expected Utility Skill: Analytical Status: Old AACSB: Analytical Skills

28) The above figure shows the utility of wealth curve for a homeowner whose only possession is a $50,000 house. If there is a 20 percent chance that the home could be entirely destroyed, what is the person's cost of risk? A) $10,000 B) $20,000 C) $30,000 D) $40,000 Answer: A Topic: Cost of Risk Skill: Analytical Status: Old AACSB: Analytical Skills

29) The above figure shows the utility of wealth curve for a homeowner whose only possession is a $50,000 house. If there is a 20 percent chance that the home could be entirely destroyed, the highest price for insurance this person would pay is A) $0. B) $5,000. C) $10,000. D) $20,000. Answer: D Topic: Maximum Value of Insurance Skill: Analytical Status: Old AACSB: Analytical Skills

30) The above figure shows the utility of wealth curve for a homeowner whose only possession is a $50,000 house. If there is a 20 percent chance that the home could be completely destroyed, would this homeowner buy insurance? A) No, because the homeowner is not risk averse. B) Yes, at any price because the homeowner is risk averse. C) Yes, but only if it costs less than $10,000. D) Yes, but only if it costs less than $20,000. Answer: D Topic: Uncertainty and Risk Skill: Analytical Status: Old AACSB: Analytical Skills

31) The above figure shows the utility of wealth curve for a homeowner whose only possession is a $50,000 house. If there is a 20 percent chance that the home could be entirely destroyed, would this person buy a $20,000 insurance policy to replace the house if destroyed? A) No, it is too expensive. B) No, he is not risk averse. C) Yes, the homeowner would pay even more. D) Yes, this is the most the homeowner would pay. Answer: D Topic: Maximum Value of Insurance Skill: Analytical Status: Old AACSB: Analytical Skills

32) John's utility of wealth curve is shown in the above figure. He currently has wealth of $20,000. If the state lottery offers a 1 in 10,000 chance of winning $10,000, John will A) pay whatever price it takes to play. B) pay $1 to play this game. C) pay less than $1 to play this game. D) not be willing to play this game at any price. Answer: C Topic: Choice Under Uncertainty Skill: Analytical Status: Old AACSB: Analytical Skills

33) John's utility of wealth curve is shown in the above figure. He currently has total wealth of $20,000. If there is a 50 percent chance that his $10,000 car will be stolen, then his expected wealth equals A) $0. B) $10,000. C) $15,000. D) $20,000. Answer: C Topic: Expected Wealth Skill: Analytical Status: Old AACSB: Analytical Skills

34) John's utility of wealth curve is shown in the above figure. He currently has total wealth of $20,000. If there is a 50 percent chance that his $10,000 car will be stolen, what is the value of insurance against the theft? A) $0 B) $5,000 C) $7,000 D) $13,000 Answer: C Topic: Maximum Value of Insurance Skill: Analytical Status: Old AACSB: Analytical Skills

35) John's utility of wealth curve is shown in the above figure. He currently has wealth of $20,000. If there is a 10 percent chance that he could lose all his wealth, what is his expected wealth? A) $0 B) $2,000 C) $17,000 D) $18,000 Answer: D Topic: Expected Wealth Skill: Analytical Status: Old AACSB: Analytical Skills

36) John's utility of wealth curve is shown in the above figure. He currently has wealth of $20,000. If there is a 10 percent chance of losing all his wealth, what is the value of insurance against this loss? A) $0 B) $2,000 C) $3,000 D) $17,000 Answer: C Topic: Maximum Value of Insurance Skill: Analytical Status: Old AACSB: Analytical Skills

37) John's utility of wealth curve is shown in the above figure. He currently has wealth of $20,000 and there is a 10 percent chance of losing it all. John is A) willing to pay any price for insurance. B) willing to pay no more than $2,000 for insurance. C) willing to pay no more than $3,000 for insurance. D) willing to pay $5,000 for insurance. Answer: C Topic: Maximum Value of Insurance Skill: Analytical Status: Old AACSB: Analytical Skills

38) John's utility of wealth curve is shown in the above figure. He currently has wealth of $20,000, and there is a 25 percent chance that he could lose it all. If an insurance company offers to insure against this loss for $6,000, John will A) buy the policy. B) not buy the policy. C) be indifferent between being insured and uninsured. D) There is not enough information to answer. Answer: A Topic: Maximum Value of Insurance Skill: Analytical Status: Old AACSB: Analytical Skills

39) Andrew has the utility of wealth curve shown in the above figure. He owns an SUV worth $30,000, and that is his only wealth. There is a 10 percent chance that he will have an accident within a year. If he does have an accident, his SUV is worthless. What is Andrew's expected wealth? A) $30,000 B) $27,000 C) $20,000 D) zero Answer: B Topic: Expected Wealth Skill: Analytical Status: Old AACSB: Analytical Skills

40) Andrew has the utility of wealth curve shown in the above figure. He owns an SUV worth $30,000, and that is his only wealth. There is a 10 percent chance that he will have an accident within a year. If he does have an accident, his SUV is worthless. What is Andrew's expected utility? A) 100 B) 90 C) 50 D) zero Answer: B Topic: Expected Utility Skill: Analytical Status: Old AACSB: Analytical Skills

41) Andrew has the utility of wealth curve shown in the above figure. He owns an SUV worth $30,000, and that is his only wealth. There is a 10 percent chance that he will have an accident within a year. If he does have an accident, his SUV is worthless. Andrew would have the same expected utility as he currently has if his wealth was ________ and he faced no uncertainty. A) $30,000 B) $27,000 C) $21,000 D) $18,000 Answer: C Topic: Expected Utility Skill: Analytical Status: Old AACSB: Analytical Skills

42) Andrew has the utility of wealth curve shown in the above figure. He owns an SUV worth $30,000, and that is his only wealth. There is a 10 percent chance that he will have an accident within a year. If he does have an accident, his SUV is worthless. The value of insurance to Andrew against an accident is A) zero. B) $3,000 per year. C) $10,000 per year. D) $6,000 per year. Answer: D Topic: Maximum Value of Insurance Skill: Analytical Status: Old AACSB: Analytical Skills

43) Andrew has the utility of wealth curve shown in the above figure. He owns an SUV worth $30,000 and that is his only wealth. There is a 10 percent chance that he will have an accident within a year. If he does have an accident, his SUV is worthless. Suppose all SUV owners are like Andrew. An insurance company agrees to pay each person who has an accident the full value of his/her SUV. The company's operating expenses are $1,500. What is the minimum insurance premium that the company is willing to accept? A) $1,500 per year B) $4,500 per year C) $3,000 per year D) $6,000 per year Answer: B Topic: Minimum Cost of Insurance Skill: Analytical Status: Old AACSB: Analytical Skills

44) Andrew has the utility of wealth curve shown in the above figure. He owns an SUV worth $30,000, and that is his only wealth. There is a 10 percent chance that he will have an accident within a year. If he does have an accident, his SUV is worthless. Suppose all SUV owners are like Andrew. An insurance company agrees to pay each person who has an accident the full value of their SUV. The company's operating expenses are $1,500. Andrew will ________ the company's policy because the minimum insurance premium that the company is willing to accept is ________ the maximum premium that Andrew is willing to pay. A) buy; by $1,500 lower than B) buy; the same as C) not buy; $500 higher than D) not buy; $1,500 higher than Answer: A Topic: Maximum Value of Insurance and Minimum Cost of Insurance Skill: Analytical Status: Old AACSB: Analytical Skills

45) Ashton has the utility of wealth curve shown in the above figure. He owns a sports car worth $30,000, and that is his only wealth. Ashton is a careless driver and there is a 30 percent chance that he will have an accident within a year. If he does have an accident, his car is worthless. What is Ashton's expected wealth? A) $30,000 B) $9,000 C) $21,000 D) zero Answer: C Topic: Expected Wealth Skill: Analytical Status: Old AACSB: Analytical Skills

46) Ashton has the utility of wealth curve shown in the above figure. He owns a sports car worth $30,000, and that is his only wealth. Ashton is a careless driver and there is a 30 percent chance that he will have an accident within a year. If he does have an accident, his car is worthless. What is Ashton's expected utility? A) 100 B) 30 C) 70 D) zero Answer: C Topic: Expected Utility Skill: Analytical Status: Old AACSB: Analytical Skills

47) Ashton has the utility of wealth curve shown in the above figure. He owns a sports car worth $30,000, and that is his only wealth. Ashton is a careless driver and there is a 30 percent chance that he will have an accident within a year. If he does have an accident, his car is worthless. Ashton would have the same expected utility as he currently has if his wealth was ________ and he faced no uncertainty. A) $30,000 B) $21,000 C) $12,000 D) $9,000 Answer: C Topic: Expected Utility Skill: Analytical Status: Old AACSB: Analytical Skills

48) Ashton has the utility of wealth curve shown in the above figure. He owns a sports car worth $30,000, and that is his only wealth. Ashton is a careless driver and there is a 30 percent chance that he will have an accident within a year. If he does have an accident, his car is worthless. The maximum amount that Ashton is willing to pay for auto insurance is A) $6,000 per year. B) $3,000 per year. C) $9,000 per year. D) $10,000 per year. Answer: C Topic: Maximum Value of Insurance Skill: Analytical Status: Old AACSB: Analytical Skills

49) Ashton has the utility of wealth curve shown in the above figure. Ashton owns a sports car worth $30,000, and that is his only wealth. Ashton is a careless driver and there is a 30 percent chance that he will have an accident within a year. If he does have an accident, his car is worthless. Suppose all sports cars owners are like Ashton. An insurance company agrees to pay each person who has an accident the full value of their car. The company's operating expenses are $1,000. What is the minimum insurance premium that the company is willing to accept? A) $3,000 per year B) $6,000 per year C) $10,000 per year D) $15,000 per year Answer: C Topic: Minimum Cost of Insurance Skill: Analytical Status: Old AACSB: Analytical Skills

50) Ashton has the utility of wealth curve shown in the above figure. He owns a sports car worth $30,000, and that is his only wealth. Ashton is a careless driver and there is a 30 percent chance that he will have an accident within a year. If he does have an accident, his car is worthless. Suppose all sports cars owners are like Ashton. An insurance company agrees to pay each person who has an accident the full value of their car. The company's operating expenses are $1,000. Ashton will ________ the company's policy because the minimum premium for such insurance that the company is willing to accept is ________ the maximum premium Ashton is willing to pay. A) buy; by $1,500 lower than B) buy; the same as C) not buy; $1,500 higher than D) not buy; $1,000 higher than Answer: D Topic: Maximum Value of Insurance and Minimum Cost of Insurance Skill: Analytical Status: Old AACSB: Analytical Skills

51) Insurance companies A) pool risk and thereby lower people's utility. B) can earn a profit only if people are risk neutral. C) can increase risk averse people's utility. D) try to shift their customers' utility of wealth curves downward. Answer: C Topic: Study Guide Question, How Insurance Works Skill: Analytical Status: Old AACSB: Analytical Skills

52) When Sardar buys insurance, on net he A) gains if the value of the insurance is greater than the price he pays the insurance company. B) loses because the price must pay the insurance company lowers his expected utility. C) gains because his actual wealth with the insurance is greater than his expected wealth without the insurance. D) loses if the price of the insurance equals his expected loss from a bad outcome. Answer: A Topic: Study Guide Question, Gains From Insurance Skill: Definition Status: Old AACSB: Analytical Skills

3 Private Information 1) Private information is a situation in which A) two parties to an exchange have information that is available to outsiders if they ask. B) one party to an exchange has information that is not available to the other. C) the marginal cost of a person's obtaining additional information is zero. D) the marginal cost of making information available to one more person is zero. Answer: B Topic: Private Information Skill: Definition Status: Old AACSB: Analytical Skills

2) Of the following, the best example of private information is when A) Michael knows the price of a gallon of milk at the minimart but Michelle doesn't know. B) you know some of your used car's defects but a potential buyer cannot find out about them until after buying. C) you don't know the quality of a used car and must hire a trained mechanic who tells you all its defects. D) you pay the owner of a used car a little extra and she lets you know all of the car's defects. Answer: B Topic: Private Information Skill: Conceptual Status: Old AACSB: Analytical Skills

3) Moral hazard results from ________ information and adverse selection results from ________ information. A) private; private B) private; public C) public; private D) public; public Answer: A Topic: Private Information Skill: Conceptual Status: Old AACSB: Analytical Skills

4) Private information A) creates moral hazard but eliminates adverse selection. B) creates adverse selection but eliminates moral hazard. C) creates both moral hazard and adverse selection. D) eliminates both moral hazard and adverse selection. Answer: C Topic: Private Information Skill: Conceptual Status: Old AACSB: Analytical Skills

5) Moral hazard and adverse selection are the result of A) poorly functioning markets. B) government intervention. C) private information. D) treachery. Answer: C Topic: Private Information Skill: Conceptual Status: Old AACSB: Analytical Skills

6) Moral hazard occurs ________ an agreement is made and when monitoring the parties to the agreement is ________. A) before; easy B) before; costly C) after; easy D) after; costly Answer: D Topic: Moral Hazard Skill: Conceptual Status: Old AACSB: Analytical Skills

7) Moral hazard exists chiefly because of A) economies of scale. B) diseconomies of scale. C) private information. D) public information. Answer: C Topic: Moral Hazard Skill: Conceptual Status: Old AACSB: Analytical Skills

8) Moral hazard is A) the tendency for people to enter into agreements in which they can use their private information to their own advantage and to the disadvantage of the less informed party. B) when one of the parties to an agreement has an incentive after the agreement is made to act in a manner that brings additional benefits to himself or herself at the expense of the other party. C) a situation in which only bad quality items are bought and sold. D) an action taken outside a market that conveys information that can be used by that market. Answer: B Topic: Moral Hazard Skill: Definition Status: Old AACSB: Analytical Skills

9) Moral hazard typically occurs because A) people are dishonest. B) agreements sometimes create incentives that are costly to monitor. C) workers possess diminishing marginal productivity. D) workers possess adverse selection. Answer: B Topic: Moral Hazard Skill: Conceptual Status: Old AACSB: Analytical Skills

10) Moral hazard occurs because people act A) in the interest of others at all time. B) in the best interest of society. C) in their own self-interest. D) like anarchists. Answer: C Topic: Moral Hazard Skill: Conceptual Status: Old AACSB: Analytical Skills

11) Which of the following is an example of moral hazard? A) I hire you to work in my garden for a fixed fee, and you work hard all day. B) I hire you to work at an hourly rate and you work as slowly as possible. C) You apply for the job only because I pay a fixed wage per day, no matter how much or little you do. D) You agree to be paid by the weed to work in my garden, and then don't work hard. Answer: B Topic: Moral Hazard Skill: Conceptual Status: Old AACSB: Analytical Skills

12) Because Don has health insurance, he is more likely to see the doctor when he has a cold. This is an example of A) adverse selection. B) moral hazard. C) both moral hazard and adverse selection. D) private information. Answer: B Topic: Moral Hazard Skill: Conceptual Status: Old AACSB: Analytical Skills

13) If Sally drives less carefully after buying auto insurance, she illustrates A) adverse selection. B) negative selection. C) moral hazard. D) lemon hazard. Answer: C Topic: Moral Hazard Skill: Conceptual Status: Old AACSB: Analytical Skills

14) Adverse selection is created by A) incentives to change behavior after two parties have reached an agreement. B) risk. C) lump-sum taxes. D) private information. Answer: D Topic: Adverse Selection Skill: Conceptual Status: Old AACSB: Analytical Skills

15) Adverse selection can occur when A) all parties have full information. B) one party has information not available to the other party. C) incentives result in one party not reaching an agreement with the other party. D) nobody has any information. Answer: B Topic: Adverse Selection Skill: Definition Status: Old AACSB: Analytical Skills

16) The tendency for people to enter into agreements in which they can use their private information to their own advantage and to the disadvantage of the less informed party is known as A) adverse selection B) moral hazard. C) the market for oranges. D) a signal. Answer: A Topic: Adverse Selection Skill: Definition Status: Old AACSB: Analytical Skills

17) Adverse selection is the tendency for people who accept contracts to be those who A) buy goods and then regret it later. B) buy goods for more than their own reservation price. C) plan to use private information to the disadvantage of the less well-informed party. D) engage in a number of searches larger than that specified in the contract. Answer: C Topic: Adverse Selection Skill: Definition Status: Old AACSB: Analytical Skills

18) Travel insurance (which pays a traveler if the traveler needs to cancel his or her trip) has a clause that states it will not pay if the trip is cancelled because of a pre-existing condition. If sick people are more likely to purchase travel insurance, this clause is meant to A) reduce moral hazard. B) reduce adverse selection. C) increase moral hazard. D) increase adverse selection. Answer: B Topic: Adverse Selection Skill: Analytical Status: New AACSB: Analytical Skills

19) If a salesperson is paid by the volume of sales he or she makes, then the A) moral hazard problem is diminished. B) moral hazard problem is enhanced. C) adverse selection problem is enhanced. D) None of the above answers is correct. Answer: A Topic: Moral Hazard and Adverse Selection Skill: Conceptual Status: Old AACSB: Analytical Skills

20) Paying salespeople a fixed wage contract, one in which income does not depend on the volume of sales, avoids A) both adverse selection and moral hazard. B) neither adverse selection nor moral hazard. C) adverse selection but not moral hazard. D) moral hazard but not adverse selection. Answer: B Topic: Moral Hazard and Adverse Selection Skill: Conceptual Status: Old AACSB: Analytical Skills

21) The use of incentive payments for salespeople combats A) both adverse selection and moral hazard. B) neither adverse selection nor moral hazard. C) adverse selection but not moral hazard. D) moral hazard but not adverse selection. Answer: A Topic: Moral Hazard and Adverse Selection Skill: Conceptual Status: Old AACSB: Analytical Skills

22) Even if your college degree is irrelevant to an employer's needs, your high GPA might still get you the job because A) the firm is not a profit maximizer. B) your GPA sends a signal about your quality as a worker. C) the firm will most likely make an adverse selection. D) the high GPA eliminates the possibility of moral hazard. Answer: B Topic: Private Information; Signals Skill: Analytical Status: Old AACSB: Analytical Skills

23) Signals are believable when the cost of sending a A) false signal is known to be low. B) false signal is known to be high. C) true or false signal is known to be low. D) true signal is known to be high. Answer: B Topic: Private Information; Signals Skill: Analytical Status: Old AACSB: Analytical Skills

24) A major function of incentive payments, guarantees, and signals is to enable markets to overcome the problem of A) irrational forecasting. B) efficient forecasting. C) private information. D) public information. Answer: C Topic: Private Information; Signals Skill: Conceptual Status: Old AACSB: Analytical Skills

25) Your grade point average acts as ________ to potential employers. A) a signal B) a reservation price C) a guarantee D) insurance Answer: A Topic: Private Information; Signals Skill: Conceptual Status: Old AACSB: Analytical Skills

26) Without warranties, used car buyers can assume that all used cars are "lemons" because of A) moral hazard. B) moral dilemma. C) adverse selection. D) adverse reaction. Answer: C Topic: Market for Used Cars Skill: Conceptual Status: Old AACSB: Analytical Skills

27) In the used car market without warranties, adverse selection results in A) sellers of "lemons" claiming that their car is a lemon. B) only lemons being available for sale. C) the market price of used cars equal to that of good used cars. D) all of the above Answer: B Topic: Market for Used Cars Skill: Conceptual Status: Old AACSB: Analytical Skills

28) Suppose that there are only two types of used cars, peaches and lemons. Peaches are worth $10,000, and lemons are worth $4,000. If the market is such that only lemons are sold, then used cars are A) experience goods and the used car market has effective signals. B) experience goods and the used car market lacks effective signals. C) not experience goods and the used car market has effective signals. D) not experience goods and the used car market lacks effective signals. Answer: B Topic: Market for Used Cars Skill: Analytical Status: Old AACSB: Analytical Skills

29) Suppose that there are only two types of used cars, peaches and lemons. Peaches are worth $10,000 and lemons are worth $4,000. Without effective signals such as warranties, the owners of peaches cannot sell their cars for $10,000 because the A) owners of peaches cannot convince buyers that their cars are worth $10,000. B) buyers cannot convince owners of peaches to sell their cars for $10,000. C) owners of lemons cannot convince buyers that their cars are worth more than $4,000. D) buyers cannot convince owners of lemons to sell their cars for $4,000. Answer: A Topic: Market for Used Cars Skill: Analytical Status: Old AACSB: Analytical Skills

30) Suppose that there are only two types of used cars, peaches and lemons and that used cars are pure experience goods. Peaches are worth $10,000, and lemons are worth $6,000. Three fourths of all used cars are peaches, and one fourth are lemons. In a market with no signals, for instance, a market without warranties, the average value of cars actually sold will be A) $6,000. B) $7,000. C) $9,000. D) $10,000. Answer: A Topic: Market for Used Cars Skill: Analytical Status: Old AACSB: Analytical Skills

31) Suppose there are only two kind of cars in the market for used cars: lemons and good cars. A lemon is worth $1,000 both to its current owner and to anyone who buys it. A good car is worth $8,000 to its current and potential owners. Buyers can't tell whether a car is a lemon until after they have bought the car, and there is no warranty. What is the prevailing price of a used car? A) $8,000 B) $1,000 C) $4,500 D) The prevailing price depends on how many lemons and how many good cars are traded Answer: B Topic: Market for Used Cars Skill: Analytical Status: Old AACSB: Analytical Skills

32) The used car market without warranties suffers from A) perfect competition. B) oligopoly. C) adverse selection and moral hazard. D) excessive signaling. Answer: C Topic: Market for Used Cars; Warranties Skill: Conceptual Status: Old AACSB: Analytical Skills

33) One of the ways the market for used cars copes with the problems associated with private information is through the offering of A) leases. B) warranties. C) low interest rates. D) low prices. Answer: B Topic: Market for Used Cars; Warranties Skill: Conceptual Status: Old AACSB: Analytical Skills

34) Used car buyers believe a car is good quality when the seller signals the car's quality by offering a warranty because A) car sellers would never lie. B) car buyers are gullible. C) the signal cannot be false. D) a false signal can be costly to the seller. Answer: D Topic: Market for Used Cars; Warranties Skill: Conceptual Status: Old AACSB: Analytical Skills

35) Used car buyers believe a car is good quality when the seller signals the car's quality by offering a warranty because A) a warranty on a lemon is costly to the seller. B) warranties are only offered on lemons. C) the signal cannot be false. D) a false signal has no effect on the seller. Answer: A Topic: Market for Used Cars; Warranties Skill: Conceptual Status: Old AACSB: Analytical Skills

36) In the used car market, adverse selection can be limited by A) offering warranties. B) establishing loan limits. C) requiring high deductibles. D) requiring low deductibles. Answer: A Topic: Market for Used Cars; Warranties Skill: Conceptual Status: Old AACSB: Analytical Skills

37) Warranties in the used car market ________ the problem of private information thereby causing the price of good and bad used cars to ________. A) reduce; be the same B) reduce; differ C) magnify; be the same D) magnify; differ Answer: B Topic: Market for Used Cars; Warranties Skill: Analytical Status: Old AACSB: Analytical Skills

38) If a lender checks credit reports on individuals before mailing out loan offers, it is most likely trying to avoid A) moral hazard. B) moral dilemma. C) adverse selection. D) adverse reaction. Answer: C Topic: Market for Loans Skill: Conceptual Status: Old AACSB: Analytical Skills

39) Questions about employment history on a loan application are used to prevent A) moral hazard. B) adverse selection. C) market signaling. D) risk aversion. Answer: B Topic: Market for Loans Skill: Conceptual Status: Old AACSB: Analytical Skills

40) Dan, age 19, may have trouble buying insurance at a low price because A) the insurance company has private information that he is a risky driver. B) the insurance company has private information that his signals are valid. C) insurance companies fear that he has private information that his deductible is too high. D) insurance companies fear that he has private information that he is a risky driver. Answer: D Topic: Market for Insurance Skill: Conceptual Status: Old AACSB: Analytical Skills

41) In the market for automobile insurance, adverse selection implies that A) those who are insured might take greater risks. B) those who are uninsured might take greater risks. C) insured and uninsured alike will take greater risks. D) drivers with greater risks are more likely to buy insurance. Answer: D Topic: Market for Insurance; Adverse Selection Skill: Conceptual Status: Old AACSB: Analytical Skills

42) In the market for automobile insurance, adverse selection implies that A) drivers with greater risks want to buy a policy without deductibles. B) drivers with greater risks want to buy a policy with large deductibles. C) uninsured drivers will drive recklessly. D) insured drivers will drive recklessly. Answer: A Topic: Market for Insurance; Adverse Selection Skill: Conceptual Status: Old AACSB: Analytical Skills

43) In the health insurance market, adverse selection occurs when A) chronically ill people buy health insurance. B) insured people go to the doctor unnecessarily. C) patients sue their doctor. D) people with health insurance tend to behave more recklessly. Answer: A Topic: Market for Insurance; Adverse Selection Skill: Conceptual Status: Old AACSB: Analytical Skills

44) Life insurance companies often give applicants a physical examination to prevent A) moral hazard. B) adverse selection. C) signaling. D) warranties. Answer: B Topic: Market for Insurance; Adverse Selection Skill: Conceptual Status: Old AACSB: Analytical Skills

45) If a life insurance company offers coverage regardless of age, health status, or smoking history, it is likely to suffer A) moral hazard problems. B) adverse selection problems. C) lower costs. D) low demand for its product. Answer: B Topic: Market for Insurance; Adverse Selection Skill: Conceptual Status: Old AACSB: Analytical Skills

46) Bill purchases property insurance for his office building, which includes coverage for fire damage. The policy offers premium discounts for smoke detectors, fire alarms, fire extinguishers and sprinkler systems. This is an incentive system to help avoid A) adverse selection. B) moral hazard. C) optimal-stopping. D) none of the above Answer: A Topic: Market for Insurance; Adverse Selection Skill: Conceptual Status: Old AACSB: Analytical Skills

47) In the market for automobile insurance, moral hazard implies that A) those who are insured might take greater risks. B) those who are uninsured might take greater risks. C) insured and uninsured alike will take greater risks. D) drivers with greater risks are more likely to buy insurance. Answer: A Topic: Market for Insurance; Moral Hazard Skill: Conceptual Status: Old AACSB: Analytical Skills

48) In the health insurance market, moral hazard occurs when A) chronically ill people buy insurance. B) insured people go to the doctor unnecessarily. C) patients sue their doctor. D) chronically ill people refuse appropriate medical treatment. Answer: B Topic: Market for Insurance; Moral Hazard Skill: Analytical Status: Old AACSB: Analytical Skills

49) Insurance companies charge a lower premium to drivers who carry a higher deductible because A) insurance companies are not profit maximizers. B) a driver's riskiness decreases as the driver's deductible increases. C) a high deductible signals a high risk. D) insurance companies prefer that drivers carry no deductible. Answer: B Topic: Market for Insurance; Moral Hazard Skill: Analytical Status: Old AACSB: Analytical Skills

50) One way of reducing the moral hazard problem in the automobile insurance market is for drivers to A) carry high deductibles. B) carry no deductibles. C) all have good driving records. D) never make any claims. Answer: A Topic: Market for Insurance; Moral Hazard Skill: Conceptual Status: Old AACSB: Analytical Skills

51) If Ben becomes less likely to buy smoke detectors after he has fire insurance, he is illustrating A) moral hazard. B) adverse selection. C) the lemon problem. D) the free rider problem. Answer: A Topic: Study Guide Question, Moral Hazard Skill: Conceptual Status: Old AACSB: Analytical Skills

52) If buyers cannot assess the quality of used cars but there are warranties for cars, A) too few lemons are sold. B) too many good used cars are sold. C) good used cars are sold at a higher price than lemons. D) there is an adverse selection problem. Answer: C Topic: Study Guide Question, Market for Used Cars; Warranties Skill: Conceptual Status: Old AACSB: Analytical Skills

53) If you have private information that you are a safer driver than your record indicates, you are likely to buy an insurance policy with A) a higher than average deductible. B) a positive but lower than average deductible. C) an average deductible. D) no deductible. Answer: A Topic: Study Guide Question, Market for Insurance Skill: Analytical Status: Old AACSB: Analytical Skills

54) Travel insurance (which pays a traveler if the traveler needs to cancel his or her trip) has a clause that states it will not pay if the trip is cancelled because of a pre-existing condition. If sick people are more likely to purchase travel insurance, this clause is meant to A) reduce moral hazard. B) reduce adverse selection. C) increase moral hazard. D) increase adverse selection. Answer: B Topic: Adverse Selection Skill: Analytical Status: New AACSB: Analytical Skills

4 Uncertainty, Information, and the Invisible Hand 1) As more information is gather, the marginal cost of additional information ________ and the marginal benefit of additional information ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: B Topic: Efficient Amount of Information Skill: Analytical Status: Old AACSB: Analytical Skills 61 Copyright © 2014 Pearson Education, Inc.

2) There is a growing market for buying and selling information about the online behavior of consumers. Most people use one of only a small number of search engines (such as Google, Bing, or Yahoo!) when surfing the net. It has been hard for new search engines to gain any market share. The market for search is best considered as A) perfectly competitive. B) oligopoly. C) monopolistically competitive. D) monopoly. Answer: B Topic: Information and Organization Skill: Analytical Status: New AACSB: Analytical Skills

3) Information can be thought of as a A) non-economic piece of data. B) violation of the invisible hand idea that the pursuit of self-interest promotes social interest. C) good whose marginal benefit is infinite. D) good whose marginal benefit decreases as more information is acquired. Answer: D Topic: Study Guide Question, Efficient Amount of Information Skill: Definition Status: Old AACSB: Analytical Skills

4) Which of the following statements is correct? A) Because information is different from typical goods and services, it cannot be provided in a market. B) The marginal benefit from more information does not decrease. C) Too little information is provided if the market for information is a monopoly. D) Acquiring more information can never be inefficient. Answer: C Topic: Study Guide Question, Efficient Amount of Information Skill: Conceptual Status: Old AACSB: Analytical Skills

5) There is a growing market for buying and selling information about the online behavior of consumers. Most people use one of only a small number of search engines (such as Google, Bing, or Yahoo!) when surfing the net. It has been hard for new search engines to gain any market share. The market for search is best considered as A) perfectly competitive. B) oligopoly. C) monopolistically competitive. D) monopoly. Answer: B Topic: Information and Organization Skill: Analytical Status: New AACSB: Analytical Skills

5 News Based Questions 1) The International Maritime Bureau said the waters off Somalia are the world's most dangerous, accounting for nearly a third reported pirate attacks worldwide between January and September 2008. Suppose all boats are insured to $100,000 and pay a premium of $10,000 each. Suppose 10 out of 100 boats are attacked by pirates and these 10 file claims with their insurance. If the insurance company's only costs are the claims it must pay, has the insurance company earned an economic profit? A) Yes, they earned an economic profit of $90,000. B) No, they broke even. C) No, they sustained an economic loss of $90,000. D) Yes, they earned an economic profit of $1,000,000. Answer: B Topic: Insurance Skill: Analytical Status: Old AACSB: Analytical Skills

2) The International Maritime Bureau said the waters off Somalia are the world's most dangerous, accounting for nearly a third reported pirate attacks worldwide between January and September 2008. Suppose all boats are insured to $100,000 and pay a premium of $10,000 each. Suppose 10 out of 100 boats are attacked by pirates and these 10 file claims with their insurance. What is the value of the claims? A) One trillion dollars B) One billion dollars C) One million dollars D) One hundred thousand dollars Answer: C Topic: Insurance Skill: Analytical Status: Old AACSB: Analytical Skills

3) The International Maritime Bureau said the waters off Somalia are the world's most dangerous, accounting for nearly a third reported pirate attacks worldwide between January and September 2008. Suppose all boats are insured to $100,000 and pay a premium of $15,000 each. Suppose 10 out of 100 boats are attacked by pirates and these 10 file claims with their insurance. Has the insurance company earned an economic profit? A) Yes, they earned an economic profit of $500,000. B) Yes, they earned an economic profit of $50,000. C) No, they sustained an economic loss of $85,000. D) No, they broke even. Answer: A Topic: Insurance Skill: Conceptual Status: Old AACSB: Analytical Skills

4) Mortgage insurance protects lenders when a borrower defaults by making up any shortfall needed to repay the loan if the sale of the property doesn't cover the debt. Federally regulated lenders must have mortgage insurance on loans where the buyer's down payment is less than 20 per cent of the price. In this example, what signal do potential homeowners give to indicate they are low-risk? A) Indicating high income B) Buying an expensive home C) Having a large down payment D) Buying an inexpensive home Answer: C Topic: Signal Skill: Conceptual Status: Old AACSB: Communication

5) Mortgage insurance protects lenders when a borrower defaults by making up any shortfall needed to repay the loan if the sale of the property doesn't cover the debt. Federally regulated lenders must have mortgage insurance on loans where the buyer's down payment is less than 20 per cent of the price. This can partially prevent ________. A) symmetric information problems B) adverse selection problems C) public information problems D) the lemon problem Answer: B Topic: Adverse Selection Skill: Conceptual Status: Old AACSB: Communication

6) Mortgage insurance protects lenders when a borrower defaults by making up any shortfall needed to repay the loan if the sale of the property doesn't cover the debt. Federally regulated lenders must have mortgage insurance on loans where the buyer's down payment is less than 20 percent of the price. Why is this 20 percent threshold efficient for the insurance company? A) Information about an individual's mortgage repayment risk is valuable to the insurance company, and the insurance company has found that all individuals fall into this 20 percent threshold. B) Information about an individual's mortgage repayment risk is valuable to the insurance company, but there diminishing marginal cost in obtaining very specific information. C) Information about an individual's mortgage repayment risk is valuable to the insurance company, and the insurance company has found that this 20 percent threshold is perfectly efficient. D) Information about an individual's mortgage repayment risk is valuable to the insurance company, but there diminishing marginal benefit in obtaining very specific information. Answer: D Topic: Private Information Skill: Analytical Status: Old AACSB: Communication

7) Suppose Nara could invest her $1000 in a savings account or she could invest in the stock market. After one year, the savings account has a guaranteed 5 percent interest rate and the stock market has a 10 percent chance of tripling her money, and 90 percent chance of losing it all. What is Nara's expected wealth if she places her money in the savings account? A) $1,050 B) $50 C) $300 D) $1,300 Answer: A Topic: Expected Wealth Skill: Analytical Status: Old AACSB: Analytical Skills

8) Suppose Nara could invest her $1000 in a savings account or she could invest in the stock market. After one year, the savings account has a guaranteed 5 percent interest rate and the stock market has a 10 percent chance of tripling her money, and 90 percent chance of losing it all. What is the difference in Nara's expected wealth between these two options? A) $1050 B) $300 C) $750 D) $50 Answer: C Topic: Expected Wealth Skill: Analytical Status: Old AACSB: Analytical Skills

9) Suppose Nara could invest her $1000 in a savings account or she could invest in the stock market. After one year, the savings account has a guaranteed 5 percent interest rate and the stock market has a 10 percent chance of tripling her money, and 90 percent chance of losing it all. What is Nara's expected wealth if she places her money in the stock market? A) $300 B) $1,300 C) $50 D) $1,050 Answer: A Topic: Expected Wealth Skill: Analytical Status: Old AACSB: Analytical Skills

10) Suppose Nara could invest her $1000 in a savings account or she could invest in the stock market. After one year, the savings account has a guaranteed 5 percent interest rate and the stock market has a 10 percent chance of tripling her money, and 90 percent chance of losing it all. To give Nara the maximum expected wealth, what should she do? A) She should invest all of her money in the stock market. B) She should invest all of her money in the savings account. C) She should invest half of her money in the savings account and half in the stock market. D) She should only invest her money in the stock market if she is risk averse. Answer: B Topic: Expected Wealth Skill: Analytical Status: Old AACSB: Analytical Skills

11) Katy has an ailing and wealthy, but miserly, parent. The parent has told Katy that if she takes care of him until he dies, then she will get $100,000 in inheritance. Katy knows that there is only a 50-50 chance that her father will leave her the full amount or nothing. To take care of her father, she has to take a job that pays $30,000 where her current job pays her $70,000 per year. If her father is expected to pass away in 1 year, what is Katy's expected wealth if she takes care of her father? A) $130,000 B) $90,000 C) $80,000 D) $70,000 Answer: C Topic: Expected Wealth Skill: Analytical Status: Old AACSB: Analytical Skills

12) Katy has an ailing and wealthy, but miserly, parent. The parent has told Katy that if she takes care of him until he dies, then she will get $100,000 in inheritance. Katy knows that there is only a 50-50 chance that her father will leave her the full amount or nothing. To take care of her father, she has to quit her job that pays $60,000 where per year. If her father is expected to pass away in 1 year, what is Katy's expected wealth if she takes care of her father? A) $100,000 B) $50,000 C) $60,000 D) $110,000 Answer: B Topic: Expected Wealth Skill: Analytical Status: Old AACSB: Analytical Skills

13) In an ad for insurance, the text reads "Life's an adventure, and there are plenty of perils awaiting your jewelry: a lost or broken stone, theft, accidental loss, damage, mysterious disappearance Have you thought about insurance?" What is the economic reasoning for an individual to buy insurance? A) Individuals who buy insurance are profit maximizers. B) Individuals who buy insurance are rational. C) Individuals who buy insurance are dishonest and can profit from dishonesty. D) Individuals who buy insurance increase their expected utility by owning insurance. Answer: D Topic: Insurance Skill: Conceptual Status: Old AACSB: Reflective Thinking

14) In an ad for insurance, the text reads "Life's an adventure, and there are plenty of perils awaiting your jewelry: a lost or broken stone, theft, accidental loss, damage, mysterious disappearance Have you thought about insurance?" How does the inclusion of accidental loss and mysterious disappearance create moral hazard? A) Individuals who purchase insurance are risk averse. B) Those who seek this jewelry insurance know that tend to lose their jewelry often. C) Once insured, some individuals wear their jewelry swimming, exercising, etc. where there is an increased risk of loss. D) Individuals who own jewelry know more about their risk than insurance company. Answer: C Topic: Moral Hazard Skill: Conceptual Status: Old AACSB: Reflective Thinking

15) In an ad for insurance, the text reads "Life's an adventure, and there are plenty of perils awaiting your jewelry: a lost or broken stone, theft, accidental loss, damage, mysterious disappearance Have you thought about insurance?" How does the inclusion of accidental loss and mysterious disappearance create adverse selection? A) Those who seek this jewelry insurance know that tend to lose their jewelry often. B) Individuals who own jewelry know more about their risk than insurance company. C) Once insured, some individuals wear their jewelry swimming, exercising, etc. where there is an increased risk of loss. D) Individuals who purchase insurance are risk averse. Answer: A Topic: Adverse Selection Skill: Conceptual Status: Old AACSB: Reflective Thinking

16) Ebay is an online auction site where individual buyers and sellers receive feedback on their how well they conducted their transaction. This feedback is public available. What is the purpose of this feedback? A) It is a signal that the buyer or seller is reliable. B) To reduce credit risk of a faulty buyer C) To reduce default risk of a faulty seller D) It is a tool to prevent moral hazard. Answer: A Topic: Signal Skill: Conceptual Status: Old AACSB: Reflective Thinking

17) Pirates have been intensely attacking ships off the shore of Somalia this year. Boat owners have reportedly coughed up more than $30 million in ransom and insurance premiums have shot up. Why would insurance premiums increase dramatically? I. Because the probability of pirate attack has increased II. Because consumers' willingness to pay for insurance has increased because of these attacks III. Because insurance claims have increased A) I only B) I and III only C) III only D) I, II, and III Answer: D Topic: Insurance Skill: Conceptual Status: Old AACSB: Reflective Thinking

18) Pirates have been intensely attacking ships off the shore of Somalia this year. Boat owners have reportedly coughed up more than $30 million in ransom and insurance premiums have shot up. The pirate activity and increase in premiums means that the expected wealth of boat owners who sail near Somalia is ________. A) decreasing B) increasing C) staying the same D) decreasing only if they have insurance Answer: A Topic: Expected Wealth Skill: Conceptual Status: Old AACSB: Communication

19) Pirates have been intensely attacking ships off the shore of Somalia this year. Boat owners have reportedly coughed up more than $30 million in ransom and insurance premiums have shot up. The pirate activity means that the expected utility of wealth of risk averse boat owners who do not have insurance and sail near Somalia is ________. A) increasing B) decreasing C) staying the same D) not able to be determined without knowing the extent of risk aversion Answer: B Topic: Expected Utility Skill: Conceptual Status: Old AACSB: Communication

20) Pirates have been intensely attacking ships off the shore of Somalia this year. Boat owners have reportedly coughed up more than $30 million in ransom and insurance premiums have shot up. If there is a sudden and unexpected increase in risk, who gains? A) Insurance companies B) The government of Somalia C) Boat owners who are insured with policies whose price cannot be changed D) Pirates Answer: C Topic: Insurance Skill: Conceptual Status: Old AACSB: Communication

6 Essay Questions 1) What is expected utility? Answer: Expected utility is the average utility arising from all possible outcomes. Topic: Expected Utility Skill: Recognition Status: Old AACSB: Reflective Thinking

2) What does it mean to be risk averse? Answer: A person is risk averse if his or her expected utility from a risky situation is less than the utility he or she would receive from having, with certainty, the expected wealth from the risky situation. Topic: Risk Aversion Skill: Recognition Status: Old AACSB: Reflective Thinking

3) How can we measure the cost of risk? Answer: The cost of risk is the amount by which expected wealth must be increased to give the same expected utility as a no-risk situation. Topic: Cost of Risk Skill: Recognition Status: Old AACSB: Reflective Thinking

4) When would a risk averse individual not insure a risky event? Answer: Risk averse individuals are always willing to pay more than the minimum cost of insurance up to a point. If the insurance is priced above the maximum price the individual is willing to pay, he or she will not buy the insurance. Topic: Gains From Insurance Skill: Conceptual Status: Old AACSB: Reflective Thinking

5) What is private information and what problems does it create? Answer: Private information is information that is available to one person but too costly for anyone else to obtain. Private information creates two problems: moral hazard and adverse selection. Topic: Private Information Skill: Recognition Status: Old AACSB: Reflective Thinking

6) Explain the concept of moral hazard. Give an example. Answer: Moral hazard exists when one of the parties to an agreement has an incentive after the agreement made to act in a manner that brings additional benefits to himself or herself at the expense of the other party. Moral hazard arises because it is too costly for the injured party to monitor the actions of the advantaged party. For example, Bob hires Jack as a salesperson and pays him a fixed wage. Jack has an incentive to put the least possible effort, benefiting himself and lowering Bob's profits. Topic: Moral Hazard Skill: Recognition Status: Old AACSB: Communication

7) "People buy insurance do protect themselves from moral hazard." True or false? Explain. Answer: The statement is false. In fact, insurance creates a moral hazard problem because a person with insurance coverage for a loss has less incentive than an uninsured person to avoid such a loss. For example, a person with fire insurance for his house has less incentive to take precautions against fire than a person with no fire insurance does. Topic: Moral Hazard Skill: Conceptual Status: Old AACSB: Communication

8) Most college professors are granted tenure after six years of employment. Tenure implies a lifetime appointment. What problem does this situation create, and how can colleges minimize the problem? Answer: Receiving a lifetime appointment creates a moral hazard. Knowing that one cannot be fired creates an incentive to shirk work. Colleges minimize the problem by looking for signals such as publications and an ongoing commitment to one's discipline during the six year probation period with the belief that those who work hard for these six years are also likely to work hard throughout the future. Topic: Moral Hazard Skill: Conceptual Status: Old AACSB: Communication

9) Explain the concept of adverse selection. Give an example. Answer: Adverse selection is a tendency for people to enter into agreements in which they can use their private information to their own advantage and to the disadvantage of the less informed party. For example, if a car dealership offers its salespeople a fixed wage, it will attract lazy salespeople. Hardworking salespeople will prefer not to work for this dealership because they can earn more by working a dealership that pays by results. Topic: Adverse Selection Skill: Recognition Status: Old AACSB: Communication

10) Consider a market for used cars. Suppose there are only two kinds of cars: lemons and good cars. A lemon is worth $1,500 both to its current owner and to anyone who buys it. A good car is worth $6,000 to its current and potential owners. Buyers can't tell whether a car is a lemon until after they have bought the car. What do economists call the problem that buyers of used cars face? What kind of cars (lemons, good cars, or both) are traded? Explain and substantiate your answer. Answer: Because buyers can't tell the difference between a lemon and a good car, they are willing to pay only one price for a used car. And they are not willing to pay $6,000 since there is some probability that they are buying a lemon worth only $1,500. If buyers are not willing to pay $6,000 for a used car, the owners of good cars are not willing to sell them: their car is worth $6,000 to them. So only the owners of lemons are willing to sell. But if only the owners of lemons are selling, all the used cars available are lemons. Thus the market for used cars is a market for lemons. Economists call the problem that buyers of used cars face adverse selection. Topic: Used Car Market Skill: Conceptual Status: Old AACSB: Communication

11) Consider a market for used cars. Suppose there are only two kind of cars: lemons and good cars. A lemon is worth $1,500 both to its current owner and to anyone who buys it. A good car is worth $6,000 to its current and potential owners. Buyers can't tell whether a car is a lemon until after they have bought the car. What do economists call the problem that buyers of used cars face? What is the price of a used car? Explain and substantiate your answer. Answer: Because buyers can't tell the difference between a lemon and a good car, they are willing to pay only one price for a used car. And they are not willing to pay $6,000 since there is some probability that they are buying a lemon worth only $1,500. If buyers are not willing to pay $6,000 for a used car, the owners of good cars are not willing to sell them: their car is worth $6,000 to them. So only the owners of lemons are willing to sell. But if only the owners of lemons are selling, all the used cars available are lemons, so the maximum price worth paying is $1,500. Thus the market for used cars is a market for lemons, and the price of a used car is $1,500. Economists call the problem that buyers of used cars face adverse selection. Topic: Used Car Market Skill: Conceptual Status: Old AACSB: Communication

12) How can a warranty at the seller's expense signal that a product is high quality? Answer: If the product is low quality, the warranty would be very costly for the seller to uphold. Low quality products would need numerous repairs for which the seller would be required to pay. Thus, warranties are not likely to be offered on low quality products. Topic: Private Information; Signals Skill: Conceptual Status: Old AACSB: Communication

7 Numeric and Graphing Questions 1) Mike owns a car worth $20,000, and that is his only wealth. There is a 10 percent chance that Mike will have an accident within a year. If he does have an accident, his car is worthless. What is Mike's expected wealth? Answer: The probability of an accident is 0.1, and the probability of not having an accident is 0.9. So Mike's expected wealth is $20,000 × 0.9 + $0 × 0.1 = $18,000. Topic: Expected Wealth Skill: Analytical Status: Old AACSB: Analytical Skills

2) Mike has the utility of wealth curve shown in the figure above. He owns a car worth $20,000, and that is his only wealth. There is a 10 percent chance that Mike will have an accident within a year. If he does have an accident, his car is worthless. a) What is Mike's expected utility? b) What is the maximum amount that Mike is willing to pay for auto insurance? c) Suppose all car owners are like Mike insofar as they have a 10 percent chance of having an accident. An insurance company agrees to pay each person who has an accident the full value of his or her car. The company's operating expenses are $1,000. What is the minimum insurance premium that the company is willing to accept? d) Will Mike buy the company's policy? Why or why not? Answer: a) If Mike has an accident, his utility is zero. If he does not have an accident, his utility is 100. The probability of an accident is 0.1, and the probability of not having an accident is 0.9. So Mike's expected utility is 100 × 0.9 + 0 × 0.1 = 90.

b) The probability of an accident is 0.1, and the probability of not having an accident is 0.9. So Mike's expected wealth is $20,000 × 0.9 + $0 × 0.1 = $18,000. If Mike has an accident, his utility is zero. If he does not have an accident, his utility is 100. So Mike's expected utility is 100 × 0.9 + 0 × 0.1 = 90. Given his utility of wealth curve, the figure above shows that Mike gets the same utility if his wealth is $14,000 with certainty. That is, Mike's utility of a guaranteed wealth of $14,000 is the same as his utility of an expected wealth of $18,000 with the degree of risk he faces. This result means that Mike is willing to pay up to $18,000 - $14,000 = $4,000 for auto insurance. c) The probability of an accident is 0.1. So the company will pay out $20,000 to 1/10 of car owners, or an average of $2,000 per person. The company covers all its costs if it offers insurance for $2,000 + $1,000 = $3,000. So $3,000 is the minimum insurance premium that the company is willing to accept. d) Mike is willing to pay up to $4,000 for auto insurance. The minimum insurance premium that the company is willing to accept is $3,000. So Mike will buy the policy because the maximum amount he is willing to pay is greater than the minimum amount that the insurance company is willing to accept. Topic: Gains From Insurance Skill: Analytical Status: Old AACSB: Analytical Skills

8 True or False 1) A risk averse person has diminishing marginal utility of wealth. Answer: TRUE Topic: Utility of Wealth Skill: Recognition Status: Old AACSB: Reflective Thinking

2) Expected utility is the utility that arises from expected wealth. Answer: FALSE Topic: Expected Utility Skill: Conceptual Status: Old AACSB: Reflective Thinking

3) The cost of risk is the same for everyone. Answer: FALSE Topic: Cost of Risk Skill: Conceptual Status: Old AACSB: Reflective Thinking

4) A risk averse person will always buy insurance against risk. Answer: FALSE Topic: Gains From Insurance Skill: Conceptual Status: Old AACSB: Reflective Thinking

5) Moral hazard occurs when an agreement encourages undesirable behavior. Answer: TRUE Topic: Moral Hazard Skill: Recognition Status: Old AACSB: Reflective Thinking

6) If reckless drivers are more likely than safe drivers to buy automobile insurance, then a moral hazard problem has occurred. Answer: FALSE Topic: Moral Hazard Skill: Conceptual Status: Old AACSB: Reflective Thinking

7) Adverse selection occurs when a sales offer attracts the kinds of customers that the seller does not want. Answer: TRUE Topic: Adverse Selection Skill: Recognition Status: Old AACSB: Reflective Thinking

8) If insured drivers decide to drive more recklessly than uninsured drivers do, then an adverse selection has occurred. Answer: FALSE Topic: Adverse Selection Skill: Conceptual Status: Old AACSB: Reflective Thinking 75 Copyright © 2014 Pearson Education, Inc.

9 Extended Problems

1) Al works as a sales clerk at a department store for a fixed salary of $2,500 per month. He is offered a job as a salesperson at a car dealership in which there is a 50 percent chance that he will make $5,000 a month and a 50 percent chance that he will make only $1,000 a month. The figure above Al's utility of wealth curve: a) What is Al's expected income from the offered job? b) What is Al's expected utility from the offered job? c) Will Al accept the offer? Why or why not? d) What is the minimum fixed salary for which Al will continue to work for the department store and not accept the dealership's offer? Answer: a) The probability that Al will make $5,000 a month is 0.5, and the probability that he'll make $1,000 a month is also 0.5. Therefore Al's expected income is $5,000 × 0.5 + $1,000 × 0.5 = $3,000 per month. b) Al's utility of wealth curve shows that if he makes $5,000 a month, his utility is 100, and if he makes $1,000 a month, his utility is 40. Therefore Al's expected utility is 100 × 0.5 + 40 × 0.5 = 70. c) Al chooses the job that maximizes his expected utility. Al's utility of wealth curve shows that if he stays at the current job and makes $2,500 a month with certainty, his utility is 80. If Al accepts the car dealership's offer, his expected utility (calculated in part (b)) is 70. So Al will not accept the dealership's offer. d) Al will continue to work for the department store and not accept the dealership's offer if his fixed salary gives him a greater utility than that expected from the offered job, 70. As Al's utility of wealth curve shows, his utility is 70 if his risk free income is $2,000 a month. So Al will stay at the current job if his fixed salary is greater than $2,000 a month. Topic: Decisions Under Uncertainty Skill: Analytical Status: Old AACSB: Analytical Skills

2) Wendy works as a teller at a bank for a fixed salary of $1,800 per month. She is offered a job as a salesperson at which there is a 40 percent chance that she will make $5,000 a month and a 60 percent chance that she will make only $1,000 a month. The figure shows Wendy's utility of wealth curve: a) What is Wendy's expected income from the offered job? b) What is Wendy's expected utility from the offered job? c) Will Wendy accept the offer? Why or why not? d) What is the minimum fixed salary for which Wendy will continue to work for the bank and not take the sales job? Answer: a) The probability that Wendy will make $5,000 a month is 0.4, and the probability that she'll make $1,000 a month is also 0.6. Therefore Wendy's expected income is $5,000 × 0.4 + $1,000 × 0.6 = $2,600 per month. b) Wendy's utility of wealth curve shows that if she makes $5,000 a month, her utility is 100, and if she makes $1,000 a month, her utility is 40. Therefore Wendy's expected utility is 100 × 0.4 + 40 × 0.6 = 64. c) Wendy chooses the job that maximizes her expected utility. Wendy's utility of wealth curve shows that if she stays at the current job and makes $1,800 a month with certainty, her utility is 60. If Wendy takes the sales job, her expected utility (calculated in part (b)) is 64. So Wendy will take the sales job. d) Wendy will continue to work for the bank and not take the sales job if her fixed salary gives her a greater utility than that expected from the offered job, 64. As Wendy's utility of wealth curve shows, her utility is 64 if her risk free income is $2,000 a month. So Wendy will stay at the current job if her fixed salary is greater than $2,000 a month. Topic: Decisions Under Uncertainty Skill: Analytical Status: Old AACSB: Analytical Skills

3) Larry owns a car worth $20,000, and that is his only wealth. There is a 10 percent chance that Larry will have an accident within a year. If he does have an accident, his car is worthless. Larry's utility of wealth curve is shown in the figure above. An insurance company agrees to pay a car owner like Larry the full value of his car in case of an accident if the car owner buys the company's insurance policy. The company's operating expenses are $2,500 per policy. a) What is Larry's expected wealth? b) What is Larry's expected utility? c) What is the maximum amount that Larry is willing to pay for car insurance? d) What is the minimum premium that the insurance company is willing to accept? e) Will Larry buy the insurance policy? Why or why not? Answer: a) The probability that Larry will have an accident is 0.1, and the probability that he won't have an accident is 0.9. Therefore Larry's expected wealth is $20,000 × 0.9 + $0 × 0.1 = $18,000. b) If Larry has an accident, his utility is zero. If he does not have an accident, his utility is 100. Because the probability of an accident is 0.1, and the probability of not having an accident is 0.9, Larry's expected utility is 100 × 0.9 + 0 × 0.1 = 90.

c) With no insurance, Larry's expected utility of wealth is 90. This amount of utility is the same utility as Larry gets if his wealth is $12,000 with no risk. This result means Larry is willing to pay up to $20,000 $12,000 = $8,000 for car insurance. d) Because the probability of an accident is 0.1, the company will pay out $20,000 to 1/10 of car owners like Larry, or an average of $2,000 per person. The company covers all its costs if it offers insurance for $2,000 + $2,500 = $4,500. So $4,500 is the minimum insurance premium that the company is willing to accept. e) Larry will buy the policy because the maximum amount that he is willing to pay, $8,000, is greater than the minimum amount that the insurance company is willing to accept, $4,500. Topic: Insurance Skill: Analytical Status: Old AACSB: Analytical Skills

4) Roy owns a sports car worth $40,000, and that is his only wealth. Roy is a reckless driver, and there is a 30 percent chance that he will have an accident within a year. If he does have an accident, his car is worthless. Roy's utility of wealth curve is shown in the figure below. An insurance company agrees to pay a car owner like Roy the full value of his car in case of an accident if the car owner buys the company's insurance policy. The company's operating expenses are $2,000 per policy. a) What is Roy's expected wealth? b) What is Roy's expected utility? c) What is the maximum amount that Roy is willing to pay for car insurance? d) What is the minimum premium that the insurance company is willing to accept? e) Will Roy buy the insurance policy? Why or why not? Answer: a) The probability that Roy will have an accident is 0.3, and the probability that he won't have an accident is 0.7. Therefore Roy's expected wealth is $40,000 × 0.7 + $0 × 0.3 = $28,000. b) If Roy has an accident, his utility is zero. If he does not have an accident, his utility is 100. Because the probability of an accident is 0.3, and the probability of not having an accident is 0.7, Roy's expected utility is 100 × 0.7 + 0 × 0.3 = 70.

c) With no insurance, Roy's expected utility of wealth is 70. The figure above shows that Roy gets the same utility if his wealth is $16,000 with no risk. That is, Roy's utility of a guaranteed wealth of $16,000 is the same as his utility of an expected wealth of $28,000 with the degree of risk he faces. This means that Roy is willing to pay up to $40,000 - $16,000 = $24,000 for car insurance. d) Because the probability of an accident is 0.3, the company will pay out $40,000 to 3/10 of car owners like Roy, or an average of $12,000 per person. The company covers all its costs if it offers insurance for $12,000 + $2,000 = $14,000. So $14,000 is the minimum insurance premium that the company is willing to accept. e) Roy will buy the policy because the maximum amount he is willing to pay, $24,000, is more than the minimum amount that the insurance company is willing to accept, $14,000. Topic: Insurance Skill: Analytical Status: Old AACSB: Analytical Skills

Economics, 11e, Global Edition (Parkin) Chapter 21 Measuring GDP and Economic Growth 1 Gross Domestic Product 1) Gross domestic product is the total ________ produced within a country in a given time period. A) market value of all final and intermediate goods and services B) market value of all goods and services C) amount of final and intermediate goods and services D) market value of all final goods and services Answer: D Topic: GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 2) Gross domestic product A) includes all the goods and none of the services produced in an economy in a given time period. B) measures the value of the aggregate production of goods and services in a country during a given time period. C) measures the value of labor payments generated in an economy in a given time period. D) is generally less than federal expenditure in any time period. Answer: B Topic: GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 3) Gross domestic product is a measure of the total value of all A) sales in an economy over a period of time. B) consumer income in an economy over a period of time. C) capital accumulation in an economy over a period of time. D) final goods and services produced in an economy over a period of time. Answer: D Topic: GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

4) Gross domestic product (GDP) is the ________ in a given time period. A) value of personal consumption expenditures, gross private domestic investment, and federal government expenditures B) sum of wage and salary compensation of employees and corporate profits C) value of all final and intermediate goods and services produced by the economy excluding those goods exported to foreign nations D) market value of final goods and services produced by the economy Answer: D Topic: GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 5) Gross domestic product (GDP) measures the A) number of final goods and services produced in the economy in a given time period. B) number of final goods and services sold in the economy in a given time period. C) market value of old and new final goods and services sold in the economy in a given time period. D) market value of final goods and services produced in the economy in a given time period. Answer: D Topic: GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 6) GDP is defined as the market value of all ________ in a given time period. A) final goods produced in a country B) final goods and services produced by citizens of a particular country regardless of where in the world they are located C) final goods and services produced in a country by only the citizens of the country D) final goods and services produced in a country Answer: D Topic: GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 7) In the definition of GDP, "market value" refers to A) valuing production in production units. B) not counting intermediate products. C) valuing production according to the market price. D) when the production took place. Answer: C Topic: Market Value Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 2 Copyright © 2014 Pearson Education, Inc.

8) In the United States, GDP is typically measured A) monthly. B) quarterly. C) daily. D) weekly. Answer: B Topic: Time Period Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 9) If Nike, an American corporation, produces sneakers in Thailand this would A) count as part of U.S. GDP since it is a U.S. corporation. B) count for both Thailand's GDP and U.S. GDP. C) add to Thailand's GDP but not to U.S. GDP. D) add to neither U.S. GDP nor Thailand's GDP. Answer: C Topic: Production Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 10) If Frito Lay, an American snack company, opens a new manufacturing facility in Mexico and produces snacks which are distributed in South America, then Mexico's GDP ________ and U.S. GDP ________. A) increases; does not change B) does not change; increases C) increases; decreases D) increases; increases Answer: A Topic: Production Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 11) The word "final" in the definition of GDP refers to A) not counting intermediate goods or services. B) the time period when production took place. C) valuing production at market prices. D) counting the intermediate goods and services used to produce GDP. Answer: A Topic: Final Good Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 3 Copyright © 2014 Pearson Education, Inc.

12) A loaf of bread purchased by one of your instructors would be best described as A) an intermediate good. B) a financial asset. C) a used good. D) a final good. Answer: D Topic: Final Good Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 13) Which of the following is a final good? A) the memory chips in your new smart phone B) a share of IBM stock C) flour purchased at the store to bake cookies D) flour used by the bakery to bake cookies Answer: C Topic: Final Good Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 14) In 2013, Ozzie purchased a 2010 Ford Escort from his neighbor for his son, purchased a 2009 "one owner" Camry from Larchmont Toyota for his wife, bought a 2013 new Ford for himself, and sold his 2002 Dodge Caravan to his teenage nephew. Which, if any, of these transactions will be included in GDP in 2013? A) all four transactions B) all three purchases but not the sale C) the purchase of the Ford and the Caravan D) only the purchase of the Ford Answer: D Topic: Final Good Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 15) Which of the following expenditures associated with the production of a new highperformance SUV will be directly included in GDP? A) the sale of bonds to finance the construction of the assembly plant B) the purchase of used welding robots to assemble to vehicles C) the purchase of new tires to be installed on the new vehicles D) the purchase of new machine tools to manufacture the engines Answer: D Topic: Final Good Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 4 Copyright © 2014 Pearson Education, Inc.

16) Intermediate goods are excluded from GDP because A) their inclusion would involve double counting. B) they represent goods that have never been purchased so they cannot be counted. C) their inclusion would understate GDP D) the premise of the question is incorrect because intermediate goods are directly included in calculating GDP. Answer: A Topic: Intermediate Goods and Services Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 17) A ton of coal purchased by your local utility to burn to make electricity would be best described as A) an intermediate good. B) a financial asset. C) a used good. D) a final product. Answer: A Topic: Intermediate Goods and Services Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 18) Which of the following expenditures is for an intermediate good? A) The government buys new tires for its military vehicles. B) A U.S. tire firm sells new tires to Canada. C) General Motors buys new tires to put on the cars it's building. D) You buy new tires for your used car. Answer: C Topic: Intermediate Goods and Services Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 19) GDP does not directly include intermediate goods because A) intermediate goods are not valuable. B) intermediate goods are not useful to consumers. C) that would count the intermediate goods twice. D) that would understate the true size of GDP. Answer: C Topic: Intermediate Goods and Services Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 5 Copyright © 2014 Pearson Education, Inc.

20) The calculation of the final goods and services sold in an economy would NOT include A) the purchase of a lawnmower by a household. B) General Motors' purchases of tires for new automobiles. C) Ford Motor Company's purchase of a new industrial robot to be used to produce cars. D) the purchase of a service by a household. Answer: B Topic: Intermediate Goods and Services Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 21) In computing GDP, it is essential to A) avoid double counting. B) include government transfer payments. C) include government tax revenues. D) count all intermediate products directly as they are produced. Answer: A Topic: Intermediate Goods and Services Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 22) Double counting (counting the same thing twice) in GDP accounting is avoided by not including A) net exports. B) intermediate goods. C) illegal activities. D) depreciation. Answer: B Topic: Intermediate Goods and Services Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 23) GDP counts only final goods and services because this A) method avoids including any goods that are produced this year and sold next year. B) method avoids double counting of goods going through several stages of production. C) amount can be more easily determined in the marketplace. D) method avoids understating the value of GDP produced during a given year. Answer: B Topic: Final Goods and Intermediate Goods Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

24) The circular flow model shows that consumer goods and services produced by business firms are sold in the A) goods market. B) factor market. C) labor market. D) financial market. Answer: A Topic: Circular Flow Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 25) The factor market can best be described as where A) households buy goods and services. B) firms buy goods and services. C) firms buy the services of labor, land and capital. D) governments sell goods and services. Answer: C Topic: Circular Flow Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 26) In the circular flow of income A) households demand goods and services that are supplied by firms, and the firms demand factors that are supplied by intermediate firms. B) households demand goods and services that are supplied by firms, while supplying factors that are demanded by firms. C) households sell goods and services while firms sell factors. D) households buy goods and services while firms sell goods and services. Firms obtain labor from households, capital from government, and raw materials from other firms. Answer: B Topic: Circular Flow Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 27) The circular flow shows that the household sector earns its income by A) selling factors of production. B) buying factors of production. C) selling goods and services. D) selling financial assets. Answer: A Topic: Circular Flow Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 7 Copyright © 2014 Pearson Education, Inc.

28) The circular flow of income shows that A) households transact only in the goods market. B) governments purchase goods and services. C) firms generally are the demanders in the goods markets and suppliers in the factor markets. D) None of the above answers is correct. Answer: B Topic: Circular Flow Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 29) Which of the following is true regarding the circular flow diagram? I. "Aggregate income" is the flow of income earned by firms. II. Retained earnings are considered income earned by firms rather than part of households' income. III. The government, households, and firms all have transactions in the goods market. A) I only B) I and II C) I and III D) III only Answer: D Topic: Circular Flow Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 30) If we compare the four sources of spending in the economy we see that A) household consumption is the smallest. B) government expenditure is the largest. C) business investment is the largest. D) household consumption is the largest. Answer: D Topic: Circular Flow Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

31) Compared to the other sources of spending, net exports is A) large and negative. B) small and negative. C) large and positive. D) small and positive. Answer: B Topic: Circular Flow Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 32) The circular flow diagram shows that A) the flow of payments to the factors used to produce goods and services exceeds the flow of payments for final goods and services. B) goods and factor markets are independent. C) the total amount of income generated by the economy equals the total purchases of final goods and services. D) consumption expenditure equals saving. Answer: C Topic: Circular Flow Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 33) The circular flow diagram shows A) how nominal GDP is distinct from real GDP. B) how the prices of factors are determined. C) the effects of inflation in a simple economy. D) the flows between different sectors of the economy. Answer: D Topic: Circular Flows Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 34) The circular flow diagram indicates that A) households sell the services of factors of production to firms. B) firms buy the services of factors of production from the government. C) households sell goods and services to the government. D) firms buy goods and services from households. Answer: A Topic: Circular Flows Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

35) In the circular flow model of an economy, households A) receive income from buyers of goods and services. B) receive income from the sale of factors in the goods markets. C) pay firms for the use of their factors. D) receive income from producers for the use of factors in the factor markets. Answer: D Topic: Circular Flows Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 36) In the circular flow diagram, aggregate expenditure includes the sum of A) saving and investment. B) consumption and investment. C) consumption, investment, and saving. D) income and saving. Answer: B Topic: Circular Flow, Aggregate Expenditures Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 37) In the circular flow of economic activity A) aggregate expenditure measures the dollar value of purchases of factors. B) aggregate expenditure measures the dollar value of purchases of final goods and services. C) aggregate income measures the dollar value of labor resources only. D) aggregate expenditure is measured as it moves through the financial markets. Answer: B Topic: Circular Flow, Aggregate Expenditures Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 38) In the circular flow diagram, aggregate expenditure includes A) consumption expenditure, saving, investment and government expenditure B) consumption expenditure, saving, investment and net exports C) consumption expenditure, investment, government expenditure and net exports D) consumption expenditure, saving, government expenditure and net exports Answer: C Topic: Circular Flow, Aggregate Expenditures Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

39) In the above figure, flow B represents ________. A) household purchases of goods and services B) household borrowing C) household income D) firms' payments for labor services Answer: A Topic: Circular Flow Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 40) In the above figure, flow B represents households' ________. A) income B) consumption expenditures C) saving D) investment Answer: B Topic: Circular Flow Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

41) In the above figure, household income is shown by flow A) A. B) B. C) C. D) F. Answer: A Topic: Circular Flow Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 42) In the above figure, consumption expenditure is shown by flow A) A. B) B. C) C. D) F. Answer: B Topic: Circular Flow Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 43) Which of the following are equal to one another? I. aggregate production II. aggregate expenditure III. aggregate income A) I equals II, but not III. B) I equals III, but not II. C) II equals III, but not I. D) I equals II equals III. Answer: D Topic: Expenditure Equals Income Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

44) Choose the best statement. A) GDP equals aggregate expenditure and equals aggregate income. B) An increase in government purchases increases aggregate expenditure but does not change GDP. C) An increase in compensation of employees increases aggregate income but does not change GDP. D) GDP always equals aggregate expenditure and sometimes equals aggregate income. Answer: A Topic: Expenditure Equals Income Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 45) According to the circular flow diagram, the dollar value of a nation's output is equal to A) profits. B) total income. C) net income minus taxes. D) wages. Answer: B Topic: Expenditure Equals Income Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 46) Total output and total income in the circular flow model A) are measures of the economy's level of savings. B) include only intermediate goods. C) are equal to each other. D) are related because national income is less than national product. Answer: C Topic: Expenditure Equals Income Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 47) The circular flow shows that A) aggregate production equals aggregate expenditure. B) aggregate expenditure is less than aggregate income. C) GDP equals aggregate income. D) Both answers A and C are correct. Answer: D Topic: Expenditure Equals Income Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

48) Comparing aggregate expenditure and aggregate incomes shows that A) aggregate expenditure is usually greater than aggregate income. B) aggregate income is usually greater than aggregate expenditure. C) they are equal. D) aggregate income can not equal aggregate expenditure if we have any savings. Answer: C Topic: Expenditure Equals Income Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 49) Gross domestic product (GDP) is A) the value of all final goods and services produced in a country during a year. B) the sum of consumption expenditure, investment, government expenditure on goods and services, and net exports. C) the sum of compensation of employees, proprietors' income, net interest, rental income, corporate profits, depreciation, and indirect business taxes minus subsidies. D) all of the above Answer: D Topic: Expenditure Equals Income Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 50) Gross domestic product can be calculated A) either by valuing the nation's output of goods and services or by valuing the income generated in the production process. B) by adding up the personal consumption of all members of the society. C) by adding up the value of all intermediate goods used in the economy. D) by adding up the income tax returns of all members of the society. Answer: A Topic: Expenditure Equals Income Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

51) Gross domestic product is the A) value of the final goods and services produced in a country during a specific time. B) total amount that buyers spent on the final goods and services produced in a country during a specific time. C) total amount of income earned in producing the final goods and services in a country during a specific time. D) All of the above answers are correct. Answer: D Topic: Expenditure Equals Income Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 52) Which of the following is correct? A) Aggregate expenditure equals GDP but is less than aggregate income. B) Aggregate income is greater than GDP but equal to aggregate expenditure. C) Aggregate income is greater than aggregate expenditure but equal to GDP. D) Aggregate income, aggregate expenditure and GDP are all equal. Answer: D Topic: Expenditure Equals Income Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 53) GDP equals A) C + S + G + (X - M) B) C + I + G + (X + M) C) C + I + G + (X - M) D) C + S + G + (X - M) Answer: C Topic: Expenditure Equals Income Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 54) Depreciation is defined as the A) decrease in the stock of capital due to wear and tear. B) increase in the stock of capital due to investment by firms. C) increase in the stock of capital due to wear and tear. D) decrease in the stock of capital due to investment by firms. Answer: A Topic: Depreciation Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

55) Suppose Mail Boxes Etc. buys a new copier for its store for $1000. A year later, when the firm wants to upgrade to a new copier, it finds that the old copier is only worth $750. Over the year the copier was used, ________ has occurred. A) replacement investment B) gross investment C) depreciation D) net investment Answer: C Topic: Depreciation Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 56) Net investment equals A) capital stock minus depreciation. B) gross investment minus depreciation. C) the total quantity of plant, equipment and buildings. D) gross investment/depreciation. Answer: B Topic: Net Investment and Gross Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 57) Which of the following relationships is correct? A) Net Investment = Gross Investment + Depreciation B) Consumption expenditure = Net Investment - Depreciation C) Gross Investment = Net Investment + Depreciation D) Depreciation = Gross Investment - Consumption expenditure Answer: C Topic: Net Investment and Gross Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 58) Gross investment equals net investment plus A) capital. B) capital gains. C) depreciation. D) dividends paid to the owners of the company. Answer: C Topic: Net Investment and Gross Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

59) Gross investment is equal to A) depreciation minus net investment. B) net investment plus capital stock. C) depreciation plus net investment. D) net investment minus capital stock. Answer: C Topic: Net Investment and Gross Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 60) Gross investment equals A) net investment - depreciation + change in inventories. B) net investment + depreciation. C) net investment + change in inventories. D) depreciation + change in inventories. Answer: B Topic: Net Investment and Gross Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 61) ________ is gross investment minus ________. A) The capital stock; net investment B) The capital stock; depreciation C) Depreciation; replacement investment D) Net investment; depreciation Answer: D Topic: Net Investment and Gross Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 62) The difference between gross investment and net investment is A) the capital stock. B) depreciation. C) the real interest rate. D) equal to saving. Answer: B Topic: Net Investment and Gross Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

63) If depreciation is less than gross investment, then net investment is A) positive. B) negative. C) zero. D) This situation could never occur because it is impossible for depreciation to be less than gross investment. Answer: A Topic: Net Investment and Gross Investment Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 64) Net investment A) equals gross investment plus depreciation. B) is the only measure of investment used to calculate GDP. C) equals gross investment minus depreciation. D) is equivalent to the existing capital stock in the economy. Answer: C Topic: Net Investment and Gross Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 65) Net investment equals A) gross investment + depreciation. B) depreciation + addition to inventories. C) savings - depreciation. D) gross investment - depreciation. Answer: D Topic: Net Investment and Gross Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 66) Net investment is the A) total amount of gross investment minus depreciation. B) value of software and other network related products. C) profit or loss in the stock market. D) value of the depreciated capital multiplied by the changes in the price level. Answer: A Topic: Net Investment and Gross Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

67) Which of the following is NOT a final good? A) a new computer sold to an NYU student B) a new car sold to Avis for use in their fleet of rental cars C) a purse sold to a foreign visitor D) a hot dog sold to a spectator at a Chicago Bears football game Answer: B Topic: Study Guide Question, GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 68) GDP equals A) aggregate expenditure. B) aggregate income. C) the value of the aggregate production in a country during a given time period. D) all of the above Answer: D Topic: Study Guide Question, Expenditure Equals Income Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 2 Measuring U.S. GDP 1) Two methods of measuring GDP are A) the income approach and the expenditure approach. B) the income approach and the receipts approach. C) the goods approach and the services approach. D) the saving approach and the investment approach. Answer: A Topic: Measuring U.S. GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 2) GDP can be computed as the sum of A) all sales that have taken place in an economy over a period of time. B) the total expenditures of consumers and business over a period of time. C) the total expenditures of consumption, investment, and government expenditure on goods and services over a period of time. D) the total expenditures of consumption, investment, government expenditure on goods and services, and net exports over a period of time. Answer: D Topic: Expenditure Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 19 Copyright © 2014 Pearson Education, Inc.

3) GDP using the expenditure approach equals the sum of personal consumption expenditures plus A) gross private investment. B) gross private investment plus government expenditure on goods and services. C) gross private investment plus government expenditure on goods and services minus imports of goods and services. D) gross private investment plus government expenditure on goods and services plus net exports of goods and services. Answer: D Topic: Expenditure Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 4) The expenditure approach measures GDP by adding A) compensation of employees, rental income, corporate profits, net interest, and proprietors' income. B) compensation of employees, rental income, corporate profits, net interest, proprietors' income, subsidies paid by the government, indirect taxes paid, and depreciation. C) compensation of employees, rental income, corporate profits, net interest, proprietors' income, indirect taxes paid, and depreciation and subtracting subsidies paid by the government. D) consumption expenditure, gross private domestic investment, net exports of goods and services, and government expenditure on goods and services. Answer: D Topic: Expenditure Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 5) The four categories of expenditure used by the expenditure approach method to calculate GDP are A) consumption expenditure, taxes, saving and investment. B) consumption expenditure, investment, net imports and saving. C) saving, taxes, government expenditure and investment. D) consumption expenditure, investment, government expenditure and net exports. Answer: D Topic: Expenditure Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

6) In the equation, GDP = C + I + G + X - M, G refers to A) federal government expenditures plus all transfer payments. B) local, state, and federal government spending for all purposes. C) the taxes and expenditures of all government units. D) local, state, and federal government expenditure on goods and services, but does not include transfer payments. Answer: D Topic: Expenditure Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 7) The components of the expenditure approach to measuring GDP include all of the following EXCEPT A) net exports. B) government expenditure on goods and services. C) investment. D) the implicit payments for unpaid household work. Answer: D Topic: Expenditure Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 8) All of the following are components of the expenditure approach to measuring GDP EXCEPT A) Shaniq's purchase of a meal at the Olive Garden in Atlanta. B) a Senator from Iowa being paid the monthly salary. C) the army buying new M1 Abram tanks. D) Ford Motor Company buying new Dell computers for use in its marketing department in Dearborn, Michigan. Answer: B Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 9) The largest component of GDP in the expenditure approach is A) personal consumption expenditures. B) gross private domestic investment. C) government expenditure on goods and services. D) net exports. Answer: A Topic: Expenditure Approach, Consumption Expenditures Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 21 Copyright © 2014 Pearson Education, Inc.

10) Of the following, the largest component of GDP is A) personal consumption expenditure. B) gross private domestic investment. C) government expenditure on goods and services. D) net exports of goods and services. Answer: A Topic: Expenditure Approach, Consumption Expenditures Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 11) Which of the following is NOT part of the expenditure approach to measuring GDP? A) gross private domestic investment B) net exports of goods and services C) net interest D) personal consumption expenditures Answer: C Topic: Expenditure Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 12) To measure GDP using the expenditure approach you must collect data on A) inflation. B) exports. C) wages. D) saving. Answer: B Topic: Expenditure Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 13) Aggregate expenditures include all of the following EXCEPT A) consumption of food. B) purchases of intermediate goods. C) purchases of a piece of capital equipment. D) purchases of guns by the government. Answer: B Topic: Expenditure Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

14) Gross Domestic Product is equal to the sum of consumption expenditure, investment, net exports, and ________. A) government expenditures on goods and services B) saving C) profits D) net taxes Answer: A Topic: Expenditure Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 15) Which of the following items is not a component of the expenditure approach to measuring U.S. GDP? A) purchases of food made by families B) social security payments made by the government C) purchases of U.S.-made movies by Europeans D) purchases of new homes made by families Answer: B Topic: Expenditure Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 16) In the expenditure approach to GDP, the largest component is A) government expenditure on goods and services. B) personal consumption expenditures. C) gross private domestic investment. D) net exports. Answer: B Topic: Expenditure Approach Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 17) Let C represent consumption expenditure, S saving, I gross private domestic investment, G government expenditure on goods and services, and X - M net exports of goods and services. Then GDP equals A) C + S + G + X - M. B) C + S + G - X - M. C) C + I + G + X - M. D) C + I + G - X - M. Answer: C Topic: Expenditure Approach Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 23 Copyright © 2014 Pearson Education, Inc.

18) According to the BEA, in the second quarter of 2012 personal consumption expenditures grew by 1.7 percent, gross private domestic investment grew by 3.0 percent, government expenditure on goods and services decreased by -0.9 percent, imports grew by 2.9%, and exports grew by 6.0%. Given these data, it is most likely that A) GDP growth was positive in the 2nd quarter. B) GDP growth was negative in the 2nd quarter. C) the economy hit a business cycle peak. D) the economy hit a business cycle trough. Answer: A Topic: Expenditure Approach Skill: Analytical Status: New AACSB: Analytical Skills 19) Consumption expenditure is the payment by households for consumption of A) goods but not services. B) services but not goods. C) goods and services. D) services and for saving. Answer: C Topic: Expenditure Approach, Consumption Expenditures Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 20) The largest component of GDP is A) gross private domestic investment. B) personal consumption expenditures. C) net exports of goods and services. D) government expenditure on goods and services. Answer: B Topic: Expenditure Approach, Consumption Expenditures Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

21) Personal consumption expenditures include A) expenditures by households on goods and services produced only in the United States. B) expenditures by households on goods and services produced in the United States and the rest of the world. C) the purchase of new homes. D) the purchase of used goods and new goods. Answer: B Topic: Expenditure Approach, Consumption Expenditures Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 22) Which of the following purchases is included in personal consumption expenditures when determining gross domestic product? A) purchase of a new house because of the arrival of a new baby B) purchase of a new office building C) vacation expenses for a spring trip to Fort Lauderdale D) purchases of jeans to add to a store's inventory Answer: C Topic: Expenditure Approach, Consumption Expenditures Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 23) Personal consumption expenditures include all of the following EXCEPT spending on A) consumer durable goods. B) consumer nondurable goods. C) consumer services. D) new housing. Answer: D Topic: Expenditure Approach, Consumption Expenditures Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 24) All of the following household expenditures are included in consumption expenditure EXCEPT A) payment to a dentist for filling a tooth. B) purchase of corporate stock. C) purchase of a new purse. D) purchase of hair styling. Answer: B Topic: Expenditure Approach, Consumption Expenditures Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 25 Copyright © 2014 Pearson Education, Inc.

25) Gross private domestic investment is all purchases of newly produced business capital goods and buildings A) minus the change in business inventories. B) plus the change in business inventories plus residential construction. C) plus fixed investment minus inventory investment. D) plus purchases of capital goods produced in previous years to replace any depreciated capital goods. Answer: B Topic: Expenditure Approach, Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 26) The difference between gross investment and net investment is A) inflation. B) depreciation. C) initial capital. D) consumption. Answer: B Topic: Expenditure Approach, Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 27) Goods that are produced this year, stored in inventories, and then sold to consumers next year A) count in this year's GDP. B) count in next year's GDP. C) count in both this year's and next year's GDP. D) are not counted as a part of GDP. Answer: A Topic: Expenditure Approach, Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 28) A new 2012 Honda Civic produced in 2012 and purchased in 2013 is A) part of GDP in 2012. B) part of GDP in 2013. C) not part of GDP in either year because it was produced in one year and sold in another year. D) part of GDP in both 2012 and 2013. Answer: A Topic: Expenditure Approach, Consumption Expenditures Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

29) Which of the following are examples of the gross private domestic investment component of GDP? I. the purchase of production machinery by IBM II. an increase in the finished goods inventory at Intel A) I only B) II only C) both I and II D) neither I nor II Answer: C Topic: Expenditure Approach, Investment Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 30) In the calculation of gross domestic product by the expenditure approach, the "investment" component is A) net investment. B) gross investment minus depreciation. C) gross investment plus depreciation. D) gross investment. Answer: D Topic: Expenditure Approach, Investment Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 31) An example of "investment" in computing real GDP using the expenditure approach is the purchase of A) a new set of tools by an auto mechanic, for use in repairing cars. B) 100 shares of IBM stock. C) a 100 year old house by a married couple. D) computer chips by Dell to put in their personal computers. Answer: A Topic: Expenditure Approach, Investment Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

32) An example of "investment" in the national income accounts is the purchase of A) a new van by a potter, who packs it with his wares and travels to art shows. B) 100 shares of Intel stock on the New York Stock Exchange. C) a 100-year-old house that was just put on the protected historic sites list in the year in question. D) a U.S. government bond. Answer: A Topic: Expenditure Approach, Investment Skill: Conceptual Status: Revised AACSB: Reflective Thinking 33) According to the BEA, in the second quarter of 2012 business spending on equipment and software rose by 4.7 percent. Using the expenditure approach, this change increases A) gross private domestic investment. B) government expenditure on goods and services. C) net exports of goods and services. D) personal consumption expenditures. Answer: A Topic: Expenditure Approach, Investment Skill: Analytical Status: New AACSB: Analytical Skills 34) According to the BEA, in the second quarter of 2012 purchases of new residential structures rose by 8.9 percent. Using the expenditure approach, this change increases A) gross private domestic investment. B) government expenditure on goods and services. C) net exports of goods and services. D) personal consumption expenditures. Answer: A Topic: Expenditure Approach, Investment Skill: Analytical Status: New AACSB: Analytical Skills 35) In the national income accounts, the purchase of a new house counts as A) consumption expenditure. B) investment. C) a transfer. D) an addition to inventory. Answer: B Topic: Expenditure Approach, Investment Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

36) All of the following are included in gross private domestic investment expenditure EXCEPT a A) business's purchase of a fleet of cars. B) household's purchase of a new house. C) business's purchase of another company's stock. D) a retail store's purchase of shoes to add to its inventory. Answer: C Topic: Expenditure Approach, Investment Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 37) In the national income accounts, government expenditure on goods and services refer to those purchases made by A) federal and state governments only. B) the federal government only. C) state and local governments only. D) all levels of government. Answer: D Topic: Expenditure Approach, Government Expenditure Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 38) In the national income accounts, government expenditure on goods and services exclude A) transfer payments. B) state and local government purchases. C) local government purchases but include state government purchases. D) spending on national defense. Answer: A Topic: Expenditure Approach, Government Expenditure Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 39) Which of the following is included in the government expenditure component of the expenditure approach to GDP? A) state government expenditure on local schools B) transfer payments C) changes in inventories D) taxes Answer: A Topic: The Expenditure Approach, Government Purchases Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

40) According to the BEA, in the second quarter of 2012 state and local government spending on goods and services changed by -1.4 percent. Using the expenditure approach, this change leads to A) a decrease in government expenditure on goods and services. B) no change in GDP because only federal government expenditures are included in GDP. C) a decrease in gross private domestic investment. D) no change in GDP because state and local government expenditure is always canceled out by federal government expenditure. Answer: A Topic: Expenditure Approach, Government Expenditure Skill: Analytical Status: New AACSB: Analytical Skills 41) Which one of the following transactions in a particular year is included in gross domestic product for that year? A) Social Security payments to retirees B) The government pays a computer services company that assisted in the delivery of Social Security payments to retirees. C) A car is produced in the previous year and remains in inventory for the entire year under consideration. D) A stay-at-home parent performs housework that the family would otherwise have paid a maid $20,000 a year to perform. Answer: B Topic: The Expenditure Approach, Government Purchases Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 42) Which of the following is included in government expenditures when measuring GDP? A) Social Security payments B) unemployment compensation payments C) pension payment made to past presidents D) the current president's salary Answer: D Topic: Expenditure Approach, Government Expenditure Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

43) Transfer payments A) are included in the government expenditure category in gross domestic product. B) refer to all payments made to households by governments. C) refer to payments made by the government that are not made to purchase a good or service. D) are made by households to firms in exchange for goods and services. Answer: C Topic: Expenditure Approach, Government Expenditure Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 44) In the computation of GDP, social security payments count as A) transfer payments and are included in GDP. B) transfer payments and are not included in GDP. C) government expenditure on goods and services and are included in GDP. D) government expenditure on goods and services and are not included in GDP. Answer: B Topic: The Expenditure Approach, Government Purchases Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 45) Which of the following items is NOT part of government expenditure on goods and services in the GDP accounts? A) gasoline purchases for government car pools B) Social Security expenditures C) new computer hardware for use by the IRS D) drapes to brighten up the president's office Answer: B Topic: Expenditure Approach, Government Expenditure Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 46) Transfer payments are not included in GDP because A) their market value cannot be accurately determined. B) they do not generate additional income. C) they are not purchases of goods or services. D) their value is included in government expenditure. Answer: C Topic: Expenditure Approach, Government Expenditure Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

47) Which of the following transfer payments is included in GDP? A) Social Security payments B) welfare payments C) veteran's benefits D) none of the above Answer: D Topic: Expenditure Approach, Government Expenditure Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 48) Which of the following is NOT part of GDP calculated using the expenditure approach? A) General Motors' purchases of new capital equipment B) expenditures by the federal government for national defense C) social security payments made to the elderly D) the purchase of new homes by consumers Answer: C Topic: The Expenditure Approach, Government Purchases Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 49) Transfer payments are not part of government expenditure on goods and services because transfer payments A) are not predictable given the nature of their appropriation and allocation. B) do not represent the purchase of a final good or service. C) are not always spent on goods produced in the U.S. D) The premise of the question is incorrect because transfer payments are part of government purchases of goods and services. Answer: B Topic: Expenditure Approach, Government Expenditure Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 50) Government expenditures included in the expenditure approach to GDP include ________. A) social security and education B) net exports C) buying a new bomber D) Both answers A and C are correct Answer: C Topic: Expenditure Approach, Government Expenditure Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

51) According to the BEA, in the second quarter of 2012 federal government spending on goods and services changed by -0.1 percent. This decrease could have been caused by a decrease in spending on A) national defense. B) Social Security. C) interest payments on the national debt. D) unemployment benefits. Answer: A Topic: Expenditure Approach, Government Expenditure Skill: Analytical Status: New AACSB: Analytical Skills 52) Net exports of goods and services equal the A) exports of goods and services divided by the imports of goods and services. B) exports of goods and services plus the imports of goods and services. C) exports of goods and services minus the imports of goods and services. D) imports of goods and services minus the exports of goods and services. Answer: C Topic: Expenditure Approach, Net Exports Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 53) Net exports is negative if A) the value of exports exceeds the value of imports. B) the value of imports exceeds the value of exports. C) the tariff payments are included in the value of imported and exported items. D) too much production occurs in the exporting country during the year. Answer: B Topic: Expenditure Approach, Net Exports Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 54) In 2012, net exports in the United States were A) zero. B) positive. C) negative. D) greater than personal consumption expenditures. Answer: C Topic: Expenditure Approach, Net Exports Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

55) To calculate GDP using the expenditure approach, in part it is necessary to A) add imports and exports. B) add imports and subtract exports. C) add exports and subtract imports. D) subtract both exports and imports. Answer: C Topic: Expenditure Approach, Net Exports Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 56) An increase in exports of goods or services with no change in imports of goods or services A) decreases GDP. B) increases GDP. C) may increase or decrease GDP depending on whether it is the export of goods or the export of services that increased. D) has no effect on GDP. Answer: B Topic: Expenditure Approach, Net Exports Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 57) By itself, an increase in exports A) increases GDP. B) decreases GDP. C) means imports decrease by the same amount. D) can either increase or decrease GDP, depending on whether the exports are durable or nondurable. Answer: A Topic: Expenditure Approach, Net Exports Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 58) If Ford sells 200 Explorers for a total of $400,000 to Germany, while the United States imports 100 BMWs for a total of $500,000 from Germany, A) U.S. GDP increases because it sells more Explorers. B) U.S. GDP decreases because net exports are negative. C) Germany's GDP decreases. D) U.S. net exports is positive. Answer: B Topic: Expenditure Approach, Net Exports Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 34 Copyright © 2014 Pearson Education, Inc.

59) An U.S. firm buys a new industrial sewing machine from a company located in France. Which of the following is true? I. U.S. net exports decrease. II. U.S. investment increases. A) only I B) only II C) both I and II D) neither I nor II Answer: C Topic: The Expenditure Approach, Net Exports Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 60) If an American firm produces goods that are sold to a German household, then A) German GDP increases but not U.S. GDP. B) U.S. GDP increases. C) the transaction is considered an export in the German GDP accounts. D) net exports in the United States will not change because an export immediately generates an offsetting import. Answer: B Topic: Expenditure Approach, Net Exports Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 61) In the calculation of GDP by the expenditure approach, exports from the United States must be A) subtracted because they are included in the consumption of a foreign country. B) ignored because they are not bought by U.S. citizens. C) subtracted if they are bought by foreign firms for investment purposes. D) added. Answer: D Topic: Expenditure Approach, Net Exports Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

Item Personal consumption expenditure Government expenditure on goods and services Net taxes Gross private domestic investment Imports of goods and services Exports of goods and services

Millions of dollars 80 30 35 20 10 20

62) Using the information in the table above, calculate the value of GDP. A) $185 million B) $145 million C) $195 million D) $140 million Answer: D Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 63) Use the information in the table above to calculate the value of net exports. A) $10 million B) $0 C) -$10 million D) $30 million Answer: A Topic: Expenditure Approach, Net Exports Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 64) Last year in the country of Nerf imports equaled exports. Nerf's GDP was $500 million, its consumer expenditure was $380 million, and its investment was $20 million. Nerf's government expenditure on goods and services were ________. A) $100 million B) $900 million C) $500 million D) zero Answer: A Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 36 Copyright © 2014 Pearson Education, Inc.

Item Billions of dollars Government expenditure on 250 goods and services Compensation of employees 1,675 Gross private domestic 325 investment Rental income 20 Personal consumption 1425 expenditures Net interest 40 Net exports of goods and 100 services Indirect business taxes and 300 depreciation 65) The above table shows some (but not all) national income accounting data for a hypothetical country. According to these data, the value of GDP is ________ billion. A) $2100 B) $1850 C) $2000 D) $2050 Answer: A Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

Item Personal consumption expenditure Gross private domestic investment Government expenditure on goods and services Exports of goods and services Imports of goods and services Depreciation Indirect business taxes

Dollars 1500 355 590 70 50 200 75

66) Based on the data in the above table, gross domestic product equals A) $2,190. B) $2,840. C) $2,465. D) $2,750. Answer: C Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

Item Personal consumption expenditure Gross private domestic investment Government expenditure on goods and services Exports of goods and services Imports of goods and services Net taxes

Billions of dollars 100 10 50 30 30 50

67) The above table shows data from the GDP accounts of Hypothetica. Hypothetica's GDP is ________ billion. A) $270 B) $210 C) $190 D) $160 Answer: D Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 68) If imports are $100 million less than exports, government expenditures are $500 million, consumer expenditures are $1 billion, and gross investment spending is $500 million, then GDP is A) $1 billion. B) $1.9 billion. C) $2 billion. D) $2.1 billion. Answer: D Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

69) If consumption expenditures are $500 million, net investment is $100 million, depreciation equals $5 million, imports are $50 million, exports are $55 million, government expenditure on goods and services is $220 million, and government transfer payments are $20 million, then GDP is A) $790 million. B) $800 million. C) $830 million. D) $850 million. Answer: C Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

Component Net taxes Personal consumption expenditure Depreciation Government expenditure Gross investment Exports Imports Household saving

Amount (billions of dollars) 1,635 5,566 622 1,784 1,234 957 1,138 1,202

70) Using the data in the table above, what is the value of GDP? A) $13,516 billion B) $10,679 billion C) $9,541 billion D) $8,403 billion Answer: D Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

71) Using the data in the above table, what is the value of net exports? A) -$181 billion B) $181 billion C) $957 billion D) -$957 billion Answer: A Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 72) Using the data in the above table, what is the value of national saving? A) $1,202 billion B) $2,837 billion C) $1,053 billion D) -$85 billion Answer: C Topic: National Saving Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills Component Net taxes Personal consumption expenditure Depreciation Government expenditure Gross investment Net exports Compensation of employees

Amount (dollars) 10 50 8 20 26 -10 65

73) Using the information in the table above, calculate gross domestic product. A) $118 B) $108 C) $86 D) $78 Answer: C Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

74) Using the information in the table above, calculate the government's budget deficit or surplus. A) $2 B) -$4 C) -$10 D) $4 Answer: C Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

Component Personal consumption expenditure Government expenditure Gross investment Net investment Exports Imports

Amount (billions of dollars) 3,720 430 610 520 650 720

75) Using the information in the table above, calculate gross domestic product. A) $5,130 billion B) $5,320 billion C) $4,760 billion D) $4,690 billion Answer: D Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 76) Using the information in the table above, net exports equals A) $1,370 billion. B) $650 billion. C) $20 billion. D) -$70 billion. Answer: D Topic: Net Exports Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

77) Using the information in the table above, depreciation equals A) -$90 billion. B) $90 billion. C) -$70 billion. D) some amount that cannot be determined. Answer: B Topic: Depreciation Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills Government purchases of goods and services Depreciation Gross private domestic investment Personal income taxes Net taxes Net exports of goods and services Personal consumption expenditures Net interest

$240 240 400 140 120 80 640 100

78) From the data in the above table, GDP equals A) $1,120. B) $1,280. C) $1,290. D) $1,360. Answer: D Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 79) The approach to GDP that sums compensation of employees, rental income, corporate profits, net interest, proprietors' income, depreciation, and indirect taxes and subtracts subsidies is the A) opportunity cost approach. B) expenditure approach. C) added cost approach. D) income approach. Answer: D Topic: Income Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

80) The income approach to measuring GDP sums together A) compensation of employees, rental income, corporate profits, net interest, proprietors' income, subsidies paid by the government, indirect taxes paid, and depreciation. B) compensation of employees, rental income, corporate profits, net interest, proprietors' income, indirect taxes paid, and depreciation and subtracts subsidies paid by the government. C) the sales of each firm in the economy. D) the costs of each firm in the economy and then subtracts indirect business taxes and depreciation. Answer: B Topic: Income Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 81) Proprietors' income is a component of which approach to measuring GDP? A) incomes approach B) expenditure approach C) cost approach D) output approach Answer: A Topic: Income Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 82) The income approach to measuring GDP A) determines the cost of production, then adjusts it to equal the market value of production. B) sums all incomes earned in the United States and makes no other adjustments because other adjustments are not necessary. C) measures the cost of producing GDP rather than the market value. D) sums the value at each stage of production plus the value of depreciation. Answer: A Topic: Income Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

83) The five categories of income used in the income approach to the measurement of GDP are A) consumption, saving, rental income, corporate profits, and investment. B) employee compensation, net interest, rental income, corporate profits, and proprietor's income. C) employee compensation, consumption, rental income, corporate profits, and proprietor's income. D) employee compensation, saving, rental income, corporate profits, and investment. Answer: B Topic: Income Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 84) Which of the following expressions equals GDP? A) compensation of employees + consumption + depreciation + net investment B) compensation of employees + net interest + rental income + depreciation + corporate profits + proprietors' income + indirect taxes - subsidies C) compensation of employees + net exports + depreciation + corporate profits D) compensation of employees + gross investment + rental income + depreciation + corporate profits + indirect taxes - subsidies Answer: B Topic: Income Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 85) Which of the following is a component of the incomes approach to GDP? A) consumption expenditure B) wages and salaries C) investment D) government expenditure on goods and services Answer: B Topic: Income Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

86) The income approach measures GDP by adding together compensation of employees, proprietors' income, ________. A) net investment, saving, and farmers' income B) net interest, rental income, and corporate profits C) net investment, rental income, and corporate profits D) net saving, investment income, and profits Answer: B Topic: Income Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 87) Which of the following items is NOT a component of the income approach to measuring U.S. GDP? A) interest earned on savings deposits B) profits made by businesses C) income earned by businesses that export goods D) investment Answer: D Topic: Income Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 88) Which of the following is NOT a part of the income approach to determining GDP? A) rental income B) gross private domestic investment C) net interest D) indirect business taxes Answer: B Topic: Income Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 89) Which of the following is NOT one of the components for computing GDP based upon the income approach? A) investment B) corporate profits C) compensation of employees D) net interest Answer: A Topic: Income Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 46 Copyright © 2014 Pearson Education, Inc.

90) Which of the following is NOT included in the income approach to measuring GDP? A) net interest B) net exports C) corporate profits D) compensation of employees Answer: B Topic: Income Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 91) In the country of Darrowby, net domestic income at factor cost is $2.0 million. Gross domestic product is $3.0 million, and depreciation is $0.5 million. Indirect taxes less subsidies ________. A) are $1 million B) are $0.5 million C) cannot be calculated D) are -$0.5 million Answer: B Topic: Income Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills Item Compensation of employees Net interest and rental income Corporate profits Proprietor's income

Billions of dollars 80 30 10 20

92) Use the information in the table above plus the fact that indirect taxes less subsidies are $10 billion and depreciation is $30 billion to calculate the value of GDP. A) $180 billion B) $150 billion C) $140 billion D) $130 billion Answer: A Topic: Income Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

93) The largest component of national income is A) compensation of employees. B) rental income. C) corporate profits. D) proprietors' income. Answer: A Topic: Income Approach, Compensation of Employees Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 94) Looking at the components of the income approach we see that A) compensation of employees is the largest category. B) consumption is the largest category. C) profits are the largest category. D) rental income is the largest category. Answer: A Topic: Income Approach, Compensation of Employees Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 95) Compensation paid to employees represented ________ of GDP for the United States in 2012. A) about 5 percent B) approximately 15 percent C) 35 percent D) more than 50 percent Answer: D Topic: Income Approach, Compensation of Employees Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

96) Which of the following is included in "compensation of employees" part of the income approach to measuring GDP? I. Wages and salaries. II. Pension fund contributions. III. Social security contributions. A) I only B) I and II C) I and III D) I, II and III Answer: D Topic: Income Approach, Compensation of Employees Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 97) When calculating the compensation of employees part of GDP, A) social security contributions must be included. B) fringe benefits are not included. C) taxes withheld on earnings are not included. D) the value of vacation time must be included. Answer: A Topic: Income Approach, Compensation of Employees Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 98) In the national income accounts, net interest is the total interest payments received by households on loans made by them minus A) interest received from households' ownership of government bonds. B) interest payments made by households on their own borrowing. C) interest payments made by households to foreign lenders. D) taxes paid by households on their interest income. Answer: B Topic: Income Approach, Net Interest Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

99) Rental income includes A) the payment for the use of land. B) the payment for the use of all rented inputs. C) no income from rental housing because most houses are occupied by their owners. D) Both answers A and B are correct. Answer: D Topic: Income Approach, Rental Income Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 100) Which of the following is included in the category of corporate profits when measuring GDP? I. Profits paid as dividends. II. Undistributed profits. III. Income received by owners and operators of businesses. A) I only B) I and II C) I and III D) I, II and III Answer: B Topic: Income Approach, Corporate Profits Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 101) An indirect tax is a tax paid by consumers A) to a state or local government. B) when they purchase goods and services. C) on unearned income (as opposed to wages and salaries). D) that is a percentage of the value of their real property. Answer: B Topic: Indirect Tax Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 102) An indirect tax is exemplified by A) an income tax. B) a sales tax. C) a subsidy. D) None of the above answers is correct. Answer: B Topic: Indirect Tax Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 50 Copyright © 2014 Pearson Education, Inc.

103) Which of the following best represents an indirect tax? A) federal income tax B) state income tax C) local property tax D) sales taxes paid on goods and services Answer: D Topic: Indirect Tax Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 104) The presence of ________ creates a difference in the value between the market price and the factor cost of a product. A) indirect taxes and consumption B) subsidies and direct taxes C) corporate profits and subsidies D) indirect taxes and subsidies Answer: D Topic: Indirect Tax Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 105) The sum of compensation to employees, rental income, corporate profits, net interest, and proprietors' income is A) gross domestic product. B) gross domestic income. C) net domestic income at factor cost. D) net domestic product. Answer: C Topic: Net Domestic Income at Factor Cost Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 106) Two reasons why valuing goods at their market prices is different than valuing them at their factor costs include A) depreciation and investment. B) exports and imports. C) personal taxes and corporate taxes. D) indirect taxes and subsidies. Answer: D Topic: Net Domestic Income at Factor Cost Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 51 Copyright © 2014 Pearson Education, Inc.

Corporate profits Net interest Indirect taxes less subsidies Depreciation Compensation of employees Proprietor's income Rental income Personal consumption expenditures Government expenditure on goods and services Net exports of goods and services

$200 150 230 250 1,350 150 70 1,400 500 40

107) Using the data in the table above, gross domestic product equals A) $1,920. B) $1,940. C) $2,150. D) $2,400. Answer: D Topic: Income Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 108) Using the data in the above table, gross private domestic investment equals A) $250. B) $260. C) $460. D) some amount that cannot be determined without more information. Answer: C Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 109) Using the data in the above table, net private domestic investment equals A) $210. B) $260. C) $510. D) some amount that cannot be determined without more information. Answer: A Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 52 Copyright © 2014 Pearson Education, Inc.

Item Personal income Net domestic income at factor cost Government expenditure on goods and services Depreciation Gross private domestic investment Indirect taxes Subsidies

Billions of dollars 1,200 2,100 400 200 100 600 100

110) The above table shows some national income accounting data for a nation. In this nation, gross domestic product is equal to ________ billion. A) $2,000 B) $2,300 C) $2,500 D) $2,800 Answer: D Topic: Income Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

Item Net interest Government expenditure on goods and services Compensation of employees Rental income Proprietors' income Indirect taxes minus subsidies Corporate profits Exports of goods and services Imports of goods and services Depreciation

Dollars 239 136 1,735 37 128 259 194 249 289 333

111) Using the data in the above table, gross domestic product as calculated by the income approach equals ________. A) $2,333 B) $2,592 C) $2,925 D) $2,205 Answer: C Topic: Income Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

Component Gross investment Personal consumption expenditure Depreciation Government expenditure on goods and services U.S. imports U.S. exports Compensation of employees

Amount (billions of dollars) 1300 1475 25 1315 260 249 65

112) The above table gives data for a hypothetical nation. Gross domestic product is A) $4,049 billion. B) $4,079 billion. C) $4,054 billion. D) $4,339 billion. Answer: B Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 113) Nominal GDP is A) real GDP adjusted for price changes. B) GDP valued at prices of that year. C) GDP valued at constant prices. D) real GDP valued at base year prices. Answer: B Topic: Nominal GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 114) Nominal GDP is the value of final goods and services A) at the prices of that year. B) at the prices of the immediately previous year. C) at the prices of a base year. D) produced in foreign countries but consumed in the domestic country. Answer: A Topic: Nominal GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 55 Copyright © 2014 Pearson Education, Inc.

115) Normally in the United States the relationship between nominal and real GDP for a given year is A) real GDP is greater than nominal GDP because of price increases. B) nominal GDP is greater than real GDP because of price increases. C) nominal GDP equals real GDP. D) nominal GDP is greater than real GDP because of price decreases. Answer: B Topic: Nominal GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 116) Of the following, which is correct? A) Nominal GDP does not change when the production of goods and services increases. B) Nominal GDP is not affected by changes in prices of goods and services. C) Nominal GDP increases when the prices of goods and services increase. D) Real GDP changes only when the prices of goods and services really change. Answer: C Topic: Real and Nominal GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 117) According to the BEA, in the second quarter of 2012 nominal GDP rose by 3.3 percent and real GDP rose by 1.7 percent. The difference between the change in nominal GDP and the change in real GDP could be explained by A) an increase in prices of final goods and services produced. B) a decrease in prices of final goods and services produced. C) an increase in quantity of final goods and services produced. D) a decrease in quantity of final goods and services produced. Answer: A Topic: Real and Nominal GDP Skill: Analytical Status: New AACSB: Analytical Skills

118) Real GDP is A) an increase in the average level of prices. B) the value of total production when the unemployment rate is 6 percent. C) the value of total production of all the nation's farms, factories, shops and offices measured in the prices of a single year. D) the value of total production of all the nation's farms, factories, shops and offices measured at the prices of the year it was produced. Answer: C Topic: Real GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 119) Real GDP measures the A) total profits earned by all businesses valued using prices from a single year. B) changes in the prices of output measured in dollars. C) general upward drift in prices. D) value of total production linked to prices of a single year. Answer: D Topic: Real GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 120) ________ gross domestic product is the value of ________ linked back to the prices of a single year. A) Real; total production B) Real; production possibilities C) Productivity; the consumer price index D) Nominal; total production Answer: A Topic: Real GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 121) Real Gross Domestic Product is A) the amount of people unemployed divided by the total labor force. B) the productivity of labor. C) the most that can be produced when the economy's resources are fully employed. D) the value of total production linked back to the prices of a single year. Answer: D Topic: Real GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 57 Copyright © 2014 Pearson Education, Inc.

122) Which of the following is TRUE regarding real GDP? I. Real GDP is the value of the total production of the country's farms, factories, shops, and offices. II. Real GDP rises whenever inflation occurs. III. Real GDP does not measure all that is produced. A) I and II B) I and III C) II and III D) I, II and III Answer: B Topic: Real GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 123) According to the BEA, in the second quarter of 2011 nominal GDP was $15 trillion and in the second quarter of 2012 nominal GDP was $15.6 trillion. Based solely on this information, from the second quarter of 2011 to the second quarter of 2012 A) real GDP may have increased, decreased, or stayed the same. B) real GDP definitely increased. C) real GDP definitely decreased. D) prices definitely increased. Answer: A Topic: Real and Nominal GDP Skill: Analytical Status: New AACSB: Analytical Skills 124) In years with inflation, nominal GDP increases ________ real GDP. A) faster than B) slower than C) at the same rate as D) sometimes faster, sometimes slower, and sometimes at the same rate as Answer: A Topic: Real and Nominal GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

125) Suppose an economy has some inflation. Then, after a base year, the value of real GDP will A) be less than nominal GDP. B) not be different from nominal GDP. C) be greater than nominal GDP. D) will be approximately half the value of nominal GDP. Answer: C Topic: Real and Nominal GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 126) Gross private domestic investment is a component of which approach to measuring GDP? A) incomes approach B) expenditure approach C) linking approach D) output approach Answer: B Topic: Study Guide Question, Expenditure Approach, Investment Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 127) Which of the following is NOT a component of the incomes approach to GDP? A) net exports B) wages and salaries C) corporate profits D) proprietors' income Answer: A Topic: Study Guide Question, Incomes Approach Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

3 The Uses and Limitations of Real GDP 1) The maximum amount of production that can be produced while avoiding shortages of labor, capital, land, and entrepreneurship that would bring rising inflation is called A) real GDP. B) nominal GDP. C) actual GDP. D) potential GDP. Answer: D Topic: Potential GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 2) Potential GDP is A) another name for real GDP. B) always different from real GDP. C) the level of GDP not adjusted for price changes. D) the maximum amount of GDP that can be produced while avoiding shortages of labor, capital, land, and entrepreneurship that would bring rising inflation. Answer: D Topic: Potential GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 3) Potential GDP is A) the maximum GDP that an economy actually achieves throughout its entire history. B) the level of GDP achieved during periods when 100 percent of the labor force is employed. C) a goal that can never be achieved by the economy. D) the maximum amount of GDP that can be produced while avoiding shortages of labor, capital, land, and entrepreneurship that would bring rising inflation. Answer: D Topic: Potential GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

4) Potential GDP is the A) the maximum amount of production that can be produced while avoiding shortages of labor, capital, land, and entrepreneurship that would bring rising inflation. B) current value of production in the economy. C) value of production when the economy is in a recession. D) value of production when the economy is at a peak. Answer: A Topic: Potential GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 5) Potential GDP A) measures the actual production from year to year. B) measures the maximum amount of production that can be produced while avoiding shortages of labor, capital, land, and entrepreneurship that would bring rising inflation. C) is cyclical. D) Both answers A and C are correct Answer: B Topic: Potential GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 6) In any year, real GDP A) must always be less than potential GDP. B) might be greater or less than potential GDP. C) will always be greater than potential GDP because of the tendency of nations to incur inflation. D) always equals potential GDP. Answer: B Topic: Potential GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 7) The relationship between real GDP and potential GDP is that A) real GDP always equals potential GDP. B) real GDP never equals potential GDP. C) real GDP fluctuates about potential GDP. D) real GDP is always below potential GDP. Answer: C Topic: Potential GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

8) In any year, real GDP A) must always be less than potential GDP. B) might be greater or less than potential GDP. C) will be greater than potential GDP if the inflation rate is positive. D) always equals potential GDP. Answer: B Topic: Potential GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 9) ________ refers to a period when the ________ decreases. A) Recession; growth rate of nominal GDP B) Recession; growth rate of output per person C) Productivity growth slowdown; growth rate of real GDP D) Productivity growth slowdown; growth rate of output per person Answer: D Topic: Productivity Growth Slowdown Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 10) The series of ups and downs the economy tends to move in is called A) the business cycle. B) a recession. C) a depression. D) economic growth. Answer: A Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 11) The business cycle refers to A) fluctuations in the level of real GDP around potential GDP. B) changes in the level of nominal GDP. C) changes in the level of the stock market. D) changes in the level of employment. Answer: A Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

12) A business cycle is A) the pattern of short-run upward and downward movements in total output. B) the increase in consumer spending that accompanies an increase in disposable income. C) the cyclical change in the nation's balance of trade. D) the cyclical movement in the interest rates. Answer: A Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 13) The business cycle is the A) regular growth rate of the real GDP. B) regular fluctuations of real GDP below potential GDP. C) irregular fluctuations of prices around real GDP. D) irregular fluctuations of real GDP around potential GDP. Answer: D Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 14) Business cycles are A) irregular, with some having two recessions and no expansion. B) predictable, with a recession following a trough. C) unpredictable, but always have two phases and two turning points. D) unpredictable, and don't always have two phases and two turning points. Answer: C Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 15) Business cycles A) are more volatile during a Republican administration. B) are unpredictable due to political upheavals and global markets. C) follow a pattern of trough, expansion, peak and recession. D) are all identical in duration over the last century. Answer: C Topic: Business Cycle Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

16) Which of the following statements is true? A) Real GDP fluctuates around potential GDP. B) Potential GDP fluctuates around real GDP. C) Potential GDP is the same as real GDP. D) When all of the economy's resources are fully employed, the value of production is called real GDP. Answer: A Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 17) Real GDP A) fluctuates from year to year but is always below potential GDP. B) fluctuates around potential GDP. C) grows at a constant 3 to 4 percent per year. D) can be called potential GDP when it is adjusted for price changes. Answer: B Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 18) The term "business cycle" most closely refers to the A) fluctuating profits of firms. B) fiscal year. C) accounting period used by firms. D) alternating periods of expansions and recessions. Answer: D Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 19) Which of the following is not a phase or turning point of the business cycle? A) recession B) expansion C) shutdown D) trough Answer: C Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

20) The four parts of the business cycle occur in the following order: A) recession, trough, peak, expansion. B) expansion, trough, peak, recession. C) recession, trough, expansion, peak. D) expansion, trough, recession, peak. Answer: C Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 21) Which of the following are parts of the business cycles? A) peak and potential GDP B) real GDP and potential GDP C) recession and expansion D) inflation and recession Answer: C Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 22) Which of the following is TRUE regarding business cycles? I. Cycles are predictable. II. In each cycle, a peak follows an expansion. III. Potential GDP fluctuates around real GDP. A) I and II B) I and III C) II and III D) II only Answer: D Topic: Business Cycle Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 23) A common definition of a recession is a time with A) a decline in the price level. B) a decline in interest rates. C) a decrease in real GDP for two or more successive quarters. D) a decrease in real GDP for two or more successive years. Answer: C Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 65 Copyright © 2014 Pearson Education, Inc.

24) A recession is commonly defined as a period with A) negative growth rate in real GDP that lasts at least one quarter. B) positive growth rate in real GDP that lasts at least one quarter. C) positive growth rate in real GDP that lasts at least two quarters. D) negative growth rate in real GDP that lasts at least two quarters. Answer: D Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 25) A common definition of a recession is a period of time A) of at least 6 months during which real GDP decreases. B) with an increase in real economic output from the previous period. C) with no change in real GDP. D) with no change in the dollar (money) value of economic output. Answer: A Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 26) A recession is commonly defined as occurring when A) real GDP decreases for a period of 12 or more months. B) real GDP decreases for a period of 6 or more months. C) the unemployment rate rises above 7.5 percent for 6 or more months. D) the unemployment rate rises above 5.0 percent for 12 or more months. Answer: B Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 27) By common definition, a recession occurs when A) the international deficit worsens for at least two successive quarters. B) the government budget deficit exceeds the national debt. C) the inflation rate exceeds 3.5 percent. D) real GDP decreases for at least two successive quarters. Answer: D Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

28) Recessions are commonly defined to occur A) whenever unemployment increases. B) when growth in real GDP decreases for two consecutive quarters. C) when growth in real GDP is negative for two consecutive quarters. D) when the unemployment rate exceeds 6 percent. Answer: C Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 29) Real GDP decreases during A) the movement from trough to peak. B) the movement from below potential GDP back to potential GDP. C) the movement from peak to trough. D) a decrease in unemployment. Answer: C Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 30) When a recession ends, the turning point that immediately follows is called a A) trough. B) peak. C) depression. D) None of the above answers is correct. Answer: A Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 31) The low point of economic activity during a business cycle is called the A) trough. B) recession. C) peak. D) failure. Answer: A Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

32) What term is used to describe the lowest point of a business cycle? A) peak B) trough C) expansion D) recession Answer: B Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 33) A trough is the A) lower turning point of a business cycle when an expansion begins. B) lower turning point of a business cycle when a recession begins. C) upper turning point of a business cycle when an expansion begins. D) upper turning point of a business cycle when a recession begins. Answer: A Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 34) An expansion occurs when the level of real GDP is A) increasing. B) decreasing. C) at a cyclical peak. D) at a cyclical trough. Answer: A Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 35) An expansion A) follows a peak. B) is defined as a period of negative real GDP growth. C) comes just before a trough. D) is defined as a period of real GDP increases. Answer: D Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

36) An expansion ends when the economy A) hits a trough and then enters a recession. B) hits a peak and then enters a recession. C) begins to grow following a peak. D) has grown for two quarters in a row. Answer: B Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 37) The times during which real GDP increases are referred to as A) contractions. B) expansions. C) anti-cycles. D) corrections. Answer: B Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 38) Suppose the country of Dingo experienced an economic trough in January 2011. We can conclude that A) real GDP in Dingo was increasing in January 2011. B) an expansion occurred after January 2011. C) Dingo did not experience a recession in 2010. D) Dingo's potential GDP fell in 2011. Answer: B Topic: Business Cycle Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 39) An economy recovering from a recession A) moves up from its trough to a period of expansion. B) moves up from its peak to a period of expansion. C) moves down from its trough to a period of depression. D) moves down from its peak to a period of expansion. Answer: A Topic: Business Cycle Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

40) An economic expansion rather than a recession occurs A) when the federal budget is balanced. B) when the unemployment rate falls below 5 percent. C) when growth in real GDP is positive. D) when the unemployment rate is not changing. Answer: C Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 41) A peak is the A) lower turning point of a business cycle when an expansion ends. B) lower turning point of a business cycle when a recession ends. C) upper turning point of a business cycle when an expansion ends. D) upper turning point of a business cycle when a recession ends. Answer: C Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

42) In the above figure, the distance between points S and T represents A) an expansion. B) a trough. C) a peak. D) a recession. Answer: D Topic: Business Cycle Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 43) In the above figure, the distance between points T and U represents A) an expansion. B) a trough. C) a peak. D) a recession. Answer: A Topic: Business Cycle Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

44) In the above figure, a recession begins at point ________ and an expansion begins at point ________. A) a; b B) b; c C) b; a D) d; c Answer: A Topic: Business Cycle Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 45) In the above figure, a trough is at point ________ and a peak is at point ________. A) a; b B) b; c C) b; a D) d; c Answer: C Topic: Business Cycle Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

46) In the above figure, which point represents the under use of resources? A) point F B) point G C) point H D) point K Answer: B Topic: Business Cycle Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Analytical Skills 47) In the above figure, which point represents a situation with significant shortages of labor, capital, and other resources? A) point F B) point G C) point I D) point K Answer: A Topic: Business Cycle Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Analytical Skills

48) In the above figure, which point represents an economy which is at the peak part of a business cycle? A) point F B) point G C) point I D) point K Answer: A Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Analytical Skills

49) In the above figure, the letters A, B, and C represent which positions in the business cycle? A) peak, expansion, and recession, respectively B) recession, expansion, and peak, respectively C) expansion, peak, and recession, respectively D) peak, recession, and expansion, respectively Answer: D Topic: Business Cycle Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

50) Purchasing power parity prices are used to construct GDP data that A) do not omit the underground economy. B) can be used to make more valid comparisons between one country and another. C) is a proper measure of economic welfare. D) adjust for differences in population. Answer: B Topic: Purchasing Power Parity Prices Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 51) If we compare the U.S. GDP and the Chinese GDP, A) real GDP per person is about the same in the two countries. B) U.S. real GDP per person is less than China's real GDP per person once we adjust for currency differences. C) China's real GDP per person is less than real GDP per person in the United States. D) real U.S. GDP per person was much larger than China's real GDP per person when purchasing power parity prices are used but is less than China's real GDP per person when exchange rate prices are used. Answer: C Topic: Purchasing Power Parity Prices Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 52) The use of purchasing power parity prices A) decreases the real GDP per person statistics published by the International Monetary Fund. B) weakens the validity of cross country comparisons of economic welfare. C) increases the amount by which U.S. GDP is larger than that of any other nation. D) accounts for differences in the prices of the same goods in different countries when measuring real GDP. Answer: D Topic: Purchasing Power Parity Prices Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

53) Real GDP is not a perfect indicator of economic welfare because ________. A) it includes the underground economy B) it includes a direct measure of health and life expectancy C) it underestimates inflation D) economic welfare depends on many factors not measured or not measured accurately by real GDP Answer: D Topic: GDP and Economic Welfare Comparisons Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 54) Real GDP does not show the state of economic welfare in a country in part because GDP omits I. household production. II. leisure time available. III. the quality of the environment. A) I only B) I and III C) II and III D) I, II and III Answer: D Topic: GDP and Economic Welfare Comparisons Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 55) Real GDP can be criticized as a measure of economic welfare because it A) does not include the value of products produced in the household. B) does not take account of the degradation of environmental quality. C) does not include leisure time available to a society. D) All of the above answers are correct. Answer: D Topic: Economic Welfare Comparisons Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

56) Which, if any, of the following causes a country's reported GDP to be less than its total economic production? A) the exclusion of household production B) the exclusion of government transfers C) the inclusion of government expenditures D) None of the above cause reported GDP to be less than total production. Answer: A Topic: Household Production Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 57) In calculating GDP, household production is A) included as part of consumption. B) ignored because it is not a large amount. C) not included because there is no market transaction. D) included under employee compensation. Answer: C Topic: Household Production Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 58) Which of the following is NOT included in real GDP? A) production of services, such as the services of doctors B) production of goods that last more than one year, such as television sets C) production of goods that do not last more than one year, such as gasoline D) production in the home Answer: D Topic: Household Production Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 59) If a larger fraction of the adult population is working in the marketplace, household production A) counted in real GDP increases. B) not counted in real GDP increases. C) counted in real GDP decreases. D) not counted in real GDP decreases. Answer: D Topic: Household Production Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

60) Reported GDP increases when, in fact, total production is unchanged when I. there is a shift from household production to market production. II. a previously illegal activity is legalized. A) I only B) II only C) Neither I nor II D) Both I and II. Answer: D Topic: Household Production, Underground Economic Activity Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 61) When calculating GDP, underground economic activity is A) the production of goods and services in the home. B) that portion of the time when we are enjoying leisure activities and not producing marketable goods. C) the part of the economy purposely hidden. D) an aspect of the quality of life, such as health and life expectancy. Answer: C Topic: Underground Economic Activity Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 62) Which of the following is NOT included in real GDP? A) production of services, such as the services of hair dressers B) production of goods that last less than a year, such as production of hot dogs C) production that takes place in the underground economy D) production of goods that last more than a year, such as a pair of roller blades Answer: C Topic: Underground Economic Activity Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 63) Because pollution reduces economic welfare, on this count real GDP as measured A) decreases as pollution increases. B) increases to take into account the expenditures that will be made in the future to clean up the pollution. C) overstates economic welfare. D) understates economic welfare. Answer: C Topic: Environmental Quality Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 78 Copyright © 2014 Pearson Education, Inc.

64) In the post World War II period, considerable growth in total production took place in the United States. But at the same time, businesses were dumping their waste into the Great Lakes with minimal cost to themselves, significantly polluting the bodies of water as a result. This occurrence is an example where A) real GDP gives an overly positive view of economic welfare. B) real GDP gives an overly negative view of economic welfare. C) investment would have been a better measure of total production. D) the pollution counts as a final good. Answer: A Topic: Environmental Quality Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 65) Which of the following would lead GDP to overstate economic welfare? A) the existence of home-cooked meals B) restaurant workers that under-report tip income C) a self-employed CPA who takes a longer than normal vacation D) electric utilities that switch to burning coal because of higher natural gas prices and thereby create more acid rain pollution Answer: D Topic: Environmental Quality Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 66) Pollution is a by-product of some production processes, so on this count real GDP as measured A) is adjusted downward to take into account the pollution. B) is adjusted upward to take into account the expenditures that will be made in the future to clean up the pollution. C) tends to overstate economic welfare. D) tends to understate economic welfare. Answer: C Topic: Study Guide Question, Environmental Quality Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

67) Which of the following is NOT a reason that real GDP is a poor measure of a nation's economic welfare? A) Real GDP omits measures of political freedom. B) Real GDP does not take into account the value of people's leisure time. C) Real GDP does not include the underground economy. D) Real GDP overvalues household production. Answer: D Topic: Study Guide Question, Household Production Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 68) Which of the following statements about the comparison between GDP in China and in the United States is correct? A) Using the exchange rate to value China's GDP in dollars shows that China's GDP per person exceeds the GDP per person in the United States. B) Using purchasing power parity prices to value China's GDP in dollars shows that China's GDP per person exceeds the GDP per person in the United States. C) China's GDP per person is higher using purchasing power parity prices rather than the exchange rate when valuing China's GDP in dollars. D) None of the above answers are correct because they are all false statements. Answer: C Topic: Study Guide Question, International Comparisons Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 69) What we produce during our working time is ________ as part of GDP and the enjoyment we gain from our leisure time is ________ as part of GDP. A) included; not included B) included; included C) not included; included D) not included; not included Answer: A Topic: GDP and Economic Welfare Comparisons Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

4 News Based Questions "As the credit crisis unfolded over the past year, one of the few certainties in the global economy seemed to be China's ability to plough on regardless of double-digit growth rates...The ...crisis has also focused ...on the need to update a growth model that...is still dependent on assembling goods for export without adding much value and on heavy industries that create pollution. Chinese companies have continued to find new foreign markets for their products...several other factors point to a slowing property market...production of steel, cement and air conditioners was down... Retail sales have risen by 23 per cent in each of the last two months". Beijing's Burden, www.FT.com, by Geoff Dyer, Sept. 23, 2008 1) According to the article, ________ are expected to contribute ________ to China's real GDP in 2008. A) exports and consumption; positively B) consumption and government spending; negatively C) exports and investment; negatively D) rental income and investment; negatively Answer: A Topic: GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Communication 2) According to the article, ________ can be expected to ________ this year. A) exports; increase B) consumption; decrease C) imports; decrease D) net interest income; decrease Answer: A Topic: GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Communication 3) According to the article, ________ is expected to increase and add to China's ________ component of GDP. A) retail sales; consumption B) retail sales; investment C) rental income; investment D) rental income; exports Answer: A Topic: GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Communication

Canada's economy expanded by...0.1 percent in the second quarter...further evidence that the economy has stalled...following a first quarter slip in gross domestic product. The second quarter figures fell well below forecasts of a 0.7 per cent growth in real GDP. Exports....fell for the fourth consecutive quarter. The accumulating gloom is increasingly discouraging business investment. Consumer spending remains strong and corporate profits were at their highest since 2004. "The sources of strength in the second quarter are clearly unsustainable," said Sal Gautieri, senior economist at BMO capital markets. Canada Avoids Fall into Recession, www.FT.com, by Christopher Mason, August 30, 2008 4) According to the article, the best description of Canada's position in the business cycle is A) at a peak B) at a trough C) in an expansion D) in a recession Answer: A Topic: Business Cycle Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Communication 5) According to the article, ________ in ________ have contributed to Canada's ________ change in real GDP. A) increases; consumption and exports; expected B) decreases; exports and investment; unexpected C) increases; consumption and investment; unexpected D) decreases; exports and government spending; expected Answer: B Topic: GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Communication 6) It is estimated that in 2007, Mexico had a population of 110 million and Brazil had a population of 190 million. At the same time, Mexico's GDP was $1 trillion while Brazil's was $1.31 trillion. These data show that A) Brazil had a healthier economy than did Mexico. B) Mexico's GDP per person was lower than was Brazil's GDP per person in 2007. C) Mexico's GDP per person was $9090 in 2007. D) Brazil's GDP per person was $5300 in 2007. Answer: C Topic: GDP Growth Rate Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

7) It is estimated that in 2007, Mexico had a population of 110 million and GDP of $1 trillion. In 2006, Mexico's population was 104 million and GDP was $839 billion. Per GDP person ________ by ________ between 2006 and 2007 in Mexico. A) increased; $1038 B) increased; 5 percent C) decreased; $2013 D) decreased; 5 percent Answer: A Topic: GDP Growth Rate Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 8) The following data describe Mexico's economy in 2007. Government spending $210 billion Investment $210 billion Exports $272 billion Imports $283 billion GDP 1 trillion Population 110 million From the data, we can conclude that ________ in Mexico in 2007. A) Consumption totaled $591 billion B) Net exports totaled -$11 billion. C) GDP per person equalled $2000 D) Imports were the largest component of GDP Answer: A Topic: GDP Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

9) The following data describe France's economy in 2008. Consumption 234 billion euros Government expenditure 93 billion euros Investment 88 billion euros Exports 128 billion euros Imports 137 billion euros From the data, we can conclude that in France A) net exports totaled -11 billion euros. B) GDP equaled 424 billion euros. C) GDP equaled 680 billion euros. D) Net exports totaled 265 billion euros. Answer: A Topic: GDP Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 10) The following data are estimates describing Ireland's economy in 2006 and 2007 (in millions of euros, in constant prices): 2006 2007 Consumption 84,000 89,000 Government expenditure 24,000 26,000 Investment 48,000 48,000 Exports 142,000 151,000 Imports 123,000 128,000 Subsidies 1,800 1,900 Taxes 500 500 Ireland's real GDP in 2007 was ________ million euros. A) 442,000 B) 186,000 C) 188,400 D) 163,000 Answer: B Topic: GDP Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

11) The following data are estimates describing Ireland's economy in 2006 and 2007 (in millions of euros, in constant prices): 2006 2007 Consumption 84,000 89,000 Government expenditure 24,000 26,000 Investment 48,000 48,000 Exports 142,000 151,000 Imports 123,000 128,000 Subsidies 1,800 1,900 Taxes 500 500 In 2007, Ireland's net exports was ________ million euros. A) 23,000 B) -23,000 C) 279,000 D) 149,100 Answer: A Topic: GDP Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 12) The following data are estimates describing Ireland's economy in 2006 and 2007 (in millions of euros, in constant prices): 2006 2007 Consumption 84,000 89,000 Government expenditure 24,000 26,000 Investment 48,000 48,000 Exports 142,000 151,000 Imports 123,000 128,000 Subsidies 1,800 1,900 Taxes 500 500 Which of the following is true regarding Ireland's economy? A) The change in GDP from 2006 to 2007 represented a peak in the business cycle. B) GDP decreased from 2006 to 2007. C) Net exports decreased from 2006 to 2007. D) Consumption was 48 percent of Ireland's GDP in 2007. Answer: D Topic: GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Analytical Skills

"Life expectancy is exceptionally high in Japan. Scores for political freedom and civil liberties approach those of peer countries in Europe...equality of opportunity is extremely weak. The country also possesses one of the longer working weeks." Japan's GDP was estimated to be $4.2 trillion (purchasing power parity) and the population was 127.4 million. "Driven by its attractive climate, Brazil performs substantially better on Life Satisfaction than Material Wealth. High international demand for Brazil's commodities and raw materials has produced a sustained economic expansion since 2004, which in turn has led to job creation, wage growth and relatively low inflation. Brazilians report that they control their own lives to a substantial degree." Brazil's GDP was estimated to be $1.7 trillion (purchasing power parity) and 190 million in 2006. www.prosperity.com 13) According to the article, we can conclude that the standard of living A) is higher in Brazil because its citizens feel more control over their lives and have experienced job and wage growth. B) is higher in Japan because their life expectancy is longer. C) is higher in Japan because its GDP is higher. D) might be higher in Japan because it has a higher per capita real GDP but other factors such as Brazilians' satisfaction with their lives and economic growth should be considered when determining economic well being. Answer: D Topic: GDP and Economic Welfare Comparisons Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Communication 14) According to the information, Japan's real GDP per person A) is higher than Brazil's and therefore we can definitely conclude that economic well-being is higher in Japan. B) is $33,000. C) is lower than Brazil's, but its real GDP is higher which makes standard of living higher in Japan. D) cannot be expected to change much given the other factors affecting GDP growth including political freedom and life expectancy. Answer: B Topic: GDP and Economic Welfare Comparisons Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

15) "German economic growth slowed ... Economic growth slowed to 0.3 percent from 0.5 percent. Expansion was driven by exports... (and) household consumption added ...to growth. As unemployment declines and disposable incomes increase, household spending may also gain momentum. www.bloomberg.com, August 23, 2007 We can conclude that the German economy A) is at the peak of the business cycle. B) has entered the expansion phase of the business cycle. C) has slowed due to a decline in investment or government spending. D) is in the recession phase of the business cycle. Answer: C Topic: GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Communication 16) The data show Argentina's GDP (using purchasing power parity) in billions of dollars. Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 GDP($) 182 209 235 255 277 274 294 324 340 333 338 330 300 333 373 420 470

The data show that A) Argentina's economy was in a recession from 2004 through 2006. B) Argentina's economy was in a recession in 2001 and 2002. C) GDP per person more than doubled between 1990 and 2006. D) Argentina's economy reached a peak in 1996. Answer: B Topic: Business Cycle Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 17) The data show Argentina's GDP (using purchasing power parity) in billions of dollars. Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 GDP($) 182 209 235 255 277 274 294 324 340 333 338 330 300 333 373 420 470

The data show that A) Argentina's economy reached a peak in 1998. B) GDP per person increased between 1990 and 2006. C) Argentina's potential GDP doubled between 1990 and 2006. D) Argentina's economy entered a recession in 2000. Answer: A Topic: Business Cycle Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 87 Copyright © 2014 Pearson Education, Inc.

18) The following data show Uruguay's GDP using purchasing power parity in billions of dollars. Year GDP($)

2000 26.1

2001 25.8

2002 23.3

2003 24.3

2004 27.9

2005 30.1

2006 33.9

2007 37.2

2008 40.2

Using the data, we can conclude that A) Uruguay's economy reached a peak in 2000. B) GDP per person in Uruguay almost doubled between 2000 and 2008. C) potential GDP in Uruguay doubled between 2000 and 2008. D) Uruguay's economy was entered a recession in 2008. Answer: A Topic: Business Cycle Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 19) The following data show Uruguay's GDP using purchasing power parity in billions of dollars. Year GDP($)

2000 26.1

2001 25.8

2002 23.3

2003 24.3

2004 27.9

2005 30.1

2006 33.9

2007 37.2

2008 40.2

Using the data, we can conclude that A) the standard of living did not change in Uruguay between 2000 and 2008. B) Uruguay entered a recession in 2001. C) potential GDP decreased in 2001. D) Uruguay's economy reached a peak in 2005. Answer: B Topic: Business Cycle Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 20) The following data show Uruguay's GDP using purchasing power parity in billions of dollars. Year GDP($)

2000 26.1

2001 25.8

2002 23.3

2003 24.3

2004 27.9

2005 30.1

2006 33.9

2007 37.2

2008 40.2

Using the data, we can conclude that A) Uruguay's economy entered a recession in 2005. B) Uruguay's standard of living increased steadily between 2000 and 2008. C) potential GDP more than doubled between 2000 and 2008. D) Uruguay's economy reached a trough in 2002. Answer: D Topic: Business Cycle Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 88 Copyright © 2014 Pearson Education, Inc.

5 Essay Questions 1) Define and discuss GDP. Answer: GDP is the market value of all final goods and services produced within a country in a given time period. Only final goods and services are included. Goods produced as intermediate goods are excluded. The goods and services must be produced within the time period under consideration and so sales of used goods are excluded. The goods and services also are those produced within the country, so production by the country's firms that takes place in a foreign nation is not included. Topic: Gross Domestic Product Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Communication 2) How does the production of a U.S. firm located in France affect U.S. GDP? How does the production of a French firm located in Ohio affect U.S. GDP? Answer: U.S. GDP includes all production in the United States, regardless of who owns the factors of production used. Therefore, the production by the U.S. firm in France won't be counted in U.S. GDP because the production does not take place in the United States. However, the production by the French firm in the United States will be counted as part of U.S. GDP because the production has taken place in the United States. Topic: Gross Domestic Product Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Communication 3) Why are only final goods and services included in measuring GDP? Give examples to complete your answer. Answer: We purposely leave intermediate goods or services out of our calculation of GDP so we don't double count. Examples of this are not counting the tires produced by Firestone that are then sold to Ford to be placed on their new cars. If we counted the tires when they were produced by Firestone and then also counted them when they were part of the Ford, we would be double counting them. Topic: Final Good Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

4) Is every product produced in the United States included in U.S. gross domestic product? Answer: No, not every product produced is included in U.S. GDP. For instance, goods produced as intermediate goods are excluded. Only final goods and services are included. In addition, GDP counts only goods traded in markets, so goods and services that people produce for their own use are excluded. Topic: Final Good Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 5) Define and distinguish between final goods and intermediate goods. Answer: Final goods are those goods that are purchased by their final user. Essentially, these goods (and services) have been completed and do not need to go through further processes of completion. Examples of final goods include restaurant meals, lamps, railroad engines, and books. Intermediate goods and services are goods or services produced by one firm, bought by another, and then used as a component in the manufacture of another good or service. Basically, intermediate goods and services are used as a part of another good or service. Lumber used by a carpenter to build a table or paper used by a publisher to publish a book are examples of intermediate goods. Topic: Intermediate Goods and Services Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 6) Neither intermediate goods nor used goods are included in GDP. Explain why these expenditures are not included in GDP. Answer: Intermediate goods and used goods are not included in the measurement of GDP because they do not represent final expenditures on goods and services produced within the relevant time period. Intermediate goods are inputs used in the production of final goods and services. To count them twice would be double counting and inflate the level of GDP. Used goods already have been counted in GDP during the year in which they were produced. They were not produced in the current time period and therefore are not included in GDP. Topic: Intermediate Goods and Used Goods Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 7) What are the categories of total expenditure? Answer: There are four categories: Consumption expenditure, spending by households; investment, spending by firms to buy new capital equipment or add to inventories; government expenditures on goods and services, spending by all levels of the government to buy goods and services; and net exports of goods and services, which equals the exports of goods and services minus the imports of goods and services. Topic: Total Expenditure Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 90 Copyright © 2014 Pearson Education, Inc.

8) How do firms and households interact within the context of the circular flow model? Answer: Households are the owners of the factors of production. Firms purchase these factors in the factor market. They use these factors to produce goods and services which are sold to households in the goods market. Households are paid for the services of the factors of production and use this income to pay for the goods and services. Topic: Circular Flow Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 9) What is the relationship shown by the circular flow among income, total expenditure, and GDP? Answer: They are all equal. The value of production, which is GDP, equals income because firms pay factors (as income) all the revenue they receive from selling the goods and services they produce (GDP). Next, the revenue that firms receive from selling the goods and services they produce (GDP) is equal to what is spent as expenditures on the goods and services. (total expenditure). Topic: Circular Flow Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 10) Use the idea of the circular flow diagram to explain why the value of production equals total income equals total expenditure. Answer: The basic point is that nothing escapes the system. Firms receive the value of their production in the form of revenue. With this revenue, they pay for the factors of production they hire and what is left over after paying their costs is profit, which is paid to the households that own the firms. Thus the value of production equals total income. These incomes flow from firms to households. Households then allocate their income to taxes, saving, and consumption. Taxes are collected and spent by the government. Saving by households is spent as investment by firms after being cycled through the banking system. Thus total expenditure equals the value of total income, which equals the value of production by firms. Topic: Circular Flow Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Communication 11) What is the distinction between gross investment and net investment? Answer: Gross investment is the total spending on capital goods. Net investment equals gross investment minus depreciation. From one year to the next, the capital stock increases by the amount of net investment. Topic: Capital and Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

12) Explain how gross investment, depreciation, net investment, and the capital stock are related. Answer: The change in the capital stock equals net investment and net investment equals gross investment minus depreciation. Topic: Capital and Investment Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 13) What is the relationship between gross investment, net investment, and depreciation? Which measures the change in the capital stock? Answer: Gross investment minus depreciation equals net investment. Gross investment is all the investment made during the year. Depreciation is the wear and tear on capital from its use and obsolescence. The "depreciation part" of gross investment goes to replace old, worn out capital and so net investment is the change in the capital stock. Topic: Capital and Investment Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 14) Explain the relationship among the capital stock, gross investment, net investment, and depreciation. Answer: The capital stock is the total quantity of plant, equipment, buildings and inventories. Some of this capital stock is always depreciating or wearing out. During a year a firm will purchase new capital. The amount of capital purchased is gross investment. The amount of gross investment minus the amount of depreciation during a year is net investment. So net investment is the change in the capital stock from one period to the next. Topic: Capital Stock and Investment Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 15) Explain the difference between the capital stock, gross investment, depreciation, and net investment. Answer: The capital stock is the total quantity of plant, equipment, buildings, and inventories. Gross investment is the purchase of new capital. Depreciation is the wearing out and scrapping of capital. Net investment equals gross investment minus depreciation. The change in the capital stock from one period to the next equals net investment. Topic: Capital and Investment Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

16) Define gross investment and net investment. Discuss the relationship between gross investment and net investment. Answer: Gross investment is the total amount spent on new capital goods to increase the quantity of capital and replace the depreciated capital. Net investment is the amount spent on new capital that exceeds the value of the depreciated capital or, in other words, net investment equals gross investment minus depreciation. Net investment is equal to the change in the capital stock. Topic: Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 17) "When a company's depreciation is larger than its gross investment, net investment becomes negative and the firm's capital stock decreases." Is the previous statement correct or incorrect? Explain your answer. Answer: The statement is correct. Net investment equals gross investment minus depreciation. If depreciation is larger than gross investment, net investment will be negative. Net investment is the change in the capital stock, and so the company's capital stock decreases. Essentially, because depreciation is larger than the company's gross investment, the company is not buying enough capital to replace the capital that depreciated. As a result, the total amount of the company's capital decreases. Topic: Investment Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 18) Investment, as included in GDP, consists of what? Answer: Investment is the purchase of new capital goods such as tools, instruments, machines, buildings, and additions to inventories. Investment does not include the purchase or sale of stocks and bonds. Topic: Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 19) How are changes in inventory treated in GDP? Answer: Changes in inventory are part of the investment component of GDP. So, if Dell produces 100,000 computers this year and sells 95,000, the 5,000 unsold computers that are added to Dell's inventory are part of the investment component of GDP for this year. Topic: Expenditure Approach, Investment Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

20) "To calculate GDP, economists begin with total income earned and then subtract total expenditure by the four sectors of the economy." Is the previous sentence true or false? Explain your answer. Answer: The sentence is false. To calculate GDP, economists can begin with total income and then make a few adjustments but they do not subtract total expenditure. Alternatively, economists can sum total expenditure by the economy's four sectors, but this summation is GDP. Topic: Measuring GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 21) List the components of the expenditure approach to measuring GDP. Answer: The expenditure approach measures GDP by adding final expenditures, so the components are personal consumption expenditure, gross private investment, government expenditures on goods and services, and net exports. Topic: Expenditure Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 22) List and compare the four components of the expenditure approach to calculating GDP. Answer: The 4 parts can be summarized according to the formula GDP = C + I + G + (X - M). The first part, C, is consumption expenditure, which measures household spending and is the largest component accounting for around 70 percent of GDP. The next category, I, is investment and refers to the purchase of new capital, the purchase of new homes and changes in inventories. This fluctuates a great deal but generally accounts for 15 to 20 percent of GDP. Next is G, which government expenditure on goods and services. This component includes purchases by all levels of government on new goods and services and is about 20 percent of GDP. The final category, (X - M), is net exports. In it, exports are added and imports are subtracted. This component is typically negative in the United States because we typically run a trade deficit. It is generally around -1 to -5 percent or so of GDP. Topic: Expenditure Approach to GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

23) Explain how GDP is measured according to the expenditure and income approaches. Answer: GDP is measured using the expenditure approach and the income approach. The expenditure approach uses the streams of spending and adds together the total expenditure, or spending, on final goods and services. Thus the expenditure approach calculates the sum of consumption expenditure, investment, government expenditure on goods and services, and net exports. The income approach uses another of the circular flows to calculate GDP. The income approach adds together all sources of income and then incorporates a few additional adjustments. Thus the income approach calculates the sum of compensation of employees, net interest, rental income of persons, corporate profits, and proprietors' income. The sum is "net domestic product at factor cost." To change this sum to GDP, which is calculated at market prices rather than factor costs, and which is the gross product rather than net product, indirect taxes are added and subsidies subtracted and then depreciation is added. Any statistical discrepancy is added to (or subtracted from) GDP calculated using the income approach. Topic: Expenditure Approach and Income Approach Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Communication 24) How does the income approach measure GDP? Answer: The incomes approach adds the compensation of employees, net interest, rental income, corporate profits and proprietors' income to give net domestic income at factor cost. Then indirect taxes and depreciation are added. Finally, subsidies are subtracted to obtain GDP. Topic: Income Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 25) What must be done to net domestic product at factor cost in order to transform it to gross domestic product? Explain why these adjustments are necessary. Answer: Several adjustments must be made to net domestic product at factor cost in order to set it equal to GDP. First, indirect taxes must be added and subsidies must be subtracted. These changes are necessary because GDP is measured using market prices whereas net domestic product at factor cost measures what the goods and services cost to produce. The price can be different than the cost when there are taxes and subsidies present. Thus taxes must be added to the cost and subsidies subtracted in order to determine the price that was actually paid. (For instance, a DVD might cost $20 but a $1 sales tax makes the price $21.) Then, the second adjustment is that depreciation also needs to be added. Depreciation is the wear and tear on capital when it is used and when it becomes obsolete. GDP includes expenditure on investment and some investment is used to replace the capital stock that has depreciated. So, when calculating GDP using the income approach, depreciation must be included. But depreciation is not included in net domestic product at factor cost because that amount includes only payments made (as income) to the inputs that helped produce the products and no payment is made for the depreciation of capital. So the addition of depreciation (as well as the adjustments for taxes and subsidies) is necessary in order to convert net domestic product at factor cost into GDP. Topic: Income Approach, Adjustments Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 95 Copyright © 2014 Pearson Education, Inc.

26) Several adjustments must be made to net domestic product at factor cost in order to calculate GDP. One of these adjustments is adding depreciation. What is depreciation and why must it be added? Answer: Depreciation is the wear and tear of capital when it is used and when it becomes obsolete. GDP includes expenditure on investment and some investment is used to replace the capital stock that has depreciated. So, when calculating GDP using the income approach, depreciation must be included. But depreciation is not included in net domestic product at factor cost because that includes only payments made (as income) to the inputs that helped produce the products and no payment is made for the depreciation of capital. Hence depreciation must be added to net domestic product at factor cost in order to calculate GDP. Topic: Income Approach, Depreciation Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 27) What is the difference between real and nominal GDP and why do economists make this distinction? Answer: Real GDP is a measure of the final goods and services produced in a year valued at constant prices. Nominal GDP is the final goods and services produced in a year valued at the prices that existed during the year. Economists make the distinction between real GDP and nominal GDP because nominal GDP changes for two reasons: When the production of goods and services changes and when the prices of the goods and services change. Economists want to be able to distinguish between changes brought about by production changes and changes brought about by price changes. Real GDP allows economists to make this distinction. In particular, by using prices that are constant, a change in real GDP represents a change in the production of goods and services and factors out the change in prices. Thus real GDP removes the effect from changes in prices and thereby reveals the change in the underlying production of goods and services. Topic: Real and Nominal GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Analytical Skills 28) Is it possible for nominal GDP to increase while real GDP does not change? Answer: Yes, it is possible for nominal GDP to increase while real GDP does not change. Nominal GDP changes if either prices or production change, while real GDP changes only if production changes. If production does not change while the prices of the goods and services increase, real GDP does not change while nominal GDP increases. Topic: Real and Nominal GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Analytical Skills

29) Can nominal GDP ever be less than real GDP? Answer: Yes, nominal GDP can be less than real GDP. If prices generally fall from one period to the next, then nominal GDP is less than real GDP. However, in the U.S. economy, because prices generally rise, nominal GDP typically is greater than real GDP (except in the base period.) But, there is no economic law that states that prices must generally rise and so there is no necessity for nominal GDP to be larger than real GDP. Topic: Real and Nominal GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Analytical Skills 30) What is the relationship between actual and potential real GDP? Answer: Real GDP equals potential GDP when all resources are fully employed and there are no shortages that lead to inflation. Real GDP can be greater than potential GDP and can be less than potential GDP. During a business cycle, real GDP cycles around potential GDP. During an expansion, real GDP rises above potential GDP and during a recession real GDP falls below potential GDP. Topic: Actual and Potential GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 31) Explain the relationship between real GDP and potential GDP during the two phases of the business cycle. Answer: During an expansion the level of real GDP eventually surpasses potential GDP, reaches a peak and subsequently falls below potential GDP during a recession eventually reaching a trough. Topic: Actual and Potential GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 32) Explain the relationship between potential GDP and real GDP in the United States since the early 1960s. You do not need to tell what happened during any specific year; just describe the general relationship. Answer: Potential GDP has grown over the period, albeit at a slower rate over the past 3 decades, while the level of real GDP has fluctuated around potential GDP throughout. Topic: Actual and Potential GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

33) What is a business cycle? Answer: The business cycle is the recurrent but irregular upward and downward movements in production and jobs. A downward movement is called a recession and an upward movement is called an expansion. At the top of the cycle, when an expansion gives way to a recession, is a peak. At the bottom of the cycle, when a recession gives way to an expansion, is a trough. Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 34) List and explain the two phases and two turning points of the business cycle. Answer: The economy is defined as being an expansion when real GDP is increasing and in a recession when real GDP decreases for at least two consecutive quarters. Between expansion and recession the economy reaches a peak defined as a local maximum in the level of real GDP. A trough is the opposite of a peak where real GDP hits a local minimum as the economy goes from being in a recession to being in an expansion. Topic: Business Cycle Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 35) What is a recession? Answer: A recession is a period of time during which real GDP decreases, so that the growth rate of real GDP is negative, for at least two successive quarters. A recession occurs starts after a peak in the business cycle and ends before a trough in the business cycle. During a recession, real GDP falls below potential GDP. Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 36) Explain the business cycle by describing the phases and turning points. Answer: The business cycle has two phases, the expansion where GDP is increasing and the recession where GDP is declining for at least two consecutive quarters. There are two turning points, the peak, where an expansion ends and a recession begins, and the trough, where a recession ends and an expansion begins. Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

37) Why does real GDP have limitations in determining economic welfare? Answer: First economic welfare is a broad concept of economic well-being that entails all goods and services not just those measured by GDP. These include production in the home and within the underground economy. Secondly, items such as leisure time are all aspects that are highly desirable and count for economic welfare yet are not measured by GDP. Lastly, environmental quality is highly desired yet real GDP growth could actually reduce the quality of the environment. So for all these reasons, economic growth is not totally determined by real GDP. Topic: Economic Welfare Comparisons Skill: Conceptual Status: Revised AACSB: Reflective Thinking 38) Explain how our economic welfare depends upon our level of real GDP per person but there might not be a one-to-one relationship between economic welfare and real GDP per person. Give examples of things that can effect one but not the other. Answer: Although GDP has a significant impact on our economic welfare, it is not a perfect measure of economic welfare. GDP omits some factors that affect our economic welfare. GDP does not include household production, all the tasks performed around the house. It omits underground production, the part of the economy hidden from the government. Real GDP does not include the value of people's leisure time. And, GDP does not make allowances for environmental quality. All of these factors influence the quality of our life and hence our economic welfare. Indeed, occasionally a change will affect GDP and economic welfare in different directions. For instance, if people decide they want more leisure and hence retire early, GDP will decrease because fewer people are working, but economic welfare will increase. Or, if there is an increase in production that creates massive amounts of pollution, GDP increases even though economic welfare likely decreases. Topic: Economic Welfare Comparisons Skill: Conceptual Status: Revised AACSB: Communication 39) "If country A has a higher level of real GDP per person than country B, then people in Country A must enjoy a higher standard of economic welfare than people in Country B." Is this statement true or false and explain your answer. Answer: The statement is false. Factors other than real GDP per person affect economic welfare. For instance, factors such as household production, underground production, leisure time, and environmental quality all affect economic welfare and all are omitted from real GDP per person. Although real GDP per person is an important factor in determining a country's economic welfare, it is not the only factor. Topic: Economic Welfare Comparisons Skill: Conceptual Status: Revised AACSB: Communication

40) List and discuss various types of goods and services omitted from measured GDP. Answer: Household production, such as preparing meals and taking care of children, are productive activities but do not involve market transactions. Therefore, household production is omitted as part of GDP. Underground production, such as working for cash to avoid taxes or engaging in illegal activities, are not reported to the government and hence are not counted as part of GDP. Leisure time and preserving and improving the natural environment are not production per se but are clearly economic goods. They are not counted as part of GDP because it is hard to quantify and put a monetary value on them. Topic: Omissions from GDP Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Communication 41) What would happen to measured GDP if more people started hiring workers to do house chores such as cooking and cleaning? Answer: GDP is the value of the final goods and services that are produced in an economy over a specified time period. However, GDP, as measured, does not include the value of household production people do for themselves around their homes. Therefore if you wash your car at your home or apartment, the value of the car washing is not included in GDP. However if you hired someone to wash your car at your home or apartment, the value of the car washing would be included in GDP. Thus if more people started hiring workers to do household chores, measured GDP would increase. Topic: Household Production Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Communication 42) What is "underground production"? Is it included in GDP? Answer: Underground production is the production of goods and services that remain hidden from the government. Underground production includes the production of illegal goods and services and the production of legal goods and services but in a way that avoids taxes or regulations. Underground production is not included in GDP. Topic: GDP and Underground Economic Activity Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 43) Explain how underground economic activity affects measurement of GDP. Answer: The underground economy are transactions hidden from the government, either because they are illegal or to avoid taxes. Because the underground economy is hidden from the government, it is not included in GDP and so GDP is smaller than it otherwise would be. Topic: GDP and Underground Economic Activity Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

44) While studying with your friend, your friend states, "Our leisure time increases GDP but lowers our economic welfare because it reduces the amount of goods and services we can consume." Is your friend's statement correct? Answer: Your friend's assertion is incorrect on two counts. First, leisure time does not increase GDP. Indeed, by taking time away from production, leisure time decreases GDP. Second, leisure time increases our economic welfare. People enjoy their leisure time and therefore having more leisure time raises their economic welfare. Topic: GDP and Leisure Time Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 45) If you buy a new water skis and other new equipment for $2,500 and take a week off of your job, where you earn $1,000 a week, to go water skiing. The equipment you purchased was all produced in the United States. You think that the week was worth $4,000. As a result of your vacation, GDP changes by how much? Answer: GDP changes by only the $2,500 you spent on the water skis and other equipment. Topic: GDP and Leisure Time Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

6 Numeric and Graphing Questions 1) Assume a small nation has the following statistics: its consumption expenditure is $15 million, investment is $2 million, government purchases of goods and services is $1 million, exports of goods and services to foreigners is $1 million, and imports of goods and services from foreigners is $1.5 million. Calculate this nation's GDP. Answer: The nation's GDP equals the sum of consumption expenditure, investment, government purchases of goods and services, and net exports of goods and services, where net exports of goods and services equals of goods and services exports minus imports of goods and services. So, GDP = $15 million + $2 million + $1 million + $1 million - $1.5 million = $17.5 million. Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills Item Consumption expenditure Investment Government expenditure on goods and services Exports of goods and services Imports of goods and services

Billions of dollars 6,258 1,623 1,630 998 1,252

2) The table above gives the values of different expenditures in the United States during 1999. Answer the following questions about the United States. a) What was the value of net exports of goods and services in 1999? b) What was (nominal) GDP equal to in 1999? c) What was the (nominal) value of total production equal to in 1999? Answer: a) Net exports of goods and services equals the value of exports of goods and services, $998 billion, minus the value of imports of goods and services, $1,252 billion, or -$254 billion. b) GDP equals the sum of consumption expenditure, $6,258, plus investment, $1,623, plus government expenditure on goods and services, $1,630, plus net exports, -$254, or $9,257 billion. c) The value of total production equals the value of GDP, so total production was $9,257 billion in 1999. Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

3) On January 1, 2010, United Delivery had trucks valued at $1.3 million. During 2010, United Delivery purchased new trucks valued at $500,000. If the value of the trucks on December 31, 2010 was $1.5 million, what is the amount of its net investment and its depreciation during 2010? Answer: Net investment is the change in the capital stock from one period to the next. For United Delivery, net investment equals $1.5 million - $1.3 million = $200,000. Net investment also equals gross investment minus depreciation, so depreciation equals gross investment minus net investment. Gross investment, the total amount spent on new capital equipment, was $500,000. Net investment was calculated to be $200,000. Therefore depreciation equals $500,000 $200,000 = $300,000. Topic: Capital Stock and Investment Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 4) Using a graph, draw and label the phases and turning points of the business cycle. Answer:

The figure shows a business cycle. Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Analytical Skills

7 True or False 1) When IBM, an American firm, produces computer chips in another country, this production is not included in U.S. GDP because the production did not take place in the United States. Answer: TRUE Topic: Gross Domestic Product Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 2) The circular flow diagram shows that the flow of payments to the factors used to produce goods and services exceeds the flow of payments for final goods and services. Answer: FALSE Topic: Circular Flow Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 3) The circular flow diagram shows only the aggregate expenditures measure of GDP. Answer: FALSE Topic: Circular Flow, Aggregate Expenditures Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 4) The circular flow shows that aggregate spending is larger than aggregate income because people save. Answer: FALSE Topic: Expenditure Equals Income Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 5) When gross investment is greater than depreciation, then the nation's capital stock increased. Answer: TRUE Topic: Capital and Investment Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 6) Net investment equals gross investment minus depreciation. Answer: TRUE Topic: Net Investment Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 104 Copyright © 2014 Pearson Education, Inc.

7) If depreciation exceeds gross investment, net investment is negative. Answer: TRUE Topic: Net Investment Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 8) The expenditure approach to measuring GDP includes firms' spending on wages. Answer: FALSE Topic: Expenditure Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 9) Intermediate goods and services are one of the largest components of the expenditure approach to measuring GDP. Answer: FALSE Topic: Expenditure Approach Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 10) To calculate GDP using the expenditure approach, in part it is necessary to add exports and subtract imports. Answer: TRUE Topic: Expenditure Approach, Net Exports Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 11) To calculate GDP when using the income approach, you must add indirect business taxes and depreciation. Answer: TRUE Topic: Income Approach Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 12) The largest component of income is proprietors' income. Answer: FALSE Topic: Income Approach, Compensation of Employees Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

13) A productivity growth slowdown can be shown as year-to-year fluctuations of real GDP around potential GDP. Answer: FALSE Topic: Productivity Growth Slowdown Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 14) Real GDP fluctuates from year to year but is always below potential GDP. Answer: FALSE Topic: Real and Potential GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 15) A business cycle is the pattern of short-run upward and downward movements in production and jobs. Answer: TRUE Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 16) Phases and turning points of the business cycle are expansion, peak, recession and trough. Answer: TRUE Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 17) The business cycle progresses from an expansion to a peak to a recession and then to a trough. Answer: TRUE Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 18) A recession occurs when real GDP decreases for at least 6 months. Answer: TRUE Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

19) An expansion ends when the economy hits a trough and then enters a recession. Answer: FALSE Topic: Business Cycle Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 20) To measure economic welfare, one needs only to measure real GDP. Answer: FALSE Topic: Economic Welfare Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 21) The omission of household production causes actual economic production to be underestimated. Answer: TRUE Topic: GDP and Household Production Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 22) Household production is not measured in the GDP. Answer: TRUE Topic: Household Production Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 23) All economic activity in the underground economy represents the production of illegal goods and services. Answer: FALSE Topic: GDP and Underground Economic Activity Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 24) The underground economy means that GDP will overstate the actual level of economic welfare. Answer: FALSE Topic: GDP and Underground Economic Activity Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

25) If a measure of real GDP could include the value of leisure time, measured real GDP would increase. Answer: TRUE Topic: GDP and Leisure Time Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 26) The fact that prices for similar goods differ across nations complicates comparisons of real GDP across countries. Answer: TRUE Topic: GDP and Purchasing Power Parity Prices Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

8 Extended Problems

Item Wages paid Consumption expenditure Taxes Transfer payments Profits Investment Government expenditure Exports Imports

Amount (millions of dollars) 100 120 40 15 35 30 50 30 40

1) The table above shows the transaction in Pinkland last year: a) Calculate Pinkland's GDP. b) What approach did you use to make this calculation? Answer: a) GDP = C + I + G + (X - M) = $120 + $30 + $50 + ($30 - $40) = $190 million. b) The expenditure approach is used, which measures GDP as C + I + G + (X - M). Topic: Expenditure Approach Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

Year 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Real GDP (trillions of yen) 478 483 484 489 499 516 525 519 520 534 536

2) The table above shows Japan's real GDP between 1991 to 2001. a) Draw a figure with Japan's real GDP from 1991 to 2001. b) In the previous 30 years, the growth rate of Japan's potential GDP was 6 percent a year. On your graph, show the path that potential GDP would have followed if its GDP in 1991 was equal to potential GDP and the growth rate of potential GDP had been maintained in 1991-2001. c) Show the Lucas wedge on your figure. Answer:

a) See the figure above. b) Potential GDP is illustrated in the figure above. Potential GDP in 1991 is assumed to equal real GDP in 1991. Then, projected GDP levels for subsequent years are calculated by multiplying potential GDP in the previous year by 1.06. For example, in 1992, potential GDP equals 478 trillion yen × 1.06 = 507 trillion yen; potential GDP in 1993 equals 507 trillion yen × 1.06 = 537 trillion yen; and so on. 110 Copyright © 2014 Pearson Education, Inc.

c) The figure above shows the Lucas wedge as the darkened area. The Lucas wedge shows that the loss of output accumulated in Japan in 1991-2001 that resulted from a slowdown in the growth rate of real GDP was 1,575 trillion yen. Topic: Lucas Wedge Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 9 Appendix: Graphs in Macroeconomics 1) To see how variables evolve over time we use A) a scatter graph. B) an evolution plot. C) a cross-section plot. D) a time-series graph. Answer: D Topic: Time-Series Graphs Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Analytical Skills

2) The figure above shows a A) two-variable time-series graph. B) time-series graph. C) scatter diagram. D) regression. Answer: B Topic: Time-Series Graphs Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Analytical Skills 3) On a time-series graph, time is typically shown A) as an area. B) along the x-axis. C) along the y-axis. D) as an implicit variable held constant. Answer: B Topic: Time-Series Graphs Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Analytical Skills

4) The horizontal axis on a time-series graph A) measures the variable being graphed. B) measures units of time such as years. C) runs parallel to the y-axis. D) measures how the variable being graphed changes. Answer: B Topic: Time-Series Graphs Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Analytical Skills

5) The figure above shows a time-series graph. The horizontal axis measures ________ and the vertical axis measures ________. A) time; x-values B) time; the variable of interest C) the variable of interest; time D) y-values; the variable of interest Answer: B Topic: Time-Series Graphs Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Analytical Skills

6) A trend is A) a measure of closeness on a scatter diagram. B) a general tendency for a variable to rise or fall. C) the maximum value of a variable. D) the minimum value of a variable. Answer: B Topic: Time-Series Graphs Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Analytical Skills 7) A trend shows A) the degree of correlation between two variables. B) the general tendency for a variable to rise or fall. C) the scale used to measure to variables. D) the increases in one variable. Answer: B Topic: Time-Series Graphs Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Analytical Skills 8) Trend refers to A) the scale used on the x- and y-coordinates. B) increases but not decreases of a variable. C) decreases but not increases of a variable. D) a general tendency for a variable to rise or fall. Answer: D Topic: Time-Series Graphs Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Analytical Skills 9) Which of the following is TRUE regarding a trend? I. A cross section graph shows trends. II. A time-series graph shows trends. III. A scatter plot shows trends over time. A) I B) II C) I and II D) II and III Answer: B Topic: Time-Series Graphs Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Analytical Skills 114 Copyright © 2014 Pearson Education, Inc.

10) Which type of graph is used to identify trends? A) time-series B) scatter diagram C) cross-section D) None of the above answers is correct. Answer: A Topic: Time-Series Graphs Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Analytical Skills 11) Which of the following is correct about a time-series graph? I. The x-axis measures time. II. A time-series graph can reveal if there is a trend in the variable. A) only I B) only II C) both I and II D) neither I nor II Answer: C Topic: Time-Series Graphs Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Analytical Skills 12) A time-series graph reveals whether there is a ________ which represents ________. A) trend in a variable; a general tendency for the variable to rise or fall B) relationship between two variables; a cross-section graph C) trend in a variable; unrelated variables D) relationship between two variables; a trend in a variable Answer: A Topic: Time-Series Graphs Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Analytical Skills 13) A time-series graph showing total production in Japan from 1960 to 2010 shows a positive trend. It is the case that total production A) fell every year between 1960 and 2010. B) rose every year between 1960 and 2010. C) was lower in 2010 than in 1960. D) was higher in 2010 than in 1960. Answer: D Topic: Time-Series Graphs Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Analytical Skills 115 Copyright © 2014 Pearson Education, Inc.

14) Using the above figure, during which month was the price for crude oil the highest? A) July B) December C) May D) October Answer: B Topic: Time-Series Graphs Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 15) Using the above figure, during which of the following periods does the price of crude oil have a downward trend? A) May to July B) May to November C) July to October D) October to December Answer: C Topic: Time-Series Graphs Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

16) Using the above figure, during which of the following periods does the price of crude oil shows an upward trend? A) May to November B) May to July and October to December C) July to October D) April to November Answer: B Topic: Time-Series Graphs Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

17) According to the graph in the figure above, which year experienced the most rapid change in employment? A) Year 2 B) Year 3 C) Year 4 D) Year 5 Answer: B Topic: Time-Series Graphs Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

18) In the above figure, the diagram shows A) a downward trend in x. B) an upward trend in x. C) a scatter diagram. D) a two-variable scatter diagram. Answer: A Topic: Time-Series Graphs Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Analytical Skills 19) Inflation climbed steadily from 1952 to 1972. A time-series graph with inflation on the vertical axis and time (in years) on the horizontal axis would show A) the rate of inflation as a horizontal line. B) that inflation was following a decreasing trend line. C) that inflation had a positive trend. D) that inflation had a negative trend. Answer: C Topic: Time-Series Graphs Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills

20) A time-series graph displays the price of copper. The slope of the line is negative for periods when the A) price of copper is falling. B) price of copper is rising. C) quantity of copper is falling. D) price of copper is low and not changing. Answer: A Topic: Time-Series Graphs Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 21) A graph shows the wages of factory workers. The slope of the line is positive for periods when the wage rate is A) falling. B) rising. C) high but not rising any higher. D) low. Answer: B Topic: Time-Series Graphs Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 22) On a time-series graph with a ratio scale, A) the slope of the line is negative when the level of the variable is rising. B) the same distance along the vertical axis measures different amounts of the variable. C) time is plotted on the vertical axis rather than the horizontal axis. D) it is impossible to determine a trend. Answer: B Topic: Ratio Scale Skill: Analytical Status: Previous edition, Chapter 4 AACSB: Analytical Skills 23) You believe that the total amount of goods produced in the United States has generally increased over the years. In a time-series graph illustrating the total amount produced, you expect to find A) an upward trend. B) no relationship between time and the amount of goods produced. C) an inverse relationship between time and the amount of goods produced. D) a linear relationship. Answer: A Topic: Study Guide Question, Time-Series Graphs Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Analytical Skills 119 Copyright © 2014 Pearson Education, Inc.

10 Appendix: Essay Questions 1) What kind of information is conveyed in a time-series graph? Answer: A time series graph reveals four types of information. First, it shows the actual value of the variable(s) at each point in time. Second, it shows whether the variable(s) is rising or falling as time passes. Third, it shows the speed with which the variable(s) is changing. Finally, it shows the presence—or absence—of a trend. Topic: Time Series Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Communication 11 Appendix: Numeric and Graphing Questions

1) The figure above shows the price of a DVD player from 2003 to 2007. a) What type of graph is illustrated above? b) What is the trend in the price of a DVD player? Answer: a) The graph is a time-series graph because it plots time along the horizontal axis and the price of a DVD player along the vertical axis. b) The trend in the price of a DVD player is negative, that is, the price of a DVD player has generally decreased from one year to the next. Topic: Time Series Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Analytical Skills

12 Appendix: True or False 1) A time series graph can show both the level of a variable and the speed with which the variable changes over time. Answer: TRUE Topic: Graphing Data Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 2) A trend is a general tendency for a variable to increase or decrease over time. Answer: TRUE Topic: Graphing Data Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 13 Mathematical Note: Chained-Dollar Real GDP 1) Valuing the quantities of goods produced in consecutive years using prices in both years and then averaging the percentage changes in the value of output is part of the ________ method of calculating real GDP. A) base-year B) moving-base-year C) chain-weighted output index D) fixed quantities/variable prices Answer: C Topic: Real GDP Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 2) The chain-weighted output index method ________. A) is used to calculate the value of nominal GDP B) values the quantities produced in a year at the prices of the base year C) shows that real GDP increases every year D) uses the prices of two adjacent years to calculate the real GDP growth rate Answer: D Topic: Chain-Weighted Growth Rate Skill: Recognition Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

3) Which of the following is TRUE regarding the chain-weighted output index method? I. It is the method used to measure the growth rate of nominal GDP. II. It uses data from the current year and from the previous year. III. It is a method of measuring the growth rate of real GDP. A) I and II B) II and III C) I and III D) I, II and III Answer: B Topic: Chain-Weighted Growth Rate Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 4) The chain-weighted output index A) uses only the current year's prices to calculate growth in real GDP. B) uses prices for the current year and the previous year to calculate growth in real GDP. C) must be calculated only every other year. D) is an inaccurate way to measure growth in real GDP and so has been replaced by the "nominalto-real" index. Answer: B Topic: Chain-Weighted Growth Rate Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 5) The chain-weighted output index method of calculating real GDP compares A) compares the quantities of goods produced in consecutive years using prices in both years and averaging the percentage changes in the value of output. B) quantities produced in different years using prices from a year chosen as a reference period. C) quantities produced in different years with the prices that prevailed during the year in which the output was produced. D) prices at different points in time using a sample of goods that is representative of goods purchased by households. Answer: A Topic: Chain-Weighted Growth Rate Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking

6) The chain-weighted output index method of measuring real GDP is based on A) using current prices rather than base year prices B) averaging the market value of the expenditures over a two year period and then comparing with a base period. C) using the prices of two adjacent years to calculate the growth rate of real GDP. D) averaging the nominal and real measures of GDP to come up with a more accurate figure. Answer: C Topic: Chain-Weighted Growth Rate Skill: Conceptual Status: Previous edition, Chapter 4 AACSB: Reflective Thinking 7) At 2012 prices, the value of production in 2013 was 6 percentage points higher than in 2012. At 2013 prices, the value of production in 2013 was 4 percentage points higher than in 2012. Using the chain-weighted output index, real GDP is ________ in 2013 than in 2012. A) 10 percent greater B) 5 percent greater C) 7.5 percent greater D) 4 percent smaller Answer: B Topic: Chain-Weighted Growth Rate Skill: Analytical Status: Revised AACSB: Analytical Skills 8) Real GDP in 2012 is $10 trillion. Between 2012 and 2013, using 2012 prices, GDP grew 3 percent and using 2013 prices real GDP grew 7 percent. Using the chain-weighted output index method, real GDP in 2013 is ________ trillion. A) $10.5 B) $11 C) $10.1 D) $12.72 Answer: A Topic: Chain-Weighted Growth Rate Skill: Analytical Status: Revised AACSB: Analytical Skills

Economics, 11e, Global Edition (Parkin) Chapter 22 Monitoring Jobs and Inflation 1 Employment and Unemployment 1) The working-age population is defined as the number of A) people over the age of 16 who are not in jail, hospital, or other institution. B) people who have a job. C) people working full-time jobs who are over the age of 16. D) people looking for work. Answer: A Topic: Population Survey Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 2) The working-age population can be divided into two groups, A) people in the labor force and people looking for work. B) people in the labor force and people with a job. C) people looking for work and those in the armed forces. D) people in the labor force and people who are not in the labor force. Answer: D Topic: Population Survey Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 3) The total number of people aged 16 years and over who are not institutionalized ________. A) equals the number of employed plus unemployed B) is the working-age population C) does not include students D) is the labor force Answer: B Topic: Working Age Population Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

4) Which of the following statements is incorrect? A) The labor force is equal to the number of people employed plus the number of people unemployed. B) The working age population includes everyone over the age of 16. C) The unemployment rate is the number of persons who are unemployed divided by the labor force then times 100. D) The labor-force participation rate is the labor force divided by the working-age population then times 100. Answer: B Topic: Working Age Population Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 5) Which of the following is NOT included in the working-age population? A) discouraged workers B) people waiting to be called back to a job after being laid off C) retirees under the age of 55 D) people in prison Answer: D Topic: Working Age Population Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 6) All people in the working-age population can be divided into A) labor force participants. B) employed, unemployed, or not in the labor force. C) either over-employed or under-employed. D) potential employees. Answer: B Topic: Working Age Population Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 7) Suppose the working age population in Tiny Town is 100 people. If 25 of these people are NOT in the labor force, the ________ equals ________. A) unemployment rate; 25/100 × 100 B) unemployment rate; 25/75 × 100 C) labor force; 75 D) labor force; 25/100 × 100 Answer: C Topic: Working Age Population Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Analytical Skills 2 Copyright © 2014 Pearson Education, Inc.

8) The labor force is the sum of the A) working-age population and the number of unemployed people. B) number of employed people and the working-age population. C) number of employed people and the number of unemployed people. D) total population and the number of unemployed people. Answer: C Topic: Labor Force Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 9) The labor force is defined as A) people with full time jobs. B) workers with jobs and unemployed workers. C) all people capable of work. D) All of the above answers are correct. Answer: B Topic: Labor Force Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 10) The ________ equals the number of ________. A) labor force; persons over 16 years old B) labor force; unemployed and employed persons C) working age population; employed persons D) unemployment rate; people unemployed Answer: B Topic: Labor Force Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 11) The labor force is defined as people A) who have a job or are looking for a job. B) in the working-age population who have a job. C) in the working-age population who have a full time job. D) who are 16 years of age or older. Answer: A Topic: Labor Force Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

12) Which population category equals the sum of employed and unemployed people? A) working-age population B) labor force C) young and institutionalized D) not in the labor force Answer: B Topic: Labor Force Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 13) The ________ is the total number of people aged 16 years and older (and not in jail, hospital or institutional care) while the ________ is the number of people employed and the unemployed. A) labor force; working-age population B) labor force participation rate; labor force C) working-age population; labor force D) working-age population; labor force participation rate Answer: C Topic: Labor Force Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 14) The labor force is defined as the number of A) people 16 and over. B) unemployed people. C) people with jobs, both part-time and full-time. D) people who are employed and unemployed. Answer: D Topic: Labor Force Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 15) The labor force is defined as the A) number of people over 16 years of age. B) number of people who are working. C) sum of employed and unemployed people. D) number of people in blue-collar jobs. Answer: C Topic: Labor Force Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

16) The labor force is defined as the A) number of employed people plus the number of unemployed people. B) number of people who are working. C) number of people who are working in labor-type jobs. D) number of union members who are working. Answer: A Topic: Labor Force Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 17) The labor force includes A) only the number of people employed. B) discouraged workers. C) only the number of people unemployed. D) both employed and unemployed workers. Answer: D Topic: Labor Force Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 18) The labor force is defined as the number of people who A) are employed plus the number of people who are unemployed. B) are available and looking for work but are unable to find employment. C) would like to have a job but have stopped seeking work. D) would like to have a full-time job but are working part-time. Answer: A Topic: Labor Force Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 19) Full-time students and prisoners are ________. A) not in the labor force B) in the labor force C) counted as discouraged workers D) counted as unemployed Answer: A Topic: Labor Force Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

20) Which of the following is NOT considered to be in the labor force? A) a student who works part-time B) a person who is not working but who has tried to find a job in the past week C) a person who is waiting to start a new job in the next 30 days D) a person who is not working and who has not tried to find a job Answer: D Topic: Labor Force Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 21) In an economy, 42 million people are in the labor force, 38 million are employed, and 47 million are of working age. How many people are not in the labor force? A) 19 percent B) 9 million C) 5 million D) 4 million Answer: C Topic: Labor Force Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 22) If the number of people unemployed is 100, the number of people employed is 1000, and the working-age population is 1400, then the labor force is A) 1000. B) 1100. C) 1400. D) 1500. Answer: B Topic: Labor Force Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 23) The official U-3 unemployment rate A) includes persons without a job who have made efforts in the last week to find a job. B) includes persons without a job, whether they are actively searching for work or not. C) counts discouraged workers as unemployed. D) counts people with part-time jobs who want full-time jobs as unemployed. Answer: A Topic: Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

24) The official U-3 unemployment rate includes the total number of people who A) have jobs or are currently looking for jobs. B) are available and looking for work but unable to find employment. C) would like to have a job but have stopped seeking work. D) would like to have a full-time job but are working part-time. Answer: B Topic: Unemployment Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 25) Which of the following people would be counted as is employed in the Current Population Survey? A) Rich, who is working 20 hours a week but wants a full-time job B) Misty, who just quit her job to return full-time to school C) April, who just graduated from college and is looking for work D) Jason, who was laid off from work less than 6 months ago but who has stopped looking for work Answer: A Topic: Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 26) Which of the following best fits the definition of unemployed? A) retired and not working B) working less than a full work week C) not working but looking for a job D) not working and not looking for work Answer: C Topic: Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

27) Using the definition of unemployment, which of the following individuals would be unemployed? A) A full-time student quits school, enters the labor market for the first time, and searches for employment. B) Because of the increased level of automobile imports, an employee of General Motors is laid off but expects to be called back to work soon. C) Because of a reduction in the military budget, your next door neighbor loses her job in a plant where nuclear warheads are made and must look for a new job. D) All of these individuals are unemployed. Answer: D Topic: Population Survey Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 28) Which of the following people would be considered unemployed by the Bureau of Labor Statistics? I. Mrs. X retires from her job at the age of 55 and does not look for another job. II. Mr. Y was laid off from his job as a welder, but expects to be rehired in 8 months. A) I only B) II only C) both I and II D) neither I nor II Answer: B Topic: Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 29) Using the official measure of unemployment, which of the following people is considered unemployed? A) a part-time worker who wishes to work full time B) a person who gave up looking for jobs because he or she was discouraged about his or her job prospects C) a person who has been searching for work, but turns down a job paying a lower wage rate than desired D) a person who is working but expects to be laid off at the end of the month Answer: C Topic: Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

30) Using the official measure of unemployment, which of the following would NOT be counted as unemployed? A) a person who is not working but who has tried to find a job in the past week B) a person who is waiting to be called back to a job after having been laid off C) a person who performs traditional housework and does not work outside the home for pay D) a person who is waiting to start a new job in the next 30 days Answer: C Topic: Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 31) The unemployment rate is the ________ who are unemployed. A) number of people in the labor force B) percentage of people in the labor force C) percentage of people in the country D) percentage of the working-age population Answer: B Topic: Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 32) The unemployment rate is calculated as A) [(labor force) ÷ (population)] × 100. B) [(unemployment) ÷ (population)] × 100. C) [(unemployment) ÷ (labor force)] × 100. D) [(labor force) ÷ (unemployment)] × 100. Answer: C Topic: Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Analytical Skills 33) The unemployment rate equals A) (number of people employed/working age population) × 100. B) (number of people unemployed/labor force) × 100. C) (labor force/working age population) × 100. D) (number of people employed/number of people age 16 and over) × 100. Answer: B Topic: Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Analytical Skills

34) The unemployment rate equals the number of A) unemployed workers multiplied by 100. B) unemployed workers divided by the population then multiplied by 100. C) unemployed workers divided by the number of employed workers then multiplied by 100. D) unemployed workers divided by the labor force then multiplied by 100. Answer: D Topic: Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Analytical Skills 35) The unemployment rate equals A) (the number of unemployed workers)/(the number of employed + unemployed workers) × 100. B) (the number of unemployed workers)/(the civilian population) × 100. C) (the number of unemployed workers)/(the U.S. population older than 16 years of age) × 100. D) (the number of unemployed + employed workers)/(U.S. population older than 16 years of age) × 100. Answer: A Topic: Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Analytical Skills 36) The unemployment rate equals A) the total number of people without jobs in a given period. B) the percentage of the population not currently employed. C) the rate of change in unemployment figures from one period to another. D) the percentage of the labor force currently unemployed. Answer: D Topic: Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 37) The unemployment rate is found by dividing the number of unemployed people by the A) number of working individuals, and multiplying by 100. B) number of the working-age population, and multiplying by 100. C) sum of working individuals plus unemployed workers, and multiplying by 100. D) number in the labor force, and dividing by 100. Answer: C Topic: Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Analytical Skills

38) The ________ is calculated as the number of people ________ divided by the labor force multiplied by 100. A) unemployment rate; unemployed B) employment-to-population ratio; unemployed C) employment rate; employed D) employment-to-population ratio; in the working age population Answer: A Topic: Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Analytical Skills 39) The unemployment rate is defined as the A) number of people not working. B) percentage of the population not working. C) percentage of the labor force not working. D) percentage of the working-age population not working. Answer: C Topic: Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 40) The unemployment rate is measured as A) the number of people that want to work but cannot find jobs out of the entire population. B) the percentage of people in the labor force who are unemployed. C) an indicator to determine long-term economic growth. D) an indicator for potential inflation. Answer: B Topic: Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

41) To calculate the unemployment rate, which of the following are necessary pieces of information? I. the number of unemployed persons II. the population III. the number of people in the labor force IV. the working age population A) I, II III and IV B) I and II C) I and III D) I and IV Answer: C Topic: Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 42) The unemployment rate measures the percentage of A) people who want full-time jobs, but can't find them. B) the working-age population who can't find a job. C) people in the labor force who can't find a job. D) the working age population that can't find a full-time job. Answer: C Topic: Unemployment Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 43) Which labor market statistic tends rise during recessions and fall during expansions? A) the unemployment rate B) the labor-force participation rate C) the employment-to-population ratio D) aggregate hours Answer: A Topic: Unemployment Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

44) Suppose the population of Tiny Town is 100 people and the working age population is 70. If 10 of these people are unemployed, the unemployment rate in Tiny Town is A) 10 percent. B) 10/70 × 100. C) 10/80 × 100. D) There is not enough information provided to calculate the unemployment rate. Answer: D Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 45) The population of Tiny Town is 100 people and the labor force is made up of 75 people. If 5 of these people are unemployed, the unemployment rate is A) 5/100 × 100. B) 5/80 × 100. C) 5/75 × 100. D) There is not enough information provided to calculate the unemployment rate. Answer: C Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 46) Based on the following data for the country of Tiny Town, the unemployment rate equals: Population = 100 Labor force = 80 Number of employed persons = 70 Number of discouraged workers = 5 A) 10/100 × 100. B) 10/80 × 100. C) 15/80 × 100. D) 5/70 × 100. Answer: B Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

47) In an economy, 23 million people are employed and 2 million are unemployed, but 5 million part-time workers would prefer full-time work. What is the unemployment rate? A) 23.2 percent B) 6.7 percent C) 8 percent D) 25 percent Answer: C Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 48) Assume that the total labor force is 100 individuals with 10 unemployed. The unemployment rate is ________. Now assume that 10 people drop out of the labor force and that 10 remain unemployed. The new unemployment rate is ________. A) 9 percent; 10 percent B) 10 percent; 9 percent C) 10 percent; 11 percent D) 11 percent; 10 percent Answer: C Topic: Unemployment Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 49) Which of the following decreases the official U-3 unemployment rate? A) Workers leave the labor force. B) More women enter the labor force and seek jobs. C) Young people graduate from college and start to look for their first full-time job. D) None of the above because they all increase or do not change the unemployment rate. Answer: A Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 50) During a recession, people drop out of the labor force because they are unable to find a job. All else the same, this A) increases the official U-3 unemployment rate. B) decreases the official U-3 unemployment rate. C) does not change the official U-3 unemployment rate. D) increases the official U-3 unemployment rate and the labor force participation rate. Answer: B Topic: Unemployment Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 14 Copyright © 2014 Pearson Education, Inc.

51) In August 2012, the official U-3 unemployment rate dropped from 8.3 percent to 8.1 percent. This change could have been caused by A) unemployed workers giving up looking for a job. B) part-time workers getting a full-time job. C) full-time workers becoming part-time workers. D) workers who had previously given up looking for a job starting to look again. Answer: A Topic: Unemployment Rate Skill: Analytical Status: New AACSB: Analytical Skills 52) In the United States in 1996, the population was 265.5 million and the working age population was 200.6 million. There were 133.9 million people in the labor force and 126.7 of them were employed. The unemployment rate equaled ________. A) 7.2 percent B) 5.4 percent C) 3.6 percent D) 33 percent Answer: B Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 53) Suppose there are 100 million in the labor force, and 6 million unemployed people. During the next month, 200,000 people lose their jobs and 300,000 find jobs. The new total of employed persons is ________ and the new unemployment rate is ________. A) 100.1 million; 5.8 percent B) 100 million; 6.1 percent C) 94.1 million; 5.9 percent D) 93.9 million; 6.1 percent Answer: C Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

54) Suppose the working-age population is 220 million, the labor force is 150 million, and the unemployment rate is 10 percent. The number of unemployed people is A) 15 million. B) 22 million. C) 37 million. D) 7 million. Answer: A Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 55) Suppose initially that the working-age population is 220 million, the labor force is 150 million, and the official U-3 unemployment rate is 10 percent. 5 million new jobs are created and filled by 5 million people who had previously been discouraged workers. What is the new U-3 unemployment rate? A) 6.25 percent B) 6.7 percent C) 9.7 percent D) 8.7 percent Answer: C Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 56) Between August 2011 and August 2012 the number of discouraged workers decreased from 977,000 to 844,000. Assuming the change resulted from discouraged workers starting to make specific efforts to find a job again, this change creates A) an increase to the U-3 unemployment rate. B) a decrease to the U-3 unemployment rate. C) no change to the U-3 unemployment rate. D) a decrease in the labor force participation rate. Answer: A Topic: Unemployment Rate Skill: Analytical Status: New AACSB: Analytical Skills

57) Between August 2011 and August 2012 the number of economic part-time workers decreased from 8.8 million to 8.0 million. Assuming the change resulted from economic parttime workers transitioning to full-time jobs, this change created A) no change to the U-3 unemployment rate. B) a decrease to the U-3 unemployment rate. C) an increase to the U-3 unemployment rate. D) an increase in the employment-to-population ratio. Answer: A Topic: Unemployment Rate Skill: Analytical Status: New AACSB: Analytical Skills 58) If the number of people unemployed is 100, the number of people employed is 1000, and the working-age population is 1400, then the unemployment rate is A) 6.6 percent. B) 10 percent. C) 9.1 percent. D) 7.1 percent. Answer: C Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 59) Suppose the population is 220 million people, the labor force is 150 million people, the number of people employed is 130 million and the working-age population is 175 million people. What is the unemployment rate? A) 9.0 percent B) 13.3 percent C) 11.4 percent D) 15.4 percent Answer: B Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

60) Suppose there are currently 100 people unemployed, 1500 people employed, 1600 people in the labor force, and 2000 people in the working age population. The unemployment rate equals 100 times A) 100/1500. B) 100/1600. C) 100/2000. D) 1500/2000. Answer: B Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 61) If the population is 300 million, with 70 million under the age of 16 and institutionalized, another 70 million not in the labor force, 10 million unemployed and 150 million employed, the unemployment rate is A) 23.3 percent. B) 6.7 percent. C) 6.25 percent. D) 26.7 percent. Answer: C Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 62) Suppose the current unemployment rate is 5 percent, the labor force is 400 million people, the labor force participation rate is 80 percent and the working-age population is 500 million people. What number of people are unemployed? A) 100 million people B) 25 million people C) 20 million people D) 5 million people Answer: C Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

Person A Now that the kids are in school for a full day, this person is looking for work and has interviewed for three jobs during the past two weeks. Person B This person has been laid off from a job but expects to be called back as soon as the economy improves. Person C This person has just graduated from college and will start a new job in three weeks. In the meantime this person will tour the great American beaches. Person D This person was laid off last year when new equipment was installed at the plant, reducing the number of workers needed. Shortly after being laid off, this person looked for a new job, was unable to find one and then stopped looking, even though this person still wants a job and is available for work. 63) The above table shows answers given by people interviewed in a government survey of households. Which individuals are considered to be a part of the labor force? A) C and D B) B, C, and D C) A, C, and D D) A, B, and C Answer: D Topic: Population Survey Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 64) The above table shows answers given by people interviewed in a government survey of households. Which individuals are considered unemployed using the official U-3 unemployment rate? A) A, B, and C B) B, C, and D C) A, C, and D D) C and D Answer: A Topic: Population Survey Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

65) The above table shows answers given by people interviewed in a government survey of households. Which individual or individuals are considered marginally attached? A) A B) B, C, and D C) A and D D) D Answer: D Topic: Marginally Attached Workers Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking Not working Want to work but Total Currently and looking no longer looking population employed for work for work (millions) (millions) (millions) (millions) 80 40 2 4 66) In the table above, the size of the labor force is A) 80 million. B) 46 million. C) 42 million. D) 40 million. Answer: C Topic: Labor Force Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 67) In the table above, the number of people officially unemployed is ________. A) 40 million B) 6 million C) 4 million D) 2 million Answer: D Topic: Population Survey Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

68) In the table above, the official U-3 unemployment rate is A) 50 percent. B) 15 percent. C) 10 percent. D) 5 percent. Answer: D Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 69) In the table above, the number of marginally attached workers is ________. A) 40 million B) 6 million C) 2 million D) 4 million Answer: D Topic: Marginally Attached Workers Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 70) The employment-to-population ratio equals A) (labor force)/(working-age population) × 100. B) (number of people employed)/(labor force) × 100. C) (number of people with full-time jobs)/(labor force) × 100. D) (number of people employed)/(working-age population) × 100. Answer: D Topic: Employment-to-Population Ratio Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Analytical Skills 71) The employment-to-population ratio is defined as A) total employment divided by labor hours then multiplied by 100. B) the labor force divided by the working-age population then multiplied by 100. C) total employment divided by the labor force then multiplied by 100. D) total employment divided by the working-age population then multiplied by 100. Answer: D Topic: Employment-to-Population Ratio Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Analytical Skills

72) The employment-to-population ratio is equal to the number of A) unemployed people divided by the total population then multiplied by 100. B) employed people divided by the working-age population then multiplied by 100. C) employed people divided by the total population then multiplied by 100. D) unemployed people divided by the working age population then multiplied by 100. Answer: B Topic: Employment-to-Population Ratio Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Analytical Skills 73) The percentage of people employed aged 16 years and older divided by the working-age population is known as the A) employment rate. B) employment-to-population ratio. C) labor force participation rate. D) working-age population ratio. Answer: B Topic: Employment-to-Population Ratio Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Analytical Skills 74) The percentage of the people of working age who have jobs is called the ________. A) labor force B) inverse of the unemployment rate C) employment-to-population ratio D) employment-to-working-age-population ratio Answer: C Topic: Employment-to-Population Ratio Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 75) In August 2012, the employment-to-population ratio dropped from 58.4 percent to 58.3 percent. This change could have been the result of A) an increase in the working-age population. B) unemployed workers becoming part-time workers. C) unemployed workers becoming discouraged workers. D) discouraged workers starting to look for jobs again. Answer: A Topic: Employment-to-Population Ratio Skill: Analytical Status: New AACSB: Analytical Skills

76) In an economy, 43 million people are employed, 3 million are unemployed, and 4 million are not in the labor force. What is the employment-to-population ratio? A) 86 percent B) 92 percent C) 93 percent D) 6.5 percent Answer: B Topic: Employment-to-Population Ratio Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 77) Suppose the number of people employed is 25 million and the number of people in the labor force is 75 million. What is the employment-to-population ratio? A) 33 percent B) 25 percent C) 75 percent D) There is not enough information given to answer the question. Answer: D Topic: Employment-to-Population Ratio Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 78) If the number of people unemployed is 100, the number of people employed is 1000, and the working-age population is 1400, then the employment-to-population ratio is A) 78.6 percent. B) 75 percent. C) 71.4 percent. D) 66.6 percent. Answer: C Topic: Employment-to-Population Ratio Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

79) If the population is 300 million, with 70 million under the age of 16 and institutionalized, another 70 million not in the labor force, 10 million unemployed, and 150 million employed, the employment-to-population rate is A) 53.3 percent. B) 65.2 percent. C) 46.7 percent. D) 87.5 percent. Answer: B Topic: Employment-to-Population Ratio Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 80) Based on the following data for the country of Tiny Town, the employment-to-population ratio equals ________ multiplied by 100. Population = 200 Working age population = 100 Labor Force = 90 Number of employed persons = 75 A) 90/100. B) 75/200 C) 90/200. D) 75/100. Answer: D Topic: Employment-to-Population Ratio Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 81) From 1980 to 2000 the trend in the employment-to-population ratio was ________ and from 2000 to 2012 the trend was ________. A) upward; downward B) downward; downward C) upward; upward D) downward; upward Answer: A Topic: Employment-to-Population Ratio Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

Not working Want to work but Total Currently and looking no longer looking population employed for work for work (millions) (millions) (millions) (millions) 80 40 2 4 82) The labor force participation rate is the ratio of A) (the labor force divided by the working-age population) multiplied by 100. B) (the number of unemployed divided by the working-age population) multiplied by 100. C) (the labor force divided by the total population) multiplied by 100. D) (the number of unemployed divided by the labor force) multiplied by 100. Answer: A Topic: Labor Force Participation Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Analytical Skills 83) The labor force participation rate is calculated as the A) labor force divided by the number of persons employed then multiplied by 100. B) number of persons unemployed divided by the labor force then multiplied by 100. C) labor force divided by the unemployment rate then multiplied by 100. D) labor force divided by the working age population then multiplied by 100. Answer: D Topic: Labor Force Participation Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Analytical Skills 84) The labor force participation rate is percentage of the ________ who are in the labor force. A) people under age 65 B) working-age population C) people over age 16 D) population Answer: B Topic: Labor Force Participation Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

85) The labor force participation rate shows the percentage of A) people not working, but who want to work. B) people who are not actively participating in meaningful economic activity. C) new entrants into the labor force. D) non-institutionalized working-age people who are actually working or seeking employment. Answer: D Topic: Labor Force Participation Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 86) From 1980 to 2000 the trend in the labor force participation rate was ________ and from 2000 to 2012 the trend was ________. A) upward; downward B) downward; downward C) upward; upward D) downward; upward Answer: A Topic: Labor Force Participation Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 87) Which of the following pieces of information do you need to calculate the labor force participation rate? I. the number of employed persons II. the number of unemployed persons III. the population IV. the working age population A) I and II B) I and III C) I, II and III D) I, II and IV Answer: D Topic: Labor Force Participation Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

88) If the people who take early retirement are not counted in the working-age population, then A) the unemployment rate would be lower. B) the labor force participation rate would be less. C) the unemployment rate would be higher. D) the labor force participation rate would be higher. Answer: D Topic: Labor Force Participation Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 89) In August 2012, the labor force participation rate dropped from 63.7 percent to 63.5 percent. This change could have been caused by A) unemployed workers giving up looking for a job. B) full-time workers becoming part-time workers. C) unemployed workers getting full-time jobs. D) discouraged workers starting to look for jobs again. Answer: A Topic: Labor Force Participation Rate Skill: Analytical Status: New AACSB: Analytical Skills 90) In an economy, 40 million people are employed, 2 million are unemployed, and 8 million are not in the labor force. What is the labor force participation rate? A) 83 percent B) 84 percent C) 80 percent D) 87.5 percent Answer: B Topic: Labor Force Participation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 91) If the labor force participation rate is rising and the working-age population is not changing, then the A) size of the labor force is rising. B) number of unemployed people is rising and the size of the labor force is falling. C) size of the labor force is falling. D) number of unemployed people is falling and the size of the labor force is rising. Answer: A Topic: Labor Force Participation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 27 Copyright © 2014 Pearson Education, Inc.

92) Suppose the labor force in Tiny Town is 100 people. If the ________ in Tiny Town is 150 people, the labor force participation rate equals ________ multiplied by 100. A) working age population; 100/150 B) working age population; 100/250 C) number of employed persons; 100/250 D) number of employed persons; 100/150 Answer: A Topic: Labor Force Participation Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Analytical Skills 93) Suppose there are currently 100 people unemployed, 1500 people employed, and 2000 people in the working age population. The labor force participation rate equals 100 times A) 100/1500. B) 100/1600. C) 1500/2000. D) 1600/2000. Answer: D Topic: Labor Force Participation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 94) If the number of people unemployed is 100, the number of people employed is 1000, and the working-age population is 1400, then the labor force participation rate is A) 78.6 percent. B) 71.4 percent. C) 64.3 percent. D) 66.6 percent. Answer: A Topic: Labor Force Participation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

95) Suppose the population is 220 million people, the labor force is 150 million people, the number of people employed is 130 million and the working-age population is 175 million people. What is the labor force participation rate? A) 0.68 percent B) 68 percent C) 85.7 percent D) 86.7 percent Answer: C Topic: Labor Force Participation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 96) If the population is 300 million, with 70 million under the age of 16 and institutionalized, another 70 million not in the labor force, 10 million unemployed and 150 million employed, the labor force participation rate is A) 69.6 percent. B) 23.3 percent. C) 6.67 percent. D) 50 percent. Answer: A Topic: Labor Force Participation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills Category Discouraged workers Unemployed workers Employed workers Population (16 years and over)

Number (millions) 15 40 100 225

97) In the above table, the working age population is A) 225 million. B) 100 million. C) 140 million. D) 155 million. Answer: A Topic: Population Survey Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

98) In the above table, the size of the labor force is A) 210 million. B) 155 million. C) 140 million. D) 100 million. Answer: C Topic: Population Survey Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 99) In the above table, the unemployment rate is A) 6 percent. B) 24 percent. C) 18 percent. D) 29 percent. Answer: D Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 100) In the above table, the labor force participation rate is A) 55 percent. B) 44 percent. C) 62 percent. D) 69 percent. Answer: C Topic: Labor Force Participation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 101) In the above table, the employment-to-population ratio is A) 51 percent. B) 42 percent. C) 62 percent. D) 44 percent. Answer: D Topic: Employment-to-Population Ratio Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

102) In the above table, the number of marginally attached workers is A) 40 million. B) 55 million. C) 15 million. D) 100 million. Answer: C Topic: Marginally Attached Workers Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills Component Under 16 Working full-time Working part-time Retired Unemployed

Number of people (millions) 50 90 30 40 5

103) Using the data in the above table, the unemployment rate is A) 4.0 percent. B) 4.16 percent. C) 5.55 percent. D) 28.0 percent. Answer: A Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 104) Using the data in the above table, the labor force is ________ million. A) 215 B) 120 C) 125 D) 165 Answer: C Topic: Labor Force Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

105) Using the data in the above table, the labor force participation rate is A) 66 percent. B) 58.1 percent. C) 75.7 percent. D) 96.0 percent. Answer: C Topic: Labor Force Participation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills Component Total population Working-age population Not in labor force Employed

Number of people 2600 2000 500 1300

106) Using the information in the table above, calculate the number of people in the labor force. A) 2500 B) 2100 C) 1500 D) 800 Answer: C Topic: Labor Force Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 107) Using the information in the table above, calculate the unemployment rate. A) 53.3 percent B) 30.8 percent C) 13.3 percent D) 7.7 percent Answer: C Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

108) Using the information in the table above, calculate the employment-to-population ratio. A) 75 percent B) 65 percent C) 50 percent D) 23.2 percent Answer: B Topic: Employment-to-Population Ratio Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills Number of people (millions) Total population 246 Working-age population 207 Labor force 139 Employed 133 Unemployed 6 Component

109) Using the information in the above table, the unemployment rate is A) 4.5 percent. B) 4.3 percent. C) 2.8 percent. D) 6.0 percent. Answer: B Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 110) The labor force participation rate is A) 67.1 percent. B) 64.0 percent. C) 95.7 percent. D) 56 percent. Answer: A Topic: Labor Force Participation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

111) The employment-to-population ratio is A) 67 percent. B) 64 percent. C) 50 percent. D) 62 percent. Answer: B Topic: Employment-to-Population Ratio Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 112) An individual who has stopped looking for a job but has looked in the past and still wants a job is referred to as A) a contingent worker. B) a productive worker. C) a marginally attached worker. D) an unemployed worker. Answer: C Topic: Marginally Attached Workers Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 113) An individual who has stopped looking for a job because he is convinced that he cannot find a job is referred to as A) a contingent worker. B) a productive worker. C) a discouraged worker. D) an unemployed worker. Answer: C Topic: Discouraged Workers Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 114) A discouraged worker ________ counted as officially unemployed and ________ counted as in the labor force. A) is; is B) is; is not C) is not; is D) is not; is not Answer: D Topic: Discouraged Workers Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 34 Copyright © 2014 Pearson Education, Inc.

115) Discouraged workers ________ counted as officially unemployed because they ________. A) are; are not working B) are; are still in the labor force C) are not; are not qualified to work D) are not; are not actively seeking work Answer: D Topic: Discouraged Workers Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 116) During a recession, the ________. A) number of discouraged workers decreases B) unemployment rate decreases C) employment-to-population ratio increases D) number of marginally attached workers increases Answer: D Topic: Marginally Attached Workers Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 117) Including marginally attached workers in the calculation of the unemployment rate would A) increase the reported rate. B) lower the reported rate. C) not change the reported rate. D) change the reported rate, but in an unpredictable manner. Answer: A Topic: Marginally Attached Workers Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 118) When an individual who has not been working but has been looking for work decides to terminate the search process, the official unemployment rate A) will fall. B) will rise. C) will remain unchanged. D) may fall or rise depending on whether or not the individual resumes his education. Answer: A Topic: Marginally Attached Workers Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

119) Marginally attached workers fall into which of the following population categories? A) employed B) unemployed C) labor force D) not in the labor force Answer: D Topic: Marginally Attached Workers Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 120) In August 2012, 40 percent of unemployed workers had been unemployed for 6 months or more. This long-term unemployment is of particular concern because A) long-term unemployment is the most costly type of unemployment. B) the U-3 unemployment rate no longer includes these workers in the measurement since they are long-term unemployed. C) the employment-to-population ratio no longer includes these workers in the measurement since they are long-term unemployed. D) the labor force participation rate no longer includes these workers in the measurement since they are long-term unemployed. Answer: A Topic: Long-Term Unemployment Skill: Conceptual Status: New AACSB: Analytical Skills 121) Who of the following is counted as unemployed? A) Rene, a retired chemist B) Homer, a full-time student at a vocational school C) Kim, a worker on strike from her company for a week D) Glenn, a student who just graduated from college last week and is currently looking for a job Answer: D Topic: Study Guide Question, Population Survey Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

122) In a country with a working-age population of 150 million, 120 million workers are employed and 10 million workers are unemployed. What is the size of the labor force? A) 150 million B) 130 million C) 120 million D) 10 million Answer: B Topic: Study Guide Question, Population Survey Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Analytical Skills 123) In a country with a working-age population of 300 million, 230 million workers are employed and 40 million workers are unemployed. What is the labor force participation rate? A) 100 percent B) 90 percent C) 65 percent D) 5 percent Answer: B Topic: Study Guide Question, Population Survey Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Analytical Skills 124) In a country with a working-age population of 100 million, 70 million workers are employed and 5 million workers are unemployed. What is the labor force participation rate? A) 70 percent B) 5 percent C) 75 percent D) 7 percent Answer: C Topic: Study Guide Question, Labor Force Participation Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Analytical Skills 125) In a country with a working-age population of 130 million, 90 million workers are employed and 10 million workers are unemployed. What is the unemployment rate? A) 5.0 percent B) 7.1 percent C) 7.7 percent D) 10.0 percent Answer: D Topic: Study Guide Question, Unemployment Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Analytical Skills 37 Copyright © 2014 Pearson Education, Inc.

2 Unemployment and Full Employment 1) Bob inherits a large sum of money from his dead uncle's estate. Bob decides to retire young, so he quits his job and heads to the Bahamas. Bob is an example of A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) None of the above is correct. Answer: D Topic: Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 2) The three types of unemployment are A) voluntary, involuntary, and structural. B) voluntary, part-time, and cyclical. C) frictional, part-time, and involuntary. D) frictional, structural, and cyclical. Answer: D Topic: Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 3) Frictional unemployment A) includes discouraged workers. B) is voluntary part-time unemployment. C) is unemployment associated normal labor turnover. D) is unemployment associated with declining industries. Answer: C Topic: Frictional Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 4) Frictional unemployment is A) unemployment associated with business cycle recessions. B) unemployment associated with the changing of jobs in a changing economy. C) long-term unemployment. D) unemployment associated with declining industries. Answer: B Topic: Frictional Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 38 Copyright © 2014 Pearson Education, Inc.

5) This type of unemployment reflects the normal amount of unemployed workers who possess skills that will enable them to find another job. A) cyclical unemployment B) frictional unemployment C) structural unemployment D) None of the above answers is correct. Answer: B Topic: Frictional Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 6) Frictional unemployment includes A) unemployment caused by normal labor turnover associated with people leaving and entering the labor force. B) unemployment caused by industries moving overseas to better meet foreign competition. C) unemployment caused by a lack of education so that workers do not possess necessary job skills. D) unemployment caused by automation of the work place that displaces unskilled workers. Answer: A Topic: Frictional Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 7) Unemployment caused by the normal labor turnover is called ________ unemployment. A) part-time B) frictional C) involuntary D) cyclical Answer: B Topic: Unemployment Types Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 8) Frictional unemployment is the result of A) technological change or foreign competition. B) normal labor market turnover. C) a slowdown in the rate of economic expansion. D) irresponsible workers with poor work habits. Answer: B Topic: Frictional Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 39 Copyright © 2014 Pearson Education, Inc.

9) Which of the following correctly describes "frictional unemployment"? A) Frictional unemployment is due mainly to job losers. B) Frictional unemployment is due mainly to job leavers. C) Frictional unemployment occurs mainly during recessions. D) Frictional unemployment is a normal occurrence in a growing economy. Answer: D Topic: Frictional Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 10) Frictional unemployment comes about because of A) friction between labor and management. B) a mismatch between skills and available jobs. C) normal labor market turnover. D) a general economic slowdown. Answer: C Topic: Frictional Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 11) The type of unemployment created by the normal rate of reentry and entry into the labor force is A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) seasonal unemployment. Answer: A Topic: Frictional Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 12) Unemployment caused by people voluntarily leaving their jobs is classified as A) part-time unemployment. B) cyclical unemployment. C) frictional unemployment. D) seasonal unemployment. Answer: C Topic: Frictional Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

13) Suppose the country of Tiny Town experienced frictional unemployment. This frictional unemployment would A) definitely signal that the country is in a recession. B) be considered a natural occurrence in a growing economy. C) signal that there are more job leavers than job losers. D) signal that the number of discouraged workers is growing. Answer: B Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 14) When an individual is frictionally unemployed, the unemployment arises in part from A) a short-term elimination of jobs because of a slowdown in business activity. B) individuals searching for appropriate employment. C) the permanent elimination of jobs because of a change in the structure of the economy. D) a reduction in the overall demand for workers' skills. Answer: B Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 15) Frictional unemployment increases when A) real GDP decreases and the unemployment rate rises. B) the number of workers who quit one job to find another increases. C) discouraged workers drop out of the work force. D) workers are replaced by machines and the unemployed workers do not have the skills to perform new jobs. Answer: B Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 16) To prevent frictional unemployment, we would have to A) eliminate recessions. B) eliminate the business cycle. C) prevent people from leaving their jobs. D) make sure everyone goes to college. Answer: C Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

17) A person quits her job in order to spend time looking for a better-paying job. This type of unemployment is an example of A) frictional unemployment. B) cyclical unemployment. C) seasonal unemployment. D) structural unemployment. Answer: A Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 18) An individual with good job prospects who is between jobs is best considered as A) structurally unemployed. B) cyclically unemployed. C) not in the labor force. D) frictionally unemployed. Answer: D Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 19) A recent accounting graduate from a major business school is searching for a place to begin his career as an accountant. This individual is best considered as A) structurally unemployed. B) seasonally unemployed. C) cyclically unemployed. D) frictionally unemployed. Answer: D Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 20) When a worker quits a job to look for a better job, A) structural and cyclical unemployment increase. B) structural unemployment decreases. C) cyclical unemployment increases. D) frictional unemployment increases. Answer: D Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

21) When a woman reenters the labor force and looks for a job after spending time at home raising a child, A) cyclical unemployment increases. B) structural unemployment decreases. C) frictional and cyclical unemployment increase. D) frictional unemployment increases. Answer: D Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 22) Students who leave school in the spring and look for work are one source of ________. A) structural unemployment B) cyclical unemployment C) frictional unemployment D) business-cycle fluctuations Answer: C Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 23) When a student finishes college and begins looking for work, A) cyclical unemployment increases. B) structural unemployment increases. C) frictional unemployment increases. D) frictional and cyclical unemployment increase. Answer: C Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 24) Which of the following most likely would decrease frictional unemployment? A) an increase in the number of high school and college graduates B) effective Internet-based employment services and job registries C) an expansion of unemployment compensation benefits D) All of the above would decrease frictional unemployment. Answer: B Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

25) Suppose that Matt quits a job with the XYZ Corporation in order to look for more rewarding employment. Matt would be best be considered as A) still being employed. B) included in the economy's "hidden employment." C) frictionally unemployed. D) cyclically unemployed. Answer: C Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 26) Catherine quit her job in order to look for a new one; therefore, she is best considered as A) frictionally unemployed. B) structurally unemployed. C) cyclically unemployed. D) seasonally unemployed. Answer: A Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 27) Because of a bank merger, Ms. Davis lost her position as Vice President and had to seek work with other banks. Ms. Davis has the skills necessary to find a new job, thus she is best considered as A) frictionally unemployed. B) cyclically unemployed. C) structurally unemployed. D) naturally unemployed. Answer: A Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

28) Bill loses his job as a loan officer when the bank he works for is bought up by a larger financial institution. Bill has the skills necessary to find a new job, so as Bill searches for work he is best considered an example of A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) a discouraged worker. Answer: A Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 29) The best example of a frictionally unemployed individual is A) Charles who has lost his job as an autoworker because of increased imports and can't find a good job that utilizes his skills. B) Mary who quit her job to find work closer to her home. C) Sam who lost his job as a real estate salesperson when the housing market went soft because of a recession. D) Sandy who has few skills and is no longer looking for work. Answer: B Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 30) Structural unemployment is A) associated with the normal changing of jobs in a dynamic economy. B) associated with the general downturns in the economy. C) associated with the general decline of specific industries. D) almost always short-term in nature. Answer: C Topic: Structural Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 31) Structural unemployment is the result of A) technological change or foreign competition. B) normal labor market turnover. C) a slowdown in the rate of economic expansion. D) irresponsible workers with poor work habits. Answer: A Topic: Structural Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 45 Copyright © 2014 Pearson Education, Inc.

32) Structural unemployment is A) associated with the changing of jobs in a dynamic economy. B) associated with general downturns in the economy. C) associated with changes in technology that change required job skills. D) very short-term unemployment. Answer: C Topic: Structural Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 33) Suppose that over a period of years the country of Quasiland switched from being an agriculturally-based economy to a technologically-based economy. As a result, many people lost jobs because they lacked the correct skills. As they search for new jobs, these people are part of A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) discouraged workers. Answer: B Topic: Structural Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 34) An individual is structurally unemployed if A) there is a recession and the individual is laid off. B) the individual wants to work just during certain months of the year. C) the individual quits a job in order to search for a better one. D) the individual lacks marketable job skills because technology has changed. Answer: D Topic: Structural Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 35) Which statement correctly describes "structural unemployment?" A) Structural unemployment occurs mainly during recessions. B) Structural unemployment is also called "frictional unemployment." C) Structural unemployment occurs even when the economy is at the natural unemployment rate. D) The amount of structural unemployment depends on normal labor turnover. Answer: C Topic: Structural Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

36) Unemployment caused by changes in technology is called ________ unemployment. A) structural B) frictional C) techno D) cyclical Answer: A Topic: Structural Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 37) Structural unemployment A) falls during the expansion phase of the business cycle. B) falls as the pace of technological progress increases. C) generally lasts longer than frictional unemployment. D) falls when the government provides more generous unemployment compensation benefits. Answer: C Topic: Structural Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 38) Suppose that the number of jobs in the fishing industry decreases but the number of jobs in the travel industry increases. Initially, ________. A) the economy remains at full employment B) structural unemployment increases C) there is a shortage of workers in both sectors D) cyclical unemployment increases Answer: B Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 39) When the automobile replaced horse-drawn carriages as the principal means of transportation, firms producing horse-drawn carriages went bankrupt and permanently laid off all their workers, thereby increasing A) frictional unemployment. B) structural unemployment. C) frictional and cyclical unemployment. D) cyclical unemployment. Answer: B Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 47 Copyright © 2014 Pearson Education, Inc.

40) The nation's structural unemployment will increase when A) bad economic policies send the economy into a recession. B) there is influx into the labor market of new college graduates. C) there is an increase in post-Christmas layoffs of workers. D) an increase in textile imports displaces older textile workers who do not have the skills necessary to find new jobs. Answer: D Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 41) A major characteristic of structural unemployment that differentiates it from frictional unemployment is that structural unemployment A) exists only during a recession. B) exists in an expansion whereas there is no frictional unemployment in an expansion. C) is a short-term problem. D) usually lasts longer than frictional unemployment. Answer: D Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 42) When the economy switches production toward services and away from manufacturing and workers in the manufacturing industry are permanently laid off, A) frictional unemployment decreases. B) structural unemployment increases. C) cyclical unemployment increases. D) frictional and cyclical unemployment increase. Answer: B Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

43) Suppose the country of Tiny Town decided to open its borders to free trade. As a result, a number of its workers lost their jobs to international competition and can't find new jobs because their skills don't match what is required for job openings. The workers who lost their jobs and searched for new ones are best be considered part of A) frictional unemployment. B) structural unemployment C) cyclical unemployment. D) discouraged workers. Answer: B Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 44) In the 1990s, video recordings were made primarily on tapes. However, in the 2000s DVDs became increasingly popular, leading to a sharp decline in video tapes. As a result, many people who manufactured tapes lost their jobs and didn't have the skills necessary to work making DVDs. This occurrence is best consider an example of A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) underemployment. Answer: B Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 45) How would you best describe a manufacturing employee who has been fired because he was replaced by a robot (new technology) and does not have the skills necessary to help operate the robot? A) job leaver B) entrant/reentrant C) cyclically unemployed D) structurally unemployed Answer: D Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

46) Which of the following individuals is the best example of a structurally unemployed worker? A) a recent college graduate who has entered the labor force B) an individual who has been laid off from his job because of a business cycle recession C) an automobile worker who has lost her job because of an increase in automobile imports and does not have the skills currently needed by businesses D) an individual who quits one job in the hope of finding a better job Answer: C Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 47) Ms. Krupsky has shorthand and typing skills and still finds herself unemployed. In today's economy, Ms. Krupsky is an example of what type of unemployment? A) cyclical unemployment B) frictional unemployment C) structural unemployment D) None of the above answers is correct. Answer: C Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 48) Andrew just lost his job as a corkscrew operator since his company has found a machine to perform his work tasks. Andrew did not have the skills needed to operate the machine. Andrew has searched for a new job for 6 months and continues to search. Therefore, Andrew is considered to be A) frictionally unemployed. B) a discouraged worker. C) cyclically unemployed. D) structurally unemployed. Answer: D Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

49) Nicholas does not possess marketable job skills; therefore, he is A) frictionally unemployed. B) structurally unemployed. C) cyclically unemployed. D) seasonally unemployed. Answer: B Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking Person A This person has just graduated from high school and is working at a part-time job but wants a full-time job. Person B At the age of 45, this person was laid off from the automobile industry when new equipment was installed and the person did not have the skills necessary to use the equipment. This person now is searching to find a new job. Person C As a result of this person's spouse being transferred to a job in a new city, this person is looking for a new job. Person D This person just graduated from college and is looking for an engineering job. In the meantime, this person is working full-time waiting tables. 50) The above table shows answers given by people interviewed in the Current Population Survey. Which people are structurally unemployed? A) A, B, C, and D B) A, B, and C C) B and C. D) A, B, and D Answer: C Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

51) The above table shows answers given by people interviewed in the Current Population Survey. Which person is cyclically unemployed? A) A B) B C) C D) None of the people Answer: D Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 52) Cyclical unemployment A) is due mainly to job leavers. B) may increase or decrease during an expansion. C) occurs when technology improvements change job requirements. D) fluctuates over the business cycle. Answer: D Topic: Cyclical Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 53) Which type of unemployment increases during a recession? A) cyclical unemployment B) frictional unemployment C) structural unemployment D) the natural unemployment rate Answer: A Topic: Cyclical Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 54) Cyclical unemployment A) is always present in an economy. B) is higher during an expansion. C) decreases during a recession. D) fluctuates over the business cycle. Answer: D Topic: Cyclical Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

55) Cyclical unemployment is the result of A) technological change or foreign competition. B) normal labor market turnover. C) the business cycle. D) irresponsible workers with poor work habits. Answer: C Topic: Cyclical Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 56) Cyclical unemployment occurs when A) individuals enter into the labor market making the rounds of potential employers. B) individuals with skills no longer valued in the labor market cannot find employment. C) individuals give up the search for employment. D) a business cycle recession decreases employment. Answer: D Topic: Cyclical Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 57) Unemployment caused by the fluctuation of the business cycle is called ________ unemployment. A) structural B) recession-related C) frictional D) cyclical Answer: D Topic: Cyclical Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 58) Unemployment that is the result of recessions is called A) frictional unemployment. B) cyclical unemployment. C) downtime unemployment. D) structural unemployment. Answer: B Topic: Cyclical Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

59) Suppose the country of Quasiland experienced a decrease in real GDP and people were laid off from their jobs. The people would be considered part of A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) discouraged workers. Answer: C Topic: Cyclical Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 60) The primary factor leading to cyclical unemployment is when A) businesses often discriminate in their hiring practices on the basis of age, sex, and race. B) the level of overall economic activity fluctuates. C) workers quit their jobs in order to look for higher paying employment. D) some workers do not have marketable job skills. Answer: B Topic: Cyclical Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 61) If a worker is temporarily laid off because the economy is in a recession, A) frictional unemployment increases. B) structural unemployment increases. C) the size of the labor force rises. D) cyclical unemployment increases. Answer: D Topic: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 62) A recession causes a decrease in the demand for housing, resulting in substantial layoffs in the construction industry. The people laid off are considered A) cyclically unemployment. B) frictionally unemployment. C) seasonally unemployment. D) structurally unemployment. Answer: A Topic: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

63) If the economy enters an expansion, A) cyclical unemployment increases. B) structural unemployment increases. C) cyclical unemployment decreases. D) structural unemployment decreases. Answer: C Topic: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 64) Cyclical unemployment A) is the major part of the natural unemployment rate. B) decreases during economic expansions. C) rises as a result of increased international competition. D) falls when unemployment compensation payments are increased. Answer: B Topic: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 65) During an economic expansion, real GDP ________ and unemployment ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: B Topic: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 66) An observer of the economy notices that over the past 12 months the unemployment rate has fallen from 7.0 percent to 6.5 percent. During the same time, the rate of growth in real GDP has been positive. From this information we might conclude that A) inflation is not occurring. B) an expansion is occurring in the economy. C) a recession is in progress. D) a trough in the business cycle will soon be reached. Answer: B Topic: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

67) Cyclical unemployment ________. A) decreases during an expansion B) grows at the same rate as potential GDP C) is zero at a business-cycle trough D) decreases during a recession Answer: A Topic: Cyclical Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 68) Cyclical unemployment ________ during expansions and ________ during recessions. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: C Topic: Cyclical Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 69) Auto and steel workers commonly experience this type of unemployment in a recession. A) frictional unemployment B) cyclical unemployment C) structural unemployment D) natural unemployment rate Answer: B Topic: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 70) If the economy enters a recession, A) frictional unemployment increases. B) structural unemployment decreases. C) cyclical unemployment increases. D) the number of workers on layoff decreases. Answer: C Topic: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

71) Recessions and expansions affect most strongly which type of unemployment? A) frictional unemployment B) structural unemployment C) cyclical unemployment D) seasonal unemployment Answer: C Topic: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 72) Mike has just been laid off from his construction job because consumers are not purchasing new homes because of the recession. Mike would be considered to be part of A) structural unemployment. B) cyclical unemployment. C) seasonal unemployment. D) frictional unemployment. Answer: B Topic: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 73) Bill is a high-school drop out who lost his job in a fast food restaurant when the economy plunged into a recession. After 8 months, Bill is still looking for work. He is an example of A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) the natural unemployment rate Answer: C Topic: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 74) The best example of a cyclically unemployed individual is A) Charles who lost his job as a real estate salesperson when the housing market went soft because of a recession. B) Alice who quit her job to enter college. C) Mary who lost her job in the textile industry following a decrease in the tariff on textiles. D) Bob who has just graduated from college and is entering the labor market. Answer: A Topic: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 57 Copyright © 2014 Pearson Education, Inc.

75) Which of the following situations best describes an individual who is cyclically unemployed? A) Catherine is a ski instructor who is not working because it is summer. B) Matthew was an artillery man, but he has been unable to find work since he left the army. C) Nicholas was laid-off when orders for General Motors cars fell during a recession. D) Susan quit her job as a preschool teacher to try to find a better paying job. Answer: C Topic: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 76) Full employment occurs when A) structural unemployment is zero. B) cyclical unemployment is zero. C) frictional unemployment is zero. D) cyclical and frictional unemployment are zero. Answer: B Topic: Full Employment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 77) Full employment occurs when A) there is no cyclical unemployment. B) there is no unemployment. C) there is no frictional unemployment. D) the unemployment rate is less than 5 percent. Answer: A Topic: Full Employment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 78) Full employment means that A) no one is unemployed. B) there is no cyclical unemployment. C) there is no cyclical or frictional unemployment. D) there is no structural or frictional unemployment. Answer: B Topic: Full Employment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

79) The economy is at full employment when A) there are no unemployed workers. B) all unemployment is frictional or structural. C) there are fewer unemployed workers than available jobs. D) all unemployment is cyclical. Answer: B Topic: Full Employment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 80) Full employment occurs when the A) unemployment rate equals the natural unemployment rate. B) structural unemployment rate equals the frictional unemployment rate. C) natural unemployment rate equals the frictional unemployment rate. D) cyclical unemployment rate equals the natural unemployment rate. Answer: A Topic: Full Employment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 81) Full employment occurs A) only if the unemployment rate is zero. B) only if the unemployment rate is equal to the natural unemployment rate. C) only if unemployment is equal to structural unemployment plus cyclical unemployment. D) None of the above answers are correct. Answer: B Topic: Full Employment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 82) When the economy is at full employment the A) natural unemployment rate is equal to 0 percent. B) natural unemployment rate equals the unemployment rate. C) natural unemployment rate is equal to 10 percent. D) unemployment rate is equal to 0 percent. Answer: B Topic: Full Employment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

83) An economy is at full employment when ________. A) the unemployment rate is zero B) there is no frictional unemployment C) the unemployment rate equals the natural unemployment rate D) there is no structural unemployment Answer: C Topic: Full Employment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 84) Suppose the natural unemployment rate equals 6 percent and the current unemployment rate is 8 percent. We can conclude that A) there is no structural unemployment. B) there is no frictional unemployment. C) there is no cyclical unemployment. D) full employment is not occurring. Answer: D Topic: Full Employment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 85) Full employment means A) zero unemployment. B) only cyclical unemployment exists. C) only frictional and structural unemployment exists. D) None of the above answers are correct. Answer: C Topic: Full Employment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 86) When economists speak of full employment, they refer to the case in which the sum of frictional and structural unemployment is A) falling over time. B) equal to zero. C) equal to the actual amount of unemployment. D) greater than the level of deficient demand unemployment. Answer: C Topic: Full Employment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

87) When the economy is operating at full employment, the natural unemployment rate consists of only A) cyclical unemployment. B) frictional and structural unemployment. C) frictional and cyclical unemployment. D) structural and cyclical unemployment. Answer: B Topic: Full Employment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 88) An unemployment rate of zero percent cannot be expected because A) there are some people who do not want to work. B) there will always be discouraged workers. C) some portion of the labor force will always be between jobs. D) cyclical unemployment will always exist. Answer: C Topic: Natural Unemployment Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 89) The natural unemployment rate I. occurs when only there is no cyclical unemployment present. II. is the unemployment rate when the economy is at potential GDP. A) I only. B) II only C) neither I nor II. D) I and II Answer: D Topic: Natural Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 90) The natural unemployment rate A) falls with an increase in cyclical unemployment. B) rises with an increase in structural unemployment. C) rises with an increase in cyclical unemployment. D) rises with a decrease in frictional unemployment. Answer: B Topic: Natural Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 61 Copyright © 2014 Pearson Education, Inc.

91) The unemployment rate is at the natural unemployment rate when A) frictional unemployment equals zero. B) structural unemployment equals zero. C) cyclical unemployment equals zero. D) all types of unemployment equal zero. Answer: C Topic: Natural Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 92) The natural unemployment rate is the unemployment rate that exists when there is no A) structural unemployment. B) frictional unemployment. C) cyclical unemployment. D) cyclical or structural unemployment. Answer: C Topic: Natural Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 93) When cyclical unemployment is zero, A) frictional unemployment is zero. B) cyclical and frictional unemployment are zero. C) structural unemployment is zero. D) the unemployment rate equals the natural unemployment rate. Answer: D Topic: Natural Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 94) The natural unemployment rate A) is a constant figure of about 4 percent. B) fluctuates with the rate of inflation. C) is the unemployment rate that occurs when the economy is at full employment. D) is equal to cyclical unemployment. Answer: C Topic: Natural Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

95) If unemployment is at the natural rate, then there A) is no cyclical unemployment. B) is no frictional unemployment. C) will be cyclical and frictional unemployment but not structural unemployment. D) will be only cyclical unemployment. Answer: A Topic: Natural Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 96) If unemployment equals the natural unemployment rate, then there A) is zero unemployment. B) is only frictional or structural unemployment. C) are no job openings existing at the time. D) is less than full employment. Answer: B Topic: Natural Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 97) The natural unemployment rate A) occurs when the unemployment rate is 0 percent. B) is the unemployment rate when there is no structural unemployment. C) is the unemployment rate at full employment. D) is the unemployment rate when there is only cyclical unemployment. Answer: C Topic: Natural Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 98) Full employment exists when A) there is only frictional and structural unemployment. B) the economy is at the natural unemployment rate. C) there is no cyclical unemployment. D) All of the above answers are correct. Answer: D Topic: Natural Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

99) When the economy moves into and out of recessions and expansions, the unemployment rate fluctuates around the A) natural unemployment rate. B) structural unemployment rate. C) cyclical unemployment. D) frictional unemployment rate. Answer: A Topic: Natural Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 100) The natural unemployment rate ________. A) is the same from year to year B) is greater than the actual rate of unemployment C) is the unemployment rate when there is no cyclical unemployment D) equals zero Answer: C Topic: Natural Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 101) When cyclical unemployment increases and other things remain the same, ________. A) the natural unemployment rate increases B) the amount of frictional unemployment increases C) the amount of structural unemployment decreases D) the natural unemployment rate does not change Answer: D Topic: Natural Unemployment Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 102) The relationship between the unemployment rate and the natural unemployment rate is that the unemployment rate A) fluctuates about the natural rate. B) equals the natural rate. C) is always below the natural rate. D) is always above the natural rate. Answer: A Topic: Natural Unemployment Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

103) Suppose the economy is experiencing frictional unemployment of 1 percent, structural unemployment of 3 percent and cyclical unemployment of 4 percent. What is the natural unemployment rate? A) 3 percent. B) 4 percent. C) 5 percent. D) 7 percent. Answer: B Topic: Natural Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 104) Suppose that the natural unemployment rate is 4.5 percent and the actual unemployment rate is 3.5 percent. Then cyclical unemployment is A) 1 percent. B) -1 percent. C) 8 percent. D) 0 percent. Answer: B Topic: Natural Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 105) The natural unemployment rate A) estimated to be close to 9 percent in recent years in the United States. B) has been estimated to range between 4 percent and 6 percent in the United States in recent years. C) is attained whenever the unemployment rate is less than 5 percent because 95 percent employment is considered full employment. D) occurs when 100 percent of the labor force is employed. Answer: B Topic: Natural Unemployment Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

106) Cyclical unemployment exists when A) frictional and structural unemployment is zero. B) real national income exceeds potential income. C) real GDP exceeds potential GDP. D) real GDP is less than potential GDP. Answer: D Topic: Potential GDP and Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 107) When real GDP is ________ potential GDP, the unemployment rate is ________ the natural unemployment rate. A) greater than; less than B) less than; equal to C) equal to; greater than D) greater than; greater than Answer: A Topic: Potential GDP and Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 108) Suppose that the unemployment rate equals 4.5 percent and that the natural unemployment rate is 5.5 percent. We can conclude that A) the output gap is negative. B) the output gap equals zero. C) the output gap is positive. D) we have mismeasured the natural unemployment rate. Answer: C Topic: Potential GDP and Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 109) In September 2012 the U.S. unemployment rate was 7.8 percent while the natural unemployment rate was 6 percent. The U.S. economy A) had a negative output gap. B) had a positive output gap. C) had an output gap of zero. D) was at full employment. Answer: A Topic: Potential GDP and Unemployment Skill: Analytical Status: New AACSB: Analytical Skills 66 Copyright © 2014 Pearson Education, Inc.

110) When the unemployment rate is less than the natural unemployment rate, A) the output gap is positive. B) the output gap equals zero. C) the output gap is negative. D) None of the above is possible because it is impossible for the unemployment rate to be less than the natural rate. Answer: A Topic: Potential GDP and Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 111) When more labor is unemployed than the amount at the natural unemployment rate, then real GDP ________ potential GDP. A) is equal to B) is less than C) is greater than D) cannot be compared to Answer: B Topic: Potential GDP and Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 112) The unemployment rate generally falls during ________ in the business cycle. A) a peak B) a recession C) a trough D) an expansion Answer: D Topic: Study Guide Question, Unemployment Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 113) At the natural unemployment rate, there is no A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) unemployment. Answer: C Topic: Study Guide Question, Natural Rate of Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

114) If the economy is at full employment, A) the entire population is employed. B) the entire labor force is employed. C) the only unemployment is frictional unemployment plus discouraged workers. D) real GDP equals potential GDP. Answer: D Topic: Study Guide Question, Full Employment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 3 The Price Level, Inflation, and Deflation 1) An increase in the price level is defined as A) a recession. B) a growth boom. C) inflation. D) an expansion. Answer: C Topic: Inflation Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 2) Inflation is a problem when A) it is unpredictable. B) it causes the value of money to vary unpredictably. C) it causes resources to be diverted from productive uses. D) All of the above answers are correct. Answer: D Topic: Why Inflation Is a Problem Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 3) Unpredictable changes in the value of money, which brings about gains and losses, are a consequence of unpredictable changes in A) real GDP. B) unemployment rate. C) inflation. D) productivity. Answer: C Topic: Why Inflation Is a Problem Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 68 Copyright © 2014 Pearson Education, Inc.

4) The cost of inflation to society includes I. the opportunity costs of resources used by people to protect themselves against inflation. II. the diversion of productive resources to forecasting inflation. A) I only B) II only C) both I and II D) neither I nor II Answer: C Topic: Why Inflation Is a Problem Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 5) The cost of inflation to society includes A) unpredictable changes in the value of money. B) higher interest rates paid by borrowers. C) higher interest rates paid by the government on its debt. D) the lost spending when people do not have enough money. Answer: A Topic: Why Inflation Is a Problem Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 6) In a period of rapid, unexpected inflation, resources can be lost A) when firms invest in research and development instead of forecasting inflation. B) when firms use resources to forecast inflation. C) because rapid inflation almost always turns into a hyperinflation. D) Both answers B and C are correct. Answer: B Topic: Why Inflation Is a Problem Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 7) Hyperinflation is defined as A) declining inflation rates. B) rising but low inflation rates. C) very high inflation rates. D) very low inflation rates. Answer: C Topic: Why Inflation Is a Problem Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

8) The Consumer Price Index is a measure of the average of the prices paid by ________ for a fixed basket of consumer goods and services. A) urban consumers B) all consumers C) urban wage earners and clerical workers D) consumers living in cities with a population greater than 100,000 Answer: A Topic: Consumer Price Index Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 9) The first step in measuring the CPI is to A) select the market basket. B) conduct a monthly survey. C) collect prices for the basket of goods and services. D) interview businesses. Answer: A Topic: Consumer Price Index Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 10) The consumer price index (CPI) A) compares the cost of the typical basket of goods consumed in period 1 to the cost of a basket of goods typically consumed in period 2. B) compares the cost in the current period to the cost in a reference base period of a basket of goods typically consumed in the base period. C) measures the increase in the prices of the goods included in GDP. D) is the ratio of the average price of a typical basket of goods to the cost of producing those goods. Answer: B Topic: Consumer Price Index Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

11) If the basket of goods and services used to calculate the CPI cost $200 in the reference base period and $450 in a later year, the CPI for the latter year equals A) 200. B) 225. C) 325. D) 450. Answer: B Topic: Consumer Price Index Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 12) If the CPI basket costs $35 in the base period but costs $42, what is the CPI in the next period? A) 83.3 B) $42 C) 20 percent D) 120 Answer: D Topic: Consumer Price Index Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 13) Suppose the Consumer Price Index is 143.6. What does that number mean? A) On average, goods cost $143.60. B) On average, goods cost $243.60. C) Prices rose 143.6 percent over the reference base period, on average. D) Prices rose 43.6 percent over the reference base period, on average. Answer: D Topic: Consumer Price Index Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Analytical Skills 14) If the CPI is 120, this means that A) prices are 120 percent higher than in the reference base period. B) prices are 0.12 times higher than in the reference base period. C) prices are 20 percent higher than in the reference base period. D) the inflation rate must be positive. Answer: C Topic: Consumer Price Index Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

DVDs Bottled water

CPI basket quantity 10 discs 200 bottles

2003 price

2011 price

$16 per disc $1.00 per bottle

$12 per disc $1.25 per bottle

15) If 2003 is the reference base period, what is the price index for the CPI basket of goods for 2011 in the above table? A) 97.3 B) 102.8 C) 128.0 D) zero because the price of CDs fell and the price of water increased Answer: B Topic: Consumer Price Index Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Analytical Skills 2012 2013 Item Quantity Price Price Movie tickets 4 $5.00 $7.50 Bags of 2 $3.00 $3.00 popcorn Drinks of soda 4 $1.00 $1.50 16) The information in the table above gives the 2012 reference base period CPI basket and prices used to construct the CPI for a small nation. It also has the 2013 prices. What is the value of the CPI for the reference base period, 2012? A) 140 B) 133 C) 100 D) 75 Answer: C Topic: Consumer Price Index Skill: Analytical Status: Revised AACSB: Analytical Skills

17) The information in the table above gives the 2012 reference base period CPI basket and prices used to construct the CPI for a small nation. It also has the 2013 prices. What is the value of the CPI for 2013? A) 140 B) 133 C) 100 D) 75 Answer: A Topic: Consumer Price Index Skill: Analytical Status: Revised AACSB: Analytical Skills 18) The CPI basket contains 400 oranges and 800 pens. In the base year, the price of an orange is $1.00 and the price of a pen is $0.75. This year, urban consumers each buy 300 oranges at $2.00 each and 850 pens at $1.00 each. The CPI this year is ________. A) 1.60 B) 62.5 C) 160 D) 140 Answer: C Topic: Consumer Price Index Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 19) If the CPI basket of goods cost $200 in the reference base period and $450 in a later year, the CPI in the later year equals A) 225. B) 250. C) 300. D) 450. Answer: A Topic: Consumer Price Index Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

20) Using the notation Pt to designate this period's price level and Pt-1 to designate last period's price level, the formula for measuring the inflation rate from last period to this period is A) [(Pt - Pt - 1) / Pt] × 100. B) [(Pt -1 - Pt) / Pt - 1] × 100. C) [(Pt - Pt - 1) / Pt - 1] × 100. D) [(Pt -1 - Pt) / Pt] × 100. Answer: C Topic: Inflation Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Analytical Skills 21) Suppose the CPI last year is 121 and the CPI this year is 137. The correct method to calculate the inflation rate is A) (137 - 121)/100 = 0.16. B) 137 × 121 = 258. C) [(137 - 121)/121] × 100 = 13.2. D) (137/121) × 100 = 113.2. Answer: C Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 22) If the CPI was 132.5 at the end of last year and 140.2 at the end of this year, the inflation rate over these two years was A) 7.7 percent. B) 5.4 percent. C) 4.4 percent. D) 5.8 percent. Answer: D Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

23) If the CPI was 121.5 at the end of last year and 138.3 at the end of this year, the inflation rate over these two years was A) 10.2 percent. B) 13.8 percent. C) 12.2 percent. D) 16.8 percent. Answer: B Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 24) If the CPI was 122.3 at the end of last year and 124.5 at the end of this year, the inflation rate over these two years was A) 1.8 percent. B) 2.5 percent. C) 22.5 percent. D) 18.0 percent. Answer: A Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 25) If the CPI was 132.5 at the end of last year and 137.5 at the end of this year, the inflation rate over these two years was A) 3.6 percent. B) 3.8 percent. C) 5.0 percent. D) None of the above answers is correct. Answer: B Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 26) At the end of last year the Consumer Price Index was equal to 163.8 and at the end of this year it was equal to 157.5. What is the inflation rate over this time period? A) 6.3 percent B) 4.0 percent C) 3.85 percent D) 10.1 percent Answer: B Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 75 Copyright © 2014 Pearson Education, Inc.

27) If the price level last year was 220 and this year is 250, what is the inflation rate between the two years? A) 30 percent B) 13.6 percent C) 12.2 percent D) 20 percent Answer: B Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 28) If this year the price level is 135 and last year it was 125, the inflation rate is A) 8 percent. B) 10 percent. C) 12 percent. D) none of the above Answer: A Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 29) Suppose the price level this year is 150 and the price level last year was 125. The inflation rate between last year and this year was A) 20 percent. B) 2 percent. C) 16.6 percent. D) 1.6 percent. Answer: A Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 30) Suppose that last year the Consumer Price Index was 124; this year it is 130.7. What was the inflation rate between these years? A) 30.7 percent B) 6.7 percent C) 5.4 percent D) 5.1 percent Answer: C Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 76 Copyright © 2014 Pearson Education, Inc.

31) If the CPI this year is 220 and was 200 in last year, the annual inflation rate between the two years is A) 5 percent. B) 10 percent. C) 20 percent. D) 2 percent. Answer: B Topic: Inflation Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 32) If the Consumer Price Index last year was 110 and 115 this year, the inflation rate is approximately A) 4.5 percent. B) 5.0 percent. C) 10.0 percent. D) 15.0 percent. Answer: A Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 33) If the CPI for this year is 220 and the CPI for last year was 215, the inflation rate is A) just over 2 percent. B) 5 percent. C) just over 5 percent. D) 10 percent. Answer: A Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 34) If this year's price level is 126 and last year's price level was 120, the inflation rate is ________. A) 0.95 percent a year B) 5 percent a year C) 6 percent a year D) 1.05 percent a year Answer: B Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 77 Copyright © 2014 Pearson Education, Inc.

35) If the CPI at the end of last year was 100 and the CPI at the end of this year was 115, the inflation rate was A) 1.5 percent. B) 15 percent. C) 100 percent. D) 115 percent. Answer: B Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 36) Last year's price level was 120 and since then there has been a 5 percent inflation. This year's price level is A) 125. B) 126. C) 130. D) none of the above Answer: B Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills Year 2008 2009 2010 2011

Price level 91 100 110 121

37) In the above table, the inflation rate between 2008 and 2009 is approximately A) 0.9 percent. B) 1 percent. C) 10 percent. D) 100 percent. Answer: C Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

38) In the above table, the inflation rate between 2009 and 2010 is approximately A) 9 percent. B) 10 percent. C) 100 percent. D) 110 percent. Answer: B Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 39) In the above table, the inflation rate between 2010 and 2011 is approximately A) 10 percent. B) 11 percent. C) 121 percent. D) None of the above answers is correct. Answer: A Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills Year

Price index

1 2 3 4 5 6

100 117 125 120 D 150

Inflation rate (percent) A B C 8.3 E

40) In the table above, what inflation rate belongs in space A? A) 17.0 percent B) 6.8 percent C) 8.3 percent D) -4.0 percent Answer: A Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

41) In the table above, what inflation rate belongs in space B? A) 17.0 percent B) 6.8 percent C) 8.3 percent D) -4.0 percent Answer: B Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 42) In the table above, what inflation rate belongs in space C? A) 17.0 percent B) 6.8 percent C) 8.3 percent D) -4.0 percent Answer: D Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 43) In the table above, what price level belongs in space D? A) 125 B) 130 C) 140 D) 145 Answer: B Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 44) In the table above, what inflation rate belongs in space E? A) 17.0 percent B) 6.8 percent C) 8.3 percent D) 15.4 percent Answer: D Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

Item Books Pens

2012 Quantity Price 10 $30 20 $1

2013 Quantity Price 8 $50 15 $2

45) In 2012, consumers in Dexter consumed only books and pens. The prices and quantities for 2012 and 2013 are listed in the table above. The reference base period for Dexter's CPI is 2012. What is the cost of the CPI basket in 2012? A) $430 B) $335 C) $320 D) $540 Answer: C Topic: The Consumer Price Index Skill: Analytical Status: Revised AACSB: Analytical Skills 46) In 2012, consumers in Dexter consumed only books and pens. The prices and quantities for 2012 and 2013 are listed in the table above. The reference base period for Dexter's CPI is 2012. What is the CPI in 2012? A) 320 B) 1.00 C) 3.20 D) 100 Answer: D Topic: The Consumer Price Index Skill: Analytical Status: Revised AACSB: Analytical Skills 47) In 2012, consumers in Dexter consumed only books and pens. The prices and quantities for 2012 and 2013 are listed in the table above. The reference base period for Dexter's CPI is 2012. What is the cost of the CPI basket in 2013? A) $430 B) $335 C) $320 D) $540 Answer: D Topic: The Consumer Price Index Skill: Analytical Status: Revised AACSB: Analytical Skills

48) In 2012, consumers in Dexter consumed only books and pens. The prices and quantities for 2012 and 2013 are listed in the table above. The reference base period for Dexter's CPI is 2012. What is the CPI in 2013? A) 59 B) 129 C) 169 D) 102 Answer: C Topic: The Consumer Price Index Skill: Analytical Status: Revised AACSB: Analytical Skills 49) In 2012, consumers in Dexter consumed only books and pens. The prices and quantities for 2012 and 2013 are listed in the table above. The reference base period for Dexter's CPI is 2012. What is the inflation rate in 2013? A) 69 percent B) zero C) 31 percent D) 2 percent Answer: A Topic: Inflation Rate Skill: Analytical Status: Revised AACSB: Analytical Skills 50) If this year's price level exceeds last year's, A) the inflation rate between these years has been positive. B) the inflation rate is accelerating. C) deflation is occurring. D) no relative price changes are occurring. Answer: A Topic: Inflation and the Price Level Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

51) If the price level for the last three months has been 112, 125, and 126, we would say A) inflation has been constant over the three months. B) inflation was more rapid between the first and second month than between the second and third month. C) inflation was less rapid between the first and second month than between the second and third month. D) inflation has steadily increased over the three months. Answer: B Topic: Inflation and the Price Level Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 52) Assume the inflation rate falls from 4 percent to 2 percent. This means that A) the price level has fallen. B) the price level is increasing more slowly. C) the economy is experiencing deflation. D) real GDP is decreasing. Answer: B Topic: Inflation and the Price Level Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 53) If the inflation rate is negative, the price level in an economy is A) falling. B) rising slowly. C) constant. D) rising rapidly. Answer: A Topic: Inflation and the Price Level Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 54) Suppose that the price level was 100 in 2011, 110 in 2012, and 130 in 2013. Over these three years, A) deflation occurred at an accelerating rate. B) the inflation rate was positive but slowing. C) prices were stable. D) the inflation rate was positive and accelerating. Answer: D Topic: Inflation and the Price Level Skill: Analytical Status: Revised AACSB: Analytical Skills 83 Copyright © 2014 Pearson Education, Inc.

55) In China, suppose that the price level was 100 in 2011, 110 in 2012, and 120 in 2013. Over these three years, A) the inflation rate accelerated. B) inflation did not occur. C) prices were stable. D) the inflation rate was positive. Answer: D Topic: Inflation and the Price Level Skill: Analytical Status: Revised AACSB: Analytical Skills 56) In the United States, the inflation rate has A) remained almost constant over the past 25 years. B) risen and fallen since the 1970s. C) fallen as a result of OPEC oil price hikes. D) risen constantly over the past 30 years. Answer: B Topic: Inflation in the United States Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 57) Looking at inflation rates in the United States since the 1970s we see that A) inflation fell the most during the 1970s productivity slowdown. B) the highest inflation rates were the double digits during the 1990s. C) the inflation rate increased with the increased growth of the 1990s. D) the 1970s experienced the highest inflation rates. Answer: D Topic: Inflation in the United States Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 58) The biases in the CPI include the A) old goods, unemployment, and inflation biases. B) new goods, quality change, and substitution biases. C) old goods, new goods, and quality change biases. D) substitution, new goods, and old goods biases. Answer: B Topic: Biased CPI Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

59) The bias in the CPI typically A) overstates inflation. B) understates inflation. C) about half the time overstates and about half the time understates the inflation rate. D) cannot be measured or estimated. Answer: A Topic: Biased CPI Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 60) Which of the following means that the CPI overstates the actual inflation rate? A) new goods bias B) quality change bias C) outlet substitution bias D) All of the above cause the CPI to overstate inflation Answer: D Topic: Biased CPI Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 61) The biases in the CPI are A) not important since they are so small. B) important only to economists, not the real world. C) important since they effect nearly 1/3 of federal government spending. D) not important although they are large. Answer: C Topic: Biased CPI Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 62) The currently used method for calculating the CPI A) accounts for people increasing consumption of a good that falls in relative price. B) probably overstates inflation by about 1 percentage point. C) has no effect on government expenditures. D) None of the above answers are correct. Answer: B Topic: Biased CPI Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

63) Because of the biases in calculating the CPI, actual inflation is A) accurately measured. B) less than the measured inflation rate by about 1 percent per year. C) more than the measured inflation rate by about 1 percent per year. D) more than the measured inflation rate by about 1 percent per month. Answer: B Topic: Biased CPI Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 64) The currently used method for calculating the CPI A) accounts for people increasing consumption of a good that falls in relative price. B) probably overstates inflation by about 1 percentage point. C) has no effect on government expenditures. D) None of the above answers are correct. Answer: B Topic: Biased CPI Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 65) An example of the new goods bias in the CPI is the A) introduction of higher quality brakes as standard equipment on new cars. B) introduction of hybrid automobiles, vehicles that were not made until recently. C) decreasing popularity of SUVs as the price of gasoline has risen. D) switch from traditional car dealerships to low-cost Internet car buying services. Answer: B Topic: Biased CPI, New Goods Bias Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 66) If a new and better good replaced an older and less expensive good, then the price level measured by the CPI ________. A) is lower than the actual price level B) is higher than the actual price level C) might be either higher or lower than the actual price D) is the same as the actual price level because it measures the prices of the actual goods Answer: B Topic: The Biased CPI, New Goods Bias Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

67) Price indexes can overstate inflation because they A) omit some quality improvements. B) do not contain the prices of any used goods. C) do not contain the prices of foreign goods. D) do not contain the prices of services. Answer: A Topic: Biased CPI, Quality Improvement Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 68) As currently calculated, the CPI tends to overstate the true inflation rate because A) we cannot know what the true inflation rate is. B) it fails to correctly measure quality changes for some products. C) the market basket selected is inappropriate. D) the market basket fails to weigh housing costs sufficiently. Answer: B Topic: Biased CPI, Quality Improvement Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 69) The technique currently used to calculate the CPI implicitly assumes that over time consumers buy A) relatively more of goods whose relative prices are rising. B) relatively less of goods whose relative prices are rising. C) the same relative quantities of goods as in a base year. D) goods and services whose quality improves at the rate of growth of real income. Answer: C Topic: Biased CPI, Commodity Substitution Bias Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 70) Substitution bias in the CPI refers to the fact that the CPI A) takes into account the substitution of goods by consumers when relative prices change. B) takes no account of the substitution of goods by consumers when relative prices change. C) substitutes quality changes whenever they occur without taking account of the cost of the quality changes. D) substitutes relative prices for absolute prices of goods. Answer: B Topic: Biased CPI, Commodity Substitution Bias Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

71) In August 2012, the CPI inflation rate was 0.6 percent while the core CPI inflation rate was 0.1 percent. The difference between these two measurements of inflation indicates A) prices for food and fuel were increasing more rapidly than prices for other goods. B) prices for food and fuel were increasing less rapidly than prices for other goods. C) the underlying inflation rate was higher than the overall inflation rate. D) a negative underlying inflation rate. Answer: A Topic: Core CPI Skill: Analytical Status: New AACSB: Analytical Skills 72) As of July 2012, the 12 month CPI inflation rate was 1.4 percent and the 12 month core CPI inflation rate was 2.1 percent. The difference between these two measurements of inflation indicates A) prices for food and fuel grew more rapidly than prices for other goods. B) prices for food and fuel grew less rapidly than prices for other goods. C) the underlying inflation rate was lower than the overall inflation rate. D) hyperinflation. Answer: A Topic: Core CPI Skill: Analytical Status: New AACSB: Analytical Skills 73) At the end of last year, the CPI equaled 120. At the end of this year, the CPI equals 132. What is the inflation rate over this year? A) 6 percent B) 10 percent C) 12 percent D) None of the above answers are correct because more information is needed to calculate the inflation rate. Answer: B Topic: Study Guide Question, Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

74) If last year's price level was 100 and this year's price level is 114, over the year the inflation rate has been A) 14 percent. B) 114 percent. C) 12 percent D) 100 percent. Answer: A Topic: Study Guide Question, Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 75) Of the following sequences of price levels, which correctly represents a 5 percent inflation rate? A) 100, 100, 100, 100 B) 100, 105, 105, 105 C) 100, 105, 110, 115 D) 100, 105, 110.25, 115.76 Answer: D Topic: Study Guide Question, Inflation and the Price Level Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 76) The commodity substitution bias is that A) consumers substitute high-quality goods for low-quality goods. B) government spending is a good substitute for investment expenditures. C) national saving and foreign borrowing are interchangeable. D) consumers decrease the quantity they buy of goods whose relative prices rise and increase the quantity of goods whose relative price falls. Answer: D Topic: Study Guide Question, Commodity Substitution Bias Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

4 News Based Questions 1) The New York Times reported in November 2008 that 240,000 additional people lost their jobs which increased the unemployment rate to 6.5 percent. In addition, it was noted that a large number of college graduates were "taking jobs that do not require a college degree." It was also expected that "teens will be thrown out of the labor market....causing youths to miss experience" that could help them prepare for higher-skilled jobs. The article reflects the idea that unemployment is a problem because it results in A) a loss of human capital. B) fewer discouraged workers. C) a loss of income. D) a decrease in the labor force. Answer: A Topic: Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Communication 2) The table below shows data regarding Germany's labor market.

Year 2006 2007 2008

Labor Force (millions) 43.7 43.7 43.6

Number of Employed (millions) 39.01 39.06 39.8

Population (millions) 82.3 82.2 82.1

The data show that Germany's unemployment rate in 2007 was A) 9.8 percent. B) 8.4 percent C) 5.6 percent D) More information is needed to answer this question. Answer: B Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

3) The table below shows data regarding Germany's labor market.

Year 2006 2007 2008

Labor Force (millions) 43.7 43.7 43.6

Number of Employed (millions) 39.01 39.06 39.8

Population (millions) 82.3 82.2 82.1

The data show that Germany's unemployment rate between 2007 and 2008 A) increased. B) decreased C) stayed the same. D) cannot be determined because the population decreased. Answer: B Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 4) The table below shows data regarding Germany's labor market.

Year 2006 2007 2008

Labor Force (millions) 43.7 43.7 43.6

Number of Employed (millions) 39.01 39.06 39.8

Population (millions) 82.3 82.2 82.1

Working-age Population (millions) 54.9 54.7 54.6

The data show that Germany's employment-to-population ratio is ________ in 2007. A) 92 percent B) 47.5 percent C) 67 percent D) 80 percent Answer: C Topic: Employment-to-Population Ratio Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

5) The table below shows data regarding Germany's labor market.

Year 2006 2007 2008

Labor Force (millions) 43.7 43.7 43.6

Number of Employed (millions) 39.01 39.06 39.8

Population (millions) 82.3 82.2 82.1

Working-age Population (millions) 54.9 54.7 54.6

The data show that Germany's labor force participation rate is ________ in 2007. A) 80 percent B) 47.5 percent C) 67 percent D) 78 percent Answer: A Topic: Labor Force Participation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 6) An article in the Financial Times reports on a trend by college students to take a year off after graduation given the lack of success in finding a job. "In a survey published last month by TMP Worldwide... 54 per cent of the final-year undergraduate interviewees were thinking about taking a gap year and one in 10 was planning to wait for a year to escape the financial chaos and wait for the economy to either improve or for the picture to become clearer." www.ft.com, 10/13/2008 These choices add to the fluctuations seen in the ________ as workers leave the labor force given their unsuccessful job searches. A) labor force participation rate B) employment rate C) efficiency wage D) inflation rate Answer: A Topic: Labor Force Participation Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Communication

7) NPR ("Certain Green Industries Have Job Openings", November 12, 2008) reported on a story about wind turbine manufacturers in Ohio having trouble finding skilled workers. The report noted that as a result tens of thousands of people having been laid off, there is "a huge pool of job-seekers." The firms claim to "offer good pay and benefits." A representative from the United Steelworkers claim that their union members have easily transferrable skills, but the pay is too low, around $30,000 annually. A manager at Apollo Alliance says that workers in the new industry need different skills than those in the old steel industry. The type of unemployment described in the story is ________ unemployment. A) cyclical B) structural C) frictional D) efficiency wage Answer: B Topic: Unemployment Types Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Communication 8) Reflecting the state of the economy in 2008, the Bureau of Labor Statistics reported in October that over 1000 jobs were lost in the legal services sector. For example, one firm in Chicago stated that it had fired 54 lawyers in 2008. A representative from the firm stated that most had worked in its real estate division. www.nytimes.com, 11/11/2008 The lawyers that were fired are an example of ________ unemployment. A) frictional B) structural C) efficiency wage D) cyclical Answer: D Topic: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

9) In late 2006, the unemployment rate increased from 4.4 percent to 4.5 percent. It was reported that new jobs were created in several sectors including accounting, engineering services, computer design and education. These increases offset job losses in the construction and automobile industries. At the same time, the natural unemployment rate was estimated to be about 5.5 percent www.nytimes.com, 12/9/2006 Based on the story, the labor market reflects A) a positive output gap. B) a negative output gap. C) cyclical unemployment. D) efficiency wages. Answer: A Topic: Output Gap Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 10) Inflation in Vietnam rose to 27 percent in July 2008— the highest inflation rate in Asia. "Squeezed on all sides, people are cutting back on food, limiting travel, looking for second jobs, delaying major purchases and waiting for the cost of a wedding to go down before marrying...Given this slowdown, Vietnam... is scaling back its plans for growth and economic development. ... Some are losing confidence in the ability of the government to manage the economy. And rumors of price increases have caused panic buying of fuel and rice." www.nytimes.com, 8/23/2008 The story provides an example of how inflation A) redistributes income. B) diverts resources from production. C) leads to increases in the consumer price index. D) can lead to changes in the CPI market basket. Answer: B Topic: Inflation Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

11) In 2000, you could buy a Cadillac DTS for $45,000. In 2011, the Cadillac DTS sold for $55,000. While both models include anti-lock brakes and air bags (along with other similar features), the 2011 model also includes satellite radio and new technology that provides improved gas mileage and safer driving. If the Cadillac DTS was included in the CPI basket, it would create A) a downward bias in the inflation rate. B) an upward bias in the CPI as a result of quality change bias. C) an upward bias in the CPI as a result of commodity substitution bias. D) a downward bias in the CPI as a result of new goods bias. Answer: B Topic: Biased CPI, Quality Improvement Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 12) The table below shows the price index for Zimbabwe starting in 2000. Year 2000 2001 2002 2003 2004 2005 2006

Price Index 100.0 173.4 404.37 1880.5 8462.2 28,586.6 319,222.5

www.econstats.com Which of the following statements correctly describe the behavior of prices in Zimbabwe? I. The cost of the CPI basket increased. II. The inflation rate was 73.4 percent between 2000 and 2001. A) I only B) II only C) both I and II D) neither I nor II Answer: C Topic: Inflation Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

13) The table below shows the price index for Zimbabwe starting in 2000. Year 2000 2001 2002 2003 2004 2005 2006

Price Index 100.0 173.4 404.37 1880.5 8462.2 28,586.6 319,222.5

www.econstats.com The data show that A) the inflation rate between the base year and 2001 is 73.4 percent. B) new goods bias and quality change bias are responsible for most of Zimbabwe's inflation. C) the inflation rate between 2005 and 2006 was 319.2 percent. D) while Zimbabwe experienced a high price level, it did not experience high inflation. Answer: A Topic: Inflation Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 14) The table below shows the price index for China starting in 2000. Year 2000 2001 2002 2003 2004 2005 2006

Price Index 100.0 100.73 99.95 101.12 105.06 106.95 108.52

www.econstats.com Which of the following statements correctly describe the behavior of prices in China? A) The cost of the CPI basket decreased in 2002. B) China experienced a high price level and high inflation. C) Inflation reached 73% between the base year and 2001. D) The inflation rate between 2005 and 2006 was 14.4 percent. Answer: A Topic: Inflation Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 96 Copyright © 2014 Pearson Education, Inc.

15) The table below shows the price index for China starting in 2000. Year 2000 2001 2002 2003 2004 2005 2006

Price Index 100.0 100.73 99.95 101.12 105.06 106.95 108.52

www.econstats.com The inflation rate between 2004 and 2005 was A) 3.9 percent B) 2.8 percent C) 1.8 percent D) 0.7 percent. Answer: C Topic: Inflation Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 16) ABC news in Australia reported that the average annual wage in 2008 was $13,308. To calculate the real wage rate in Australia, you would need to know A) Australia's inflation rate between 2007 and 2008. B) Australia's price level in 2008. C) the core inflation rate in Australia in 2008. D) the exchange rate between the US dollar and the Australian dollar. Answer: B Topic: Real Wage Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

17) The table below shows Vietnam's price index between 2004 and 2007. Year 2004 2005 2006 2007

Price Index 115.15 124.65 134 145.12

www.econstats.com From the data, we can conclude that A) the inflation rate 2005 and 2006 was 7.5 percent. B) food and energy prices in Vietnam were increasing between 2004 and 2007. C) commodity substitution bias occurred over the four years. D) deflation occurred between 2005 and 2006 as price increased more slowly than in 2004. Answer: A Topic: Inflation Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 5 Essay Questions 1) Why is unemployment a problem? Answer: Unemployment is a problem for both the nation and for the unemployed worker. For the nation, unemployment represents lost production and lost incomes. The lost income is also a major problem for the unemployed worker. In the long run, the worker also suffers a loss of human capital which can permanently damage the worker's future job prospects. Topic: Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Communication 2) How does the Current Population Survey determine if a person should be counted in the labor force? Answer: To be in the labor force, a person must either be employed or unemployed. To be counted as "employed," in the week prior to the survey the person must either have worked for pay for one hour or more or else worked without pay for fifteen hours or more in a family-owned business or else been temporarily absent from his or her job. To be counted as unemployed in the survey, the person must have had no job, been available for work, and either made specific efforts to find work within the previous four weeks or else be waiting to be recalled to a job from which they were laid off. Topic: Population Survey Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Communication 98 Copyright © 2014 Pearson Education, Inc.

3) How is the unemployment rate calculated? Include in your answer the process by which the U.S. Census Bureau classifies the data it collects in its Current Population Survey. Answer: The U.S. Census Bureau conducts the Current Population Survey which asks questions about the age and employment status of household members. The population is divided into the working-age population (everyone 16 or older who is available to work) and all the others. The working age population is divided into the labor force and those not in the labor force. The labor force includes all those who are working (either part-time or full-time) and those who are unemployed. The unemployment rate is the ratio of the unemployed to the labor force multiplied by 100 to convert it into a percentage. Topic: Unemployment Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Communication 4) The current U.S. population is about 300 million yet the current U.S. labor force is only about 150 million. What subtractions are made from the population number to set it equal to the labor force? Answer: The population is first reduced by eliminating those who are less than 16 years of age or institutionalized. Then those who are neither working nor looking for work are eliminated. This leaves just those who are employed or unemployed. These two groups together comprise the labor force. Topic: Employment Calculations Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Communication 5) What is the definition of the unemployment rate? How are part-time workers and discouraged workers treated when calculating the unemployment rate? Answer: The definition of the unemployment rate is [(number of unemployed) ÷ (labor force)] × 100. In this calculation, the labor force equals the sum of employed plus unemployed people. Part-time workers are counted as employed. Thus part-time workers are counted in the labor force but are NOT counted as unemployed. Discouraged workers are people who have stopped looking for work and so are not in the labor force. Hence, when calculating the unemployment rate, discouraged workers are counted in neither the number of unemployed nor in the labor force. Topic: Unemployment Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Communication 6) How does the unemployment rate change in a recession and in an expansion? Answer: During a recession, the unemployment rate generally increases. During an expansion, the unemployment rate generally decreases. Topic: Unemployment Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 99 Copyright © 2014 Pearson Education, Inc.

7) Define the unemployment rate and labor-force participation rate. Discuss the differences between these two rates. Answer: The unemployment rate is defined as [(number of unemployed) ÷ (labor force)] × 100. and the labor force participation rate is defined as is [(labor force) ÷ (working-age population)] × 100. The two measures give different perspectives on the labor market. The labor force participation rate tells the percentage of the working-age population that is either working or is available for work. The unemployment rate tells the percentage of the people working or available for work (the labor force) who do not have jobs. Topic: Unemployment Rate and Labor Force Participation Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Communication 8) What is a "marginally attached worker"? Answer: A marginally attached worker is a person without a job, who is available and willing to work, but who has stopped looking in the recent past. One type of marginally attached worker is a discouraged worker. Essentially, a discouraged worker is someone who wants a job but has grown so "discouraged" about finding one, he or she has stopped looking. Topic: Marginally Attached Workers Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 9) What is a discouraged worker? How do they affect the unemployment rate? Answer: A discouraged worker is a person without a job, who is available and willing to work, but who has not made specific efforts to find a job within the past four weeks. Essentially, a discouraged worker is someone who wants a job but has grown so "discouraged" about finding one, he or she has stopped looking. Discouraged workers are not in the labor force so in one sense they do not affect the unemployment rate. However, if they re-enter the labor force to look for work, the unemployment will increase because while they are searching they are now counted among the ranks of the unemployed. Topic: Discouraged Workers Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Communication 10) Explain how the labor force participation rate and the unemployment rate change in a recession. Answer: The labor force participation rate tends to decrease during a recession as more workers become discouraged. The unemployment rate increases during a recession because there are fewer jobs. Topic: Labor Market in a Recession Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

11) List and define the three types of unemployment. Answer: The three types are frictional, structural and cyclical. Frictional unemployment is defined as the normal turnover in the labor market of workers entering and leaving the work force. Structural unemployment is caused by technological change or international competition that causes jobs to disappear. Cyclical unemployment is caused by business cycle fluctuations that change the unemployment rate. Topic: Types of Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 12) What are the three types of unemployment and how do they change over the business cycle? Answer: The three types of unemployment are frictional, structural, and cyclical. Of these three types, the first two—frictional and structural unemployment—have no strong relationship to the business cycle. The third type, cyclical unemployment, however is the result of the business cycle. When the economy is in a recession and people lose their jobs as a result of the recession, the unemployed workers are cyclically unemployed. Conversely, when the economy is an expansion, cyclical unemployment decreases. Hence, cyclical unemployment increases during a recession and decreases during an expansion. Topic: Types of Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Communication 13) Give an example of a frictionally unemployed person. Answer: A person who is without a job because of a normal labor market turnover is frictionally unemployed. For instance, a student who just graduated from school and is looking for a job is frictionally unemployed as is a worker who quit to look for a better job. Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 14) Define and give an example of how a spell of frictional unemployment can begin. Answer: Frictional unemployment is the unemployment resulting from normal turnover in the labor market. For instance, there are always people entering or reentering the labor force (entrants and reentrants) and while these people look for work, they are frictionally unemployed. Similarly, there are always some people who quit their jobs to look for something better, and these people are frictionally unemployed. And, there is always a normal ebb and flow among firms as some gain sales while others lose them. The losers may release workers and these people also are frictionally unemployed. Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

15) Can frictional unemployment ever be totally eliminated? Explain your answer. Answer: Frictional unemployment arises from normal labor market turnover. Because this type of unemployment is associated with normal changes, it is impossible to be eliminated. Indeed, some frictional unemployment is purely voluntary, with these unemployed workers choosing to become unemployed because they expect to find a job that is more satisfying. Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 16) Explain the difference between frictional and structural unemployment. Answer: Frictional unemployment is more short term and is associated with people changing jobs and entering the labor force. Structural unemployment is more long term and is associated with changes in the structure of the economy that require people to learn new skills. Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 17) Give an example of a structurally unemployed person. Answer: A person who loses his or her job because his firm had to close because of foreign competition or because he or she no longer possesses the skills necessary for a job is structurally unemployed. Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 18) Define and give an example of how a spell of structural unemployment can begin. Answer: Structural unemployment arises when changes in technology or international competition changes the skills necessary for jobs or change the location of jobs. For instance, technological change, such as the invention of the personal computer, can switch the skills needed for jobs, say from the ability to repair typewriters to the ability to repair computers. In this case, the people who lose their jobs and do not have the necessary skills to perform the new jobs are structurally unemployed. In addition, there are times when foreign competition causes large downscaling in sectors of the U.S. economy as U.S. firms find that they cannot compete with foreign firms. In this case, the U.S. workers who lose their jobs do not go overseas to take jobs in the expanding foreign companies, so the workers are structurally unemployed. Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

19) Give an example of a cyclically unemployed person. Answer: A person who loses his or her job because of a recession is cyclically unemployed. Topic: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 20) Explain what type of unemployment changes with the business cycle and how it changes. Answer: Cyclical unemployment is the unemployment that changes with the business cycle. Cyclical unemployment rises when the economy is in the recession part of a business cycle and decreases when the economy is in the expansion part of the business cycle. Topic: Cyclical Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 21) Why is there unemployment even when the economy is at "full employment"? Answer: There is unemployment even at "full employment" because there always will be unemployment. Unemployment is a natural occurrence in any economy with changes, such as high school or college graduates entering the labor force, or technological advances in one sector, or consumer preferences changing to favor one product over another. Frictional and structural unemployment will always exist. Cyclical unemployment, however, is a different matter. Cyclical unemployment does not seem to have the same degree of inevitability and hence full employment is defined as occurring when cyclical unemployment equals zero. Topic: Full Employment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Communication 22) What is the relationship between the natural unemployment rate, the unemployment rate, potential GDP, and actual GDP? Answer: When the economy is at potential GDP, the unemployment rate is the natural unemployment rate. If actual GDP is less than potential GDP, then the unemployment rate exceeds the natural unemployment rate. And if actual GDP exceeds potential GDP, then the unemployment rate is less than the natural unemployment rate. Topic: Actual and Potential GDP Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

23) Explain the relationship(s) between full employment, cyclical unemployment, the natural unemployment rate, and potential GDP. Answer: The economy is at full employment when there is no cyclical unemployment. The unemployment rate at full employment is called the natural unemployment rate. Because there is no cyclical unemployment, the natural unemployment rate is comprised of only frictional and structural unemployment. The level of output that the economy would produce if it was at full employment is called potential GDP. Topic: Actual and Potential GDP Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 24) Consider the following statement: "Real GDP and potential GDP are always equal." Is this statement true or false? Explain your answer. Answer: Real GDP often differs from potential GDP. Real GDP equals potential GDP only when the economy is at full employment. However, the economy is not always at full employment. When employment is less than full employment, real GDP is less than potential GDP and the economy is in a recession. When employment exceeds full employment, real GDP exceeds potential GDP and the economy is in an expansion. Topic: Actual and Potential GDP Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 25) What is potential GDP and what is the relationship between actual and potential real GDP? Answer: The quantity of GDP at full employment is called potential GDP. Over the business cycle, real GDP fluctuates around potential GDP. When the unemployment rate is higher than the natural rate, real GDP is less than potential GDP and when the unemployment rate is lower than the natural rate, real GDP exceeds potential GDP. Topic: Actual and Potential GDP Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

26) Explain the relationship between real GDP and potential GDP and between the unemployment rate and the natural unemployment rate as the economy moves through a business cycle. Answer: Potential GDP is the level of GDP when the economy is at full employment. Real GDP is the level of GDP and can be above or below potential GDP depending on whether employment is above or below full employment. The natural unemployment rate is the unemployment rate when the economy is at full employment. The unemployment rate can be above or below the natural unemployment rate. In a recession, real GDP is less than potential GDP and unemployment exceeds the natural rate. In an expansion, real GDP is greater than potential GDP and unemployment is less than the natural rate. Topic: Actual and Potential GDP Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 27) What is the relationship over the business cycle of potential GDP and real GDP? Answer: The level of output that the economy would produce if it was at full employment is called potential GDP. However, the economy is not always at full employment. In a recession, employment is less than full employment and so real GDP is less than potential GDP. And, in an expansion, employment can exceed full employment so that real GDP exceeds potential GDP. Topic: Actual and Potential GDP Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 28) What are the three stages of constructing the CPI? Answer: The first stage is to select the CPI basket. The basket is determined by surveying the spending habits of consumers by conducting a Consumer Expenditure Survey. The second stage is to check the prices of about 80,000 goods and services in 30 metropolitan areas. This checking is done on a monthly basis. The third stage is to calculate the CPI itself. To calculate the CPI, a period of time is selected as the base reference period and the cost of the CPI basket using the prices from that period is computed. Then the CPI in any other month equals 100 times the quotient of the cost of the basket using current-period prices divided by the cost of the basket in the reference base period. Topic: Consumer Price Index Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

29) "The market basket used to calculate the CPI is revised monthly to more accurately depict consumers' choices. The price data for the CPI are collected every month." Are the previous sentences true or false? Answer: The first sentence is false and the second is true. The point of the CPI is to determine how the prices of a fixed basket of goods and services change over time, so the CPI basket is revised only infrequently. However, the prices for the goods and services in the basket are collected monthly so that the CPI can be computed monthly. Topic: Consumer Price Index Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 30) Assume that after you graduate, you move to a simple economy in which only three goods are produced and consumed: fish, fruit, and meat. Suppose that on January 1, fish sold for $2.50 per pound, meat was $3.00 per pound, and fruit was $1.50 per pound. At the end of the year, you discover that the catch was low and that fish prices had increased to $5.00 per pound, but fruit prices stayed at $1.50 per pound, and meat prices had actually fallen to $2.00. Can you say what happened to the overall CPI, in terms of whether it increased, decreased, or stayed the same? Do you have enough information to calculate the inflation rate? Note, this problem requires no calculation; just state and explain your answers. Answer: You cannot say what happened to the CPI because you do not know the quantities in the basket. You also do not have enough information to determine the inflation rate because you need the CPI at the beginning and the end of the year to compute the inflation rate. Topic: Consumer Price Index Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Analytical Skills 31) What is inflation and how is it measured using the Consumer Price Index? Answer: The inflation rate is the percentage change in the price level from one year to the next. In other words, it is the growth rate of the price level. The CPI is a measure of the price level and so can be used to calculate the inflation rate. Topic: Inflation Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

32) List the four sources of bias in the CPI and briefly explain them. Answer: There are four potential biases. First is the new goods bias, which occurs when new, higher priced goods replace older goods. Second is the quality change bias, which occurs when the CPI fails to take account of quality improvements that raise prices. Third is the commodity substitution bias, which occurs when consumers shift their purchases away from goods whose relative prices rise toward lower priced goods. Last is the outlet substitution bias, which because with higher prices, people switch to low-cost discount stores. Topic: Biased CPI Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 33) Is the CPI a biased measure of the inflation rate? Explain your answer. Answer: There are at least four sources of bias in the CPI measure. The first bias is the new goods bias, which refers to the fact that new goods are continuously replacing old ones. Because the new goods are often both of higher quality and higher priced, their introduction complicates measuring the CPI. The new goods bias biases the CPI upwards. Second, the CPI is not always adjusted for improvements in the quality of the products, which is the quality change bias. A price hike that reflects a quality increase often is mistakenly recorded as only a price hike, with no recognition given to the higher quality. Third, consumers substitute relatively lower priced goods for goods that increase in price, which is called commodity substitution. However, the CPI doesn't take this substitution into account, thereby giving rise to the commodity substitution bias. Fourth, when faced with price hikes, consumers switch away from buying at full service stores to buying from discount stores because the prices in the discount stores are lower. Once again, the CPI does not take account of this outlet substitution and so the CPI suffers from the outlet substitution bias. Topic: Biased CPI Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Communication 34) "The new goods bias puts a downward bias into the CPI and its measure of the inflation rate." Is the previous sentence correct or not? Explain your answer. Answer: The sentence is false because the new goods bias puts an upward bias into the CPI and its measure of the inflation rate. The new goods bias occurs when new, higher quality and more expensive goods replace older, lower quality and less expensive goods. Part of the expense of the new goods is to pay for the higher quality of the new goods. But, if the price is not adjusted (downward) to take account of the higher quality, incorporating the new good into the CPI leads to an upward bias in the prices that go to make up the CPI and hence also an upward bias in the inflation rate. Topic: The Biased CPI, New Goods Bias Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Communication

35) What is the commodity substitution bias? What effect does it have on the CPI? Answer: The commodity substitution bias refers to the fact that people switch (substitute) away from goods and services that have risen in price and buy more goods and services that have not risen as much in price. Thus if then price of Coke rises 20 cents while Pepsi's price does not change, many people will substitute Pepsi for Coke. The commodity substitution bias in the CPI occurs because the CPI uses a fixed basket of goods and services. So, if the basket contains, say, 10 bottles of Coke and 8 bottles of Pepsi, the basket will not change even though people change their buying patterns in favor of Pepsi and away from Coke. The change in people's buying patterns offsets, at least to a degree, the effect of higher prices. In the Coke/Pepsi case, by purchasing more Pepsi and less Coke, people have insulated themselves from part of the effect of the higher price of Coke. However the CPI does not take this change into account and so the CPI reflects the full effect of the higher price of Coke, thereby overstating the actual inflation that people experience. Topic: The Biased CPI, Commodity Substitution Bias Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Communication 36) "The bias in the CPI distorts private contracts because a future payment that is linked to the CPI will be raised above the true increase in the price level." Is the previous sentence true or false? Answer: The sentence is correct. The fact that the payments increase by more than the true increase in the price level means that one party to the contract benefits more, the higher the inflation rate. Topic: The Biased CPI, Private Contracts Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 37) Explain the CPI bias and how it can distort private contracts and increase government outlays. Answer: The CPI bias is the point that the CPI overstates the true inflation rate. The amount of the bias has been estimated at 1.1 percentage points per year. Thus when workers sign a contract that links their wages to the CPI in order to adjust the wages to offset inflation, the adjustment is too large. Wages rise by more than is necessary to keep pace with inflation. Thus a contract that might have been designed to keep workers "even" with inflation is distorted so that workers actually gain. Similarly, many government outlays, such as Social Security, are linked to the CPI. Thus the adjustment in these expenditures exceeds the amount necessary for inflation, and hence the amount of the government's outlays increases by more than is appropriate for inflation. Topic: The Biased CPI, Government Outlays Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Communication

38) What, if any, is the impact of the CPI bias on government spending? Answer: About one-third of government outlays, such as Social Security, are linked to the CPI so that these sources of government spending increase when the CPI increases. Because the CPI overstates the actual inflation rate, government spending increases by more than is warranted by inflation. Hence the CPI bias increases the amount of government outlays. Topic: The Biased CPI, Government Outlays Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 39) How is the GDP deflator is calculated. Answer: The GDP deflator equals 100 times the nominal GDP divided by real GDP, or in terms of symbols, the GDP deflator equals (100) × (nominal GDP) ÷ (real GDP). Topic: GDP Deflator Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Analytical Skills 6 Numeric and Graphing Questions 1) The unemployment rate is 6 percent. If the population is 300 million, and the number unemployed is 6 million and the number employed is 94 million, what is the size of the labor force? Answer: The labor force is the sum of the number of employed people plus the number of unemployed people. Hence the labor force equals 94 million + 6 million = 100 million. Topic: Population Survey Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 2) Suppose the current unemployment rate is 5 percent, the labor force is 400 million people, the labor force participation rate is 80 percent and the working-age population is 500 million people. What number of people are unemployed? Answer: The number of unemployed people equals the labor force multiplied by the unemployment rate. So the number of unemployed people is (400 million) × (5 percent) = 20 million people. Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

3) Suppose that the U.S. population is 275 million. Also assume that the labor force is 135 million and that 130 million people are employed. Calculate the unemployment rate. Answer: The unemployment rate is (5 million unemployed) ÷ (135 million labor force) × 100 = 3.7 percent. Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 4) Suppose the population is 220 million people, the labor force is 150 million people, the number of people employed is 130 million and the working-age population is 175 million people. What is the unemployment rate? Answer: The unemployment rate is (20 million unemployed) ÷ (150 million labor force) × 100 = 13.3 percent. Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 5) Suppose the working-age population is 150 million, the labor force is 125 million, and employment is 120 million. a) What is the unemployment rate? b) Now suppose that 2 million students graduate from college and begin to look for jobs. What is the new unemployment rate if none of the students have found jobs yet? c) Suppose that all 2 million students find jobs. What is the unemployment rate now? Answer: a) The unemployment rate is (5 million unemployed) ÷ (125 million labor force) × 100 = 4.0 percent. b) The unemployment rate is (7 million unemployed) ÷ (127 million labor force) × 100 = 5.5 percent. c) The unemployment rate is (5 million unemployed) ÷ (127 million labor force) × 100 = 3.9 percent. Topic: Unemployment Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

6) Suppose there are 180 million employed people and 20 million unemployed people. a) What is the unemployment rate? b) Suppose that 5 million unemployed people give up their search for jobs and become discouraged workers. What is the new official unemployment rate? Answer: a) The unemployment rate is (20 million unemployed) ÷ (200 million labor force) × 100 = 10.0 percent. b) The unemployment rate is (15 million unemployed) ÷ (195 million labor force) × 100 = 7.7 percent. Topic: Unemployment Rate and Discouraged Workers Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 7) Consider the following scenario. Initially the economy has 90 million people working, 10 million people unemployed, and 20 million people not in the labor force. Then prospects for the economy improve. Five million people who previously were not in the labor force now join the 10 million previously unemployed in looking for work. For now, the economy remains with 90 million workers. What happens to the unemployment rate? Answer: The unemployment rate rises from 10.0 percent, (10 million unemployed) ÷ (100 million labor force) × 100, to 14.3 percent, (15 million unemployed) ÷ (105 million labor force) × 100. Topic: Unemployment Rate and Discouraged Workers Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills Category Total population Working-age population Labor force Employed Unemployed

Number of people (millions) 246 207 139 133 6

8) Based on the information in the above table, what is the unemployment rate? What is the labor force participation rate? Answer: The unemployment rate equals (6 million unemployed) ÷ (139 million labor force) × 100 = 4.3 percent. The labor force participation rate equals (139 million labor force) ÷(207 million working-age population) × 100 = 67.1 percent. Topic: Unemployment Rate and Labor Force Participation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

9) If the base year CPI basket costs $250 and next year the CPI basket costs $275, what is next year's CPI? Answer: The CPI equals 100 × ($275/$250) = 110. Topic: Consumer Price Index Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills Item Loaves of bread Jugs of soda Item Loaves of bread Jugs of soda

Quantity (2012) 20 20

Price (2012) $3.00 $2.00

Quantity (2013) 22 30

Price (2013) $4.00 $1.50

10) The tables above give the purchases of an average consumer in a small economy. (These consumers purchase only loaves of bread and jugs of soda.) Suppose 2012 is the reference base period. a) What quantities are in the CPI basket? b) What is the cost of the CPI basket using 2012 prices? c) What is the cost of the CPI basket using 2013 prices? d) What is the CPI in 2013? Answer: a) The quantities in the CPI basket are the 2012 quantities because 2012 is the reference base period. So, the quantities are 20 loaves of bread and 20 jugs of soda. b) The cost of the CPI basket using 2012 prices is (20 loaves) × ($3) + (20 jugs) × ($2) = $100. c) The cost of the CPI basket using 2013 prices is (20 loaves) × ($4) + (20 jugs) × ($1.50) = $110. Note that the quantities used in this calculation are the quantities in the CPI basket. d) The CPI in 2013 equals 100 times the cost of the CPI basket at 2013 prices divided by the cost of the CPI basket at 2012 (base period) prices. The CPI equals 100 × ($110) ÷ ($100) = 110. Topic: Consumer Price Index Skill: Analytical Status: Revised AACSB: Analytical Skills

Item Shampoo Pizza Item Shampoo Pizza

Quantity (2012) 25 15

Price (2012) $2.35 $7.50

Quantity (2012) 25 15

Price (2013) $2.50 $7.75

11) The tables above give the purchases of an average consumer in a small economy. (These consumers purchase only shampoo and pizza.) Suppose 2012 is the reference base period. a) What is the cost of the CPI basket in 2012 and 2013? b) What is the CPI in 2012 and in 2013? c) What is the inflation rate between 2012 and 2013? Answer: a) For 2012 the CPI basket costs $171.25. For 2013 the CPI basket costs $178.75. b) For 2012, the base period, the CPI is 100.0. For 2013 the CPI is ($178.75/$171.25) × 100, which is 104.4. c) Between the two years the inflation rate is equal to [(104.4 - 100.0)/100] × 100, which is 4.4 percent. Topic: Consumer Price Index Skill: Analytical Status: Revised AACSB: Analytical Skills

Item Meals Parking Item Meals Parking

Quantity (2012) 100 50

Price (2012) $10.00 $100.00

Quantity (2013) 100 50

Price (2013) $12.00 $97.50

12) The tables above give the purchases of a typical consumer in a country comprised of one large city. These consumers purchase only restaurant meals and parking. The year 2012 is the reference base period. a) Find the total cost of the CPI basket for 2012 and 2013. b) What is the CPI in 2012 and in 2013? c) What is the inflation rate between 2012 and 2013? Answer: a) The total cost of the CPI basket in 2012 equals (100 meals) × ($10) + (50 parking) × ($100) = $6,000. The total cost of the CPI basket in 2013 equals (100 meals) × ($12) + (50 parking) × ($97.50) = $6,075. The quantities are the same in 2012 and 2013. If the quantities differed, the 20120 quantities would be used because 2012 is the base year. b) The CPI in 2012 is 100 because 2012 is the base period. (Alternatively, the CPI in 2012 equals 100 × ($6,000)/$6,000) = 100.) The CPI in 2013 equals 100 × ($6075)/($6,000) = 101.25. c) The inflation rate between 2012 and 2013 equals 100 × [(101.25 - 100) ÷ (100)] = 1.25 percent. Topic: Consumer Price Index Skill: Analytical Status: Revised AACSB: Analytical Skills

Item Oranges Bananas Chicken Beef Bread

Quantity (2012) 50 100 200 100 300

Price (2012) $0.90 $0.50 $2.00 $5.00 $1.75

Price (2013) $0.75 $0.95 $2.50 $4.80 $2.00

13) The table above gives the CPI basket for 2012. Suppose that 2012 is the reference base period. a) What is the cost of the CPI basket in 2012? b) What is the cost of the CPI basket in 2013? c) What is the CPI for 2012? d) What is the CPI for 2013? Answer: a) The cost of the CPI basket in 2012 is $1,520.00. b) The cost of the CPI basket in 2013 is $1,712.50. c) The CPI for 2012 is 100 because 2012 is the base period. d) The CPI for 2013 equals 100 × [$1,712.50 ÷ $1,520.00] = 112.66. Topic: Consumer Price Index Skill: Analytical Status: Revised AACSB: Analytical Skills 14) If the CPI this year is 175.2 and next year the CPI is 176.1, what was the inflation rate over the year? Answer: The inflation rate equals 100 × [(176.1 - 175.2) ÷ 175.2] = 0.5 percent. Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 15) Last year the CPI was 177.1 and this year the CPI is 180.9. What was the inflation rate between these two years? Answer: The inflation rate equals 100 ( [(180.9 ( 177.1) ÷ 177.1] = 2.1 percent. Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

Year 1997 1998 1999 2000 2001 2002

CPI 152.5 157.0 160.6 163.1 166.7 172.3

16) The table above gives the U.S. CPI for six years. Calculate the inflation rates between 1997 to 1998, 1998 to 1999, 1999 to 2000, 2000 to 2001, and 2001 to 2002. Answer: Between 1997 to 1998, the inflation rate was 3.0 percent. Between 1998 to 1999, the inflation rate was 2.3 percent. Between 1999 to 2000, the inflation rate was 1.6 percent. Between 2000 to 2001, the inflation rate was 2.2 percent. And between 2001 to 2002, the inflation rate was 3.4 percent. Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 17) For each of the following values of nominal GDP and real GDP, calculate the GDP price deflator. a) Nominal GDP = $600; real GDP = $800. b) Nominal GDP = $900; real GDP = $900. c) Nominal GDP = $1,200; real GDP = $1,000 Answer: a) The GDP deflator equals($600 ÷ $800) × 100, which is 75. b) The GDP deflator equals($900 ÷ $900) × 100, which is 100. c) The GDP deflator equals($1,200 ÷ $1,000) × 100, which is 120. Topic: GDP Deflator Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 18) If nominal GDP is $230 for a period and real GDP is $200 for the same period, what is the GDP deflator for this period? Answer: The GDP deflator equals 115, or (100) × ($230) ÷ ($200). Topic: GDP Deflator Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

7 True or False 1) The working-age population is divided between those people in the labor force and those people unemployed. Answer: FALSE Topic: Population Survey Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 2) One way to be considered unemployed is to be without a job and looking for work. Answer: TRUE Topic: Population Survey Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 3) The labor force is the sum of the working-age population and the number of unemployed people. Answer: FALSE Topic: Population Survey Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 4) The unemployment rate equals [(the number of people unemployed)/(the population)] × 100. Answer: FALSE Topic: Unemployment Rate Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 5) The unemployment rate measures the percentage of the working-age population who can't find a job. Answer: FALSE Topic: Unemployment Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 6) The unemployment rate measures the percentage of people in the labor force who can't find a job. Answer: TRUE Topic: Unemployment Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 117 Copyright © 2014 Pearson Education, Inc.

7) Unlike cyclical unemployment, both frictional and structural unemployment rise during recessions and fall during expansions. Answer: FALSE Topic: Types of Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 8) Frictional, structural and cyclical unemployment are three classifications of unemployment. Answer: TRUE Topic: Types of Unemployment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 9) If a worker is temporarily laid off because the economy is in a recession, frictional unemployment increases. Answer: FALSE Topic: Frictional Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 10) Structural unemployment usually lasts longer than frictional unemployment. Answer: TRUE Topic: Structural Unemployment Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 11) When the economy is at full employment the unemployment rate equals the natural unemployment rate. Answer: TRUE Topic: Full Employment Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 12) The absence of cyclical unemployment means the economy is at the natural unemployment rate. Answer: TRUE Topic: Natural Unemployment Rate Skill: Conceptual Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 118 Copyright © 2014 Pearson Education, Inc.

13) The natural unemployment rate increased significantly during the 1980s and the 1990s. Answer: FALSE Topic: Explaining Employment and Wage Rates Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 14) The CPI is the average price of all goods and services produced within the economy. Answer: FALSE Topic: Consumer Price Index Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking 15) The commodity substitution bias is that consumers substitute high-quality goods for lowquality goods. Answer: FALSE Topic: Commodity Substitution Bias Skill: Recognition Status: Previous edition, Chapter 5 AACSB: Reflective Thinking

8 Extended Problems Category Working age population Labor force Employment

Number (millions) 222.0 146.8 138.0

1) The Bureau of Labor Statistics reported the data in the table above for October 2003. a) Calculate the number of people unemployed. b) Calculate the number of people who are not in the labor force c) Calculate the unemployment rate. d) Calculate the labor force participation rate. Answer: a) The labor force is the sum of the number of people employed plus the number of unemployed. So the number of people unemployed is the labor force minus the number of employed: b) The number of people who are not in the labor force is the difference between the working age population and the labor force: c) The unemployment rate is the number of unemployed as a percentage of the labor force: d) The labor force participation rate is the percentage of the working-age population who are in the labor force: Topic: Population Survey Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 2) A labor force survey in Brownland records the following data: Employed: 189,000 Unemployed: 15,000 Not in the labor force: 84,000 a) Calculate the unemployment rate. b) Calculate the labor force participation rate. Answer: a) The unemployment rate is the number of unemployed as a percentage of the labor force. The labor force is the sum of the number of people employed plus the number of unemployed. Brownland's labor force is So the unemployment rate is b) The labor force participation rate is the percentage of the working-age population who are in the labor force. The working age population are those who are in the labor force and those who are not in the labor force. So Brownland's working-age population is and its labor force participation rate is Topic: Unemployment Rate and Labor Force Participation Rate Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills 120 Copyright © 2014 Pearson Education, Inc.

3) A typical household in Orangeland consumes only orange juice and shorts. Last year, which was the base year, the household spent $400 on juice and $120 on shorts. In the base year, juice was $2 a bottle and shorts were $10 a pair. This year, juice is $3 a bottle, shorts are $12 a pair, and a typical household has bought 180 bottles of juice and 14 pairs of shorts. a) What is the basket used in the CPI? b) Calculate the CPI in the current year. c) Calculate the inflation rate in the current year. d) Is the inflation rate that you've calculated likely to be biased? Why or why not? Answer: a) The CPI basket is the quantities bought in the base year. In the base year, a typical household spent $400 on juice at $2 a bottle, so the quantity of juice bought was The household spent $120 on shorts at $10 a pair, so the quantity of shorts bought was Thus the CPI basket is 200 bottles of juice and 12 pairs of shorts. b) The cost of the CPI basket last year was The cost of the CPI basket in the current year is So the CPI is c) The inflation rate is the percentage change in the CPI. Because the last year was also the base year, the CPI last year was 100. So the inflation rate for the current year is which is 43.1 percent. d) The calculated CPI is likely to overstate inflation because of the commodity substitution bias. The relative price of shorts has fallen from 5 to 4 bottles of juice. This fall led consumers to buy more shorts and less juice. As a result, the actual consumer basket in the current year is less expensive than the CPI basket. The CPI ignores this commodity substitution, and so overstates the inflation rate. Topic: Consumer Price Index Skill: Analytical Status: Previous edition, Chapter 5 AACSB: Analytical Skills

Economics, 11e, Global Edition (Parkin) Chapter 23 Economic Growth 1 The Basics of Economic Growth 1) The best definition for economic growth is A) a sustained expansion of production possibilities measured as the increase in real GDP over a given period. B) a sustained expansion of production possibilities measured as the increase in nominal GDP over a given period. C) a sustained expansion of consumption goods over a given period. D) a sustained expansion of production goods over a given period. Answer: A Topic: Long-Term Growth Trends Skill: Definition Status: Old AACSB: Analytical Skills 2) Economic growth is measured by A) changes in real GDP. B) changes in nominal GDP. C) changes in the employment rate. D) All of the above are used to measure economic growth. Answer: A Topic: Long-Term Growth Trends Skill: Definition Status: Old AACSB: Analytical Skills 3) We are interested in long-term growth primarily because it brings A) higher price levels. B) lower price levels. C) higher standards of living. D) trade wars with our trading partners. Answer: C Topic: Long-Term Growth Trends Skill: Conceptual Status: Old AACSB: Analytical Skills

4) If a nation's population grows, then, A) growth in real GDP per person will be less than the growth of real GDP. B) there can be no economic growth. C) growth in real GDP per person will be greater than the growth of real GDP. D) there must be an increase in real GDP per person. Answer: A Topic: Long-Term Growth Trends Skill: Conceptual Status: Old AACSB: Analytical Skills 5) In 2011, Armenia had a real GDP of $4.21 billion and a population of 2.98 million. In 2012, real GDP was $4.59 billion and population was 2.97 million. What was Armenia's economic growth rate from 2011 to 2012? A) 0.38 percent B) 9.0 percent C) 3.8 percent D) 8.3 percent Answer: B Topic: Economic Growth Rate Skill: Analytical Status: Revised AACSB: Analytical Skills 6) In 2011, Armenia had a real GDP of approximately $4.21 billion and a population of 2.98 million. In 2012, real GDP was $4.59 billion and population was 2.97 million. From 2011 to 2012, Armenia's standard of living ________. A) increased B) decreased C) did not change D) might have increased, decreased, or remained unchanged but more information is needed to determine which. Answer: A Topic: Economic Growth Rate Skill: Analytical Status: Revised AACSB: Analytical Skills

7) In 2011, Armenia had a real GDP of approximately $4.21 billion and a population of 2.98 million. In 2012, real GDP was $4.59 billion and population was 2.97 million. Armenia's real GDP per person in 2012 was A) $1,545 B) $380 C) $1,413 D) $132 Answer: A Topic: Economic Growth Rate Skill: Analytical Status: Revised AACSB: Analytical Skills 8) During 2014, the country of Economia had a real GDP of $115 billion and the population was 0.9 billion. In 2013, real GDP was 105 billion and the population was 0.85 billion. In 2014, real GDP per person was A) $128 B) $124 C) $135 D) $117 Answer: A Topic: Economic Growth Rate Skill: Analytical Status: Revised AACSB: Analytical Skills 9) During 2014, the country of Economia had a real GDP of $115 billion and the population was 0.9 billion. In 2013, real GDP was 105 billion and the population was 0.85 billion. In 2013, real GDP per person was A) $128 B) $124 C) $135 D) $117 Answer: B Topic: Economic Growth Rate Skill: Analytical Status: Revised AACSB: Analytical Skills

10) Suppose real GDP for a country is $13 trillion in 2010, $14 trillion in 2011, $15 trillion in 2012, and $16 trillion in 2013. Over this time period, the real GDP growth rate is A) increasing. B) decreasing. C) constant. D) negative. Answer: B Topic: Economic Growth Rate Skill: Analytical Status: Revised AACSB: Analytical Skills 11) Suppose that in 2013 a country has a population of 1 million and real GDP of $1 billion. In 2014, the population is 1.1 million and the real GDP is $1.1 billion. The real GDP per person growth rate is A) $1000. B) positive. C) negative. D) zero. Answer: D Topic: Economic Growth Rate Skill: Analytical Status: Revised AACSB: Analytical Skills 12) During 2013, the country of Economia had a real GDP of $115 billion and the population was 0.9 billion. In 2012, real GDP was 105 billion and the population was 0.85 billion. Economia's growth rate of real GDP per person is A) 3.23 percent B) 5 percent C) 5.88 percent D) 9.52 percent Answer: A Topic: Economic Growth Rate Skill: Analytical Status: Revised AACSB: Analytical Skills

13) Suppose a nation's population grows by 2 percent and, at the same time, its GDP grows by 5 percent. Approximately how fast will real GDP per person increase? A) 3 percent per year B) 2 percent per year C) 5 percent per year D) 10 percent per year Answer: A Topic: Economic Growth Rate Skill: Analytical Status: Old AACSB: Analytical Skills 14) Which of the following is used to calculate the standard of living? A) real GDP/population B) ((real GDP in the current year - real GDP in previous year)/real GDP in previous year) × 100 C) the one-third rule D) real GDP/aggregate hours Answer: A Topic: Economic Growth Rate Skill: Conceptual Status: Old AACSB: Analytical Skills 15) According to the Economic Times (09/2012), Standard & Poor's forecast for India's GDP growth rate was cut by 1 percentage point to 5.5 percent as the entire Asia Pacific region feels the pressure of ongoing economic uncertainty. India has averaged 7 percent growth in GDP since 1997. Which of the following is true? A) India's PPF has been shifting rightward since 1997. B) India's PPF has been shifting leftward since 1997. C) India has been moving from a point within its PPF to points beyond its PPF. D) India's PPF has not shifted since 1997. Answer: A Topic: Growth vs. Cyclical Expansion Skill: Analytical Status: New AACSB: Analytical Skills

16) According to the Economic Times (09/2012), Standard & Poor's forecast for India's GDP growth rate was cut by 1 percentage point to 5.5 percent as the entire Asia Pacific region feels the pressure of ongoing economic uncertainty. India has averaged 7 percent growth in GDP since 1997. Based on this story, it is most likely that the slowdown reflects a A) temporary business cycle slowdown. B) temporary business cycle expansion. C) change to India's long-term economic growth rate. D) shrinkage of India's economy. Answer: A Topic: Growth vs. Cyclical Expansion Skill: Analytical Status: New AACSB: Analytical Skills 17) The Rule of 70 is used to A) estimate how much of an economy's growth rate is due to increases in capital per hour of labor B) calculate the standard of living C) calculate the economy's growth rate D) estimate how long it will take the level of any variable to double Answer: D Topic: Rule of 70 Skill: Conceptual Status: Old AACSB: Analytical Skills 18) Using the Rule of 70, if China's current growth rate of real GDP per person was 7 percent a year, how long would it take the country's real GDP per person to double? A) 35 years B) 14 years C) 10 years D) 49 years Answer: C Topic: Rule of 70 Skill: Analytical Status: Revised AACSB: Analytical Skills

19) Using the Rule of 70, if the country of Huttodom's current growth rate of real GDP per person was 10 percent a year, how long would it take the country's real GDP per person to double? A) 0.7 years B) 20 years C) 7 years D) 10 years Answer: C Topic: Rule of 70 Skill: Analytical Status: Revised AACSB: Analytical Skills 20) Slowdonia's current growth rate of real GDP per person is 2 percent a year. How long will it take to double real GDP per person? A) half a year B) approximately 10 years C) 28.6 years D) 35 years Answer: D Topic: Rule of 70 Skill: Analytical Status: Old AACSB: Analytical Skills 21) Slowdonia's current growth rate of real GDP per person is 1 percent a year. Approximately how long will it take to double real GDP per person? A) 10 years B) 35 years C) 70 years D) 100 years Answer: C Topic: Rule of 70 Skill: Analytical Status: Old AACSB: Analytical Skills

22) If real GDP per person is growing at 4 percent per year, approximately how many years will it take to double? A) 17.5 B) 25 C) 4 D) 8 Answer: A Topic: Rule of 70 Skill: Analytical Status: Old AACSB: Analytical Skills 23) Suppose a country is producing $20 million of real GDP. If the economy grows at 10 percent per year, approximately how many years will to take for real GDP to grow to $80 million? A) 14 B) 7 C) 4 D) 30 Answer: A Topic: Rule of 70 Skill: Analytical Status: Old AACSB: Analytical Skills 24) Real GDP per person in the country of Flip is $10,000, and the growth rate is 10 percent a year. Real GDP per person in the country of Flap is $20,000 and the growth rate is 5 percent a year. When will real GDP per person be greater in Flip than in Flap? A) in 2 years B) in 15 years C) never D) in 10 years Answer: B Topic: Rule of 70 Skill: Analytical Status: Old AACSB: Analytical Skills

25) According to the Economic Times (09/2012), Standard & Poor's forecast for India's GDP growth rate was cut by 1 percentage point to 5.5 percent as the entire Asia Pacific region feels the pressure of ongoing economic uncertainty. India has averaged 7 percent growth in GDP since 1997. Which of the following is true? A) India's PPF has been shifting rightward since 1997. B) India's PPF has been shifting leftward since 1997. C) India has been moving from a point within its PPF to points beyond its PPF. D) India's PPF has not shifted since 1997. Answer: A Topic: Growth vs. Cyclical Expansion Skill: Analytical Status: New AACSB: Analytical Skills 26) According to the Economic Times (09/2012), Standard & Poor's forecast for India's GDP growth rate was cut by 1 percentage point to 5.5 percent as the entire Asia Pacific region feels the pressure of ongoing economic uncertainty. India has averaged 7 percent growth in GDP since 1997. Based on this story, it is most likely that the slowdown reflects a A) temporary business cycle slowdown. B) temporary business cycle expansion. C) change to India's long-term economic growth rate. D) shrinkage of India's economy. Answer: A Topic: Growth vs. Cyclical Expansion Skill: Analytical Status: New AACSB: Analytical Skills

2 Long-Term Growth Trends 1) Over the last 100 years, the average U.S. growth rate in real GDP per person was about A) 2 percent per year. B) 6 percent per year. C) 12.5 percent per year. D) 1 percent per year. Answer: A Topic: Long-Term Economic Growth in the United States Skill: Analytical Status: Old AACSB: Analytical Skills 2) Over the past 100 years, real GDP per person in the United States has grown at an average of ________ percent a year. A) 1 B) 2 C) 3 D) 4 Answer: B Topic: Long-Term Economic Growth in the United States Skill: Analytical Status: Old AACSB: Analytical Skills 3) The growth rate of real GDP per person in the United States has A) averaged approximately 2 percent per year over the past century. B) has consistently been 2 percent per decade over the past century. C) has been the highest in the world over the past 5 decades. D) has increased every year over the past century. Answer: A Topic: Long-Term Economic Growth in the United States Skill: Analytical Status: Old AACSB: Analytical Skills 4) Over the past 100 years real GDP per person in the United States, on average, has A) decreased by about 5 percent per year. B) increased by about 2 percent per year. C) increased by about 5 percent per year. D) increased by about 10 percent per year. Answer: B Topic: Long-Term Economic Growth in the United States Skill: Analytical Status: Old AACSB: Analytical Skills 10 Copyright © 2014 Pearson Education, Inc.

5) Over the past 100 years, in the United States the average growth rate of ________ grew at a faster rate than ________. A) real GDP; nominal GDP B) the population; real GDP C) real GDP; the population D) inflation; real GDP Answer: C Topic: Long-Term Economic Growth in the United States Skill: Analytical Status: Old AACSB: Analytical Skills 6) Over the past four decades, A) the growth rate of real GDP per person in the United States has been increasing. B) U.S. real GDP per person has fallen below that of the other rich industrial countries. C) U.S. real GDP per person has increased. D) Both answers A and C are correct. Answer: C Topic: Long-Term Economic Growth in the United States Skill: Analytical Status: Old AACSB: Analytical Skills 7) The historical record for the United States for the past 100 years shows A) growth in real GDP per person during most years. B) economic growth for about half the years and economic decline for the other half. C) growth until 1970 and then a period of constant per person real GDP. D) continuous economic growth, although at different rates, throughout the entire century. Answer: A Topic: Long-Term Economic Growth in the United States Skill: Analytical Status: Old AACSB: Analytical Skills 8) Which of following was a period of below-average economic growth in the United States? A) the 1920s B) the 1960s C) the 1930s D) all of the above Answer: C Topic: Long-Term Economic Growth in the United States Skill: Analytical Status: Old AACSB: Analytical Skills

9) Which of the following statements are correct? I. The average economic growth rate in real GDP per person in the United States over the last century was 5 percent per year. II. The United States has the highest economic growth rate of any nation. A) I only B) II only C) both I and II D) neither I nor II Answer: D Topic: Long-Term Economic Growth in the United States Skill: Analytical Status: Old AACSB: Analytical Skills 10) The historical record for the United States over the last 100 years shows A) mostly positive economic growth, though the Great Depression caused actual GDP to dip well below potential GDP. B) economic growth for about half the years and economic decline for the other half. C) growth until 1970 and then a period of constant per person real GDP. D) continuous economic growth for each year, although at different rates, throughout the entire century. Answer: A Topic: Long-Term Economic Growth in the United States Skill: Analytical Status: Revised AACSB: Analytical Skills 11) Which of the following statements regarding U.S. economic growth is NOT correct? A) Over the past 100 years, on the average real GDP per person grew 2 percent a year. B) The average annual growth rate of real GDP per person in the United States was rapid during World War II. C) In the 1930s, real GDP fell well below its trend. D) The growth rate of real GDP per person accelerated between 1973 to 1984. Answer: D Topic: Long-Term Economic Growth in the United States Skill: Analytical Status: Old AACSB: Analytical Skills

12) In 2010, of the following which nations had the highest level of real GDP per person? A) Japan B) Europe Big 4 C) Canada D) China Answer: C Topic: Real GDP Growth in the World Economy Skill: Analytical Status: Old AACSB: Analytical Skills 13) In 2012, of the following ________ had the highest real GDP per person. A) Japan B) Canada C) the Europe Big 4 countries D) the United States Answer: D Topic: Real GDP Growth in the World Economy Skill: Analytical Status: Revised AACSB: Analytical Skills 14) During the last 50 years, which of the following had the lowest level of real GDP per person? A) Africa B) Central and South America C) United States D) Central Europe Answer: A Topic: Real GDP Growth in the World Economy Skill: Analytical Status: Revised AACSB: Analytical Skills 15) During the 1990s, which of the following experienced the slowest rate of growth in real GDP per person? A) Japan B) The big 4 nations of Europe C) United States D) Canada Answer: A Topic: Real GDP Growth in the World Economy Skill: Analytical Status: Old AACSB: Analytical Skills

16) Countries or regions in which real GDP per person has not grown as fast as in the United States since 1960 include A) Japan. B) countries in Africa. C) Hong Kong. D) Canada. Answer: B Topic: Real GDP Growth in the World Economy Skill: Analytical Status: Old AACSB: Analytical Skills 17) Which of the following statements about world growth during the last half of the 20th century is correct? A) In every decade, Japan has experienced faster growth than the United States. B) Growth rates in South American countries have exceeded those in North America. C) Real GDP per person in Hong Kong and Singapore are approaching or surpassing that in the United States. D) Due to rapid growth, real GDP per person in China is now about 50 percent of that in the United States. Answer: C Topic: Real GDP Growth in the World Economy Skill: Analytical Status: Old AACSB: Analytical Skills 18) Since 1960, which of the following countries had average growth rates in real GDP per person higher than that of the United States? A) Singapore B) Hong Kong C) South Korea D) All of the above answers are correct. Answer: D Topic: Real GDP Growth in the World Economy Skill: Analytical Status: Old AACSB: Analytical Skills

19) Of the following Asian countries, which has the lowest level of real GDP per person? A) China B) Korea C) Singapore D) Hong Kong Answer: A Topic: Real GDP Growth in the World Economy Skill: Analytical Status: Old AACSB: Analytical Skills 20) The gap between real GDP per person in Africa and real GDP per person in the United States has been A) increasing. B) decreasing. C) remaining fairly constant. D) there is no gap in real GDP per person between Africa and the United States. Answer: A Topic: Real GDP Growth in the World Economy Skill: Analytical Status: Old AACSB: Analytical Skills 21) Over the past fifty years, there has been substantial closure of the gap in real GDP per person between which of the following groups of countries? A) the United States and Central and South America B) Africa and Western Europe C) Central and South America and Africa D) the United States and Japan Answer: D Topic: Real GDP Growth in the World Economy Skill: Analytical Status: Old AACSB: Analytical Skills 22) Between which pair of countries or continents listed below has real GDP per person converged the most since 1960? A) Canada and Japan B) United States and Africa C) United States and South America D) Canada and South America Answer: A Topic: Real GDP Growth in the World Economy Skill: Analytical Status: Old AACSB: Analytical Skills 15 Copyright © 2014 Pearson Education, Inc.

23) If a rich country grows at a faster rate than a poor one, then A) the gap in their standard of living will widen over time. B) the gap in their standard of living will close over time. C) the difference in their living standards will not change over time. D) whether or not the living standards gap widens or closes over time depends on the absolute size of the relative growth rates. Answer: A Topic: Real GDP Growth in the World Economy Skill: Analytical Status: Old AACSB: Analytical Skills 24) Convergence of the income gap has been most dramatic between A) Hong Kong and the United States. B) the Central European countries and the United States. C) Africa and the United States. D) South America and the United States. Answer: A Topic: Real GDP Growth in the World Economy Skill: Analytical Status: Old AACSB: Analytical Skills 25) The gaps between the United States and the Asian countries of Honk Kong, Singapore, Korea and China have been A) decreasing B) increasing C) remaining fairly constant D) there are no gaps between these Asian countries and the United States Answer: A Topic: Real GDP Growth in the World Economy Skill: Analytical Status: Old AACSB: Analytical Skills 26) By measuring ________ we can see that the economies of Hong Kong and Singapore are catching up to the economies of North America but that the economies of Central and South America are not. A) inflation per person B) real GDP per person C) the population D) real GDP Answer: B Topic: Real GDP Growth in the World Economy Skill: Analytical Status: Old AACSB: Analytical Skills 16 Copyright © 2014 Pearson Education, Inc.

3 How Potential GDP Grows 1) Moving along the aggregate production function shows the relationship between ________, holding all else constant. A) capital input and real GDP B) labor input and real GDP C) labor input, capital input and real GDP D) technology and real GDP Answer: B Topic: Aggregate Production Function Skill: Conceptual Status: Old AACSB: Analytical Skills 2) The aggregate production function shows how ________ varies with ________. A) leisure time; labor B) labor; leisure time C) real GDP; labor D) labor; capital Answer: C Topic: Aggregate Production Function Skill: Conceptual Status: Old AACSB: Analytical Skills 3) An aggregate production function shows the relationship between A) real GDP and leisure. B) real GDP and the quantity of labor employed. C) leisure and unemployment. D) real GDP and unemployment. Answer: B Topic: Aggregate Production Function Skill: Conceptual Status: Old AACSB: Analytical Skills 4) The aggregate production function describes the relationship between A) real GDP and the quantity of labor employed. B) real GDP and the price level. C) the rate of growth of real GDP and inflation. D) real GDP and the unemployment rate. Answer: A Topic: Aggregate Production Function Skill: Conceptual Status: Old AACSB: Analytical Skills 17 Copyright © 2014 Pearson Education, Inc.

5) A movement along the aggregate production function is the result of a change in A) the quantity of labor B) technology C) capital D) interest rates Answer: A Topic: Aggregate Production Function Skill: Conceptual Status: Old AACSB: Analytical Skills 6) Along the aggregate production function, as the quantity of labor rises, real GDP A) rises B) falls C) stays the same D) may fall, rise, or stay the same Answer: A Topic: Aggregate Production Function Skill: Conceptual Status: Old AACSB: Analytical Skills 7) The aggregate production function shows that an economy increases its real GDP in the short run by A) developing new technologies. B) increasing its physical capital stock. C) using more labor. D) exploring for new deposits of natural resources. Answer: C Topic: Aggregate Production Function Skill: Conceptual Status: Old AACSB: Analytical Skills 8) Moving along the aggregate production function, all of the following are held constant EXCEPT A) labor B) capital C) human capital D) technology Answer: A Topic: Aggregate Production Function Skill: Conceptual Status: Old AACSB: Analytical Skills

9) An increase in labor hours will lead to A) a shift of the aggregate production function but no movement along it. B) a movement along the aggregate production function but no shift in it. C) both a movement along and a shift in the aggregate production function. D) neither a movement along nor a shift in the aggregate production function. Answer: B Topic: Aggregate Production Function Skill: Conceptual Status: Old AACSB: Analytical Skills 10) The aggregate production function is graphed as A) a downward sloping curve. B) an upward sloping straight line. C) an upward sloping line that becomes flatter as the quantity of labor increases. D) an upward sloping line that becomes steeper as the quantity of labor increases. Answer: C Topic: Aggregate Production Function Skill: Graphing Status: Old AACSB: Analytical Skills 11) The aggregate production function A) measures the productivity of labor as leisure decreases. B) increases only with increases in productivity. C) shows that real GDP can increase because of increased productivity as well as increased labor hours. D) cannot show the impacts of productivity improvements. Answer: C Topic: Aggregate Production Function Skill: Conceptual Status: Old AACSB: Analytical Skills 12) The aggregate production function relating real GDP to labor hours A) has a constant slope. B) has a negative slope. C) has a positive slope and becomes steeper as employment increases. D) has a positive slope and becomes less steep as employment increases. Answer: D Topic: Aggregate Production Function, Diminishing Returns Skill: Graphing Status: Old AACSB: Analytical Skills

13) The curvature of the production function shows that as employment increases, the productivity of labor A) remains positive and increases. B) remains positive but decreases. C) decreases and becomes negative. D) remains constant. Answer: B Topic: Aggregate Production Function, Diminishing Returns Skill: Graphing Status: Old AACSB: Analytical Skills 14) The decreasing slope of a production function reflects A) diminishing returns. B) rising unemployment. C) decreasing costs. D) increasing aggregate demand. Answer: A Topic: Aggregate Production Function, Diminishing Returns Skill: Conceptual Status: Old AACSB: Analytical Skills 15) As labor increases, there is a A) shift of the aggregate production function, but no movement along it. B) movement along the aggregate production function, but no shift in it. C) movement along the aggregate production function and real GDP will increase less with each additional increase in labor. D) movement along the aggregate production function and real GDP will decrease less with each additional increase in labor. Answer: C Topic: Aggregate Production Function Skill: Conceptual Status: Old AACSB: Analytical Skills 16) According to the law of diminishing returns, an additional unit of A) capital produces more output than an additional unit of labor. B) labor decreases output. C) labor produces more output than the previous unit. D) labor produces less output than the previous unit. Answer: D Topic: Law of Diminishing Returns Skill: Conceptual Status: Old AACSB: Analytical Skills 20 Copyright © 2014 Pearson Education, Inc.

17) In the illustration above, which figure shows an aggregate production function? A) Figure A B) Figure B C) Figure C D) Figure D Answer: A Topic: Aggregate Production Function Skill: Graphing Status: Old AACSB: Analytical Skills

18) The country of Kemper is on its aggregate production function at point W in the above figure. The government of Kemper passes a law that makes 4 years of college mandatory for all citizens. After all citizens have their education, the economy will A) move to point such as Y. B) remain at point W. C) move to point such as X. D) move to point such as Z. Answer: D Topic: Aggregate Production Function Skill: Conceptual Status: Old AACSB: Analytical Skills 19) The country of Kemper is on its aggregate production function at point W in the above figure. If the population increases with no change in capital or technology, the economy will A) move to point such as Y. B) remain at point W. C) move to point such as X. D) move to point such as Z. Answer: C Topic: Aggregate Production Function Skill: Conceptual Status: Old AACSB: Analytical Skills

20) The real wage rate measures the A) quantity of goods and services that an hour of work will buy. B) average weekly earnings in dollars of a worker. C) dollar value of an hour of work. D) dollar value of what a worker could earn in another job. Answer: A Topic: Real Wage Rate Skill: Conceptual Status: Old AACSB: Analytical Skills 21) Which of the following is TRUE regarding the real wage rate? The real wage rate I. is always greater than the money wage. II. measures the quantity of goods and services an hour's work can buy. A) only I B) only II C) both I and II D) neither I nor II Answer: B Topic: Real Wage Rate Skill: Conceptual Status: Old AACSB: Analytical Skills 22) The real wage rate equals A) (money wage rate)/(price level). B) (price level)/(money wage rate). C) (money wage rate) × (price level). D) (money wage) + (number of hours worked)/(price level). Answer: A Topic: Real Wage Rate Skill: Conceptual Status: Old AACSB: Analytical Skills 23) The relationship between the labor employed by a firm and the real wage rate is shown by the A) supply of labor curve. B) supply of jobs curve. C) demand for jobs curve. D) demand for labor curve. Answer: D Topic: Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills 23 Copyright © 2014 Pearson Education, Inc.

24) The quantity of labor demanded depends on the A) money wage rate not the real wage rate. B) real wage rate not the money wage rate. C) price of output not the money wage rate nor the real wage rate. D) money wage rate AND the real wage rate. Answer: B Topic: Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills 25) Because the productivity of labor decreases as the quantity of labor employed increases, A) the quantity of labor a firm demands increases as the real wage rate decreases. B) the quantity of labor a firm demands increases as the money wage rate decreases. C) the labor demand curve shifts right as the real wage rate decreases. D) the aggregate production function shifts upward as the real wage rate decreases. Answer: A Topic: Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills 26) Which of the following is TRUE regarding the labor market? I. The labor supply curve slopes upward because firms maximize profits as they hire more workers. II. If the real wage rate falls, the quantity of labor firms demand increases. III. The demand for labor curve slopes downward because as the real wage rate falls, workers demand to work fewer hours. A) I and II B) I and III C) II only D) I, II and III Answer: C Topic: Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills

27) Which of the following statements are TRUE regarding the demand for labor? I. The quantity of labor demanded depends on the real wage rate. II. If the money wage rate increases and the price level remains the same, the quantity of labor demanded decreases. A) I only B) II only C) I and II D) neither I nor II Answer: C Topic: Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills 28) If the price level falls by 5 percent and workers' money wage rates remain constant, firms' A) quantity of labor demanded will decrease. B) quantity of labor demanded will increase. C) supply of jobs will increase. D) None of the above answers are correct. Answer: A Topic: Demand for Labor Skill: Analytical Status: Old AACSB: Analytical Skills 29) If the price level rises by 5 percent and workers' money wage rates remain constant, firms' A) quantity of labor demanded will decrease. B) quantity of labor demanded will increase. C) supply of jobs will decrease. D) None of the above answers are correct. Answer: B Topic: Demand for Labor Skill: Analytical Status: Old AACSB: Analytical Skills 30) Suppose there is a rise in the price level, but no change in the money wage rate. As a result, the quantity of labor demanded A) increases. B) decreases. C) does not change because there is no change in the real wage rate. D) decreases only if the money wage rate also decreases. Answer: A Topic: Demand for Labor Skill: Analytical Status: Old AACSB: Analytical Skills 25 Copyright © 2014 Pearson Education, Inc.

31) Suppose there is a rise in the real wage rate. As a result, the quantity of labor demanded A) increases. B) decreases. C) does not change because there is no change in the money wage rate. D) increases only if the price level also decreases. Answer: B Topic: Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills 32) Suppose the money wage rate and the price level both fall by 5 percent. As a result, A) the quantity of labor demanded increases. B) the quantity of labor demanded decreases. C) the quantity of labor demanded does not change because there is no change in the real wage. D) people are worse off and there is more unemployment. Answer: C Topic: Demand for Labor Skill: Analytical Status: Old AACSB: Analytical Skills 33) If the price level rises by 3 percent and workers' money wage rates increase by 2 percent, then the A) quantity of labor demanded will decrease. B) quantity of labor demanded will increase. C) quantity of labor demanded does not change because there is no change in the real wage rate. D) real wage rate increases. Answer: B Topic: Demand for Labor Skill: Analytical Status: Old AACSB: Analytical Skills 34) If the price level rises by 3 percent and workers' money wages increase by 3 percent, then the A) quantity of labor demand will decrease. B) quantity of labor demand will increase. C) quantity of labor demanded does not change because there is no change in the real wage rate. D) Any of the above could occur depending on the magnitude on the dollar increase in the price level versus the dollar increase in the wage rate. Answer: C Topic: Demand for Labor Skill: Analytical Status: Old AACSB: Analytical Skills 26 Copyright © 2014 Pearson Education, Inc.

35) The demand for labor curve is A) upward sloping at potential GDP and downward sloping elsewhere. B) vertical at potential GDP. C) downward sloping. D) upward sloping because firms demand labor. Answer: C Topic: Demand for Labor Curve Skill: Conceptual Status: Old AACSB: Analytical Skills 36) The labor demand curve slopes downward because A) the firm maximizes profits by hiring more labor when the real wage rate rises. B) workers supply more hours of work when the real wage rate rises. C) the firm maximizes profits by hiring more labor when the real wage rate falls. D) workers supply fewer hours of work when the real wage rate rises. Answer: C Topic: Demand for Labor Curve Skill: Conceptual Status: Old AACSB: Analytical Skills 37) If the price level increases, but workers' money wage rates remain constant, which of the following is TRUE? I. The quantity of labor demanded will increase. II. The real wage rate will decrease. III. The demand for labor curve shifts rightward. A) I only B) I and II C) II and III D) I, II and III Answer: B Topic: Demand for Labor Curve Skill: Conceptual Status: Old AACSB: Analytical Skills 38) The quantity of labor supplied depends on the A) money wage rate not the real wage rate. B) real wage rate not the money wage rate. C) price of output not the money wage rate nor the real wage rate. D) level of profits. Answer: B Topic: Supply of Labor Skill: Conceptual Status: Old AACSB: Analytical Skills 27 Copyright © 2014 Pearson Education, Inc.

39) People base their labor supply on the ________ because they care about ________. A) real wage; what their earnings will buy B) real wage; the equality of money wages and the price level C) money wage; a surplus of labor D) money wage; the amount of labor firms demand Answer: A Topic: Supply of Labor Skill: Conceptual Status: Old AACSB: Analytical Skills 40) If workers' money wage rates increase by 5 percent and the price level remains constant, workers' A) quantity of labor supplied will decrease. B) quantity of labor supplied will increase. C) quantity of labor supplied will not change. D) demand for jobs will decrease. Answer: B Topic: Supply of Labor Skill: Analytical Status: Old AACSB: Analytical Skills 41) If the price level rises by 4 percent and workers' money wage rates increase by 2 percent, then the A) quantity of labor supplied decreases. B) quantity of labor supplied increases. C) quantity of labor supplied does not change because there is no change in the real wage rate. D) the supply curve of labor shifts rightward. Answer: A Topic: Supply of Labor Skill: Analytical Status: Old AACSB: Analytical Skills 42) If the price level rises by 2 percent and workers' money wages increase by 2 percent, then the A) quantity of labor supply decreases. B) quantity of labor supply increases. C) quantity of labor supplied does not change because there is no change in the real wage rate. D) More information about the dollar change in the price level and money wage rate are needed to answer the question. Answer: C Topic: Supply of Labor Skill: Analytical Status: Old AACSB: Analytical Skills 28 Copyright © 2014 Pearson Education, Inc.

43) If the price level rises by 3 percent and workers' money wage rate increase by 1 percent, then the A) quantity of labor supplied decreases. B) quantity of labor supplied increases. C) quantity of labor supplied does not change because there is no change in the real wage rate. D) real wage rate increases. Answer: A Topic: Supply of Labor Skill: Analytical Status: Old AACSB: Analytical Skills 44) The labor force participation rate A) does not change when the real wage rate changes. B) decreases as the real wage rate rises. C) increases as the real wage rate increases. D) has an inverse effect of the supply of labor. Answer: C Topic: Supply of Labor Skill: Conceptual Status: Old AACSB: Analytical Skills 45) The supply of labor curve A) has a negative slope. B) is independent of the wage rate. C) shows how much labor workers are willing to supply at various real wage rates. D) is usually vertical. Answer: C Topic: Supply of Labor Curve Skill: Conceptual Status: Old AACSB: Analytical Skills 46) The supply of labor curve is A) vertical at potential GDP. B) upward sloping. C) downward sloping. D) horizontal at the equilibrium wage rate. Answer: B Topic: Supply of Labor Curve Skill: Graphing Status: Old AACSB: Analytical Skills

47) Which of the following statements is correct? A) When the real wage increases, the labor supply curve shifts rightward. B) When the real wage increases, the labor supply curve shifts leftward. C) When the real wage decreases, the labor supply curve shifts leftward. D) None of the above statements are correct. Answer: D Topic: Supply of Labor Curve Skill: Conceptual Status: Old AACSB: Analytical Skills 48) As the real wage rate increases, the A) quantity of labor supplied increases. B) supply of labor curve shifts rightward. C) supply of labor curve shifts leftward. D) quantity of labor supplied increases and the supply of labor shifts rightward. Answer: A Topic: Supply of Labor Curve Skill: Conceptual Status: Old AACSB: Analytical Skills 49) If the price level increases and workers' money wage rates remain constant, which of the following will occur? I. The quantity of labor supplied will decrease. II. The real wage rate will decrease. III. The labor supply curve will shift rightward. A) I only B) I and II C) II and III D) I, II and III Answer: B Topic: Supply of Labor Curve Skill: Analytical Status: Old AACSB: Analytical Skills 50) Greater labor force participation for households at higher real wage rate is one reason that A) the demand for labor curve is upward sloping. B) the demand for labor curve is downward sloping. C) the supply of labor curve is upward sloping. D) the supply of labor curve is downward sloping. Answer: C Topic: Supply of Labor Curve Skill: Conceptual Status: Old AACSB: Analytical Skills 30 Copyright © 2014 Pearson Education, Inc.

51) If the money wage rate rises relative to the price level, firms ________ the quantity of labor they demand and workers ________ the quantity of labor they supply. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: C Topic: Demand for Labor and Supply of Labor Skill: Analytical Status: Old AACSB: Analytical Skills 52) If the price level rises relative to the money wage rate, firms ________ the quantity of labor they demand and workers ________ the quantity of labor they supply. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Topic: Demand for Labor and Supply of Labor Skill: Analytical Status: Old AACSB: Analytical Skills 53) If the real wage rate is such that the quantity of labor supplied equals the quantity of labor demanded, A) a full-employment equilibrium occurs. B) actual GDP equals potential GDP. C) the supply curve of labor is vertical. D) Both answers A and B are correct. Answer: D Topic: Labor Market Equilibrium Skill: Conceptual Status: Revised AACSB: Analytical Skills

54) If at the prevailing real wage rate, the quantity of labor supplied exceeds the quantity demanded, A) there is a shortage of labor. B) the real wage rate will rise to restore equilibrium. C) the real wage rate is greater than the equilibrium real wage rate. D) None of the above answers is correct. Answer: C Topic: Labor Market Equilibrium Skill: Conceptual Status: Old AACSB: Analytical Skills 55) If the real wage rate is such that the quantity of labor supplied is greater than the quantity of labor demanded, A) the economy is at full employment. B) actual real GDP will not equal potential GDP. C) job search decreases. D) labor resources are allocated efficiently. Answer: B Topic: Labor Market Equilibrium Skill: Conceptual Status: Revised AACSB: Analytical Skills 56) If the real wage rate is such that the quantity of labor supplied by workers is less than the quantity of labor demanded by firms, A) the economy is at full employment. B) there is a shortage of labor. C) the real wage rate will fall to restore equilibrium. D) actual real GDP equals potential GDP because firms make the decision about how many workers to hire. Answer: B Topic: Labor Market Equilibrium Skill: Conceptual Status: Revised AACSB: Analytical Skills 57) At the full-employment equilibrium in the labor market, A) there is no unemployment. B) there are no job vacancies. C) there is neither a shortage nor a surplus of labor. D) the money wage rate equals the real wage rate. Answer: C Topic: Labor Market Equilibrium Skill: Conceptual Status: Old AACSB: Analytical Skills 32 Copyright © 2014 Pearson Education, Inc.

58) Equilibrium in the labor market A) cannot occur if the production function is shifting upward. B) can happen only when actual GDP exceeds potential GDP. C) means that resources are allocated inefficiently D) occurs when actual GDP is equal to potential GDP Answer: D Topic: Labor Market Equilibrium Skill: Conceptual Status: Revised AACSB: Analytical Skills 59) When the quantity of labor demanded exceeds the quantity of labor supplied, the real wage rate A) rises to eliminate the labor-market shortage. B) falls to eliminate the labor-market surplus. C) rises to eliminate the labor-market surplus. D) falls to eliminate the labor-market shortage. Answer: A Topic: Labor Market Equilibrium Skill: Conceptual Status: Old AACSB: Analytical Skills 60) If the labor market is in equilibrium and then the labor supply curve shifts rightward, A) there will be a shortage of labor at the original equilibrium wage rate. B) there will be a surplus of labor at the original equilibrium wage rate. C) the equilibrium wage rate will rise. D) there will be a surplus of jobs at the new equilibrium. Answer: B Topic: Labor Market Equilibrium Skill: Conceptual Status: Old AACSB: Analytical Skills 61) In the labor market, an increase in labor productivity ________ the real wage rate and ________ the level of employment. A) raises; increases B) raises; decreases C) lowers; increases D) lowers; decreases Answer: A Topic: Labor Market Equilibrium Skill: Conceptual Status: Old AACSB: Analytical Skills 33 Copyright © 2014 Pearson Education, Inc.

Quantity of labor Real wage rate Quantity of labor demanded (2005 dollars supplied (billions (billions of hours per hour) of hours per year) per year) 15 70 10 20 60 20 25 50 30 30 40 40 35 30 50 62) The table above shows the labor market for the country of Pickett. When the labor market is in equilibrium, the real wage rate is ________ and ________ of labor a year are employed. A) any value less than $25 an hour; any value greater than 40 billion hours B) any value greater than $30 an hour; any value more than 40 billion hours C) any value greater than or equal to $25 an hour; any value less than 40 billion hours D) $30 an hour; 40 billion hours Answer: D Topic: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

63) In the above figure, at the real wage rate of $50 A) there is a surplus of 100 billion hours per year. B) there is a shortage of 100 billion hours per year. C) there is a surplus of 60 billion hours per year. D) there is shortage of 20 billion hours per year. Answer: C Topic: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 64) In the above figure, what is the full-employment real wage rate and quantity of hours per year? A) $40 and 60 billion hours per year B) $50 and 100 billion hours per year C) $35 and 100 billion hours per year D) $50 and 40 billion hours per year Answer: A Topic: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

65) In the above figure, at a wage rate of $20 per hour, A) there is a shortage of labor. B) there is a surplus of labor. C) the labor supply curve will shift rightward. D) the labor demand curve will shift rightward. Answer: B Topic: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 66) In the figure, when the real wage rate is $10 an hour, ________. A) a shortage of labor exists and the real wage rate will rise B) the demand for labor will increase C) the demand for labor will decrease D) a surplus of labor exists and the real wage rate will fall Answer: A Topic: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

67) In the above figure, the equilibrium real wage rate is A) $10 per hour. B) $15 per hour. C) $20 per hour. D) none of the above Answer: B Topic: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 68) In the above figure, the equilibrium level of labor is A) 100 billion hours. B) 150 billion hours. C) 200 billion hours. D) none of the above Answer: B Topic: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 69) In the above figure, if the real wage is $20 per hour, a labor A) shortage will occur and the real wage will rise. B) shortage will occur and the real wage will fall. C) surplus will occur and the real wage will rise. D) surplus will occur and the real wage will fall. Answer: D Topic: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 70) In the above figure, if the real wage is $10 per hour, a labor A) shortage will occur and the real wage will rise. B) shortage will occur and the real wage will fall. C) surplus will occur and the real wage will rise. D) surplus will occur and the real wage will fall. Answer: A Topic: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

71) Full employment corresponds to A) equilibrium in the labor market, with actual GDP being equal to potential GDP. B) labor demand being greater than labor supply and actual GDP being equal to potential GDP. C) being at the point where the marginal product of labor equals zero. D) equilibrium in the labor market, and actual GDP exceeding potential GDP. Answer: A Topic: The Labor Market and Full Employment Skill: Conceptual Status: Revised AACSB: Analytical Skills Quantity of labor Real wage rate Quantity of labor demanded (2005 dollars supplied (billions (billions of hours per hour) of hours per year) per year) 15 70 10 20 60 20 25 50 30 30 40 40 35 30 50 Real GDP Quantity of labor (trillions of 2005 (billions of hours dollars per year) per year) 3 20 9 30 14 40 18 50 21 60 72) The tables above show the labor market and the production function schedule for the country of Pickett. Potential GDP is ________. A) $40 trillion B) $9 trillion C) $14 trillion D) $25 trillion Answer: C Topic: Labor Market and Full Employment Skill: Analytical Status: Revised AACSB: Analytical Skills

73) The tables above show the labor market and the production function schedule for the country of Pickett. An increase in population changes the labor supply by 20 billion hours at each real wage rate. Potential GDP ________. A) does not change B) decreases to $3 trillion C) increases to $50 trillion D) increases to $18 trillion Answer: D Topic: Labor Market and Full Employment Skill: Analytical Status: Old AACSB: Analytical Skills 74) Real GDP grows when I. the quantities of the factors of production grow II. persistent advances in technology make factors of production increasingly productive III. human capital grows A) Only I. B) Both I and III. C) Only II. D) I, II, and III. Answer: D Topic: Economic Growth Rate Skill: Conceptual Status: Old AACSB: Analytical Skills 75) If the labor and capital grow more quickly, then real GDP will A) not grow fast enough. B) grow more quickly. C) grow more slowly. D) stay fixed at potential GDP. Answer: B Topic: Economic Growth Rate Skill: Conceptual Status: Old AACSB: Analytical Skills

76) The real wage rate will fall if the A) labor supply curve shifts rightward and the labor demand curve does not shift. B) labor supply curve shifts leftward and the labor demand curve does not shift. C) labor demand curve shifts rightward and the labor supply curve does not shift. D) labor demand curve shifts rightward more than the labor supply curve shifts rightward. Answer: A Topic: Labor Market Equilibrium with an Increase in Population Skill: Conceptual Status: Old AACSB: Analytical Skills 77) The U.S. employment-to-population ratio peaked in 2000 and in 2012 fell to 58 percent, a level not seen since the early 1980s. This fall in the employment-to-population ratio shifts the ________ curve ________. A) labor supply; leftward B) labor supply; rightward C) labor demand; leftward D) labor demand; rightward Answer: B Topic: Labor Market Equilibrium Skill: Conceptual Status: New AACSB: Analytical Skills 78) The U.S. employment-to-population ratio peaked in 2000 and in 2012 fell to 58 percent, a level not seen since the early 1980s. This fall in the employment-to-population ratio ________ the equilibrium quantity of labor and ________ potential GDP. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: D Topic: Labor Market Equilibrium Skill: Conceptual Status: New AACSB: Analytical Skills 79) An increase in a nation's population results in A) an upward shift in the production function. B) a movement along the production function. C) a leftward shift in the labor supply curve. D) Both answers A and C are correct. Answer: B Topic: Labor Market Equilibrium with an Increase in Population Skill: Conceptual Status: Old AACSB: Analytical Skills 40 Copyright © 2014 Pearson Education, Inc.

80) An increase in a nation's population results in A) a rightward shift in the labor demand curve. B) a movement along the nation's production function. C) a decrease in the full-employment quantity of labor. D) an upward shift of the nation's production function. Answer: B Topic: Labor Market Equilibrium with an Increase in Population Skill: Conceptual Status: Old AACSB: Analytical Skills 81) An increase in the population and hence the supply of labor causes a A) shortage of labor at the original real wage rate and the real wage rate will fall. B) surplus of labor at the original real wage rate and the real wage rate will rise. C) surplus of labor at the original real wage rate and the real wage rate will fall. D) shortage of labor at the original real wage rate and the real wage rate will rise. Answer: C Topic: Labor Market Equilibrium with an Increase in Population Skill: Conceptual Status: Old AACSB: Analytical Skills 82) Employment and (total) potential GDP increase if the A) labor supply curve shifts rightward and the labor demand curve does not shift. B) labor demand curve shifts leftward more than the labor supply curve shifts rightward. C) labor demand curve shifts leftward and the labor supply curve does not shift. D) None of the above answers are correct. Answer: A Topic: Labor Market Equilibrium with an Increase in Population Skill: Conceptual Status: Old AACSB: Analytical Skills 83) When the population increases with no change in labor productivity, employment ________ and potential GDP ________. A) decreases; decreases B) increases; increases C) decreases; increases D) increases; decreases Answer: B Topic: Labor Market Equilibrium with an Increase in Population Skill: Conceptual Status: Old AACSB: Analytical Skills

84) If the population increases, then potential GDP ________ and employment ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: A Topic: Labor Market Equilibrium with an Increase in Population Skill: Conceptual Status: Old AACSB: Analytical Skills 85) An increase in the working-age population results in a A) rightward shift of demand for labor curve and an increase in potential GDP. B) rightward shift of the demand for labor curve and no change in potential GDP. C) rightward shift of the supply of labor curve and an increase in potential GDP. D) leftward shift of the supply of labor curve and a decrease in potential GDP. Answer: C Topic: Labor Market Equilibrium with an Increase in Population Skill: Conceptual Status: Old AACSB: Analytical Skills 86) Potential GDP per labor hour can increase due to A) increases in labor productivity. B) increases in the quantity of money. C) increases in population. D) decreases in the quantity of capital. Answer: A Topic: Economic Growth Rate Skill: Conceptual Status: Old AACSB: Analytical Skills 87) Labor growth depends mainly on ________ and labor productivity growth depends mainly on ________. A) population growth; increases in real GDP B) population growth; technological advances C) growth in real GDP per person; growth rate of capital D) growth in real GDP per person; technological advances Answer: B Topic: Labor Productivity Skill: Conceptual Status: Revised AACSB: Analytical Skills

88) Labor productivity is A) real GDP per hour of labor times the hours of work. B) real GDP per hour of labor times the number of people. C) real GDP per hour of labor. D) the rate of change in real GDP per hour of labor. Answer: C Topic: Labor Productivity Skill: Definition Status: Old AACSB: Analytical Skills 89) Dividing the value of real GDP by aggregate labor hours gives A) the net domestic product. B) labor productivity. C) the size of the labor force. D) the rate of capital accumulation. Answer: B Topic: Labor Productivity Skill: Definition Status: Old AACSB: Analytical Skills 90) Labor productivity is defined as A) total output attributable to labor. B) total real GDP. C) the growth rate of the labor force. D) real GDP per hour of labor. Answer: D Topic: Labor Productivity Skill: Definition Status: Old AACSB: Analytical Skills 91) Labor productivity equals A) real GDP divided by the capital stock. B) real GDP divided by the working-age population. C) total wages divided by real GDP. D) real GDP divided by aggregate labor hours. Answer: D Topic: Labor Productivity Skill: Definition Status: Old AACSB: Analytical Skills

92) If real GDP is $800 million and aggregate labor hours are 20 million, labor productivity is ________. A) $40 per hour B) $16,000 million C) $40 million D) $160 per hour Answer: A Topic: Labor Productivity Skill: Analytical Status: Old AACSB: Analytical Skills 93) If real GDP is $13,000 billion and aggregate hours are 270 billion, labor productivity equals A) $6.50 per hour. B) $45 per hour. C) $48 per hour. D) $650 per hour. Answer: C Topic: Labor Productivity Skill: Analytical Status: Old AACSB: Analytical Skills 94) If real GDP is $13,500 billion and aggregate hours are 110 billion, labor productivity equals A) $6.75 per hour. B) $104 per hour. C) $123 per hour. D) $675 per hour. Answer: C Topic: Labor Productivity Skill: Analytical Status: Old AACSB: Analytical Skills 95) If real GDP is $11,750 billion and aggregate hours are 175 billion, labor productivity equals A) $23.50 per hour. B) $52 per hour. C) $67 per hour. D) $235 per hour. Answer: C Topic: Labor Productivity Skill: Analytical Status: Old AACSB: Analytical Skills

96) An increase in labor productivity relates to A) working harder over time. B) working longer over time. C) producing the same output with fewer labor hours. D) producing the same output with more labor hours. Answer: C Topic: Labor Productivity Skill: Conceptual Status: Revised AACSB: Analytical Skills 97) When labor productivity increases, the demand for labor curve ________ and the supply of labor curve ________. A) shifts rightward; shifts rightward B) shifts rightward; does not shift C) shifts leftward; shifts rightward D) shift s leftward; does not shift Answer: B Topic: Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills 98) If the nation's capital stock increases so that workers become more productive, the A) demand for labor will increase B) supply of labor will increase C) demand for labor will decrease D) supply of labor will decrease Answer: A Topic: Demand for Labor Curve Skill: Conceptual Status: Old AACSB: Analytical Skills 99) Which of the following statements is correct? A) When workers become more productive, the demand for labor curve shifts rightward. B) When technology decreases, the supply of labor curve shifts leftward. C) When labor force participation increases, the supply of labor curve shifts leftward. D) When human capital increases, the demand for labor curve shifts leftward. Answer: A Topic: Demand for Labor Curve Skill: Conceptual Status: Old AACSB: Analytical Skills

100) If both the supply of labor and the demand for labor increase, then A) potential GDP decreases. B) potential GDP increases. C) full employment decreases. D) the impact on potential GDP is uncertain Answer: B Topic: Shifts in Labor Demand and Labor Supply Skill: Conceptual Status: Revised AACSB: Analytical Skills 101) An increase in labor productivity ________ the real wage rate and an increase in population ________ the real wage rate. A) raises; lowers B) raises; raises C) lowers; lowers D) lowers; raises Answer: A Topic: Shifts in Labor Demand and Labor Supply Skill: Conceptual Status: Old AACSB: Analytical Skills 102) If the demand for labor increases I. employment increases. II. the real wage rate increases. A) Only I is correct. B) Only II is correct. C) Both I and II are correct. D) Neither I nor II is correct. Answer: C Topic: Labor Market Equilibrium with an Increase in Productivity Skill: Conceptual Status: Old AACSB: Analytical Skills 103) An advance in technology that results in increased productivity results in a A) rightward shift of the labor supply curve. B) rightward shift of the labor demand curve. C) rightward shift of both the labor supply and labor demand curves. D) no change to the production function. Answer: B Topic: Labor Market Equilibrium with an Increase in Productivity Skill: Conceptual Status: Revised AACSB: Analytical Skills 46 Copyright © 2014 Pearson Education, Inc.

104) An advance in technology that increases productivity and an increase in the working-age population results in a A) rightward shift of the labor supply curve. B) rightward shift of the labor demand curve. C) rightward shift of the labor demand curve and of the labor supply curve. D) no change to the production function. Answer: C Topic: Labor Market Equilibrium with an Increase in Productivity Skill: Conceptual Status: Revised AACSB: Analytical Skills 105) An advance in technology increases the productivity of labor. As a result, the nation's production function shifts ________ and the ________ labor curve shifts rightward. A) upward; demand for B) downward; demand for C) upward; supply of D) downward; supply of Answer: A Topic: Labor Market Equilibrium with an Increase in Productivity Skill: Conceptual Status: Old AACSB: Analytical Skills 106) An increase in physical capital or a technological advance A) raises the real wage rate. B) decreases the quantity of labor employed. C) shifts the production function downward. D) decreases demand for labor. Answer: A Topic: Labor Market Equilibrium with an Increase in Productivity Skill: Conceptual Status: Old AACSB: Analytical Skills 107) An advance in technology will A) not shift the production function but will lead to a movement down along the production function. B) shift the production function downward. C) not shift the production function but will lead to a movement up along the production function. D) shift the production function upward. Answer: D Topic: Labor Market Equilibrium with an Increase in Productivity Skill: Conceptual Status: Old AACSB: Analytical Skills 47 Copyright © 2014 Pearson Education, Inc.

108) An advance in technology shifts the production function upward and shifts the labor A) demand curve leftward. B) supply curve leftward. C) demand curve rightward. D) supply curve rightward. Answer: C Topic: Labor Market Equilibrium with an Increase in Productivity Skill: Conceptual Status: Old AACSB: Analytical Skills 109) An increase in labor productivity shifts the labor ________ curve ________. A) demand; rightward B) demand; leftward C) supply; rightward D) supply; leftward Answer: A Topic: Labor Market Equilibrium with an Increase in Productivity Skill: Conceptual Status: Old AACSB: Analytical Skills 110) If new capital increases labor productivity, the supply of labor ________ and the demand for labor ________. A) stays the same; increases B) increases; increases C) increases; decreases D) decreases; stays the same Answer: A Topic: Labor Market Equilibrium with an Increase in Productivity Skill: Conceptual Status: Old AACSB: Analytical Skills

111) As a result of the rightward shift in the demand curve for labor from LD0 to LD1, the equilibrium level of employment ________ and potential GDP ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: A Topic: Labor Market Equilibrium with an Increase in Productivity Skill: Graphing Status: Old AACSB: Analytical Skills

112) The figure above shows the U.S. production function. From 1986 to 2008 the United States experienced major advances in technology as well as an increase in the working-age population. The combined effect can best be shown by a A) movement from point W to point X. B) movement from point Y to point Z. C) movement from point Y to point X. D) movement from point W to point Z. Answer: D Topic: Labor Market Equilibrium with an Increase in Productivity Skill: Analytical Status: Old AACSB: Analytical Skills 113) A decrease in the real wage rate A) shifts the labor demand curve rightward. B) shifts the labor demand curve leftward. C) shifts the labor supply curve leftward. D) none of the above because a change in the real wage rate does not shift either the labor demand or labor supply curve. Answer: D Topic: Study Guide Question, Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills

114) The demand for labor curve A) is downward sloping because productivity of labor diminishes as more workers are employed. B) is upward sloping and the supply curve of labor is downward sloping. C) is upward sloping because productivity of labor diminishes as more workers are employed. D) shifts rightward when the real wage rate rises. Answer: A Topic: Study Guide Question, Demand for Labor Skill: Conceptual Status: Old AACSB: Analytical Skills 115) An increase in labor productivity shifts the A) labor demand curve rightward. B) labor demand curve leftward. C) labor supply curve rightward. D) labor supply curve leftward Answer: A Topic: Study Guide Question, Increase in Productivity Skill: Conceptual Status: Revised AACSB: Analytical Skills 116) A decrease in population shifts the A) labor demand curve rightward. B) labor demand curve leftward. C) labor supply curve rightward. D) labor supply curve leftward Answer: D Topic: Study Guide Question, Population Skill: Conceptual Status: Old AACSB: Analytical Skills

4 Why Labor Productivity Grows 1) The Industrial Revolution in England in large was the result of A) growth in human capital. B) technological innovations encouraged by the patent system. C) population growth. D) technological innovations that were financed mainly by government spending. Answer: B Topic: Achieving Faster Economic Growth Skill: Conceptual Status: Old AACSB: Analytical Skills 2) Which of the following is NOT an important factor affecting growth in labor productivity? A) the saving rate B) the speed with which prices fall C) the growth rate of physical capital D) the growth rate of labor productivity Answer: B Topic: Factors Creating Economic Growth Skill: Conceptual Status: Old AACSB: Analytical Skills 3) All of the following contribute to labor productivity growth EXCEPT: A) population growth. B) physical capital growth. C) human capital growth. D) technological advancements. Answer: A Topic: Factors Creating Economic Growth Skill: Conceptual Status: Old AACSB: Analytical Skills 4) Technological change A) lowers the real wage rate. B) decreases labor productivity. C) has no effect on employment. D) increases potential GDP. Answer: D Topic: Factors Creating Economic Growth Skill: Conceptual Status: Old AACSB: Analytical Skills

5) A recent survey by India's central bank reported that spending plans by firms on large new projects fell by 46 percent in the year ending March 2012, compared with the prior year. This decrease will most directly impact A) physical capital growth. B) human capital growth. C) technological change. D) population growth. Answer: A Topic: Factors Creating Economic Growth Skill: Conceptual Status: New AACSB: Analytical Skills 6) Factors that influence labor productivity include ________. A) the inflation rate, the real wage rate, and the exchange rate B) the labor demand curve C) physical capital, the real wage rate, and technology D) physical capital, human capital, and technology Answer: D Topic: Labor Productivity Skill: Conceptual Status: Old AACSB: Analytical Skills 7) Labor productivity, real GDP per labor hour, increases if A) saving and investment cause an increase in the quantity of capital per worker. B) there is an increase in the accumulation of human capital. C) new technologies are continuously discovered. D) All of the above answers are correct. Answer: D Topic: Labor Productivity Skill: Conceptual Status: Old AACSB: Analytical Skills

8) Which of the following directly creates growth in labor productivity? I. Growth in capital per hour of labor. II. Technological change. III. Population growth. A) I only B) II only C) I and II D) I and III Answer: C Topic: Labor Productivity, Changes in Capital Stock Skill: Conceptual Status: Old AACSB: Analytical Skills 9) Labor productivity rises A) if the amount of capital per worker increases. B) in the absence of technological progress. C) if firms invest in hiring more workers rather than buying more capital. D) if the amount of capital per worker decreases. Answer: A Topic: Labor Productivity, Changes in Capital Stock Skill: Conceptual Status: Old AACSB: Analytical Skills 10) Which of the following contributes to an increase in labor productivity? A) increased consumption expenditure B) decreased investment C) increased capital stock D) All of the above contribute to an increase in labor productivity. Answer: C Topic: Labor Productivity, Changes in Capital Stock Skill: Conceptual Status: Old AACSB: Analytical Skills 11) Which of the following does NOT increase labor productivity? A) increases in aggregate hours B) physical capital growth C) human capital growth D) technological advances Answer: A Topic: Labor Productivity, Changes in Capital Stock Skill: Conceptual Status: Old AACSB: Analytical Skills 54 Copyright © 2014 Pearson Education, Inc.

12) If capital per worker rises, A) labor productivity decreases. B) no technological progress occurs. C) labor productivity increases. D) firms respond by raising their prices. Answer: C Topic: Labor Productivity, Changes in Capital Stock Skill: Conceptual Status: Old AACSB: Analytical Skills 13) If the quantity of capital per worker in the economy increases, A) the amount of money held by workers increases. B) labor productivity increases. C) the stock of human capital necessarily increases. D) the stock of financial assets held by the public increases. Answer: B Topic: Labor Productivity, Changes in Capital Stock Skill: Conceptual Status: Old AACSB: Analytical Skills 14) Saving and investment that increase a nation's capital lead to A) slower growth because there is a lack of consumption. B) a decrease in labor productivity as capital is used to replace labor. C) a decrease in the amount of capital per worker. D) an increase in labor productivity. Answer: D Topic: Labor Productivity, Changes in Capital Stock Skill: Conceptual Status: Old AACSB: Analytical Skills 15) An increase in saving that leads to more capital accumulation ________ labor productivity. A) increases B) does not change C) decreases D) probably changes but in an ambiguous direction Answer: A Topic: Labor Productivity, Changes in Capital Stock Skill: Conceptual Status: Old AACSB: Analytical Skills

16) A higher savings rate that leads to an increase in the capital stock A) leads to higher interest rates. B) leads to increases in labor productivity. C) immediately decreases investment. D) is associated with a decrease in the rate of growth of the population. Answer: B Topic: Labor Productivity, Changes in Capital Stock Skill: Conceptual Status: Old AACSB: Analytical Skills 17) Labor productivity increases with A) increases in consumption expenditure. B) increases in depreciation. C) increases in capital. D) All of the above answers are correct. Answer: C Topic: Labor Productivity, Changes in Capital Stock Skill: Conceptual Status: Old AACSB: Analytical Skills 18) If capital per hour of labor increases, real GDP per hour of labor A) decreases for a given level of technology. B) increases because the level of technology increases. C) increases for a given level of technology. D) decreases because the level of technology decreases. Answer: C Topic: Labor Productivity, Changes in Capital Stock Skill: Analytical Status: Old AACSB: Analytical Skills 19) If capital per hour of labor decreases, real GDP per hour of labor A) decreases because the level of technology decreases. B) increases because the level of technology increases. C) increases for a given level of technology. D) decreases for a given level of technology. Answer: D Topic: Labor Productivity, Changes in Capital Stock Skill: Analytical Status: Old AACSB: Analytical Skills

20) An increase in education and training A) increases labor productivity. B) increases aggregate hours. C) decreases real GDP growth. D) increases the employment-to-population ratio. Answer: A Topic: Human Capital Skill: Conceptual Status: Old AACSB: Analytical Skills 21) ________ is the knowledge and skill that people have obtained from education and on-thejob training. A) Labor productivity B) Human capital C) Capital D) Technology Answer: B Topic: Human Capital Skill: Definition Status: Old AACSB: Analytical Skills 22) Human capital is the A) machinery used by humans to produce GDP. B) technology used by humans to produce GDP. C) skill and knowledge accumulated by humans. D) plant and equipment produced by humans and not by machines. Answer: C Topic: Human Capital Skill: Definition Status: Old AACSB: Analytical Skills 23) Human capital is A) the saving done by human beings. B) people's knowledge and skills. C) a measure of the labor productivity of workers. D) the investment people make in industries that make capital goods. Answer: B Topic: Human Capital Skill: Definition Status: Old AACSB: Analytical Skills

24) Human capital is, in part, the A) amount of money held by a worker. B) stock of knowledge of a worker. C) stock of plant and equipment. D) stock of financial assets held by the public. Answer: B Topic: Human Capital Skill: Definition Status: Old AACSB: Analytical Skills 25) A worker's stock of knowledge is known as A) monetary capital. B) human capital. C) physical capital. D) financial capital. Answer: B Topic: Human Capital Skill: Definition Status: Old AACSB: Analytical Skills 26) On-the-job-training is an example of A) increasing labor force participation. B) investment in human capital. C) investment in physical capital. D) technological change. Answer: B Topic: Human Capital Skill: Conceptual Status: Old AACSB: Analytical Skills 27) The more education that workers have, the ________ is their human capital and the ________ is their productivity. A) larger; higher B) larger; smaller C) smaller; higher D) smaller; smaller Answer: A Topic: Human Capital Skill: Conceptual Status: Revised AACSB: Analytical Skills

28) During World War II, the increasing productivity of workers who built ships was due primarily to A) human capital accumulation through schooling and training. B) human capital accumulation by repeatedly doing the same tasks. C) discoveries of new and better technologies. D) investments by shipyards in new capital equipment. Answer: B Topic: Human Capital Skill: Conceptual Status: Old AACSB: Analytical Skills 29) Which of the following statements regarding human capital is INCORRECT? A) Human capital is the accumulated skill and knowledge of human beings. B) Education is the only vehicle for the creation of human capital because training simply reinforces what has already been learned. C) The accumulation of human capital is the source of both increased productivity and technological advance. D) Writing and mathematics, the most basic of human skills, are crucial elements in economic progress. Answer: B Topic: Human Capital Skill: Conceptual Status: Old AACSB: Analytical Skills 30) Workers who pursue an education directly increase their A) financial capital. B) physical capital. C) human capital. D) saving. Answer: C Topic: Human Capital Skill: Conceptual Status: Old AACSB: Analytical Skills

31) In addition to saving and investment in capital, making an even larger contribution to longterm economic growth in real GDP per person A) are technological advances. B) is lower current consumption. C) is higher current consumption. D) is a larger work force. Answer: A Topic: Labor Productivity, Technological Advance Skill: Conceptual Status: Old AACSB: Analytical Skills 32) Most ________ is embodied in physical capital. A) human capital B) technological change C) labor productivity D) economic growth Answer: B Topic: Labor Productivity, Technological Advance Skill: Conceptual Status: Old AACSB: Analytical Skills 33) In developing nations, microloans A) have increased the indebtedness of impoverished people, thereby slowing economic growth. B) are primarily used to finance consumption expenditure, thereby leading to economic growth. C) have enabled small businesses with limited access to credit to purchase capital and expand, thus allowing greater economic growth. D) are far too small to have any discernible effect. Answer: C Topic: Microloans Skill: Conceptual Status: Old AACSB: Analytical Skills

5 Growth Theories, Evidence, and Policies 1) Which of the following is associated with classical growth theory? I. Growth in real GDP can continue indefinitely. II. Technological growth increases as the population grows. III. Population explosions bring real GDP per person back to subsistence levels. A) I B) II C) III D) I and III Answer: C Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 2) The view that population growth occurs when real GDP per person exceeds the amount necessary to sustain life is part of the ________. A) classical growth theory B) modern theory of population growth C) neoclassical growth theory D) new growth theory Answer: A Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 3) An assumption of classical growth theory is that when ________ the population growth rate ________. A) real GDP per person exceeds the subsistence level; increases B) people become more skilled; decreases C) the real wage rate falls; increases D) saving declines; decreases Answer: A Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

4) Classical growth theory asserts that A) an increase in the labor supply raises real wage rates. B) the economy can grow indefinitely. C) real wage rates fall over time and, as they fall, they increase the population growth rate. D) population growth is determined by the level of real GDP per person. Answer: D Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 5) Which of the following is consistent with the classical theory of growth? A) permanent increases in real wages B) permanent growth in productivity C) rapid population growth in poor countries D) permanent increases in living standards Answer: C Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 6) Classical growth theory states that A) growth is maximized when everyone is fully employed. B) growth is followed by increases in the population, eventually leaving real GDP per person unchanged. C) growth in real GDP per person is difficult in the beginning but easier in the later stages. D) advances in technology will always insure a permanent increase in real GDP per person. Answer: B Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 7) Which of the following predicts that there can be no sustained rise in real GDP per person above the subsistence level? A) classical growth theory B) neoclassical growth theory C) new growth theory D) None of the above because all predict that there will be a sustained rise above the subsistence level. Answer: A Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 62 Copyright © 2014 Pearson Education, Inc.

8) Classical growth theory argues that when real GDP per person rises above the subsistence level, A) technological change slows down, stagnating the economy. B) population growth increases, driving real GDP per person back to subsistence level. C) people don't want to work as much, decreasing labor supply. D) the economy enjoys a period of permanent growth. Answer: B Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 9) What best explains why real GDP per person is always driven to the subsistence level in the classical model? A) Population growth occurs, increasing the supply of labor. B) Population growth occurs, shifting the labor supply curve leftward. C) Growth is not possible so the demand for labor never changes. D) Investment in capital decreases labor demand, decreasing the demand for labor. Answer: A Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 10) Which of the following ideas are included in classical growth theory? I. Subsistence real GDP per person II. Growth in real GDP per person is temporary. III. Technological change induces investment. A) I only B) I and II C) II and III D) I, II and III Answer: B Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

11) The assumption that population growth will lead to a fall in real GDP per person rate back to subsistence level is A) accepted by all economists today. B) associated with Malthusians. C) part of the neoclassical school of growth theory. D) central to the new growth theory. Answer: B Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 12) According to the classical growth theory of Thomas Malthus, A) labor productivity increases continuously. B) the population growth rate is fixed. C) technological advances lead to permanent increases in real GDP per person. D) increases in real GDP per person are only temporary. Answer: D Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 13) Population increases are the limiting factor in the growth process in A) classical growth theory. B) neoclassical growth theory. C) the new growth theory. D) real growth theory. Answer: A Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 14) Classical growth theory proposes that real GDP growth is ________ and that real GDP per person will ________ the subsistence level. A) permanent; temporarily be above B) permanent; always be above C) temporary; temporarily be above D) temporary; be above and below Answer: C Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

15) Classical economists believed that A) real GDP per person would rise above its subsistence level in the long run. B) real GDP per person would never rise above its subsistence level in the long run. C) the demand for labor increases when the population increases. D) population growth decreases as real GDP per person rises. Answer: B Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 16) Classical growth theory asserts that A) growth in real GDP per person is temporary. B) only some countries can have economic growth. C) real GDP growth will eventually be a constant 3 percent per year. D) nominal GDP growth is most important. Answer: A Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 17) The classical model of Malthus predicted that economies would A) continue to grow indefinitely. B) experience rapid technological progress. C) reach a state where the growth of real GDP per person stopped. D) experience significant productivity growth. Answer: C Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 18) Which of the following is consistent with classical growth theory? A) Real GDP per person will increase because technological change induces investment. B) Real GDP per person will never permanently increase. C) Competition destroys innovation and decreases profit. D) As real GDP increases, there will be a decrease in the rate of population growth. Answer: B Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

19) According to the neoclassical growth theory, A) increases in labor productivity are only temporary. B) technological change depends on people's choices. C) forces other than GDP growth determine population growth. D) higher saving rates generate permanently faster growth in GDP per person. Answer: C Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 20) Neoclassical growth theory predicts that A) population growth rates slow as employment opportunities for women increase. B) population explosions decrease real GDP per person. C) economic growth leads to technological change. D) the pursuit of profit creates perpetual growth. Answer: A Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 21) Which of the following ideas apply to the neoclassical growth theory? I. The rate of technological change influences the rate of economic growth. II. Technological change promotes saving and investment. III. Convergence of economic growth rates across countries. A) I only B) III only C) I and II D) I, II and III Answer: D Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

22) Which of the following ideas apply to the neoclassical growth theory? I. Technological change results from chance. II. Growth in real GDP stops if technology stops advancing. A) I only B) II only C) both I and II D) neither I nor II Answer: C Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 23) Neoclassical growth theory attributes economic growth to A) technological change. B) fiscal policy. C) the law of diminishing returns. D) increasing population growth. Answer: A Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills A recent article states that "...gains from two centuries of rapid technological innovation are largely exhausted, and new discoveries lack the same revolutionary quality....{Further}, 80 percent of the growth between 1950 and 1993 came from the new application of old ideas, and these old ideas are now mostly wrung dry." (The Economist, 03/03/2011) 24) If this quote is true, what would the neoclassical growth theory predict? A) Economic growth stops because most technological advances have already been made. B) Economic growth is temporary regardless of technological change and GDP per person returns to subsistence levels. C) Economic growth will persist indefinitely because technological change will accelerate again as firms seek profits. D) Economic growth will accelerate because these technological changes are permanent. Answer: A Topic: Neoclassical Growth Theory Skill: Conceptual Status: New AACSB: Analytical Skills

25) The neoclassical growth theory says, in part, that A) a population explosion driven by economic growth will end economic growth. B) technological change leads to economic growth. C) the differences in nation's growth rates will persist indefinitely. D) technology does not play a role in economic growth. Answer: B Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 26) In neoclassical growth theory, technological change ________. A) occurs by chance B) is influenced by population growth C) is influenced by the rate of economic growth D) occurs at a steady rate Answer: A Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 27) An assumption of neoclassical growth theory is that A) technological change is random. B) technological change can be influenced by savings. C) more growth encourages more technological change. D) None of the above answers is correct. Answer: A Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 28) Neoclassical growth theory assumes that technological progress A) is determined by investment. B) is determined by saving. C) responds to economic incentives. D) is a purely chance event. Answer: D Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

29) Neoclassical growth theory proposes that A) technological progress increases the population growth rate and drives down real wages. B) real GDP per person grows because technological change increases profit opportunities. C) real GDP growth is caused by growth in the population. D) discoveries result from choices that increase profits. Answer: B Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 30) Within neoclassical growth theory, technological change ________ saving and ________ investment. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: A Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 31) Neoclassical growth theory is based on the proposition that real GDP per person grows when A) the population growth rate increases. B) the population growth rate decreases. C) technological advances occur. D) saving decreases. Answer: C Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 32) According to neoclassical growth theory, the higher real GDP per person from economic growth will A) not last because the population will increase. B) last because there is no link between growth and population. C) last indefinitely regardless of any other factor. D) last as long as technological change continues. Answer: B Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

33) Neoclassical growth theory predicts that A) advances in technology increase the productivity of capital, which leads to an increase in investment and rising real GDP per person. B) advances in technology are a result of discoveries motivated by the pursuit of profits. C) growth in real GDP can increase without any increase in investment. D) growth in real GDP can continue indefinitely. Answer: A Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 34) Neoclassical growth theory A) predicts that growth rates and incomes per person throughout the world will converge. B) predicts that the faster growing underdeveloped nations will overtake and then surpass the industrial nations. C) predicts that nations that enjoy a technological advantage will maintain that advantage. D) makes no predictions about the relative growth or incomes among countries. Answer: A Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 35) Neoclassical growth theory predicts that China's economic growth rate will ________. A) decrease when the interest rate increases B) continue at around 10 percent a year C) always remain above the U.S. economic growth rate D) eventually converge to the U.S. economic growth rate. Answer: D Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 36) A problem with the neoclassical growth theory is its A) prediction that population growth lowers the real wage rate. B) inability to explain persistent differences between countries' GDP growth rates. C) prediction that population growth raises the real wage rate. D) comparison of the economy to a perpetual motion machine. Answer: B Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

37) The notion that technological change is not random but instead is driven by the pursuit of profits is an essential element of A) classical growth theory. B) neoclassical growth theory. C) the new growth theory. D) perpetual growth theory. Answer: C Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 38) According to the new growth theory, competition A) reduces profit. B) increases profit. C) has no impact on real profit, only nominal profit. D) is only theoretical because all firms are growing at some rate. Answer: A Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 39) According to new growth theory, technological change is driven by A) random chance. B) government policies. C) foreign firms' attempts to increase their sales in the domestic market. D) firms' attempts to increase their profit. Answer: D Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 40) Because of the choices people make in the pursuit of profit, new growth theory argues that A) technology growth slows down in the long-run. B) population growth increases will bring real GDP per person back to subsistence level. C) the capital stock experiences diminishing returns. D) the economy can enjoy persisting economic growth. Answer: D Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

41) ________ predicts that real GDP per person can grow indefinitely. A) New growth theory B) Classical growth theory C) Profit growth theory D) Neoclassical growth theory Answer: A Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 42) New growth theory predicts that A) economic growth is only temporary. B) economic growth can last indefinitely. C) economic growth is eroded by changes in taxes. D) government policies can do nothing to foster increased growth. Answer: B Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 43) A central proposition of the new growth theory is that A) growth will cease but prosperity will persist. B) knowledge is not subject to diminishing returns. C) government direction and oversight is necessary for consistent growth. D) growth is often just an illusion fostered by growth accounting. Answer: B Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 44) New growth theory assumes that A) all inputs experience diminishing returns. B) only random technological advances produce growth. C) knowledge does not experience diminishing returns. D) None of the above answers is correct. Answer: C Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

45) A key feature of the new growth theory is the assumption of A) diminishing returns to labor. B) diminishing returns to knowledge. C) no diminishing returns to knowledge. D) no diminishing returns to labor. Answer: C Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 46) According to the new growth theory A) the rate of technological progress is determined by chance. B) knowledge is not subject to diminishing returns. C) the labor demand curve does not shift rightward over time. D) the concept of a labor market is not necessary. Answer: B Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 47) According to new growth theory ________. A) ever-advancing productivity keeps the population growth rate high B) knowledge does not experience diminishing returns C) growth rates and income levels per person around the globe will converge D) knowledge is subject to the law of diminishing returns Answer: B Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 48) Which theory emphasizes the significance of new discoveries that can be used by many people at the same time? A) neoclassical growth theory B) new growth theory C) classical growth theory D) None of the above answers are correct. Answer: B Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

49) Which of the following is NOT associated with the new growth theory? A) natural resources B) research C) technology D) innovation Answer: A Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 50) New growth theory A) dates from the 18th century. B) concludes that economic growth is temporary. C) states that economic growth arises from people's choices. D) asserts that population growth is the source of economic growth. Answer: C Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 51) An important foundation of the new growth theory is that A) we will get more technological advances the more the government is involved in deciding which technology to pursue. B) we will get more technological advances the greater the rewards people receive from making technological advances. C) the growth rate of the capital stock is more important than the growth rate of new knowledge in generating economic growth. D) improvements in labor productivity are poor measures of technological growth. Answer: B Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

52) New growth theory economists believe that: I. Economic growth can continue as long as we keep finding new ideas. II. The marginal product of capital diminishes very rapidly, so we must rely upon technological advances to create economic growth. A) I only B) II only C) both I and II D) neither I nor II Answer: A Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 53) New growth theory proposes that real GDP per person grows because of ________ and that growth ________. A) the pursuit of profit; can persist indefinitely B) productivity shocks; can persist indefinitely C) technological change; can only increase above the subsistence level temporarily D) productivity shocks; occurs randomly Answer: A Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 54) Which growth theory models growth as a perpetual motion machine? A) new growth theory B) classical growth theory C) neoclassical growth theory D) all growth theories model growth as a perpetual motion machine Answer: A Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 55) Which growth theory predicts perpetual growth? A) classical growth theory B) neoclassical growth theory C) new growth theory D) None of the above answers is correct. Answer: C Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 75 Copyright © 2014 Pearson Education, Inc.

56) The growth theory that predicts perpetual economic growth is A) classical growth theory. B) neoclassical growth theory. C) the new growth theory. D) real growth theory. Answer: C Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 57) Which one of the following statements about growth theories is correct? A) In the new growth theory, knowledge is not subject to diminishing returns. B) In neoclassical growth theory, technological progress is the result of rapid increases in saving and investment in capital per person. C) In classical growth theory, real GDP per person is unrelated to the subsistence real GDP. D) In classical growth theory physical resources are unlimited. Answer: A Topic: Sorting Out the Growth Theories Skill: Conceptual Status: Old AACSB: Analytical Skills 58) Ongoing economic growth in real GDP per person requires all of the following except ________. A) investment in human capital B) the discovery of new technologies C) saving and investment in new capital D) population growth Answer: D Topic: Achieving Faster Economic Growth Skill: Conceptual Status: Old AACSB: Analytical Skills 59) Which of the following has NOT been one of the primary sources of economic growth over the last 200 years? A) investment in new capital B) resource conservation C) investment in human capital D) discoveries of new technology Answer: B Topic: Achieving Faster Economic Growth Skill: Conceptual Status: Old AACSB: Analytical Skills 76 Copyright © 2014 Pearson Education, Inc.

60) Which of the following policy actions could speed productivity growth? I. Tax incentives to encourage saving. II. Encouraging international trade. III. Directing public funds toward financing basic research. A) II only. B) I and III. C) I only. D) I, II, and III. Answer: D Topic: Achieving Faster Economic Growth Skill: Conceptual Status: Old AACSB: Analytical Skills 61) A higher saving rate leads to faster growth because A) more saving produces greater additions to capital per hour of labor, raising real GDP per person. B) capital would wear out faster. C) people could consume more of an economy's output. D) population growth would accelerate. Answer: A Topic: Achieving Faster Growth, Saving Skill: Conceptual Status: Old AACSB: Analytical Skills 62) If the saving rate increases, a country's growth rate of real GDP per hour of labor ________ and capital per hour of labor ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: A Topic: Achieving Faster Growth, Saving Skill: Conceptual Status: Old AACSB: Analytical Skills

63) Savings is an important factor influencing economic growth because saving A) can finance new investment and capital formation. B) helps the economy maintain the current level of total expenditures when a recession begins. C) provides a fund for wages needed from any unexpected population growth. D) All of the above answers are correct. Answer: A Topic: Achieving Faster Growth, Saving Skill: Conceptual Status: Old AACSB: Analytical Skills 64) Which of the following statements is CORRECT? I. Higher savings rates can stimulate economic growth. II. Limiting international trade can stimulate economic growth. A) I only B) II only C) both I and II D) neither I nor II Answer: A Topic: Achieving Faster Growth, Saving Skill: Conceptual Status: Old AACSB: Analytical Skills 65) One policy that would increase the saving rate would be A) raising taxes on the returns to saving. B) raising taxes on the returns to investment. C) taxing consumption. D) raising taxes on saving. Answer: C Topic: Achieving Faster Growth, Saving Skill: Conceptual Status: Old AACSB: Analytical Skills 66) To achieve faster growth, one possibility is to tax A) consumption. B) saving. C) hiring. D) immigration. Answer: A Topic: Achieving Faster Growth, Saving Skill: Conceptual Status: Old AACSB: Analytical Skills

67) Activities that encourage faster growth are A) investment in new capital and human capital. B) high levels of consumption and low levels of savings. C) taxes on saving that serve to encourage more spending and less saving. D) developing trade barriers to protect national industries. Answer: A Topic: Achieving Faster Economic Growth Skill: Conceptual Status: Old AACSB: Analytical Skills 68) Which of the following policies improves prospects for more rapid economic growth? A) policies to increase government expenditure B) limitations on international trade C) policies to increase the educational attainment of the labor force D) encouragement of political instability Answer: C Topic: Achieving Faster Economic Growth Skill: Conceptual Status: Old AACSB: Analytical Skills 69) All of the following lead to more rapid economic growth EXCEPT A) restricting international trade. B) encouraging higher rates of saving. C) supporting more research and development. D) encouraging higher quality education. Answer: A Topic: Achieving Faster Economic Growth Skill: Conceptual Status: Old AACSB: Analytical Skills 70) A country would achieve faster growth by ________. A) encouraging free trade B) increasing the cost of education C) increasing union membership D) taxing income and not consumption Answer: A Topic: Achieving Faster Growth, International Trade Skill: Conceptual Status: Old AACSB: Analytical Skills

71) Several factors are important for achieving faster economic growth. Which of the following is one of those factors? A) expansion of international trade B) increased government expenditure C) increased taxes on saving D) promotion of consumption expenditure Answer: A Topic: Achieving Faster Growth, International Trade Skill: Conceptual Status: Old AACSB: Analytical Skills 72) Economic growth tends to be higher in a country that A) has a low savings rate. B) has an economy open to international trade. C) has an undeveloped system of property rights. D) does not grant patents to inventors. Answer: B Topic: Achieving Faster Growth, International Trade Skill: Conceptual Status: Old AACSB: Analytical Skills 73) The relationship between education and economic growth can best be summarized by saying that A) educated people are less apt to consume goods that deplete economic resources, which encourages economic growth. B) educational expenditures tend to divert funds from productive investments, which discourages economic growth. C) educational expenditures tend to be inflationary, which discourages economic growth. D) education has benefits beyond those who receive the education, which encourages economic growth. Answer: D Topic: Achieving Faster Growth, Education Skill: Conceptual Status: Old AACSB: Analytical Skills

74) All of the following would increase the growth rate of the economy EXCEPT A) raising the saving rate. B) stimulating research and development. C) discouraging international trade. D) None of the above answers is correct because they all would increase the growth rate. Answer: C Topic: Achieving Faster Economic Growth Skill: Conceptual Status: Old AACSB: Analytical Skills 75) Which of the following will NOT work to increase the rate of economic growth? A) increase saving B) limit competition from international trade C) improve the quality of education D) All of the above will work to increase the rate of economic growth. Answer: B Topic: Achieving Faster Economic Growth Skill: Conceptual Status: Old AACSB: Analytical Skills 76) All of the following would stimulate economic growth EXCEPT A) decreasing taxes on consumption (for instance, decreasing a sales taxes) and increasing income taxes. B) subsidizing basic research. C) decreasing tuition charges at state universities. D) encouraging international trade. Answer: A Topic: Achieving Faster Economic Growth Skill: Conceptual Status: Old AACSB: Analytical Skills 77) According to empirical evidence, A) providing international aid to developing nations stimulates economic growth. B) providing international aid to developing nations does not have a positive effect on economic growth. C) international trade stimulates economic growth in richer nations, but actually slows economic growth in developing economies. D) international trade stimulates economic growth in developing economies, but actually slows economic growth in richer nations. Answer: B Topic: Achieving Faster Economic Growth Skill: Conceptual Status: Old AACSB: Analytical Skills 81 Copyright © 2014 Pearson Education, Inc.

78) Which theory of economic growth concludes that in the long run real GDP per person will be at its subsistence level? A) the classical theory B) the neoclassical theory C) the new growth theory D) all of the theories Answer: A Topic: Study Guide Question, Classical Theory Skill: Conceptual Status: Revised AACSB: Analytical Skills 79) A factor that turned out to be a weakness of the classical theory of growth is its A) emphasis on saving and investment. B) assumption that the growth rate of the population increases when income increases. C) reliance on constant growth in technology. D) neglect of the subsistence real wage. Answer: B Topic: Study Guide Question, Classical Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 80) An assumption of the neoclassical theory of growth is that A) people receive only subsistence real GDP per person. B) all technological advances are the result of chance. C) the marginal product of all types of capital increases as more capital is accumulated. D) knowledge has diminishing returns. Answer: B Topic: Study Guide Question, Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 81) In the neoclassical theory of growth, growth in ________ is the result of luck. A) saving B) income C) technology D) the real interest rate Answer: C Topic: Study Guide Question, Neoclassical Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

82) A key assumption of new growth theory is that A) all technological change is the result of luck. B) higher incomes lead to a higher birth rate. C) a successful innovator has the opportunity to earn a temporary, above-average profit. D) the population growth rate is lower than the real interest rate. Answer: C Topic: Study Guide Question, New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 83) Which theory of economic growth concludes that growth can continue indefinitely? A) the classical theory B) the neoclassical theory C) the new theory D) all of the theories Answer: C Topic: Study Guide Question, New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

6 News Based Questions 1) The table below shows data for China.

2000 2003 2006

Population (millions) 1267 1292 1315

Real GDP (yuan, billions) 4999 6498 8776

Nominal GDP (yuan, billions) 9921 13582 21087

The economic growth rate in China between 2000 and 2003 was ________ percent. A) 30 B) 37 C) 1.97 D) 98 Answer: A Topic: Economic Growth Rate Skill: Analytical Status: Old AACSB: Analytical Skills 2) The table below shows data for China.

2000 2003 2006

Population (millions) 1267 1292 1315

Real GDP (yuan, billions) 4999 6498 8776

Nominal GDP (yuan, billions) 9921 13582 21087

The standard of living between 2003 and 2006 increased by ________. A) 55.3 percent B) 1.8 percent C) 35 percent D) 32.7 percent Answer: D Topic: Economic Growth Rate Skill: Analytical Status: Old AACSB: Analytical Skills

3) "IT Policy Can Spur Economic Growth, Industry Says" As staffers on Capitol Hill know all too well, the growth of technology has created an economy increasingly reliant on energy consumption, as BlackBerrys, laptops, and other devices become everyday necessities. The right policies, however, can make IT growth a part of the energy solution rather than the problem, IT representatives said Monday at a forum, in a congressional office, hosted by the Information Technology & Innovation Foundation. Information technology could reduce the expected growth in carbon emissions by one third over 10 years, said Daniel Castro, a senior analyst with the ITIF. Information and communication technology has "great promise in driving economic growth as well as reducing emissions," added David Isaacs, director of government affairs for HewlettPackard, but "policy should drive these results." www.news.cnet.com 11/17/2008 In order to drive economic growth in real GDP per person, the changes in information technology that the article addresses must A) cause a movement along the aggregate production function. B) increase labor productivity. C) increase labor supply. D) decrease the demand for labor. Answer: B Topic: Increase in Productivity Skill: Conceptual Status: Old AACSB: Communication 4) "Premier Liu Chao-shiuan announced Tuesday a government plan to distribute NT$82.9 billion (US$2.51 billion) in consumption coupons to Taiwan's citizens in a bid to stimulate ... economic growth." www.etaiwannews.com 11/18/2008 The Premier's plan to boost economic growth by boosting consumption A) will work because employment will increase. B) will work because there will be a movement out along Taiwan's aggregate production function. C) will not work because real GDP per person will decrease. D) will not work because economic growth is boosted by labor productivity, not consumption. Answer: D Topic: Increase in Productivity Skill: Conceptual Status: Old AACSB: Reflective Thinking

5) Hu Tells Leaders China Growth Will Help World Economy Chinese President Hu Jintao told world leaders that his country "has taken an active part in the international cooperation to deal with the financial crisis'' by providing a "$586 billion economic stimulus, focused on building low-rent housing, roads, railways and airports. The package also allows tax deductions for fixed assets such as machinery to stimulate investment. Farmers will also benefit from more subsidies." Hu stated that "China is in itself an important contribution to international financial stability and world economic growth.'' www.bloomberg.com 11/15/2008 If the fiscal stimulus spending does generate economic growth, we can expect to see A) growth in labor productivity. B) growth China's price level. C) an excess supply of labor in China's labor market. D) growth in the supply of labor. Answer: A Topic: Increase in Productivity Skill: Conceptual Status: Old AACSB: Communication

6) Hu Tells Leaders China Growth Will Help World Economy Chinese President Hu Jintao told world leaders that his country "has taken an active part in the international cooperation to deal with the financial crisis'' by providing a "$586 billion economic stimulus, focused on building low-rent housing, roads, railways and airports. The package also allows tax deductions for fixed assets such as machinery to stimulate investment. Farmers will also benefit from more subsidies." Hu stated that "China is in itself an important contribution to international financial stability and world economic growth.'' www.bloomberg.com 11/15/2008 Which of the following will occur if China's spending generates economic growth in real GDP per person? I. There will be an upward shift in China's aggregate production function. II. There will be a rightward shift in China's labor demand curve. III. There will be an increase in the real wage. A) I and II only. B) I, II and III. C) I and III only. D) II and III only. Answer: B Topic: Increase in Productivity Skill: Analytical Status: Old AACSB: Analytical Skills

7) Hu Tells Leaders China Growth Will Help World Economy Chinese President Hu Jintao told world leaders that his country "has taken an active part in the international cooperation to deal with the financial crisis'' by providing a "$586 billion economic stimulus, focused on building low-rent housing, roads, railways and airports. The package also allows tax deductions for fixed assets such as machinery to stimulate investment. Farmers will also benefit from more subsidies." Hu stated that "China is in itself an important contribution to international financial stability and world economic growth.'' www.bloomberg.com 11/15/2008 China wants to increase investment because this change will A) increase the growth in physical capital and speed up economic growth. B) increase human capital. C) cause an increase in the supply of labor. D) not cause the real wage rate to increase so employment will increase. Answer: A Topic: Why Labor Productivity Grows Skill: Conceptual Status: Old AACSB: Analytical Skills 8) Strategy to Address Dependence on Foreign Workers, Labour Market Demands The prime minister of Malaysia announced his government's "immediate focus would be to enhance skills development and improve the quality of education." By "the constant upgrading of skills of the country's workforce" he hoped to improve the country's "global competitiveness and raise average incomes of workers." www.thestar.com.my 11/21/2008 The story describes A) a plan increase physical capital. B) improvements in Malaysia's incentive system. C) a consequence of economic growth. D) a plan to increase human capital. Answer: D Topic: Human Capital Skill: Conceptual Status: Old AACSB: Reflective Thinking

9) Strategy to Address Dependence on Foreign Workers, Labour Market Demands The prime minister of Malaysia announced his government's "immediate focus would be to enhance skills development and improve the quality of education." By "the constant upgrading of skills of the country's workforce" he hoped to improve the country's "global competitiveness and raise average incomes of workers." www.thestar.com.my 11/21/2008 The long-run benefit of enhancing "skill development and improve....education" is to A) improve property rights. B) increase labor supply. C) speed economic growth. D) smooth the growth of labor productivity. Answer: C Topic: Economic Growth Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 10) "Why India Cannot Sustain High Economic Growth", by Kunal KumarKundu In his article about India's prospects for growth, the author notes that "Per capita availability of food grain is falling as population is growing faster than food grain production. Deplorable rural infrastructure leads to India wasting an amount of food grain ... . India's agriculture is still so very highly monsoon dependent..." www.rediff.com 5/29/2008 This view of India's economic growth is best reflected in the ________. A) classical growth theory. B) new growth theory. C) neoclassical growth theory. D) aggregate production theory. Answer: A Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills

11) "Why India Cannot Sustain High Economic Growth", by Kunal KumarKundu In his article about India's prospects for growth, the author notes that "Per capita availability of food grain is falling as population is growing faster than food grain production. Deplorable rural infrastructure leads to India wasting an amount of food grain ... . India's agriculture is still so very highly monsoon dependent..." www.rediff.com 5/29/2008 If the author is suggesting that India's growth prospects are explained by the classical growth theory, we also expect that A) real GDP per worker will increase. B) the subsistence wage will increase. C) the economy will perpetually grow. D) labor productivity, which has risen in recent years, will eventually decline. Answer: D Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 12) Use the table below to answer this question. The data show national savings rates as a percentage of GDP; the growth rate of real GDP per person; and birth rates in 2006. Growth rate National Saving of real GDP Country (% of GDP) per person Birth Rate Japan 28 1.6 9.96 Canada 24 2.6 11.4 Germany 23 1.9 9.35 U.S. 14 1.9 14.2 www.econstats.com; www.os-connect.com If the data support the neoclassical growth theory, we would expect to see A) Japan with the highest economic growth rate because the high saving means that more capital is accumulated. B) the United States with the highest economic growth rate because a lower savings rate means more income is spent on consumption. C) Canada with the highest economic growth rate because it has the highest real GDP per person. D) the United States with the highest economic growth rate because it has the highest birth rate. Answer: A Topic: Neoclassical Growth Theory Skill: Analytical Status: Old AACSB: Analytical Skills

13) "Global Innovation 1000—Money Isn't Everything." The report by Booz Allen Hamilton Consulting claims that "There is no direct relationship between R&D spending and significant measures of corporate success such as growth, profitability, and shareholder return. ...However, the pace of corporate R&D spending continues to accelerate, as many executives continue to believe that enhanced innovation is required to fuel their future growth. www.boozallen.com 10/11/2005 The report provides ________ evidence of the ________. A) conflicting; new growth model which claims that profits are linked to innovation. B) supporting; new growth model which claims that innovation is indirectly related to profit. C) conflicting; neoclassical growth model which claims that population growth spurs technology. D) supporting; neoclassical growth model which claims that technology advances are random. Answer: A Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Analytical Skills 14) According to UNESCO reporting, "Governments in North America and Western Europe invested the highest shares of national resources in education: 5.6 percent of GDP." As a result, we would expect ________, all else held constant. www.worldometers.info A) higher economic growth rates in these countries compared to other countries B) lower economic growth rates in the countries because fewer resources can be devoted to innovation. C) lower research and development spending and lower economic growth unless the governments can raise taxes. D) lower saving rates and slower economic growth. Answer: A Topic: Achieving Faster Growth, Education Skill: Conceptual Status: Old AACSB: Analytical Skills

15) Cuba spends the highest percentage of GDP (18.7 percent) on education while the United States is the 38th highest spender with 5.7 percent of GDP. If spending on education is important for economic growth, which of the following statements explain why Cuba's economic growth rate is lower than the U.S. economic growth rate? (data from United Nations Human Development Programme) A) Cuba trades with many more countries than does the United States. B) Cuba doesn't offer property rights that promote innovation. C) Cuba's population is smaller than the U.S. population. D) all of the above explain why Cuba's economic growth rate is lower than the U.S. economic growth rate. Answer: D Topic: Achieving Faster Economic Growth Skill: Conceptual Status: Old AACSB: Analytical Skills 7 Essay Questions 1) How has U.S. real GDP per person changed over the last 100 years? Answer: Although the U.S. economy usually displays growth in real GDP per person, there have been periods of time when real GDP per person has fallen. The decline is usually mild, although this was not the case during the Great Depression, which had a severe decrease in real GDP per person. Overall, the average yearly growth rate was higher after World War II than prior to the Great Depression. Prior to the Great Depression, the yearly U.S. growth rate of real GDP per person averaged only about 1.4 percent per year, while after World War II it averaged 2 percent per year. And, over the entire 100 years, the U.S. growth rate of real GDP per person has averaged about 2 percent per year. Topic: U.S. Economic Growth Skill: Conceptual Status: Old AACSB: Communication 2) Briefly explain how growth in real GDP differs across economies including the United States, Japan, Africa, Central America, Hong Kong, Korea, and Singapore. Answer: Over the past 100 years, growth in real GDP per person in the United States has averaged 2 percent per year. The growth rate has varied from one period to the next. Some rich nations, such as Japan, are catching up to the U.S. level of real GDP per person. Many poor nations, especially those in Africa and Central America are not catching up. But Hong Kong, Korea, Singapore, and Taiwan are generally growing more rapidly than the United States and so they are catching up. Topic: Real GDP Growth in the World Economy Skill: Recognition Status: Old AACSB: Communication 92 Copyright © 2014 Pearson Education, Inc.

3) How has the U.S. growth experience compared to that of Central Europe and Africa? How has compared to the recent experience of Asian nations such as Hong Kong and Singapore. Answer: A persistent gap in the level of real GDP per person has existed between the United States and most other nations in the world. Nations from Central Europe and Africa have consistently grown at a slower rate and have therefore fallen further behind in real GDP per person. An exception to this rule has been the experience of several Asian nations such as Hong Kong and Singapore. These and other Asian nations have experienced, on average, higher growth rates than the United States and so have (partially) closed the gap in real GDP per person. Topic: Real GDP Growth in the World Economy Skill: Recognition Status: Old AACSB: Communication 4) Discuss the aggregate production function. How does the aggregate production function relate to the labor market and potential GDP? Answer: The aggregate production function shows the maximum amounts of real GDP that can be produced as the quantity of labor changes, holding constant all other influences on aggregate production. As the quantity of labor increases, real GDP increases but at a decreasing rate, that is, the aggregate production function shows diminishing returns. The aggregate production function "stands between" the labor market and potential GDP. In particular, the quantity of employment is determined in the labor market. The aggregate production function then shows the amount of real GDP that is produced by this quantity of employment. When the quantity of employment determined in the labor market is the equilibrium quantity, then the amount of real GDP produced is potential GDP. Topic: Aggregate Production Function Skill: Conceptual Status: Old AACSB: Communication 5) Define the aggregate production function. Discuss why the aggregate production function exhibits diminishing returns. Answer: The aggregate production function is the relationship that shows the maximum quantity of real GDP that can be produced as the quantity of labor employed changes and all other influences on aggregate production remain the same. The aggregate production function exhibits diminishing returns because the quantity of capital (and other resources) is fixed. As more labor is hired, the extra output produced decreases because the extra workers have less capital with which to work. As a result, the additional workers cannot produce as much additional output as did the previously hired workers. Topic: Aggregate Production Function Skill: Conceptual Status: Old AACSB: Communication

6) What is the real wage rate? Answer: The real wage rate is the money wage rate "corrected" for changes in the price level. It is calculated by dividing the money wage rate by the price level. The real wage rate is the quantity of goods and services that can be purchased by an hour's worth of work. Topic: Real Wage Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 7) Explain how the labor market and the production function determine potential GDP. Answer: The labor market determines the equilibrium quantity of labor. In other words, the amount of employment is determined by supply and demand in the labor market. The production function shows the amount of output, real GDP, that is produced for all different amounts of employment. Intuitively, the production function "converts" the amount of employment from the labor market into real GDP. If the labor market is in equilibrium, so that the level of employment is equal to full employment, then the amount of real GDP produced, determined from the production function is potential GDP. Topic: Labor Market and Potential GDP Skill: Conceptual Status: Old AACSB: Communication 8) How will an increase in physical capital affect labor productivity, labor demand, and potential GDP? Answer: An increase in capital increases labor productivity. It shifts the production function upward and, because productivity has increased, it increases the demand for labor. Equilibrium employment increases because of the increase in demand for labor. Potential GDP increases because employment increases and because the production function has shifted upward. Topic: Labor Market and Potential GDP Skill: Conceptual Status: Old AACSB: Communication 9) What happens to the real wage rate and potential GDP if population increases? Answer: An increase in population increases the supply of labor. As a result, the labor supply curve shifts rightward. The labor demand curve does not shift. The increase in the supply of labor means that employment increases and the real wage rate falls. The economy moves along its (unchanged) production function to a higher level of potential GDP. Topic: Labor Market and Potential GDP Skill: Conceptual Status: Old AACSB: Communication

10) With no change in labor productivity, what would happen to the real wage rate and potential GDP if the population increased? Answer: An increase in population increases the supply of labor. As a result, the labor supply curve shifts rightward. Neither the labor demand curve not the production function shifts. The increase in the supply of labor means that employment increases and the real wage rate falls. The economy moves along its (unchanged) production function to a higher level of potential GDP. Topic: Labor Market and Potential GDP Skill: Conceptual Status: Old AACSB: Communication 11) What is the effect on real GDP per person if labor productivity increases? Answer: Real GDP equals (aggregate hours) × (labor productivity). Hence an increase in labor productivity increases real GDP. Real GDP per person equals (real GDP)/(population). Therefore an increase in real GDP with no change in the population increases real GDP per person. Topic: Labor Productivity Skill: Conceptual Status: Old AACSB: Communication 12) Define labor productivity. Discuss the relationship between labor productivity, human capital growth, and technology change. Answer: Labor productivity is real GDP per hour of labor, so it equals (real GDP) ÷ (aggregate hours). The expansion of human capital and the discovery of new technology are two factors that increase labor productivity. Increasing human capital increases labor productivity because workers' skills and knowledge increase, which allows them to produce more goods and services without boosting aggregate hours. Similarly, the discovery and use of new technologies allows workers to produce more goods and services without increasing aggregate hours. Topic: Labor Productivity Skill: Conceptual Status: Old AACSB: Communication 13) What factors raise the productivity of labor? Answer: The productivity of labor is affected by the amount physical capital, the amount of human capital, and the level of technology. An increase in either physical capital or human capital means that more goods and services can be produced with a given amount of labor, so that the productivity of labor increases. Similarly a technological improvement also increases the productivity of labor. Topic: Labor Productivity Skill: Conceptual Status: Old AACSB: Reflective Thinking

14) List and explain the factors that can increase labor productivity. Answer: The three factors that can increase labor productivity are saving and investment in physical capital, expansion of human capital, and discovery of new technology. Saving and investing in physical capital increases the amount of capital per worker and thereby increases workers' productivity. Increasing the amount of human capital means that workers' skills, knowledge, and talents increase, which thereby increases their productivity. And, the discovery and use of new technologies allows workers to produce more goods and services than before, which increases their productivity. Topic: Labor Productivity Skill: Conceptual Status: Old AACSB: Reflective Thinking 15) What are the sources of human capital? Answer: Human capital, the accumulated skills and knowledge people possess, comes from both formal education and training, and from on-the-job experience. On-the-job experience creates "learning by doing," in which workers become more knowledgeable about the best way to accomplish a task as they do the task. Topic: Human Capital Skill: Recognition Status: Old AACSB: Reflective Thinking 16) What are the basic arguments of the classical growth theory? Answer: The classical growth theory originated during the late 18th century. Although proposed by many leading economists of the time, it has most often associated with Malthus. The classical theory states that economic growth will be temporary. The reason why the growth is temporary is because any economic growth will lead to a population explosion. The growth in population increases labor hours, which lead to a reduction in capital per labor hour. Productivity declines until real GDP per person falls to the subsistence level where life is just sustained. At this point, economic growth ceases. Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Communication

17) What is the main difference between classical economists' ideas about economic growth versus what modern evidence suggests? Answer: Classical economists assumed that as real GDP per person rises, the population growth rate increased. But, contrary to this assumption, the data show that population growth rate is approximately independent of the economic growth rate. Classical economists concluded that the increase in population, which increases labor supply, would drive real GDP per person back to the subsistence level. But the data show that in advanced nations real GDP per person is well above the subsistence wage rate. Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Communication 18) In the classical theory of growth, what is the final outcome of an increase in growth and labor productivity? Answer: In the classical growth theory, a rise in labor productivity and the resulting economic growth result in a population explosion that drives real GDP per person back to the subsistence level. In the classical viewpoint, resources are limited and technological change occurs infrequently, so that technological advances are not sufficient to compensate for the lack of resources. Hence, in the long run people earn only a subsistence level of real income. Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Communication 19) What are the basic arguments of the neoclassical growth theory? Answer: The neoclassical growth theory explains economic growth as the result of technological change. Technological change leads to a level of saving and investment that makes capital per hour of labor grow. Growth, therefore, only ends if technological change ends. However the theory looks at technological change as being the result of chance and luck and so offers no explanation for how or why technological change occurs. Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Communication

20) "According to the neoclassical growth theory, national incentives to save, invest, accumulate human capital, and develop new technology influence the country's growth rate of real GDP." Comment on the accuracy of the previous statement. Answer: The sentence is inaccurate. The neoclassical growth theory says that a nation's growth rate of real GDP depends on the growth rate of technology. The neoclassical growth theory assumes that the growth rate of technology is the result of chance and luck. It is the new growth theory that asserts that growth depends on people's incentives, so it is the new growth theory that predicts that a nation's growth rate depends on its national incentives to save, invest, accumulate human capital, and develop new technology. Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Communication 21) What is the role of profits in the neoclassical growth theory versus the new growth theory? Answer: Profits play essentially no role in the neoclassical growth theory. In the new growth theory, they are key because it is based on the idea that technological change results from the choices that people make in the pursuit of profit. Discoveries result from people's choices, such as whether to look for something new and, if so, how intensively to look. Profit affects these choices. A new discovery brings the discovered high profits but eventually competitors emerge and the above-average profit is competed away. Topic: Neoclassical and New Growth Theory Skill: Conceptual Status: Old AACSB: Communication 22) What is the main shortcoming of the neoclassical growth model and how does the new growth theory address this shortcoming? Answer: One difficulty with the neoclassical model is that it predicts all nations will converge to the same level of per capita income. The new growth theory is based on the idea that technological change results from the choices that people make in the pursuit of profit. So if people in different nations face different incentives to innovate, technological progress and hence economic growth can differ among nations. Topic: Neoclassical and New Growth Theory Skill: Conceptual Status: Old AACSB: Communication

23) How does the new growth theory explain economic growth? Answer: The new growth theory explains growth as the result of choices made in the pursuit of profit. If people choose to look intensively for new technologies they will be found more quickly. Profit is the motive to look for technological change. The reason is that competition squeezes profits. Firms are constantly looking for ways to reduce costs and increase profits through technological change. The economy can grow forever as long as people make the choices that encourage the search for new technologies. Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Communication 24) Of the three economic growth theories, which is the most optimistic about the chances of real GDP per person growing indefinitely? Which is the most pessimistic? What accounts for the differences? Answer: The most optimistic is the new growth theory, which concludes that real GDP per person can continue to grow indefinitely. The most pessimistic is the classical theory, which concludes that growth in real GDP per person will stop and that people will produce only the subsistence level of real GDP per person. The difference in the two conclusions can be traced to differences in assumptions in three key areas. First, the new growth theory concludes that technology will advance forever because people, seeking profit, make decisions to develop new technology. Classical growth theory assumes that technological advances are rare and infrequent. Second, the new growth theory assumes that the economy is not subject to diminishing returns. Hence, as the economy accumulates more capital, the returns to capital do not diminish and so the incentive to add yet more capital continues undiminished. The classical growth theory assumes that capital (and labor) is subject to diminishing returns. Thus as more capital is accumulated, the returns diminish and so the incentive to continue adding more capital disappears. Thus the capital stock eventually stops growing. Finally, the new growth theory assumes that the population does not grow more rapidly as real GDP per person increases. The classical theory assumes that whenever real GDP per person exceeds the subsistence level, rapid population growth occurs and, because of diminishing returns to labor, the increased population drives the level of real GDP back to the subsistence amount. Topic: Growth Theories Skill: Conceptual Status: Old AACSB: Communication

25) Explain the role played by technological change in classical growth theory, neoclassical growth theory, and new growth theory. Answer: Technology plays a secondary role in classical growth theory. While technology might increase real GDP in the classical growth model, population changes drive real GDP per person back to a subsistence level of income. Technology also plays a secondary role in neoclassical growth theory. Neoclassical theory has technological change bringing about an increase in real GDP but diminishing returns brings an end to economic growth. The new growth theory emphasizes the role of technological change in creating continuous growth because entrepreneurs have an incentive to develop new technologies as a means of generating profits for themselves. Topic: Growth Theories Skill: Conceptual Status: Old AACSB: Communication 26) Suppose the President asks you to write him a letter suggesting ways the government might help the economy achieve permanently higher rates of economic growth. Based on your understanding of growth theory and growth accounting, what would you suggest? Answer: According to both neoclassical and new growth theories, the key to faster growth is generating higher rates of technological progress. Because many technological advances are embodied in new capital, sustaining a high rate of saving and investment is important. Government might help stimulate saving supply by tax incentives such as IRAs and stimulate investment demand by offering investment tax credits, accelerated depreciation and reductions in corporate profit tax rates. New ideas are also embodied in human capital. Government can finance education and training directly and provide low-interest loans to students and training tax credits to businesses. Finally, we need to generate more new ideas, by stimulating research and development efforts. This includes government funding of basic research and tax credits to businesses for R&D expenses. Topic: Achieving Faster Economic Growth Skill: Conceptual Status: Old AACSB: Communication 27) Describe ways that governments can promote faster economic growth. Answer: Policies for increasing the economic growth rate are 1) Stimulate saving (for instance, tax incentives could be directed at increasing saving which will then increase the capital stock); 2) Stimulate research and development (inventions can be copied, so government subsidies can lead to more inventions that spread throughout the economy); 3) Encourage international trade (free international trade encourages economic growth because free trade extracts all the possible gains from specialization and exchange); 4) Improve the quality of education (education creates benefits beyond the ones enjoyed by the students who receive education). Topic: Achieving Faster Economic Growth Skill: Conceptual Status: Old AACSB: Communication

8 Numeric and Graphing Questions

Labor demand Labor supply (billions of Real wage rate (billions of hours per (2005 dollars) hours per year) year) 0 30 6 1 25 5 2 20 4 3 15 3 4 10 2 Employment (billions of Real GDP hours per (billions of year) 2005 dollars) 6 95 5 90 4 80 3 60 2 30 1) The first table above gives the labor demand and labor supply schedules for a nation. The second table gives its production function. a) What is the equilibrium real wage rate and the level of employment? b) What is potential GDP? Answer: a) The equilibrium real wage rate is $15 an hour because this is the real wage rate for which the quantity of labor demanded equals the quantity supplied. The equilibrium level of employment is 3 billion hours a year. b) With employment equal to 3 billion hours per year, potential GDP is equal to $60 billion. Topic: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

Labor demand Labor supply Real wage rate (billions of (billions of (2005 dollars) hours per hours per year) year) 30 100 700 25 200 600 20 300 500 15 400 400 10 500 300 Employment (billions of Real GDP hours per (trillions of year) 2005 dollars) 200 3.0 300 4.0 400 4.8 500 5.4 600 5.8 2) The first table above gives the labor demand and labor supply schedules for a nation. The second table gives its production function. a) What is the equilibrium real wage rate and the level of employment? b) What is potential GDP? Answer: a) The equilibrium real wage rate is $15 an hour because this is the real wage rate for which the quantity of labor demanded equals the quantity supplied. The equilibrium level of employment is 400 billion hours a year. b) With employment equal to 400 billion hours per year, potential GDP is equal to $4.8 trillion. Topic: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

Labor demand Labor supply Real wage rate (billions of (billions of (2005 dollars) hours per hours per year) year) 5 360 260 10 325 275 15 300 300 20 280 330 Employment (billions of Real GDP hours per (trillions of year) 2005 dollars) 100 2.0 200 3.0 300 3.8 400 4.4 3) The first table above gives the labor demand and labor supply schedules for a nation. The second table gives its production function. a) What is the equilibrium real wage rate and the level of employment? b) What is potential GDP? If you cannot determine a precise amount, give the range in which potential GDP must lie. Answer: a) The equilibrium real wage rate is $15 an hour because this is the real wage rate for which the quantity of labor demanded equals the quantity supplied. The equilibrium level of employment is 300 billion hours a year. b) With employment equal to 300 billion hours per year, potential GDP is equal to $3.8 trillion. Topic: Labor Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 4) Real GDP equals $12 trillion and aggregate hours equals 300 billion hours. What does labor productivity equal? Answer: Labor productivity is (real GDP)/(aggregate hours), so labor productivity equals ($12 trillion)/(300 billion hours) = $40 per hour. Topic: Labor Productivity Skill: Analytical Status: Old AACSB: Analytical Skills

9 True or False 1) Economists are interested in long-term economic growth because growth increases real GDP per person and improves our standard of living. Answer: TRUE Topic: Economic Growth Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 2) Over the last 100 years, real GDP per person in the United States has grown at an average rate of approximately 2 percent per year. Answer: TRUE Topic: Growth in the U.S. Economy Skill: Recognition Status: Old AACSB: Reflective Thinking 3) The United States had the largest real GDP per person until the 2012 when the China's real GDP per person overtook and then exceeded that in the United States. Answer: FALSE Topic: Real GDP Growth in the World Economy Skill: Recognition Status: Revised AACSB: Reflective Thinking 4) Because the United States is a developed economy, every other country is catching up to the level of U.S. real GDP per person. Answer: FALSE Topic: Real GDP Growth in the World Economy Skill: Conceptual Status: Old AACSB: Reflective Thinking 5) The gap between real GDP per person in the United States and South America has been narrowing since 1980. Answer: FALSE Topic: Real GDP Growth in the World Economy Skill: Recognition Status: Old AACSB: Reflective Thinking

6) Real GDP per person is slowly converging around the world. Answer: FALSE Topic: Real GDP Growth in the World Economy Skill: Recognition Status: Old AACSB: Reflective Thinking 7) Labor productivity has grown at almost the same rate each year over the last 40 years in the United States. Answer: FALSE Topic: Labor Productivity Skill: Conceptual Status: Old AACSB: Reflective Thinking 8) If the price level rises faster than the money wage rate, the real wage rate falls. Answer: TRUE Topic: Real Wage Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 9) The real wage rate measures the quantity of goods and services an hour's work will buy. Answer: TRUE Topic: Real Wage Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 10) The demand curve for labor shows how many hours workers demand to work. Answer: FALSE Topic: Demand for Labor Skill: Recognition Status: Old AACSB: Reflective Thinking 11) In general, a higher real wage rate decreases the quantity of labor supplied because fewer people enter the labor force. Answer: FALSE Topic: Labor Supply Skill: Recognition Status: Old AACSB: Reflective Thinking

12) The higher the real wage rate, the higher the labor force participation rate. Answer: TRUE Topic: Labor Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 13) To achieve faster growth, economies can increase income tax rates in order to increase saving rates. Answer: FALSE Topic: Achieving Faster Growth, Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 14) Faster long-term growth can be achieved by discouraging saving and encouraging consumption. Answer: FALSE Topic: Achieving Faster Growth, Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 15) All else equal, an increase in population decreases potential GDP. Answer: FALSE Topic: An Increase in Population Skill: Conceptual Status: Old AACSB: Reflective Thinking 16) The classical growth theory shows how technology changes continually generate economic growth. Answer: FALSE Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Reflective Thinking 17) The classical growth theory's view of the economy and its ability to achieve growth can be compared to a perpetual motion machine. Answer: FALSE Topic: Classical Growth Theory Skill: Conceptual Status: Old AACSB: Reflective Thinking

18) The neoclassical growth theory is based on a subsistence real wage rate. Answer: FALSE Topic: Neoclassical Growth Theory Skill: Recognition Status: Old AACSB: Reflective Thinking 19) The neoclassical growth theory concluded that economic growth is temporary because of a population explosion that occurs as a result of economic growth. Answer: FALSE Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Reflective Thinking 20) In neoclassical growth theory, technological progress is the key to continuous growth in labor productivity. Answer: TRUE Topic: Neoclassical Growth Theory Skill: Conceptual Status: Old AACSB: Reflective Thinking 21) New growth theory claims that economic growth occurs because firms reap profits from research and add to the stock of capital. Answer: TRUE Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Reflective Thinking 22) New growth theory holds that choices, and the discoveries that result from them, result in growth that is temporary in nature. Answer: FALSE Topic: New Growth Theory Skill: Conceptual Status: Old AACSB: Reflective Thinking

10 Extended Problems Leisure (hours) 0 40 80 120 160 200

Real GDP (2005 dollars) 2,000 1,920 1,680 1,280 720 0

1) The people of Palm Island are willing to work 80 hours a day for a real wage rate of $4 an hour. Then each dollar increase in the real wage, they are willing to work 10 additional hours a day. Palm Island's production possibilities are in the table above. a) Draw Palm Island's demand for labor curve. b) Draw Palm Island's supply of labor curve. c) What are the full-employment equilibrium real wage rate and quantity of labor in Palm Island's economy? d) What is Palm Island's potential GDP? Answer:

a) See the figure above. Palm Island's demand for labor curve is the marginal product of labor curve. The marginal product of labor for each quantity of labor employed is the change in real GDP divided by the change in quantity of labor employed. For example, 100 hours of labor employed is the midpoint between 80 and 120 hours on the production function. The 40 hors of additional labor between 80 and 100 hours produce of additional real GDP. So for these 40 hours of labor, one hour will produce additional real GDP of So the marginal product of labor is $10 per hour when 100 hours of labor are employed. The rest of the marginal products are calculated similarly and are in the figure above. 108 Copyright © 2014 Pearson Education, Inc.

b) The figure above shows the labor supply curve. c) The full-employment equilibrium real wage rate is the one at which the quantity of labor demanded equals the quantity of labor supplied so that real GDP is at its full-employment level. In the economy of Palm Island, the figure above shows that the full-employment equilibrium real wage rate is $8 per hour and the full-employment quantity of labor is 120 hours per day. d) Potential GDP is the level of real GDP at full employment. As the figure above shows, Palm Island's full employment is 120 hours per day. And the production function shows that 120 hours of labor can produce a real GDP of $1,280. So Palm Island's potential GDP is $1,280 per day. Topic: Labor Market and Potential GDP Skill: Analytical Status: Old AACSB: Analytical Skills

Economics, 11e, Global Edition (Parkin) Chapter 24 Finance, Saving, and Investment 1 Financial Institutions and Financial Markets 1) The term "capital," as used in macroeconomics, refers to A) the plant, equipment, buildings, and inventories of raw materials and semi-finished goods. B) financial wealth. C) the sum of investment and government purchases of goods. D) investment. Answer: A Topic: Capital Skill: Recognition Status: Old AACSB: Reflective Thinking 2) The term capital, as used in macroeconomics, refers to A) the amount of money that someone can invest in a new venture. B) the amount of money a firm can raise in the stock market. C) physical capital. D) All of the above answers are correct. Answer: C Topic: Capital Skill: Recognition Status: Old AACSB: Reflective Thinking 3) Which of the following items are considered physical capital? I. shares of Ford stock traded on the New York Stock Exchange II. the Taco Bell store nearest you III. the rental cars owned by Hertz Rental-A-Car IV. the salaries paid to Intel executives A) II and III. B) I and IV. C) I, II and III. D) I, II and IV. Answer: A Topic: Capital Skill: Conceptual Status: Old AACSB: Reflective Thinking

4) Gross investment A) is the purchase of new capital. B) includes only replacement investment. C) does not include additions to inventories. D) Both answers A and B are correct. Answer: A Topic: Gross Investment Skill: Recognition Status: Old AACSB: Reflective Thinking 5) The total amount spent on new capital in a time period is equal to A) wealth. B) gross investment. C) depreciation. D) net investment. Answer: B Topic: Gross Investment Skill: Recognition Status: Old AACSB: Reflective Thinking 6) In January 2013, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the equipment fell by 30 percent. During 2013, Tim spent $200,000 on new machines. During 2013, Tim's gross investment totalled A) $1 million. B) $300,000. C) $200,000 D) $900,000. Answer: C Topic: Gross Investment Skill: Analytical Status: Old AACSB: Analytical Skills 7) Net investment equals A) capital stock minus depreciation. B) gross investment minus depreciation. C) the total quantity of plant, equipment and buildings. D) gross investment/depreciation. Answer: B Topic: Net Investment Skill: Recognition Status: Old AACSB: Reflective Thinking

8) The increase in the capital stock equals the amount of A) gross investment. B) depreciation. C) net investment. D) private sector spending. Answer: C Topic: Net Investment Skill: Recognition Status: Old AACSB: Reflective Thinking 9) The capital stock increases whenever A) gross investment is exceeds net investment. B) net investment exceeds gross investment. C) gross investment is negative. D) net investment is positive. Answer: D Topic: Net Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking 10) If the economy's capital stock increases over time, A) net investment is positive. B) depreciation is less than zero. C) depreciation exceeds gross investment. D) gross investment equals depreciation. Answer: A Topic: Net Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking 11) If the economy's capital stock decreases over time, A) net investment is positive. B) depreciation is less than zero. C) depreciation exceeds gross investment. D) gross investment equals net investment. Answer: C Topic: Net Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking

12) In January 2013, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the equipment fell by 30 percent. During 2013, Tim spent $200,000 on new machines. During 2013, Tim's net investment totalled A) $1 million. B) -$300,000. C) $200,000. D) -$100,000. Answer: D Topic: Net Investment Skill: Analytical Status: Revised AACSB: Analytical Skills 13) The Acme Stereo Company had a capital stock of $24 million at the beginning of the year. At the end of the year, the firm had a capital stock of $20 million. Thus its A) net investment was some amount but we need more information to determine the amount. B) net investment was $4 million for the year. C) gross investment was zero. D) net investment was -$4 million for the year. Answer: D Topic: Capital and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 14) At the beginning of the year, Tom's Tubes had a capital stock of 5 tube inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tom's net investment for the year totaled A) 1 machine. B) 2 machines. C) 3 machines. D) 6 machines. Answer: A Topic: Capital and Investment Skill: Analytical Status: Old AACSB: Analytical Skills

15) At the beginning of the year, Tom's Tubes had a capital stock of 5 tube inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tom's gross investment for the year totaled A) 1 machine. B) 2 machines. C) 3 machines. D) 6 machines. Answer: C Topic: Capital and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 16) At the beginning of the year, Tom's Tubes had a capital stock of 5 tube inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tom's capital stock at the end of year equals A) 1 machine. B) 2 machines. C) 3 machines. D) 6 machines. Answer: D Topic: Capital and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 17) Which of the following is FALSE about saving? A) Saving adds to wealth. B) Income left after paying taxes can either be consumed or saved. C) Saving equals wealth minus consumption expenditures. D) Saving is the source of funds used to finance investment. Answer: C Topic: Wealth and Saving Skill: Recognition Status: Old AACSB: Reflective Thinking 18) An increase in the ________ is an example of a capital gain. A) value of a share of stock B) wage rate of a federal employee C) amount of income not spent on consumption or taxes D) after-tax wage rate as a result of a decrease in income tax rates Answer: A Topic: Wealth and Saving Skill: Definition Status: New AACSB: Reflective Thinking 5 Copyright © 2014 Pearson Education, Inc.

19) Facebook sold shares of stock for the first time in an IPO on May 18, 2012. The stock originally sold for $38 per share. As of October 19, 2012, a share of Facebook stock was valued at $19 per share. The decrease in the value of a share of Facebook purchased in May and still owned in October is called A) a capital gain. B) a capital loss. C) gross investment. D) net investment. Answer: B Topic: Wealth and Saving Skill: Definition Status: New AACSB: Reflective Thinking 20) At the beginning of the year, your wealth is $10,000. During the year, you have an income of $90,000 and you spend $80,000 on consumption. You pay no taxes. Your wealth at the end of the year is A) $20,000.00. B) $0. C) $90,000.00. D) $100,000.00. Answer: A Topic: Wealth and Saving Skill: Analytical Status: Old AACSB: Analytical Skills 21) At the beginning of the year, your wealth is $10,000. During the year, you have an income of $80,000 and you spend $90,000 on consumption. You pay no taxes. Your wealth at the end of the year is A) $20,000.00. B) $0. C) $90,000.00. D) $100,000.00. Answer: B Topic: Wealth and Saving Skill: Analytical Status: Old AACSB: Analytical Skills

22) In January, suppose that a share of stock in Meyer, Inc. had a price of $50 and that each share entitled its owner to $2 of Meyer, Inc.'s profit. During the year, the price of a share of Meyer's stock rose to $100. The interest rate paid on the share in January was ________ percent. A) 2 B) 0.02 C) 4 D) 25 Answer: C Topic: Interest Rate and Price of Asset Skill: Analytical Status: Old AACSB: Analytical Skills 23) Suppose that a bond promises to pay its holder $100 a year forever. If the price of the bond increases from $1,000 to $1,250, then the interest rate on the bond A) falls from 10 percent to 8 percent. B) rises from 8 percent to 10 percent. C) does not change because it is not affected by the price of the bond. D) falls from 10 percent to 6 percent. Answer: A Topic: Interest Rate and Price of Asset Skill: Analytical Status: Old AACSB: Analytical Skills 24) Suppose a bond promises to pay its holder $100 a year forever. The interest rate on the bond rises from 4 percent to 5 percent. The price of the bond A) falls from $2,500 to $2,000. B) does not change because it is not affected by the interest rate. C) falls from $25,000 to $20,000. D) rises from $2,000 to $2,500. Answer: A Topic: Interest Rate and Price of Asset Skill: Analytical Status: Old AACSB: Analytical Skills

25) The Restoring American Financial Stability Act of 2010 A) cut the federal government's ties with Fannie Mae and Freddy Mac. B) prohibits banks from selling mortgage backed securities, which were largely to blame for the financial market crisis in 2007-2008. C) eliminated the Federal Deposit Insurance Corporation. D) had restrictions that try to limit risky investment by banks. Answer: D Topic: The Financial Crisis and the Fix Skill: Recognition Status: Old AACSB: Reflective Thinking 26) All of the following are points of the Restoring American Financial Stability Act of 2010 EXCEPT: A) creating a Consumer Financial Protection Bureau. B) requiring mortgage lenders to review income and credit histories of applicants to ensure they can afford payments. C) imposing tighter restrictions on banks to limit risky investments. D) requiring firms that create mortgage backed securities to keep at least 50 percent of their value as reserves. Answer: D Topic: The Financial Crisis and the Fix Skill: Recognition Status: Old AACSB: Reflective Thinking 27) The funds used to buy and operate physical capital are A) depreciation. B) financial capital. C) saving. D) wealth. Answer: B Topic: Study Guide Question, Financial Capital Skill: Recognition Status: Old AACSB: Reflective Thinking

28) This year Pizza Hut makes a total investment of $1.3 billion in new stores. Its depreciation in this year is $300 million. Pizza Hut's gross investment is ________ and its net investment is ________. A) $1.3 billion; $1.6 billion B) $1.0 billion; $1.3 billion C) $1.3 billion; $1.0 billion D) $1.0 billion; $0.7 billion Answer: C Topic: Study Guide Question, Gross and Net Investment Skill: Analytical Status: Old AACSB: Analytical Skills 29) If a bank's net worth is negative, then the bank definitely is A) liquid. B) insolvent. C) illiquid. D) solvent. Answer: B Topic: Study Guide Question, Insolvent Skill: Recognition Status: Old AACSB: Reflective Thinking

2 The Loanable Funds Market 1) Investment is financed by which of the following? I. Government spending II. National saving III. Borrowing from the rest of the world A) I, II, and III B) I and II only C) I and III only D) II and III only Answer: D Topic: How Investment is Financed Skill: Recognition Status: Old AACSB: Reflective Thinking 2) U.S. investment is financed from A) private saving, government budget surpluses, and borrowing from the rest of the world. B) private saving, government budget deficits, and borrowing from the rest of the world. C) private borrowing, government budget deficits, and lending to the rest of the world. D) private saving and borrowing from the rest of the world only. Answer: A Topic: Financing Investment Skill: Recognition Status: Old AACSB: Reflective Thinking 3) A nation's investment must be financed by A) national saving only. B) the government's budget deficit. C) borrowing from the rest of the world only. D) national saving plus borrowing from the rest of the world. Answer: D Topic: Financing Investment Skill: Recognition Status: Old AACSB: Reflective Thinking

4) National saving is defined as the amount of A) business saving. B) household saving. C) business saving and household saving. D) private saving and government saving. Answer: D Topic: National Saving Skill: Recognition Status: Old AACSB: Reflective Thinking 5) National saving equals A) household saving + business saving. B) household saving + business saving + government saving. C) household saving + business saving + net taxes - government expenditure. D) Both answers B and C are correct. Answer: D Topic: National Saving Skill: Recognition Status: Old AACSB: Reflective Thinking 6) If the government runs a budget deficit, then A) national saving is negative. B) household but not business saving must pay for the deficit. C) part of household and business saving finances the deficit. D) national saving cannot fund investment. Answer: C Topic: National Saving Skill: Analytical Status: Old AACSB: Analytical Skills 7) If national saving (S) is $100,000, net taxes (T) equal $100,000 and government expenditure (G) is $25,000, how much are households and businesses saving? A) $25,000. B) $225,000. C) -$25,000. D) none of the above Answer: A Topic: National Saving Skill: Recognition Status: Old AACSB: Analytical Skills

8) Suppose the United States spends more on foreign goods and services than foreigners spend on our goods and services and the United States sells no foreign assets. Then the A) United States must borrow an amount equal to national saving. B) United States must borrow an amount equal to imports minus exports. C) rest of the world may or may not finance the U.S. trade deficit. D) United States must borrow an amount equal to consumption expenditure plus investment. Answer: B Topic: Borrowing from the Rest of the World Skill: Conceptual Status: Old AACSB: Reflective Thinking 9) If foreigners spend more on U.S.-made goods and services than we spend on theirs, A) foreigners must borrow from the United States or sell U.S. assets to make up the difference. B) all U.S. national saving remains in the United States C) we must borrow from foreigners because of low imports. D) funds flow in from abroad to help finance U.S. investment. Answer: A Topic: Borrowing from the Rest of the World Skill: Analytical Status: Old AACSB: Analytical Skills 10) If U.S. exports are $2.2 billion and our imports are $2.7 billion, A) the United States is lending to the rest of the world. B) U.S. national saving is too high. C) the United States is borrowing from the rest of the world. D) U.S. investment must decrease. Answer: C Topic: Borrowing from the Rest of the World Skill: Analytical Status: Old AACSB: Analytical Skills 11) Suppose Country A had net taxes of $30 million and government expenditures of $35 million. In addition, household saving in Country A totalled $5 million while consumption was $80 million. The government of Country A is running a budget ________ and national saving is ________ million. A) surplus; $5 B) deficit; -$5 C) deficit; $0 D) surplus; $25 Answer: C Topic: Financing Investment Skill: Analytical Status: Revised AACSB: Analytical Skills 12 Copyright © 2014 Pearson Education, Inc.

Item Personal consumption expenditure Government expenditure on goods and services Net taxes Gross private domestic investment Imports of goods and services Exports of goods and services

Millions of dollars 80 30 35 20 10 20

12) Use the information in the table above to calculate the value of national saving. A) -$15 million B) $40 million C) $25 million D) $20 million Answer: C Topic: Financing Investment Skill: Analytical Status: Revised AACSB: Analytical Skills 13) Use the information in the table above to calculate the value of government saving. A) $15 million B) -$5 million C) $5 million D) $45 million Answer: C Topic: Financing Investment Skill: Analytical Status: Old AACSB: Analytical Skills 14) Which of the following is TRUE regarding the real interest rate? I. The real interest rate is the opportunity cost of borrowed funds. II. The real interest rate equals the nominal interest rate adjusted for inflation. A) I B) II C) both I and II D) neither I nor II Answer: C Topic: Real Interest Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 13 Copyright © 2014 Pearson Education, Inc.

15) Approximately, the real interest rate ________ the inflation rate ________ the nominal interest rate. A) plus; equals B) equals; plus C) equals; minus D) minus; equals Answer: A Topic: Real Interest Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 16) The ________ interest rate approximately equals the ________ interest rate minus ________. A) nominal; real; depreciation B) nominal; real; the inflation rate C) real; nominal; depreciation D) real; nominal; the inflation rate Answer: D Topic: Real Interest Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 17) The real interest rate A) can never be negative. B) is approximately equal to the nominal interest rate plus the inflation rate. C) is approximately equal to the nominal interest rate minus the inflation rate. D) is positively related to the inflation rate. Answer: C Topic: Real Interest Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 18) The nominal interest rate minus the real interest rate approximately equals the A) rate of increase in the amount of investment. B) inflation rate. C) the rate of increase in the income. D) the rate the bank receives to cover lending costs. Answer: B Topic: Real Interest Rate Skill: Recognition Status: Old AACSB: Reflective Thinking

19) The nominal interest rate approximately equals which of the following? A) the real interest rate minus the inflation rate B) the real interest rate plus the inflation rate C) the real interest rate minus the growth rate of real GDP D) the real interest rate plus the growth rate of real GDP Answer: B Topic: Real Interest Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 20) If you lend a dollar for a year and at the end of the year the price level has risen by 10 percent, A) the purchasing power of your loan has risen over the year regardless of the interest rate at which you lent it. B) the purchasing power of your loan has remained constant over the year regardless of the interest rate at which you lent it. C) you must have earned a nominal interest rate of 10 percent to maintain the purchasing power of your loan. D) you must have earned a nominal interest rate of 5 percent to maintain the purchasing power of your loan. Answer: C Topic: Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 21) When the inflation rate is zero, the A) real interest rate is greater than the nominal interest rate. B) real interest rate is less than the nominal interest rate. C) nominal interest rate is zero. D) real interest rate equals the nominal interest rate. Answer: D Topic: Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking

22) When the inflation rate is positive, the A) real interest rate is greater than the nominal interest rate. B) real interest rate is less than the nominal interest rate. C) nominal interest rate is zero. D) real interest rate equals the nominal interest rate. Answer: B Topic: Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 23) When the inflation rate is negative, the A) real interest rate is greater than the nominal interest rate. B) real interest rate is less than the nominal interest rate. C) nominal interest rate is zero. D) real interest rate equals the nominal interest rate. Answer: A Topic: Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 24) People expect an inflation rate of 5 percent and the real interest rate is positive. Consequently the nominal interest rate will be A) more than 5 percent. B) 5 percent. C) less than 5 percent. D) Without more information it is impossible to tell if the nominal interest rate will be more than, less than, or equal to 5 percent. Answer: A Topic: Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 25) People know that the inflation rate will increase from 3 percent to 5 percent. As a result A) the nominal interest rate falls by 2 percentage points. B) the nominal interest rate is constant. C) the nominal interest rate rises by 2 percentage points. D) the real interest rate rises by 2 percentage points. Answer: C Topic: Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills

26) Suppose that you took out a $1000 loan in January and had to pay $75 in annual interest. During the year, inflation was 6 percent. Which of the following statements is correct? A) The nominal interest rate is 7.5 percent and the real interest rate is 1.5 percent. B) The nominal interest rate is 7.5 percent and the real interest rate is 13.5 percent. C) The real interest rate is 7.5 percent and the nominal interest rate is 1.5 percent. D) The real interest rate is 6 percent and the nominal interest rate is 7.5 percent. Answer: A Topic: Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 27) People know that the inflation rate will decrease from 7 percent to 3 percent. As a result A) the nominal interest rate falls by 4 percentage points. B) the nominal interest rate is constant. C) the nominal interest rate rises by 4 percentage points. D) the nominal interest rate equals 3 percent. Answer: A Topic: Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 28) If people expect an inflation rate of 3.3 percent, and the real interest rate is 3 percent, the nominal interest rate equals (approximately) A) 0.3 percent. B) 8.6 percent. C) 6.3 percent. D) 9.9 percent. Answer: C Topic: Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 29) If the nominal interest rate is 8 percent and inflation is 3 percent, approximately what is the real interest rate? A) 11 percent B) 8 percent C) 5 percent D) 3 percent Answer: C Topic: Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 17 Copyright © 2014 Pearson Education, Inc.

30) If the nominal interest rate is 7 percent and the inflation rate is 1 percent, the real interest rate is approximately A) 7 percent. B) 6 percent. C) 8 percent. D) -6 percent. Answer: B Topic: Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 31) If the nominal interest rate is 8 percent and the inflation rate is 2 percent, the real interest rate is approximately A) 4 percent. B) 6 percent. C) 0.25 percent. D) 10 percent. Answer: B Topic: Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 32) If the nominal interest rate is 11 percent and the inflation rate is 9 percent, then the real interest rate is approximately A) 2 percent. B) 20 percent. C) 4 percent. D) 18 percent. Answer: A Topic: Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 33) If the nominal interest rate is 8 percent and the current inflation rate is 3 percent, approximately what is the real interest rate? A) 11 percent B) 8 percent C) 5 percent D) 3 percent Answer: C Topic: Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 18 Copyright © 2014 Pearson Education, Inc.

34) Assume you save $1,000 in a bank account that pays 8 percent interest per year and the inflation rate is 3 percent. At the end of the year you have earned A) a nominal return of $50. B) a negative real return. C) a real return of $50. D) a real return of $80. Answer: C Topic: Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 35) The real interest rate is 4 percent a year. When the inflation rate is zero, the nominal interest rate is approximately ________ percent a year; and when the inflation rate is 2 percent a year, the nominal interest rate is approximately ________ percent a year. A) 0; 2 B) 4; 6 C) 6; 8 D) 6; 4 Answer: B Topic: Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 36) Initially the nominal interest rate is 8 percent and the inflation rate is 5 percent. People know that the inflation rate increases to 10 percent. What is the new nominal interest rate? A) 8 percent B) 3 percent C) 13 percent D) 11 percent Answer: C Topic: Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills

37) Suppose that, initially, the nominal interest rate is 6 percent and the inflation rate is 3 percent. If the inflation rate increases to 6 percent, what will be the new nominal interest rate? A) 6 percent B) 1 percent C) 11 percent D) 9 percent Answer: D Topic: Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 38) A firm's decision to invest in a project is based on the A) real interest rate and expected total revenue. B) nominal interest rate and expected total revenue. C) nominal interest rate and the expected profit. D) real interest rate and the expected profit. Answer: D Topic: Investment Decisions Skill: Recognition Status: Old AACSB: Reflective Thinking 39) Suppose a firm has an investment project which will cost $200,000 and result in $30,000 profit. The firm will not undertake the project if the interest rate is ________. A) greater than 15 percent. B) greater than 10 percent. C) greater than 5 percent. D) positive. Answer: A Topic: Investment Demand Skill: Analytical Status: Old AACSB: Analytical Skills 40) Other things remaining the same, the greater the expected profit, A) the less the amount of investment. B) the greater the amount of investment. C) the steeper is the investment demand curve. D) the flatter is the investment demand curve. Answer: B Topic: Expected Profit Skill: Recognition Status: Old AACSB: Reflective Thinking

41) Which of the following are major influences on the expected profit from an investment? I. technology advances II. stock market behavior III. accounting practices A) I only B) I and II C) I and III D) II and III Answer: A Topic: Expected Profit Skill: Conceptual Status: Old AACSB: Reflective Thinking 42) The expected profit from an investment will change with A) a change in the real interest rate. B) a change in technology. C) Both A and B are correct. D) Neither A nor B is correct. Answer: B Topic: Expected Profit Skill: Recognition Status: Old AACSB: Reflective Thinking 43) The ________ the expected profit, the greater is the ________. A) lower; investment demand B) higher; investment demand C) lower; capital stock D) None of the above answers is correct Answer: B Topic: Expected Profit Skill: Recognition Status: Old AACSB: Reflective Thinking 44) As the ________ interest rate increases, the quantity of loanable funds demanded ________. A) real; increases B) real; decreases C) nominal; increases D) nominal; decreases Answer: B Topic: The Real Interest Rate and Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking 21 Copyright © 2014 Pearson Education, Inc.

45) Which of the following explains why the demand for loanable funds is negatively related to the real interest rate? A) A lower real interest rate makes more investment projects profitable. B) Consumers are willing to spend less and hence save more at higher real interest rates. C) Interest rate flexibility in financial markets assures an equilibrium in which saving equals investment. D) All of the above are reasons why the demand for loanable funds is negatively related to the real interest rate. Answer: A Topic: The Real Interest Rate and Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking 46) The demand for loanable funds is the relationship between loanable funds and the ________ other things remaining the same. A) real interest rate B) nominal interest rate C) inflation rate D) price level Answer: A Topic: Demand for Loanable Funds Skill: Recognition Status: Old AACSB: Reflective Thinking 47) The demand for loanable funds curve is A) downward sloping when plotted against the real interest rate. B) vertical at the full employment level of investment. C) constant at the maximum expected profit rate. D) upward sloping when plotted against the real interest rate. Answer: A Topic: Demand for Loanable Funds Curve Skill: Recognition Status: Old AACSB: Reflective Thinking

48) The demand for loanable funds curve shows that as the ________ interest rate increases, there will be ________ the curve. A) nominal; a rightward shift in B) real; a rightward shift in C) nominal; movement down along D) real; movement up along. Answer: D Topic: Demand for Loanable Funds Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 49) If the real interest rate increases from 3 percent to 5 percent, A) the nominal interest rate will also increase. B) the demand for loanable funds curve will shift rightward. C) there will be a movement up along the demand for loanable funds curve. D) the supply of loanable funds curve will shift rightward. Answer: C Topic: Demand for Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 50) A rise in the real interest rate A) shifts the demand for loanable funds curve rightward. B) shifts the demand for loanable funds curve leftward. C) creates a movement upward along the demand for loanable funds curve. D) creates a movement downward along the demand for loanable funds curve. Answer: C Topic: Demand for Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 51) A decrease in the real interest rate leads to A) an increase in investment demand so that the demand for loanable funds curve shifts rightward. B) a fall in the capital stock. C) an increase in the expected profit. D) a movement downward along the demand for loanable funds curve. Answer: D Topic: Demand for Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking

52) When the real interest rate rises A) there is a downward movement along the demand for loanable funds curve. B) there is an upward movement along the demand for loanable funds curve. C) the demand for loanable funds curve shifts rightward. D) the demand for loanable funds curve shifts leftward. Answer: B Topic: Demand for Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 53) A movement downward along the demand for loanable funds curve occurs when A) the expected profit from investment increases. B) business expectations become more optimistic. C) the real interest rate falls. D) the supply of loanable funds decreases. Answer: C Topic: Demand for Loanable Funds Curve Skill: Conceptual Status: Revised AACSB: Reflective Thinking 54) A rise in the real interest rate A) decreases the demand for loanable funds. B) increases the demand for loanable funds. C) decreases the quantity of loanable funds demanded. D) increases the quantity of loanable funds demanded. Answer: C Topic: Demand for Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 55) A decrease in the real interest rate leads to a ________ the demand for loanable funds curve, and a decrease in the expected profit leads to a ________ the demand for loanable funds curve. A) rightward shift in; leftward shift in B) movement down along; movement up along C) rightward shift in; movement up along D) movement down along; leftward shift in Answer: D Topic: Demand for Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking

56) A decrease in the demand for loanable funds and a leftward shift of the demand for loanable funds curve results from A) an increase in the real interest rate. B) technological improvements. C) tax cuts. D) decreases in the expected profit. Answer: D Topic: Demand for Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 57) Greater optimism about the expected profits from investment projects A) shifts the demand for loanable funds curve rightward. B) shifts the demand for loanable funds curve leftward. C) causes a movement upward along the demand for loanable funds curve. D) causes a movement downward along the demand for loanable funds curve. Answer: A Topic: Demand for Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 58) Due to the recession in 2008, firms decreased their profit expectations. As a result, there was a ________ shift in the ________ loanable funds curve. A) rightward; supply of B) leftward; demand for C) rightward; demand for D) rightward, supply of Answer: B Topic: Demand for Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 59) Which of the following shifts the demand for loanable funds curve leftward? A) a fall in the real interest rate B) a rise in the real interest rate C) a decrease in the taxes paid by the business D) a decrease in the expected profit Answer: D Topic: Demand for Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking

60) In the above figure, the economy is at point a on the initial demand for loanable funds curve DLF0. What happens if the real interest rate rises? A) There is a movement to a point such as b on the demand for loanable funds curve DLF0. B) The demand for loanable funds curve shifts rightward to a curve such as DLF2. C) The demand for loanable funds curve shifts leftward to a curve such as DLF1. D) none of the above Answer: A Topic: Demand for Loanable Funds Curve Skill: Analytical Status: Old AACSB: Analytical Skills

61) In the above figure, a decrease in the real interest rate will result in a movement from point E to A) point F. B) point G. C) point H. D) point I. Answer: B Topic: Demand for Loanable Funds Curve Skill: Analytical Status: Old AACSB: Analytical Skills 62) In the above figure, an increase in the expected profit will result in a movement from point E to A) point F. B) point G. C) point H. D) point I. Answer: A Topic: Demand for Labor Curve Skill: Analytical Status: Old AACSB: Analytical Skills

63) In the above figure, a decrease in the expected profit will result in a movement from point E to A) point F. B) point G. C) point H. D) point I. Answer: C Topic: Demand for Loanable Funds Curve Skill: Analytical Status: Old AACSB: Analytical Skills

64) In the above figure, if the real interest rate is 6 percent, the quantity of loanable funds demanded is A) $150 billion. B) $300 billion. C) $450 billion. D) $600 billion. Answer: C Topic: Demand for Loanable Funds Curve Skill: Analytical Status: Old AACSB: Analytical Skills

65) In the above figure, the demand for loanable funds curve is drawn for the average expected profit. If the real interest rate is constant at 6 percent and the expected profit falls, the amount of loanable funds demanded will be A) less than $450 billion. B) $450 billion. C) between $450 billion and $600 billion. D) greater than $600 billion. Answer: A Topic: Demand for Loanable Funds Curve Skill: Analytical Status: Old AACSB: Analytical Skills 66) In the above figure, the demand for loanable funds curve is drawn for the average expected profit. If the real interest rate is constant at 6 percent and the expected profit rises, the amount of loanable funds demanded will be A) less than $450 billion. B) $450 billion. C) between $300 billion and $450 billion. D) greater than $450 billion. Answer: D Topic: Demand for Loanable Funds Curve Skill: Analytical Status: Old AACSB: Analytical Skills 67) In the above figure, new expectations of booming business conditions and a higher expected profit will A) shift the demand for loanable funds curve leftward. B) shift the demand for loanable funds curve rightward. C) have no effect on the demand for loanable funds curve. D) make the demand for loanable funds curve become horizontal. Answer: B Topic: Demand for Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking

68) In the above figure, technological progress that increases the expected profit will A) shift the demand for loanable funds curve leftward. B) shift the demand for loanable funds curve rightward. C) have no effect on the demand for loanable funds curve. D) make the demand for loanable funds curve become horizontal. Answer: B Topic: Demand for Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 69) All of the following are sources of loanable funds except A) business investment. B) private saving. C) government budget surplus. D) international borrowing. Answer: A Topic: Supply of Loanable Funds Skill: Conceptual Status: Old AACSB: Reflective Thinking 70) Which of the following are included in the supply of loanable funds? I. private saving II. government budget surplus III. international borrowing A) I, II and III. B) I and III. C) II and III. D) I and II. Answer: A Topic: Supply of Loanable Funds Skill: Conceptual Status: Old AACSB: Reflective Thinking 71) In the loanable funds market, the supply comes from A) saving, the government budget surplus and international borrowing B) only saving and the government budget surplus C) only saving D) only the government budget surplus and international borrowing Answer: A Topic: Supply of Loanable Funds Skill: Conceptual Status: Old AACSB: Reflective Thinking 30 Copyright © 2014 Pearson Education, Inc.

72) Which of the following influences household saving? I. The real interest rate. II. Disposable income. III. Expected future income. A) I only B) I and II C) I and III D) I, II, and III Answer: D Topic: Saving Decisions Skill: Recognition Status: Old AACSB: Reflective Thinking 73) Which of the following is NOT a determinant of household saving? A) the nominal interest rate B) disposable income C) the household's wealth D) expected future income Answer: A Topic: Household Saving Skill: Recognition Status: Old AACSB: Reflective Thinking 74) Saving by households A) decreases when the real interest rate rises. B) increases when the real interest rate rises. C) increases when the real interest rate falls. D) is unaffected by the real interest rate. Answer: B Topic: The Real Interest Rate and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 75) The quantity of ________ by households will be less ________. A) saving; the higher is disposable income B) saving; the lower is the real interest rate C) consumption; the lower is the inflation rate D) consumption; the higher is disposable income Answer: B Topic: The Real Interest Rate and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 31 Copyright © 2014 Pearson Education, Inc.

76) If the real interest rate rises, people A) save more. B) save less. C) earn a higher real wage rate. D) decrease their expected future income. Answer: A Topic: The Real Interest Rate and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 77) If households' disposable income decreases, then A) households' saving will decrease. B) households' saving will increase. C) investment will increase. D) Both B and C are correct. Answer: A Topic: Disposable Income and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 78) Households will choose to save more if A) income is expected to decrease in the future. B) current disposable income increases. C) Both answers A and B are correct. D) Neither answer A nor B is correct. Answer: C Topic: Disposable Income and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 79) Which of the following have a positive relationship with household saving? I. the real interest rate II. disposable income III. expected future income A) I and II B) II only C) II and III D) I, II and III Answer: A Topic: Disposable Income and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 32 Copyright © 2014 Pearson Education, Inc.

80) Which of the following is correct? A) As disposable income increases, the real interest rate increases. B) As disposable income decreases, saving decreases. C) As saving decreases, disposable income increases. D) As saving increases, investment by households decreases. Answer: B Topic: Disposable Income and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 81) ________ increases households' saving. A) A decrease in the real interest rate B) A tax cut that increases disposable income C) Higher expected future income D) A stock market boom that increases the purchasing power of households' wealth Answer: B Topic: Disposable Income and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 82) The greater a household's ________ the less is its saving. A) return from saving B) wealth C) disposable income D) expected future profits Answer: B Topic: Wealth and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 83) Suppose Molly has an income of $35,000 annually and has inherited a savings account of $20,000. Wyatt has a job that pays $35,000 annually, but has debts totaling $6,000. Which of the following is true? A) We can expect Wyatt and Molly to save the same proportion of their incomes this year. B) We can expect Molly to save more than Wyatt this year. C) We can expect Wyatt to save more than Molly this year. D) We can expect Wyatt and Molly to have equal amounts of consumption this year. Answer: C Topic: Wealth and Saving Skill: Recognition Status: Old AACSB: Reflective Thinking

84) If households expect an increase in their future incomes, they will save A) less and consume more today B) more and consume less today C) and consume more today D) and consume less today Answer: A Topic: Expected Future Income and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 85) Which of the following is true regarding the effect expected future income has on saving? I. As expected future income increases, saving increases. II. Young people typically save very little. III. Middle aged people, earning higher incomes, are not very big savers. A) I and III B) II only C) III only D) II and III Answer: B Topic: Expected Future Income and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 86) Sarah and Diane are both billing clerks for the local trucking company earning $17,000 per year. Sarah is attending college, plans to graduate in one year and earn $55,000 as an economist. Diane is not in college or undergoing any specialized training and will have the same job next year. According to economic theory, which of the two individuals would tend to have a higher current savings rate? A) Diane B) Sarah C) Both will have the same saving rate D) Economic theory sheds no light on this question Answer: A Topic: Expected Future Income and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking

87) If two households have the same disposable income in the current year, the household with the A) higher expected future income will consume a larger portion of its current income today. B) lower expected future income will consume more today while it has the money. C) lower expected future income will spend a larger portion of its current income on consumption today because it will increase its saving in the future. D) none of the above Answer: A Topic: Expected Future Income and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 88) The supply of loanable funds is the relationship between loanable funds and ________ other things remaining the same. A) real GDP B) the price level C) the real interest rate D) the inflation rate Answer: C Topic: Supply of Loanable Funds Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 89) Changes in all of the following shift the supply curve of loanable funds EXCEPT A) the real interest rate. B) wealth. C) disposable income. D) expected future income. Answer: A Topic: Supply of Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 90) Which of the following will shift the supply of loanable funds curve leftward? A) a decrease in the real interest rate B) a decrease in real wealth C) a decrease in disposable income D) a decrease in expected future income Answer: C Topic: Supply of Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 35 Copyright © 2014 Pearson Education, Inc.

91) An increase in ________ will shift the supply of loanable funds curve ________. A) expected future income; rightward B) wealth; leftward C) disposable income; leftward D) default risk; rightward Answer: B Topic: Supply of Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 92) As a result of the recession in 2008, the default risk increased. How did this change affect the loanable funds market? A) There was a movement up along the supply of loanable funds curve. B) There was a leftward shift in the supply of loanable funds curve. C) There was a movement down along the demand for loanable funds curve. D) There was a rightward shift in the supply of loanable funds curve. Answer: B Topic: Supply of Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 93) When the real interest rate increases, A) the supply of loanable funds curve shifts rightward. B) the supply of loanable funds curve shifts leftward. C) there is a movement upward along the supply of loanable funds curve. D) there is a movement downward along the supply of loanable funds curve. Answer: C Topic: Supply of Loanable Funds Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 94) An increase in the real interest rate results in a A) rightward shift in the supply of loanable funds curve. B) leftward shift in the supply of loanable funds curve. C) movement along the supply of loanable funds curve. D) None of the above. Answer: C Topic: Supply of Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking

95) Which of the following is true? I. As the real interest rate increases, people increase the quantity they save. II. The supply of loanable funds curve is downward sloping. III. As disposable income increases, the supply of loanable funds curve becomes steeper. A) I and III B) II and III C) I only D) III only Answer: C Topic: Supply of Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 96) In the loanable funds market, an increase in wealth shifts the ________ loanable funds curve ________. A) supply of; rightward B) supply of; leftward C) demand for; rightward D) demand for; leftward Answer: B Topic: Supply of Loanable Funds Curve Skill: Conceptual Status: Revised AACSB: Reflective Thinking 97) A increase in disposable income ________. A) has no effect on the supply of loanable funds curve B) shifts the supply of loanable funds curve rightward C) shifts the supply of loanable funds curve leftward D) results in movement up the supply of loanable funds curve Answer: B Topic: Supply of Loanable Funds Curve Skill: Conceptual Status: Revised AACSB: Reflective Thinking 98) If households believe their incomes will fall in the future, the result is a A) rightward shift in the supply of loanable funds curve. B) leftward shift in the supply of loanable funds curve. C) movement along the supply of loanable funds curve. D) movement along the demand for loanable funds curve. Answer: A Topic: Supply of Loanable Funds Skill: Conceptual Status: Old AACSB: Reflective Thinking 37 Copyright © 2014 Pearson Education, Inc.

99) In the above figure, the economy is at point a on the initial supply of loanable funds curve SLF0. What happens if disposable income decreases? A) Nothing; the economy would remain at point a. B) There would be a movement to a point such as b on supply of loanable funds curve SLF0. C) The supply of loanable funds curve would shift rightward to a curve such as SLF2. D) The supply of loanable funds curve would shift leftward to a curve such as SLF1. Answer: D Topic: Supply of Loanable Funds Curve Skill: Analytical Status: Old AACSB: Analytical Skills 100) In the above figure, the economy is at point a on the initial supply of loanable funds curve SLF0. What happens if the real interest rate rises? A) Nothing; the economy would remain at point a. B) There would be a movement to a point such as b on supply of loanable funds curve SLF0. C) The supply of loanable funds curve would shift rightward to a curve such as SLF2. D) The supply of loanable funds curve would shift leftward to a curve such as SLF1. Answer: B Topic: Supply of Loanable Funds Curve Skill: Analytical Status: Old AACSB: Analytical Skills

101) In the above figure, the economy is at point a on the initial supply of loanable funds curve SLF0. What happens if the interest rate rises? A) There is a movement to a point such as b on supply of loanable funds curve SLF0. B) The supply of loanable funds curve shifts rightward to a curve such as SLF2. C) The supply of loanable funds curve shifts leftward to a curve such as SLF1. D) none of the above Answer: A Topic: Supply of Loanable Funds Curve Skill: Analytical Status: Old AACSB: Analytical Skills 102) In the above figure, the economy is at point a on the initial supply of loanable funds curve SLF0. What happens if real wealth decreases? A) Nothing; the economy would remain at point a. B) There would be a movement to a point such as b on supply of loanable funds curve SLF0. C) The supply of loanable funds curve would shift rightward to a curve such as SLF2. D) The supply of loanable funds curve would shift leftward to a curve such as SLF1. Answer: C Topic: Supply of Loanable Funds Curve Skill: Analytical Status: Old AACSB: Analytical Skills 103) In the loanable funds market, as the interest rate rises the ________ and the ________. A) quantity of loanable funds supplied increases; quantity of loanable funds demanded decreases B) quantity of loanable funds supplied decreases; quantity of loanable funds demanded increases C) supply of loanable funds increases; demand for loanable funds decreases D) supply of loanable funds decreases; demand for loanable funds increases Answer: A Topic: Equilibrium in the Loanable Funds Market Skill: Recognition Status: Old AACSB: Reflective Thinking 104) Suppose the current real interest rate is 4 percent and the equilibrium real interest rate is 3 percent. Then A) prices rise and inflation occurs. B) there is a surplus of loanable funds. C) there is a shortage of loanable funds. D) there is neither a shortage nor surplus of loanable funds. Answer: B Topic: Determining the Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 39 Copyright © 2014 Pearson Education, Inc.

105) An increase in the real interest rate ________ the quantity of loanable funds supplied and ________ the quantity of loanable funds demanded. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: B Topic: Determining the Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 106) When the actual real interest rate is less than the equilibrium real interest rate, A) the equilibrium real interest rate will rise. B) borrowers find it difficult to borrow. C) there is a shortage of loanable funds. D) Both answers B and C are correct. Answer: D Topic: Determining the Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 107) If the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, then ________. A) the real interest rate will rise B) firms will decrease their investment demand C) people will save more D) the real interest rate will fall Answer: D Topic: Determining the Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking

108) If the real interest rate is above the equilibrium real interest rate, A) lenders will be unable to find borrowers willing to borrow all of the available funds and the real interest rate will fall. B) borrowers will be unable to borrow all of the funds they want to borrow and the real interest rate will rise. C) lenders will be unable to find borrowers willing to borrow all of the available funds and the real interest rate will rise. D) borrowers will be unable to borrow all of the funds they want to borrow and the real interest rate will fall. Answer: A Topic: Determining the Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 109) If the real interest rate is below the equilibrium real interest rate, A) lenders will be unable to find borrowers willing to borrow all of the available funds and the real interest rate will fall. B) borrowers will be unable to borrow all of the funds they want to borrow and the real interest rate will rise. C) lenders will be unable to find borrowers willing to borrow all of the available funds and the real interest rate will rise. D) borrowers will be unable to borrow all of the funds they want to borrow and the real interest rate will fall. Answer: B Topic: Determining the Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 110) If the real interest rate is below the equilibrium real interest rate, A) lenders will be unable to find borrowers willing to borrow all of the available funds and the supply of loanable funds curve will shift leftward. B) borrowers will be unable to borrow all of the funds they want to borrow and the demand for loanable funds curve will shift rightward. C) a shortage of loanable funds will cause the real interest rate to rise. D) borrowers will be unable to borrow all of the funds they want to borrow and the demand for loanable funds curve will shift leftward. Answer: C Topic: Determining the Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking

111) In the loanable funds market, if the interest rate is above the equilibrium level A) there is a shortage of loanable funds. B) there is a surplus of loanable funds. C) expected profit falls. D) government expenditure decreases. Answer: B Topic: Determining the Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking

112) In the above figure, if the real interest rate is 8, there is A) underproduction in this economy. B) a surplus of loanable funds. C) a shortage of loanable funds. D) a shortage in available funds for investment. Answer: B Topic: Determining the Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills

113) In the above figure, if the real interest rate is 4 percent, then there A) there is a surplus of loanable funds. B) is equilibrium in the loanable funds market. C) the real interest rate will rise. D) the demand curve for loanable funds will shift rightward. Answer: C Topic: Determining the Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 114) An increase in disposable income shifts the supply of loanable funds curve A) leftward and decreases the real interest rate. B) leftward and increases the real interest rate. C) rightward and decreases the real interest rate. D) rightward and increases the real interest rate. Answer: C Topic: Changes in the Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 115) Technological progress that increases the expected profit shifts the demand for loanable funds curve A) leftward and reduces the real interest rate. B) rightward and increases the real interest rate. C) rightward and reduces the real interest rate. D) leftward and increases the real interest rate. Answer: B Topic: Changes in the Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 116) Suppose that expected profit decreases. This change means A) the demand curve for loanable funds shifts leftward and the real interest rate falls. B) the supply curve for loanable funds shifts rightward and the nominal interest rate rises. C) there is a movement down along the demand curve for loanable funds. D) the real interest rate rises as saving increases. Answer: A Topic: Changes in the Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills

117) If disposable income increases, people will decide to ________ saving, the supply of loanable funds will ________ and the real interest rate will ________. A) increase; decrease; rise B) decrease; decrease; rise C) increase; increase; fall D) decrease; increase; fall Answer: C Topic: Changes in the Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 118) Suppose the real interest rate rises and the quantity of loanable funds decreases. These changes could have been the result of A) firms expecting higher future profits. B) an increase in disposable income. C) an increase in household wealth. D) a decrease in the default risk. Answer: C Topic: Changes in the Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 119) Suppose the real interest rate rises and the quantity of loanable funds increases. These changes could have been the result of A) firms expecting higher future profits. B) firms expecting lower future profits. C) households expecting higher future income. D) in increase in the default risk. Answer: A Topic: Changes in the Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills

120) The U.S. personal savings rate for the first quarter of 2012 dropped to its lowest level since the start of the recession. Americans stashed away 3.6 percent of personal income in the first quarter, down from 4.2 percent in the fourth quarter and a near-term peak of 6.2 percent in the second quarter of 2009. Which of the following could explain this drop in savings? A) a decrease in wealth from a fall in stock prices B) a rise in the real interest rate C) a increase in disposable income as the job market recovers D) a rise in consumer confidence that their incomes will be higher in the future Answer: D Topic: Changes in the Real Interest Rate Skill: Analytical Status: New AACSB: Analytical Skills 121) Suppose the market for loanable funds is in equilibrium. If disposable income increases, the equilibrium real interest rate ________ and the quantity of loanable funds ________. A) falls; increases B) falls; decreases C) rises; decreases D) rises; increases Answer: A Topic: Changes in the Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 122) According to the Bureau of Economic Analysis, household disposable income fell by 0.3 percent of August, 2012. If all else remains the same, what is the likely impact of this fall on the real interest rate? A) the real interest rate will rise B) the real interest rate will fall C) a change in household disposable income will have no impact on the real interest rate D) the impact on the real interest rate is ambiguous Answer: A Topic: Changes in the Real Interest Rate Skill: Analytical Status: New AACSB: Analytical Skills

123) Suppose the market for loanable funds is in equilibrium. If the expected profit falls, the equilibrium real interest rate ________ and the quantity of loanable funds ________. A) falls; decreases B) falls; increases C) rises; increases D) rises; decreases Answer: A Topic: Changes in the Real Interest Rate Skill: Analytical Status: Revised AACSB: Analytical Skills

124) In the above figure, the initial supply of loanable funds curve is SLF0 and the initial demand for loanable funds curve is DLF0. An economic expansion that raises disposable income and the expected profit would A) only shift the supply of loanable funds curve rightward to a curve such as SLF1. B) shift the supply of loanable funds curve rightward to a curve such as SLF1, and shift the demand for loanable funds curve rightward to a curve such as DLF1. C) only shift the demand for loanable funds curve rightward to a curve such as DLF1. D) have no effect on either the demand for loanable funds curve or the supply of loanable funds curve. Answer: B Topic: Changes in the Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills

125) In the above figure, the initial supply of loanable funds curve is SLF0 and the initial demand for loanable funds curve is DLF0. An increase in the expected profit would A) only shift the supply of loanable funds curve rightward to a curve such as SLF1. B) shift the supply of loanable funds curve rightward to a curve such as SLF1, and shift the demand for loanable funds curve rightward to a curve such as DLF1. C) only shift the demand for loanable funds curve rightward to a curve such as DLF1. D) have no effect on either the demand for loanable funds curve or the supply of loanable funds curve. Answer: C Topic: Changes in the Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 126) In the above figure, the initial supply of loanable funds curve is SLF0 and the demand for loanable funds investment curve is DLF0. An increase in the real interest rate to 7 percent could be caused by A) an increase in investment demand. B) a decrease in the expected profit. C) an increase in people's disposable incomes. D) an expansion that increased both saving and investment by the same amount. Answer: A Topic: Changes in the Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 127) A fall in the real interest rate A) results in a movement along the demand for loanable funds curve. B) shifts the demand for loanable funds curve rightward. C) shifts the demand for loanable funds curve leftward. D) has no effect on the demand for loanable funds curve Answer: A Topic: Study Guide Question, Investment Demand Curve Skill: Recognition Status: Old AACSB: Reflective Thinking

128) A decrease in disposable income shifts the ________. A) demand for loanable funds curve rightward B) demand for loanable funds curve leftward C) supply of loanable funds curve leftward D) supply of loanable funds curve rightward Answer: C Topic: Study Guide Question, Saving Supply Curve Skill: Recognition Status: Revised AACSB: Analytical Skills 3 Government in the Loanable Funds Market 1) If net taxes exceed government expenditures, the government sector has a budget ________ and government saving is ________. A) surplus; positive B) surplus; negative C) deficit; positive D) deficit; negative Answer: A Topic: Government Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 2) When a government has a budget surplus, the surplus A) helps finance investment. B) crowds-out private saving. C) must be subtracted from private saving to get total saving. D) increases the world real interest rate. Answer: A Topic: Government Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 3) If the government's budget deficit increases and the Ricardo-Barro effect does not apply, A) the real interest rate rises. B) investment increases C) investment decreases D) Both answers A and C are correct. Answer: D Topic: Direct Effect of Government Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 48 Copyright © 2014 Pearson Education, Inc.

4) The idea that a government budget deficit decreases investment is called A) government dissaving. B) the crowding-out effect. C) the Ricardo-Barro effect. D) the capital investment effect. Answer: B Topic: Crowding-Out Effect Skill: Recognition Status: Old AACSB: Reflective Thinking 5) The term "crowding out" relates to the decrease in A) consumption expenditure from an increase in investment. B) the real interest rate from a government budget deficit. C) private investment from a government budget deficit. D) saving from an increase in disposable income. Answer: C Topic: Crowding-Out Effect Skill: Recognition Status: Old AACSB: Reflective Thinking 6) The crowding-out effect refers to A) government spending crowding out private spending. B) private saving crowding out government saving. C) government investment crowding out private investment. D) private investment crowding out government saving. Answer: C Topic: Crowding-Out Effect Skill: Recognition Status: Old AACSB: Reflective Thinking 7) If the government has a budget deficit, crowding out might occur. Crowding out leads to all of the following EXCEPT A) a higher real interest rate. B) a decreased quantity of investment. C) a smaller capital stock in the future. D) decreased private saving. Answer: D Topic: Crowding-Out Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking

8) If the government begins to run a larger budget deficits, then assuming there is no RicardoBarro effect, the demand for loanable funds ________ and the real interest rate ________. A) decreases; falls B) decreases; rises C) increases; rises D) increases; falls Answer: C Topic: Crowding-Out Effect Skill: Analytical Status: Old AACSB: Analytical Skills 9) In the absence of a Ricardo-Barro effect, a government budget deficit ________ the demand for loanable funds and ________ investment. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: B Topic: Crowding-Out Effect Skill: Analytical Status: Old AACSB: Analytical Skills 10) In the absence of the Ricardo-Barro effect, an increase in the government deficit results in a ________ real interest rate and a ________ equilibrium quantity of investment. A) higher; higher B) higher; lower C) lower; higher D) lower; lower Answer: B Topic: Crowding-Out Effect Skill: Analytical Status: Old AACSB: Analytical Skills 11) In the absence of a Ricardo-Barro effect, a government budget deficit ________ the demand for loanable funds, ________ the real interest rate, and ________ investment. A) increases; increases; crowds out B) increases; decreases; increases C) decreases; increases; increases D) decreases; increases; crowds out Answer: A Topic: Crowding-Out Effect Skill: Analytical Status: Revised AACSB: Analytical Skills 50 Copyright © 2014 Pearson Education, Inc.

12) If China's government runs a budget surplus and there is no Ricardo-Barro effect, there will be ________ in the supply of loanable funds, private saving ________ and investment ________. A) an increase; decreases; increases B) a decrease; increases; increases C) an increase; increases; increases D) a decrease; decrease; increases Answer: A Topic: Crowding-Out Effect Skill: Analytical Status: Old AACSB: Analytical Skills 13) France's government is running a budget deficit. With no Ricardo-Barro effect, which of the following events will occur? I. The supply curve of loanable funds will shift leftward. II. A higher real interest rate crowds out investment. III. Saving increases. A) I and II. B) II and III. C) I only. D) III only. Answer: B Topic: Crowding-Out Effect Skill: Analytical Status: Old AACSB: Analytical Skills 14) The tendency for private saving to increase in response to growing government deficits is known as the A) crowding out effect. B) money illusion effect. C) Keynes effect. D) Ricardo-Barro effect. Answer: D Topic: Ricardo-Barro Effect Skill: Recognition Status: Old AACSB: Reflective Thinking

15) According to the Ricardo-Barro effect, A) government deficits raise the real interest rate. B) taxpayers fail to foresee that government deficits imply higher future taxes. C) households increase their personal saving when governments run budget deficits. D) government budget deficits increase households' expected future disposable income. Answer: C Topic: Ricardo-Barro Effect Skill: Recognition Status: Old AACSB: Reflective Thinking 16) The Ricardo-Barro effect of a government budget deficit refers to A) a change in private savings supply. B) a large crowding out effect from a government budget deficit. C) a large crowding out effect from a government budget surplus. D) the international impact of government deficits. Answer: A Topic: Ricardo-Barro Effect Skill: Recognition Status: Old AACSB: Reflective Thinking 17) The Ricardo-Barro effect holds that A) equal increases in taxes and government expenditures have no effect on equilibrium real GDP. B) government budget deficits have no effect on the real interest rate. C) a government budget deficit crowds out private investment. D) a government budget deficit induces a decrease in saving that magnifies the crowding out effect. Answer: B Topic: Ricardo-Barro Effect Skill: Recognition Status: Old AACSB: Reflective Thinking

18) The Ricardo-Barro effect says that A) government budget deficits have no crowding out effect because taxpayers increase their savings to match the quantity of loanable funds demanded by the government. B) government budget deficits crowd out private investment and thereby lower the real interest rate. C) government budget deficits resulting from an increase in government expenditure have no effect on investment but government deficits resulting from a decrease in taxes crowd out investment. D) government budget deficits cause households to save more in anticipation of higher taxes, which causes higher real interest rates. Answer: A Topic: Ricardo-Barro Effect Skill: Recognition Status: Old AACSB: Reflective Thinking 19) According to the Ricardo-Barro effect, government deficits A) lead to a rise in the equilibrium real interest rate, crowding out investment. B) lead to simultaneous increases in private saving and no effect on the equilibrium real interest rate and investment. C) lead to simultaneous decreases in private saving and decreases in the equilibrium real interest rate and investment. D) lead to a fall in the equilibrium real interest rate and a rise in investment. Answer: B Topic: Ricardo-Barro Effect Skill: Recognition Status: Old AACSB: Reflective Thinking 20) According to the Ricardo-Barro effect, A) the government budget has no effect on the real interest rate. B) a government budget deficit crowds out private investment. C) financing government spending with taxes has a smaller effect on private investment than financing through government borrowing. D) None of the above answers are correct. Answer: A Topic: Ricardo-Barro Effect Skill: Recognition Status: Old AACSB: Reflective Thinking

21) The Ricardo-Barro effect asserts that A) government saving affects private saving. B) government budget deficits crowd out private borrowing. C) government expenditure affects private expenditure. D) taxation raises interest rates. Answer: A Topic: Ricardo-Barro Effect Skill: Conceptual Status: Revised AACSB: Reflective Thinking 22) If the Ricardo-Barro effect occurs, an ________ in saving finances the government budget deficit and the real interest rate ________. A) increase; remains the same B) decrease; increases C) increase; falls D) decrease; remains the same Answer: A Topic: Ricardo-Barro Effect Skill: Analytical Status: Old AACSB: Analytical Skills 23) If the Ricardo-Barro effect is present, a government budget deficit raises the equilibrium real interest rate by ________ and decreases the equilibrium quantity of investment by ________ than if the Ricardo-Barro effect is absent. A) more; more B) more; less C) less; more D) less; less Answer: D Topic: Ricardo-Barro Effect Skill: Analytical Status: Old AACSB: Analytical Skills 24) A decrease in the government budget deficit decreases the ________ loanable funds and an increase in the government budget surplus increases the ________ loanable funds. A) demand for; demand for B) demand for; supply of C) supply of; demand for D) supply of; supply of Answer: B Topic: Study Guide Question, Government Saving Skill: Conceptual Status: Old AACSB: Analytical Skills 54 Copyright © 2014 Pearson Education, Inc.

4 The Global Loanable Funds Market 1) In the global loanable funds market, A) funds flow into countries with the highest risk-adjusted interest rates and out of countries with the lowest risk-adjusted interest rates. B) funds flow into countries with the lowest risk-adjusted interest rates and out of countries with the highest risk-adjusted interest rates. C) when funds leave a country, a shortage of funds lowers the real interest rate. D) when funds enter a country, a surplus of funds raises the real interest rate. Answer: A Topic: World Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 2) Real interest rates around the world tend to A) be quite different because no two countries are exactly the same. B) be equal after adjusting for differences in risk because financial capital seeks the highest possible return. C) differ because inflation rates differ across countries. D) be equal because trading partners would not do business otherwise. Answer: B Topic: World Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 3) In the global loanable funds market, A) loans of equal risk will have equal interest rates. B) riskier loans will have lower real interest rates than safer loans. C) interest rates for all types of loans will be equal. D) safer loans will have higher real interest rates than riskier loans. Answer: A Topic: World Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking

4) In May, 2011, the interest rate in North Korea was 5.4 percent. For the same month, the interest rate in the United States was slightly more than 1 percent. Suppose the risks in North Korea were the same as in the United States. If North Korea were integrated into the global economy, then A) funds would flow into North Korea and the equilibrium quantity of loanable funds in North Korea would increase. B) funds would flow out of North Korea and the equilibrium quantity of loanable funds in North Korea would decrease. C) funds would flow into North Korea and world interest rates would rise. D) funds would flow into North Korea and world interest rates would fall. Answer: A Topic: World Real Interest Rate Skill: Analytical Status: New AACSB: Analytical Skills 5) The real interest rate is ________ in the United States compared to Zimbabwe because ________. A) lower; there is a lower risk premium in the United States. B) higher; more firms want to borrow financial capital in the United States. C) lower; the United States is a net borrower. D) higher; Zimbabwe is a net borrower. Answer: A Topic: World Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 6) The free international mobility of financial capital pulls real interest rates around the world toward equality. Why then might interest rates in Greece and Spain in 2012 be much higher than in other western economies? A) Greece and Spain are considered risky borrowers and their interest rates reflect a sizable risk premium. B) Greece and Spain are considered large borrowers and their interest rates reflect a sizable transaction cost. C) Greece and Spain are not fully integrated into the global economy. D) Greece and Spain are considered small borrowers and do not attract many interested lenders because the potential profit is so small. Answer: A Topic: World Real Interest Rate Skill: Conceptual Status: New AACSB: Reflective Thinking

7) Suppose that Country A (a small country) has exports of $40 million and imports of $50 million. As a result, Country A will ________ funds from the rest of the world and engage in net foreign ________. A) receive; lending B) send; lending C) receive; borrowing D) send; borrowing Answer: C Topic: International Lending and Borrowing Skill: Analytical Status: Old AACSB: Analytical Skills 8) The United States' August, 2012 exports were $181.3 billion and its imports were $225.5 billion. During this month, the United States was A) an international borrower of funds from the rest of the world. B) an international lender of funds to the rest of the world C) neither an international borrower or lender because the U.S. government lends money for any trade imbalance D) Not enough information is provided to determine whether the United States was an international borrower or lender Answer: A Topic: International Lending and Borrowing Skill: Conceptual Status: New AACSB: Reflective Thinking 9) A small country is a net foreign borrower if its real interest rate without foreign borrowing is ________ the world real interest rate. A) higher than B) equal to C) lower than D) not comparable to Answer: A Topic: International Lending and Borrowing Skill: Conceptual Status: Old AACSB: Reflective Thinking

10) A small country is a net foreign borrower and its domestic supply of loanable funds increases. Consequently, the equilibrium quantity of loanable funds used in the country ________ and the country's foreign borrowing ________. A) does not change; decreases B) does not change; does not change C) does not change; increases D) increases; does not change Answer: A Topic: International Lending and Borrowing Skill: Analytical Status: Revised AACSB: Analytical Skills 11) A small country is a net foreign borrower and its domestic demand for loanable funds increases. Consequently, the equilibrium quantity of loanable funds used in the country ________ and the country's foreign borrowing ________. A) does not change; increases B) does not change; does not change C) increases; increases D) increases; does not change Answer: C Topic: International Lending and Borrowing Skill: Analytical Status: Revised AACSB: Analytical Skills 12) A small country is a net foreign lender and its domestic supply of loanable funds increases. Consequently, the equilibrium quantity of loanable funds used in the country ________ and the country's foreign lending ________. A) increases; decreases B) does not change; does not change C) does not change; increases D) increases; does not change Answer: C Topic: Study Guide Question, International Lending and Borrowing Skill: Analytical Status: Revised AACSB: Analytical Skills

13) If the world real interest rate falls, then a country that is a net foreign lender A) increases the amount of its lending. B) does not change the amount of its lending. C) decreases the amount of its lending. D) None of the above answers is correct because lending might increase, decrease, or not change. Answer: C Topic: Study Guide Question, International Lending and Borrowing Skill: Analytical Status: Old AACSB: Analytical Skills 14) The free international mobility of financial capital pulls real interest rates around the world toward equality. Why then might interest rates in Greece and Spain in 2012 be much higher than in other western economies? A) Greece and Spain are considered risky borrowers and their interest rates reflect a sizable risk premium. B) Greece and Spain are considered large borrowers and their interest rates reflect a sizable transaction cost. C) Greece and Spain are not fully integrated into the global economy. D) Greece and Spain are considered small borrowers and do not attract many interested lenders because the potential profit is so small. Answer: A Topic: International Lending and Borrowing Skill: Conceptual Status: New AACSB: Reflective Thinking

5 News Based Questions 1) In November 2008, automobile executives from Ford, GM and Chrysler testified to Congress that their firms needed a $25 billion bailout to prevent bankruptcies. The executives stated that part of the cash would be used to re-design production lines. The $25 billion is ________ and the re-designed production lines are ________. A) financial capital; physical capital B) gross investment; physical capital C) physical capital; financial capital D) net investment; gross investment Answer: A Topic: Financial Capital and Physical Capital Skill: Conceptual Status: Old AACSB: Reflective Thinking 2) In 2007, France's GDP totaled $1.9 trillion and in 2006 GDP was $1.8 trillion. The total amount spent on new capital in 2007 was $357 billion and in 2006 was $335 billion. To calculate the amount of net investment in France for these years, you need to know ________. A) saving B) depreciation C) the amount of financial capital available. D) the aggregate production function. Answer: B Topic: Net Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking 3) In 2007, France's GDP totalled $1.9 trillion and in 2006 GDP was $1.8 trillion. The total amount spent on new capital in 2007 was $357 billion and in 2006 was $335 billion. Suppose that depreciation is 12 percent of GDP. ________ investment in 2006 was ________ billion. A) Gross; $357 B) Gross; $216 C) Gross; $335 D) Net; $216 Answer: C Topic: Net Investment Skill: Analytical Status: Old AACSB: Analytical Skills

4) In 2007, France's GDP totalled $1.9 trillion and in 2006 GDP was $1.8 trillion. The total amount spent on new capital in 2007 was $357 billion and in 2006 was $335 billion. Suppose that depreciation is 12 percent of GDP. ________ investment in 2007 was ________ billion. A) Gross; $216 B) Gross; $129 C) Net; $228 D) Net; $129 Answer: D Topic: Net Investment Skill: Analytical Status: Old AACSB: Analytical Skills 5) In November 2008, Grand Canyon Education chose to finance expansion by offering ownership in its firm. These owners of Grand Canyon Education the are entitled to a share of the firm's profits. This financing is an example of ________. A) a mortgage B) a bond C) issuing stock. D) gross investment Answer: C Topic: Financial Institutions & Financial Markets Skill: Conceptual Status: Old AACSB: Reflective Thinking 6) The University of Central Florida (UCF) wanted "to create a town center where students can live, eat, study and revel in college traditions like football." In addition, the university needed funding to build dorms that would house 2000 students. UCF was able to secure financing by promising to pay a lender a specific amount of money on specific dates. This transaction takes place in the ________ market for ________ capital. www.sptimes.com 10/14/2007 A) loan; physical B) bond; financial C) stock; financial D) loan; financial. Answer: B Topic: Financial Institutions & Financial Markets Skill: Conceptual Status: Old AACSB: Reflective Thinking

7) A share of Apple stock has a price of $430 and gives $43 of Apple profit to its owner. The interest rate on this share A) 10 percent. B) $430. C) 15.4 percent D) $43 Answer: A Topic: Interest Rate and Price of Asset Skill: Analytical Status: Revised AACSB: Analytical Skills 8) In 2007, the interest rate banks in France charge each other for loans was 4.86 percent. The inflation rate in France in 2007 was 2.8 percent. The real interest rate in France is A) 7.62 percent B) 2.06 percent. C) 0.58 percent. D) 13.6 percent. Answer: B Topic: Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills 9) In January 2013, you can put your savings in a Bank of America account and be paid 2 percent per year. During 2013, suppose the inflation rate is 3.4 percent. In 2013 you earned a real interest rate of A) 0.59 percent. B) 6.8 percent. C) 1.4 percent. D) -1.4 percent. Answer: D Topic: Real Interest Rate Skill: Analytical Status: Revised AACSB: Analytical Skills

10) The table below shows data for the United States.

2011 2012 2013

Nominal Interest Rate Inflation Rate 5.25 4 5 2 4.5 4.3

Between 2011 and 2012, the real interest rate ________ and caused a ________ the demand for loanable funds curve. A) increased; rightward shift B) decreased; leftward C) increased; movement upward along D) decreased; downward along Answer: C Topic: Demand for Loanable Funds Curve Skill: Analytical Status: Revised AACSB: Analytical Skills 11) The table below shows data for the U.S.

2011 2012 2013

Nominal Interest Rate Inflation Rate 5.25 4 5 2 4.5 4.3

Between 2012 and 2013 the real interest rate ________ and caused a ________ the demand for loanable funds curve. A) increased; rightward shift B) decreased; movement down along C) increased; movement up along D) decreased; leftward shift Answer: B Topic: Demand for Loanable Funds Curve Skill: Analytical Status: Revised AACSB: Analytical Skills

12) In 2008, the financial and housing crisis caused firms to decrease their profit expectations. As a result, there was a ________ in the ________ for loanable funds curve. A) leftward shift; demand B) movement upward along; demand C) leftward shift; supply D) movement downward along; supply Answer: A Topic: Demand for Loanable Funds Curve Skill: Analytical Status: Old AACSB: Analytical Skills 13) In 2010, the United States and foreign economies start to recover from the recession. U.S. firms increase their profit expectations. As a result, the demand for loanable funds curve shifts ________ and the real interest rate ________. A) leftward; decreases B) rightward; decreases C) leftward; increases D) rightward; increases Answer: D Topic: Demand for Loanable Funds Curve Skill: Analytical Status: Old AACSB: Analytical Skills 14) In 2008, the many people became unable to make payments on their mortgages and instead defaulted on them. As a result, the ________ of loanable funds curve shifts ________ and real interest rate ________. A) supply; leftward; increases B) demand; leftward; increases. C) supply; rightward; falls. D) demand; rightward; decreases. Answer: A Topic: Supply of Loanable Funds Curve Skill: Analytical Status: Old AACSB: Analytical Skills

15) During the financial crisis in 2007 and 2008, financial institutions believed that default risks were higher. As a result, there was ________ in the supply of loanable funds and a ________ in the real interest rate. A) a decrease; fall B) an increase; rise C) an increase; fall D) a decrease; rise Answer: D Topic: Supply of Loanable Funds Curve Skill: Analytical Status: Old AACSB: Analytical Skills 16) In 2007, Singapore's government ran a budget surplus of $4.5 billion. The budget surplus ________ loanable funds and ________ the real interest rate. A) increased the supply of; lowered B) decreased the demand for; lowered C) increased the supply of; raised D) increased the demand for; raised Answer: A Topic: Government in the Market for Loanable Funds Skill: Analytical Status: Old AACSB: Analytical Skills 17) In 2008, Germany had a budget deficit of 37 billion euros. This will budget deficit ________ the supply of loanable funds and ________ the real interest rate. A) increased; lowered B) decreased; raised C) decreased; lowered D) increased; raised Answer: B Topic: Government in the Market for Loanable Funds Skill: Analytical Status: Old AACSB: Analytical Skills 18) In 2008, Germany had a budget deficit of 37 billion euros. This deficit resulted in A) a rightward shift of the supply of loanable funds curve. B) a leftward shift of the demand for loanable funds curve. C) a crowding out effect in which investment decreases. D) the Ricardo-Barro effect and an increase in the interest rate. Answer: C Topic: Government in the Market for Loanable Funds Skill: Analytical Status: Old AACSB: Analytical Skills 65 Copyright © 2014 Pearson Education, Inc.

19) In 2007, France's exports totaled $490 billion and its imports totaled $529 billion. As a result, the I. rest of the world supplies funds to France. II. quantity of loanable funds in France is less than the supply. III. Ricardo-Barro effect occurs in France. A) I only. B) I and II. C) I, II and III. D) II and III only. Answer: A Topic: Global Loanable Funds Market Skill: Analytical Status: Old AACSB: Analytical Skills 20) In 2007, France's exports totalled $490 billion and its imports totalled $529 billion. As a result, France is an international ________ and financial funds from around the world ________ France's market for loanable funds. A) borrower; leaves B) borrower; enters C) lender; leaves D) lender; enters Answer: C Topic: Global Loanable Funds Market Skill: Analytical Status: Old AACSB: Analytical Skills 21) In 2008, Australia had a government budget surplus of $21.7 billion. This budget surplus shifts the demand for loanable funds curve ________ A) leftward and lowers the real interest rate. B) leftward and creates a crowding-out effect. C) rightward and creates a crowding-out effect. D) rightward and creates a Ricardo-Barro effect. Answer: A Topic: Government in the Market for Loanable Funds Skill: Analytical Status: Old AACSB: Analytical Skills

6 Essay Questions 1) Begin with the formula showing how households can divide their income. Then use this formula and the expenditure approach to GDP to show how investment is financed from three sources. Answer: The formula showing how households can divide their income is where Y is income, C is consumption expenditure and T is taxes. According to the expenditure approach income, But income, Y, equals GDP. So, setting the equalities equal to one another and removing C since it is on both sides gives Moving G, X and M to the right hand side gives the final result: Here we see that investment is financed by private saving, S, government saving, and borrowing from the rest of the world, Topic: How Investment is Financed Skill: Conceptual Status: Old AACSB: Communication 2) What is the approximate relationship among the real interest rate, the inflation rate, and the nominal interest rate? Answer: The real interest rate equals the nominal interest rate minus the inflation rate. Topic: The Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 3) What is the influence of the expected profit and the real interest rate on the amount of investment firms make? Answer: Firms make a decision about whether to undertake an investment based upon the benefit of the investment, the expected profit, versus the opportunity cost of making the investment, the real interest rate. For any particular investment firms compare the expected profit to the real interest rate. If the expected profit exceeds the real interest rate the firm will undertake the investment. If the expected profit is less than the real interest rate the firm will not undertake the investment. Topic: Investment Decisions Skill: Conceptual Status: Old AACSB: Communication

4) "An increase in the real interest rate increases the quantity of investment." Is the previous statement correct or incorrect? Answer: The statement is false. The interest rate is the opportunity cost of the funds used to make an investment. Hence an increase in the interest rate decreases the quantity of investment demanded. Topic: The Real Interest Rate and Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking 5) Explain the relationship between the real interest rate and the demand for loanable funds. Compare that relationship to the relationship between expected profit and the demand for loanable funds. Answer: The real interest rate determines the quantity of loanable funds demanded. There is an inverse relationship between the real interest rate and the quantity of loanable funds demanded. Expected profit affects investment and, because investment is a major source of the demand for loanable funds, the expected profit rate affects the demand for loanable funds. An increase in the expected profit from investing increases investment and thereby increases the demand for loanable funds. Hence there is a positive relationship between the demand for loanable funds and the expected profit rate. Topic: The Real Interest Rate and Investment Skill: Conceptual Status: Old AACSB: Communication 6) How does an increase in the expected profit affect investment demand and the demand for loanable funds curve? Answer: An increase in the expected profit increases investment. Because investment demand is a large part of the demand for loanable funds, an increase in the expected profit shifts the demand for loanable funds curve rightward. Topic: Expected Profit Skill: Conceptual Status: Old AACSB: Analytical Skills 7) What are the factors that change investment demand and shift the demand for loanable funds curve? Answer: Investment demand changes with the changes in the expected profit. The expected profit depends on technological change. Investment increases and so the demand for loanable funds curve shifts rightward when technology advances. Topic: Investment Demand Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking

8) How does the real interest affect households' decisions about saving? Answer: All disposable income is either used for consumption or saving. The opportunity cost of consumption is the amount of foregone interest you could earn if you saved. The return to saving is the real interest rate, so the higher the real interest rate, the greater the opportunity cost of consuming and not saving. As a result, an increase in the real interest rate leads to an increase in the quantity households save. Topic: Saving Decisions Skill: Conceptual Status: Old AACSB: Reflective Thinking 9) How does expected future income affect saving supply? Answer: Expected future income affects saving supply because the lower a household's expected future income, the greater is its (current) saving supply. Topic: Expected Future Income and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 10) What is the relationship between the real interest rate, the supply of loanable funds and the demand for loanable funds? Answer: The supply of loanable funds has a positive relationship between the real interest rate and the quantity of loanable funds supplied. In a figure, a supply of loanable funds curve has a positive slope. Similarly, the demand for loanable funds is the relationship between the real interest rate and the amount of loanable funds demanded. In a figure, a demand for loanable funds curve has a negative slope. Topic: Determining the Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 11) Does a change in the real interest rate shift the supply of loanable funds curve? Explain your answer. Answer: A change in the real interest rate does not shift the supply of loanable funds curve. Instead, the change in the real interest rate results in a change in the quantity of loanable funds supplied and a movement along the supply of loanable funds curve. The supply of loanable funds curve shifts if some factor that influences the supply of loanable funds other than the real interest rate changes. Topic: Supply of Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking

12) What are the factors that change the supply of saving and shift the supply of loanable funds curve? Answer: There are three main factors that influence saving: disposable income, wealth, expected future disposable income, and default risk. The higher disposable income, the more people save, so an increase in disposable income shifts the supply of loanable funds curve rightward. The higher people's wealth, the less they save because they feel richer and do not see the need to save. Thus an increase wealth shifts the supply of loanable funds curve leftward. The higher the expected future disposable income, the less people save today. Thus an increase in the expected future disposable income shifts the supply of loanable funds curve leftward. Finally the higher the default risk, the less people save and so the supply of loanable funds curve shifts leftward. Topic: Supply of Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Communication 13) Explain how each of the following events affect the supply of loanable funds curve: a) The economy is in a recession so people's disposable income is lower. b) The stock market is booming so the people's wealth is higher. c) Fewer college graduates are finding jobs so expected future income is lower. d) The real interest rate increases. Answer: a) Disposable income is lower, so saving is decreased. The supply of loanable funds curve shifts leftward. b) People are wealthier, so they save less. The supply of loanable funds curve shifts leftward. c) Expected future income is lower, so people save more. The supply of loanable funds curve shifts rightward. d) The quantity of saving increases. There is an upward movement along the supply of loanable funds curve but no shift in the curve. Topic: Supply of Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Communication 14) "When there is a shortage of loanable funds, the real interest rate will increase." Explain whether the previous statement is correct or not. Answer: The statement is correct. The shortage of loanable funds means that there are firms and others attempting to obtain loans who cannot do so. As a result, the real interest rate rises until equilibrium is attained. Topic: Determining the Real Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking

15) In the loanable funds market, what variable changes to eliminate a shortage of loanable funds and how is the shortage eliminated? Answer: The real interest rate changes to eliminate the shortage of loanable funds. A shortage of loanable funds means that businesses and others want to borrow more than households and others are willing to loan so that the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied. This shortage means that some businesses are willing to pay a higher interest rate. The real interest rate rises, and as it does so, the quantity of loanable funds demanded decreases and the quantity of loanable funds supplied increases. Both changes help eliminate the shortage of loanable funds and so the real interest rate rises until it reaches its equilibrium value. Topic: Determining the Real Interest Rate Skill: Conceptual Status: Old AACSB: Communication 7 Numeric and Graphing Questions

Real interest rate (percent per year) 10 8 6 4 2

Loanable Loanable funds funds demanded supplied (trillions of (trillions of 2005 dollars) 2005 dollars) 0.7 1.5 0.9 1.3 1.1 1.1 1.4 0.9 1.7 0.7

1) The table above shows the loanable funds supply and demand schedules. a) What is the equilibrium real interest rate and the equilibrium quantity of loanable funds? b) If the real interest rate is 4 percent, is there a shortage or surplus? What will happen in the market? Answer: a) The equilibrium real interest rate is 6 percent and the equilibrium quantity of loanable funds is $1.1 trillion. b) If the real interest rate is 4 percent, there is a shortage of loanable funds. The shortage means that the quantity of funds demanded for investment exceeds the quantity supplied, so the real interest rate will rise to its equilibrium of 6 percent. Topic: Determining the Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills

8 True or False 1) Expected profit and the real interest rate affect investment decisions. Answer: TRUE Topic: Investment Decisions Skill: Conceptual Status: Old AACSB: Reflective Thinking 2) The nominal interest rate is approximately equal to the real interest rate minus the inflation rate. Answer: FALSE Topic: The Real Interest Rate Skill: Analytical Status: Old AACSB: Reflective Thinking 3) There is a positive relationship between the demand for loanable funds and the real interest rate. Answer: FALSE Topic: The Real Interest Rate and Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking 4) The real interest rate has a positive relationship with the supply of loanable funds. Answer: TRUE Topic: The Real Interest Rate and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 5) If Ann's disposable income increases, her saving decreases. Answer: FALSE Topic: Disposable Income and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking 6) As the purchasing power of wealth increases, saving decreases. Answer: TRUE Topic: Wealth and Saving Skill: Conceptual Status: Old AACSB: Reflective Thinking

7) The supply of loanable funds curve shifts leftward if the real interest rate rises. Answer: FALSE Topic: Supply of Loanable Funds Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 9 Extended Problems Real interest rate (percent per year) 5 7 9 11

Supply of loanable funds (2005 dollars) 2,000 3,000 4,000 5,000

Demand for loanable funds (2005 dollars) 5,000 4,000 3,000 2,000

1) The economy of Dream Island, which is isolated from the rest of the world, has the supply of loanable funds schedule and the demand for loanable funds schedule shown in the table above. As it happens, all of the supply of loanable funds are from households' saving and the entre demand for loanable funds is from firms' investment demand. a) Draw the demand and supply curves. b) What is the equilibrium real interest rate? c) What is equilibrium investment? Equilibrium saving? d) Describe the situation in Dream Island's loanable funds market when the real interest rate is 10 percent. Is there a shortage of loanable funds? A surplus of loanable funds? e) Describe the situation in Dream Island's capital market when the real interest rate is 6 percent. Is there a shortage of loanable funds? A surplus of loanable funds?

Answer:

a) See the figure above. b) The equilibrium real interest rate is the interest rate at which the quantity of loanable funds demanded (which is the quantity of investment demanded) equals the quantity of loanable funds supplied (which is the quantity of saving supplied). As the figure shows, in the economy of Dream Island, the equilibrium real interest rate is 8 percent. c) The equilibrium amount of investment equals 3,500 dollars. The equilibrium amount of saving is the same, $3,500. d) When the real interest rate is 10 percent, the quantity of loanable funds supplied(which is the quantity of saving supplied), $4,500, exceeds the quantity of loanable funds demanded (which is the quantity of investment demanded), $2,500. So there a surplus of loanable funds. Borrowers have an easy time finding the loans they want, but lenders are unable to lend all the funds they have available. As a result, the real interest rate falls until the quantity of loanable funds supplied equals the quantity of loanable funds demanded. e) When the real interest rate is 6 percent, the quantity of loanable funds supplied (which is the quantity of saving supplied) $2,500, is less than the quantity of loanable funds demanded (which is the quantity of investment demanded), $4,500. There is a shortage of loanable funds. Borrowers can't find the loans they want, but lenders are able to lend all the funds they have available. As a result, the real interest rate rises until the quantity of loanable funds supplied equals the quantity of loanable funds demanded. Topic: Determining the Real Interest Rate Skill: Analytical Status: Old AACSB: Analytical Skills

Economics, 11e, Global Edition (Parkin) Chapter 25 Money, the Price Level, and Inflation 1 What is Money? 1) As a means of payment, the functions of money are A) medium of exchange and the ability to buy goods and services. B) medium of exchange, unit of account, and means of lending. C) pricing, contracts, and store of value. D) medium of exchange, unit of account, and store of value. Answer: D Topic: What Is Money? Skill: Recognition Status: Revised AACSB: Reflective Thinking 2) Which of the following does NOT describe a function of money? A) a unit of account B) a hedge against inflation C) a medium of exchange D) a store of value Answer: B Topic: What Is Money? Skill: Recognition Status: Old AACSB: Reflective Thinking 3) Which of the following is a primary function of money? A) to serve as a unit of account B) to serve as an encouragement to work C) to reduce the burden of excessive imports D) to raise funds for the government Answer: A Topic: What Is Money? Skill: Recognition Status: Old AACSB: Reflective Thinking

4) The functions of money are A) interest rates, prices and output. B) M1, M2 or currency. C) currency, deposits, and traveler's checks. D) medium of exchange, unit of account, and store of value. Answer: D Topic: What Is Money? Skill: Recognition Status: Old AACSB: Reflective Thinking 5) Which of the following is NOT considered a function of money? A) It facilitates exchange. B) It acts as a means of payment. C) It can be held and exchanged for future goods and services. D) It allows banks to lend out funds. Answer: D Topic: What Is Money? Skill: Recognition Status: Old AACSB: Reflective Thinking 6) Which of the following does NOT describe a function of money? A) a unit of account B) barter C) a medium of exchange D) a store of value Answer: B Topic: What Is Money? Skill: Recognition Status: Old AACSB: Reflective Thinking 7) Barter is A) another type of money. B) printing too much money. C) the exchange of goods and services directly for other goods and services. D) the exchange of goods and services for any type of money. Answer: C Topic: Medium of Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking

8) The most direct way in which money replaces barter is through its use as a A) medium of exchange. B) recording device. C) store of value. D) unit of account. Answer: A Topic: Medium of Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 9) The most direct way in which money eliminates the need for a double coincidence of wants is through its use as a A) medium of exchange. B) standard of deferred payment. C) store of value. D) unit of account. Answer: A Topic: Medium of Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 10) Which function of money refers to the use of money to solve the problem of a need for a double coincidence of wants? A) medium of exchange B) unit of account C) store of value D) none of the above Answer: A Topic: Medium of Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 11) A medium of exchange is A) an object that sellers will accept as payment. B) a measure by which prices are expressed. C) an asset that is used to settle future debts. D) the thing traded when barter takes place. Answer: A Topic: Medium of Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking

12) The "double coincidence of wants" problem is A) resolved under a system of barter. B) always present in all economic systems. C) resolved by the use of money. D) created by the use of money. Answer: C Topic: Medium of Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 13) The direct exchange of goods and services for other goods and services is known as A) primitive trade. B) nonmarket trade. C) barter. D) purchasing power trading. Answer: C Topic: Medium of Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 14) Barter occurs when you exchange A) money for goods. B) goods for money. C) goods for other goods. D) one money, such as U.S. dollars, for another money, such as Japanese yen. Answer: C Topic: Medium of Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 15) The fact that using money avoids the double coincidence of wants necessary in a barter economy illustrates which function of money? A) medium of exchange B) unit of account C) store of value D) source of liquidity Answer: A Topic: Medium of Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking

16) Money ________. A) is always composed of coins and paper B) loses its value as it becomes older C) requires a double coincidence of wants D) is any commodity that is generally acceptable as a means of payment Answer: D Topic: Medium of Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 17) If an economy has no money, then all transactions must be conducted through the use of ________. A) credit cards B) barter C) debit cards D) tobacco or wampum Answer: B Topic: Medium of Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 18) In a barter system, we would see A) many different units of money. B) money and goods exchanged for each other. C) wide-spread depository institutions. D) goods traded directly for other goods and services. Answer: D Topic: Medium of Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 19) When you buy a hamburger for lunch, you are using money as a A) store of value. B) standard of deferred payment. C) medium of exchange. D) unit of accounting. Answer: C Topic: Medium of Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking

20) When money is accepted as payment in a market transaction, it is functioning as a A) store of value. B) unit of accounting. C) medium of exchange. D) unit of investment. Answer: C Topic: Medium of Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 21) Money's function as a medium of exchange means that A) money is a common denominator for expressing the prices of goods and services. B) money can be used to store wealth. C) money serves as an acceptable means of payment. D) money requires a double coincidence of wants. Answer: C Topic: Medium of Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 22) Matthew purchases a candy bar with his allowance. This purchase represents using money as A) a medium of exchange. B) a store of value. C) an unit of account. D) none of the above Answer: A Topic: Medium of Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 23) When you bought your textbook for this course, you were using money as a A) store of value. B) price mechanism. C) medium of exchange. D) unit of account. Answer: C Topic: Medium of Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking

24) Money as a medium of exchange I. facilitates the exchange of goods. II. reduces or eliminates the need for barter. A) I only B) II only C) both I and II D) neither I nor II Answer: C Topic: Medium of Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 25) Suppose prices are quoted in dollars and transactions are conducted in pesos. The peso serves as a A) medium of exchange. B) store of value. C) unit of account. D) all of the above Answer: A Topic: Medium of Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 26) Barter is an inefficient means of exchange because A) barter transactions require a double coincidence of wants. B) barter only occurs in relatively primitive economies. C) demand will not necessarily equal supply. D) in a barter transaction only one party needs to want what the other party has to sell. Answer: A Topic: Medium of Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 27) The unit of account A) is a type of accounting of how many currency units there are in an economy. B) is an accounting of the total units of goods and services produced in an economy. C) is an agreed measure for stating the prices of goods and services in an economy. D) is a type of value stored within all assets. Answer: C Topic: Unit of Account Skill: Recognition Status: Old AACSB: Reflective Thinking 7 Copyright © 2014 Pearson Education, Inc.

28) Which function of money refers to the use of money to state the prices of goods and services? A) medium of exchange B) unit of account C) store of value D) means of payment Answer: B Topic: Unit of Account Skill: Recognition Status: Old AACSB: Reflective Thinking 29) Which of the following applies to the use of money as a unit of account? I. A unit of account is an agreed measure for stating the prices of goods and services. II. Using money as a unit of account creates a simplified pricing system. III. Economies choose many goods as units of account. A) I only B) II only C) I and III D) I and II Answer: D Topic: Unit of Account Skill: Conceptual Status: Old AACSB: Reflective Thinking 30) A $25,000 price tag on a new car is an example of money as A) medium of exchange. B) a unit of account. C) a store of value. D) a time deposit. Answer: B Topic: Unit of Account Skill: Conceptual Status: Old AACSB: Reflective Thinking

31) After you finish your degree, suppose your salary is $52,000 per year. This is an example of using the function of money known as A) medium of exchange. B) a unit of account. C) a store of value. D) M1. Answer: B Topic: Unit of Account Skill: Conceptual Status: Old AACSB: Reflective Thinking 32) Suppose prices are quoted in dollars and transactions are conducted in pesos. The dollar serves as a A) medium of exchange. B) store of value. C) unit of account. D) all of the above Answer: C Topic: Unit of Account Skill: Conceptual Status: Old AACSB: Reflective Thinking 33) Suppose that I find out from an L.L. Bean catalogue that a sweater costs $30.00. In this case, money is serving as a A) medium of exchange. B) unit of account. C) store of value. D) double coincidence of want. Answer: B Topic: Unit of Account Skill: Conceptual Status: Old AACSB: Reflective Thinking 34) As a unit of account, money is used to A) state prices of all goods and services. B) pay off future debts. C) hold purchasing power over time. D) exchange for goods and services. Answer: A Topic: Unit of Account Skill: Conceptual Status: Old AACSB: Reflective Thinking 9 Copyright © 2014 Pearson Education, Inc.

35) Cigarettes served as money in some POW camps during World War II. Given this fact, we would expect to observe A) no one ever smoking a cigarette. B) people usually resorting to barter rather than using cigarettes as money. C) prices of other goods expressed in terms of cigarettes. D) only government-issued cigarettes being accepted as money. Answer: C Topic: Unit of Account Skill: Conceptual Status: Old AACSB: Reflective Thinking 36) Catherine compares the prices of candy bars in order to get the "best buy." This comparison represents using money as a A) medium of exchange. B) store of value. C) unit of account. D) none of the above Answer: C Topic: Unit of Account Skill: Conceptual Status: Old AACSB: Reflective Thinking 37) Frank spends Saturday afternoon at the Dodge dealership looking at new trucks. The model he is interested in has a sticker price of $29,000. The fact the price is quoted in dollars is an example of money as a A) medium of exchange. B) unit of account C) store of value. D) All of the above answers are correct. Answer: B Topic: Unit of Account Skill: Conceptual Status: Old AACSB: Reflective Thinking

38) In a world with no money, costs are expressed in terms of other goods. If one video game costs two hamburgers, and a hamburger costs three sodas, how many sodas would it take to buy a video game? A) 6 B) 5 C) 3 D) 3/2 Answer: A Topic: Unit of Account Skill: Analytical Status: Old AACSB: Analytical Skills 39) Which of the following is an example of using money as a store of value? A) paying for a new dress with a credit card B) paying cash for a new automobile C) paying rent with a check on a demand deposit D) keeping $200 on hand for an emergency Answer: D Topic: Store of Value Skill: Conceptual Status: Old AACSB: Reflective Thinking 40) When you toss your spare quarters into a jar so you can use them later at the laundromat, you are using money in its function as a A) medium of exchange. B) unit of account. C) store of value. D) record keeping device. Answer: C Topic: Store of Value Skill: Conceptual Status: Old AACSB: Reflective Thinking 41) During periods of inflation, which function of money is most severely affected? A) medium of exchange B) unit of account C) means of payment D) store of value Answer: D Topic: Store of Value Skill: Conceptual Status: Old AACSB: Reflective Thinking 11 Copyright © 2014 Pearson Education, Inc.

42) Which of the following applies to an object serving as a store of value? I. If an object can be held and exchanged later for a good or service, it serves as a store of value. II. The less stable an object's value, the better it serves as a store of value. III. A work of art can serve as a store of value. A) I only B) I and II C) I and III D) I, II and III Answer: C Topic: Store of Value Skill: Conceptual Status: Old AACSB: Reflective Thinking 43) If an economy tried to use bananas as money, which function would bananas likely have the most difficult time fulfilling? A) a store of value B) a unit of account C) a medium of exchange D) a means of payment Answer: A Topic: Store of Value Skill: Conceptual Status: Old AACSB: Analytical Skills 44) Which of the following applies to money when it serves as a store of value? I. Money is a store of value because it is an agreed measure for stating goods' prices. II. The more stable money's value, the better it serves as a store of value. III. When money serves as a store of value, it requires a double coincidence of wants. A) I only B) II only C) I and II D) II and III Answer: B Topic: Store of Value Skill: Conceptual Status: Old AACSB: Reflective Thinking

45) Nicholas is saving money collected from his paper route in order to purchase a new bicycle. His saving represents using money as A) a medium of exchange. B) a store of value. C) an unit of account. D) none of the above Answer: B Topic: Store of Value Skill: Conceptual Status: Old AACSB: Reflective Thinking 46) U.S. currency ________. A) is less efficient than barter B) includes tobacco C) is the sum of M1 and M2 D) is composed of the bills and coins that we use today Answer: D Topic: Money in the United States Today Skill: Recognition Status: Old AACSB: Reflective Thinking 47) In the United States today, money consists of A) currency only. B) deposits at banks only. C) coins only. D) currency and deposits at banks. Answer: D Topic: Money in the United States Today Skill: Recognition Status: Old AACSB: Reflective Thinking 48) Checking deposits are A) not part of money. B) part of money. C) small in volume relative to currency in circulation. D) quite different from checking accounts. Answer: B Topic: Money in the United States Today Skill: Recognition Status: Old AACSB: Reflective Thinking

49) Which of the following is money? A) checking deposits B) checks in the checkbook C) credit cards D) All of the above are money. Answer: A Topic: Money in the United States Today Skill: Recognition Status: Old AACSB: Reflective Thinking 50) Which of the following counts as part of money? A) $10,000 of gold bars B) $10,000 of government bonds C) $10,000 in a checking account D) $10,000 of corporate bonds Answer: C Topic: Money in the United States Today Skill: Recognition Status: Old AACSB: Reflective Thinking 51) Which of the following correctly completes this statement? Money in the United States includes A) the sum of all money incomes. B) the cash in banks plus the sum of all checks written. C) the currency and bank deposits outside of banks. D) the sum of currency, deposits, and bonds held by the public and by the banking industry. Answer: C Topic: Money in the United States Today Skill: Recognition Status: Old AACSB: Reflective Thinking 52) Checking deposits at banks are A) money. B) not money because they are an intangible. C) money only because they are insured by the FDIC. D) not money until they are converted into currency. Answer: A Topic: Money in the United States Today Skill: Recognition Status: Old AACSB: Reflective Thinking

53) M1 includes A) currency, checking deposits and traveler's checks. B) money, stocks and bonds. C) money, checking deposits and traveler's checks. D) money market mutual funds, stocks and bonds. Answer: A Topic: Money in the United States Today, M1 Skill: Recognition Status: Old AACSB: Reflective Thinking 54) The money aggregate M1 consists of A) currency and savings accounts. B) currency and checking deposits, including traveler's checks. C) only checking deposits and time deposits. D) checking accounts, savings accounts and Treasury bills. Answer: B Topic: Money in the United States Today, M1 Skill: Recognition Status: Revised AACSB: Reflective Thinking 55) M1 is a measure of A) money and includes both currency and checking deposits. B) liquidity and in which the most liquid asset is money. C) money and includes both savings deposits and currency. D) money and includes both savings deposits and money market mutual funds. Answer: A Topic: Money in the United States Today, M1 Skill: Recognition Status: Old AACSB: Reflective Thinking 56) Which of the following is NOT included in the M1 definition of money? A) currency held outside banks B) time deposits C) traveler's checks D) checking deposits at savings and loans Answer: B Topic: Money in the United States Today, M1 Skill: Recognition Status: Old AACSB: Reflective Thinking

57) M1 includes all the following items except ________. A) checking deposits owned by individuals and businesses B) traveler's checks C) deposits in money market mutual funds D) currency owned by individuals and businesses Answer: C Topic: Money in the United States Today, M1 Skill: Recognition Status: Old AACSB: Reflective Thinking 58) Which of the following is NOT included in M1? A) currency B) checking deposits owned by individuals C) saving deposits D) traveler's checks Answer: C Topic: Money in the United States Today, M1 Skill: Recognition Status: Old AACSB: Reflective Thinking 59) Which of the following is NOT included in the M1 measure of money? A) currency held outside banks B) currency held in bank vaults C) checking deposits at commercial banks D) checking deposits at credit unions Answer: B Topic: Money in the United States Today, M1 Skill: Recognition Status: Old AACSB: Reflective Thinking 60) Which of the following is NOT included in the M1 measure of money? A) checking deposits B) currency C) traveler's checks D) savings deposits Answer: D Topic: Money in the United States Today, M1 Skill: Recognition Status: Old AACSB: Reflective Thinking

61) Which of the following measures is NOT included in the M1 definition of money? A) currency held by the public B) time deposits C) checking deposits D) travelers checks Answer: B Topic: Money in the United States Today, M1 Skill: Recognition Status: Old AACSB: Reflective Thinking 62) Which of the following is included in M1? A) the $200 you charged on your credit card to purchase your textbooks B) the $200 check you wrote to purchase your textbooks C) the $200 in cash you used to purchase your textbooks D) the $200 loan you arranged to purchase your textbooks Answer: C Topic: Money in the United States Today, M1 Skill: Conceptual Status: Old AACSB: Reflective Thinking 63) In an economy, there is $200 million in currency held outside banks, $100 million in traveler's checks, $250 million in currency held inside the banks, $300 million in checking deposits, and $600 million in savings deposits. The value of M1 is ________. A) $750 million B) $1,200 million C) $1,150 million D) $600 million Answer: D Topic: Money in the United States Today, M1 Skill: Analytical Status: Old AACSB: Analytical Skills 64) M2 ________. A) does not include currency B) does not include traveler's checks C) is a broader measure of money than M1 D) does not include checking deposits held at credit unions Answer: C Topic: Money in the United States Today, M2 Skill: Recognition Status: Old AACSB: Reflective Thinking

65) The definition of M2 includes A) M1. B) savings deposits. C) time deposits. D) all of the above Answer: D Topic: Money in the United States Today, M2 Skill: Recognition Status: Old AACSB: Reflective Thinking 66) The definition of M2 includes I. M1. II. money market mutual funds. III. currency held outside of banks. A) I and II only B) I and III only C) II and III only D) I, II, and III Answer: D Topic: Money in the United States Today, M2 Skill: Recognition Status: Old AACSB: Reflective Thinking 67) Which of the following is NOT included in the M2 definition of money? A) currency held by banks B) money market mutual fund balances C) savings deposits D) checkable deposits Answer: A Topic: Money in the United States Today, M2 Skill: Definition Status: Old AACSB: Reflective Thinking 68) Which of the following is NOT included in the M2 measure of money? A) checking deposits B) traveler's checks C) time deposits D) shares of the stocks of large companies Answer: D Topic: Money in the United States Today, M2 Skill: Recognition Status: Old AACSB: Reflective Thinking 18 Copyright © 2014 Pearson Education, Inc.

69) The largest component of M2 is A) savings deposits B) currency C) money market mutual funds D) travelers checks Answer: A Topic: Money in the United States Today, M2 Skill: Recognition Status: Old AACSB: Reflective Thinking 70) Which of the following is part of M2? A) checks B) credit cards C) currency held inside a bank D) none of these are part of M1 or M2 Answer: D Topic: Money in the United States Today, M2 Skill: Recognition Status: Old AACSB: Reflective Thinking 71) M2 is A) smaller than M1. B) larger than M1. C) equal to M1, given full employment. D) equal to M1, but only when all three functions of money apply. Answer: B Topic: Money in the United States Today, M1 and M2 Skill: Recognition Status: Old AACSB: Reflective Thinking 72) Checking deposits are included in A) M1 only. B) M2 only. C) M1 and M2. D) neither M1 nor M2. Answer: C Topic: Money in the United States Today, M1 and M2 Skill: Recognition Status: Old AACSB: Reflective Thinking

73) Currency held outside the banking system is included A) in M1 but not M2. B) in M2 but not M1. C) in both M1 and M2. D) in neither M1 nor M2. Answer: C Topic: Money in the United States Today, M1 and M2 Skill: Recognition Status: Old AACSB: Reflective Thinking 74) Comparing M1 and M2 we know that A) M1 is larger because it contains currency. B) M2 is approximately equal to M1. C) M2 is larger because it contains M1 and other assets. D) M2 is larger because it contains more liquid assets than does M1. Answer: C Topic: Money in the United States Today, M1 and M2 Skill: Conceptual Status: Old AACSB: Reflective Thinking 75) Suppose you cash in a Certificate of Deposit (a small time deposit) to acquire the traveler's checks you'll need for your vacation. What happens to M1 and M2? A) M1 and M2 both increase. B) M1 stays the same and M2 increases. C) M1 increases and M2 decreases. D) M1 increases and M2 stays the same. Answer: D Topic: Money in the United States Today, M1 and M2 Skill: Conceptual Status: Old AACSB: Reflective Thinking 76) If you use $500 of currency to make a deposit in a saving deposit, A) M1 decreases, but M2 is unchanged B) M1 decreases and M2 increases C) M1 is unchanged, but M2 increases D) M1 and M2 both increase Answer: A Topic: Money in the United States Today, M1 and M2 Skill: Conceptual Status: Old AACSB: Reflective Thinking

77) Sam has $500 in traveler's checks. He cashes a $100 traveler check, deposits $150 into his checking account at a Savings and Loan Association, and deposits the remaining $250 into a savings account at a credit union. Immediately, ________. A) M1 decreases by $250 and M2 does not change B) M1 decreases by $400 and M2 increases by $250 C) M1 does not change and M2 increases by $250 D) M1 and M2 do not change Answer: A Topic: Money in the United States Today, M1 and M2 Skill: Conceptual Status: Old AACSB: Analytical Skills 78) A new financial innovation results in people switching their funds from checking deposits to savings accounts. The quantity of M1 ________ and the quantity of M2 ________. A) decreases; decreases B) increases; decreases C) decreases; does not change D) decreases; increases Answer: C Topic: Money in the United States Today, M1 and M2 Skill: Conceptual Status: Old AACSB: Reflective Thinking

Component Money market mutual fund deposits Time deposits Savings deposits Checking deposits Currency

Amount (billions of dollars) 4,400 1,237 1,589 752 609

79) Based on the data in the table above, what is the value of M1? A) $2,950 billion B) $1,361 billion C) $752 billion D) $609 billion Answer: B Topic: Money in the United States Today, M1 Skill: Analytical Status: Old AACSB: Analytical Skills 21 Copyright © 2014 Pearson Education, Inc.

80) Based on the data in the table above, what is the value of M2? A) $2,950 billion B) $4,187 billion C) $4,400 billion D) $8,587 billion Answer: D Topic: Money in the United States Today, M2 Skill: Analytical Status: Old AACSB: Analytical Skills

Component Currency Checking deposits Savings deposits Traveler's checks Time deposits Money market mutual funds Available credit on credit cards

Amount (billions of dollars) 235 570 416 8 1,144 930 675

81) According to the table above, the value of M1 is ________ and the value of M2 is ________. A) $813 billion; $2490 billion B) $805 billion; $2490 billion C) $813 billion; $3303 billion D) $1,488 billion; $3978 billion Answer: C Topic: Money in the United States Today, M1 and M2 Skill: Analytical Status: Old AACSB: Analytical Skills

Component Currency Checking deposits Savings deposits Traveler's checks Time deposits Money market mutual funds Available credit on credit cards

Amount (billions of dollars) 300 600 450 10 1,200 1,100 900

82) According to the table above, the value of M1 is ________ and the value of M2 is ________. A) $860 billion; $2,750 billion B) $910 billion; $1,960 billion C) $860 billion; $4,560 billion D) $910 billion; $3,660 billion Answer: D Topic: Money in the United States Today, M1 and M2 Skill: Analytical Status: Old AACSB: Analytical Skills 83) Liquidity is the A) speed with which the price of an asset changes as its intrinsic value changes. B) inverse of the velocity of money. C) same as the velocity of money. D) ease with which an asset can be converted into money. Answer: D Topic: Liquidity Skill: Recognition Status: Old AACSB: Reflective Thinking 84) Liquidity is the A) degree to which an asset acts as money without a loss of value. B) ease with which an asset can be converted into a means of payment with little loss of value. C) degree to which money can be converted into an asset with little loss of value. D) ease with which credit cards are accepted as a means of payment. Answer: B Topic: Liquidity Skill: Recognition Status: Old AACSB: Reflective Thinking 23 Copyright © 2014 Pearson Education, Inc.

85) Liquidity is the same as A) easy conversion of money to an asset, allowing for loss of value. B) diversification of an investor's store of value. C) easy conversion of an asset to a means of payment, allowing for loss of value. D) easy conversion of an asset to a means of payment, with little or no loss of value. Answer: D Topic: Liquidity Skill: Recognition Status: Old AACSB: Reflective Thinking 86) A highly liquid asset A) has high transaction costs associated with its sale. B) is highly leveraged. C) generally has a very limited market for its resale. D) can be converted into a means of payment easily without loss of value. Answer: D Topic: Liquidity Skill: Recognition Status: Old AACSB: Reflective Thinking 87) Liquidity ________. A) increases when a country owns gold B) increases when a consumer has more credit cards C) is how quickly an asset loses its worth D) is the property of being instantly convertible into money Answer: D Topic: Liquidity Skill: Recognition Status: Old AACSB: Reflective Thinking 88) In the list of assets below, which is the most liquid? A) $500 worth of Ford Motors common stock B) $500 worth of Ford Motors bonds C) a $500 traveler's check D) a one-ounce gold coin Answer: C Topic: Liquidity Skill: Conceptual Status: Old AACSB: Reflective Thinking

89) An individual wanting the most liquid asset possible will hold A) currency. B) a savings account. C) gold. D) U.S. government bonds. Answer: A Topic: Liquidity Skill: Conceptual Status: Old AACSB: Reflective Thinking 90) Which of the following is the most liquid? A) the U.S. dollars in your pocket B) the funds in your checking account C) your house D) your friend's house Answer: A Topic: Liquidity Skill: Conceptual Status: Old AACSB: Reflective Thinking 91) Which of the following is the most liquid? A) the U.S. dollars that your professor used this morning to buy breakfast B) your credit card C) gold D) the pencil or pen in your hand right now Answer: A Topic: Liquidity Skill: Conceptual Status: Old AACSB: Reflective Thinking 92) Which of the following is the most liquid asset? A) money B) land C) a government bond D) a share of stock Answer: A Topic: Liquidity Skill: Conceptual Status: Old AACSB: Reflective Thinking

93) Checks ________ money and credit cards ________ money. A) are; are B) are not; are C) are; are not D) are not; are not Answer: D Topic: Checks Are Not Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 94) Which of the following is NOT money? A) currency B) checking deposits C) checks in the checkbook D) All of the above are money. Answer: C Topic: Checks Are Not Money Skill: Recognition Status: Old AACSB: Reflective Thinking 95) Checks are A) the largest component of the money supply. B) not money. C) only part of M2 but not part of M1. D) part of M1 but not part of M2. Answer: B Topic: Checks Are Not Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 96) Which of the following is true? I. Checks are considered money because they can be used as a medium of exchange. II. Checks represent a transfer of money. A) I only B) II only C) both I and II D) neither I nor II Answer: B Topic: Checks Are Not Money Skill: Conceptual Status: Old AACSB: Reflective Thinking

97) Checks ________ money and checking deposits ________ money. A) are; are B) are; are not C) are not; are D) are not; are not Answer: C Topic: Checks Are Not Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 98) Checks are NOT money because they A) are issued by banks, not by the government. B) are merely instructions to transfer money. C) have value in exchange but little intrinsic value. D) are not backed by either gold or silver. Answer: B Topic: Checks Are Not Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 99) Credit cards are A) money but are not a large part of the money supply. B) not money. C) money and are the largest part of the money supply. D) not money because they are not made of paper. Answer: B Topic: Credit Cards Are Not Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 100) Credit cards are A) not a part of money because they are not a means of payment. B) a part of M1 but not of M2. C) a part of money because they are used to purchase goods and services. D) a part of M2 but not a part of M1. Answer: A Topic: Credit Cards Are Not Money Skill: Conceptual Status: Old AACSB: Reflective Thinking

101) Credit cards are A) a part of money because they are used in so many transactions. B) a part of money when the transaction approach is used but not when the liquidity approach is used. C) not part of money because they represent a loan of money to the user. D) not part of money because the government has no control over the amount of credit outstanding. Answer: C Topic: Credit Cards Are Not Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 102) Using a credit card can best be likened to A) taking out a loan. B) a barter exchange. C) using any other form of money because you immediately get to take the goods home. D) writing a check on your demand deposit account. Answer: A Topic: Credit Cards Are Not Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 103) Credit cards are NOT money because they A) have a value in exchange but little intrinsic value. B) are not issued by the government. C) do not serve as a unit of account. D) are ID cards that make borrowing easier. Answer: D Topic: Credit Cards Are Not Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 104) Checks and credit cards are NOT considered money because they A) are issued by banks, not the Federal Reserve. B) are not the means of payment. C) typically require an identification check, such as your driver's license. D) are not backed by all commercial banks. Answer: B Topic: Checks and Credit Cards Are Not Money Skill: Conceptual Status: Old AACSB: Reflective Thinking

105) Credit cards were introduced in 1959. In 2009, the U.S. credit card balance was $866 billion. Which of the following is true? A) The $866 billion balance is part of M2 but not part of M1. B) The $866 billion balance is part of both M1 and M2. C) Only that portion of the $866 billion actually charged in 2009 is counted in M1 and M2. D) No part of the $866 billion balance is counted in M1 and M2. Answer: D Topic: Credit Cards Are Not Money Skill: Conceptual Status: New AACSB: Reflective Thinking 106) The balance owed on credit cards in the United States in 2009 was $866 billion. When consumers pay off this balance in full, A) M1 will decrease by $866 billion. B) M1 will remain unchanged but M2 will decrease by $866 billion. C) neither M1 nor M2 will change. D) M1 will increase by $866 billion. Answer: C Topic: Credit Cards Are Not Money Skill: Conceptual Status: New AACSB: Reflective Thinking 107) Which of the following is NOT a function of money? A) medium of exchange B) barter C) unit of account D) store of value Answer: B Topic: Study Guide Question, Barter Skill: Conceptual Status: Old AACSB: Reflective Thinking 108) The fact that money can be exchanged for goods reflects money's role as a A) cause of inflation. B) medium of exchange. C) unit of account. D) store of value. Answer: B Topic: Study Guide Question, Medium of Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking

2 Depository Institutions 1) Which of the following is considered a depository institution? I. the U.S. Treasury II. a commercial bank like Citibank III. a credit union for federal government employees A) I only B) I and II C) II and III D) I, II and III Answer: C Topic: Depository Institutions Skill: Recognition Status: Old AACSB: Reflective Thinking 2) Which of the following institutions is NOT a depository institution? A) the U.S. Treasury B) a commercial bank C) a money market mutual fund D) a thrift institution, such as a savings and loan association Answer: A Topic: Depository Institutions Skill: Recognition Status: Old AACSB: Reflective Thinking 3) A depository institution is a firm that takes deposits from ________ and makes loans to ________. A) households and firms; other households and firms B) firms; households C) households; firms D) firms; other firms Answer: A Topic: Depository Institutions Skill: Recognition Status: Old AACSB: Reflective Thinking

4) Depository institutions A) make profit from the spread between the interest rate they pay on deposits and the interest rate they receive on loans. B) make a profit according to how much the Federal Reserve pays them. C) make their profit by charging the government for their services. D) make zero profit but receive compensation by the government because their services are so valuable. Answer: A Topic: Depository Institutions Skill: Recognition Status: Old AACSB: Reflective Thinking 5) The major role of a commercial bank is to A) make mortgage loans. B) sell shares and use the proceeds to buy stocks. C) receive deposits and make loans. D) restrain the growth of the quantity of money. Answer: C Topic: Commercial Banks Skill: Recognition Status: Old AACSB: Reflective Thinking 6) Commercial banks do not A) buy U.S. government Treasury bills. B) accept deposits from their customers. C) make loans to creditworthy individuals and businesses. D) determine what assets are money. Answer: D Topic: Commercial Banks Skill: Conceptual Status: Old AACSB: Reflective Thinking 7) Modern U.S. commercial banks perform all of the following functions EXCEPT A) accept checking deposits. B) issue paper currency. C) make loans to households and business firms. D) accept savings deposits. Answer: B Topic: Commercial Banks Skill: Conceptual Status: Old AACSB: Reflective Thinking

8) A savings bank is a depository institution that ________. A) sells shares which it uses to purchase shares in U.S. Treasury bills B) makes mostly home-purchase loans C) is owned by a social or economic group D) makes mostly consumer loans Answer: B Topic: Savings Banks Skill: Recognition Status: Old AACSB: Reflective Thinking 9) Examples of thrift institutions include A) savings deposits and checking deposits. B) commercial banks, savings and loan associations, and insurance companies. C) savings and loan associations, savings banks, and credit unions. D) money market mutual funds, commercial banks, and credit unions. Answer: C Topic: Thrift Institutions Skill: Recognition Status: Old AACSB: Reflective Thinking 10) A credit union is A) a combination of credit card corporations. B) an depository institution owned by members of a particular group. C) a thrift institution that issues credit cards. D) a commercial bank owned by its depositors. Answer: B Topic: Credit Union Skill: Recognition Status: Old AACSB: Reflective Thinking 11) Money market mutual funds invest in A) residential mortgages. B) commercial real estate. C) long-term government securities. D) highly liquid assets. Answer: D Topic: Money Market Mutual Funds Skill: Recognition Status: Old AACSB: Reflective Thinking

12) Sarah buys shares from a financial institution that uses her funds together with other funds to purchase U.S. treasury bills. Sarah has deposited her money into a ________. A) savings bank B) credit union C) money market mutual fund D) savings and loan association Answer: C Topic: Money Market Mutual Funds Skill: Recognition Status: Old AACSB: Reflective Thinking 13) Money market mutual funds A) are provided by the Federal Reserve as liquidity for private banks. B) have no restrictions on shareholder withdrawals. C) do not provide any checking services to their owners. D) allow shareholders to write check on their funds. Answer: D Topic: Money Market Mutual Funds Skill: Recognition Status: Old AACSB: Reflective Thinking 14) Which of the following is true regarding money market mutual funds? I. Money market mutual funds buy highly liquid assets like Treasury bills. II. Shareholders can obtain loans from money market mutual funds. A) I only B) II only C) both I and II D) neither I nor II Answer: A Topic: Money Market Mutual Funds Skill: Conceptual Status: Old AACSB: Reflective Thinking 15) A money market mutual fund is A) essentially the same as a demand deposit account. B) a time deposit of $100,000 or less. C) a time deposit of more than $100,000. D) a depository institution that sells shares and buys securities such as U.S. Treasury bills. Answer: D Topic: Money Market Mutual Funds Skill: Conceptual Status: Old AACSB: Reflective Thinking 33 Copyright © 2014 Pearson Education, Inc.

16) Which of the following explains why a bank holds reserves? I. Banks are required by law to hold reserves. II. To meet depositors' currency withdrawals. III. To use them to make loans to households. A) I only B) II only C) I and II D) I, II, and III E) I and III Answer: C Topic: Banks' Reserves Skill: Conceptual Status: New AACSB: Reflective Thinking 17) For a commercial bank, the term "reserves" refers to A) a banker's concern ("reservation") in making loans to an individual without a job. B) the profit that the bank retains at the end of the year. C) the cash in its vaults and its deposits at the Federal Reserve. D) the net interest that it earns on loans. Answer: C Topic: Banks' Reserves Skill: Recognition Status: Old AACSB: Reflective Thinking 18) Which of the following are part of a commercial bank's reserves? I. cash in the bank's vaults II. loans III. cash in checking accounts A) I only B) I and II C) I and III D) I, II and III Answer: A Topic: Banks' Reserves Skill: Recognition Status: Old AACSB: Reflective Thinking

19) Reserves are ________. A) gold in a bank's vault plus its gold at Federal Reserve banks B) cash in a bank's vault plus its deposits at Federal Reserve banks C) cash in a bank's vault plus its gold at Federal Reserve banks D) cash in a bank's vault plus the cash carried by its customers Answer: B Topic: Banks' Reserves Skill: Recognition Status: Old AACSB: Reflective Thinking 20) A bank's reserves include A) the cash in its vault plus the value of its depositors' accounts. B) the cash in its vault plus its deposits held at a Federal Reserve bank. C) the cash in its vault plus any gold held for the bank at Fort Knox. D) its common stock holdings, the cash in its vault, and any deposits at a Federal Reserve bank. Answer: B Topic: Banks' Reserves Skill: Recognition Status: Old AACSB: Reflective Thinking 21) Bank reserves include I. the cash in the bank's vault II. the bank's deposits at the Federal Reserve A) only I B) only II C) both I and II D) neither I nor II Answer: C Topic: Banks' Reserves Skill: Recognition Status: Old AACSB: Reflective Thinking 22) Of the following, the riskiest assets held by commercial banks are A) reserves. B) U.S. government bonds. C) U.S. government Treasury bills. D) loans. Answer: D Topic: Commercial Banks Skill: Conceptual Status: Old AACSB: Reflective Thinking

23) An asset category that caries the highest interest rate is A) checkable deposit accounts. B) loans. C) cash in the bank vault. D) savings deposits. Answer: B Topic: Commercial Banks Skill: Conceptual Status: Old AACSB: Reflective Thinking 24) Which of the following functions are performed by depository institutions? I. They make long-term loans using short-term deposits, thereby creating liquidity. II. They efficiently gather funds from a large base of depositors. III. They concentrate risk. A) I only B) II only C) III only D) I and II Answer: D Topic: Economic Functions of Depository Institutions Skill: Conceptual Status: Old AACSB: Reflective Thinking 25) Which of the following is a service of depository institutions? A) decreasing the liquidity drain of funds in the banking system B) monitoring the Federal Reserve C) pooling risk D) loaning funds to other depository institutions at the discount rate Answer: C Topic: Economic Functions of Depository Institutions Skill: Conceptual Status: Old AACSB: Reflective Thinking 26) Depository institutions are good at minimizing A) the costs of monitoring borrowers. B) risky borrowers. C) liquidity. D) all of the above Answer: A Topic: Economic Functions of Depository Institutions Skill: Conceptual Status: Old AACSB: Reflective Thinking 36 Copyright © 2014 Pearson Education, Inc.

27) If a savings and loan "pools risk," which of the following must it do? A) take funds in from a large number of lenders B) have a large spread between the interest rate it charges borrowers and the interest rate it pays lenders C) lend money to a large number of firms D) Both answers A and C are correct. Answer: D Topic: Economic Functions of Depository Institutions Skill: Conceptual Status: Old AACSB: Reflective Thinking 28) Depository institutions undertake all the following activities except they do not ________. A) print money B) minimize the cost of monitoring borrowers C) pool risk D) create liquidity Answer: A Topic: Economic Functions of Depository Institutions Skill: Recognition Status: Old AACSB: Reflective Thinking 29) Depository institutions do all of the following EXCEPT A) set the required reserve ratio B) create liquidity C) pool risks D) minimize the cost of obtaining funds Answer: A Topic: Economic Functions of Depository Institutions Skill: Conceptual Status: Old AACSB: Reflective Thinking 30) Liquidity can A) not be created. B) be created by borrowing short and lending long. C) only be created by the government. D) be created by borrowing long and lending short. Answer: B Topic: The Economic Functions of Depository institutions Skill: Conceptual Status: Old AACSB: Reflective Thinking

31) The practice of borrowing short and lending long A) pools risk. B) minimizes the cost of monitoring borrowers. C) creates liquidity. D) All of the above answers are correct. Answer: C Topic: The Economic Functions of Depository institutions Skill: Conceptual Status: Old AACSB: Reflective Thinking 32) Which of the following is NOT an economic benefit of depository institutions? A) They borrow long and lend short. B) They create liquidity. C) They pool risk. D) They reduce the cost of monitoring borrowers. Answer: A Topic: The Economic Functions of Depository institutions Skill: Recognition Status: Old AACSB: Reflective Thinking 33) Depository institution create liquidity when they A) buy assets that are liquid. B) borrow short and lend long. C) have liabilities that are illiquid. D) borrow long and lend short. Answer: B Topic: Economic Functions of Depository Institutions Skill: Conceptual Status: Old AACSB: Reflective Thinking 34) Which of the following allow banks to minimize the cost to a business of borrowing? I. Borrowing long and lending short. II. Raising funds from a large number of depositors. III. Creating money by lending all their reserves. A) I only B) II only C) I and III D) II and III Answer: B Topic: Economic Functions of Depository Institutions Skill: Conceptual Status: Old AACSB: Reflective Thinking 38 Copyright © 2014 Pearson Education, Inc.

35) When banks use specialized resources to monitor borrowers, they are A) pooling risk. B) lowering the cost of creating liquidity. C) minimizing the cost of assessing borrowers' creditworthiness. D) lending to only high-risk borrowers. Answer: C Topic: Economic Functions of Depository Institutions Skill: Conceptual Status: Old AACSB: Reflective Thinking 36) The risk of making a loan is A) earning profits that are too high and cause higher taxes. B) the risk that lender does not pay. C) the risk that the borrower does not pay. D) called "default risk" when taxes are not paid. Answer: C Topic: Economic Functions of Depository Institutions Skill: Recognition Status: Old AACSB: Reflective Thinking 37) Pooling of risk occurs when depository institutions A) make assets more liquid. B) specialize in loaning only to good borrowers. C) bring lenders together. D) lend to a variety of different borrowers. Answer: D Topic: Economic Functions of Depository Institutions Skill: Recognition Status: Old AACSB: Reflective Thinking 38) When a depository institution pools risk, it A) buys short and lends long. B) borrows reserves from the Federal Reserve. C) spreads loan losses across many depositors so that no one depositor faces a high degree of risk. D) makes loans to just one firm. Answer: C Topic: Economic Functions of Depository Institutions Skill: Recognition Status: Old AACSB: Reflective Thinking

39) Financial innovation is A) the process of turning assets into a more liquid form. B) the development of new financial products and services. C) responsible for credit cards being included as part of money. D) causing a decrease in bank profits. Answer: B Topic: Financial Innovation Skill: Recognition Status: Old AACSB: Reflective Thinking 40) Depository institutions do all the following EXCEPT A) minimize the cost of obtaining funds. B) create liquidity. C) pool risks. D) create required reserve ratios. Answer: D Topic: Study Guide Question, Depository Institutions Skill: Recognition Status: Old AACSB: Reflective Thinking 3 The Federal Reserve System 1) The Federal Reserve System is the A) insurance agency the insures deposits. B) central bank of the United States. C) law enforcement agency that tracks counterfeit money. D) federal government agency that undertakes deregulation for depository institutions. Answer: B Topic: The Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 2) In the United States, the central bank is the ________. A) Bank of America B) Federal Reserve System C) Federal Reserve Bank of New York D) Federal Reserve Bank of Washington D.C. Answer: B Topic: The Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking

3) Which of the following is the central bank of the United States? A) Comptroller of the Currency B) Treasury Department C) Federal Reserve System D) Office of the Budget Answer: C Topic: The Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 4) The Federal Reserve System A) regulates the nation's financial institutions. B) conducts the nation's monetary policy. C) Both answers A and B are correct. D) Neither answer A nor B is correct. Answer: C Topic: The Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 5) All the following statements about the Federal Reserve are true EXCEPT it ________. A) is a public authority B) regulates a nation's depository institutions C) accepts checking deposits from the nation's residents D) controls the quantity of money Answer: C Topic: The Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 6) The Bank of Japan is Japan's central bank. As part of its duties, the Bank of Japan would A) provide banking services to Japan's citizens and firms. B) provide banking services to foreigners. C) control the quantity of money in circulation in Japan. D) change tax rates. Answer: C Topic: The Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking

7) As a "central bank," which of the following is true regarding the Fed? I. The Fed is a public authority that regulates the nation's banks. II. The Fed is not allowed to provide services to commercial banks like Citibank. III. The Fed is required to provide banking services to private citizens. A) I B) II C) I and II D) I and III Answer: A Topic: The Federal Reserve System Skill: Conceptual Status: Old AACSB: Reflective Thinking 8) The Federal Reserve System A) has officers that are elected, like members of Congress. B) controls the amount of currency in circulation. C) is headquartered in San Francisco. D) was recently declared unconstitutional by the Supreme Court. Answer: B Topic: The Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 9) Control of the nation's quantity of money is handled by A) Congress. B) the Federal Reserve System. C) the President of the United States. D) Congress, the Federal Reserve System, and all commercial banks. Answer: B Topic: Monetary Policy Skill: Recognition Status: Old AACSB: Reflective Thinking 10) Monetary policy is conducted A) only by the Federal Reserve. B) by the Federal Reserve and the President of the United States. C) by the Federal Reserve, the President of the United States, and Congress. D) by the Federal Reserve with veto power residing with the President of the United States. Answer: A Topic: Monetary Policy Skill: Recognition Status: Old AACSB: Reflective Thinking 42 Copyright © 2014 Pearson Education, Inc.

11) When the Fed is ________ it is ________. A) adjusting the amount of money in circulation; issuing government bonds B) issuing government bonds; conducting monetary policy C) adjusting the amount of money in circulation; conducting monetary policy D) regulating the nation's financial institutions; conducting monetary policy Answer: C Topic: Monetary Policy Skill: Conceptual Status: Old AACSB: Reflective Thinking 12) Controlling the quantity of money and interest rates to influence aggregate economic activity is called A) foreign policy. B) monetary policy. C) fiscal policy. D) bank antitrust policy. Answer: B Topic: Monetary Policy Skill: Conceptual Status: Old AACSB: Reflective Thinking 13) The interest rate banks charge other banks for overnight loans is A) the federal funds rate. B) targeted by the FDIC C) higher than interest rates for securities and loans. D) lower than interest rates for loans, but higher than interest rates for securities. Answer: A Topic: Monetary Policy Skill: Conceptual Status: Old AACSB: Reflective Thinking 14) The nation is divided into ________ Federal Reserve districts, each having a Federal Reserve Bank. A) 10 B) 50 C) 12 D) 7 Answer: C Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Revised AACSB: Reflective Thinking

15) The Federal Reserve has ________ regional Federal Reserve banks and ________ members of the Board of Governors. A) 12; 12 B) 12; 7 C) 7; 12 D) 7; 7 Answer: B Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 16) Regional Federal Reserve banks A) are located in each of the 50 states. B) are run by the governors of the states in which they are located. C) provide general banking services to the public. D) None of the above answers is correct. Answer: D Topic: The Structure of the Federal Reserve System Skill: Conceptual Status: Old AACSB: Reflective Thinking 17) Which of the following institutions is NOT part of the structure of the Federal Reserve system? A) The Federal Open Market Committee B) The Federal Reserve Banks C) The Board of Governors D) The Federal Government Answer: D Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 18) Members of the Federal Reserve System's Board of Governors A) are elected for life. B) hold 14-year staggered terms. C) are a special subcommittee of the Senate. D) are elected at large by district banks. Answer: B Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking

19) The Board of Governors of the Federal Reserve System consists of A) 7 members appointed by Congress and 7 appointed by the President. B) the presidents of each regional Federal Reserve bank. C) 12 members appointed by Congress. D) 7 members appointed by the President of the United States. Answer: D Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 20) The Board of Governors is the A) Presidents of the 12 regional banks of the Federal Reserve. B) 7-member group that oversees the Federal Reserve. C) 12-member monetary policy committee of the Federal Reserve. D) 50-member organization of state banking regulators of the Federal Reserve. Answer: B Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 21) The Board of Governors of the Federal Reserve System is A) appointed by the Congress. B) elected by the public. C) appointed by the President of the United States and confirmed by the U.S. Senate. D) elected by members of the American Banking Association. Answer: C Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 22) This group consists of seven members appointed by the President of the United States for 14year terms: A) the presidents of the Federal Reserve Banks. B) the members of the Federal Open Market Committee. C) the members of the Board of Governors of the Federal Reserve System. D) None of the above answers are correct. Answer: C Topic: The Federal Reserve System Skill: Recognition Status: Revised AACSB: Reflective Thinking

23) The Board of Governors of the Federal Reserve System does NOT A) consist of seven members with fourteen-year terms. B) include the presidents of the twelve Federal Reserve Banks. C) utilize a system of rotations so that a position comes open every two years. D) consist of members whose appointments have been approved by the Senate. Answer: B Topic: The Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 24) The Federal Open Market Committee A) consists of the Fed chairman and the 12 regional bank presidents. B) is the main policy-making organ of the Federal Reserve. C) is headed by the president of the New York Federal Reserve Bank. D) meets every week to review the state of the economy. Answer: B Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 25) The Federal Open Market Committee (FOMC) A) consists of the 12 districts of the Federal Reserve. B) is the 7-member group that oversees the Federal Reserve. C) is the 12-member monetary policy committee of the Federal Reserve. D) is the 50-member organization of state banking regulators of the Federal Reserve. Answer: C Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 26) The Federal Open Market Committee (FOMC) is composed of A) representatives from the governors of all 50 states. B) Presidents of 5 Federal Reserve regional banks and the Board of Governors. C) the 12 Presidents of the Federal Reserve regional banks. D) the Board of Governors, the Vice-President of the United States, and the Secretary of Treasury for the United States. Answer: B Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking

27) The Federal Open Market Committee (FOMC) A) determines the government's tax policy. B) determines the Fed's monetary policy. C) oversees all transactions on the stock market. D) lends to the least credit-worthy customers who otherwise can't get loans. Answer: B Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 28) The Federal Open Market Committee consists of the A) Federal Reserve chairman and the other six members of the Board of Governors. B) Federal Reserve branch bank presidents. C) Federal Reserve chairman and the Federal Reserve branch bank presidents. D) Federal Reserve chairman, the other six members of the Board of Governors, and five of the Federal Reserve branch bank presidents. Answer: D Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Revised AACSB: Reflective Thinking 29) The main policy-making organ of the Federal Reserve System is A) the Board of Governors. B) the Federal Reserve branch banks. C) the Federal Reserve chairman and the Federal Reserve branch bank presidents. D) the Federal Open Market Committee. Answer: D Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 30) Which part of the Federal Reserve System meets every 6 weeks to determine the nation's monetary policy? A) Federal Open Market Committee B) Board of Governors C) the Federal Reserve Banks D) depository institutions such as commercial banks Answer: A Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking

31) Which of the following is TRUE regarding the Federal Open Market Committee (FOMC)? A) It is the main policy-making group of the Congress. B) Representatives from each state control its operation. C) It meets about every six weeks to decide on monetary policy. D) Both answers A and C are correct. Answer: C Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 32) The monetary policy-making body of the Federal Reserve is the A) the Federal Open Market Committee B) the New York Federal Reserve Bank C) regional Federal Reserve Banks D) Board of Governors Answer: A Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 33) Which Federal Reserve Bank president is always on the Federal Open Market Committee? A) New York B) Chicago C) St. Louis D) Boston Answer: A Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 34) The Federal Open Market Committee of the Federal Reserve System is responsible for A) maintaining competition among the nation's commercial banks. B) determining monetary policy actions. C) establishing the official price of gold. D) defining the foreign exchange value of the dollar. Answer: B Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking

35) The Federal Open Market Committee A) meets weekly to set Fed policy. B) has 7 voting members. C) always includes the president of the Federal Reserve Bank of New York as a member. D) does not include any members of the Board of Governors. Answer: C Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 36) The main policy-making organ of the Federal Reserve System is the A) Board of Governors. B) Federal Reserve bank presidents. C) Federal Open Market Committee. D) Joint Congressional Committee on Monetary Policy. Answer: C Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 37) The main policy-making body of the Federal Reserve System is the A) Board of Governors. B) Federal Open Market Committee. C) Federal Reserve Banks. D) member commercial banks. Answer: B Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 38) The main policy-making organization of the Federal Reserve System is the ________. A) U.S. Mint B) U.S. Treasury C) Joint Congressional Committee on Monetary Policy D) Federal Open Market Committee Answer: D Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Revised AACSB: Reflective Thinking

39) The main policy designer of the Federal Reserve system is the A) 12 district banks. B) President and Congress. C) Federal Open Market Committee. D) Council of Economic Advisors. Answer: C Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 40) The Chairman of the Fed is appointed by ________. A) the Board of Governors of the Federal Reserve System B) the President of the United States C) Congress D) the U.S. Senate Answer: B Topic: The Fed's Power Center Skill: Recognition Status: Old AACSB: Reflective Thinking 41) The current chairman of the Federal Reserve System is A) Milton Friedman. B) Alan Greenspan. C) President Obama. D) Ben Bernanke. Answer: D Topic: The Fed's Power Center Skill: Recognition Status: Old AACSB: Reflective Thinking 42) The chairman of the Federal Reserve's Board of Governors A) controls the agenda of the Federal Open Market Committee meetings. B) is the main point of contact between the Fed and the President of the U.S. C) receives frequent background briefings on monetary policy issues from a large staff of economists and technical experts. D) All of the above answers are correct. Answer: D Topic: The Fed's Power Center Skill: Recognition Status: Old AACSB: Reflective Thinking

43) Most of the day-to-day power in monetary policy decisions lies with A) the President of the United States B) the Senate Banking Committee C) the chairman of the Board of Governors D) large commercial banks Answer: C Topic: The Fed's Power Center Skill: Recognition Status: Old AACSB: Reflective Thinking 44) On the Fed's balance sheet, assets include A) depository institutions deposits at the Federal Reserve and loans to depository institutions. B) U.S. government securities and loans to depository institutions. C) Federal Reserve notes and depository institutions' deposits at the Federal Reserve. D) Federal Reserve notes and loans to depository institutions. Answer: B Topic: Fed's Balance Sheet Skill: Recognition Status: Old AACSB: Reflective Thinking 45) Which of the following is an asset of the Fed? A) loans to depository institutions B) Federal Reserve notes C) banks' deposits D) Both answers B and C are correct. Answer: A Topic: Fed's Balance Sheet Skill: Recognition Status: Old AACSB: Reflective Thinking 46) Which of the following is NOT an asset of the Federal Reserve? A) Federal Reserve notes B) government securities C) loans to depository institutions D) None of the above are correct because they are all assets of the Federal Reserve Answer: A Topic: The Fed's Balance Sheet Skill: Recognition Status: Old AACSB: Reflective Thinking

47) Which of the following is NOT an asset of the Federal Reserve System? A) loans to depository institutions B) reserves of depository institutions C) U.S. government securities D) None of the above are correct because they are all assets of the Federal Reserve Answer: B Topic: The Fed's Balance Sheet Skill: Recognition Status: Old AACSB: Reflective Thinking 48) Which of the following is a liability of the Federal Reserve? A) Federal Reserve notes B) loans to depository institutions C) U.S. government securities D) U.S. coins Answer: A Topic: The Fed's Balance Sheet Skill: Recognition Status: Old AACSB: Reflective Thinking 49) Which of the following is a liability on the balance sheet of the Federal Reserve System? A) Federal Reserve notes B) U.S. government securities C) loans to depository institutions D) None of the above are correct because they are all liabilities of the Federal Reserve Answer: A Topic: The Fed's Balance Sheet Skill: Recognition Status: Old AACSB: Reflective Thinking 50) The monetary base is the sum of A) U.S. Treasury notes and other government securities. B) Federal Reserve notes, coins, and deposits of depository institutions. C) foreign and domestic deposits at the Fed. D) coins, currency, and checkable deposits. Answer: B Topic: Monetary Base Skill: Recognition Status: Old AACSB: Reflective Thinking

51) The monetary base is the sum of A) Federal Reserve notes, coins, and deposits of depository institutions B) currency, travelers' checks, and checking deposits C) currency D) M1 and M2 Answer: A Topic: Monetary Base Skill: Recognition Status: Old AACSB: Reflective Thinking 52) The monetary base consists of A) the quantity of money. B) the sum of Federal Reserve notes, coins, and depository institutions' deposits at the Fed. C) demand deposits and vault cash. D) government securities held by the Fed. Answer: B Topic: Monetary Base Skill: Recognition Status: Old AACSB: Reflective Thinking 53) The monetary base is A) the sum of Federal Reserve notes, coins, and depository institutions' deposits at the Federal Reserve. B) Federal Reserve notes minus depository institutions' deposits at the Federal Reserve. C) depository institutions' deposits at the Federal Reserve minus Federal Reserve notes. D) the money borrowed by banks from other banks. Answer: A Topic: Monetary Base Skill: Recognition Status: Old AACSB: Reflective Thinking 54) The monetary base does NOT include A) Federal Reserve notes. B) reserves of depository institutions. C) checking accounts at commercial banks. D) commercial banks' reserves. Answer: C Topic: Monetary Base Skill: Recognition Status: Old AACSB: Reflective Thinking

55) Which of the following is NOT part of the monetary base? A) Federal Reserve notes B) reserves of depository institutions at the Fed C) the public's checking deposits at commercial banks D) coins Answer: C Topic: Monetary Base Skill: Recognition Status: Old AACSB: Reflective Thinking 56) The sum of Federal Reserve notes, coins, and depository institutions' reserves is the ________. A) reserves of the Fed B) assets of the Fed C) monetary base D) liabilities of the Fed Answer: C Topic: Monetary Base Skill: Recognition Status: Old AACSB: Reflective Thinking 57) Which of the following is NOT a part of the monetary base? A) Chemical Bank's deposits of reserves at the Fed B) First Bank's required reserves held at the Federal Reserve C) Federal Reserve notes D) U.S. government securities owned by the Fed Answer: D Topic: Monetary Base Skill: Conceptual Status: Old AACSB: Reflective Thinking 58) Which of the following is a tool that is used by the Fed to control the quantity of money? A) open market operations B) excess reserves C) government expenditure multiplier D) real interest rate Answer: A Topic: The Fed's Policy Tools Skill: Conceptual Status: Old AACSB: Reflective Thinking

59) Which of the following is NOT a monetary policy tool of the Federal Reserve? A) changes in required reserves B) last resort loans C) deposit insurance D) open market operations Answer: C Topic: The Fed's Policy Tools Skill: Recognition Status: Old AACSB: Reflective Thinking 60) Which of the following is NOT one of the Fed's monetary policy tools? A) last resort loans B) the required reserve ratio C) the income tax rate D) buying and selling U.S. government securities Answer: C Topic: The Fed's Policy Tools Skill: Recognition Status: Old AACSB: Reflective Thinking 61) Which of the following tools is NOT a policy tool of the Fed? A) last resort loans B) the tax rate on interest income C) the reserve ratio D) open market operations Answer: B Topic: The Fed's Policy Tools Skill: Recognition Status: Old AACSB: Reflective Thinking 62) Which of the following is NOT a monetary policy tool? A) last resort loans B) open market operations C) required reserve ratio D) federal funds rate Answer: D Topic: The Fed's Policy Tools Skill: Recognition Status: Old AACSB: Reflective Thinking

63) Which of the following is NOT a policy tool of the Federal Reserve System? A) open market operations B) the tax rate imposed on interest income C) the interest rate charged by the Fed for loans to member banks D) the amount of required reserves held by member banks Answer: B Topic: The Fed's Policy Tools Skill: Recognition Status: Old AACSB: Reflective Thinking 64) The tools at the disposal of the Fed for changing the quantity of money do NOT include A) open market operations. B) changing the required reserve ratio. C) changing discount rates. D) increasing the number of commercial banks. Answer: D Topic: The Fed's Policy Tools Skill: Recognition Status: Old AACSB: Reflective Thinking 65) Federal Reserve policy tools include all of the following EXCEPT A) excess reserve ratios. B) required reserve ratios. C) last resort loans. D) open market operations. Answer: A Topic: The Fed's Policy Tools Skill: Recognition Status: Old AACSB: Reflective Thinking 66) Federal Reserve policy tools include all of the following EXCEPT A) desired reserve ratios. B) required reserve ratios. C) the discount rate. D) open market operations. Answer: A Topic: The Fed's Policy Tools Skill: Recognition Status: Old AACSB: Reflective Thinking

67) The minimum percentage of deposits that a depository institution must hold and cannot use for lending is known as the A) minimum rate. B) required reserve ratio. C) money multiplier. D) discount rate. Answer: B Topic: The Fed's Policy Tools, Required Reserve Ratio Skill: Recognition Status: Old AACSB: Reflective Thinking 68) Reserve requirements are the A) minimum percentages of deposits that banks must hold as reserves. B) minimum amount of an owner's financial resources that must be placed in a depository institution. C) rules covering the types of deposits that banks may offer. D) rules covering the types of assets that banks may purchase. Answer: A Topic: The Fed's Policy Tools, Required Reserve Ratio Skill: Recognition Status: Old AACSB: Reflective Thinking 69) The fraction of deposits that banks must keep on hand or at the Federal Reserve is called the A) discount rate. B) required reserve ratio. C) deposit multiplier. D) money multiplier. Answer: B Topic: The Fed's Policy Tools, Required Reserve Ratio Skill: Recognition Status: Old AACSB: Reflective Thinking 70) The required reserve ratio is the ratio of reserves to ________ required by banking regulations. A) deposits B) loans C) profits D) cash Answer: A Topic: The Fed's Policy Tools, Required Reserve Ratio Skill: Recognition Status: Old AACSB: Reflective Thinking 57 Copyright © 2014 Pearson Education, Inc.

71) The required reserve ratio A) is the amount of money that banks require borrowers to reserve in their accounts. B) is the fraction of a bank's total deposits that are required to be held in reserve. C) increases when withdrawals from a bank are made. D) is higher for banks that make riskier loans. Answer: B Topic: The Fed's Policy Tools, Required Reserve Ratio Skill: Recognition Status: Old AACSB: Reflective Thinking 72) Which of the following is true regarding the required reserve ratio? A) The ratio determines the legally required amount of reserves a bank must hold. B) The ratio determines the amount of excess reserves a bank must hold. C) The ratio is only enforced against banks that are operating in a risky manner. D) None of the above answers is correct. Answer: A Topic: The Fed's Policy Tools, Required Reserve Ratio Skill: Recognition Status: Old AACSB: Reflective Thinking 73) Required reserves for a commercial bank A) are the reserves a bank is legally required to hold to back its deposits. B) are only the reserves required to be held in the bank's vault. C) are only the money used by the bank tellers. D) consist only of deposits at the Fed. Answer: A Topic: The Fed's Policy Tools, Required Reserve Ratio Skill: Recognition Status: Old AACSB: Reflective Thinking 74) The required reserve ratio ranges from A) 0 to 3 percent. B) 0 to 7 percent. C) 3 to 30 percent. D) 0 to 10 percent. Answer: D Topic: The Fed's Policy Tools, Required Reserve Ratio Skill: Recognition Status: Old AACSB: Reflective Thinking

75) Changing which of the following is a Federal Reserve monetary policy tool? A) required reserve ratios B) desired reserve ratios C) excess reserve ratios. D) gold and foreign reserve ratios Answer: A Topic: The Fed's Policy Tools, Required Reserve Ratio Skill: Recognition Status: Old AACSB: Reflective Thinking 76) The discount rate is the interest rate A) that banks charge their best customers. B) that the Fed charges on its last resort loans. C) on interbank lending. D) that bank insurers pay on insured deposits. Answer: B Topic: The Fed's Policy Tools, Discount Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 77) When the Federal Reserve lends reserves to depository institutions, it charges them interest. That interest rate is called the A) federal funds rate. B) loan rate. C) prime rate. D) discount rate. Answer: D Topic: The Fed's Policy Tools, Discount Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 78) The interest rate that the Fed charges when it makes a last resort loan is the ________ rate. A) discount B) short-term C) reserve D) federal funds Answer: A Topic: The Fed's Policy Tools, Discount Rate Skill: Recognition Status: Old AACSB: Reflective Thinking

79) The discount rate is the interest rate that A) the Federal Reserve charges when it loans reserves to depository institutions. B) is the lowest rate that banks will charge when lending to their best customers. C) the Federal Reserve charges when it loans to the U.S. Government. D) banks charge when they lend to each other. Answer: A Topic: The Fed's Policy Tools, Discount Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 80) The discount rate is the interest rate A) paid on time deposits. B) paid on funds banks borrow from other banks. C) paid on funds that depository institutions borrow from the Federal Reserve. D) that banks charge their "best" customers. Answer: C Topic: The Fed's Policy Tools, Discount Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 81) The ________ rate is the interest rate at which the Fed lends ________ to depository institutions. A) discount rate; reserves B) discount rate; gold C) federal funds rate; deposits D) federal funds rate; reserves Answer: A Topic: The Fed's Policy Tools, Discount Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 82) When the Fed wants to undertake open market operations, it A) can require all commercial banks to buy from or sell to it. B) can require all member banks to buy from or sell to it. C) buys or sells securities. D) buys securities from or sells securities to the federal government. Answer: C Topic: The Fed's Policy Tools, Open Market Operations Skill: Recognition Status: Old AACSB: Reflective Thinking

83) An open market operation occurs when the ________ buys or sells securities ________. A) Federal Reserve System; from or to the federal government B) Federal Reserve System; in the open market C) a commercial bank; from or to the federal government D) a commercial bank; from or to the public Answer: B Topic: The Fed's Policy Tools, Open Market Operations Skill: Recognition Status: Old AACSB: Reflective Thinking 84) An open market operation involves A) the Federal Reserve's purchase or sale of securities. B) the Federal Reserve's issuance of new stock. C) changing federal income tax rates. D) raising the debt limit of the United States. Answer: A Topic: The Fed's Policy Tools, Open Market Operations Skill: Recognition Status: Old AACSB: Reflective Thinking 85) When the Fed sells government securities to a bank, how are the Fed's assets affected? A) The amount of the Fed's government securities decreases. B) The amount of the Fed's government securities increases. C) The amount of reserves held at the Fed increases. D) The amount of reserves held at the Fed decreases. Answer: A Topic: How an Open Market Operation Works Skill: Conceptual Status: Old AACSB: Reflective Thinking 86) An open market purchase of securities by the Fed A) increases banks' reserves and decreases banks' securities. B) decreases banks' reserves and increases banks' securities. C) decreases banks' total assets. D) involves a bank purchasing government securities from the Fed. Answer: A Topic: How an Open Market Operation Works Skill: Conceptual Status: Old AACSB: Analytical Skills

87) An open market sale of securities by the Fed A) decreases banks' reserves and increases banks' securities. B) increases banks' reserves and decreases banks' securities. C) increases banks' total assets. D) involves a bank selling government securities to the Fed. Answer: A Topic: How an Open Market Operation Works Skill: Conceptual Status: Old AACSB: Analytical Skills 88) In an open market purchase, the Fed ________ government securities, which ________ bank reserves. A) buys, increases B) buys, decreases C) sells, increases D) sells, decreases Answer: A Topic: How an Open Market Operation Works Skill: Conceptual Status: Old AACSB: Reflective Thinking 89) The Fed buys securities and gives the bank a check for the amount. After the check has cleared, A) reserves remain unchanged because the increase of reserves at the bank are offset by an increase in reserves at the Fed. B) reserves have decreased by the amount of the check because the Fed pays for the check by decreasing the bank's deposits at the Fed. C) reserves have increased by the amount of the check because the Fed pays for the check by increasing the amount of the bank's deposits with the Fed. D) reserves have increased by the amount of the reserves multiplied by the required reserve ratio, and the quantity of money increases by the difference between the amount of the check and the increase in the reserves. Answer: C Topic: How an Open Market Operation Works Skill: Conceptual Status: Old AACSB: Reflective Thinking

90) If the Federal Reserve purchases government securities, A) banks' reserves will increase. B) the federal funds rate will rise. C) the discount rate will be forced higher. D) None of the above answers is correct because none of the effects occur. Answer: A Topic: How an Open Market Operation Works Skill: Conceptual Status: Old AACSB: Reflective Thinking 91) When the Fed buys U.S. government securities from a bank, the Fed A) loans the money needed to buy the securities to the bank. B) increases the bank's reserves at the Fed. C) obtains the money for the purchase from the U.S. Treasury. D) decreases the monetary base and raises the federal funds rate. Answer: B Topic: How an Open Market Operation Works Skill: Conceptual Status: Old AACSB: Reflective Thinking 92) If the Fed buys $100 in securities from a commercial bank, the A) Fed's assets will decrease. B) quantity of money will decrease. C) quantity of the bank's reserves will increase. D) amount of the bank's reserves reserves will not change. Answer: C Topic: How an Open Market Operation Works Skill: Conceptual Status: Revised AACSB: Reflective Thinking 93) In response to the financial crisis of 2007 and the ensuing recession, the Fed announced three rounds of "quantitative easing," where the Fed purchased billions of dollars of securities. What impact would quantitative easing have on the monetary base? A) The monetary base would increase. B) The monetary base would decrease. C) The monetary base would not change. D) While the monetary base would change, it is impossible to predict in which direction. Answer: A Topic: Monetary Base Skill: Conceptual Status: New AACSB: Reflective Thinking

94) If the Fed sells government securities, A) commercial bank reserves will decrease. B) the government's debt will be decreased. C) commercial bank reserves will increase. D) there will be no effect on the quantity of money. Answer: A Topic: How an Open Market Operation Works Skill: Conceptual Status: Old AACSB: Reflective Thinking 95) The initial impact of the Fed's open market sale of government securities to banks is A) an increase in the quantity of money by some multiple of the dollar volume of the sale. B) an increase in bank deposits at the Fed. C) a decrease in the quantity of money by some multiple of the dollar volume of the sale. D) a decrease of the banking system's reserve deposits at the Fed. Answer: D Topic: How an Open Market Operation Works Skill: Conceptual Status: Old AACSB: Reflective Thinking 96) A decrease in the quantity of reserves held by commercial banks could be the result of A) a decision by U.S. households to hold less currency. B) the sale of government securities by the Federal Reserve. C) a decrease in the government's budget deficit. D) an increase in the exchange rate. Answer: B Topic: How an Open Market Operation Works Skill: Conceptual Status: Revised AACSB: Reflective Thinking 97) The Fed's purchase of government securities could A) increase loans made by banks. B) be an effective anti-inflationary policy. C) decrease the price level and have no effect on real GDP. D) decrease bank reserves. Answer: A Topic: How an Open Market Operation Works Skill: Conceptual Status: Revised AACSB: Reflective Thinking

98) When the Fed buys one million dollars in government securities from a commercial bank, A) the Fed's total assets decrease by one million dollars. B) the commercial bank's total assets increase by one million dollars. C) there is a change in the composition of the commercial bank's assets: reserves increase and government securities decrease. D) All of the above answers are correct. Answer: C Topic: How an Open Market Operation Works Skill: Analytical Status: Old AACSB: Analytical Skills 99) If the Fed buys $100,000 in U.S. government securities from a commercial bank, the bank now has an additional $100,000 of A) total assets. B) excess reserves. C) actual reserves. D) net worth. Answer: C Topic: How an Open Market Operation Works Skill: Analytical Status: Old AACSB: Analytical Skills 100) When the Fed sells one million dollars in securities to a commercial bank, A) the Fed's total assets increase by one million dollars. B) the commercial bank's total assets decrease by one million dollars. C) there is no change in the total assets of the Fed or the commercial bank. D) None of the above answers is correct. Answer: D Topic: How an Open Market Operation Works Skill: Analytical Status: Old AACSB: Analytical Skills

101) Which of the following will occur if the Fed buys $10 million of securities from the University National Bank? A) The Fed will pay by increasing the University National Bank's deposit account with the Fed by $10 million. B) The University National Bank has $10 million more in securities. C) The Fed will pay by decreasing the University National Bank's deposit account with the Fed by $10 million. D) The University National Bank has $10 million less in excess reserves. Answer: A Topic: How an Open Market Operation Works Skill: Analytical Status: Old AACSB: Analytical Skills 102) The Fed buys $100 million of government securities from Bank A. What is the effect on the Federal Reserve's balance sheet? A) Securities increase by $100 million and Federal Reserve notes (currency) decrease by $100 million. B) Securities increase by $100 million and reserves of Bank A increase by $100 million. C) Securities increase by $100 million and reserves of Bank A decrease by $100 million. D) Securities decrease by $100 million and reserves of Bank A increase by $100 million. Answer: B Topic: How an Open Market Operation Works Skill: Analytical Status: Old AACSB: Analytical Skills 103) The Fed buys $100 million of government securities from Bank A. What is the effect on Bank A's balance sheet? A) Securities decrease by $100 million and reserves increase by $100 million. B) Securities decrease by $100 million and deposits decrease by $100 million. C) Securities increase by $100 million and reserves decrease by $100 million. D) Securities increase by $100 million and reserves increase by $100 million. Answer: A Topic: How an Open Market Operation Works Skill: Analytical Status: Old AACSB: Analytical Skills

104) When the Fed lowers the federal funds rate, it can lead to A) the Fed selling government securities. B) an increase in lending by banks. C) a decrease in demand deposits. D) a decrease in the quantity of money. Answer: B Topic: How an Open Market Operation Works Skill: Conceptual Status: Revised AACSB: Reflective Thinking 105) The sale of government securities by the Fed leads to A) a decrease in bank reserves. B) a contraction in bank lending. C) a decrease in the monetary base. D) All of the above answers are correct. Answer: D Topic: How an Open Market Operation Works Skill: Conceptual Status: Revised AACSB: Reflective Thinking 106) The sale of $1 billion of securities to a bank or some other business by the Fed is an example of A) a last resort loan. B) a multiple contraction of the quantity of money. C) an open market operation. D) a change in the required reserve ratio. Answer: C Topic: Study Guide Question, Open Market Operations Skill: Conceptual Status: Old AACSB: Reflective Thinking

4 How Banks Create Money 1) Money is created by A) government taxation. B) banks taking in deposits. C) banks making loans. D) banks paying for depositor's insurance. Answer: C Topic: How Banks Create Money Skill: Recognition Status: Old AACSB: Reflective Thinking 2) The majority of money is created when A) banks make loans B) new coins are minted C) the federal government borrows from the public D) the Fed sells bonds Answer: A Topic: How Banks Create Money Skill: Recognition Status: Old AACSB: Reflective Thinking 3) A bank creates money by A) lending its excess reserves B) purchasing currency from the Federal Reserve C) buying bonds from the Federal Reserve D) printing more checks Answer: A Topic: How Banks Create Money Skill: Recognition Status: Old AACSB: Reflective Thinking 4) Banks create money whenever they A) accept a deposit. B) lend excess reserves to a borrower. C) receive monthly payments on their loans. D) receive interest on existing loans. Answer: B Topic: How Banks Create Money Skill: Conceptual Status: Old AACSB: Reflective Thinking

5) Whenever a bank's actual reserves exceed its desired reserves, the bank A) can lend out additional funds. B) needs to call in loans. C) will go out of business. D) must increase the amount of its required reserves by obtaining more cash. Answer: A Topic: How Banks Create Money Skill: Recognition Status: Old AACSB: Reflective Thinking 6) Commercial banks are able to create money by A) printing Federal Reserve Notes. B) making loans. C) making customers pay back their loans. D) exchanging their reserves at the Fed for vault cash. Answer: B Topic: How Banks Create Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 7) The banking system in the United States creates money through the combination of excess reserves and A) banks loaning excess reserves. B) commodity money. C) banks' assets being more than their liabilities. D) stringent Federal Reserve regulations. Answer: A Topic: How Banks Create Money Skill: Recognition Status: Old AACSB: Reflective Thinking 8) If the desired reserve ratio is 3 percent and deposits totaled $575 billion, banks would hold A) $534.75 in reserves. B) $17.25 billion in excess reserves. C) $1,725 billion in currency. D) $17.25 billion in reserves. Answer: D Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills

9) A bank with $100 million in deposits has $15 million of cash in the bank, $10 million in deposits with the Fed, and $15 million in government securities in its vault. Its total reserves equal A) $10 million. B) $15 million. C) $25 million. D) $40 million. Answer: C Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 10) If required reserves are $150 and deposits are $1000, what is the required reserve ratio? A) 10 percent B) 15 percent C) 5 percent D) 85 percent Answer: B Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 11) If a customer deposits $10,000 in currency into a checking account, the bank's total reserves ________. A) increase B) do not change C) are greater than 100 percent D) decrease Answer: A Topic: Reserves: Actual and Required Skill: Conceptual Status: Old AACSB: Analytical Skills 12) A bank's required reserves are calculated by multiplying ________. A) its deposits by the required reserve ratio B) the sum of its deposits and cash in its vault by the reserve ratio C) cash in its vault by the required reserve ratio D) the gold in its vault by the reserve ratio Answer: A Topic: Reserves: Actual and Required Skill: Conceptual Status: Old AACSB: Reflective Thinking 70 Copyright © 2014 Pearson Education, Inc.

13) When bank deposits increase from $1 million to $2 million, banks' required reserves increase from $100,000 to $200,000. The required reserve ratio is ________. A) 10.0 B) 0.10 C) 1.00 D) 0.25 Answer: B Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 14) Excess reserves are A) desired reserves minus actual reserves. B) required reserves minus actual reserves. C) liquidity funds minus actual reserves. D) actual reserves minus desired reserves. Answer: D Topic: Reserves: Actual and Required Skill: Recognition Status: Old AACSB: Reflective Thinking 15) The difference between actual reserves and required reserves is A) net worth. B) excess reserves. C) illegal reserves. D) borrowings from the Fed. Answer: B Topic: Reserves: Actual and Required Skill: Recognition Status: Old AACSB: Reflective Thinking 16) Excess reserves are equal to A) the sum of desired reserves plus any reserves that are more than are required. B) actual reserves minus desired reserves. C) actual reserves plus desired reserves. D) desired reserves minus actual reserves. Answer: B Topic: Reserves: Actual and Required Skill: Recognition Status: Old AACSB: Reflective Thinking

17) The commercial banks on Sunny Island have checking deposits of $4 million, reserves of $600,000, and loans of $2.4 million. The desired reserve ratio is 10 percent. The banks have ________ of desired reserves and ________ of excess reserves. A) $600,000; $0 B) $400,000; $200,000 C) $400,000; $600,000 D) $600,000; $200,000 Answer: B Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 18) Suppose a bank has $1,500,000 in deposits and the desired reserve ratio is 12 percent. If the bank is currently holding $200,000 in reserves, the excess reserves are equal to A) zero. B) $40,000. C) $120,000. D) $20,000. Answer: D Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 19) If Bank A holds $200 in reserves, deposits are $1000, and the desired reserve ratio is 15 percent, how much are excess reserves? A) zero, because banks never hold excess reserves B) $200 C) $50 D) $150 Answer: C Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills

20) A small commercial bank has $10,000 in actual reserves, $60,000 in deposits, and has a 10 percent desired reserve ratio. Its excess reserves are A) $4,000. B) $10,000. C) $50,000. D) $60,000. Answer: A Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 21) Suppose that a bank begins with $500 million in deposits and $100 million in reserves and is just meeting its desired reserve ratio. Now suppose a decrease in the required reserve ratio lowers the desired reserve ratio to 10 percent. After the fall in the desired reserve ratio but before the bank makes any changes, the bank's excess reserves are A) 0. B) $400 million. C) $450 million. D) $50 million. Answer: D Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 22) Suppose a bank has a desired reserve requirement ratio of 12 percent. If someone deposits $1,000 in the bank, A) immediately after the deposit, excess reserves increase by $880. B) the bank can make loans of $1,000. C) the bank's desired reserves rise by $1,000. D) Both answers B and C are correct. Answer: A Topic: Reserves: Actual and Required Skill: Conceptual Status: Old AACSB: Analytical Skills

23) Suppose a bank is exactly meeting its desired reserve ratio of 10 percent and a new deposit of $75,000 is made. Immediately after the deposit is made, the bank's excess reserves equal A) zero. B) $7,500. C) $67,500. D) It is impossible to determine without additional information. Answer: C Topic: Reserves: Actual and Required Skill: Conceptual Status: Old AACSB: Analytical Skills 24) A bank cannot create money unless its ________. A) required reserves are greater than actual reserves B) excess reserves are zero C) desired reserves are greater than actual reserves D) excess reserves equal deposits multiplied by the reserve ratio Answer: C Topic: Reserves and Loans Skill: Conceptual Status: Old AACSB: Reflective Thinking 25) You withdraw $2,000 from your account. Your bank has a desired reserve ratio of 20 percent. This transaction, by itself, will directly reduce A) the quantity of money by $1,600. B) deposits by $1,600. C) the quantity of money by $2,000. D) deposits by $2,000. Answer: D Topic: Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills

TBK Bank Balance Sheet Assets Liabilities Reserves Deposits $120 $600 Loans Net worth 580 100 Total assets Total liabilities $700 $700 26) The above table presents the balance sheet of the TBK commercial bank. What is this bank's actual reserve ratio? A) $120 B) $700 C) 20 percent D) 17.14 percent Answer: C Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 27) The above table presents the balance sheet of the TBK commercial bank. If the desired reserve ratio is 25 percent, what is this bank's desired reserves? A) $120 B) $150 C) $175 D) 20 percent Answer: B Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills

Assets Reserves $100 Loans $600 Total $700

Liabilities Deposits $400 Net Worth $300 Total $700

28) The above table gives the initial balance sheet for Mini Bank. Mini Bank's actual reserve ratio equals ________. A) 25 percent B) 14.3 percent C) 33.3 percent D) 20 percent Answer: A Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 29) The above table gives the initial balance sheet for Mini Bank. If the bank's desired reserve ratio is 10 percent, how much does this bank have in excess reserves? A) $60 B) $100 C) $40 D) $10 Answer: A Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 30) The above table gives the initial balance sheet for Mini Bank. If the bank's desired reserve ratio is 10 percent, it will make A) more loans. B) fewer loans. C) no change in its lending. D) you cannot predict what the bank will do from this balance sheet without more information. Answer: A Topic: Reserves: Actual and Required Skill: Analytical Status: Revised AACSB: Analytical Skills

Assets Reserves $30 Loans $970 Total $1,000

Liabilities Deposits $1,000 Total $1,000

31) The above table gives the initial balance sheet for Mega Bank. Mega Bank's desired reserves equal its required reserves. Based on the initial balance sheet, what is the required reserve ratio for Mega Bank? A) 3 percent B) 10 percent C) 30 percent D) 1.4 percent Answer: A Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 32) The above table gives the initial balance sheet for Mega Bank. Barney comes into the bank and deposits $50 of currency into his checking account. The desired reserve ratio is 3 percent. After Barney's deposit, but before any other actions occur, MegaBank will have excess reserves of A) $15.00. B) $33.00. C) $48.50. D) $50.00. Answer: C Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills

33) The above table gives the initial balance sheet for Mega Bank. Barney comes into the bank and deposits $50 of currency into his checking account. The desired reserve ratio is 3 percent. After Barney's deposit, but before any other actions occur, what volume of loans will be made by MegaBank if the bank wants more profit and holds no excess reserves? A) $15.00 B) $33.00 C) $48.50 D) $50.00 Answer: C Topic: Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills Assets Reserves $500 Loans $2,500 Total assets $1,000

Liabilities Deposits $3,000 Total $3,000

34) The table above shows the balance sheet for Ralph's Bank. If the desired reserve ratio is 15 percent, Ralph's Bank has desired reserves of ________. A) $3,000 B) $2,500 C) $500 D) $450 Answer: D Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 35) The table above shows the balance sheet for Ralph's Bank. If the desired reserve ratio is 15 percent, Ralph's Bank has excess reserves of ________. A) $50 B) $500 C) $3,000 D) $2,500 Answer: A Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 78 Copyright © 2014 Pearson Education, Inc.

36) The table shows the balance sheet for Ralph's Bank. If the desired reserve ratio is 15 percent, the maximum additional amount that Ralph's Bank can loan is equal to ________. A) $50 B) $500 C) $3,000 D) $2,500 Answer: A Topic: Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills 37) When a bank has excess reserves A) it can create money. B) it can make loans. C) it has too many loans. D) Both answers A and B are correct. Answer: D Topic: Reserves and Loans Skill: Conceptual Status: Old AACSB: Reflective Thinking 38) A bank can only make a loan if it has A) excess reserves. B) a creditworthy customer willing to pay a high interest rate. C) permission from the Federal Reserve. D) reserves equal to its deposits. Answer: A Topic: Reserves and Loans Skill: Conceptual Status: Old AACSB: Reflective Thinking 39) Given a desired reserve ratio of 20 percent, a commercial bank that has received a new deposit of $100 can make additional loans of A) $0. B) $20. C) $80. D) $400. Answer: C Topic: Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills

40) A bank has no excess reserves. Then it receives a new deposit for $100,000. If it has a desired reserve ratio of 20 percent, by how much can it increase its loans? A) $20,000 B) $80,000 C) $400,000 D) $500,000 Answer: B Topic: Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills 41) Suppose Bank A holds $200 of reserves, has deposits of $1000, and the desired reserve ratio is 15 percent. How many loans can Bank A create at Bank A? A) zero, because Bank A has no excess reserves B) $200 C) $50 D) $850 Answer: C Topic: Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills 42) Suppose Bank A holds $200 of reserves, has deposits of $1000, and the desired reserve ratio is 20 percent. How many deposits can Bank A create? A) zero, because Bank A has no excess reserves B) $200 C) $850 D) $50 Answer: A Topic: Reserves and Loans Skill: Conceptual Status: Old AACSB: Analytical Skills

University National Bank Balance Sheet Assets Liabilities Reserves $320 Deposits $440 Loans 120 _ Total assets $440 Total liabilities $440 43) The above table has the balance of the University National Bank. All figures are in millions of dollars. The desired reserve ratio is 20 percent. What is the value of excess reserves held by the University National Bank? A) $120 million B) $232 million C) $320 million D) $760 million Answer: B Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 44) The above table has the balance of the University National Bank. All figures are in millions of dollars. The desired reserve ratio is 20 percent. What would be the total increase in loans at this bank if all excess reserves were loaned out? A) $1,160 million B) $600 million C) $232 million D) $0 Answer: C Topic: Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills 45) When part of the quantity of money is held in currency, then A) a currency drain occurs. B) there is a higher level of excess reserves. C) the money multiplier will increase in value. D) the Fed will find it beneficial to increase the discount rate. Answer: A Topic: Currency Drain Skill: Recognition Status: Old AACSB: Reflective Thinking

46) An increase in currency held outside the banks is ________. A) a currency drain B) income C) a currency surplus D) wealth Answer: A Topic: Currency Drain Skill: Recognition Status: Old AACSB: Reflective Thinking 47) Currency outside of banks increases from $100 million to $200 million. This change is considered A) a currency drain. B) a decrease in the monetary base. C) expansionary monetary policy. D) contractionary monetary policy. Answer: A Topic: Currency Drain Skill: Conceptual Status: Old AACSB: Reflective Thinking 48) An increase in the currency drain A) leads to an increase in excess reserves. B) decreases the size of the money multiplier. C) results in an increase in deposits. D) results in an increase in required reserves. Answer: B Topic: Currency Drain Skill: Conceptual Status: Old AACSB: Reflective Thinking 49) The larger the public's currency drain from the banking system, the A) smaller is the monetary base. B) smaller is the money multiplier. C) larger is the monetary base. D) larger is the money multiplier. Answer: B Topic: Currency Drain Skill: Conceptual Status: Old AACSB: Reflective Thinking

50) In February, 2010 the U.S. M1 money multiplier crashed to 0.786. Each $1 increase in the monetary base resulted in the quantity of money increasing by only $0.79. Where did the remaining $0.21 disappear? A) Banks held part of the $0.21 as excess reserves. B) Banks loaned out the $0.21. C) Consumers held part of the $0.21 as currency. D) Both A and C are correct. Answer: D Topic: Currency Drain Skill: Conceptual Status: New AACSB: Reflective Thinking 51) When the Fed conducts an open market operation by purchasing securities from a bank, ________. A) public holdings of securities increase B) the bank's deposits increase but its reserves do not change C) the bank's deposits increase but its reserves decrease D) the bank's reserves increase Answer: D Topic: How an Open Market Operation Works Skill: Conceptual Status: Old AACSB: Reflective Thinking 52) Which of the following best describes the chain of events in the money creation process? A) The monetary base increases. Banks acquire excess reserves which they loan out, increasing deposits and also the quantity of money. The new deposits then create additional excess reserves. B) Currency is drained from the quantity of money into the banking system, where it is lent out. The loans are spent, increasing the currency drain and also the quantity of money. C) Desired reserves increase, encouraging banks to seek new deposits. When the new depositors come in, desired reserves decrease and the quantity of money increases. D) Low interest rates discourage people from holding currency. When they deposit the currency, interest rates rise, increasing the quantity of money. Answer: A Topic: The Multiplier Effect of an Open Market Operation Skill: Conceptual Status: Old AACSB: Reflective Thinking

53) The monetary expansion process from an open market operation continues until A) required reserves are eliminated. B) the Federal Reserve takes actions to stop the process. C) the discount rate is lower than market interest rates. D) excess bank reserves are eliminated. Answer: D Topic: The Multiplier Effect of an Open Market Operation Skill: Recognition Status: Old AACSB: Reflective Thinking 54) The money multiplier determines how much A) real GDP will be expanded given an increase in autonomous investment. B) the monetary base will be expanded given a change in the quantity of money. C) the quantity of money will be expanded given a change in the monetary base. D) money demand will expand given a change in the quantity of money. Answer: C Topic: The Money Multiplier Skill: Recognition Status: Old AACSB: Reflective Thinking 55) The money multiplier is A) the amount by which a change in the quantity of money is multiplied to determine the change in the monetary base. B) the amount by which a change in the monetary base is multiplied to determine the change in the quantity of money. C) equal to bank reserves divided by the change in the monetary base. D) equal to bank reserves divided by the change the quantity of money. Answer: B Topic: The Money Multiplier Skill: Recognition Status: Old AACSB: Reflective Thinking 56) When the monetary base increases by $2 billion, the quantity of money increases by $10 billion. Thus, the money multiplier equals A) 0.2 B) 5 C) 20.0 D) none of the above Answer: B Topic: The Money Multiplier Skill: Analytical Status: Old AACSB: Analytical Skills 84 Copyright © 2014 Pearson Education, Inc.

57) When the monetary base increases by $4 billion, the quantity of money increases by $10 billion. Thus, the money multiplier equals A) 0.4 B) 2.5 C) 40.0 D) none of the above Answer: B Topic: The Money Multiplier Skill: Analytical Status: Old AACSB: Analytical Skills 58) If an increase in the monetary base of $8 billion increases the quantity of money by $64 billion, then the money multiplier is equal to ________. A) $64 billion B) 8 C) $8 billion D) 1/8 Answer: B Topic: The Money Multiplier Skill: Analytical Status: Old AACSB: Analytical Skills 59) Suppose that the money multiplier is 3. If the monetary base increases by $1 million, the quantity of money will A) increase by $3 million. B) increase by $300,000. C) decrease by $3 million. D) decrease by $300,000. Answer: A Topic: Using the Money Multiplier Skill: Analytical Status: Old AACSB: Analytical Skills 60) Suppose that the money multiplier is 4. If the monetary base decreases by $2 million, the quantity of money will A) increase by $8 million. B) increase by $500,000. C) decrease by $8 million. D) decrease by $500,000. Answer: C Topic: Using the Money Multiplier Skill: Analytical Status: Old AACSB: Analytical Skills 85 Copyright © 2014 Pearson Education, Inc.

Assets Reserves $400 Loans $800 Total $1,200

Liabilities Deposits $1,200 Total $1,200

61) In the balance sheet above, the entries are in millions of dollars for the FBN Bank. If the desired reserve ratio on deposits is 10 percent, FBN Bank has desired reserves of A) $700 million. B) $120 million. C) $100 million. D) $0. Answer: B Topic: Study Guide Question, Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 62) In the balance sheet above, the entries are in millions of dollars for the FBN Bank. If the desired reserve ratio equals 10 percent, FBN Bank has excess reserves of A) $280 million. B) $200 million. C) $100 million. D) $0. Answer: A Topic: Study Guide Question, Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 63) In the balance sheet above, the entries are in millions of dollars for the FBN Bank. If the desired reserve ratio on deposits is 10 percent, FBN Bank can loan an additional A) $280 million. B) $200 million. C) $100 million. D) $0. Answer: A Topic: Study Guide Question, Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills

64) In the balance sheet above, the entries are in millions of dollars for the FBN Bank. After FBN Bank loans the maximum amount it can, the loans have been spent, and the proceeds have been deposited in other banks, FBN Bank has excess reserves of A) $300 million. B) $200 million. C) $100 million. D) $0. Answer: D Topic: Study Guide Question, Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills 65) If the money multiplier is 3.5, a $10 billion increase in the monetary base A) increases the quantity of money by $35 billion. B) increases the quantity of money by $10 billion. C) increases the quantity of money by $3.5 billion. D) increases the quantity of money but not by an amount given above. Answer: A Topic: Study Guide Question, Using the Money Multiplier Skill: Analytical Status: Old AACSB: Analytical Skills

5 The Money Market 1) The quantity of money that people choose to hold depends on which of the following? I. The price level. II. Financial innovation. III. The exchange rate. A) I B) I and II C) I and III D) I, II, and III Answer: B Topic: Influences on Money Holding Skill: Recognition Status: Old AACSB: Reflective Thinking 2) Which of the following affects the amount of money a person is willing to hold? A) The use of credit cards increases. B) The price level rises from 103 to 107. C) The interest rate that you earn on your savings account increases. D) All of the above are correct. Answer: D Topic: Influences on Money Holding Skill: Conceptual Status: Old AACSB: Reflective Thinking 3) If the price level rises, the quantity of A) nominal money people demand increases. B) real money people demand increases. C) nominal money people demand decreases. D) real money people demand decreases. Answer: A Topic: Influences on Money Holding, The Price Level Skill: Recognition Status: Old AACSB: Reflective Thinking

4) The demand for nominal money A) increases as the price level increases. B) decreases as the price level increases. C) depends on the quantity of money. D) is the same as the demand for real money. Answer: A Topic: Influences on Money Holding, The Price Level Skill: Recognition Status: Old AACSB: Reflective Thinking 5) Which of the following decreases the demand for nominal money? A) a decrease in the nominal interest rate B) an increase in real GDP C) an increase in the quantity of money D) a decrease in the price level Answer: D Topic: Influences on Money Holding, The Price Level Skill: Recognition Status: Old AACSB: Reflective Thinking 6) If the price level doubles, the A) nominal demand for money increases. B) nominal demand for money decreases. C) real demand for money decreases. D) real demand for money increases. Answer: A Topic: Influences on Money Holding, The Price Level Skill: Conceptual Status: Old AACSB: Reflective Thinking 7) Suppose you hold $50 to buy groceries weekly and then the price of groceries increases by 5 percent. To be able to buy the same amount of groceries, what must happen to your nominal money holdings? A) They must increase by $5. B) They can decrease by $5. C) They must increase by $2.50. D) They must increase, but the amount of the increase is different than the above answers. Answer: C Topic: Influences on Money Holding, The Price Level Skill: Analytical Status: Old AACSB: Analytical Skills

8) The quantity of real money demanded is A) negatively related to the price level. B) positively related to the price level. C) independent of the price level. D) sometimes negatively and sometimes positively related to the price level. Answer: C Topic: Influences on Money Holding, The Price Level Skill: Conceptual Status: Old AACSB: Reflective Thinking 9) The real quantity of money is A) inversely related to GDP. B) measured in current dollars. C) inversely related to the price level. D) measured in constant dollars. Answer: D Topic: Influences on Money Holding, The Price Level Skill: Recognition Status: Old AACSB: Reflective Thinking 10) When price levels rise, the quantity of nominal money demanded will ________ and the quantity of real money demanded will ________. A) increase; stay the same B) increase; increase C) increase; decrease D) decrease; increase Answer: A Topic: Influences on Money Holding, The Price Level Skill: Recognition Status: Old AACSB: Reflective Thinking 11) When the nominal interest rate rises, the A) quantity of money demanded decreases. B) demand for money decreases. C) demand for money increases. D) quantity of money demanded increases. Answer: A Topic: Influences on Money Holding, The Interest Rate Skill: Recognition Status: Old AACSB: Reflective Thinking

12) The opportunity cost of holding money balances rather than other assets is A) the nominal interest rate. B) the price level. C) forgone consumption. D) forgone liquidity. Answer: A Topic: Influences on Money Holding, The Interest Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 13) The opportunity cost of holding money is the A) nominal interest rate on assets other than money. B) price of goods and services. C) level of wage and rental income. D) ease with which an asset can be converted into a means of payment. Answer: A Topic: Influences on Money Holding, The Interest Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 14) The opportunity cost of holding money is A) the price level. B) real GDP. C) the inverse of the price level multiplied by the nominal interest rate. D) the nominal interest rate. Answer: D Topic: Influences on Money Holding, The Interest Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 15) The demand for money is ________ related to the nominal interest rate. A) positively B) negatively C) not D) None of the above answers is correct because the relationship between the demand for money and the nominal interest rate changes with the inflation rate. Answer: B Topic: Influences on Money Holding, The Interest Rate Skill: Recognition Status: Old AACSB: Reflective Thinking

16) The opportunity cost of holding money increases when A) the purchasing power of money rises. B) the nominal interest rate rises. C) the price level falls. D) consumers' real incomes increase. Answer: B Topic: Influences on Money Holding, The Interest Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 17) A decrease in the nominal interest rate ________ the opportunity cost of holding money. A) increases B) decreases C) can increase or decrease D) None of the above answers is correct because the nominal interest rate does not affect the opportunity cost of holding money. Answer: B Topic: Influences on Money Holding, The Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 18) The opportunity cost of holding money refers to A) the service fees charged to withdraw currency from an ATM. B) the price level. C) the interest that could have been earned if the money balances had been changed into an interest-bearing asset. D) the pleasure that would have been received if the money balances had been used to buy a good or service. Answer: C Topic: Influences on Money Holding, The Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 19) The demand for money is ________ related to the nominal interest rate. A) positively B) negatively C) not related D) None of the above answers is correct because the relationship between the demand for money and the interest rate varies with the inflation rate. Answer: B Topic: Influences on Money Holding, The Interest Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 92 Copyright © 2014 Pearson Education, Inc.

20) When the nominal interest rate rises, the opportunity cost of holding money A) rises and people hold more money. B) falls and people hold less money. C) falls and people hold more money. D) rises and people hold less money. Answer: D Topic: Influences on Money Holding, The Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 21) The higher the nominal interest rate, the A) greater the opportunity cost of holding money. B) lower the quantity of money demanded. C) more the demand for money curve shifts leftward. D) Both answers A and B are correct. Answer: D Topic: Influences on Money Holding, The Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 22) In October of 2012, the nominal interest rate earned on money market accounts was around 0.40 percent. This interest rate is a measure of which of the following? A) the opportunity cost of holding money B) the inflation rate C) the demand for money D) the real interest rate Answer: A Topic: Influences on Money Holding, The Interest Rate Skill: Conceptual Status: New AACSB: Reflective Thinking 23) When the nominal interest rate rises, the quantity of money demanded decreases because A) people will buy fewer goods and hold less money. B) the price level also rises and people decrease their demand for money. C) people move funds from interest-bearing assets into money. D) people shift funds from money holdings to interest-bearing assets. Answer: D Topic: Influences on Money Holding, The Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking

24) Which of the following is correct? The demand for money A) increases as real GDP increases. B) decreases as the price level increases. C) depends on the quantity of money. D) increases when the nominal interest rate rises. Answer: A Topic: Influences on Money Holding, Real GDP Skill: Recognition Status: Old AACSB: Reflective Thinking 25) When real GDP increases, the demand for money A) increases. B) decreases. C) stays the same. D) we cannot make a prediction without additional information. Answer: A Topic: Influences on Money Holding, Real GDP Skill: Recognition Status: Old AACSB: Reflective Thinking 26) The quantity of money that people choose to hold is A) positively related to the nominal interest rate. B) positively related to real GDP. C) negatively related to the price level. D) positively related to the availability of ATM machines. Answer: B Topic: Influences on Money Holding, Real GDP Skill: Recognition Status: Old AACSB: Reflective Thinking 27) The quantity of money people want to hold increases if A) the price level falls. B) the nominal interest rate rises. C) real GDP increases. D) All of the above answers are correct. Answer: C Topic: Influences on Money Holding, Real GDP Skill: Conceptual Status: Old AACSB: Reflective Thinking

28) Which of the following decreases the demand for money? A) an increase in the price level B) an increase in the quantity of money C) a decrease in real GDP D) a decrease in the cost of printing money Answer: C Topic: Influences on Money Holding, Real GDP Skill: Conceptual Status: Old AACSB: Reflective Thinking 29) When real GDP increases, people demand A) the same quantity of real money. B) less real money. C) more real money. D) more money in nominal terms but less in real terms. Answer: C Topic: Influences on Money Holding, Real GDP Skill: Conceptual Status: Old AACSB: Reflective Thinking 30) ________ real GDP increases the demand for money and ________ the nominal interest rate decreases the quantity of money demanded. A) Increasing; increasing B) Increasing; decreasing C) Decreasing; increasing D) Decreasing; decreasing Answer: A Topic: Influences on Money Holding Skill: Conceptual Status: Old AACSB: Reflective Thinking 31) Financial innovations can have the effect of A) only decreasing the demand for money. B) only increasing the demand for money. C) either increasing or decreasing the demand for money depending on what the innovation is. D) increasing the Fed's monetary policy. Answer: C Topic: Influences on Money Holding, Financial Innovation Skill: Conceptual Status: Old AACSB: Reflective Thinking

32) The demand for money curve is the relationship between ________ and ________, other things remaining the same. A) the quantity of real money demanded; the quantity of real money supplied B) the quantity of money demanded; the real interest rate C) the money demanded; the money supplied D) the quantity of real money demanded; the nominal interest rate Answer: D Topic: The Demand for Money Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 33) An increase in the nominal interest rate A) shifts the demand for money curve rightward. B) shifts the demand for money curve leftward. C) leads to an upward movement along the demand for money curve. D) leads to a downward movement along the demand for money curve. Answer: C Topic: The Demand for Money Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 34) There is a movement along the demand for money curve if A) the nominal interest rate rises. B) there is an economic expansion so that real GDP increases. C) banking customers use ATM machines more. D) the price level increases. Answer: A Topic: The Demand for Money Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 35) In October of 2012, the interest rate on money market accounts was about 0.4 percent. In 2007, the interest rate on money market accounts was about 4.0 percent. What has been the impact on the demand for money curve from this fall in the interest rate? A) the money demand curve shifted to the right B) the money demand curve shifted to the left C) there was a downward movement along the demand for money curve D) there was an upward movement along the demand for money curve Answer: C Topic: The Demand for Money Curve Skill: Conceptual Status: New AACSB: Reflective Thinking 96 Copyright © 2014 Pearson Education, Inc.

36) An increase in real GDP A) shifts the demand for money curve rightward. B) shifts the demand for money curve leftward. C) leads to an upward movement along the demand for money curve. D) leads to a downward movement along the demand for money curve. Answer: A Topic: Shifts in the Demand for Money Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 37) The demand for money curve shifts rightward if A) the price level increases. B) real GDP increases. C) the nominal interest rate increases. D) the real interest rate decreases. Answer: B Topic: Shifts in the Demand for Money Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 38) The demand for money curve shifts rightward if A) the nominal interest rate falls. B) financial innovation creates new substitutes for cash. C) real GDP increases. D) the price level falls. Answer: C Topic: Shifts in the Demand for Money Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 39) An increase in the nominal interest rate creates a ________ the money demand curve, and an increase in real GDP creates a ________ the money demand curve. A) movement down along; leftward shift of B) rightward shift of; movement up along C) movement up along; rightward shift of D) leftward shift of; rightward shift of Answer: C Topic: The Demand for Money Curve Skill: Recognition Status: Old AACSB: Analytical Skills

40) An increase in the opportunity cost of holding money creates a ________ the money demand curve and an increase in real GDP creates a ________ the money demand curve. A) leftward shift of; movement down along B) rightward shift of; movement down along C) movement up along; leftward shift of D) movement up along; rightward shift of Answer: D Topic: The Demand for Money Curve Skill: Recognition Status: Old AACSB: Reflective Thinking

41) Use the figure above to answer this question. Suppose the economy is operating at point a. A move to ________ could be explained by ________. A) point e; a decrease in the nominal interest rate B) point c; an increase in the nominal interest rate C) point d; an increase in real GDP D) point b; an increase in real GDP Answer: C Topic: Shifts in the Demand for Money Curve Skill: Analytical Status: Old AACSB: Analytical Skills

42) Use the figure above to answer this question. Suppose the economy is operating at point a. A move to ________ could be explained by ________. A) point c; an increase in the use of credit cards B) point b; an increase in real GDP C) point b; an increase in the nominal interest rate D) point e; an increase in U.S. exports Answer: A Topic: Shifts in the Demand for Money Curve Skill: Analytical Status: Old AACSB: Analytical Skills 43) In the above figure, suppose the economy is initially at point a. If the nominal interest rate increases, there is a movement to point such as A) b. B) c. C) d. D) e. Answer: D Topic: The Demand for Money Curve Skill: Analytical Status: Old AACSB: Analytical Skills 44) In the above figure, suppose the economy is at point a. If there is an increase in real GDP, there is a movement to point such as A) b. B) c. C) d. D) e. Answer: C Topic: Shifts in the Demand for Money Curve Skill: Analytical Status: Old AACSB: Analytical Skills

45) In the above figure, suppose the economy is initially on the demand for money curve MD1. What is the effect of a fall in the nominal interest rate? A) The demand for money curve would shift rightward to MD2. B) The demand for money curve would shift leftward to MD0. C) There would be a movement upward along the demand for money curve MD1. D) There would be a movement downward along the demand for money curve MD1. Answer: D Topic: The Demand for Money Curve Skill: Analytical Status: Old AACSB: Analytical Skills 46) In the above figure, suppose the economy is initially on the demand for money curve MD1. What is the effect of a rise in the nominal interest rate? A) The demand for money curve would shift rightward to MD2. B) The demand for money curve would shift leftward to MD0. C) There would be a movement upward along the demand for money curve MD1. D) There would be a movement downward along the demand for money curve MD1. Answer: C Topic: The Demand for Money Curve Skill: Analytical Status: Old AACSB: Analytical Skills

47) In the above figure, suppose the economy is initially on the demand for money curve MD1. What is the effect of an increase in real GDP? A) The demand for money curve would shift rightward to MD2. B) The demand for money curve would shift leftward to MD0. C) There would be a movement upward along the demand for money curve MD1. D) There would be a movement downward along the demand for money curve MD1. Answer: A Topic: Shifts in the Demand for Money Curve Skill: Analytical Status: Old AACSB: Analytical Skills 48) In the above figure, suppose the economy is initially on the demand for money curve MD1. What is the effect of an increase in financial innovation such as the introduction of ATMs? A) The demand for money curve would shift rightward to MD2. B) The demand for money curve would shift leftward to MD0. C) There would be a movement upward along the demand for money curve MD1. D) There would be a movement downward along the demand for money curve MD1. Answer: B Topic: Shifts in the Demand for Money Curve Skill: Analytical Status: Old AACSB: Analytical Skills 49) In the above figure, suppose the economy is initially on the demand for money curve MD1. What is the effect of increased use of credit cards? A) The demand for money curve would shift rightward to MD2. B) The demand for money curve would shift leftward to MD0. C) There would be a movement upward along the demand for money curve MD1. D) There would be a movement downward along the demand for money curve MD1. Answer: B Topic: Shifts in the Demand for Money Curve Skill: Analytical Status: Old AACSB: Analytical Skills

50) On a given day the quantity of money is ________ and the supply of money curve is ________. A) fixed; horizontal B) fixed; vertical C) variable; horizontal D) variable; vertical Answer: B Topic: The Quantity of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking

51) In the figure above, an increase in the monetary base would create a change such as a A) movement from point a to point b along the supply of money curve MS0. B) movement from point b to point a along the supply of money curve MS0. C) shift from the supply of money curve MS0 to the supply of money curve MS1. D) shift from the supply of money curve MS1 to the supply of money curve MS0. Answer: C Topic: Supply of Money Curve Skill: Analytical Status: Old AACSB: Analytical Skills

52) In the figure above, a decrease in the monetary base would create a change such as a A) movement from point a to point b along the supply of money curve MS0. B) movement from point b to point a along the supply of money curve MS0. C) shift from the supply of money curve MS0 to the supply of money curve MS1. D) shift from the supply of money curve MS1 to the supply of money curve MS0. Answer: D Topic: Supply of Money Curve Skill: Analytical Status: Old AACSB: Analytical Skills

53) The figure above illustrates the effect of A) an increase in real GDP. B) a decrease in real GDP. C) an increase in the monetary base. D) a decrease in the monetary base. Answer: B Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

54) When the interest rate falls in the money market, the quantity of money demanded ________ and the quantity of money supplied ________. A) increases; decreases B) decreases; increases C) stays the same; decreases D) increases; stays the same Answer: D Topic: Money Market Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 55) When the quantity of money demanded is greater than the quantity of money supplied, people ________ bonds and the interest rate ________. A) sell; rises B) sell; falls C) buy; rises D) buy; falls Answer: A Topic: Money Market Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 56) Suppose that the interest rate is greater than the equilibrium interest rate. Which of the following occurs? I. There is an excess quantity of money. II. The quantity of money automatically increases. III. The interest rate falls. A) I B) I and II C) I and III D) I, II and III Answer: C Topic: Money Market Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking

57) In the money market, if the interest rate exceeds the equilibrium interest, there is a surplus of money. How is the surplus eliminated? A) People buy bonds to rid themselves of the surplus money, bidding up their price and pushing interest rates down. B) Banks will lend out the surplus, lowering interest rates. C) The Federal Reserve will destroy currency, reducing the quantity of money. D) The high interest rate increases the demand for money, eliminating the surplus. Answer: A Topic: Money Market Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 58) When the interest rate is above the equilibrium interest rate there is an A) excess quantity of money and people will sell bonds. B) excess demand for money and people will sell bonds. C) excess quantity of money and people will buy bonds. D) excess demand for money and people will buy bonds. Answer: C Topic: Money Market Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 59) If the interest rate is above the equilibrium interest rate, then A) there is an excess demand for money. B) the quantity of money demanded exceeds the quantity supplied. C) people will sell bonds and the interest rate will fall. D) people will buy bonds and the interest rate will fall. Answer: D Topic: Money Market Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 60) Suppose the equilibrium interest rate in the money market is 5 percent and the current interest rate is 7 percent. As a result, A) the interest rate rises. B) real GDP increases. C) the demand for money curve shifts rightward. D) people buy bonds and the interest rate falls. Answer: D Topic: Money Market Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 105 Copyright © 2014 Pearson Education, Inc.

61) Suppose the money market has an equilibrium interest rate of 10 percent. If the actual interest is 8 percent, which of the following occurs to bring the money market back to equilibrium? A) People buy bonds, the price of bonds rises and the interest rate rises. B) People buy bonds, the price of bonds falls and the interest rate rises. C) People sell bonds, the price of bonds rises and the interest rate rises. D) People sell bonds, the price of bonds falls and the interest rate rises. Answer: D Topic: Money Market Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking

Interest rate (percent) 2 3 4 5 6 7

Quantity of money (billions of dollars) 500 500 500 500 500 500

Money demand (billions of dollars) 575 550 525 500 475 450

62) The table above gives the quantity of money and money demand schedules. Suppose that the interest rate is equal to 6 percent. The effect of this interest rate in the money market is that A) the money market is in equilibrium. B) people buy bonds and the interest rate falls. C) people sell bonds and the interest rate falls. D) bond prices fall and so the interest rate falls. Answer: B Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 63) The table above gives the quantity of money and money demand schedules. Suppose that the interest rate is equal to 3 percent. The effect of this interest rate in the money market is that A) the money market is in equilibrium. B) people buy bonds and the interest rate falls. C) people sell bonds and the interest rate rises. D) bond prices rise so that the interest rate rises. Answer: C Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 106 Copyright © 2014 Pearson Education, Inc.

64) In the figure above, if the interest rate is 8 percent, people demand $0.1 trillion A) less money than the quantity supplied and the interest rate will rise. B) less money than the quantity supplied and the interest rate will fall. C) more money than the quantity supplied and the interest rate will fall. D) more money than the quantity supplied and the interest rate will rise. Answer: B Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 65) In the figure above, if the interest rate is 8 percent, people demand $0.1 trillion A) less money than the quantity supplied and bond prices will rise. B) less money than the quantity supplied and bond prices will fall. C) more money than the quantity supplied and bond prices will fall. D) more money than the quantity supplied and bond prices will rise. Answer: A Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

66) In the figure above, if the interest rate is 4 percent, there is a $0.1 trillion excess A) quantity of money and the interest rate will rise. B) quantity of money and the interest rate will fall. C) demand for money and the interest rate will fall. D) demand for money and the interest rate will rise. Answer: D Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 67) In the figure above, if the interest rate is 4 percent, there is a $0.1 trillion excess A) quantity of money and bond prices will rise. B) quantity of money and bond prices will fall. C) demand for money and bond prices will fall. D) demand for money and bond prices will rise. Answer: C Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 68) In the figure above, if the interest rate is 6 percent, A) there is a $0.1 trillion excess quantity of money and the interest rate will rise. B) there is a $0.1 trillion excess quantity of money and the interest rate will fall. C) the money market is in equilibrium and the interest rate will remain constant. D) there is a $0.1 trillion excess demand for money and the interest rate will rise. Answer: C Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

69) In the above figure, if the interest rate is 4 percent, people A) sell bonds so as to convert them into money. B) buy bonds so as to have a better store of value. C) petition the Fed to tighten the quantity of money. D) buy stocks, because stocks are more liquid than currency. Answer: A Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 70) In the above figure, if the interest rate is 8 percent, A) people sell bonds so as to convert them into money. B) people buy bonds and the interest rate falls. C) the Fed increases the quantity of money. D) people buy stocks, because stocks are more liquid than currency. Answer: B Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

71) In the short run, which of the following actions raise the interest rate? A) a decrease in the demand for money B) an increase in bond prices C) an increase in the quantity of money D) an increase in the demand for money Answer: D Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 72) In the short run, which of the following actions lower the interest rate? A) a decrease in the demand for money B) an increase in the demand for money C) a decrease in the quantity of money D) a decrease in bond prices Answer: A Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 73) In the short run, when the Fed increases the quantity of money A) bond prices rise and the interest rate falls. B) bond prices fall and the interest rate rises. C) the demand for money increases. D) the supply of money curve shifts leftward. Answer: A Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 74) In the short run, when the Fed decreases the quantity of money A) bond prices fall and the interest rate rises. B) bond prices rise and the interest rate falls. C) the demand for money increases. D) the supply of money curve shifts rightward. Answer: A Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

75) In the long run, when the Fed increases the quantity of money the A) nothing real changes. B) price level falls. C) real interest rate rises. D) nominal interest rate falls. Answer: A Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 76) An increase in ________ decreases the quantity of money people want to hold. A) the price level B) real GDP C) the interest rate D) the quantity of money Answer: C Topic: Study Guide Question, Influences on Money Holding, Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 77) A decrease in ________ decreases the demand for money. A) the discount rate B) real GDP C) the interest rate D) the quantity of money Answer: B Topic: Study Guide Question, Influences on Money Holding, Real GDP Skill: Conceptual Status: Old AACSB: Reflective Thinking 78) If real GDP decreases, the demand for money curve will shift A) leftward and the interest rate will rise. B) leftward and the interest rate will fall. C) rightward and the interest rate will rise. D) rightward and the interest rate will fall. Answer: B Topic: Study Guide Question, Shifts in the Demand for Money Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking

79) In October of 2012, the interest rate on money market accounts was about 0.4 percent. In 2007, the interest rate on money market accounts was about 4.0 percent. What has been the impact on money demand from this fall in the interest rate? A) the money demand curve shifted to the right B) the money demand curve shifted to the left C) the quantity of money demanded increased D) the quantity of money demanded decreased Answer: C Topic: Influences on Money Holding, The Interest Rate Skill: Conceptual Status: New AACSB: Reflective Thinking 6 The Quantity Theory of Money 1) The velocity of circulation is A) the rate of change of the GDP deflator. B) the average number of times a dollar of money is used in a year to buy goods and services in GDP. C) the changes in the purchasing power of money over a given time period. D) constant. Answer: B Topic: Quantity Theory of Money, Velocity of Circulation Skill: Recognition Status: Old AACSB: Reflective Thinking 2) The velocity of circulation is A) the relationship between income and spending. B) the relationship between increases in income and investment. C) the ratio of currency to demand deposits. D) the average number of times per year a dollar is spent on goods and services in GDP. Answer: D Topic: Quantity Theory of Money, Velocity of Circulation Skill: Recognition Status: Old AACSB: Reflective Thinking

3) The velocity of circulation is A) equal to the price level multiplied by real GDP. B) equal to the quantity of money multiplied by nominal GDP. C) the average number of times a dollar bill is used in a year to buy the goods and services in GDP. D) average quantity of money that exists during a year. Answer: C Topic: Quantity Theory of Money, Velocity of Circulation Skill: Recognition Status: Old AACSB: Reflective Thinking 4) If an economy has a velocity of circulation of 3, then A) the quantity of money is 3 times real GDP. B) in a year the average dollar is exchanged 3 times to purchase goods and services in GDP. C) nominal GDP is 1/3 the size of the quantity of money. D) the quantity of money is $3 for every dollar of GDP. Answer: B Topic: Quantity Theory of Money, Velocity of Circulation Skill: Recognition Status: Old AACSB: Reflective Thinking 5) In the quantity theory of money, the quantity of money is assumed to A) not influence the velocity of circulation. B) rise during recessions. C) fall during recessions. D) be constant. Answer: A Topic: Quantity Theory of Money, Velocity of Circulation Skill: Recognition Status: Old AACSB: Reflective Thinking 6) When the velocity of circulation equals 4 in 2010, this fact means that A) consumers held four dollars in wealth for each dollar they spent in 2010. B) on average, each dollar of money in the economy purchased four dollars of goods and services in GDP in 2010. C) for each additional dollar of money injected into the economy, the price level rose 4 percent in 2010. D) real output of goods and services in GDP rose by four dollars for each additional dollar of money consumers saved. Answer: B Topic: Quantity Theory of Money, Velocity of Circulation Skill: Conceptual Status: Old AACSB: Reflective Thinking 113 Copyright © 2014 Pearson Education, Inc.

7) If nominal GDP is $12 trillion, the price level is 120, and the quantity of money is $4 trillion, what is the velocity of circulation? A) 3 B) 2.5 C) 30 D) 25 Answer: A Topic: Quantity Theory of Money, Velocity of Circulation Skill: Analytical Status: Old AACSB: Analytical Skills 8) Suppose that M = 300, P = 150, and Y = 6. Then the velocity of circulation equals A) 0.02. B) 0.50. C) 2.00. D) 3.00. Answer: D Topic: Quantity Theory of Money, Velocity of Circulation Skill: Analytical Status: Old AACSB: Analytical Skills 9) If nominal GDP = $15 trillion and the quantity of money is $3 trillion, what is the velocity of circulation? A) 16 B) 8 C) 5 D) 2 Answer: C Topic: Quantity Theory of Money, Velocity of Circulation Skill: Analytical Status: Old AACSB: Analytical Skills 10) Which of the following equations represents the equation of exchange? A) PM = VY B) MY = PV C) MV = PY D) M = VP/Y Answer: C Topic: Equation of Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 114 Copyright © 2014 Pearson Education, Inc.

11) The equation of exchange A) is MV = PY. B) becomes the quantity theory if velocity and the price level are constant. C) cannot be used in an economy with inflation. D) All of the above answers are correct. Answer: A Topic: Equation of Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 12) The equation of exchange states that the price level is equal to A) the quantity of money. B) velocity of circulation multiplied by the quantity of money divided by real GDP. C) real GDP multiplied by the velocity of circulation divided by nominal GDP. D) the velocity of circulation. Answer: B Topic: Equation of Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 13) The equation of exchange states that the quantity of money A) multiplied by the velocity of circulation equals nominal GDP. B) divided by price level equals real GDP. C) multiplied by nominal GDP equals the price level. D) divided by nominal GDP equals real GDP. Answer: A Topic: Equation of Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 14) If velocity is 6 and the quantity of money is $2 trillion, what is nominal GDP? A) $12 trillion B) $6 trillion C) $3 trillion D) $333 billion Answer: A Topic: Equation of Exchange Skill: Analytical Status: Old AACSB: Analytical Skills

15) The quantity of money in an economy is $9 million, and the velocity of circulation is 3. Nominal GDP in this economy is ________. A) $6 million B) $9 million C) $3 million D) $27 million Answer: D Topic: Equation of Exchange Skill: Analytical Status: Old AACSB: Analytical Skills 16) If real GDP is $10 trillion and the velocity of circulation is 2, the quantity of money A) is $2 trillion. B) is $5 trillion. C) is $20 trillion. D) cannot be determined from the information given. Answer: D Topic: Equation of Exchange Skill: Analytical Status: Old AACSB: Analytical Skills 17) The quantity theory asserts that real GDP is A) not influenced by the quantity of money. B) never different from potential GDP. C) equal to nominal GDP multiplied by the quantity of money. D) equal to nominal GDP divided by the quantity of money. Answer: A Topic: Quantity Theory of Money Skill: Recognition Status: Old AACSB: Reflective Thinking 18) The equation of exchange becomes the same as the quantity theory of money by assuming that the velocity of circulation ________ when the quantity of money changes and potential GDP ________ when the quantity of money changes. A) changes; changes B) changes; does not change C) does not change; changes D) does not change; does not change Answer: D Topic: Quantity Theory of Money Skill: Recognition Status: Old AACSB: Reflective Thinking 116 Copyright © 2014 Pearson Education, Inc.

19) According to the quantity theory of money, A) V and M are constant. B) V and Y are not affected by the quantity of money. C) V and P are not affected by the quantity of money. D) V and M are not affected by changes in the price level. Answer: B Topic: Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 20) If V = 5, P = $3, and Y = 50, then the quantity of money equals A) $10. B) $30. C) $150. D) $300. Answer: B Topic: Equation of Exchange Skill: Analytical Status: Old AACSB: Analytical Skills 21) If M = $100, Y = $500 and P = $2, then V is equal to A) 0.10 B) 1. C) 10. D) 50. Answer: C Topic: Equation of Exchange Skill: Analytical Status: Old AACSB: Analytical Skills 22) If nominal GDP equals $10 trillion and the velocity of circulation is 5, then A) real GDP is $2 trillion. B) the quantity of money is $50 trillion. C) the quantity of money is $2 trillion. D) the real value of the quantity of money is $10 trillion. Answer: C Topic: Equation of Exchange Skill: Analytical Status: Old AACSB: Analytical Skills

23) Suppose that the nominal quantity of money is $200 billion and the value of nominal GDP is $1 trillion. It must be the case that A) the economy is suffering from inflation. B) the average price paid for a "typical" good is $5. C) there will be a shortage of money balances in the economy. D) the velocity of circulation is 5. Answer: D Topic: Equation of Exchange Skill: Analytical Status: Old AACSB: Analytical Skills 24) The quantity theory of money predicts how changes in A) the price level affect nominal GDP. B) the price level affect real GDP. C) the quantity of money affect the price level. D) real GDP affect the nominal GDP. Answer: C Topic: Predictions of the Quantity Theory of Money Skill: Recognition Status: Old AACSB: Reflective Thinking 25) The quantity theory of money addresses the A) long-run effect the quantity of money has on the price level. B) determinants of potential GDP. C) determinants of the equilibrium unemployment rate. D) short-run effect the quantity of money has on the price level. Answer: A Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 26) The quantity theory of money asserts that inflation is the result of growth in A) the quantity of money. B) potential GDP. C) the natural rate of unemployment. D) money wage rates. Answer: A Topic: Predictions of the Quantity Theory of Money Skill: Recognition Status: Old AACSB: Reflective Thinking

27) The quantity theory of money asserts that an increase in the quantity of money A) will decrease the price level by an offsetting amount. B) by n percent will lead to an increase in the price level by n + 1 percent. C) will lead to an equal percentage increase in real GDP. D) will lead to an equal percentage increase in the price level. Answer: D Topic: Predictions of the Quantity Theory of Money Skill: Recognition Status: Old AACSB: Reflective Thinking 28) The quantity theory of money argues that, in the long run, the percentage change in money will create an equal percentage change in A) velocity. B) real GDP. C) potential GDP. D) the price level. Answer: D Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 29) The quantity theory of money predicts that in the ________, a 10 percent increase in the quantity of money leads to a 10 percent increase in ________. A) long run; real GDP B) short run; velocity C) long run; velocity D) long run; price level Answer: D Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 30) The quantity theory of money states that in the long run A) the price level will not consistently rise, it will fluctuate. B) an increase in the quantity of money results in an equal percentage increase in the price level. C) a rise in the price level rises causes the quantity of money to increase. D) an increase in the quantity of money increases real GDP by a smaller percentage. Answer: B Topic: Predictions of the Quantity Theory of Money Skill: Recognition Status: Old AACSB: Reflective Thinking

31) According to the quantity theory of money, a 10 percent increase in the quantity of money ultimately leads to a 10 percent increase in A) real national income. B) real GDP. C) the price level. D) velocity. Answer: C Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 32) According to the quantity theory of money, changes in the price level are the result of changes in the A) prime interest rate. B) real interest rate. C) quantity of money. D) velocity of circulation. Answer: C Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 33) Other things constant, the quantity theory of money concludes that any increase in the quantity of money A) decreases the demand for money. B) decreases in the aggregate price level. C) decreases the aggregate level of nominal income. D) proportionally increases the price level. Answer: D Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 34) The quantity theory of money states that A) inflation increases when the money growth rate increases. B) as the price level increases, the demand for money increases. C) as the interest rate rises, the demand for money decreases. D) changes in the quantity of money are determined by the commercial banks and not the Federal Reserve. Answer: A Topic: Quantity Theory of Money Skill: Recognition Status: Old AACSB: Reflective Thinking 120 Copyright © 2014 Pearson Education, Inc.

35) According to the quantity theory of money, a 15 percent increase in the quantity of money creates a 15 percent rise in A) the price level. B) the velocity of circulation. C) real GDP. D) the unemployment rate. Answer: A Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 36) According to the quantity theory of money, money growth and inflation are A) positively correlated. B) negatively correlated. C) independent, that is, not correlated. D) positively if the inflation rate is positive and negatively correlated if the inflation rate is negative. Answer: A Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 37) According to the quantity theory of money, in the long run A) an increase in the quantity of money creates an increase the price level but no increase in real GDP. B) the quantity of money in the economy will always be just the right amount. C) an increase in the quantity of money creates an increase in the price level and in real GDP. D) None of the above answers are correct. Answer: A Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking

38) According to the quantity theory of money, a 25 percent change in M, the quantity of money, leads to a 25 percent change in A) V, the velocity of circulation. B) P, the price level. C) Y, real GDP. D) R, the interest rate. Answer: B Topic: Predictions of the Quantity Theory of Money Skill: Analytical Status: Old AACSB: Analytical Skills 39) Suppose the money growth rate is 3 percent, velocity is constant, and real GDP is growing at 2 percent. What is the inflation rate? A) 1 percent B) 5 percent C) 3 percent D) 6 percent Answer: A Topic: Predictions of the Quantity Theory of Money Skill: Analytical Status: Old AACSB: Analytical Skills 40) Read the following statements and determine if they are true or false. I. According to the quantity theory of money, an increase in the growth rate of the quantity of money increases inflation in the long run. II. Historical and international data show that there is no correlation between inflation and money growth. A) I and II are both true. B) I and II are both false. C) I is true and II is false. D) I is false and II is true. Answer: C Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking

41) Which of the following is true regarding the quantity theory of money? I. The theory predicts that in the long run the inflation rate equals the money growth rate minus the growth rate of real GDP. II. The theory predicts that countries with high growth rates of money will have high inflation rates. III. The theory predicts that increases in the growth rate of velocity lowers the inflation rate. A) I and II B) II and III C) I and III D) I, II and III Answer: A Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 42) According to the quantity theory of money, in the long run, an increase in the quantity of money results in an equal percentage increase in ________. A) the price level B) the growth rate of real GDP C) the inflation level D) the growth rate of potential GDP Answer: A Topic: Predictions of the Quantity Theory of Money Skill: Recognition Status: Old AACSB: Reflective Thinking 43) The data show that money growth and inflation are A) positively correlated. B) negatively correlated. C) not correlated. D) independent phenomena. Answer: A Topic: Evidence on the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking

44) The U.S. historical evidence A) generally supports the quantity theory of money in the long run. B) does not support the quantity theory of money. C) demonstrates that there is no correlation between the money growth rate and inflation. D) shows that a higher inflation rate causes an increase in the money growth rate. Answer: A Topic: Evidence on the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 45) Looking at historical evidence from 1990 to 2005 for the United States and other countries, which of the following are true? I. There is a correlation between the growth rate of the quantity theory of money and the growth rate of real GDP. II. There is a correlation between the growth rate of the quantity theory of money and the inflation rate. A) Only I is true. B) Only II is true. C) Both I and II are true. D) Neither I or II is true. Answer: B Topic: International Evidence on the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 46) According to the quantity theory, in the long run, an increase in the growth rate of ________ leads to an increase in the ________. A) real GDP; inflation rate B) the quantity of money; growth rate of real GDP C) the quantity of money; inflation rate D) real GDP; growth rate of velocity Answer: C Topic: Study Guide Question, Long-Run Effects of Change in Quantity of $ Skill: Conceptual Status: Old AACSB: Reflective Thinking

47) The quantity theory of money is the idea that in the long run A) the quantity of money is determined by banks. B) the quantity of money serves as a good indicator of how well money functions as a store of value. C) the quantity of money determines real GDP. D) an increase in the growth rate of the quantity of money leads to an equal increase in the inflation rate. Answer: D Topic: Study Guide Question, Quantity Theory of Money Skill: Recognition Status: Old AACSB: Reflective Thinking 48) Nominal GDP, PY, is $7.5 trillion. The quantity of money is $3 trillion. The velocity of circulation is A) 22.5. B) 10.5. C) 2.5. D) 3. Answer: C Topic: Study Guide Question, The Quantity Theory of Money Skill: Analytical Status: Old AACSB: Analytical Skills

7 News Based Questions 1) Which of the following is an example of money functioning as a medium of exchange? A) Walmart accepting your $20 when buy a CD. B) Apple pricing an iPhone at $299. C) Bank of America paying you 3 percent on your saving account. D) You saving your spare change in a jar before depositing them in your savings account. Answer: A Topic: Medium of Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 2) Which of the following is an example of money functioning as a unit of account? A) Bank of America charging 7 percent on an auto loan. B) Pepsi charging $1 for a can of soda. C) eBay using PayPal as a method of payment. D) Your writing a check at Target to pay for new clothes. Answer: B Topic: Unit of Account Skill: Conceptual Status: Old AACSB: Reflective Thinking 3) Which of the following is an example of money functioning as a store of value? A) Comcast charging $99 for internet, phone and cable service. B) McDonalds charging 99 cents for a burger. C) Your saving your spare change in a jar in order to afford an end-of-term party. D) Amazon.com charging $9.95 for shipping. Answer: C Topic: Store of Value Skill: Conceptual Status: Old AACSB: Reflective Thinking 4) In September 2008, Regions Bank has $89 million in M1 deposits, $3 million in reserves and $81 million in loans. Regions Bank's desired reserve ratio is A) 3.4 percent B) 3.7 percent C) 91 percent D) 29.67 percent Answer: A Topic: Reserves Skill: Analytical Status: Old AACSB: Analytical Skills 126 Copyright © 2014 Pearson Education, Inc.

5) In September 2007, Regions Bank held $3 million in reserves against M1 deposits and made $83 million in loans. Between September 2007 and September 2008, deposits decreased from $114 million to $95 million. If Regions Bank wants to maintain its desired reserve ratio in 2008, it will A) increase its reserves. B) definitely make more loans. C) cannot make more loans. D) decrease its reserves. Answer: D Topic: Reserves Skill: Analytical Status: Old AACSB: Analytical Skills 6) In August 2007, Sun Trust Bank has $83 million in loans and $114 million in M1 deposits. If Sun Trust is holding $4 million in reserves, the bank's reserve ratio is A) $31 million. B) 4.8 percent C) 3.5 percent. D) 72.8 percent. Answer: C Topic: Reserves Skill: Analytical Status: Old AACSB: Analytical Skills 7) The table below shows data (in millions) for Sun Trust Banks in September 2007 and September 2008.

Loans Reserves Deposits

2007 $83 $4 $114

2008 $78 $5 $95

The data show that Sun Trust A) increased its reserve ratio to 5.3 percent over the 12 months. B) increased its reserve ratio to 6.4 percent over the 12 months. C) has fewer excess reserves in 2008. D) faced a higher currency drain ratio in 2008. Answer: A Topic: Reserves Skill: Analytical Status: Old AACSB: Analytical Skills

8) The table below shows data (in millions) for Sun Trust Banks in September 2007 and September 2008. Suppose that the required reserve ratio is 3 percent.

Loans Reserves Deposits

2007 $83 $4 $114

2008 $78 $5 $95

The data show that Sun Trust ________ make more loans in 2007 and ________ make more loans in 2008. A) can; can. B) can; cannot. C) cannot; cannot. D) cannot; can. Answer: A Topic: Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills 9) The table below shows the data (in millions) for Wells Fargo Bank in September 2007 and September 2008. Suppose that the required reserve ratio is 3 percent.

Loans Reserves Deposits

2007 79 11 247

2008 100 11 266

The data show that Wells Fargo A) the reserve ratio did not change. B) had fewer excess reserves in 2007. C) the reserve ratio increased as loans increased. D) had fewer excess reserves in 2008. Answer: D Topic: Reserves Skill: Analytical Status: Old AACSB: Analytical Skills

10) The table below shows the data (in millions) for Wells Fargo Bank in September 2007 and September 2008. Suppose that the required reserve ratio is 3 percent.

Loans Reserves Deposits

2007 79 11 247

2008 100 11 266

The data show that A) the currency drain ratio increased. B) the Federal Reserve must have increased the required reserve ratio. C) Wells Fargo had excess reserves and could create money in 2007. D) Wells Fargo was only able to make more loans in 2008 because it gained more deposits. Answer: C Topic: Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills 11) Between 2008 and 2009, U.S. real GDP decreased from $13.2 trillion to $12.9 trillion. As a result, the real demand for money ________ and the demand for money curve ________. A) decreased; shifted leftward B) did not change; did not shift C) increased; shifted leftward D) decreased; shifted rightward. Answer: A Topic: The Demand for Money Skill: Analytical Status: Old AACSB: Analytical Skills 12) In 2007, interest rates in Germany were 4.7 percent while the inflation rate was 1.7 percent. In 2008, interest rates increased to 5.3 percent and the inflation rate increased to 2.0. As a result, there is A) a leftward shift in Germany's demand for money curve. B) a downward movement along Germany's demand for money curve. C) a rightward shift in Germany's money supply curve. D) an upward movement along Germany's demand for money curve. Answer: D Topic: The Demand for Money Skill: Analytical Status: Old AACSB: Analytical Skills

13) In 2006, real GDP in Belgium grew at a 3 percent rate and inflation was 1.8 percent while the population did not change. As a result, there was ________ demand for money curve in Belgium. A) a rightward shift of the B) a leftward shift of the C) a movement up along the D) no change in the Answer: A Topic: The Demand for Money Skill: Analytical Status: Old AACSB: Analytical Skills 14) The table below shows data for Japan.

M1 growth rate Inflation rate

2008 0.7 0.4

2009 0.9 -0.3

Assuming the rate of velocity change is constant, real GDP A) grew by 0.3 percent in 2008. B) grew by -1.2 percent in 2009. C) grew by 1.1 percent in 2008. D) grew by 0.9 percent in 2009. Answer: A Topic: Predictions of the Quantity Theory of Money Skill: Analytical Status: Old AACSB: Analytical Skills 15) The table below shows data for Brazil.

Real GDP growth rate Inflation rate

2006 3.8 4.2

2007 5.4 3.7

Assuming the rate of velocity change is constant, A) the growth rate of money increased between 2006 and 2007. B) the money growth rate was -0.4 percent in 2006. C) the growth rate of nominal GDP was 1.7 percent in 2006. D) the demand for money curve shifted leftward in 2006. Answer: A Topic: Predictions of the Quantity Theory of Money Skill: Analytical Status: Old AACSB: Analytical Skills 130 Copyright © 2014 Pearson Education, Inc.

16) The table below shows data for Indonesia.

Real GDP growth rate Inflation rate

2009 4.5 4.8

2010 6.0 5.7

Assuming the rate of velocity change is constant, the money growth rate in Indonesia was A) 0.3 percent in 2009. B) 11.7 percent in 2010. C) -0.3 percent in 2009. D) 5.7 percent in 2010. Answer: B Topic: Predictions of the Quantity Theory of Money Skill: Analytical Status: Old AACSB: Analytical Skills 17) The table below shows data for Indonesia between 2005 and 2006.

Money growth rate Real GDP growth rate

2005 21.4 5.7

2006 12.0 5.5

Assume the rate of velocity change is constant. According to the quantity theory of money, Indonesia's inflation rate A) is higher in 2005 than in 2006. B) was 17.5 percent in 2006. C) is 27.1 percent in 2005. D) will increase over the 12 months. Answer: A Topic: Predictions of the Quantity Theory of Money Skill: Analytical Status: Old AACSB: Analytical Skills 18) The inflation rate in Venezuela has increased between 2005 and 2010, rising from 14 percent per year to 31 percent per year. At the same time, the growth rate of real GDP fell from 10 percent per year to -2.6 percent per year. The quantity theory of money A) states that the inflation rate over the period would average 4 percent. B) predicts that the velocity of money will decrease over the period. C) states that the growth rate of money must have increased over the period. D) predicts that nominal GDP will decrease over the period. Answer: C Topic: Predictions of the Quantity Theory of Money Skill: Analytical Status: Old AACSB: Analytical Skills 131 Copyright © 2014 Pearson Education, Inc.

8 Essay Questions 1) Define money and list its functions. Answer: Money is any commodity or token that is generally accepted as a means of payment. It has three main functions. It serves as a medium of exchange, a unit of account, and a store of value. Topic: What Is Money? Skill: Recognition Status: Old AACSB: Reflective Thinking 2) What are the three functions of money? Answer: Money serves as a medium of exchange (so that money is accepted in exchange for goods and services), as a unit of account (so that prices are measured in units of money), and as a store of value (so that money is exchangeable at a later date). Topic: What Is Money? Skill: Recognition Status: Old AACSB: Reflective Thinking 3) What is barter? What is a double coincidence of wants? How does the existence of money affect barter? Answer: Barter is the direct exchange of one good or service for another. Barter is inefficient because it requires a "double coincidence of wants," that is, the good one person offers for exchange must be the good the trading partner wants and the trading partner's good must be what the first person wants. The existence of money means that we do not need to engage in barter. Instead, we can sell a good or service for money and then use the money to purchase another good or service we desire. There is no necessity for the "double coincidence of wants" because the seller is willing to accept money from any buyer. Topic: Barter Skill: Recognition Status: Old AACSB: Reflective Thinking 4) Give an example of how money functions as a unit of account. Answer: Money functions as a unit of account when it is used to in a price. For instance, a price of $60 dollars for a purse shows how the price of the purse is being measured in units of money. Topic: Unit of Account Skill: Conceptual Status: Old AACSB: Reflective Thinking

5) Explain which of the following count as money. a) a check in Ann's checkbook b) currency in Ann's bank c) currency in Ann's purse d) Ann's checking deposit Answer: Only parts (c), currency in Ann's purse, and (d), Ann's checking deposit, are money. Ann's check, given in part (a), is a method of transferring money from Ann to someone else. Thus the check (itself) is not money. Part (d), the currency in Ann's bank, is not money until someone withdraws it because currency inside a bank does not count as money. Topic: Money in the United States Today Skill: Recognition Status: Old AACSB: Reflective Thinking 6) "Even though we can convert them into money, deposits at banks are not money." Is the previous statement correct or not? Answer: The statement is incorrect. Some deposits at banks, such as checking account deposits, are a means of payment and fulfill all the functions of money. These deposits are therefore money. Topic: Money in the United States Today Skill: Recognition Status: Old AACSB: Reflective Thinking 7) Are checks money? Answer: Checks are instructions to transfer funds from one person's checking account to another person's checking account. Checks are not money, but the checking account deposits that the check transfers are money. Topic: Checks Are Not Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 8) "Credit cards are considered money because they serve to purchase goods and services." Is the previous statement true or false? Answer: The statement is false. Credit cards are an ID card that, when presented, allow the owner to get an immediate loan. A loan is not money because a loan needs to be repaid with money. Thus a credit card is not money. Topic: Credit Cards Are Not Money Skill: Conceptual Status: Old AACSB: Reflective Thinking

9) Are credit cards or debit cards money? Explain your answer. Answer: Neither credit cards nor debit cards are money. Credit cards are a type of ID card that, when presented, allow the owner to get an immediate loan. The loan is not money; indeed, it must be repaid using money. A debit card allows the customer to pay immediately for his or her purchase by transferring money from the customer's checking account to the seller's account. Debit cards are similar to checks insofar as they are essentially instructions to move money from one person to another. The funds transferred are money, the debit card is not money. Topic: Credit Cards Are Not Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 10) Are checks and credit cards money? Explain why or why not. Answer: Checks are not money. Checks are instructions to your depository institution allowing for funds to be given to the entity listed on the check. Credit cards also are not money. Credit cards are ID cards that allow the user to access a previously-approved line of credit. The funds borrowed using a credit card must eventually be repaid using money. Topic: Checks and Credit Cards Are Not Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 11) What makes up M1? Is M1 larger or smaller than real GDP? Answer: M1 is the sum of currency outside of the banks plus checkable deposits owned by individuals and businesses plus traveler's checks. All the assets in M1 are accepted as means of payment and so all the assets are money. M1 is smaller than real GDP. Real GDP is about 9 times larger than M1. Topic: Money in the United States Today, M1 Skill: Recognition Status: Old AACSB: Reflective Thinking 12) What assets are included in M1? In M2? Is all of M1 and M2 money? If some assets of M1 or M2 are not money, why are they included in M1 or M2? Answer: M1 is the sum of currency outside of the banks plus checkable deposits owned by individuals and businesses plus traveler's checks. All the assets in M1 are accepted as means of payment and so all the assets are money. M2 includes all of M1 plus savings deposits, small time deposits, and money market funds. Some components of M2, such as time deposits, are not money because they are not a means of payment. But they are easily convertible into money, which is why they are included in M2. Topic: Money in the United States Today, M1 and M2 Skill: Recognition Status: Old AACSB: Reflective Thinking

13) "By definition, all parts of M2 are money." Is the previous statement correct or not? Explain your answer. Answer: The statement is incorrect. Many of the assets in M2 are money. But not all the assets are money. Some of the savings deposits, time deposits, and money market funds are not means of payment and hence are not money. But they are included in M2 because they are easily converted into money. Topic: Money in the United States Today, M2 Skill: Recognition Status: Old AACSB: Reflective Thinking 14) "Banks make a profit by paying depositors a high rate to attract funds and making loans at a low rate to encourage borrowing." Is the previous statement correct or not? Answer: The statement is incorrect. Banks make a profit if the interest rate they collect on the loans they make exceeds the interest rate they must pay on the deposits they attract. Topic: Commercial Banks Skill: Conceptual Status: Old AACSB: Reflective Thinking 15) "Banks hold 100 percent of their customers' deposits as reserves." Is the previous statement correct or not? Answer: The statement is incorrect. If banks kept all of their deposits as reserves, banks would earn no profit. So banks keep a fraction of their deposits as reserves. Topic: Commercial Banks Skill: Conceptual Status: Old AACSB: Reflective Thinking 16) What are the economic functions of depository institutions? Answer: Depository institutions provide four economic services. First, they create liquidity, that is, bank deposits are highly liquid so that they are easily convertible into money. Second, they minimize cost of obtaining funds because borrowing from one bank is cheaper than borrowing from a variety of lenders. Third, they minimize cost of monitoring borrowers because depository institutions specialize in monitoring borrowers. Fourth, they pool risk by making loans to many borrowers. Topic: Economic Functions of Depository Institutions Skill: Recognition Status: Old AACSB: Reflective Thinking

17) List and discuss the four economic functions that depository institutions provide their customers. Answer: Depository institutions create liquidity, lower costs of obtaining funds, lower costs of monitoring borrowers, and pool risk. They create liquidity because they create assets that can be easily converted into money. Indeed, some of their deposits are money itself! They lower the costs of lending and borrowing funds. If you have funds to loan, rather than searching for a borrower, you can simply deposit the funds in a financial firm. Similarly, if you want to borrow funds, rather than searching for someone with funds to loan, you can simply borrow from a financial firm. Depository institutions also lower the cost of monitoring borrowers because these firms specialize in this activity. Finally, depository institutions pool risk and thereby lower the average risk of loaning funds. In other words, by lending to a large number of firms and individuals, a bank lowers the average risk it faces because it knows that only a small fraction of the large number of loans won't be repaid. Topic: Economic Functions of Depository Institutions Skill: Conceptual Status: Old AACSB: Reflective Thinking 18) How do banks create liquidity? Answer: Banks create liquidity because they accept short-term deposits and make long-term loans. The short-term deposits can be quickly and easily changed into money—indeed, some of the deposits are money itself! In exchange, the bank makes long-term loans that cannot be converted to money until their due date is reached. Topic: Liquidity Skill: Conceptual Status: Old AACSB: Reflective Thinking 19) Briefly describe the Federal Reserve System, how it is governed, and its roles in the economy. Answer: The Federal Reserve, or Fed, is the U.S. central bank. The Fed consists of twelve regional Federal Reserve Banks scattered across the United States. These banks are overseen by the Board of Governors, a seven member board located in Washington D.C., whose members are appointed by the President of the United States and confirmed by the Senate. The Federal Open Market Committee, or FOMC, is the group within the Fed that sets the nation's monetary policy. The voting members of the FOMC consist of the chair and other six members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four presidents of the other regional Federal Reserve Banks, on a yearly rotating basis. The Fed's primarily role in the economy is to set and conduct the nation's monetary policy. The Fed also provides banking services to banks and helps regulate the nation's financial institutions and markets. Topic: The Federal Reserve System Skill: Conceptual Status: Old AACSB: Reflective Thinking

20) Does the Federal Reserve conduct both the nation's monetary policy and its fiscal policy? Answer: The Federal Reserve does not conduct both fiscal and monetary policy. The Federal Reserve is responsible for only the nation's monetary policy but it does not conduct the nation's fiscal policy. Topic: The Federal Reserve System Skill: Conceptual Status: Old AACSB: Reflective Thinking 21) Are the members of the Board of Governors of the Federal Reserve System elected officials? Answer: No, the members are not elected. They are appointed by the president of the United States (for 14-year terms) and confirmed by the U.S. Senate. Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 22) The president of which Federal Reserve bank is always a voting member of the FOMC? Answer: The president of the New York Federal Reserve bank is always a voting member of the FOMC. The presidents of the other Federal Reserve banks rotate on and off as voting members. The president of the New York Federal Reserve bank is always a voting member because the New York Federal Reserve bank implements the Fed's policy decisions. Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 23) What is the FOMC? Who are the members of the FOMC? What policy does the FOMC decide? Answer: The FOMC is the Federal Open Market Committee. All seven members of the Board of Governors and the 12 Federal Reserve Bank presidents attend and discuss the economy at the FOMC meeting. The voting members of the FOMC, however, are only the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four presidents of the remaining Federal Reserve Banks who serve on an annual rotating basis. The FOMC meets approximately every six weeks to review the state of the economy and decide the monetary policy actions to be carried out by the Federal Reserve Bank of New York. Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking

24) "Because monetary policy must be approved by the president of the United States, the president is chair of the Federal Open Market Committee." Analyze the previous statement—is it correct or incorrect? Answer: The statement is incorrect on several dimensions. First, monetary policy does not need to be approved by the President of the United States. Second, the president of the United States is not chair of the Federal Open Market Committee, FOMC. Third, the president of the United States is not even a member of the FOMC! The chair of the FOMC is the chair of the Federal Reserve's Board of Governors. Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 25) What is the interaction between the Federal Reserve districts and the Board of Governors of the Federal Reserve System? Answer: The Federal Reserve System divides the nation into 12 regions, each with a Federal Reserve bank. Each Federal Reserve bank has a nine-member board of directors. Of the nine members, six are elected by the commercial banks within the Federal Reserve district and three are appointed by the Board of Governors. The directors of each Federal Reserve bank appoint the president of the bank, subject to approval from the Board of Governors. Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 26) What is the structure of the Federal Reserve Bank System? Answer: The key elements in the structure of the Fed are: a) The Board of Governors. The Board of Governors has seven members who are appointed by the President of the United States and confirmed by the Senate, each for a 14-year term. b) The Regional Federal Reserve Banks. There are 12 regional banks, one for each of the 12 Federal Reserve districts. c) The Federal Open Market Committee or FOMC. The FOMC is the Fed's main policy-making committee. It has 12 voting members. Seven of the members are on the Board of Governors. One of the members is the president of the Federal Reserve Bank in New York. The other four members are presidents of other Federal Reserve Banks. Which four presidents are members changes on an annual rotating basis. Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking

27) List the Fed's main policy tools and briefly explain each one. Answer: The Fed's main policy tools are: required reserve ratios, last resort loans, and open market operations. Banks and thrifts are required to hold a minimum percentage of deposits as reserves. This minimum percentage is determined by the Fed and is known as a required reserve ratio. The last resort loans reflects the fact that the Fed stands ready to make loans to financial institutions when other firms may be unwilling to do so. The interest rate charged on these loans is the discount rate. An open market operation is the buying and selling of government bonds by the Fed in the open market. Topic: The Fed's Policy Tools Skill: Recognition Status: Old AACSB: Communication 28) What is the discount rate? Answer: The discount rate is the interest rate that the Fed charges banks when the banks borrow reserves from the Fed. Topic: How the Discount Rate Works Skill: Recognition Status: Old AACSB: Reflective Thinking 29) "When the Fed buys securities from a bank, the quantity of money eventually decreases by a fraction of the initial change in the monetary base." Is the previous statement correct or incorrect? Explain your answer. Answer: The statement is wrong on two counts. First, if the Fed buys securities from a bank, the quantity of money increases rather than decreases. Second, the money multiplier points out that the change in the quantity of money is ultimately greater than, not less than, the initial change in the monetary base. Topic: How an Open Market Operation Works Skill: Analytical Status: Old AACSB: Reflective Thinking 30) When the Fed buys securities from a bank, what happens to the monetary base and the quantity of money? Which changes by more or do both change by the same amount? Answer: When the Fed buys securities from a bank, both the monetary base and the quantity of money increase. As reflected by the money multiplier, the increase in the quantity of money exceeds the increase in the monetary base. Topic: How an Open Market Operation Works Skill: Analytical Status: Old AACSB: Reflective Thinking

31) If the Fed sells $100 million of U.S. government securities, what happens to the quantity of money? Answer: If the Fed sells $100 million of U.S. government securities, the monetary base decreases and, along with it, the quantity of money decreases. The money multiplier shows that the quantity of money decreases by more than $100 million. Topic: How an Open Market Operation Works Skill: Analytical Status: Old AACSB: Reflective Thinking 32) Describe how actual reserves are calculated and explain the difference between desired reserves and excess reserves. How do reserves affect the amount of loans a bank can make? Answer: Actual reserves are equal to the bank's reserves it keeps on deposit at the Federal Reserve plus the currency in the bank's vault. Desired reserves are the reserves that the bank wants to hold. The amount of desired reserves is equal to the desired reserve ratio multiplied by the bank's deposits. Excess reserves equal actual reserves minus desired reserves. A bank can make loans equal to the amount of its excess reserves. Topic: Reserves: Actual and Required Skill: Conceptual Status: Old AACSB: Reflective Thinking 33) "A bank can only use its excess reserves to make loans, while required reserves can only be used to buy U.S. government securities." Explain whether the previous statement is correct or incorrect. Answer: The statement is incorrect on two dimensions. First, a bank can use excess reserves to buy government securities as well as make loans. Second, a bank is not allowed to use its required reserve to buy U.S. government securities. Required reserves must be kept in the form of reserves, which are either reserve deposits the bank has made at the Federal Reserve or cash in the bank's vault. Topic: Reserves: Actual and Required Skill: Conceptual Status: Old AACSB: Reflective Thinking 34) Explain the process by which the banking system creates money. Answer: When a bank gains excess reserves, it uses the excess reserves to make a loan. The person or a business receiving the loan receives a deposit—money! The borrower then generally spends the loan and it ends up as a deposit—money—in another company's account. That company's bank then gains some excess reserves, which it loans, and so more money is created. Thus the banking system creates money by making loans. Topic: Reserves and Loans Skill: Conceptual Status: Old AACSB: Reflective Thinking

35) What factors affect the demand for money? Answer: Four factors influence the demand for money. First is the price level. An increase in the price level increases the nominal demand for money. Second is the interest rate. An increase in the interest rate raises the opportunity cost of holding money and decreases the quantity of money demanded. Third is real GDP. An increase in real GDP increases the demand for money. Fourth is financial innovation. Innovations that lower the cost of switching between money and other assets decrease the demand for money. Topic: The Influences on Money Holding Skill: Recognition Status: Old AACSB: Reflective Thinking 36) How are the nominal and real demands for money related to changes in the price level? Answer: When the price level rises the nominal demand for money increases by the same proportion. For example if the price level rises 5 percent, people demand 5 percent more nominal money so that they can continue to purchase the same quantity of goods and services. The nominal demand is measured in number of dollars. The real demand is the quantity of money measured in constant dollars. This amount does not change when the price level rises. The quantity of real money demanded is independent of the price level. Topic: The Influences on Money Holding Skill: Recognition Status: Old AACSB: Reflective Thinking 37) What is the opportunity cost of holding money? Answer: The opportunity cost of holding money is the nominal interest rate. Topic: Influences on Money Holding, The Interest Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 38) Why is the nominal interest rate the opportunity cost of holding money? Answer: The nominal interest rate is the opportunity cost of holding money because the interest is the income forgone by holding money. For instance, an individual with $1,000 can hold the funds either as money or as a financial asset with an interest rate of, say, 7 percent. If the funds are held as money, the interest paid is $0; if they are held as a financial asset, the interest paid is $70. Choosing to hold the funds as money therefore has an opportunity cost of the interest income forgone, which is $70 or 7 percent per dollar. So, the opportunity cost of each dollar held as money is 7 percent. Topic: Influences on Money Holding, The Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking

39) What effect does an increase in the interest rate have on the opportunity cost of holding money and on the demand for money curve? Answer: An increase in the interest rate increases the opportunity cost of holding money. There is a movement upward along the demand for money curve. Topic: Influences on Money Holding, The Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 40) How does an increase in real GDP affect the demand for money curve? Answer: An increase in real GDP increases the demand for money and shifts the demand curve rightward. Topic: Shifts in the Demand for Money Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 41) How would a widespread adoption of credit cards affect the demand for money and the demand for money curve? Answer: The widespread adoption of credit cards decreases the demand for money and shifts the demand for money curve leftward. Topic: Shifts in the Demand for Money Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 42) Describe how financial innovation has affected the demand for money. Answer: Financial innovation is the development by depository institutions of new financial products and changing technology within the banking industry. Examples include daily interest checking deposits, automatic transfers of money between deposits, ATM's and credit cards. In general these innovations have allowed the public to be more flexible in their choices between cash and less liquid assets as banks have delivered greater liquidity without forgoing interest earned. The result has been a large decrease in the demand for M1 and a smaller decrease in the demand for M2. Topic: Shifts in the Demand for Money Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking

43) Explain how the money market determines the equilibrium interest rate. Answer: The demand for money curve, MD, is downward sloping because as the interest rate decreases the quantity of money demanded increases. The supply of money curve, MS, is vertical at the quantity of real money. There exists only one interest rate for which the quantity of money demanded is equal to the quantity supplied. If the interest rate is above the equilibrium interest rate, so that there is an excess supply of money, people respond by buying bonds so that the interest rate falls. Likewise, if the interest rate is less than the equilibrium interest rate, so that there is an excess demand for money, people respond by selling bonds and the interest rate rises. Topic: Money Market Equilibrium Skill: Conceptual Status: Old AACSB: Communication 44) Suppose the quantity of money is greater than the quantity of money demanded. In the short run, what occurs to set the quantity of money equal to the quantity of money demanded? Answer: In the money market, the interaction between the supply of money and the demand for money determines the equilibrium interest rate. The quantity of money is greater than the quantity of the money demanded when the interest rate is above the equilibrium interest rate. When this occurs, in an effort to decrease the amount of money to be equal to the quantity they want to hold, people buy bonds with the excess money. As a result, the interest rate falls. The fall in the interest rate increases the quantity of money demanded. When the interest rate reaches its equilibrium, there is no longer an excess supply of money because at the equilibrium interest rate, the quantity of money supplied equals the quantity demanded. Topic: Money Market Equilibrium Skill: Conceptual Status: Old AACSB: Communication 45) In the short run, how is the interest rate determined? If the interest rate is less than the equilibrium interest rate, what occurs? Answer: The interest rate is determined in the money market by the interaction of the demand for money and the supply of money. If the interest rate is less than the equilibrium, there is an excess demand for money. In order to increase the quantity of money they hold, people sell bonds and other financial assets. As a result, the price of financial assets falls and the interest rate rises. People continue to sell assets and the interest rate continues to rise until it reaches its equilibrium. Topic: Money Market Equilibrium Skill: Conceptual Status: Old AACSB: Communication

46) "The velocity of circulation is the average speed with which money is loaned to businesses and households." Is the previous statement correct or incorrect? Answer: The statement is incorrect. The velocity of circulation is the average speed with which money is used to purchase goods and services. Topic: Velocity of Circulation Skill: Conceptual Status: Old AACSB: Reflective Thinking 47) According to the quantity theory of money, what is the effect of an increase in the quantity of money? Answer: According to the quantity theory, in the long run an increase in the quantity of money brings an equal percentage increase in the price level. Topic: Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 48) Discuss the quantity theory of money. Be sure to mention the velocity of circulation and the equation of exchange. Answer: The quantity theory of money is the proposition that in the long run an increase in the money supply leads to an equal percentage increase in the price level. The velocity of circulation is defined as the average number of times a dollar is used annually in exchange for goods and services. Because GDP is the total of all goods and services purchased, we can derive a formula for the velocity of circulation from GDP. If we use Y for real GDP and P as the price level, the PY = nominal GDP. Because the money supply is used to purchase GDP, velocity, V, equals (PY)/M, where M is the quantity of money. This formula can be rearranged to become the equation of exchange, which states that MV = PY. Given the assumptions that neither velocity nor potential GDP are influenced by the quantity of money, we can then solve for the price level as P = (MV/Y). Given the assumptions then, changes in the quantity of money lead to only changes in the price level. The quantity theory states that in the long run the percentage increase in the quantity of money equals the percentage increase in the price level. Topic: Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Communication

49) Define the quantity theory of money and show how it is related to the equation of exchange. Answer: The quantity theory of money is the proposition that in the long run, an increase in the quantity of money brings an equal percentage increase in the price level (other things remaining the same). The equation of exchange states that the quantity of money multiplied by velocity of circulation equals the price level times real GDP, or M × V = P × Y. Divide both sides of this formula by V to obtain P = (M × V) ÷ Y. This formula shows that when M increases, as long as V and Y do not change, P increases by the same percentage, which is the conclusion of the quantity theory of money. Topic: Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Communication 50) What is the equation of exchange? Suppose that real GDP and velocity are constant. In this case, what effect will an increase in the quantity of money have? Answer: The equation of exchange is that M × V = P × Y, where M is the quantity of money, V is the velocity of circulation, P is the price level, and Y is real GDP. If real GDP and velocity are constant, then an increase in the quantity of money will increase the price level. Topic: Equation of Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 51) How has growth in M2 minus the growth in real GDP compared to the inflation rate in the United States? Answer: Since 1960, M2 growth minus the growth in real GDP has been closely correlated with inflation rates. The period of rapid inflation, during the 1970s, occurred at the same time there was a high growth rate of M2 minus the growth rate of real GDP. This correlation is present throughout all the years. Topic: Evidence on the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 52) What is the relationship between money growth and inflation across countries? Does your answer support the quantity theory of money? Answer: The international evidence shows that the money growth rate and inflation rate are positively related. While the correlation is not precise, it is generally high. Topic: International Evidence on the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking

53) "If the currency drain increases, the monetary base decreases." Explain whether the previous statement is correct or incorrect. Answer: The statement is false. If the currency drain increases, the money multiplier (and the quantity of money) decreases but the monetary base itself is unaffected. Topic: Requires Mathematical Note Skill: Conceptual Status: Old AACSB: Reflective Thinking 54) What is a "currency drain?" How and why does it affect the money multiplier? Answer: An increase in currency held outside the banks is a currency drain. A currency drain decreases the size of the money multiplier. The money multiplier exists because when banks loan their excess reserves, the funds wind up in other banks as excess reserves, where they are loaned once again. As a result, an initial increase in reserves and the monetary base wind up increasing the quantity of money by a magnified amount. A currency drain means that when banks make loans, some of the funds are taken out as cash and not deposited back in another bank. Thus the other banks' excess reserves do not increase as much, so the amount that they can loan is decreased. The decrease in loans means that the ultimate increase in the quantity of money is less, so that the money multiplier is smaller. Topic: Requires Mathematical Note Skill: Conceptual Status: Old AACSB: Analytical Skills 55) How does a currency drain affect the money multiplier? Answer: If the currency drain is zero so that all money created is deposited in bank accounts, the money multiplier is equal to one divided by the desired reserve ratio. If the currency drain is positive, then some newly created money is held in cash and is not deposited in bank accounts. In this case, the money multiplier is smaller so that a change in the monetary base leads to a smaller change in the quantity of money. Topic: Requires Mathematical Note Skill: Conceptual Status: Old AACSB: Analytical Skills

56) Explain how a currency drain affects the size of the money multiplier. In your explanation, suppose that a bank gains $1 million in new deposits and reserves. Further suppose that the desired reserve ratio is 10 percent and the currency drain is 50 percent. Answer: A currency drain decreases the size of the money multiplier. The money multiplier reflects the fact that the banking system has a magnified effect on any change in reserves because the reserves are loaned by many banks. A currency drain decreases the amount of reserves that stay within the banking system. For example, take the bank that gains $1 million in new deposits and reserves. With the desired reserve ratio equal to 10 percent, start by assuming there is no currency drain. In this case, the desired reserve ratio of 10 percent means that the bank will keep $100,000 as reserves and so it will loan $900,000. The entire $900,000 will be deposited in a second bank. The entire $900,000 deposit adds to the initial $1 million deposit to create $1.9 million of new money. That bank will then keep $90,000 as reserves and loan $810,000. In this stage, the entire $810,000 will be deposited in a third bank and so the total new money (so far) created will become $2.71 million. Now, suppose that there is a currency drain, say of 50 percent. In this case, of the $900,000 first loan, only $600,000 is deposited in the second bank because $300,000 (50 percent of the $600,000 of newly created deposit money) is kept outside the banks as currency. Hence the second bank, which must keep $60,000 as reserves, can loan only $540,000. And of this loan, 50 percent or $180,000 is kept as currency and only $360,000 is deposited in the third bank. Therefore the amount that each bank can loan is reduced and so the ultimate effect on the quantity of money is decreased. Topic: Requires Mathematical Note Skill: Analytical Status: Old AACSB: Analytical Skills 57) If the currency drain increases, how can the Fed adjust the monetary base to offset the effect on the quantity of money? Answer: If the currency drain increases, the size of the money multiplier decreases, which decreases the quantity of money. To maintain the quantity of money at its initial amount by changing the monetary base, the Fed must increase the monetary base. Topic: Requires Mathematical Note Skill: Conceptual Status: Old AACSB: Analytical Skills 58) What is the money multiplier and what affects its size? Answer: The money multiplier is the amount by which a change in the monetary base is multiplied to determine the change in the quantity of money. The money multiplier is greater than 1.0. Its size is affected by the desired reserve ratio and the currency drain. The higher the desired reserve ratio and/or the larger the currency drain, the smaller the money multiplier. Topic: Requires Mathematical Note Skill: Conceptual Status: Old AACSB: Analytical Skills

59) Suppose the Fed buys government securities from a commercial bank. Why is there a multiplier effect on the quantity of money? Answer: When the Fed buys government securities from a bank, the payment to the bank is in the form of reserves. Hence the bank gains excess reserves. The bank can loan these excess reserves. When the loan is spent, the recipients deposit some or all of the funds in their banks. These banks gain deposits (which increase the quantity of money) as well as excess reserves. The "second round" banks then loan their excess reserves. And when these loans are spent, once again the recipients deposit some or all of the funds in their banks. These third-round banks thereby gain deposits (which further increases the quantity of money) as well as excess reserves. These reserves are loaned, spent, and then deposited in a fourth round of banks, which still further increases the quantity of money. Hence the process of loaning and depositing the proceeds increases the quantity of money by a multiple of the initial amount of the open market operation. Topic: Requires Mathematical Note Skill: Conceptual Status: Old AACSB: Analytical Skills 9 Numeric and Graphing Questions 1) If you have assets that include $50 in cash, a checking account with $135, a savings account with $500, and a jar of coins for laundry of $15.75, how much M1 do you have? Answer: You have $200.75 of M1, comprised of the $50 in cash, plus the $135 in the checking account, plus the $15.75 jar of coins. Topic: Money in the United States Today, M1 Skill: Analytical Status: Old AACSB: Analytical Skills 2) If you hold $25 in cash, have $150 in a checking account, and have $250 in a savings account, how much of M2 do you have? Answer: All of the assets mentioned are included in M2, so you have $25 + $150 + $250 = $425 of M2. Topic: Money in the United States Today, M2 Skill: Analytical Status: Old AACSB: Analytical Skills

3) The First National Bank of Townville has $125,000 in U.S. government securities, $200,000 in savings accounts, $300,000 in checking accounts, $50,000 in its reserve account at the Fed, $10,000 of currency in its vault, and loans of $250,000. What is the amount of its reserves? Answer: Reserves include the bank's deposit in its reserve account at the Fed and the currency in its vault. Therefore the First National Bank of Townville has $50,000 + $10,000 = $60,000 in reserves. Topic: Reserves Skill: Analytical Status: Old AACSB: Analytical Skills 4) The Second National Bank of Townville has $400,000 in checking deposits, $125,000 in savings deposits, $500,000 in loans, $20,000 in its reserve account at the Fed, and $5,000 of currency in its vault. What is the amount of its reserves? Answer: Reserves include the bank's deposit in its reserve account at the Fed and the currency in its vault. Therefore the Second National Bank of Townville has $20,000 + $5,000 = $25,000 in reserves. Topic: Reserves Skill: Analytical Status: Old AACSB: Analytical Skills 5) The Second National Bank of Townville has $400,000 in checking deposits, $125,000 in savings deposits, $500,000 in loans, $20,000 in its reserve account at the Fed, and $5,000 of currency in its vault. What is the amount of these assets and liabilities that is in M1? Answer: The only deposit that is in M1 is the checking deposits, so the amount that is in M1 is checking deposits of $400,000. Topic: Banks' Balance Sheet Skill: Analytical Status: Old AACSB: Analytical Skills

6) A bank has checking deposits of $400, saving deposits of $900, time deposits of $900, loans of $950, government securities of $900, outstanding credit card balances of $400, currency in its vault of $40, and deposits in its reserve account at the Fed of $40. a) What is the amount of this bank's deposits that are in M1? b) What is the amount of this bank's deposits that are in M2? c) What is the amount of this bank's reserves? Answer: a) The only deposit that is in M1 is the checking deposits, so the amount of this bank's deposits that are in M1 is $400. b) Deposits in M2 include checking deposits, saving deposits, and time deposits. Therefore the amount of this bank's deposits that are in M2 equals $400 + $900 + $900 = $2,200. c) Reserves are the sum of the currency in the bank's vault plus its deposits in its reserve account at the Fed. Therefore the bank's reserves are $40 + $40 = $80. Topic: Banks' Balance Sheet Skill: Analytical Status: Old AACSB: Analytical Skills 7) A bank has reserves of $50, deposits of $100, loans of $20, and government securities of $30. Assume the desired reserve ratio is 20 percent. a) How much does the bank have in excess reserves? b) What can the bank do with its excess reserves? Name two options. Answer: a) The excess reserves are $30, equal to the actual reserves of $50 minus the desired reserves of $20 (= 20 percent of $100 of deposits). b) The bank can use its excess reserves to make loans or buy more securities. Topic: Banks' Balance Sheet Skill: Analytical Status: Old AACSB: Analytical Skills 8) A bank reports reserves of $100,000, government securities of $50,000, loans of $750,000, and checkable deposits of $900,000. The desired reserve ratio is 10 percent. What is the amount of excess reserves for this bank? Show your work. Answer: Excess reserves equal the actual reserves minus the desired reserves. The actual reserves are $100,000. The bank wants to keep 10 percent of its checkable deposits as reserves, so the desired reserves are ($900,000) × 0.10 = $90,000. So excess reserves equal $100,000 $90,000 = $10,000. Topic: Banks' Balance Sheet Skill: Analytical Status: Old AACSB: Analytical Skills

9) The desired reserve ratio is 10 percent. Fly By Night Bank has deposits of $250,000 and reserves of $25,000. What is the amount of its excess reserves? Answer: The bank has no excess reserves. It wants to have ($250,000) × (0.10) = $25,000 as reserves. Its actual reserves equal $25,000. Therefore its excess reserves equal $25,000 $25,000, or $0. Topic: Reserves: Actual and Required Skill: Analytical Status: Old AACSB: Analytical Skills 10) If a bank receives an additional deposit of $50,000 and the desired reserve ratio is 20 percent, what is the amount of new loans the bank can make? Answer: The bank can make loans equal to its excess reserves. With the $50,000 deposit, the bank's desired reserves are ($50,000) × (0.20) = $10,000, so the bank has excess reserves of $40,000. Therefore the bank can make $40,000 of loans. Topic: Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills 11) A bank receives new deposits equal to $200,000 and the desired reserve ratio is 10 percent. What is the amount of new loans the bank can make? Answer: The bank can make new loans equal to the amount of its excess reserves. The bank's desired reserves equal ($200,000) × (0.10) = $20,000, leaving the bank with excess reserves of $180,000. As a result, the bank can make $180,000 in new loans. Topic: Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills 12) The Fed buys $50,000 of government securities from Commerce Bank. The desired reserve ratio is 25 percent. What is the change in Commerce Bank's total reserves and its excess reserves? Answer: When the Fed buys $50,000 of government securities from Commerce Bank, Commerce Bank's total reserves increase by $50,000. However, because Commerce Bank's deposits have not changed, none of these additional reserves are desired reserves, so Commerce Bank's excess reserves also increase by $50,000. Topic: Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills

13) The Federal Reserve reports that it has coins valued at $10 billion, bank reserves at the Fed of $15 billion, gold valued at $10 billion, Federal Reserves notes of $400 billion, and U.S. government securities of $300 billion. What is the size of the monetary base? Answer: The monetary base is the sum of coins, Federal Reserve notes, and banks' reserves at the Federal Reserve. Therefore the monetary base equals $10 billion + $400 billion + $15 billion = $425 billion. Topic: Monetary Base Skill: Analytical Status: Old AACSB: Analytical Skills Quantity of Interest rate money demanded (percent per year) (trillions of 2005 dollars) 8 0.7 6 0.9 4 1.1 2 1.3 14) The above table has the demand for money schedule. a) If the Fed supplies $1.1 trillion dollars, what is the equilibrium interest rate? b) Discuss how equilibrium is restored if the interest rate is greater than the equilibrium rate found in part (a). Answer: a) The equilibrium interest rate is 4 percent. b) If the interest rate is greater than 4 percent, there is an excess supply of money. In this case, to be rid of their "extra" money, people buy bonds. The price of bonds rises and so the interest rate falls until it reaches its equilibrium value, 4 percent. At this interest rate, there is no longer an excess supply of money because the quantity demanded equals the quantity supplied. Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

Quantity of Interest rate money demanded (percent per year) (trillions of 2005 dollars) 3 2.0 4 1.5 5 1.0 6 0.5 15) The above table has the demand for money schedule. a) If the Fed sets the quantity of money equal to $1.0 trillion, what is the equilibrium interest rate? b) If the Fed wants the interest rate to be 4 percent, what must it do? Answer: a) If the Fed sets the quantity of money equal to $1.0 trillion, the equilibrium interest rate is 5 percent. b) If the Fed wants the interest rate to be 4 percent, it must set the quantity of money equal to $1.5 trillion. Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

16) The above figure has the demand for money curve. Suppose the Fed initially sets the quantity of money equal to $0.6 trillion. Draw the supply of money curve in the figure. What is the equilibrium interest rate? Now suppose the Fed increases the quantity of money to $0.9 trillion. Draw the new supply curve. What is the new equilibrium interest rate? Answer:

The initial supply of money curve is MS0 and the equilibrium interest rate is 6 percent. When the Fed increases the quantity of money, the supply of money curve shifts to MS1 and the equilibrium interest rate falls to 4 percent. Topic: Money Market Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

17) The quantity of money is $1 billion, the price level is 1.10, and real GDP is $10 billion. What is the velocity of circulation? Answer: The velocity of circulation equals 11. Topic: Equation of Exchange Skill: Analytical Status: Old AACSB: Analytical Skills 10 True or False 1) The most direct way in which money eliminates the need for a double coincidence of wants is through its use as a medium of exchange. Answer: TRUE Topic: Medium of Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 2) Barter eliminates the double coincidence of wants. Answer: FALSE Topic: Medium of Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 3) When Patty uses money to buy her lunch, she is showing the use of money as a "store of value." Answer: FALSE Topic: Store of Value Skill: Conceptual Status: Old AACSB: Reflective Thinking 4) Credit cards are not part of the nation's money supply. Answer: TRUE Topic: Money in the United States Today Skill: Recognition Status: Old AACSB: Reflective Thinking 5) The money supply, as measured by M1, consists almost entirely of currency. Answer: FALSE Topic: Money in the United States Today, M1 Skill: Recognition Status: Old AACSB: Reflective Thinking 155 Copyright © 2014 Pearson Education, Inc.

6) Traveler's checks are included in M1 but not in M2. Answer: FALSE Topic: Money in the United States Today, M1 and M2 Skill: Recognition Status: Old AACSB: Reflective Thinking 7) M1 is usually larger than M2. Answer: FALSE Topic: Money in the United States Today, M1 and M2 Skill: Conceptual Status: Old AACSB: Reflective Thinking 8) A depository institution receives deposits from lenders and makes loans to borrowers. Answer: TRUE Topic: Depository Institutions Skill: Recognition Status: Old AACSB: Reflective Thinking 9) A depository institution creates liquidity and pools risk. Answer: TRUE Topic: Economic Functions of Depository Institutions Skill: Conceptual Status: Old AACSB: Reflective Thinking 10) The Federal Reserve is divided into 7 districts. Answer: FALSE Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 11) The main policy-making body of the Federal Reserve System is the Federal Open Market committee. Answer: TRUE Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking

12) The FOMC is the agency that insures deposits up to $250,000. Answer: FALSE Topic: The Structure of the Federal Reserve System Skill: Recognition Status: Old AACSB: Reflective Thinking 13) The most powerful individual in the Federal Reserve is the Chairman of the Board of Governors. Answer: TRUE Topic: The Fed's Power Center Skill: Recognition Status: Old AACSB: Reflective Thinking 14) If the Fed sells securities to commercial banks, there is no money multiplier effect. Answer: FALSE Topic: The Money Multiplier Skill: Conceptual Status: Old AACSB: Reflective Thinking 15) The desired reserve ratio helps determine the amount of money banks can create. Answer: TRUE Topic: The Money Multiplier Skill: Recognition Status: Old AACSB: Reflective Thinking 16) If actual reserves are 100 when deposits are 400, then definitely the desired reserve ratio is 0.25. Answer: FALSE Topic: The Money Multiplier Skill: Recognition Status: Old AACSB: Reflective Thinking 17) The term "currency drain" refers to an increase in currency held outside banks. Answer: TRUE Topic: Currency Drain Skill: Recognition Status: Old AACSB: Reflective Thinking

18) A currency drain occurs because people want to hold some of their money as currency rather than as deposits. Answer: TRUE Topic: Currency Drain Skill: Recognition Status: Old AACSB: Reflective Thinking 19) A change in the price level changes the amount of nominal money people demand. Answer: TRUE Topic: The Influences on Money Holding, The Price Level Skill: Conceptual Status: Old AACSB: Reflective Thinking 20) The opportunity cost of holding money is the nominal interest rate. Answer: TRUE Topic: Influences on Money Holding, The Interest Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 21) Suppose that nominal interest rates double. As a result, the quantity of money doubles as well. Answer: FALSE Topic: Influences on Money Holding, The Interest Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 22) The increased use of automatic teller machines has decreased the demand for money. Answer: TRUE Topic: The Influences on Money Holding, Financial Innovation Skill: Conceptual Status: Old AACSB: Reflective Thinking 23) If there is an excess quantity of money, people will buy bonds. Answer: TRUE Topic: Money Market Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking

24) According to the quantity theory of money, in the long run, an increase in the quantity of money does not change real GDP but does raise the price level. Answer: TRUE Topic: The Long-Run Effects of a Change in the Quantity of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 25) According to the quantity theory of money, in the long run an increase in the quantity of money creates an increase in the price level but does not increase real GDP. Answer: TRUE Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 26) The quantity theory of money asserts that an increase in the quantity of money leads to an equal percentage increase in the price level in the long run. Answer: TRUE Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 27) Assuming velocity is constant, a 10 percent increase in the quantity of money leads to a 10 percent increase in nominal GDP in both the short run and the long run. Answer: TRUE Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 28) According to the quantity theory of money, inflation causes an increase in the money supply. Answer: FALSE Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 29) International data supports the quantity theory of money conclusion that high money growth rates are associated with inflation. Answer: TRUE Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 159 Copyright © 2014 Pearson Education, Inc.

30) In comparing growth rates of money growth and inflation across countries, the long-run proposition of the quantity theory of money is supported. Answer: TRUE Topic: International Evidence on the Quantity Theory of Money Skill: Conceptual Status: Old AACSB: Reflective Thinking

11 Extended Problems 1) The commercial banks in Fundland have Reserves $500 million Loans $3,500 million Deposits $4,000 million Total assets $5,000 million The banks hold no excess reserves. a) Calculate the banks' desired reserve ratio. b) An immigrant arrives in Fundland with $10 million, which she deposits in a bank. How much does the immigrant's bank lend initially? Answer: a) With no excess reserves, the desired reserve ratio is the fraction of banks' total deposits that are held in reserves. So in Fundland, the banks' desired reserve ratio is or 12.5 percent. b) With a desired reserve ratio of 12.5 percent, the bank keeps on reserve. It then lends the rest, so it lends $10 million - $1.25 million, which is $8.75 million. Topic: Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills 2) The commercial banks in Lendland have Reserves $400 million Loans $3,600 million Deposits $4,000 million Total assets $4,600 million The banks hold no excess reserves. a) Calculate the banks' reserve ratio. b) An immigrant arrives in Lendland with $5 million, which he deposits in a bank. How much does the immigrant's bank lend initially? Answer: a) With no excess reserves, the desired reserve ratio is the fraction of banks' total deposits that are held in reserves. So in Lendland, the banks' desired reserve ratio is or 10 percent. b) With a desired reserve ratio of 10 percent, the bank keeps on reserve. It then lends the rest, so it lends $5 million - $0.5 million, which is $4.5 million. Topic: Reserves and Loans Skill: Analytical Status: Old AACSB: Analytical Skills

3) In the economy of Briskland, the commercial banks have deposits of $500 billion. Their reserves are $50 billion, 80 percent of which is in deposits with the Central Bank. There is $20 billion in Central Bank notes outside the banks, and there are no coins. a) What is the monetary base? b) If all the deposits are money, what is the total quantity of money? c) What is the banks' reserve ratio? d) What is the currency drain as a percentage of the quantity of deposits? Answer: a) The monetary base is the sum of Central Bank notes, $20 billion, and deposits at the Central Bank. The deposits at the central bank are 80 percent of banks' reserves, so deposits at the central bank are which is $40 billion. Then the monetary base is b) The quantity of money is Central Bank notes plus deposits, so the quantity of money is c) The banks' reserve ratio is the ratio of banks' reserve to deposits, which is or 10 percent. d) The currency drain is Central Bank notes held outside the banks. In Briskland, the currency drain is $20 billion, so as a percentage of the quantity of money, the currency drain is or 4.0 percent. Topic: Monetary Base Skill: Analytical Status: Old AACSB: Analytical Skills

4) Friedmania is a country in which the quantity theory of money operates. The country has a constant population, capital stock, and technology so real GDP does not change. In 2010, real GDP was $500 million, the price level, measured by the GDP deflator, was 150 and the velocity of circulation of money was 10. (Because the price level is measured by the GDP deflator, it must be divided by 100 before it is used in the equation of exchange.) In 2011, the quantity of money increased by 20 percent. a) What was the quantity of money in 2010? b) What was the velocity of circulation in 2011? c) What was the price level in 2010? Answer: a) The equation of exchange states that the quantity of money, M, multiplied by the velocity of circulation, V, equals real GDP, Y, multiplied by the price level, P. In terms of a formula, the equation of exchange is that Using this formula, gives the quantity of money as $75 billion. b) The quantity theory of money asserts that the velocity of circulation is not influenced by the quantity of money. So the velocity of circulation remains constant at 10. c) From the equation of exchange, the price level is Because the quantity of money increased by 20 percent, the quantity of money in 2011 is So Another way to calculate the price level in 2011 is to notice that according to the quantity theory, a change in the quantity of money has no effect on velocity and real GDP. So if the quantity of money increases by 20 percent, to balance the equation of exchange, the price level must also increase by 20 percent. So from this approach, the price level in Friedmania is which is also equal to 180. Topic: Quantity Theory of Money Skill: Analytical Status: Old AACSB: Analytical Skills

5) Fisheria is a country in which the quantity theory of money operates. The country has a constant population, capital stock, and technology. In 2010, real GDP was $300 million, the quantity of money was $60, and the velocity of circulation of money was 10. In 2011, the price level rose by 20 percent. a) What was the price level in 2010? (The price level is measured by the GDP deflator, which is 100 in 2000. So the price level from the equation of exchange needs to be multiplied by 100 to convert it to the GDP deflator.) b) What was real GDP in 2011? c) What was the velocity of circulation in 2011? d) What was the quantity of money in 2011? Answer: a) The equation of exchange states that the quantity of money, M, multiplied by the velocity of circulation, V, equals real GDP, Y, multiplied by the price level, P. In terms of a formula, the equation of exchange is that This formula shows that Using this result, the price level is which must be multiplied by 100 so that the price level is 200. b) Real GDP does not change because the country has a constant population, capital stock, and technology, and, according to the quantity theory of money, real GDP is not influenced by changes in the quantity of money. So real GDP in 2011 is $300 million. c) The quantity theory of money asserts that the velocity of circulation is not influenced by the quantity of money. So the velocity of circulation remains constant at 10. d) From the equation of exchange, the quantity of money is Because the price level in 2011 increased by 20 percent, the price level in 2011 is So using the equation of exchange formula, Another way to calculate the quantity of money in 2011 is to notice that according to the quantity theory, a change in the quantity of money has no effect on velocity and real GDP. So if the price level rises by 20 percent, to balance the equation of exchange, the quantity of money must also increase by 20 percent. So from this approach, in 2011 the quantity of money in Fisheria is Topic: Quantity Theory of Money Skill: Analytical Status: Old AACSB: Analytical Skills

6) In the economy of Brightland, the commercial banks have deposits of $600 billion. Their reserves are $60 billion. All reserves are in deposits with the Central Bank and the commercial banks hold no excess reserves. There is $120 billion in Central Bank notes outside the banks, and there are no coins. a) What is the economy's monetary base? b) What is the quantity of money in the economy? c) Calculate the money multiplier. d) Suppose the Central Bank of Brightland undertakes an open market purchase of securities of so that the monetary base increases by $5 billion. By how much will the quantity of money change? Answer: a) The monetary base is the sum of Central Bank notes and deposits at the Central Bank, so the monetary base is b) The quantity of money equals notes plus deposits, which is c) The money multiplier is where c is the ratio of currency to deposits and r is the desired reserve ratio. In Brightland, the ratio of currency to deposits is Because there are no excess reserves, the desired reserve ratio is So the money multiplier is d) The quantity of money in the economy increases by the change in the monetary base multiplied by the money multiplier, so the quantity of money increases by Topic: Requires Mathematical Note Skill: Analytical Status: Old AACSB: Analytical Skills

12 Mathematical Note: The Money Multiplier 1) ________ in the desired reserve ratio will ________ the money multiplier. A) An increase; have no effect on B) An increase; decrease C) A decrease; decrease D) A decrease; will have no effect on Answer: B Topic: The Money Multiplier Skill: Conceptual Status: Old AACSB: Reflective Thinking 2) ________ in the currency drain ________ the money multiplier. A) A decrease; does not change B) An increase; increases C) A decrease; decreases D) An increase; decreases Answer: D Topic: The Money Multiplier Skill: Conceptual Status: Old AACSB: Reflective Thinking 3) If the desired reserve ratio rises, the money multiplier A) decreases. B) increases. C) stays the same. D) probably changes but more information is needed to determine if it increases or decreases. Answer: A Topic: The Money Multiplier Skill: Conceptual Status: Old AACSB: Reflective Thinking 4) The smaller the currency drain, the A) smaller the increase in the quantity of money from an increase in reserves. B) more likely it is that the banking system will hold a larger proportion of excess reserves. C) the smaller the effect of a change in the discount rate. D) larger the increase in the quantity of money from an increase in reserves. Answer: D Topic: The Money Multiplier Skill: Conceptual Status: Old AACSB: Reflective Thinking

5) The banking system has just experienced an increase in deposits of $50,000. The currency drain ratio is 20 percent and the desired reserve ratio is 10 percent. What does the money multiplier equal? A) 4.00 B) 3.33 C) 0.25 D) 10.00 Answer: A Topic: The Money Multiplier Skill: Analytical Status: Old AACSB: Analytical Skills 6) In Zealand, banks' desired reserve ratio is 20 percent and there is no currency drain. The money multiplier equals ________. A) 0.50 B) 0.20 C) 20.0 D) 5.0 Answer: D Topic: The Money Multiplier Skill: Analytical Status: Old AACSB: Analytical Skills 7) In Zealand, banks' desired reserve ratio is 20 percent and the currency drain also equals 20 percent. The money multiplier equals ________. A) 2.18 B) 3.33 C) 5.0 D) 3.0 Answer: D Topic: The Money Multiplier Skill: Analytical Status: Old AACSB: Analytical Skills

Economics, 11e, Global Edition (Parkin) Chapter 26 The Exchange Rate and the Balance of Payments 1 The Foreign Exchange Market 1) The term "foreign currency" refers to foreign I. coins II. notes III. bank deposits A) II only. B) II and III only. C) I and II only. D) I, II, and III. Answer: D Topic: Financing International Trade Skill: Recognition Status: Old AACSB: Reflective Thinking 2) If portable disk players made in China are imported into the United States, the Chinese manufacturer is paid with A) dollars. B) yuan, the Chinese currency. C) international monetary credits. D) euros, or any other third currency. Answer: B Topic: Financing International Trade Skill: Conceptual Status: Old AACSB: Reflective Thinking 3) If the United States sells beef to Japan, the U.S. beef producer is paid with A) dollars. B) yen, the Japanese currency. C) international monetary credits. D) euros, or any other third currency. Answer: A Topic: Financing International Trade Skill: Conceptual Status: Old AACSB: Reflective Thinking

4) When Safeway supermarkets in the United States buys strawberries from Mexico, A) it uses dollars to pay Mexican farmers. B) it uses pesos to pay Mexican farmers. C) it may use any currency it chooses. D) the transaction shows up in the U.S. capital account. Answer: B Topic: Financing International Trade Skill: Conceptual Status: Old AACSB: Reflective Thinking 5) Americans demand Japanese yen in order to A) buy Japanese products. B) supply American goods in Japanese markets. C) allow the Japanese to buy U.S. products. D) balance the current account. Answer: A Topic: Financing International Trade Skill: Conceptual Status: Old AACSB: Reflective Thinking 6) Which of the following statements is correct? I. The exchange rate is a price. II. The exchange rate is different from other prices because it is NOT determined by supply and demand. A) only I B) only II C) I and II D) neither I nor II Answer: A Topic: The Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 7) The exchange rate is the A) opportunity cost of pursuing a nation's comparative advantage. B) price of one country's currency expressed in terms of another country's currency. C) ratio between imports and exports. D) interest rate that is charged on risk-free international capital flow. Answer: B Topic: The Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 2 Copyright © 2014 Pearson Education, Inc.

8) The exchange rate is the price at which the ________ of one country exchanges for the ________ of another country. A) currency; goods B) goods; goods C) currency; currency D) currency; financial instruments Answer: C Topic: The Exchange Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 9) A decrease in the value of a currency in terms of other currencies is known as A) an appreciation. B) a depreciation. C) a par value. D) a gold point. Answer: B Topic: The Exchange Rate, Currency Depreciation Skill: Recognition Status: Old AACSB: Reflective Thinking 10) When the value of one currency falls relative to another currency, the exchange rate for the first currency has A) depreciated. B) appreciated. C) demanded. D) revalued. Answer: A Topic: The Exchange Rate, Currency Depreciation Skill: Recognition Status: Old AACSB: Reflective Thinking 11) By definition, currency depreciation occurs when the value of A) all currencies fall relative to gold. B) one currency falls relative to another currency. C) one currency rises relative to another currency. D) gold falls relative to the value of currencies. Answer: B Topic: The Exchange Rate, Currency Depreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking

12) Suppose that the exchange rate between the dollar and the peso changed from 6 pesos per dollar to 8 pesos per dollar. This change means that the A) peso appreciated. B) dollar depreciated. C) peso depreciated. D) Both answers A and B are correct. Answer: C Topic: The Exchange Rate, Currency Depreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 13) If the dollar's value changes from 120 yen per dollar to 110 yen per dollar, the dollar has A) depreciated. B) appreciated. C) demanded. D) devalued. Answer: A Topic: The Exchange Rate, Currency Depreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 14) Which of the following examples definitely illustrates a depreciation of the U.S. dollar? A) The dollar exchanges for 120 euros and then exchanges for 100 euros. B) The dollar exchanges for 100 euros and then exchanges for 120 yen. C) The dollar exchanges for 1 pound and then exchanges for 1.2 pounds. D) The dollar exchanges for 250 yen and then exchanges for 275 euros. Answer: A Topic: The Exchange Rate, Currency Depreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 15) When the U.S. dollar depreciates against the yen, the yen becomes ________ expensive and the U.S. exchange rate ________. A) more; rises B) less; rises C) more; falls D) less; falls Answer: C Topic: The Exchange Rate, Currency Depreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking

16) When the U.S. dollar depreciates against the yen, the yen ________ and the exchange rate ________. A) appreciates; rises B) depreciates; rises C) appreciates; falls D) depreciates; falls Answer: C Topic: The Exchange Rate, Currency Depreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 17) Last year the exchange rate between U.S. dollars and Mexican pesos was 10 pesos per dollar. Today is it 11 pesos per dollar. Here, the dollar ________ against the peso, and the peso ________ against the dollar A) appreciated; depreciated B) depreciated; appreciated C) appreciated; appreciated D) depreciated; depreciated Answer: A Topic: The Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 18) Suppose the exchange rate of the U.S. dollar was 1.50 British pounds = $1.00 (U.S.) on Wednesday, and on the following Monday the exchange rate was $.75 (U.S.) = 1.00 British pound. Which of the following best describes what happened between Wednesday and the following Monday? A) The U.S. dollar appreciated against the British pound. B) The British pound appreciated against the U.S. dollar. C) The U.S. dollar depreciated against the British pound. D) Both answers B and C are correct. Answer: D Topic: The Exchange Rate, Currency Depreciation Skill: Conceptual Status: Revised AACSB: Reflective Thinking

19) An increase in the value of a domestic currency in terms of other currencies is known as A) an appreciation. B) a depreciation. C) a flexible exchange rate. D) a term not given in the above answers. Answer: A Topic: The Exchange Rate, Currency Appreciation Skill: Recognition Status: Old AACSB: Reflective Thinking 20) Which of the following examples definitely illustrates an appreciation of the U.S. dollar? A) The dollar exchanges for 120 euros and then exchanges for 100 euros. B) The dollar exchanges for 100 yen and then exchanges for 125 euros. C) The dollar exchanges for 1 pound and then exchanges for 1.2 pounds. D) none of the above Answer: C Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 21) Suppose the exchange rate of the U.S. dollar was 1.00 euro = $0.50 on Thursday, and on Friday the exchange rate was $1.00 = 2.10 euros. Which of the following best explains what has happened between Thursday and Friday? A) The U.S. dollar appreciated against the euro. B) The euro appreciated against the U.S. dollar. C) The U.S. dollar depreciated against the euro. D) Both answers B and C are correct. Answer: A Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 22) If the pound-dollar exchange rate changes from £0.60 per dollar to £0.65 per dollar, then the pound has ________ against the dollar and the dollar has ________ against the pound. A) depreciated; depreciated B) appreciated; depreciated C) appreciated; appreciated D) depreciated; appreciated Answer: D Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 6 Copyright © 2014 Pearson Education, Inc.

23) If 100 Japanese yen buy more U.S. dollars today than yesterday, the dollar has ________ and the yen has ________. A) depreciated; appreciated B) appreciated; depreciated C) depreciated; depreciated D) appreciated; appreciated Answer: A Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 24) If the value of a dollar rises in terms of yen, the dollar has ________ and the yen has ________. A) appreciated; appreciated B) appreciated; depreciated C) depreciated; appreciated D) depreciated; depreciated Answer: B Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 25) If the Japanese yen was 123 per dollar and now is 114 yen per dollar, it can be said that A) the yen appreciated against the dollar. B) the yen has depreciated against the dollar. C) the dollar has appreciated against the yen. D) None of the above answers is correct. Answer: A Topic: The Exchange Rate, Currency Appreciation Skill: Analytical Status: Old AACSB: Reflective Thinking 26) If the exchange rate falls from 120 yen per dollar to 100 yen per dollar, the dollar has ________ and the yen has ________. A) depreciated; appreciated B) appreciated; depreciated C) depreciated; depreciated D) appreciated; appreciated Answer: A Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 7 Copyright © 2014 Pearson Education, Inc.

27) Suppose $1 buys 1.20 euros in January and 1.10 euros in the following December. As a result, A) the dollar has appreciated. B) the euro has appreciated. C) the euro has depreciated. D) U.S. exports have increased. Answer: B Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual Status: Revised AACSB: Reflective Thinking

Currency Euro Japanese yen Canadian dollar

2007 exchange rate (per U.S. dollar) 0.9954

2008 exchange rate (per U.S. dollar) 1.0747

102.20

114.90

1.44

1.50

28) The table above shows the exchange rates between various currencies and the U.S. dollar. Between 2007 and 2008, the U.S. dollar ________ against the euro and ________ against the Japanese yen. A) depreciated; depreciated B) appreciated; appreciated C) appreciated; depreciated D) depreciated; appreciated Answer: B Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 29) The table above shows the exchange rates between various currencies and the U.S. dollar. Between 2007 and 2008, the Japanese yen ________ against the U.S dollar and the euro ________ against the U.S. dollar. A) appreciated; appreciated B) depreciated; appreciated C) depreciated; depreciated D) appreciated; depreciated Answer: C Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 8 Copyright © 2014 Pearson Education, Inc.

30) When people who are holding the money of some other country want to exchange it for U.S. dollars, they ________ U.S. dollars and ________ that other country's money. A) demand; supply B) supply; supply C) supply; demand D) demand; demand Answer: A Topic: The Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 31) Which of the following creates a demand for U.S. dollars? A) Toyota, a Japanese firm, purchasing land in Texas B) a U.S. restaurant purchasing Mexican tomatoes C) a U.S. tourist catching a show in London D) a Japanese tourist catching a show in London Answer: A Topic: The Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 32) When the exchange rate falls, in the foreign exchange market the A) quantity demanded of the currency increases. B) demand for the currency increases. C) quantity demanded of the currency decreases. D) demand for the currency decreases. Answer: A Topic: Law of Demand for Foreign Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 33) The law of demand in the foreign exchange market refers to the relationship between the A) exchange rate and the quantity of U.S. dollars demanded B) interest rate and the exchange rate C) interest rate and the quantity of U.S. dollars demanded D) U.S. price level and the exchange rate Answer: A Topic: The Law of Demand for Foreign Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking

34) The law of demand for dollars in the foreign exchange market means that the A) lower the exchange rate, the greater the quantity of dollars demanded. B) higher the exchange rate, the smaller the quantity of dollars demanded. C) lower the exchange rate, the smaller the quantity of U.S. exports demanded. D) Both answers A and B are correct. Answer: D Topic: The Law of Demand for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 35) With everything else the same, in the foreign exchange market the A) larger the value of U.S. exports, the greater is the quantity of dollars demanded. B) lower the exchange rate, the smaller the amount of U.S. exports. C) the lower the exchange rate, the smaller is the expected profit from buying dollars. D) the higher the exchange rate, the cheaper are U.S.-produced goods and services. Answer: A Topic: Law of Demand for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 36) In the foreign exchange market, a change in which of the following will result in a movement along the demand curve for U.S. dollars? A) the exchange rate B) the U.S. interest rate C) the interest rate in the foreign country D) the expected future exchange rate Answer: A Topic: Law of Demand for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 37) The dollar is regarded as the "safe haven" currency; investors flock to it when they are worried about the outlook for the global economy. Fears were at their greatest in late 2008 and early 2009 after the collapse of Lehman Brothers, an investment bank, in September 2008. As investors flocked to the dollar, A) the demand for dollars increased and the exchange rate increased. B) the demand for dollars decreased and the exchange rate decreased. C) the supply of dollars increased and the exchange rate decreased. D) the supply of dollars decreased and the exchange rate increased. Answer: A Topic: Law of Demand for Foreign Exchange Skill: Conceptual Status: New AACSB: Reflective Thinking 10 Copyright © 2014 Pearson Education, Inc.

38) The dollar is regarded as the "safe haven" currency; investors flock to it when they are worried about the outlook for the global economy. Fears were at their greatest in late 2008 and early 2009 after the collapse of Lehman Brothers, an investment bank, in September 2008. If investors flocked to the dollar, A) the exchange rate would increase. B) the exchange rate would decrease. C) the exchange rate would not change. D) the exchange rate could increase or decrease. Answer: A Topic: Law of Demand for Foreign Exchange Skill: Conceptual Status: New AACSB: Reflective Thinking 39) The demand curve for U.S. dollars slopes downward because as the dollar ________ U.S. goods become ________ expensive to foreign residents, so they purchase fewer U.S. goods, and the quantity of dollars demanded decreases. A) appreciates; more B) appreciates; less C) depreciates; more D) depreciates; less Answer: A Topic: The Law of Demand for Foreign Exchange, Exports Skill: Conceptual Status: Old AACSB: Reflective Thinking 40) When the U.S. exchange rate falls, U.S. goods become ________ to foreign residents and U.S. exports ________. A) less expensive; increase B) less expensive; decrease C) more expensive; decrease D) more expensive; increase Answer: A Topic: The Law of Demand for Foreign Exchange, Exports Skill: Conceptual Status: Old AACSB: Reflective Thinking

41) As the exchange rate ________, the ________ is the value of U.S. ________. A) falls; greater; imports B) falls; greater; exports C) rises; greater; exports D) rises; smaller; imports Answer: B Topic: The Law of Demand for Foreign Exchange, Exports Skill: Conceptual Status: Old AACSB: Reflective Thinking 42) As the value of U.S. exports ________, the quantity of ________ demanded increases. A) increases; foreign currencies B) increases; dollars C) decreases; dollars D) None of the above is correct because the value of U.S. exports has nothing to do with the quantity of dollars or foreign currency demanded. Answer: B Topic: Law of Demand for Foreign Exchange, Exports Skill: Conceptual Status: Old AACSB: Reflective Thinking 43) The quantity of dollars demanded by foreign nations increases as A) U.S. residents purchase more foreign goods. B) foreigners purchase more U.S. goods. C) more U.S. residents travel abroad. D) U.S. exports fall. Answer: B Topic: Law of Demand for Foreign Exchange, Exports Skill: Conceptual Status: Old AACSB: Reflective Thinking 44) Exports of U.S. goods creates a ________ U.S. dollars and creates a ________ foreign currencies. A) demand for; demand for. B) supply of; supply of C) demand for; supply of D) supply of; demand for Answer: C Topic: Law of Demand for Foreign Exchange, Exports Skill: Conceptual Status: Old AACSB: Reflective Thinking

45) Suppose China Airlines wants to purchase a French Airbus. The price of the Airbus is 95 million Euro. If the exchange rate is 1 euro per 10 yuan, the price of this airplane to China Airlines is A) 950 million yuan. B) 85.5 million yuan. C) 10 million yuan. D) 9.5 million yuan. Answer: A Topic: Law of Demand for Foreign Exchange, Exports Skill: Analytical Status: Old AACSB: Analytical Skills 46) Suppose China Airlines wants to purchase a French Airbus. The price of the Airbus is 95 million Euro. If the exchange rate is 1 euro per 9 yuan, the price of this airplane to China Airlines is A) 855 million yuan. B) 85.5 million yuan. C) 83.6 million yuan. D) 10.6 million yuan. Answer: A Topic: Law of Demand for Foreign Exchange, Exports Skill: Analytical Status: Old AACSB: Analytical Skills 47) If nothing else changes, the ________ the current exchange rate, the ________ is the expected profit from holding dollars, all other things remaining the same. A) higher; larger B) lower; smaller C) lower; larger D) The premise of the question is wrong because the exchange rate has nothing to do with expected profit from holding dollars. Answer: C Topic: The Law of Demand for Foreign Exchange, Expected Profit Skill: Conceptual Status: Old AACSB: Reflective Thinking

48) A factor helping determine demand for the dollar in the foreign exchange market is A) the expected future exchange rate. B) the expected future interest rate. C) the amount of U.S. imports. D) the supply of U.S. dollars. Answer: A Topic: Law of Demand for Foreign Exchange, Expected Profit Skill: Conceptual Status: Old AACSB: Reflective Thinking 49) If the exchange rate falls, then the expected profit from holding the currency A) does not change. B) increases. C) decreases. D) can either increase or decrease. Answer: B Topic: Law of Demand for Foreign Exchange, Expected Profit Skill: Conceptual Status: Old AACSB: Reflective Thinking 50) As the expected profit from holding dollars ________, the quantity of ________. A) increases; dollars demanded increases B) increases; dollars demanded decreases C) decrease; foreign currency demanded decreases D) None of the above answers is correct. Answer: A Topic: Law of Demand for Foreign Exchange, Expected Profit Skill: Conceptual Status: Old AACSB: Reflective Thinking 51) The lower the exchange rate today, ceteris paribus, the A) greater is the expected profit from buying U.S. dollars today and holding them. B) smaller is the expected profit from buying U.S. dollars today and holding them. C) greater is the expected profit from buying foreign currency today and holding it. D) smaller the quantity of U.S. dollars demanded in the foreign exchange market today. Answer: A Topic: The Law of Demand for Foreign Exchange, Expected Profit Skill: Conceptual Status: Old AACSB: Reflective Thinking

52) The higher the exchange rate today, the A) smaller is the expected profit from buying U.S. dollars today and holding them. B) greater is the expected profit from buying U.S. dollars today and holding them. C) smaller is the expected profit from buying foreign currency today and holding it. D) greater the quantity of U.S. dollars demanded in the foreign exchange market today. Answer: A Topic: The Law of Demand for Foreign Exchange, Expected Profit Skill: Conceptual Status: Old AACSB: Reflective Thinking 53) When the U.S. exchange rate rises and the expected future exchange rate does not change, the expected profit from buying U.S. dollars today A) also rises B) falls C) does not change D) may rise, fall, or stay the same Answer: B Topic: The Law of Demand for Foreign Exchange, Expected Profit Skill: Conceptual Status: Old AACSB: Reflective Thinking

Investor Investor A Investor B Investor C

Expected future value of a dollar (francs per dollar) 120 100 85

54) Using the table above, if the current market value of the dollar is 125 francs per dollar, A) investor A expects dollar appreciation, but B and C expect depreciation. B) investor A expects dollar depreciation, but B and C expect appreciation. C) all three investors expect the dollar to appreciate. D) all three investors expect the dollar to depreciate. Answer: D Topic: The Law of Demand for Foreign Exchange, Expected Profit Skill: Analytical Status: Old AACSB: Analytical Skills

55) Using the table above, if the current market value of the dollar is 125 francs, A) investor A holds dollars, but B and C hold francs. B) investor A holds francs, but B and C hold dollars. C) all three investors hold francs. D) all three investors hold dollars. Answer: C Topic: The Law of Demand for Foreign Exchange, Expected Profit Skill: Analytical Status: Old AACSB: Analytical Skills 56) Using the table above, if the current market value of the dollar is 70 francs, A) investor A expects dollar appreciation, but B and C expect depreciation. B) investor A expects dollar depreciation, but B and C expect appreciation. C) all three investors expect the dollar to appreciate. D) all three investors expect the dollar to depreciate. Answer: C Topic: The Law of Demand for Foreign Exchange, Expected Profit Skill: Analytical Status: Old AACSB: Analytical Skills 57) Using the table above, if the current market value of the dollar is 70 francs, A) investor A holds dollars, but B and C hold francs. B) investor A holds francs, but B and C hold dollars. C) all three investors hold francs. D) all three investors hold dollars. Answer: D Topic: The Law of Demand for Foreign Exchange, Expected Profit Skill: Analytical Status: Old AACSB: Analytical Skills 58) Using the table above, if the current market value of the dollar is 90 francs, A) investor A expects dollar appreciation, but B and C expect depreciation. B) investor C expects dollar depreciation, but A and B expect appreciation. C) all three investors expect the dollar to appreciate. D) all three investors expect the dollar to depreciate. Answer: B Topic: The Law of Demand for Foreign Exchange, Expected Profit Skill: Analytical Status: Old AACSB: Analytical Skills

59) Using the table above, if the current market value of the dollar is 110 francs, A) investor A expects dollar appreciation, but B and C expect depreciation. B) investor C expects dollar depreciation, but A and B expect appreciation. C) all three investors expect the dollar to appreciate. D) all three investors expect the dollar to depreciate. Answer: A Topic: The Law of Demand for Foreign Exchange, Expected Profit Skill: Analytical Status: Old AACSB: Analytical Skills 60) When you arrive at the airport in Paris and go to the bank window to exchange dollars into euros, you are A) selling euros to the French. B) avoiding the use of foreign exchange markets. C) contributing to U.S. exports. D) None of the above answers is correct. Answer: D Topic: Supply in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 61) In the foreign exchange market, the higher the dollar's exchange rate, the A) larger the supply of dollars. B) smaller the quantity supplied of dollars. C) smaller the supply of dollars. D) larger the quantity supplied of dollars. Answer: D Topic: Law of Supply for Foreign Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 62) When the U.S. exchange rate rises, foreign goods become ________ and U.S. imports ________. A) less expensive; increase B) more expensive; decrease C) less expensive; decrease D) more expensive; increase Answer: A Topic: The Law of Supply for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking

63) Other things remaining the same, the ________ the exchange rate for dollars, the greater the ________ in the foreign exchange market. A) higher; quantity of dollars supplied B) higher; quantity of dollars demanded C) lower; value of U.S. imports D) higher; expected profits from holding dollars Answer: A Topic: Law of Supply for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 64) The demand for Mexican tomatoes by an American food grocery chain creates a A) demand for the U.S. dollar. B) demand for an interest rate differential. C) supply of Mexican pesos. D) supply of U.S. dollars. Answer: D Topic: Law of Supply for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 65) Consider the market for dollars. If the exchange rate rises from 2 pesos per dollar to 4 pesos per dollar, A) the supply curve of dollars shifts leftward. B) the supply curve of dollars shifts rightward. C) there is an upward movement along the supply curve for dollars. D) there is a downward movement along the supply curve for dollars. Answer: C Topic: Law of Supply for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 66) As the exchange rate ________, the quantity of dollars ________ on the foreign exchange market ________. A) rises; supplied; increases B) falls; supplied; increases C) rises; demanded; increases D) falls; demanded; decreases Answer: A Topic: Law of Supply for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 18 Copyright © 2014 Pearson Education, Inc.

67) In the foreign exchange market, the supply curve for dollars slopes upwards because A) as the exchange rate rises, imports become more expensive, and more dollars are supplied to pay for the imports. B) as the exchange rate rises, imports become cheaper, and more dollars are supplied to pay for the increase in the quantity of imports. C) as the exchange rate rises, more dollars are supplied since the profit from selling dollars falls. D) supply curves always slope upwards. Answer: B Topic: Law of Supply for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 68) In the foreign exchange market, which of the following results in a movement along the supply curve of dollars? A) a change in the expected future exchange rate B) a change in the U.S. interest rate C) a change in the current exchange rate D) None of the above answers are correct. Answer: C Topic: The Law of Supply for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 69) When a good is imported into the United States, there is created a A) supply of foreign currency with no effect on the market for the dollar. B) demand for dollars with no effect on markets for foreign currencies. C) supply of foreign currencies and a demand for dollars. D) demand for foreign currencies and a supply of dollars. Answer: D Topic: Law of Supply for Foreign Exchange, Imports Skill: Conceptual Status: Old AACSB: Reflective Thinking 70) Other things remaining the same, the A) larger the value of U.S. imports, the smaller is the quantity of foreign currency demanded. B) larger the value of U.S. imports, the greater is the quantity of U.S. dollars supplied to the foreign exchange market. C) lower the exchange rate, the cheaper are foreign-produced goods and services. D) higher the exchange rate, the greater is the expected profit from selling dollars. Answer: B Topic: Law of Supply for Foreign Exchange, Imports Skill: Conceptual Status: Old AACSB: Reflective Thinking 19 Copyright © 2014 Pearson Education, Inc.

71) The larger the value of U.S. imports, the greater the quantity of ________ causing the quantity supplied of dollars to ________. A) U.S. dollars demanded; increase B) U.S. dollars demanded; decrease C) foreign currency demanded; increase D) foreign currency demanded; decrease Answer: C Topic: Law of Supply for Foreign Exchange, Imports Skill: Conceptual Status: Old AACSB: Reflective Thinking 72) The ________ the exchange rate, the ________ are foreign-produced goods and hence the greater the quantity of dollars supplied. A) higher; cheaper B) lower; cheaper C) higher; more expensive D) lower; more expensive Answer: A Topic: Law of Supply for Foreign Exchange, Imports Skill: Conceptual Status: Old AACSB: Reflective Thinking 73) The ________ the exchange rate, the ________ are foreign-produced goods and hence the smaller the quantity of dollars supplied. A) lower; more expensive B) lower; cheaper C) greater; cheaper D) greater; more expensive Answer: A Topic: Law of Supply for Foreign Exchange, Imports Skill: Conceptual Status: Old AACSB: Reflective Thinking 74) A factor determining the supply of U.S. dollars in the foreign exchange market is the A) expected future exchange rate. B) expected future interest rate in the United States. C) U.S. supply of exports. D) expected future interest rate in foreign countries. Answer: A Topic: Law of Supply for Foreign Exchange, Expected Profit Skill: Recognition Status: Old AACSB: Reflective Thinking 20 Copyright © 2014 Pearson Education, Inc.

75) The ________ the expected profit from holding a foreign currency, the greater is the ________ in the foreign exchange market. A) larger; quantity demanded of dollars B) smaller; quantity demanded of foreign currency C) larger; quantity supplied of dollars D) None of the above is correct because the expected profit has nothing to do with the supply and demand for dollars or foreign currency. Answer: C Topic: Law of Supply for Foreign Exchange, Expected Profit Skill: Conceptual Status: Old AACSB: Reflective Thinking 76) The higher the dollar's exchange rate, the ________ the expected profit from holding dollars and so ________ dollars are supplied. A) larger; more B) larger; fewer C) smaller; more D) smaller; fewer Answer: C Topic: Law of Supply for Foreign Exchange, Expected Profit Skill: Conceptual Status: Old AACSB: Reflective Thinking 77) Consider the market for dollars. The higher the exchange rate, the ________ is the expected profit from holding foreign currency and the greater is the ________. A) larger; quantity of dollars supplied B) larger; leftward shift in the demand curve for dollars C) smaller; quantity of dollars supplied D) smaller; leftward shift in the demand curve for dollars Answer: A Topic: Law of Supply for Foreign Exchange, Expected Profit Skill: Conceptual Status: Old AACSB: Reflective Thinking

78) If the equilibrium exchange rate for the dollar is 110 yen per dollar and the current exchange rate is 120 yen per dollar, then the A) supply curve of U.S. dollars shifts rightward. B) dollar will depreciate. C) dollar will appreciate. D) demand curve for U.S. dollars shifts rightward. Answer: B Topic: Equilibrium Exchange Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 79) Consider the market for euros. Suppose the exchange rate is ________ its equilibrium. This means that the quantity of euros ________ is greater than the quantity of euros ________ and the exchange rate will ________. A) above; supplied; demanded; fall B) below; supplied; demanded; rise C) above; demanded; supplied; fall D) below; demanded; supplied; fall Answer: A Topic: Equilibrium Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking

80) In the figure above, the equilibrium exchange rate is: $1 U.S. equals A) $2.00 Canadian. B) $1.50 Canadian. C) $0.50 Canadian. D) none of the above Answer: B Topic: Equilibrium Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 81) If the exchange rate between the dollar and Japanese yen is below the equilibrium exchange rate, there will be a ________ of dollars, and the exchange rate will ________. A) surplus; fall to the equilibrium level B) shortage; change only when the supply curve shifts leftward C) shortage; rise to the equilibrium level D) surplus; rise to the equilibrium level Answer: C Topic: Equilibrium Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking

82) If the exchange rate is above equilibrium, there will be ________ in the foreign exchange market. A) a surplus B) a shortage C) a decrease in demand D) an increase in demand Answer: A Topic: Equilibrium Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 83) Suppose the exchange rate between the U.S. dollar and the French franc is 0.25 francs per dollar. If a television sells for 100 francs in France, what is the dollar price of the television set? A) $400 B) $25 C) $50 D) $200 Answer: A Topic: Study Guide Question, The Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 84) Suppose that a dollar buys 120 yen. If a VCR sells for 18,600 yen in Japan, the price of the VCR in dollars is ________. A) $186.00 B) $223.20 C) $120.00 D) $155.00 Answer: D Topic: Study Guide Question, The Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 85) Suppose that the yen-dollar foreign exchange rate changes from 130 yen per dollar to 140 yen per dollar. Then the yen has A) depreciated against the dollar, and the dollar has appreciated against the yen. B) depreciated against the dollar, and the dollar has depreciated against the yen. C) appreciated against the dollar, and the dollar has appreciated against the yen. D) appreciated against the dollar, and the dollar has depreciated against the yen. Answer: A Topic: Study Guide Question, Exchange Rate, Currency Depreciation Skill: Analytical Status: Old AACSB: Analytical Skills 24 Copyright © 2014 Pearson Education, Inc.

86) Suppose the peso-dollar foreign exchange rate changes from 50 pesos per dollar to 30 pesos per dollar. Then the peso has ________ against the dollar and the dollar has ________ against the peso. A) appreciated; depreciated B) appreciated; appreciated C) depreciated; appreciated D) depreciated; depreciated Answer: A Topic: Study Guide Question, Exchange Rate, Currency Appreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 87) If the U.S. exchange rate rises, the price to foreigners of U.S.-produced goods and services ________ and the quantity of U.S. dollars demanded ________. A) rises; decreases B) rises; increases C) falls; decreases D) falls; increases Answer: A Topic: Study Guide Question, Law of Demand for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking

2 Exchange Rate Fluctuations 1) Important factors that change the demand for dollars and shift the demand curve for dollars include which of the following? I. Interest rates around the world. II. The current exchange rate. III. The expected future exchange rate. A) I and II B) I and III C) II D) I, II, and III Answer: B Topic: Changes in the Demand for Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking 2) With everything else the same, which of the following would increase the demand for U.S. dollars in the foreign exchange market? I. a rise in the U.S. interest rate II. a fall in interest rates in foreign countries III. a rise in the expected future exchange rate A) I only B) I and II only C) I and III only D) I, II, and III Answer: D Topic: Changes in the Demand for Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking 3) The demand for dollars in the foreign exchange market will increase (so that the demand curve shifts rightward) if A) the U.S. interest rate differential falls. B) the expected future exchange rate falls. C) the exchange rate for the dollar falls. D) None of the above answers is correct. Answer: D Topic: Changes in the Demand for Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking

4) In the foreign exchange market, an increase in the world demand for U.S. exports shifts A) demand curve for U.S. dollars rightward B) demand curve for U.S. dollars leftward C) supply curve for U.S. dollars leftward D) supply curve for U.S. dollars rightward Answer: A Topic: Changes in the Demand for Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking 5) Airbus is a European jet airline producer. Indian Airlines wants to buy 23 Airbus planes from Airbus, due to increased demand for world travel. As a result, the A) demand curve for euros shifts rightward. B) demand curve for euros shifts leftward. C) quantity demanded for euros increases as the euro/rupee exchange rate increases. D) quantity demand for euros decreases, on matter what the euro/rupee exchange rate is. Answer: A Topic: Changes in the Demand for Dollars, Exports Skill: Conceptual Status: Old AACSB: Reflective Thinking 6) Hyundai is a large South Korean company that produces finished steel products. Hyundai plans to buy raw steel from U.S. Steel. As a result, the A) demand curve for U.S. dollars shifts rightward. B) demand curve for U.S. dollars shifts leftward. C) demand curve for South Korean won shifts rightward. D) demand curve for South Korean won shifts leftward. Answer: A Topic: Changes in the Demand for Dollars, Exports Skill: Conceptual Status: Old AACSB: Reflective Thinking 7) Hyundai is a large South Korean company that produces finished steel products. Hyundai plans to buy raw steel from U.S. Steel. As a result, the demand curve for U.S. dollars ________ and the demand curve for South Korean won ________. A) shifts rightward; does not shift B) shifts rightward; shifts leftward C) does not shift; shifts leftward D) shifts leftward; shifts rightward. Answer: A Topic: Changes in the Demand for Dollars, Exports Skill: Conceptual Status: Old AACSB: Reflective Thinking 27 Copyright © 2014 Pearson Education, Inc.

8) Airbus is a European jet airline producer. Indian Airlines wants to buy 23 Airbus planes from Airbus, due to increased demand for world travel. As a result, A) the demand curve for European euros and the supply curve for Indian rupees both shift rightward. B) the demand curve for European euros shifts rightward and the supply curve for Indian rupees shifts leftward. C) only the demand curve for Indian rupees shifts rightward. D) only the demand curve for European euros shifts rightward. Answer: A Topic: Changes in the Demand for Dollars, Exports Skill: Conceptual Status: Old AACSB: Reflective Thinking 9) The U.S. interest rate minus the foreign interest rate is called the ________. A) foreign interest rate differential B) U.S. bond rate differential C) U.S. interest rate differential D) U.S. stock yield differential Answer: C Topic: Changes in the Demand for Dollars, Interest Rates Skill: Recognition Status: Old AACSB: Reflective Thinking 10) Suppose the U.S. interest rate is 6 percent and the world interest rate is 5 percent. The U.S. interest differential is A) -1 percent. B) 1.2 percent. C) 1 percent. D) -0.83 percent. Answer: C Topic: Changes in the Demand for Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking

11) Other things remaining the same, the U.S. interest rate differential increases if the U.S. interest rate A) rises and foreign interest rates remain constant. B) falls and foreign interest rates remain constant. C) falls and foreign interest rates rise. D) remains constant and foreign interest rates rise. Answer: A Topic: Changes in the Demand for Dollars, Interest Rates Skill: Recognition Status: Old AACSB: Reflective Thinking 12) Which of the following occurrences would NOT shift the demand curve for U.S. dollars in the foreign exchange market? A) an increase in the U.S. exchange rate B) an increase in the expected future U.S. exchange rate C) an increase in U.S. interest rates D) an increase in foreign interest rates Answer: A Topic: Changes in the Demand for Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking 13) The interest rate in Canada rises while the interest rate in the United States does not change. The A) demand curve for Canadian dollars will shift leftward. B) demand curve for Canadian dollars will shift rightward. C) demand curve for U.S. dollars will shift rightward. D) demand curves Canadian and U.S. dollars will remain unchanged. Answer: B Topic: Changes in the Demand for Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking 14) If the U.S. interest rate rises while interest rates in the rest of the world do not change, the higher U.S. interest rate A) decreases the demand for dollars. B) increases the demand for dollars. C) has no effect on the demand for dollars. D) will stop all trading between the currencies of the U.S. and other countries. Answer: B Topic: Changes in the Demand for Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking 29 Copyright © 2014 Pearson Education, Inc.

15) An increase in the interest rate in the United States compared to the interest rate in Great Britain will A) increase the U.S. interest rate differential. B) increase the demand for pounds. C) shift the demand curve for dollars rightward. D) Both answers A and C are correct. Answer: D Topic: Changes in the Demand for Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking 16) The demand for dollars in the foreign exchange market will decrease and the demand curve will shift leftward if A) the U.S. interest rate differential decreases. B) the expected future exchange rate rises. C) the exchange rate for the dollar rises. D) None of the above answers is correct. Answer: A Topic: Changes in the Demand for Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking 17) Suppose the current exchange rate between the euro and the United States dollar is 1.15 euros per dollar. If interest rates in the United States increase and interest rates in Europe remain unchanged then A) the demand for dollars will increase. B) the demand for dollars will decrease. C) the demand for euros will increase. D) None of the above answers is correct. Answer: A Topic: Changes in the Demand for Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking

18) If the interest rate in the United States increases, then in the foreign exchange market the A) demand for U.S. dollars will remain unchanged. B) demand for U.S. dollars will increase. C) demand for U.S. dollars will decrease. D) supply of U.S. dollars will increase. Answer: B Topic: Changes in the Demand for Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking 19) If the interest rate on Japanese yen assets falls while interest rates in the United States remain constant, the A) quantity of dollars demanded will increase. B) quantity of dollars demanded will decrease. C) demand for dollars will increase. D) demand for dollars will decrease. Answer: C Topic: Changes in the Demand for Dollars, Interest Rates Skill: Conceptual Status: Revised AACSB: Reflective Thinking 20) If the interest rate on Swiss franc assets increases while interest rates in the United States remain constant, the A) quantity of dollars demanded will decrease. B) demand for dollars will increase. C) demand for dollars will decrease. D) quantity of dollars demanded will increase. Answer: C Topic: Changes in the Demand for Dollars, Interest Rates Skill: Conceptual Status: Revised AACSB: Reflective Thinking 21) Today, the dollar is worth 1.15 euros. Due to changes in economic conditions, in one month people come to expect the dollar will be worth 1.20 euros. This belief A) increases the demand for dollars. B) decreases the demand for dollars. C) increases the demand for euros. D) increases the value of exports to Europe. Answer: A Topic: Changes in Demand for Dollars, Expected Future Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 31 Copyright © 2014 Pearson Education, Inc.

22) If there is an increase in the expected future U.S. exchange rate, there is A) an upward movement along the demand curve for dollars. B) a downward movement along the demand curve for dollars. C) a leftward shift of the demand curve for dollars. D) a rightward shift of the demand curve for dollars. Answer: D Topic: Changes in Demand for Dollars, Expected Future Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 23) If people expect the foreign exchange rate for dollars to rise in the future, A) the demand for dollars today decreases. B) the demand for dollars today increases. C) the demand for dollars today is unaffected. D) there is a movement along the demand curve for dollars. Answer: B Topic: Changes in Demand for Dollars, Expected Future Exchange Rate Skill: Conceptual Status: Revised AACSB: Reflective Thinking 24) U.S. residents come to believe that the dollar will depreciate in the future, that is, the exchange rate in the future will be lower than the current exchange rate. As a result, A) the demand curve for dollars shifts rightward. B) the demand curve for dollars shifts leftward. C) there is a movement upward along the demand curve for dollars. D) None of the above answers are correct. Answer: B Topic: Change in Demand for Dollars, Expected Future Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 25) U.S. residents come to believe that the dollar will appreciate in the future, that is, the exchange rate in the future will be higher than the current exchange rate. As a result, A) the demand curve for dollars shifts rightward. B) the demand curve for dollars shifts leftward. C) there is a movement downward along the demand curve for dollars. D) None of the above answers are correct. Answer: A Topic: Change in Demand for Dollars, Expected Future Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking

26) If growth in the United States speeds up so that investors believe they can make a bigger profit from U.S. assets, the ________ U.S. dollars will ________. A) demand for; increase B) demand for; decrease C) supply of; increase D) supply of; decrease Answer: A Topic: Changes in the Demand for Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking 27) Today the U.S. dollar is worth 1.5 Canadian dollars. Because of changes in economic conditions, people come to believe that by the end of the month the U.S. dollar will be worth 1.2 Canadian dollars. This belief A) increases the demand for U.S. dollars today. B) decreases the demand for U.S. dollars today. C) decreases the demand for Canadian dollars today. D) decreases the value of exports to Canada. Answer: B Topic: Changes in Demand for Dollars, Expected Future Exchange Rate Skill: Conceptual Status: Revised AACSB: Reflective Thinking

28) In the figure above, the shift in the demand curve for U.S. dollars from D0 to D1 could occur when A) the expected future exchange rate decreases. B) the U.S. interest rate rises. C) people expect that the dollar will depreciate. D) foreign interest rates increase. Answer: B Topic: Changes in the Demand for Dollars, Interest Rates Skill: Analytical Status: Old AACSB: Analytical Skills 29) In the figure above, the shift in the demand curve for U.S. dollars from D0 to D1 could occur when A) the expected future exchange rate falls. B) the U.S. interest rate drops. C) people expect that the dollar will depreciate. D) foreign interest rates drop. Answer: D Topic: Changes in the Demand for Dollars, Interest Rates Skill: Analytical Status: Old AACSB: Analytical Skills

30) In the figure above, the shift in the demand curve for U.S. dollars from D0 to D2 could occur when A) the U.S. interest rate falls. B) the U.S. interest rate rises. C) people expect that the dollar will appreciate. D) foreign interest rates fall. Answer: A Topic: Changes in the Demand for Dollars, Interest Rates Skill: Analytical Status: Old AACSB: Analytical Skills 31) In the figure above, the shift in the demand curve for U.S. dollars from D0 to D2 could occur when A) the expected future exchange rate increases. B) the U.S. interest rate falls. C) people expect that the dollar will appreciate. D) foreign interest rates fall. Answer: B Topic: Changes in the Demand for Dollars, Interest Rates Skill: Analytical Status: Old AACSB: Analytical Skills 32) In the figure above, the shift in the demand curve for U.S. dollars from D0 to D2 could occur when A) the expected future exchange rate increases. B) the U.S. interest rate rises. C) people expect that the dollar will appreciate. D) foreign interest rates rise. Answer: D Topic: Changes in the Demand for Dollars, Interest Rates Skill: Analytical Status: Old AACSB: Analytical Skills

33) In the figure above, the shift in the demand curve for U.S. dollars from D0 to D1 could occur when A) foreign interest rates increase. B) the U.S. interest rate falls. C) people expect that the dollar will depreciate. D) the expected future exchange rate increases. Answer: D Topic: Change in Demand for Dollars, Expected Future Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 34) In the figure above, the shift in the demand curve for U.S. dollars from D0 to D1 could occur when A) the expected future exchange rate falls. B) the U.S. interest rate decreases. C) people expect that the dollar will appreciate. D) foreign interest rates increase. Answer: C Topic: Change in Demand for Dollars, Expected Future Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 35) In the figure above, the shift in the demand curve for U.S. dollars from D0 to D2 could occur when A) the expected future exchange rate increases. B) the U.S. interest rate rises. C) people expect that the dollar will depreciate. D) foreign interest rates fall. Answer: C Topic: Change in Demand for Dollars, Expected Future Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills

36) The above figure shows the demand curve for dollars in the yen/dollar exchange market. A movement from point A to point B means that the A) quantity supplied of dollars has increased. B) quantity demanded of dollars has increased. C) quantity demanded of dollars has decreased. D) quantity demanded of yen has decreased. Answer: C Topic: Law of Demand for Foreign Exchange Skill: Analytical Status: Old AACSB: Analytical Skills 37) In the above figure, suppose the economy is initially at point A. The interest rate in Japan rises relative to the interest rate in the United States. As a result, there will be a change from point A to a point such as ________. A) point B B) point C C) point D D) point E Answer: D Topic: Changes in the Demand for Dollars, Interest Rates Skill: Analytical Status: Old AACSB: Analytical Skills

38) In the above figure, suppose the economy is initially at point A. People come to expect the future U.S. exchange rate to be lower. As a result, there is a change from point A to a point such as ________. A) point B B) point C C) point D D) point E Answer: D Topic: Changes in Demand for Dollars, Expected Future Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 39) In the above figure, suppose the economy is initially at point A. People come to expect the future U.S. exchange rate to be higher. As a result there is a change from point A to a point such as ________. A) point B B) point C C) point D D) point E Answer: C Topic: Changes in Demand for Dollars, Expected Future Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 40) A change in which of the following changes the supply of dollars and shifts the supply curve of dollars? I. An increase in the exchange rate. II. A change in interest rates. III. A decrease in the expected future exchange rate. A) I B) I and II C) II and III D) I, II, and III Answer: C Topic: Changes in the Supply of Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking

41) Interest rates in the United States rise relative to interest rates in other countries. As a result, in the foreign exchange market A) the supply curve of dollars shifts leftward. B) the supply curve of dollars shifts rightward. C) the demand curve for dollars shifts leftward. D) there is an upward movement along the supply curve of dollars. Answer: A Topic: Changes in the Supply of Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking 42) With everything else the same, in the foreign exchange market which of the following increases the supply of U.S. dollars? I. a fall in the U.S. interest rate II. a fall in interest rates in foreign countries III. a rise in expected future exchange rate A) I only B) I and II only C) I and III only D) I, II, and III Answer: A Topic: Changes in the Supply of Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking 43) If interest rates in Mexico decrease while the interest rates in the United States remain unchanged then A) the supply of Mexican pesos will increase. B) the supply of Mexican pesos will decrease. C) the supply of U.S. dollars will increase. D) None of the above answers is correct. Answer: A Topic: Changes in the Supply of Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking

44) If interest rates in Japan rise and those in the United States do not change, there is A) a decrease in the supply of dollars. B) an increase in the supply of dollars. C) a downward movement along the supply curve for dollars. D) None of the above answers is correct. Answer: B Topic: Changes in the Supply of Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking 45) If the U.S. interest rate differential increases, then in the foreign exchange market the A) quantity of U.S. dollars supplied increases. B) supply of U.S. dollars decreases. C) demand for U.S. dollars does not change. D) supply of U.S. dollars increases. Answer: B Topic: Changes in the Supply of Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking 46) The supply curve of U.S. dollars shifts leftward. This could have been influenced by ________. A) a rise in the U.S. interest rate differential B) a fall in the expected future exchange rate C) an increase in the U.S. exchange rate D) a decrease in the U.S. exchange rate Answer: A Topic: Changes in the Supply of Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking 47) As the expected future exchange rate for dollars increases, A) the demand for U.S. dollars increases. B) the supply of U.S. dollars decreases. C) the U.S. interest rate will fall. D) Both answers A and B are correct. Answer: D Topic: Changes in Supply of Dollars, Expected Future Exchange Rate Skill: Conceptual Status: Revised AACSB: Reflective Thinking

48) People come to expect the exchange rate for the dollar to rise from 90 yen per dollar to 111 yen per dollar in a month. As a result, A) the supply curve of dollars shifts leftward. B) the supply curve of dollars shifts rightward. C) the demand curve for dollars shifts leftward. D) there is a downward movement along the supply curve of dollars. Answer: A Topic: Changes in Supply of Dollars, Expected Future Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 49) If the expected future exchange rate rises, the currency's A) quantity supplied increases. B) supply decreases. C) supply increases. D) exchange rate falls. Answer: B Topic: Changes in Supply of Dollars, Expected Future Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 50) The supply of dollars in the foreign exchange market decreases and that the supply curve shifts leftward if A) the U.S. interest rate differential decreases. B) the expected future exchange rate rises. C) the exchange rate for the dollar rises. D) All of the above are correct. Answer: B Topic: Changes in Supply of Dollars, Expected Future Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking

51) In the figure above, suppose the economy is initially at point B. Then the interest rate in Japan rises relative to the interest rate in the United States. This change ________ the supply of dollars and the market moves to a point such as ________. A) decreases; A B) decreases; E C) increases; D D) increases; C Answer: D Topic: Changes in the Supply of Dollars, Interest Rates Skill: Analytical Status: Old AACSB: Analytical Skills 52) In the figure above, suppose the economy is initially at point B. If people come to believe that the exchange rate will fall in the future, the supply of dollars ________ and the market moves to point such as ________. A) decreases; A B) decreases; E C) increases; D D) increases; C Answer: D Topic: Changes in Supply of Dollars, Expected Future Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills

53) In the figure above, the shift in the supply curve for U.S. dollars from S0 to S1 could occur when A) the U.S. interest rate differential increases. B) the U.S. interest rate differential decreases. C) the expected future exchange rate falls. D) the current exchange rate falls. Answer: A Topic: Changes in the Supply of Dollars, Interest Rates Skill: Analytical Status: Old AACSB: Analytical Skills 54) In the figure above, the shift in the supply curve for U.S. dollars from S0 to S1 could occur when A) the U.S. interest rate falls. B) foreign interest rates fall. C) the expected future exchange rate falls. D) the current exchange rate falls. Answer: B Topic: Changes in the Supply of Dollars, Interest Rates Skill: Analytical Status: Old AACSB: Analytical Skills

55) In the figure above, the shift in the supply curve for U.S. dollars from S0 to S1 could occur when A) the U.S. interest rate rises. B) foreign interest rates rise. C) the expected future exchange rate falls. D) the current exchange rate rises. Answer: A Topic: Changes in the Supply of Dollars, Interest Rates Skill: Analytical Status: Old AACSB: Analytical Skills 56) In the figure above, the shift in the supply curve for U.S. dollars from S0 to S2 could occur when A) the U.S. interest rate falls. B) the expected future exchange rate rises. C) the U.S. interest rate differential increases. D) the current exchange rate falls. Answer: A Topic: Changes in the Supply of Dollars, Interest Rates Skill: Analytical Status: Old AACSB: Analytical Skills 57) In the figure above, the shift in the supply curve for U.S. dollars from S0 to S2 could occur when A) foreign interest rates rise. B) the expected future exchange rate rises. C) the U.S. interest rate rises. D) the current exchange rate falls. Answer: A Topic: Changes in the Supply of Dollars, Interest Rates Skill: Analytical Status: Old AACSB: Analytical Skills 58) In the figure above, the shift in the supply curve for U.S. dollars from S0 to S1 could occur when A) the expected future exchange rate rises. B) the U.S. interest rate differential decreases. C) the expected future exchange rate falls. D) the current exchange rate falls. Answer: A Topic: Changes in Supply of Dollars, Expected Future Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 44 Copyright © 2014 Pearson Education, Inc.

59) In the figure above, the shift in the supply curve for U.S. dollars from S0 to S2 could occur when A) the current exchange rate rises. B) the current exchange rate falls. C) the expected future exchange rate rises. D) the expected future exchange rate falls. Answer: D Topic: Changes in Supply of Dollars, Expected Future Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 60) In the figure above, the shift in the supply curve for U.S. dollars from S0 to S2 could occur when A) the expected future exchange rate falls. B) the U.S. interest rate differential increases. C) the expected future exchange rate rises. D) the current exchange rate falls. Answer: A Topic: Changes in Supply of Dollars, Expected Future Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 61) If the U.S. interest rate differential increases, in the foreign exchange market the demand for U.S. dollars ________ and the supply of U.S. dollars ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: B Topic: Changes in the Demand and Supply of Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking

62) When the U.S. interest rate rises relative to that in other counties, in the foreign exchange market the demand for U.S. dollars ________ and the supply of U.S. dollars ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: B Topic: Changes in the Demand and Supply of Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking 63) Other things remaining the same, if the U.S. interest rate differential increases, the demand curve for U.S. dollars shifts ________ and the supply curve of U.S. dollars shifts ________. A) rightward; rightward B) rightward; leftward C) leftward; rightward D) leftward; leftward Answer: B Topic: Changes in the Demand and Supply of Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking 64) If the Federal Reserve increases interest rates, A) the demand curve for U.S. dollars shifts rightward and the supply curve of U.S. dollars shifts leftward. B) the demand curve for U.S. dollars shifts leftward and the supply curve of U.S. dollars shifts rightward. C) the demand curve for U.S. dollars and the demand curve for European euros both shift rightward. D) only the demand curve for U.S. dollars shifts rightward. Answer: A Topic: Changes in the Demand and Supply of Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking

65) If the Federal Reserve increases interest rates, ceteris paribus, A) the supply curve of U.S. dollars shifts leftward and the supply curve of European euros shifts rightward. B) the demand curve for U.S. dollars shifts leftward and the supply curve of U.S. dollars shifts rightward. C) the demand curve for U.S. dollars and the demand curve for European euros both shift rightward. D) only the demand curve for U.S. dollars shifts rightward. Answer: A Topic: Changes in the Demand and Supply of Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking 66) If the European Central Bank increases interest rates, A) the demand curve for European euros shifts rightward and the supply curve of European euros shifts leftward. B) the demand curve for European euros shifts leftward and the supply curve of European euros shifts rightward. C) the demand curve for European euros and the demand curve for U.S. dollars both shift rightward. D) only the demand curve for European euros shifts rightward. Answer: A Topic: Changes in the Demand and Supply of Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking 67) Other things remaining the same, if the expected future exchange rate rises, the demand curve for U.S. dollars shifts ________ and the supply curve of U.S. dollars shifts ________. A) rightward; rightward B) rightward; leftward C) leftward; rightward D) leftward; leftward Answer: B Topic: Changes in the Demand and Supply of Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking

68) Relative to the yen, from 2005-2007 the U.S. dollar A) appreciated due to an increase in the interest rate differential and expectations of a higher future exchange rate. B) appreciated due to a decrease in the interest rate differential and expectations of a lower future exchange rate. C) depreciated due to an increase in the interest rate differential and expectations of a higher future exchange rate. D) depreciated due to a decrease in the interest rate differential and expectations of a lower future exchange rate. Answer: A Topic: Changes in the Exchange Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 69) Relative to the yen, from 2007-2012 the U.S. dollar A) appreciated due to an increase in the interest rate differential and expectations of a higher future exchange rate. B) appreciated due to a decrease in the interest rate differential and expectations of a lower future exchange rate. C) depreciated due to an increase in the interest rate differential and expectations of a higher future exchange rate. D) depreciated due to a decrease in the interest rate differential and expectations of a lower future exchange rate. Answer: D Topic: Changes in the Exchange Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 70) The U.S. dollar will depreciate in value if A) the demand curve for U.S. dollars shifts rightward. B) the demand curve for U.S. dollars shifts leftward. C) the supply curve of U.S. dollars shifts rightward. D) Both answers B and C are correct. Answer: D Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Reflective Thinking

71) The U.S. dollar will depreciate in value if A) the demand for the dollar increases. B) the demand for the dollar decreases. C) the supply of foreign exchange decreases. D) U.S. citizens choose to buy fewer foreign goods. Answer: B Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Reflective Thinking 72) The U.S. dollar will appreciate in value if A) the demand curve for U.S. dollars shifts rightward. B) the demand curve for U.S. dollars shifts leftward. C) the supply curve of U.S. dollars shifts rightward. D) Americans choose to buy more foreign goods. Answer: A Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Reflective Thinking 73) Suppose $1 will buy 150 yen in January and 200 yen the following December. This change could have occurred if the A) demand curve for dollars shifted rightward. B) demand curve for dollars shifted leftward. C) supply curve of dollars shifted rightward. D) demand curve for yen shifted rightward. Answer: A Topic: Changes in the Exchange Rate Skill: Analytical Status: Revised AACSB: Reflective Thinking 74) If the demand for a country's currency increases, the currency A) appreciates. B) depreciates. C) stays the same. D) could either appreciate, depreciate, or stay the same. Answer: A Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Reflective Thinking

75) An increase in the U.S. demand for imports will ________ the supply of dollars and lead the dollar to ________. A) increase; appreciate B) decrease; appreciate C) increase; depreciate D) decrease; depreciate Answer: C Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Reflective Thinking 76) Which of the following will lead to an appreciation of the U.S. dollar against the British pound? A) an increase in British demand for U.S. imports B) an increase in U.S. demand for British imports C) an increase in British interest rates D) a decrease in British demand for U.S. assets Answer: A Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Reflective Thinking 77) Assume that there is an increased demand in the United States for European wines. If all other factors are held constant, this change will result in A) an increase in the exchange rate for euros. B) an appreciation of the dollar. C) a movement along the demand curve for euros. D) a decrease in the value of the euro. Answer: A Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Reflective Thinking 78) An increase in foreign demand for U.S. exports will ________ the demand for dollars and lead the dollar to ________. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: A Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Reflective Thinking 50 Copyright © 2014 Pearson Education, Inc.

79) An increase in the Japanese interest rate will ________ the demand for dollars and lead the dollar to ________. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: D Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Reflective Thinking 80) An increase in the Japanese interest rate will ________ the supply of dollars and lead the dollar to ________. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: B Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Reflective Thinking 81) Which of the following will lead to a depreciation of the dollar against the British pound? A) an increase in British demand for U.S. imports B) an increase in U.S. interest rates C) a decrease in British demand for U.S. assets D) a decrease in U.S. demand for British goods Answer: C Topic: Changes in the Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 82) If the Federal Reserve raises the U.S. interest rate, foreigners' A) demand for U.S. dollars will increase and the exchange rate will rise. B) demand for U.S. dollars will decrease and the exchange rate will fall. C) demand for U.S. dollars will increase and the exchange rate will fall. D) demand for U.S. dollars will decrease and the exchange rate will rise. Answer: A Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Reflective Thinking 51 Copyright © 2014 Pearson Education, Inc.

83) Suppose the exchange rate for the U.S. dollar rises. This could be caused by A) an increase in U.S. import demand. B) a decrease in the world demand for U.S. exports. C) a fall in the expected future exchange rate. D) an increase in the U.S. interest rate differential. Answer: D Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 84) Suppose that the U.S. exchange rate is expected to fall in the future. As a result, in the foreign exchange market, there will be A) an increase in the demand for dollars, a decrease in the supply of dollars, and a rise in the equilibrium exchange rate. B) an increase in the demand for dollars, a decrease in the supply of dollars, and a fall in the equilibrium exchange rate. C) a decrease in the demand for dollars, an increase in the supply of dollars, and a rise in the equilibrium exchange rate. D) a decrease in the demand for dollars, an increase in the supply of dollars, and a fall in the equilibrium exchange rate. Answer: D Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Reflective Thinking 85) Suppose the market for dollars is in equilibrium, then the expected future exchange rate rises. What effect does this change have on the current exchange rate? A) It will rise. B) It will fall. C) It will remain unchanged. D) Because both the supply and demand curves shift, the effect on the exchange rate is unpredictable. Answer: A Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Reflective Thinking

86) If people expect the dollar to depreciate, then the A) demand for dollars will decrease, the supply of dollars will increase, and the exchange rate will fall. B) demand for dollars will decrease, the supply of dollars will not change, and the exchange rate will fall. C) supply of dollars will increase, the demand for dollars will not change, and the exchange rate will fall. D) demand for dollars will increase, the supply of dollars will decrease, and the exchange rate will rise. Answer: A Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Reflective Thinking 87) Suppose the exchange rate for the U.S. dollar falls. This could be caused by A) a decrease in U.S. import demand. B) an increase in the world demand for U.S. exports. C) an increase in the U.S. interest rate differential. D) a fall in the expected future exchange rate. Answer: D Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills

88) In the figure above, an increase in the U.S. interest rate relative to that in Canada shifts the demand curve for U.S. dollars ________ and shifts the supply curve of U.S. dollars ________. A) leftward; leftward B) leftward; rightward C) rightward; leftward D) rightward; rightward Answer: C Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills

89) Using the above figure, which of the following is correct? A) 1 guilder will sell for $2. B) 1 dollar will sell for 1/2 guilder. C) A shortage of guilders exists at an exchange rate above $0.60. D) A surplus of guilders exists at an exchange rate above $0.60. Answer: D Topic: Equilibrium Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 90) Using the above figure, an increase in the demand for Dutch goods by U. S. consumers will lead to A) a depreciation in the Dutch currency. B) an appreciation in the Dutch currency. C) an increase in the supply of Dutch currency as foreign exchange. D) a decrease in the supply of Dutch currency as foreign exchange. Answer: B Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills

91) What factors can change expectations about the exchange rate? A) interest rate parity B) purchasing power parity C) real GDP parity D) Both answers A and B are correct. Answer: D Topic: Exchange Rate Expectations Skill: Conceptual Status: Old AACSB: Reflective Thinking 92) Adjusted for risk, interest rate parity A) holds only for larger countries. B) holds only between the U.S. and Canada. C) holds only when purchasing parity holds. D) always holds. Answer: D Topic: Interest Rate Parity Skill: Recognition Status: Old AACSB: Reflective Thinking 93) If there are equal rates of return between assets in two currencies, then there is A) purchasing power parity. B) interest rate parity. C) parity of exchange. D) foreign exchange parity. Answer: B Topic: Interest Rate Parity Skill: Recognition Status: Old AACSB: Reflective Thinking 94) If in Chicago the interest rate is 5 percent a year and in Vancouver it is 4 percent a year, ________. A) the quantity of Canadian dollars purchased will increase B) the Canadian dollar is expected to depreciate C) interest rate parity does not exist D) the U.S. dollar is expected to depreciate Answer: D Topic: Interest Rate Parity Skill: Conceptual Status: Old AACSB: Reflective Thinking

95) Suppose that the U.S. interest rate is 5 percent and the Turkish interest rate is 50 percent. The effect of this difference in the foreign exchange market is that A) financial capital stops moving. B) an American investor is guaranteed to make an additional 45 percent in dollar terms by investing in Turkey. C) investors expect the Turkish currency to rise in value (appreciate) against the dollar. D) investors expect the Turkish currency to fall in value (depreciate) against the dollar. Answer: D Topic: Interest Rate Parity Skill: Conceptual Status: Revised AACSB: Reflective Thinking 96) Suppose that the U.S. interest rate is 5 percent and the Japanese interest rate is 1 percent. The effect of this difference in the foreign exchange market is that A) financial capital stops moving. B) a Japanese investor is guaranteed to make an additional 4 percent in yen terms by investing in the United States. C) investors expect the yen to appreciate against the dollar. D) investors expect the yen to depreciate against the dollar. Answer: C Topic: Interest Rate Parity Skill: Conceptual Status: Revised AACSB: Reflective Thinking 97) Suppose a deposit in New York earns 6 percent a year and a deposit in London earns 4 percent a year. Interest rate parity holds if the A) U.S. dollar appreciates by 2 percent a year. B) U.S. dollar depreciates by 2 percent a year. C) U.K. pound depreciates by 2 percent a year. D) None of the above answers is correct because interest rate parity requires that the interest rates be the same in both countries. Answer: B Topic: Interest Rate Parity Skill: Analytical Status: Old AACSB: Analytical Skills

98) Suppose a British bank offers a 3 percent interest rate while a U.S. bank offers a 7 percent interest rate. People must expect the U.S. dollar will A) depreciate 4 percent. B) appreciate 4 percent. C) appreciate 10 percent. D) depreciate 10 percent. Answer: A Topic: Interest Rate Parity Skill: Analytical Status: Old AACSB: Analytical Skills 99) According to interest rate parity, if the interest rate is 1 percent in the European Union and the euro is expected to appreciate 3 percent, the comparable interest rate in the United States will be A) 4 percent. B) 3 percent. C) 2 percent. D) 1 percent. Answer: A Topic: Interest Rate Parity Skill: Conceptual Status: Old AACSB: Analytical Skills 100) Suppose a Japanese bank offers a 4 percent interest rate and U.S. banks offer a 2 percent interest rate. People must expect the yen to A) depreciate by 2 percent. B) appreciate by 2 percent. C) depreciate by 6 percent. D) appreciate by 6 percent. Answer: A Topic: Interest Rate Parity Skill: Conceptual Status: Old AACSB: Analytical Skills 101) The idea that the value of money is equal across countries is known as A) interest rate parity. B) the expected profit parity effect. C) purchasing power parity. D) exchange rate parity. Answer: C Topic: Purchasing Power Parity Skill: Recognition Status: Old AACSB: Reflective Thinking 58 Copyright © 2014 Pearson Education, Inc.

102) If the prices in the United States rise faster than those in other countries, A) the exchange rate rises. B) the exchange rate falls. C) then interest rate parity must not hold. D) the interest rate in the United States falls. Answer: B Topic: Purchasing Power Parity Skill: Conceptual Status: Old AACSB: Reflective Thinking 103) Suppose the exchange rate between the U.S. dollar and the Mexican peso was $1 = 5 pesos. A can of Pepsi sells for $2 in Boston and 12 pesos in Mexico City. A) Purchasing power parity prevails with these prices. B) Purchasing power parity does not prevail with these prices. C) The U.S. dollar would be expected to depreciate. D) None of the above answers is correct. Answer: B Topic: Purchasing Power Parity Skill: Conceptual Status: Old AACSB: Analytical Skills 104) Suppose the exchange rate between the dollar and the euro is 2 euros per dollar. The price of a clock in Europe is 20 euros while the price of the same clock in the United States is $5. From these prices and exchange rate, it can be concluded that A) purchasing power parity holds. B) money buys more in the United States. C) money buys more in Europe. D) interest rate parity holds. Answer: B Topic: Purchasing Power Parity Skill: Conceptual Status: Old AACSB: Analytical Skills

105) Suppose the exchange rate between the U.S. dollar and the Jamaican dollar was $1 U.S. = $40 Jamaican dollars. A beach towel sells for $20 in Miami and $60 Jamaican in Negril. A) Purchasing power parity does not prevail with these prices. B) The U.S. dollar would be expected to depreciate. C) The Jamaican dollar would be expected to appreciate. D) All of the above are correct. Answer: D Topic: Purchasing Power Parity Skill: Conceptual Status: Old AACSB: Analytical Skills 106) If the price level rises in the United States but not in foreign nations and the current exchange rate does not change, the expected future exchange rate A) rises. B) falls. C) stays the same. D) You can't tell from the given information. Answer: B Topic: Purchasing Power Parity Skill: Conceptual Status: Old AACSB: Reflective Thinking 107) According to purchasing power parity, a rise in inflation in the United States. relative to the rest of the world will lead to A) a balance of payments surplus. B) a balance of payments deficit. C) an exchange rate appreciation. D) an exchange rate depreciation. Answer: D Topic: Purchasing Power Parity Skill: Conceptual Status: Old AACSB: Reflective Thinking 108) Suppose that U.S. inflation is 3 percent and Turkish inflation is 70 percent. The effect of this discrepancy on the foreign exchange market is that A) the Turkish currency will depreciate. B) the dollar will depreciate. C) it is impossible for interest rate parity to hold. D) the Turkish currency will appreciate. Answer: A Topic: Purchasing Power Parity Skill: Conceptual Status: Old AACSB: Reflective Thinking 60 Copyright © 2014 Pearson Education, Inc.

109) According to purchasing power parity, the foreign exchange market will A) undervalue the dollar if inflation in the United States is greater than it is elsewhere. B) no longer demand dollars if the inflation rate in the United States exceeds that of other nations. C) adjust the value of the exchange rate to reflect differing inflation rates between nations. D) result in a flow of dollars out of the United States whenever its rate of inflation is below that of other nations. Answer: C Topic: Purchasing Power Parity Skill: Conceptual Status: Old AACSB: Reflective Thinking 110) When a nation's currency depreciates, the country might A) have an inflation rate that exceeds the inflation rate in nations with which it trades. B) have an inflation rate below the inflation rate in nations with which it trades. C) be responding to an increase in the demand for its currency. D) be responding to a decrease in the domestic demand for foreign currencies. Answer: A Topic: Purchasing Power Parity Skill: Conceptual Status: Old AACSB: Reflective Thinking 111) In France, the price of a computer is 1,227.6 euros. In Japan, the price of the same computer is 137,920 yen. If a U.S. dollar can buy 1.023 euros or 119.93 yen, then purchasing power parity ________. A) is equal to interest rate parity and the computer is cheaper in North America B) does not hold and the computer is cheaper in France C) does not hold and the computer is cheaper in Japan D) holds and the computer is the same price everywhere Answer: C Topic: Purchasing Power Parity Skill: Analytical Status: Old AACSB: Analytical Skills

112) Suppose that the price of an identical sport-utility vehicle is $32,000 in U.S. dollars in the United States and $32,000 in Canadian dollars in Canada. Suppose in addition that the exchange rate between Canada and the United States is one Canadian dollar equals $0.75 U.S. dollar. Does purchasing power parity hold for SUVs between the United States and Canada? A) Yes, because SUVs have the same price in each local currency. B) No, because SUVs are more expensive in Canada than the United States. C) No, because SUVs are more expensive in the United States than in Canada. D) Without knowing interest rates, we can't say. Answer: C Topic: Purchasing Power Parity Skill: Analytical Status: Old AACSB: Analytical Skills 113) Suppose that the price of an identical sport-utility vehicle is $32,000 in U.S. dollars in the United States and $32,000 in Canadian dollars in Canada. Suppose in addition that the exchange rate between Canada and the United States is one Canadian dollar equals $0.75 U.S. dollar. Based on this information what will happen to the exchange rate between the United States and Canada? A) The value of the U.S. dollar will fall as U.S. residents purchase SUVs in Canada. B) The value of the Canadian dollar will fall as Canadians purchase SUVs in the United States. C) The exchange rate will stay the same because purchasing power parity already holds. D) The value of the Canadian dollar will fall because Canadian prices are lower than U.S. prices. Answer: A Topic: Purchasing Power Parity Skill: Analytical Status: Old AACSB: Analytical Skills 114) Suppose that $1 U.S. costs $1.50 Canadian. If in St. Louis a CD costs $10 U.S. and in Montreal it costs $15 Canadian, then ________. A) purchasing power parity exists B) Canadians will buy CDs in St. Louis C) Americans will buy CDs in Montreal D) Virgin Records will have an incentive to build more stores in North America Answer: A Topic: Purchasing Power Parity Skill: Analytical Status: Old AACSB: Analytical Skills

115) "The Big Mac index is The Economist's burger-based measure of whether currencies are over- or undervalued.... [E]xchange rates should eventually adjust to make the price of a basket of goods the same in each country. Our basket contains just one item: the Big Mac hamburger, which is pretty much the same around the world." The Economist, July 28, 2012 Which principal is The Economist relying on when using the Big Mac to value exchange rates? A) interest rate parity B) market price parity C) purchasing power parity D) exchange rate parity Answer: C Topic: Purchasing Power Parity Skill: Definition Status: New AACSB: Reflective Thinking 116) The nominal exchange rate is A) the value of the U.S. dollar expressed in units of foreign currency per U.S. dollar. B) the real exchange rate multiplied by the ratio of the U.S. price level to the foreign price level. C) the relative price of U.S. produced goods to foreign produced goods. D) a measure of the quantity of the nominal GDP of other countries that we get per unit of U.S. nominal GDP. Answer: A Topic: The Nominal Exchange Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 117) The real exchange rate is the A) relative price of U.S. produced output relative to foreign-produced output. B) price of foreign goods relative to the price of domestic goods C) trade-weighted index D) current account balance Answer: A Topic: The Real Exchange Rate Skill: Recognition Status: Old AACSB: Reflective Thinking

118) The real exchange rate is A) the relative price of U.S. produced goods to foreign produced goods. B) the nominal exchange rate multiplied by the ratio of the foreign price level to the U.S. price level. C) the money price of foreign produced goods relative to the money price of U.S. produced goods. D) a measure of how much currency exchanges for a unit of another currency. Answer: A Topic: The Real Exchange Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 119) If the nominal exchange rate rises and price levels stay constant, the real exchange rate will A) rise B) fall C) stay constant D) could rise, fall or stay constant Answer: A Topic: The Real Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 120) Given the U.S. price level P, the foreign country price level P*, and the nominal exchange rate E in foreign currency per U.S. dollar, the real exchange rate RER is given by A) RER = E × (P/P*) B) RER = E × (P*/P) C) RER = (P/P*) / E D) RER = P / (E/P*) Answer: A Topic: The Real Exchange Rate Skill: Analytical Status: Revised AACSB: Reflective Thinking 121) Given the U.S. price level P, the foreign country price level P*, and the real exchange rate RER in foreign currency per U.S. dollar, the nominal exchange rate E would be given by A) E = RER × (P/P*) B) E = RER × (P*/P) C) E = (P/P*) / RER D) E = P × (RER/P*) Answer: B Topic: The Nominal Exchange Rate Skill: Analytical Status: Revised AACSB: Reflective Thinking 64 Copyright © 2014 Pearson Education, Inc.

122) Initially the nominal exchange rate between the South Korean won and the U.S. dollar is 950 won per dollar. If the nominal exchange rate increases to 1000 won per dollar and the U.S and Korean price levels do not change, the real exchange rate A) is the same as before. B) is greater than before. C) is less than before. D) More information is needed to answer the question. Answer: B Topic: The Real Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 123) If the price level in the U.S. is 120, the price level in South Africa is 140, and the nominal exchange rate is 7 South African rands per dollar, then the real exchange rate is A) 6 South African goods per U.S. good. B) 8.4 South African goods per U.S. good. C) 9.8 South African goods per U.S. good. D) 1.4 South African goods per U.S. good. Answer: A Topic: The Real Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 124) Suppose your firm wants to import sugarcane from Brazil. The exchange rate is 3 Brazilian reals per U.S. dollar and sugarcane costs 36 reals per ton. How much is a ton of sugarcane in U.S. dollars? A) $12 B) $39 C) $108 D) $109 Answer: A Topic: The Real Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills

125) In the long run, the nominal exchange rate A) is a monetary phenomenon, determined by the quantities of money in two countries. B) is not related to the real exchange rate, since the real exchange rate is the true value of currencies. C) will not change if prices in one country change, since prices are nominal variables. D) is fixed by world central banks, as indicated by the fixed exchange rate system. Answer: A Topic: Nominal Exchange Rate in the Long Run Skill: Conceptual Status: Old AACSB: Reflective Thinking 126) A decrease in the demand for U.S. exports ________ the demand for U.S. dollars and shifts the demand curve for U.S. dollars ________. A) increases; rightward B) decreases; rightward C) decreases; leftward D) increases; leftward Answer: C Topic: Study Guide Question, Changes in the Demand for Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking 127) A decrease in the expected future exchange rate ________ the demand for U.S. dollars and shifts the demand curve for U.S. dollars ________. A) increases; rightward B) decreases; rightward C) decreases; leftward D) increases; leftward Answer: C Topic: Study Guide Question, Changes in the Demand for Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking 128) Of the following, when would the U.S. exchange rate rise the most? A) When the supply of and demand for U.S. dollars increase. B) When the supply of U.S. dollars increases and the demand for them decreases. C) When the supply of U.S. dollars decreases and the demand for them increases. D) When the supply of and demand for U.S. dollars decrease. Answer: C Topic: Study Guide Question, Changes in the Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 66 Copyright © 2014 Pearson Education, Inc.

3 Exchange Rate Policy 1) The Fed A) allows a flexible exchange rate, though their actions can impact the exchange rate. B) has no influence on the exchange rate. C) sells U.S. dollars to China in an attempt to depreciate the U.S. dollar. D) alternates between a flexible, fixed, and crawling peg exchange rate policy depending on economic conditions. Answer: A Topic: Exchange Rate Policies Skill: Recognition Status: Old AACSB: Reflective Thinking 2) Which of the following exchange rate policies uses a target exchange rate, but allows the target to change? A) crawling peg B) flexible exchange rate C) fixed exchange rate D) moving target Answer: A Topic: Exchange Rate Regimes Skill: Recognition Status: Old AACSB: Reflective Thinking 3) ________ can intervene directly in the foreign exchange market by buying or selling dollars. A) Congress B) The Fed C) The International Monetary Fund D) The U.S. Treasury department Answer: B Topic: The Fed in the Foreign Exchange Market Skill: Recognition Status: Old AACSB: Reflective Thinking 4) The Federal Reserve can influence the exchange rate by A) changing interest rates. B) buying or selling dollars. C) Both answers A and B are correct. D) None of the above answers is correct Answer: C Topic: The Fed in the Foreign Exchange Market Skill: Recognition Status: Old AACSB: Reflective Thinking 67 Copyright © 2014 Pearson Education, Inc.

5) The Fed ________ intervene in the foreign exchange market by supplying dollars and the Fed ________ intervene in the foreign exchange market by demanding dollars. A) can; can B) cannot; can C) can; cannot D) cannot; cannot Answer: A Topic: The Fed in the Foreign Exchange Market Skill: Recognition Status: Old AACSB: Reflective Thinking 6) How does a country maintain a fixed exchange rate? A) By intervening in the foreign exchange markets and buying or selling currency as needed to achieve the desired exchange rate. B) By forbidding foreign exchange markets to trade currency at anything other than the official exchange rate. C) By setting domestic interest rates to achieve purchasing power parity as the desired exchange rate. D) By intervening in import and export markets to achieve the desired current account and exchange rate. Answer: A Topic: Exchange Rate Regimes Skill: Conceptual Status: New AACSB: Reflective Thinking 7) Suppose the Fed wants to fix the U.S. dollar/Mexican peso rate at 11 pesos per dollar under a fixed exchange rate policy. If the exchange rate falls to 10 pesos per dollar, the Fed can A) buy dollars. B) sell dollars. C) attempt to freeze all sales of dollars. D) any of the above actions could take place. Answer: A Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking

8) Suppose the target exchange rate set by the Fed is 100 yen per dollar. If the demand for dollars temporarily increases, to maintain the target exchange rate, the Fed can A) sell dollars. B) buy dollars. C) violate interest rate parity. D) violate purchasing power parity. Answer: A Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 9) Suppose the target exchange rate set by the Fed is 100 guilders per dollar. If the demand for dollars temporarily decreases, to maintain the target exchange rate, the Fed can A) sell dollars. B) buy dollars. C) increase U.S. exports. D) increase U.S. imports. Answer: B Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 10) Suppose the target exchange rate set by the Fed is 150 yen per dollar. If the demand for dollars permanently decreases the Fed A) can permanently meet the target by selling dollars. B) can permanently meet the target by buying dollars. C) must violate both interest rate parity and purchasing power parity to permanently meet the target. D) cannot permanently maintain the target rate. Answer: D Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 11) If the Fed sets a target exchange rate that is higher than the current exchange rate, then A) the Fed must sell dollars. B) the Fed must buy dollars. C) the Fed can do nothing in the short run. D) will try to print more dollars for foreign distribution. Answer: B Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 69 Copyright © 2014 Pearson Education, Inc.

12) If the exchange rate is higher than the Fed's target exchange rate, the Fed would A) implement purchasing power parity. B) implement interest rate parity. C) buy dollars. D) sell dollars. Answer: D Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 13) If the Fed wants to depreciate the dollar against the yen, the Fed will A) increase the supply of dollars by selling yen. B) increase the demand for dollars by selling yen. C) decrease the supply of dollars by selling yen. D) increase the supply of dollars by buying yen. Answer: D Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 14) Suppose the current exchange rate between the Chinese yuan and the United States dollar is 7 yuan per dollar. If the Fed sought to drive up the exchange rate to 8 yuan per dollar then it would A) buy dollars. B) sell dollars. C) buy yuan. D) sell dollars and buy yuan. Answer: A Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 15) If the target exchange rate is 100 yen per dollar and the current exchange rate is 90 yen per dollar, the Fed will A) sell dollars and the demand for dollars will increase. B) sell dollars and the demand for dollars will decrease. C) buy dollars and the demand for dollars will increase. D) buy dollars and the demand for dollars will decrease. Answer: C Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 70 Copyright © 2014 Pearson Education, Inc.

16) In the above figure, suppose the demand for dollars temporarily increases so that the demand curve shifts to D1. To maintain the target exchange rate, the Fed A) can sell dollars. B) can buy dollars. C) must violate interest rate parity but not purchasing power parity. D) cannot maintain the target exchange rate. Answer: A Topic: The Fed in the Foreign Exchange Market Skill: Analytical Status: Old AACSB: Analytical Skills 17) In the figure above, suppose the demand for dollars temporarily decreases so that the demand curve shifts to D2. To maintain the target exchange rate, the Fed A) can sell dollars. B) can buy dollars. C) must violate both interest rate parity and purchasing power parity. D) cannot maintain the target exchange rate. Answer: B Topic: The Fed in the Foreign Exchange Market Skill: Analytical Status: Old AACSB: Analytical Skills

18) In the above figure, suppose the demand for dollars permanently decreases to D2. To maintain the target, the Fed A) can buy dollars. B) can sell dollars. C) must decrease the nation's net exports. D) cannot permanently maintain the exchange rate target of 150 yen per dollar. Answer: D Topic: The Fed in the Foreign Exchange Market Skill: Analytical Status: Old AACSB: Analytical Skills 19) If the Fed raises the U.S. interest rate, the demand for dollars ________ and the exchange rate ________. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls Answer: A Topic: The Fed in the Foreign Exchange Market Skill: Analytical Status: Old AACSB: Reflective Thinking 20) Epsilon is a country whose unit of currency is the omega. New information leads people to expect that the omega will appreciate next year. To keep the foreign exchange value of the omega fairly steady, the Bank of Epsilon will ________ enough omegas on the foreign exchange market so that the ________ omegas will ________. A) buy; demand for; increase B) sell; supply of; increase C) buy; demand for; decrease D) buy; supply of; decrease Answer: B Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking

21) If the Fed wants to depreciate the U.S. dollar against the British pound, it will ________. A) sell foreign exchange B) decrease the money supply C) sell British pounds D) sell U.S. dollars Answer: D Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 22) If a nation's central bank increased domestic interest rates, the nation's exchange rate would change if the country's exchange rate was a A) a flexible exchange rate. B) a fixed exchange rate. C) a crawling peg. D) a nominally fixed exchange rate. Answer: A Topic: Exchange Rate Policies Skill: Conceptual Status: Old AACSB: Reflective Thinking 23) China has used a fixed yuan exchange rate and a crawling peg exchange rate. In both cases, China pegs its currency to the A) U.S. dollar B) Japanese yen C) euro D) Mexican peso Answer: A Topic: China's Exchange Rate Policy Skill: Recognition Status: Old AACSB: Reflective Thinking 24) If the People's Bank of China adopted a flexible exchange rate policy, A) the U.S. dollar would depreciate. B) the U.S. dollar would appreciate. C) the yuan would depreciate. D) the yuan-U.S. dollar exchange rate would rise. Answer: A Topic: China's Exchange Rate Policy Skill: Recognition Status: Old AACSB: Reflective Thinking

25) The People's Bank of China has A) allowed a flexible exchange rate to boost exports. B) managed its exchange rate to help control inflation. C) strictly followed a fixed exchange rate to boost exports. D) purchased U.S. dollars to appreciate the yuan. Answer: B Topic: China's Exchange Rate Policy Skill: Conceptual Status: Old AACSB: Reflective Thinking 26) By fixing its exchange rate, China is most likely A) achieving a low inflation rate by anchoring to the U.S. inflation rate. B) keeping its export prices low. C) making it easier to compete in world markets. D) Both B and C. Answer: A Topic: China's Exchange Rate Policy Skill: Conceptual Status: Old AACSB: Reflective Thinking 27) All of the following statements are correct EXCEPT: A) China's exchange rate policy boosts exports in the long run. B) China's exchange rate policy is mainly an attempt to control inflation. C) China's exchange rate policy results in a depreciated yuan. D) China's exchange rate policy does not impact the real exchange rate in the long run. Answer: A Topic: China's Exchange Rate Policy Skill: Conceptual Status: Old AACSB: Reflective Thinking 28) If a country's central bank does not intervene in the foreign exchange market, the country has A) a crawling peg exchange rate policy. B) a fixed exchange rate policy. C) a flexible exchange rate policy. D) no exchange rate policy. Answer: C Topic: Study Guide Question, Exchange Rate Policy Skill: Conceptual Status: Old AACSB: Reflective Thinking

29) If the Fed sells U.S. dollars, the exchange rate A) rises. B) does not change. C) falls. D) changes, but the direction depends on whether the Fed affected the demand for dollars or the supply of dollars. Answer: C Topic: Study Guide Question, The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 30) How does a country maintain a fixed exchange rate? A) By intervening in the foreign exchange markets and buying or selling currency as needed to achieve the desired exchange rate. B) By forbidding foreign exchange markets to trade currency at anything other than the official exchange rate. C) By setting domestic interest rates to achieve purchasing power parity as the desired exchange rate. D) By intervening in import and export markets to achieve the desired current account and exchange rate. Answer: A Topic: Exchange Rate Regimes Skill: Conceptual Status: New AACSB: Reflective Thinking

4 Financing International Trade 1) A country's balance of payments accounts record A) the country's net indebtedness to foreigners. B) its international trading, borrowing, and lending. C) the flow of human and nonhuman resources between it and its trading partners. D) only its official transactions with other governments. Answer: B Topic: Balance of Payments Accounts Skill: Recognition Status: Old AACSB: Reflective Thinking 2) When the United States imports goods and services from the rest of the world, A) we receive payments from the rest of the world. B) we make payments to the rest of the world. C) we increase our inflation rate. D) we decrease our inflation rate. Answer: B Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking 3) When we export goods to foreign countries, we A) receive payments from the rest of the world. B) make payments to the rest of the world. C) increase our inflation rate. D) decrease our inflation rate. Answer: A Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking 4) Balance of payments accounts include A) the net interest income account. B) the current account. C) Both answers A and B are correct. D) Neither answer A nor B is correct. Answer: B Topic: Balance of Payments Accounts Skill: Recognition Status: Old AACSB: Reflective Thinking

5) Which of the following is recorded in the U.S. balance of payments account? I. foreign investment in the United States II. U.S. investment abroad III. the U.S. government deficit or surplus A) III only B) I and II C) I and III D) I, II and III Answer: B Topic: Balance of Payments Accounts Skill: Recognition Status: Old AACSB: Reflective Thinking 6) A country's balance of payments accounts records A) only the goods and services purchases among countries over a period of time. B) the international trading, borrowing, and lending positions of a country over a period of time. C) the flow of human and non-human capital among countries over a period of time. D) only official transactions between governments over a period of time. Answer: B Topic: Balance of Payments Accounts Skill: Recognition Status: Old AACSB: Reflective Thinking 7) A country's balance of payments accounts include all of the following EXCEPT A) military account. B) current account. C) capital and financial account. D) official settlements account. Answer: A Topic: Balance of Payments Accounts Skill: Recognition Status: Old AACSB: Reflective Thinking 8) In part, a country's current account measures A) its current debt as opposed to its long-term debt. B) borrowing and lending activity between the country's residents and foreigners. C) net increases and decreases in a country's holdings of foreign currency. D) receipts from the sale of goods and services to foreigners and payments for goods and services bought from foreigners. Answer: D Topic: Balance of Payments Accounts, Current Account Skill: Recognition Status: Old AACSB: Reflective Thinking 77 Copyright © 2014 Pearson Education, Inc.

9) The account that records the receipts from the exports of goods and services sold abroad, the payments for imports of goods and services from abroad, net interest income paid abroad, and net transfers is the ________. A) current account B) official settlements account C) international capital account D) capital and financial account Answer: A Topic: Balance of Payments Accounts, Current Account Skill: Recognition Status: Old AACSB: Reflective Thinking 10) Which international account is used to record payments for imports, receipts from exports, net interest paid abroad and net transfers? A) the capital and financial account B) the current account C) the official settlements account D) the trade account Answer: B Topic: Balance of Payments Accounts, Current Account Skill: Recognition Status: Old AACSB: Reflective Thinking 11) Which of the following is included in a nation's current account? I. the import of services II. a change of foreign currency holdings III. net transfers, such as foreign aid payments A) I and III B) I and II C) II and III D) III only Answer: A Topic: Balance of Payments Accounts, Current Account Skill: Recognition Status: Old AACSB: Reflective Thinking

12) The current account A) measures our exports minus our imports taking into account interest payments paid to and received from the rest of the world. B) measures our imports minus our exports. C) does not account for interest payments paid to and received from the rest of the world. D) is part of GDP. Answer: A Topic: Balance of Payments Accounts, Current Account Skill: Recognition Status: Old AACSB: Reflective Thinking 13) The current account is A) the difference between exports and imports, also taking into account interest payments to and from the rest of the world. B) the amount of money the government keeps on hand to pay its bills taking account of the interest payments on its debt. C) is the amount of tax revenue that the government expects to collect. D) is the total amount of interest payments that the U.S. owes to foreign countries. Answer: A Topic: Balance of Payments Accounts, Current Account Skill: Recognition Status: Old AACSB: Reflective Thinking 14) The largest part of the U.S. current account consists of A) Fed transfers of U.S. dollars to other central banks. B) net transfer payments between the United States and Mexico. C) receipts from exports and payments for imports. D) net borrowing between the United States and other countries. Answer: C Topic: Balance of Payments Accounts, Current Account Skill: Recognition Status: Old AACSB: Reflective Thinking 15) Suppose that the U.S. government gives foreign aid to Turkey. This transaction would directly A) increase the U.S. current account. B) decrease the U.S. current account. C) increase the U.S. capital and financial account. D) decrease the U.S. capital and financial account. Answer: B Topic: Balance of Payments Accounts, Current Account Skill: Recognition Status: Old AACSB: Reflective Thinking 79 Copyright © 2014 Pearson Education, Inc.

16) An American consumer buys a French luxury product in New York. In the U.S. balance of payments accounts, this transaction directly appears in A) the official settlements account. B) the imports part of the current account. C) the net transfers part of the current account. D) the capital and financial account. Answer: B Topic: Balance of Payments Accounts, Current Account Skill: Recognition Status: Old AACSB: Reflective Thinking 17) Which of the following contributes to a current account surplus for a country? A) having tourists visit the country B) importing textiles C) having foreigners buy government securities from the country's government D) importing financial services Answer: A Topic: Balance of Payments Accounts, Current Account Skill: Conceptual Status: Old AACSB: Reflective Thinking 18) The current account records all transactions below EXCEPT for A) net exports of goods and services. B) net interest income. C) net foreign investment. D) net transfers. Answer: C Topic: Balance of Payments Accounts, Current Account Skill: Recognition Status: Old AACSB: Reflective Thinking 19) Which of the following is NOT included in the U.S. current account? A) U.S. investment abroad B) net interest income C) net transfers D) imports of goods and services Answer: A Topic: Balance of Payments Accounts, Current Account Skill: Recognition Status: Old AACSB: Reflective Thinking

20) The balance of payments account which records foreign investment in the United States and U.S. investments abroad is the A) capital and financial account B) current account C) official settlements account D) None of the above because foreign investment in the United States is included in one account and U.S. investment abroad is included in another account Answer: A Topic: Balance of Payments Accounts, Capital and Financial Account Skill: Recognition Status: Old AACSB: Reflective Thinking 21) The account that records foreign investment in the United States minus U.S. investment abroad is the A) capital and financial account. B) official settlements account. C) current account. D) U.S. official reserves account. Answer: A Topic: Balance of Payments Accounts, Capital and Financial Account Skill: Recognition Status: Old AACSB: Reflective Thinking 22) The capital and financial account measures ________. A) foreign investment in the United States minus U.S. investment abroad B) capital produced outside of the United States minus capital produced inside the United States C) capital used inside the United States but manufactured outside the United States D) capital used outside the United States but manufactured inside the United States Answer: A Topic: Balance of Payments Accounts, Capital and Financial Account Skill: Recognition Status: Old AACSB: Reflective Thinking

23) Which of the following is included in a nation's capital and financial account? I. the purchase of foreign stocks and bonds II. the sale of foreign stocks and bonds III. importing a piece of capital equipment A) I only B) I and II C) III only D) I, II and III Answer: B Topic: Balance of Payments Accounts, Capital and Financial Account Skill: Conceptual Status: Old AACSB: Reflective Thinking 24) Which of the following transactions is NOT recorded in the capital and financial account? A) foreign investment in the United States B) U.S. investment abroad C) statistical discrepancy D) net interest income Answer: D Topic: Balance of Payments Accounts, Capital and Financial Account Skill: Recognition Status: Old AACSB: Reflective Thinking 25) A negative balance in the capital and financial account means the economy is A) lending to the rest of the world B) running a capital account surplus C) borrowing from the rest of the world D) importing more than it is exporting Answer: A Topic: Balance of Payments Accounts, Capital and Financial Account Skill: Recognition Status: Old AACSB: Reflective Thinking 26) Which of the following transactions directly leads to a surplus on the U.S. capital and financial account? A) An American purchases a share of stock on the Tokyo exchange. B) An American sells wheat to an African nation. C) A Japanese resident purchases a U.S. government bond. D) A resident of France visits the United States. Answer: C Topic: Balance of Payments Accounts, Capital and Financial Account Skill: Conceptual Status: Old AACSB: Reflective Thinking 82 Copyright © 2014 Pearson Education, Inc.

27) A German publishing company buys an American publishing company based in New York. In the U.S. balance of payments accounts, this transaction directly appears in A) the official settlements account. B) the imports part of the current account. C) the net transfers part of the current account. D) the capital and financial account. Answer: D Topic: Balance of Payments Accounts, Capital and Financial Account Skill: Recognition Status: Old AACSB: Reflective Thinking 28) The official settlements account records the change in ________. A) international trade B) U.S. official reserves C) foreign investment and domestic investment D) the reserves held by banks and the Fed Answer: B Topic: Balance of Payments Accounts, Official Settlements Account Skill: Recognition Status: Old AACSB: Reflective Thinking 29) Which of the following accounts records the change in U.S. official reserves? A) current account B) capital and financial account C) official settlements account D) none of the above Answer: C Topic: Balance of Payments Accounts, Official Settlements Account Skill: Recognition Status: Old AACSB: Reflective Thinking 30) The account that records changes in the U.S. government's holdings of foreign currency is the A) capital and financial account. B) official settlements account. C) current account. D) U.S. official reserves account. Answer: B Topic: Balance of Payments Accounts, Official Settlements Account Skill: Recognition Status: Old AACSB: Reflective Thinking

31) If the U.S. government increased its holdings of British pounds, definitely A) the capital and financial account would increase. B) the capital and financial account would decrease. C) there would be an increase in U.S. official reserves. D) there would be a decrease in U.S. official reserves. Answer: C Topic: Balance of Payments Accounts, Official Settlements Account Skill: Conceptual Status: Old AACSB: Reflective Thinking 32) If the U.S. government decreased its holdings of Mexican pesos, definitely A) the capital and financial account would increase. B) the capital and financial account would decrease. C) there would be an increase in U.S. official reserves. D) there would be a decrease in U.S. official reserves. Answer: D Topic: Balance of Payments Accounts, Official Settlements Account Skill: Conceptual Status: Old AACSB: Reflective Thinking 33) Which of the following statements is INCORRECT? A) Payments for imports and receipts from exports are recorded in the current account. B) Foreign investment in the United States and U.S. investment abroad are recorded in the capital and financial account. C) A change in U.S. official reserves is recorded in the official settlements account. D) Net interest income is recorded in the official settlements account. Answer: D Topic: Balance of Payments Accounts, Official Settlements Account Skill: Recognition Status: Old AACSB: Reflective Thinking 34) The official settlements account of a country measures A) the receipts from goods and services bought and sold and transfers to and from foreigners. B) borrowing and lending between the country's residents and foreigners. C) the net increase or decrease in the country's official reserves. D) net transfer payments between the country's citizens and foreigners. Answer: C Topic: Balance of Payments Accounts, Official Settlements Account Skill: Recognition Status: Old AACSB: Reflective Thinking

35) U.S. official reserves are the ________. A) reserves of U.S. dollars held by the World Bank B) U.S. government's holdings of foreign currency C) reserves of U.S. dollars held by foreign banks D) holdings of foreign currency by the public and the banks Answer: B Topic: Balance of Payments Accounts, Official Settlements Account Skill: Recognition Status: Old AACSB: Reflective Thinking 36) The change in U.S. official reserves is equal to A) borrowing from abroad plus the current account deficit. B) the current account balance plus the capital and financial account balance. C) the current account balance minus the capital and financial account balance. D) foreign investment in the United States minus U.S. investment abroad. Answer: B Topic: Balance of Payments Accounts, Official Settlements Account Skill: Recognition Status: Old AACSB: Reflective Thinking 37) An official settlements account balance of -$5,000 means A) official reserves of foreign currency increased $5,000 B) official reserves of foreign currency decreased $5,000 C) the country is exporting more than it is importing D) the country is importing more than it is exporting Answer: A Topic: Balance of Payments Accounts, Official Settlements Account Skill: Conceptual Status: Old AACSB: Reflective Thinking 38) To pay for a current account deficit, a country can A) borrow money from abroad B) lend money abroad C) increase official reserves to cover the shortfall D) transfer money from the capital account to the official settlements account Answer: A Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking

39) If a country is importing more than they are exporting, the current account will have a ________ balance and the capital and financial account will have a ________ balance. A) negative; positive B) negative; negative C) positive; negative D) positive; positive Answer: A Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking 40) If foreign investment in the United States exceeds U.S. investment abroad, there is a ________; and when U.S. investment abroad exceeds foreign investment in the United States, there is ________. A) current account surplus; a current account deficit B) current account surplus; an official accounts surplus C) capital and financial account surplus; a capital and financial account deficit D) capital and financial account deficit; a capital and financial account surplus Answer: C Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking 41) When there is a current account deficit and the official settlements account equals 0, then A) exports exceed imports for the country. B) the country is an exporter of capital. C) the capital and financial account has a surplus. D) the country has a budget surplus. Answer: C Topic: Balance of Payments Accounts Skill: Recognition Status: Old AACSB: Reflective Thinking 42) If U.S. imports increase, the sum of the balance of payments accounts (the sum of the current account plus capital and financial account plus official settlements account) A) becomes negative. B) becomes positive. C) becomes negative or positive depending on the government budget deficit or surplus. D) does not change. Answer: D Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking 86 Copyright © 2014 Pearson Education, Inc.

43) The sum of the current account, capital and financial account, and official settlements account is A) a positive number if the country has a trade surplus. B) a negative number if the country has a trade deficit. C) positive or negative depending on whether the domestic exchange rate is appreciating or depreciating. D) always equal to zero. Answer: D Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking 44) Suppose the current account of a country is in balance and the official settlements account equals 0. A new transaction occurs so that the current account is now in surplus, but the official settlements account does not change. From this we know that A) the balance of trade is now in surplus. B) the government is running a budget deficit. C) the capital and financial account is now in deficit. D) the government must make official reserve transactions. Answer: C Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking 45) If the current account balance is $30 billion, and the capital and financial account balance is $35 billion, then the official settlements account balance is ________ billion, and the official reserves ________. A) $5 billion; increase B) -$5 billion; increase C) $5 billion; decrease D) -$5 billion; decrease Answer: B Topic: Balance of Payments Accounts Skill: Analytical Status: Old AACSB: Analytical Skills

46) If the current account balance is -$100 billion and the capital and financial account balance is $80 billion, then the official settlement account balance is A) -$20 billion. B) $20 billion. C) always 0. D) impossible to determine with the information given. Answer: B Topic: Balance of Payments Accounts Skill: Analytical Status: Old AACSB: Analytical Skills 47) If the U.S. current account balance is -$500 billion and the capital and financial account balance is +$510 billion, A) the U.S. official settlements account balance is $10 billion. B) the U.S. government's holdings of foreign currency increases by $10 billion. C) foreign investment in the United States is smaller than the U.S. investment abroad. D) U.S. exports are greater than U.S. imports. Answer: B Topic: Balance of Payments Accounts Skill: Analytical Status: Old AACSB: Analytical Skills 48) If the current account has a negative balance of $100 and the capital and financial account has a positive balance of $80, there will be ________ in official reserves of ________. A) a decrease; $20 B) an increase; $20 C) an increase; $180 D) a decrease; $180 Answer: A Topic: Balance of Payments Accounts Skill: Analytical Status: Old AACSB: Analytical Skills 49) If the current account has a positive balance of $100 and the capital and financial account has a negative balance of $90, there will be ________ in official reserves of ________. A) a decrease; $10 B) an increase; $10 C) an increase; $190 D) a decrease; $190 Answer: B Topic: Balance of Payments Accounts Skill: Analytical Status: Old AACSB: Analytical Skills 88 Copyright © 2014 Pearson Education, Inc.

Item Exports of goods Imports of goods Exports of services Imports of services Net interest income Net transfers U.S. investment abroad Foreign investment in the United States Official settlements account

Billions of dollars 1000 -665 410 -590 0 -15 -600 400 60

50) The data in the table above are the U.S. balance of payments. The current account balance is A) $140 billion. B) $155 billion. C) $170 billion. D) -$45 billion. Answer: A Topic: Balance of Payments Accounts Skill: Analytical Status: Old AACSB: Analytical Skills 51) The data in the table above are the U.S. balance of payments. The data show that A) the United States has a current account surplus. B) the United States has a capital and financial account surplus. C) The United States loaned $400 billion to the rest of the world. D) Both answers A and B are correct. Answer: A Topic: Balance of Payments Accounts Skill: Analytical Status: Old AACSB: Analytical Skills 52) The data in the table above are the U.S. balance of payments. The capital and financial account balance is A) $0. B) -$80 billion. C) -$200 billion. D) +$200 billion. Answer: C Topic: Balance of Payments Accounts Skill: Analytical Status: Old AACSB: Analytical Skills 89 Copyright © 2014 Pearson Education, Inc.

53) The data in the table above are the U.S. balance of payments. The sum of the current account plus capital and financial account plus official settlements account is equal to A) $0. B) -$335 billion. C) $140 billion. D) -$60 billion. Answer: A Topic: Balance of Payments Accounts Skill: Analytical Status: Old AACSB: Analytical Skills

Item Imports of goods and services Exports of goods and services Net interest income Net transfers U.S. investment abroad Foreign investment in the United States

Billions of dollars -750 1,000 -50 -50 -350 200

54) The data in the table above are the U.S. balance of payments. What is the current account balance? A) $0 B) $150 billion C) -$100 billion D) -$150 billion Answer: B Topic: Balance of Payments Accounts Skill: Analytical Status: Revised AACSB: Analytical Skills 55) The data in the table above are the U.S. balance of payments. What is the capital and financial account balance? A) $0 B) $150 billion C) -$350 billion D) -$150 billion Answer: D Topic: Balance of Payments Accounts Skill: Analytical Status: Revised AACSB: Analytical Skills 90 Copyright © 2014 Pearson Education, Inc.

56) The data in the table above are the U.S. balance of payments. If there is no statistical discrepancy, what is the balance in the official settlements account? A) $150 billion B) -$150 billion C) $50 billion D) $0 Answer: D Topic: Balance of Payments Accounts Skill: Analytical Status: Revised AACSB: Analytical Skills

Item Exports of goods and services Imports of goods and services Net interest income Net transfers Urland's investment abroad Foreign investment in Urland

Billions of dollars 635 -555 -18 22 -467 321

57) The above table shows some of the balance of payments accounts for Urland. What is Urland's balance on the current account? A) $80 billion B) $62 billion C) $84 billion D) $47 billion Answer: C Topic: Balance of Payments Accounts Skill: Analytical Status: Revised AACSB: Analytical Skills

58) The above table shows some of the balance of payments accounts for Urland. What is Urland's balance on the capital and financial account? A) -$146 billion B) -$183 billion C) -$99 billion D) $142 billion Answer: A Topic: Balance of Payments Accounts Skill: Analytical Status: Revised AACSB: Analytical Skills 59) The above table shows some of the balance of payments accounts for Urland. What is Urland's balance in the official settlements account? A) $405 billion B) $62 billion C) $99 billion D) $37 billion Answer: B Topic: Balance of Payments Accounts Skill: Analytical Status: Revised AACSB: Analytical Skills 60) When we have a negative current account, we are A) borrowing from the rest of the world. B) lending to the rest of the world. C) running a government budget surplus. D) None of the above is correct. Answer: A Topic: Balance of Payments Accounts Skill: Recognition Status: Old AACSB: Reflective Thinking 61) Which of the following statements about the balance of payments accounts is correct? A) The current account must be greater than the capital and financial account. B) The sum of all three accounts is always zero. C) The official settlements account is typically larger than both the capital and financial account and the current account. D) Typically the capital and financial account is near zero because it equals the difference between the current account and the official settlements account. Answer: B Topic: Balance of Payments Accounts Skill: Recognition Status: Old AACSB: Reflective Thinking 92 Copyright © 2014 Pearson Education, Inc.

62) The European Commission believes that 2012 exports of goods and services from Spain will be 22 larger than in 2009. Irish exports are expected to have grown by 15 percent over the same period. If imports remain constant, A) the current account balance in both countries will become more positive. B) the current account balance in both countries will become more negative. C) there will be no change in the current account balance of both countries. D) in both countries the capital and financial account balance will become more positive. Answer: A Topic: Current Account Balance Skill: Conceptual Status: New AACSB: Reflective Thinking 63) Over the last 25 years, according to the United States balance of payments, A) the current account and the capital and financial account balances tend to move in the same direction. B) the current account and the capital and financial account balances tend to move in opposite directions. C) there is no clear relationship between the current account balance and the capital and financial account balance. D) the official settlements balance fluctuates greatly from year to year. Answer: B Topic: Patterns and Trends in International Trade Skill: Recognition Status: Old AACSB: Reflective Thinking 64) During most of the 1980s, 1990s, and 2000s the U.S. has had a ________ current account balance and a ________ capital and financial account balance. A) positive; positive B) positive; negative C) negative; positive D) negative; negative Answer: C Topic: Patterns and Trends in International Trade Skill: Recognition Status: Old AACSB: Reflective Thinking

65) If a country is currently lending more to the rest of the world than it is borrowing from the rest of the world, the country is a A) net borrower. B) debtor nation. C) net lender. D) creditor nation. Answer: C Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition Status: Old AACSB: Reflective Thinking 66) Suppose Italy currently lends 1.5 billion euros to other nations and borrows 1 billion euros from other nations. Italy definitely is a A) net borrower. B) net lender. C) creditor nation. D) debtor nation. Answer: B Topic: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual Status: Revised AACSB: Reflective Thinking 67) If a country lends more to foreign countries than it borrows from foreign countries in a year, then definitely that year A) it has a current account deficit. B) it is a creditor nation. C) it is a debtor nation. D) it is a net lender. Answer: D Topic: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual Status: Old AACSB: Reflective Thinking

68) Which of the following countries are net lenders? I. Japan II. United States A) I only B) II only C) both I and II D) neither I nor II Answer: A Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition Status: Old AACSB: Reflective Thinking 69) If a country is currently borrowing more from the rest of the world than it is lending to the rest of the world, the country is a A) net borrower. B) debtor nation. C) net lender. D) creditor nation. Answer: A Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition Status: Old AACSB: Reflective Thinking 70) Suppose this year Angola borrows $100 million from foreign countries while it lends $15 million. Angola definitely is a A) net borrower. B) net lender. C) creditor nation. D) debtor nation. Answer: A Topic: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual Status: Old AACSB: Reflective Thinking

71) If a country during its entire history has invested more in the rest of the world than the rest of the world has invested in it, the country is a A) net borrower. B) debtor nation. C) net lender. D) creditor nation. Answer: D Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition Status: Old AACSB: Reflective Thinking 72) A creditor nation means a nation A) whose exports exceed its imports. B) whose current account is larger than its capital account. C) whose current lending to the rest of the world exceeds its borrowing from the rest of the world. D) through its history has invested more in the rest of the world than other countries have invested in it. Answer: D Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition Status: Old AACSB: Reflective Thinking 73) Over its history, Spain has loaned more money abroad than foreigners have lent to it. Spain is a A) net lender. B) net borrower. C) creditor nation. D) debtor nation. Answer: C Topic: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual Status: Old AACSB: Reflective Thinking

74) If a nation during its entire history has borrowed more from the rest of the world than it has lent to the rest of the world, the country is a A) net borrower. B) debtor nation. C) net lender. D) creditor nation. Answer: B Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition Status: Old AACSB: Reflective Thinking 75) A debtor nation means a nation A) whose imports exceeds its exports. B) whose current account is less than its capital account. C) through its history has invested less in the rest of the world than other countries have invested in it D) whose current lending to the rest of the world exceeds its borrowing from the rest of the world. Answer: C Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition Status: Old AACSB: Reflective Thinking 76) Over its history, Brazil has borrowed more from the rest of the world than it has loaned to the rest of the world. Brazil A) eventually will have a balance of payments account that does not balance. B) is a debtor nation. C) is a creditor nation. D) has no current account balance. Answer: B Topic: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual Status: Old AACSB: Reflective Thinking

77) A country that during its entire history has borrowed more from the rest of the world than it has lent to it is a ________, and a country that during its entire history has invested more in the rest of the world than other countries have invested in it is a ________. A) debtor nation; investor nation B) borrower nation; creditor nation C) debtor nation; creditor nation D) net borrower nation; net lender nation Answer: C Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition Status: Old AACSB: Reflective Thinking 78) A net borrower is a country that ________, while a net lender is a country that ________. A) borrows more than it lends; owes more to foreigners than foreigners owe to it B) decreases its stock of outstanding foreign debt; lends more than it borrows C) borrows more than it lends; lends more than it borrows D) lends more than it borrows; borrows more than it lends Answer: C Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition Status: Old AACSB: Reflective Thinking 79) This year a country loaned more to the rest of the world than it borrowed from the rest of the world. In addition, the country has invested more in the rest of the world than other countries have invested in it. The country is currently a ________ and also a ________. A) net lender; creditor nation B) net borrower; creditor nation C) net borrower; debtor nation D) debtor nation; net lender Answer: A Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition Status: Old AACSB: Reflective Thinking

80) A country that borrows more from the rest of the world than it lends to it in a year is called a ________, and a country that lends more to the rest of the world than it borrows from it in a year is called a ________. A) borrower; lender B) importer; exporter C) net borrower; net lender D) gross borrower; gross lender Answer: C Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition Status: Old AACSB: Reflective Thinking 81) Today, the United States is a I. net borrower II. net lender III. debtor nation IV. creditor nation A) I and IV B) II and IV C) I and III D) II and III Answer: C Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition Status: Old AACSB: Reflective Thinking 82) If a country has a capital and financial account surplus, that country's stock of international indebtedness is A) increasing. B) decreasing. C) constant. D) zero. Answer: A Topic: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual Status: Old AACSB: Analytical Skills

83) If a country has a capital and financial account deficit, that country's stock of international indebtedness is A) increasing. B) decreasing. C) constant. D) zero. Answer: B Topic: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual Status: Old AACSB: Analytical Skills 84) Since the mid 1980s, the United States has been a net ________ and a ________ nation. A) borrower; creditor B) lender; creditor C) borrower; debtor D) lender; debtor Answer: C Topic: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual Status: Old AACSB: Reflective Thinking 85) If we import more than we export from the rest of the world we A) must borrow an equal amount from the rest of the world. B) can lend an equal amount to the rest of the world. C) are running a trade surplus. D) are helping to finance investment in the rest of the world. Answer: A Topic: Rest of the World Sector Skill: Recognition Status: Old AACSB: Reflective Thinking

86) If U.S. net exports are positive, A) other countries borrow from the United States to pay for some of the goods they purchase from the United States. B) other countries make loans to the United States so that the United States can pay for some of the goods it purchases from other countries. C) the United States sells some of the assets it owns in other countries to pay for some of the goods it sells to other countries. D) the United States borrows from other countries to pay for some of the goods the United States purchases from them. Answer: A Topic: Rest of the World Sector Skill: Conceptual Status: Old AACSB: Reflective Thinking 87) The main item in the current account balance is A) net interest income. B) net transfers. C) net exports. D) net taxes. Answer: C Topic: Current Account Balance Skill: Recognition Status: Old AACSB: Reflective Thinking 88) The value of net exports increases when the value of ________. A) exports of goods and services minus imports of goods and services decreases B) imports of goods and services increase C) imports of goods and services decrease D) exports of goods and services decrease Answer: C Topic: Current Account Balance Skill: Recognition Status: Old AACSB: Reflective Thinking 89) The current account balance is defined as A) the value of exports - the value of imports. B) the amount of exported capital assets + net interest income. C) the value of exports - the value of imports + net interest income + net transfers. D) the difference between the import and export of official reserves. Answer: C Topic: Current Account Balance Skill: Recognition Status: Old AACSB: Reflective Thinking 101 Copyright © 2014 Pearson Education, Inc.

90) The current account balance is equal to A) net exports + net interest income + net transfers. B) net exports - net interest income - net transfers. C) net exports + net interest income - net transfers. D) net interest income + net transfers - net exports. Answer: A Topic: Current Account Balance Skill: Recognition Status: Old AACSB: Reflective Thinking 91) Which of the following are included in the U.S. current account balance? I. exports to Japan II. interest payments made to Canada III. transfer payments made to Israel A) I only B) I and II C) I and III D) I, II and III Answer: D Topic: Current Account Balance Skill: Conceptual Status: Old AACSB: Reflective Thinking 92) All of the following are a current account transaction EXCEPT A) importing services. B) exporting goods. C) investing abroad. D) importing goods. Answer: C Topic: Current Account Balance Skill: Recognition Status: Old AACSB: Reflective Thinking

93) If net interest and net transfers are zero, and a country's exports exceed its imports, the country definitely has ________. A) a current account surplus B) a current account deficit C) a capital and financial account surplus D) an official settlements account surplus Answer: A Topic: Current Account Balance Skill: Recognition Status: Old AACSB: Reflective Thinking 94) If net interest and net transfers are $0, and a nation's purchases of foreign goods and services are $3.5 billion while its sales of goods and services to foreigners are $4.5 billion, A) it has a $1 billion surplus in its balance of payments. B) it has a $1 billion deficit in its current account. C) it has a $1 billion surplus in its current account. D) its capital and financial account shows a surplus. Answer: C Topic: Current Account Balance Skill: Conceptual Status: Old AACSB: Analytical Skills 95) The country of Pimm exports $500 billion worth of goods and services and imports $400 billion worth of goods and services. Net interest income paid abroad is $50 billion and net transfers are $0. The current account balance is ________. A) $50 billion B) $100 billion C) $150 billion D) $975 billion Answer: A Topic: Current Account Balance Skill: Analytical Status: Revised AACSB: Analytical Skills 96) The private sector surplus or deficit equals A) saving minus investment. B) net taxes minus government purchases. C) investment minus saving. D) government purchases minus net taxes. Answer: A Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Recognition Status: Old AACSB: Reflective Thinking 103 Copyright © 2014 Pearson Education, Inc.

97) Net exports equals A) exports of goods and services minus imports of goods and services. B) imports of goods and services minus exports of goods and services. C) the government sector balance plus the private sector balance. D) Both answers A and C are correct. Answer: D Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Recognition Status: Old AACSB: Reflective Thinking 98) The government sector balance is equal to ________. A) net taxes minus government purchases of goods and services B) tariffs minus imports C) saving minus investment D) exports minus imports Answer: A Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Recognition Status: Old AACSB: Reflective Thinking 99) The private sector balance is equal to ________. A) income minus consumption minus net taxes B) income minus consumption minus investment C) saving minus investment D) income minus consumption Answer: C Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Recognition Status: Old AACSB: Reflective Thinking 100) A net exports deficit or surplus equals A) taxes minus savings plus public and private investment. B) the government sector balance plus the private sector balance. C) net lending by both the private and public sector plus savings minus investment. D) net worth plus the government sector balance minus the private sector balance. Answer: B Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking

101) Which of the following is correct? A) Net exports equals the government sector balance plus the private sector balance. B) The government sector balance equals net exports plus the private sector balance. C) The private sector balance equals net exports plus the government sector balance. D) Net exports equals the current account plus the capital account plus the official settlements account. Answer: A Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking 102) Which of the following statements is true? A) If private saving is greater than private investment, then the private sector has a surplus. B) If private investment is greater than private saving, then the private sector has a deficit. C) If private investment is greater than private saving, then either the government or net export sector must have a surplus. D) All of the above answers are correct. Answer: D Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking 103) Which of the following equations represents the private sector balance? A) X - M B) T - G C) S - I D) C + S + T Answer: C Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Recognition Status: Old AACSB: Analytical Skills 104) X is exports, M is imports, T is net taxes, G is government expenditure, C is consumption expenditure, S is saving, and I is investment. The government sector balance is equal to A) T - G B) C + S + T C) S - I D) X - M Answer: A Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Recognition Status: Old AACSB: Analytical Skills 105 Copyright © 2014 Pearson Education, Inc.

105) Suppose X - M = net exports; T - G = government sector balance; and S - I = private sector balance. What relationship exists among these variables? A) (X - M ) + (T - G ) + (S - I ) = 0 B) (X - M ) = (T - G ) + (S - I ) C) (T - G ) + (X - M ) = (S - I ) D) (T - G ) = (X - M ) + (S - I ) Answer: B Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Recognition Status: Old AACSB: Analytical Skills 106) Which of the following statements is INCORRECT? A) Net exports equals exports minus imports. B) The government sector balance equals net taxes minus government expenditures on goods and services. C) Private sector balance equal private investment minus private saving. D) The sum of government sector and private sector balances equals net exports. Answer: C Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking 107) A country has a government sector deficit and a private sector surplus. If the government sector deficit increases, and the private sector surplus decreases, ________. A) net exports decrease or remain constant B) net exports increase C) net exports increase, decrease, or remain constant D) net exports decrease Answer: D Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking 108) If net exports is a negative number, the government sector must ________ if the private sector is in a ________. A) run a surplus; surplus B) equal zero; deficit C) run a deficit; surplus D) The statement errs because the accounts are not related. Answer: C Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking 106 Copyright © 2014 Pearson Education, Inc.

109) If X - M = $0 and the government sector has a deficit of $250 billion, the private sector A) has a deficit that equals $0. B) has a deficit that equals $250 billion. C) has a surplus that equals $250 billion. D) has a surplus that equals $500 billion. Answer: C Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 110) If net exports is 100 and the private sector balance is 150, then the government sector balance is A) -50. B) 50. C) 250. D) 0. Answer: A Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 111) Suppose U.S. net exports are -$400 billion and the U.S. government sector surplus is $200 billion. Then in the private sector, saving minus investment equals A) -$600 billion. B) -$200 billion. C) +$600 billion. D) +$200 billion. Answer: A Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 112) If the government sector is running a deficit of $120 million and the private sector is running a surplus of $200 million, net exports equals a A) $80 million surplus. B) $320 million surplus. C) $80 million deficit. D) $320 million deficit. Answer: A Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 107 Copyright © 2014 Pearson Education, Inc.

113) Hong Kong has imports of $1,130 billion and exports of $1,255 billion. Hong Kong definitely has ________. A) negative net exports of $125 billion B) positive net exports of $125 billion C) a government budget surplus D) Both answers B and C are correct. Answer: B Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 114) On the island country of Sunshine where the unit of currency is fish, net exports are 50 fish, saving is 250 fish, net taxes are 100 fish, and the government budget deficit is 175 fish. What is the value of investment? A) 375 fish B) -375 fish C) 25 fish D) -25 fish Answer: C Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 115) On the island country of Sunshine where the unit of currency is fish, net exports are 50 fish, saving is 250 fish, net taxes are 100 fish, and the government budget deficit is 175 fish. The private sector has a ________. A) deficit of 125 fish B) surplus of 125 fish C) deficit of 225 fish D) surplus of 225 fish Answer: D Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills

Component Investment, I Net taxes, T Government expenditure, G Exports, X Imports, M

Amount (billions of dollars) 700 1,300 1,200 1,500 1,700

116) In the above table, the government sector balance is a A) surplus of $200 billion. B) deficit of $200 billion. C) surplus of $100 billion. D) deficit of $100 billion. Answer: C Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 117) In the above table, net exports equals a A) surplus of $200 billion. B) deficit of $200 billion. C) surplus of $100 billion. D) deficit of $100 billion. Answer: B Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 118) In the above table, the government sector balance is a ________ and net exports is a ________. A) surplus of $100 billion; deficit of $200 billion B) deficit of $100 billion; surplus of $200 billion C) surplus of $100 billion; surplus of $200 billion D) deficit of $100 billion; deficit of $200 billion Answer: A Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills

119) In the above table, the private sector has a A) surplus of $300 billion. B) deficit of $300 billion. C) deficit of $200 billion. D) deficit of $400 billion. Answer: B Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 120) In the above table, saving must be A) -$300 billion. B) $300 billion. C) $400 billion. D) -$400 billion. Answer: C Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills

Item Exports of goods and services, X Imports of goods and services, M Net taxes, T Government expenditure, G Saving, S Investment, I

Billions of dollars 500 750 1,000

121) In the above table, suppose imports = $750 billion and government expenditures = $1,000 billion. Hence investment equals A) -$500 billion. B) $1,000 billion. C) $500 billion. D) $0. Answer: B Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills

122) Using the data in the above table, suppose imports equals $250 billion and investment equals $1,000 billion. Hence government expenditure equals A) $1,000 billion. B) $750 billion. C) $500 billion. D) $250 billion. Answer: C Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 123) Using the data in the above table, if the private sector runs a surplus of $250 billion, imports will equal $1,000 billion if A) government expenditure equals -$750 billion. B) investment equals -$1000 billion. C) government expenditure equals -$1000 billion. D) the government sector runs a deficit of $750 billion. Answer: D Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills Billions of dollars

Item Exports of goods and services, X Imports of goods and services, M Net taxes, T Government expenditure, G Saving, S Investment, I

1,000 1,300 650

124) Using the data in the above table, if exports = $1,150 billion and the private sector runs a surplus of $300 billion, the government sector will run A) a surplus of $150 billion. B) a surplus of $450 billion. C) a deficit of $150 billion. D) a deficit of $450 billion. Answer: C Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills

125) Using the data in the above table, if the government sector runs a deficit of $250 billion and net exports equal -$500 billion, then saving must equal A) $450 billion. B) $250 billion. C) $1,350 billion. D) $400 billion. Answer: D Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 126) Using the data in the above table, if net exports = -$500 billion and the government balances its budget, A) the private sector must balance its budget. B) savings must equal $150 billion. C) the private sector runs a surplus of $850 billion. D) saving must equal $650 billion. Answer: B Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 127) Using the data in the above table, if saving equals $650 billion and exports are greater than imports, A) the government sector must run a deficit. B) net taxes will be greater than $1300 billion. C) net taxes will be less than $650 billion. D) government expenditures must increase. Answer: B Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills

Item Exports Imports Government expenditure Net taxes Investment Saving

Billions of dollars 234 277 887 855 760 749

128) The above table gives data for the nation of Sueland. What is the value of net exports? A) $43 billion B) $234 billion C) -$43 billion D) $511 billion Answer: C Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 129) The above table gives data for the nation of Sueland. What is the government sector balance? A) $1,772 billion B) $32 billion C) -$43 billion D) -$32 billion Answer: D Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 130) The above table gives data for the nation of Sueland. What is the private sector balance? A) $11 billion B) -$11 billion C) -$43 billion D) $43 billion Answer: B Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills

Item Imports of goods and services, M Net taxes, T Government expenditure, G Savings, S Investment, I

Billions of dollars 275 300 250 125 100

131) The table above gives some of the entries in the national income and product accounts. The government sector has a ________, and the private sector has a ________. A) surplus of $50 billion; surplus of $25 billion B) deficit of $50 billion; surplus of $25 billion C) surplus of $50 billion; deficit of $25 billion D) deficit of $50 billion; deficit of $25 billion Answer: A Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 132) The table above gives some of the entries in the national income and product accounts. What is the value of exports? A) $350 billion B) $300 billion C) -$25 billion D) $25 billion Answer: A Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills

Item Exports Imports Government sector surplus Private sector deficit

Dollars 500 400 250 -150

133) The above table describes accounts for the country of Pacifica. Using this information, net exports for Pacifica equals A) $100. B) $900. C) -$100. D) $650. Answer: A Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 134) In the United States, since 1981 which two of the following have almost always moved in the same direction? A) net exports and the government sector balance B) net exports and the private sector balance C) the government sector balance and the private sector balance D) none of the above Answer: D Topic: The Three Sector Balances Skill: Recognition Status: Old AACSB: Reflective Thinking 135) Which of the following is one of the balance of payments accounts? A) government expenditure account B) capital and financial account C) reserve account D) net borrowing account Answer: B Topic: Study Guide Question, Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking

136) Suppose the United States initially has a trade deficit. Then U.S. firms increase their imports from Canada, financing that increase by borrowing from Canada. The current account deficit is now ________ and the capital and financial account surplus is now ________. A) larger; larger B) larger; smaller C) smaller; larger D) smaller; smaller Answer: A Topic: Study Guide Question, Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking

Component Government expenditure, G Net taxes, T Investment, I Savings, S

Amount (billions of dollars) 700 600 350 500

137) In the table above, what is the government's sector balance? A) a deficit of $700 billion B) a surplus of $600 billion C) a deficit of $100 billion D) $0 Answer: C Topic: Study Guide Question, Net Export, Gov. Budget, Saving & Investment Skill: Analytical Status: Old AACSB: Analytical Skills 138) In the table above, what does the private sector surplus equal? A) $500 billion B) $350 billion C) $150 billion D) $0 Answer: C Topic: Study Guide Question, Net Export, Gov. Budget, Saving & Investment Skill: Analytical Status: Old AACSB: Analytical Skills

139) In the table above, what do net exports equal? A) a deficit of $700 billion B) a deficit of $350 billion C) a surplus of $50 billion D) a surplus of $1,750 billion Answer: C Topic: Study Guide Question, Net Export, Gov. Budget, Saving & Investment Skill: Analytical Status: Old AACSB: Analytical Skills 5 News Based Questions 1) When the U.S. government buys aircraft from BAe, a British corporation, it pays for them using A) euros. B) pounds. C) dollars. D) foreign exchange rates. Answer: B Topic: Financing International Trade Skill: Recognition Status: Old AACSB: Reflective Thinking 2) In 2007, the U.S. sold $73 million of cigarettes to Iran. Iran paid for these cigarettes using A) dollars. B) rials, the Iranian currency. C) euros. D) pounds. Answer: A Topic: Financing International Trade Skill: Recognition Status: Old AACSB: Reflective Thinking 3) In July 2008, a British pound could buy $2. By October 2008, a pound could buy $1.55. Over the four months, the A) pound depreciated against the dollar. B) the real exchange rate did not change. C) pound appreciated against the dollar. D) the U.S. inflation rate increased. Answer: A Topic: The Exchange Rate, Currency Depreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 117 Copyright © 2014 Pearson Education, Inc.

4) In June 2008, $1 bought 0.5 pounds and in October, $1 bought 0.65 pounds. As a result of this change, ________ between June and October. A) the demand for dollars increased B) the dollar appreciated and the quantity of dollars demanded decreased C) the dollar depreciated and the quantity of dollars demanded decreased D) the demand for dollars decreased Answer: B Topic: The Exchange Rate, Currency Appreciation Skill: Analytical Status: Old AACSB: Analytical Skills 5) In June 2008, $1 bought 104 yen and in October, $1 bought 93 yen. This change means A) U.S. exports became more expensive for Japanese buyers. B) there will be a movement down along the demand curve for dollars. C) there was an increase in the value in the dollar, relative to the yen. D) the dollar appreciated relative to the yen. Answer: B Topic: Law of Demand for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 6) In June 2008, the dollar bought 1.6 Brazilian reals and in October, the dollar bought 2.4 reals. This resulted in a A) a movement upward along the supply curve for dollars. B) a movement downward along the supply curve for dollars. C) rightward shift in the supply curve for dollars. D) leftward shift in the supply curve for dollars. Answer: A Topic: Law of Supply for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 7) In June 2008, the dollar bought 1.6 Brazilian reals and in October, the dollar bought 2.4 reals. This resulted in a A) a decrease in the quantity of dollars supplied. B) an increase in the quantity of dollars supplied. C) a rightward shift in the supply curve of dollars. D) a depreciation of the dollar. Answer: B Topic: Law of Supply for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 118 Copyright © 2014 Pearson Education, Inc.

8) The figure above shows the demand and supply of dollars in the foreign exchange market. The equilibrium in the market occurs at a price of ________ Brazilian reals per dollar and a quantity of ________ billion dollars. A) 2.0; 100 B) 2.4; 120 C) 1.6; 100 D) 100; 2.0 Answer: A Topic: Foreign Exchange Market Skill: Analytical Status: Old AACSB: Analytical Skills 9) The figure above shows the demand and supply of dollars in the foreign exchange market. At a price of 2.40 Brazilian reals per dollar, A) there will be a shortage of dollars. B) $40 billion dollars will be demanded. C) $40 billion dollars will be supplied. D) there will be a surplus of dollars. Answer: D Topic: Equilibrium Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills

10) The figure above shows the demand and supply of dollars in the foreign exchange market. At a price of 1.20 Brazilian reals per dollar, A) there will be a shortage of dollars. B) $120 billion dollars will be supplied. C) $40 billion dollars will be demanded. D) there will be a surplus of dollars. Answer: A Topic: Equilibrium Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 11) As a result of the 2008-2009 financial crisis and the decrease in GDP in many European economies, we would expect A) an increase in the demand for U.S. exports and a leftward shift in the demand curve for dollars. B) a decrease in the demand for U.S. exports and a leftward shift in the demand curve for dollars. C) a decrease in the demand for U.S. exports and a rightward shift in the demand curve for dollars. D) a decrease in the demand for U.S. imports and a movement up along the demand curve for dollars. Answer: B Topic: The Law of Demand for Foreign Exchange, Exports Skill: Analytical Status: Old AACSB: Analytical Skills 12) In October 2008, Iceland's central bank increased its lending rate to 18% in an "effort to prop up the country's frozen current and markets." (www.nytimes.com, October, 29, 2008) As a result, the ________ curve for Icelandic krona shifted ________, holding all else the same. A) supply; rightward B) demand; rightward C) demand; leftward D) A and C are both correct. Answer: B Topic: Changes in the Demand for Dollars, Interest Rates Skill: Analytical Status: Old AACSB: Analytical Skills

13) In October 2008, Iceland's central bank increased its lending rate to 18% in an "effort to prop up the country's frozen currency and markets." (www.nytimes.com, October, 29, 2008) As a result, the ________ and demand curve for Icelandic krona shifted ________, holding all else the same. A) interest rate differential between U.S. and Icelandic interest rates increased; rightward B) interest rate differential between U.S. and Icelandic interest rates decreased; leftward C) dollar appreciated relative to the krona; rightward D) value of U.S. exports to Iceland increased; leftward Answer: A Topic: Changes in the Demand for Dollars, Interest Rates Skill: Analytical Status: Old AACSB: Analytical Skills 14) In October 2008, Iceland's central bank increased its lending rate to 18% in an "effort to prop up the country's frozen current and markets." (www.nytimes.com, October, 29, 2008) As a result, there was ________, holding all else the same. A) a movement upward along the supply curve for krona B) a leftward shift in the supply curve for krona C) a rightward shift in the supply curve for krona D) an increase in the quantity supplied of krona Answer: B Topic: Changes in the Supply of Dollars, Interest Rates Skill: Analytical Status: Old AACSB: Analytical Skills 15) In late 2010 the National Bank of Australia offered a 4 percent interest rate on a savings account while Bank of America offered 2 percent. This difference means that A) people expect the U.S. dollar to appreciate to 8 percent against the Australian dollar and interest rate parity to occur. B) there will be a surplus of U.S. dollars in the foreign exchange market. C) people expect the U.S. dollar to appreciate by 2 percent against the Australian dollar and interest rate parity to occur. D) there will be a shortage of Australian dollars in the foreign exchange markets. Answer: C Topic: Interest Rate Parity Skill: Analytical Status: Old AACSB: Analytical Skills

16) On www.yodobashi.com, you can buy a Canon EOS camera for 298,000 yen. The same camera costs $2700 on www.calumetphoto.com. If the exchange rate is ________ yen per dollar, we can determine ________ for this camera. A) 92; interest rate parity doesn't occur B) 92; purchasing power parity occurs C) 110; interest rate parity occurs D) 110; purchasing power parity occurs Answer: B Topic: Purchasing Power Parity Skill: Analytical Status: Old AACSB: Analytical Skills 17) In 2009, Germany's capital account was -$135 million. This implies that A) Germany invested more in other countries than those countries invested in Germany. B) Germany's currency must have appreciated during 2009. C) Germany imported more goods from its trading partners than it exported. D) Germany's official settlements account in 2009 must have been positive. Answer: A Topic: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual Status: Old AACSB: Reflective Thinking 18) In 2007, Japan reported that its overseas assets totalled more than $4.6 trillion. This implies that Japan A) is debtor nation. B) has a current account deficit. C) has a capital account deficit. D) is a creditor nation. Answer: D Topic: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual Status: Old AACSB: Reflective Thinking

19) Over a month in late 2008, the Federal Reserve Bank reduced the interest rate by 1 percentage point. Given that the United States operates under a ________ exchange rate regimes, the primary purpose of these changes was ________ exchange rate of each currency. A) flexible; not designed to influence B) flexible; designed to influence C) fixed; designed to influence D) fixed; not designed to influence Answer: A Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Communication 6 Essay Questions 1) Give an example of currency depreciation and appreciation. Answer: A currency depreciates when it becomes less valuable in the foreign exchange market. For instance, if the exchange rate changes from 130 yen per dollar to 110 yen per dollar, the dollar has depreciated. A currency appreciation is the exact opposite: A currency appreciates when it becomes less valuable in the foreign exchange market. For instance, if the exchange rate changes from 130 yen per dollar to 150 yen per dollar, the dollar has appreciated. Topic: The Exchange Rate, Currency Appreciation and Depreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 2) In the foreign exchange market, what factor leads to a movement along the demand curve for dollars? Answer: A change in the exchange rate leads to a movement along the demand curve for dollars. Topic: Law of Demand for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking

3) In the foreign exchange market, how does the quantity of U.S. dollars demanded respond to a change in the U.S. exchange rate? Why is there this response? Answer: If the U.S. exchange rate falls, the quantity of U.S. dollars demanded increases for two reasons. The first is the exports effect. If the exchange rate falls, then U.S. goods and services are cheaper in foreign nations. These nations increase the amount of U.S. exports they demand. As exports increase the quantity of dollars demanded increases so that the importing nations can pay for the exports. The second reason the quantity of U.S. dollars demanded increases is the expected profit effect. In general, the greater the expected profit from holding U.S. dollars, the greater is the quantity demanded of U.S. dollars. When the exchange rate falls, more people will believe that it will rise again in the future and so more people want to hold U.S. dollars. As a result, the quantity of U.S. dollars demanded increases. Topic: Law of Demand for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 4) In the foreign exchange market, how does each of the following influences affect the demand for dollars and the demand curve for dollars? a) an increase in the exchange rate. b) an increase in the U.S. interest rate. c) a fall in the expected future exchange rate. Answer: a) The increase in the exchange rate decreases the quantity of dollars demanded and creates an upward movement along the demand curve for dollars. b) An increase in the U.S. interest rate increases the demand for dollars and shifts the demand curve for dollars rightward. c) A fall in the expected future exchange rate decreases the demand for dollars and shifts the demand curve for dollars leftward. Topic: Demand for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 5) Name three factors in the foreign exchange market that affect either the quantity of dollars demanded or the demand for dollars. Discuss whether the factor increases or decreases the number of dollars people want to hold. Answer: Three factors are the exchange rate, the U.S. interest rate differential, and the expected future exchange rate. If the exchange rate rises, the quantity of dollars demanded decreases. If the U.S. interest rate differential is larger (either because the U.S. interest rate rose or because foreign interest rates fell) then the demand for dollars increases. And, if the expected future value of the exchange rate is higher, then the current demand for dollars increases. Topic: Demand for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking

6) Explain the effect on the demand for dollars in the foreign exchange market of an increase in the U.S. interest rate differential. Answer: As the U.S. interest rate differential increases, international investors can obtain a greater return by holding U.S. assets. Therefore these investors want to buy more U.S. assets, such as bonds. But in order to buy more U.S. assets, they need more dollars. Hence the increase in the U.S. interest rate differential leads to an increase in the demand for dollars in the foreign exchange market and so the demand curve for U.S. dollars shifts rightward. Topic: Changes in the Demand for Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking 7) In the foreign exchange market, how does a change in the expected future U.S. exchange rate affect the demand for dollars? Answer: Changes in the expected future exchange rate change the demand for dollars. If the expected future exchange rate falls, the demand for dollars decreases and the demand curve shifts leftward because the expected profit from holding dollars decreases. If the expected future exchange rate rises, the demand for dollars increases and the demand curve shifts rightward because the expected profit from holding dollars increases. Topic: Changes in the Demand for $, Expected Future Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 8) Why do people and firms in the United States supply dollars to the foreign exchange market? Answer: People and firms supply dollars in order to obtain foreign currency with which to purchase foreign goods and services and/or foreign assets. Topic: Supply of Foreign Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 9) In the foreign exchange market, how does a fall in the U.S. interest rate affect the supply of dollars? Answer: The fall in the U.S. interest rate increases the supply of dollars as U.S. residents supply more dollars in order to obtain foreign currency with which to buy foreign assets that now have relatively higher interest rates. Topic: Changes in the Supply of Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking

10) In the foreign exchange market, how does a change in expected future U.S. exchange rate affect the supply of dollars? Answer: Changes in the expected future exchange rate change the supply of dollars. If the expected future exchange rate falls, the supply of dollars increases and the supply curve shifts rightward because the expected profit from holding dollars decreases. If the expected future exchange rate rises, the supply of dollars decreases and the supply curve shifts leftward because the expected profit from holding dollars increases. Topic: Changes in the Supply of $, Expected Future Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 11) "In the foreign exchange market, if the demand for the U.S. dollar increases, the U.S. dollar appreciates in value." Briefly explain whether the previous statement is correct or incorrect. Answer: The statement is correct. The increase in the demand for dollars shifts the demand curve for dollars rightward and creates a shortage of dollars at the initial exchange rate. This shortage puts upward pressure on the exchange rate and so the exchange rate rises to its new equilibrium value. Topic: Changes in the Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 12) What happens in the foreign exchange market if the U.S. interest rate increases? What is the effect on the exchange rate? Answer: In the foreign exchange market, the increase in the U.S. interest rate increases the demand for dollars and the demand curve for dollars shifts rightward. The increase in the interest rate also decreases the supply of dollars and the supply curve of dollars shifts leftward. As a result, the exchange rate rises so that the dollar appreciates. Topic: Changes in the Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 13) How will an increase in the expected future exchange rate affect the current supply and demand curves for dollars? Answer: An increase in the expected future exchange rate increases the return from holding U.S. dollars. As a result, the demand for dollars increases and the demand curve shifts rightward while the supply of dollars decreases and the supply curve shifts leftward. Topic: Change in the Demand and Supply of Dollars Skill: Conceptual Status: Old AACSB: Reflective Thinking

14) What is purchasing power parity? Answer: Purchasing power parity means "equal value of money," that is, the exchange rate adjusts so that one currency can buy the same amount of goods and services as another currency. Topic: Purchasing Power Parity Skill: Recognition Status: Old AACSB: Reflective Thinking 15) "Fluctuations in exchange rates, other things remaining the same, creates a situation in which money buys the same amount of goods and services in different currencies." What does the previous statement describe? Will these fluctuations occur in the short run or the long run? Answer: The statement describes purchasing power parity, the proposition that money will buy the same amount of goods and services in different currencies. The effects of purchasing power parity will change the exchange rate in the long run. In the short run, deviations from purchasing power parity can occur. Topic: Purchasing Power Parity Skill: Conceptual Status: Old AACSB: Reflective Thinking 16) What role can the Fed play in the foreign exchange market? Answer: The Federal Reserve can intervene in the foreign exchange market by (temporarily) selling or buying dollars. If the Fed sells dollars, it drives the exchange rate lower and if the Fed buys dollars, it drives the exchange rate higher. The Fed cannot buy dollars forever because it will run out of the foreign exchange it using to buy the dollars. And, the Fed likely will not want to sell dollars forever because it would accumulate ever increasing amounts of foreign exchange. Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 17) How does the Fed intervene in the foreign exchange market and what the effects are of the Fed's actions? Answer: The Fed intervenes in the foreign exchange market and changes the value of the exchange rate by buying or selling dollars. If the Fed wants to raise the exchange rate and appreciate the dollar, the Fed will buy dollars. By buying dollars the Fed increases the demand for dollars and raises the exchange rate. If the Fed wants to lower the exchange rate and depreciate the dollar, the Fed will sell dollars. By selling dollars the Fed increases the supply of dollars and lowers the exchange rate. Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking

18) If the Fed wants to lower the U.S. exchange rate, what action should it take in the foreign exchange market? Why does the action lower the exchange rate? Answer: To lower the exchange rate, the Fed should sell dollars and buy foreign currency. By selling dollars, the Fed increases the supply of dollars, which lowers the U.S. exchange rate. Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 19) What are the three balance of payments accounts? Briefly describe them. What is the relationship among the three? Answer: The three balance of payment accounts are the current account, the capital account, and the official settlements account. The current account records exports, imports, net interest, and net transfers. The capital account records foreign investment in the United States and U.S. investment abroad. Finally, the official settlements account shows changes in U.S. official reserves, the government holdings of foreign currency. The relationship is that the current account balance plus capital account balance plus official settlements account must sum to zero. Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking 20) "The current account records foreign investment in a nation minus investment abroad." Is the previous statement correct or incorrect? Answer: The statement is incorrect. The current account equals exports minus imports plus net interest plus net transfers. The capital account records foreign investment in a nation minus investment abroad. Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking

21) What are the main components of the current account? What has been the recent U.S. experience with these items? Answer: The current account records payments for the imported of goods and services and the receipts for exported of goods and services. These two components of the current account are by far the largest components. In addition to the value of imports and exports, the current account also includes the net interest income paid abroad and net transfers. Net interest income measures the interest payments both made and received which flow from previously purchased assets. Net transfers record such items as foreign aid payments. Over recent years, the U.S. current account has been negative, that is, there has been a current account deficit. Over these years, the United States has experienced a perennial trade deficit, which means that the value of imports has exceeded the value of exports. The trade deficit has been the primary cause why the U.S. current account has been negative. Net interest income has been barely negative while net transfers are also negative and slightly larger in magnitude than net interest income. Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking 22) What balance of payment account records foreign investment between countries? Answer: The capital account records foreign investment between countries. The U.S. capital account equals foreign investment in the United States minus U.S. investment abroad. Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking 23) How do the capital account and the current account differ? Answer: The current account and the capital account differ in what is recorded in each. The current account records exports, imports, net interest, and net transfers. The capital account records foreign investment in the United States and U.S. investment abroad. Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking

24) Define official settlements account and U.S. official reserves. Discuss the differences between the two terms. Answer: The official settlements account is the record of the change in a country's official reserves. U.S. official reserves are the U.S. government's holdings of foreign currency. If the U.S. official reserves increases, the official settlements account balance is negative. The reason the official settlements account decreases is that holding foreign money is similar to investing abroad insofar as both buying foreign money and buying foreign assets (that is, investing abroad) use (rather than acquire) U.S. dollars. Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking 25) If U.S. official reserves increase, is the official settlements account balance positive, negative, or unaffected? Answer: If U.S. official reserves increase, the official settlements account balance is negative. Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking 26) "If the official settlements balance is zero, a current account surplus must equal the capital account deficit." Is the previous statement correct or incorrect? Briefly explain your answer. Answer: The statement is correct. The sum of the current account balance plus the capital account balance plus the official settlements account must equal zero. If the official settlements account balance is zero, then the sum of the current account balance plus the capital account balance must equal zero. Therefore a current account surplus must be "balanced" by an equallysized capital account deficit. Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking 27) Looking at the U.S. balance of payments for the last two decades, how have the current account and the capital account changed? Answer: Since the early 1980s and onward, the U.S. current account has been negative and sometimes quite large. The U.S. capital account has more or less mirrored the current account, only it has been positive rather than negative. Thus when the current account deficit is small, the capital account surplus is small and when the current account deficit is large, the capital account surplus is large. Topic: Patterns and Trends in International Trade Skill: Recognition Status: Old AACSB: Reflective Thinking

28) Define net borrower, net lender, creditor nation, and debtor nation. Discuss the difference between a net borrower and a debtor nation. Answer: A country that is borrowing more from the rest of the world than it is lending to the rest of the world is a net borrower. A country that is lending more to the rest of the world than it borrows from the rest of the world is a net lender. A country that during its entire history has borrowed more from the rest of the world than it has lent to the rest of the world is a debtor nation. A country that has invested more in the rest of the world than other countries have invested in it is a creditor nation. A net borrower is a country that is currently borrowing whereas a debtor nation has a stock of outstanding debt. Borrowing is a flow variable and the outstanding debt is a stock. Thus a net borrower could be a creditor nation that is currently borrowing or it could be a debtor nation that is currently borrowing and thereby increasing its debt. Topic: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual Status: Old AACSB: Reflective Thinking 29) What is the relationship between net borrower, net lender, debtor nation, and creditor nation? Answer: If a nation is currently borrowing from the world more than it is lending to the world, the nation is a net borrower. If a nation is currently lending more to the world more than it is borrowing from the world, the nation is a net lender. If during its entire history a nation has borrowed more than it has lent, the nation is a debtor nation. If during its entire history a nation has lent more than it has borrowed, the nation is a creditor nation. The distinction between borrowing or lending and being a debtor or creditor deals is the distinction between a flow and a stock. A nation that is a net borrower is increasing its debt (or decreasing its assets). The net borrowing is the flow that adds to the stock of debt (or decreases the stock of assets). A nation that is a net lender is increasing its assets (or decreasing its debt). The net lending is the flow that adds to the stock of assets (or decreases the stock of debt). Topic: Borrowing and Lending Skill: Conceptual Status: Old AACSB: Reflective Thinking 30) When a nation has no funds to finance economic development, how can it acquire the needed funds? Is the country a net lender or a net borrower? Answer: Funds for development can be borrowed from other nations. In this case, the borrowing nation is a net borrower in its capital account. Topic: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual Status: Old AACSB: Reflective Thinking

31) "Although the United States is running a large current account deficit, it is still ranked as a major international net lender." Is the previous statement correct or incorrect? Briefly explain your answer. Answer: The statement is incorrect. Aside from changes in the official settlements account, any nation that is running a current account deficit must be paying for the excess of imports over exports by borrowing from abroad. The United States is no exception and with its large current account deficits, the United States is a large net borrower from abroad. Topic: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual Status: Old AACSB: Reflective Thinking 32) What is a "debtor nation?" Is the United States a debtor nation? Answer: A debtor nation is a country that during its entire history has borrowed more from the rest of the world than it has lent to it. Although the United States was a creditor nation until the 1980s, its borrowing during the 1980s means that today the United States is a debtor nation. Topic: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual Status: Old AACSB: Reflective Thinking 33) What is the relationship between net exports, the government sector surplus or deficit, and the private sector surplus or deficit? Answer: The relationship is that net exports equals the government surplus or deficit plus the private sector surplus or deficit. Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking 34) Saving is S, investment is I, net taxes is NT, government expenditure is G, exports is X, and imports is M. Using these symbols, what is the relationship among the saving, investment, net taxes, government expenditure, exports, and imports? Answer: The relationship is that (X - M) = (S - I) + (NT - G), or net exports equals the private sector balance plus the government sector balance. Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Conceptual Status: Old AACSB: Analytical Skills

7 Numeric and Graphing Questions

1) In the figure above, illustrate the effect of an increase in the U.S. interest rate. What is the effect on the exchange rate? Answer:

The figure above shows the effect of the increase in the U.S. interest rate. The demand for dollars increases and the demand curve shifts rightward. The supply of dollars decreases and the supply curve shifts leftward. The equilibrium exchange rate rises, to 100 yen per dollar in the figure. Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills

2) The figure above illustrates the U.S. foreign exchange market. Illustrate how the exchange rate changes if the expected future exchange rate falls. Does the dollar appreciate or depreciate? Answer:

The fall in the expected future exchange rate decreases the demand for dollars and increases the supply. The demand curve shifts leftward and the supply curve shifts rightward. As shown in the figure, the exchange rate falls so the dollar depreciates. Topic: Changes in the Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills

3) If imports are $1,200 billion and exports are $1,300 billion, while net interest income and net transfers are zero, what is the current account balance? Answer: The current account balance equals exports minus imports, or $1,300 billion minus $1,200 billion, which is $100 billion. Topic: Balance of Payments Accounts Skill: Analytical Status: Old AACSB: Analytical Skills 4) During this year a country reports imports of $1,000 billion, exports of $1,100 billion, foreign investment in the country of $900 billion, investment abroad of $1,200 billion, net interest and net transfers of zero. What is the country's current account balance? Answer: The current account balance is $100 billion. Topic: Balance of Payments Accounts Skill: Analytical Status: Old AACSB: Analytical Skills 5) If the current account balance is $235 billion and U.S. official reserves increased by $35 billion, what is the official settlements account balance and the capital account balance? Answer: The official settlements account equals the negative of the change in official reserves, so the official settlements account balance is -$35 billion. Then, the sum of the current account balance plus the capital account balance plus the official settlements account balance equals zero, which means that the capital account balance must equal $200 billion. Topic: Balance of Payments Accounts Skill: Analytical Status: Old AACSB: Analytical Skills

Item Imports of goods and services Exports of goods and services Net interest Net transfers Foreign investment in the United States U.S. investment abroad

Amount (billions of dollars) 1,400 1,600 0 0 480 700

6) The above gives some of the balance of payments accounts of the United States in 2020. a) What is the current account balance? b) What is the capital account balance? c) What is the official settlements account balance? Answer: a) The current account balance is $200 billion. b) The capital account balance is -$220 billion. c) The official settlements account balance is $20 billion. Topic: Balance of Payments Accounts Skill: Analytical Status: Old AACSB: Analytical Skills

Item Investment Saving Government expenditure Net taxes

Amount (billions of dollars) 1,900 1,600 1,000 1,700

7) The table above gives some of the accounts of the United States in 2020. a) What is the private sector balance? b) What is the government sector balance? c) What is net exports? Answer: a) The private sector balance equals saving minus investment, or -$300 billion. b) The government sector balance equals net taxes minus government expenditure, or $700 billion. c) Net exports equals the sum of the private sector balance plus the government sector balance, so net exports equal $400 billion. Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills 8) The United States has net exports of -$350 billion and the private sector balance is -$400 billion. What is the government sector balance? Answer: The sum of the private sector balance plus the government sector balance equals net exports. Therefore -$350 billion = + government sector balance, so the government sector balance is $50 billion. Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills

8 True or False 1) An exchange rate is the price of one country's currency in terms of another country's currency. Answer: TRUE Topic: The Exchange Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 2) "Currency appreciation" means the price of the currency is decreasing. Answer: FALSE Topic: The Exchange Rate, Currency Appreciation Skill: Recognition Status: Old AACSB: Reflective Thinking 3) If the exchange rate rises from 100 yen per dollar to 120 yen per dollar, the dollar has appreciated. Answer: TRUE Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 4) If the exchange rate falls from 120 yen per dollar to 110 yen per dollar, the dollar has depreciated. Answer: TRUE Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 5) If the yen appreciates in value against the dollar, the dollar must have depreciated against the yen. Answer: TRUE Topic: The Exchange Rate, Currency Appreciation and Depreciation Skill: Conceptual Status: Old AACSB: Reflective Thinking 6) The demand for one money is the supply of another money. Answer: TRUE Topic: The Exchange Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 138 Copyright © 2014 Pearson Education, Inc.

7) A rise in the exchange rate leads to a decrease in the quantity of dollars demanded. Answer: TRUE Topic: Law of Demand for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 8) The lower the exchange rate, the cheaper are foreign-produced goods and services. Answer: FALSE Topic: Law of Demand for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 9) Other things remaining the same, the higher the current exchange rate, the larger is the expected profit from buying dollars. Answer: FALSE Topic: Law of Demand for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 10) In the foreign exchange market, a decrease in the exchange rate increases the quantity of dollars supplied. Answer: FALSE Topic: Law of Supply for Foreign Exchange Skill: Conceptual Status: Old AACSB: Reflective Thinking 11) According to the law of supply in the foreign exchange market, when the U.S. exchange rate rises, the quantity of U.S. dollars supplied will decrease. Answer: FALSE Topic: Law of Supply for Foreign Exchange Skill: Recognition Status: Old AACSB: Reflective Thinking 12) An increase in the U.S. interest rate differential increases the demand for dollars. Answer: TRUE Topic: Changes in the Demand for Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking

13) If the Fed raises the interest rate, in the foreign exchange market the demand for the U.S. dollar increases. Answer: TRUE Topic: Changes in the Demand for Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking 14) If U.S. interest rates are rise relative to foreign interest rates, in the foreign exchange market the demand for U.S. dollars will decrease. Answer: FALSE Topic: Changes in the Demand for Dollars, Interest Rates Skill: Conceptual Status: Old AACSB: Reflective Thinking 15) In the foreign exchange market, a decrease in the supply of dollars leads to an appreciation of the U.S. dollar. Answer: TRUE Topic: Changes in the Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 16) Purchasing power parity means that the expected exchange rate is such that the returns from investing in two nations are equal. Answer: FALSE Topic: Purchasing Power Parity Skill: Recognition Status: Old AACSB: Reflective Thinking 17) Purchasing power parity means equal rates of return. Answer: FALSE Topic: Purchasing Power Parity Skill: Recognition Status: Old AACSB: Reflective Thinking 18) In the short run, a change in the nominal exchange rate brings an equivalent change in the real exchange rate. Answer: TRUE Topic: The Real Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 140 Copyright © 2014 Pearson Education, Inc.

19) The exchange rate can be influenced by a nation's central bank. Answer: TRUE Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 20) In the foreign exchange market, if the demand for dollars permanently decreases, the Fed can maintain the exchange rate at its old equilibrium level indefinitely by buying dollars. Answer: FALSE Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 21) When the demand for a currency permanently increases, that nation's central bank can maintain its fixed exchange rate indefinitely. Answer: TRUE Topic: The Fed in the Foreign Exchange Market Skill: Conceptual Status: Old AACSB: Reflective Thinking 22) A country's balance of payment accounts include its government budget deficit or surplus. Answer: FALSE Topic: Balance of Payments Accounts Skill: Recognition Status: Old AACSB: Reflective Thinking 23) The current account records foreign investment in the United States minus U.S. investment abroad. Answer: FALSE Topic: Balance of Payments Accounts Skill: Recognition Status: Old AACSB: Reflective Thinking 24) The official settlements account records the change in official U.S. reserves. Answer: TRUE Topic: Balance of Payments Accounts Skill: Recognition Status: Old AACSB: Reflective Thinking

25) The sum of the current, capital and official settlements accounts is always zero. Answer: TRUE Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking 26) If the official settlements account is zero, whenever the United States has a current account deficit, it must also have a capital account deficit. Answer: FALSE Topic: Balance of Payments Accounts Skill: Conceptual Status: Old AACSB: Reflective Thinking 27) Over the past decade, the United States has had a current account deficit and capital account deficit. Answer: FALSE Topic: Balance of Payments Accounts Skill: Recognition Status: Old AACSB: Reflective Thinking 28) In the market for international loans, most countries, including the United States, are net borrowers. Answer: TRUE Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition Status: Old AACSB: Reflective Thinking 29) The United States is a creditor nation. Answer: FALSE Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition Status: Old AACSB: Reflective Thinking 30) Currently, the United States is both a net borrower and a debtor nation. Answer: TRUE Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition Status: Old AACSB: Reflective Thinking

31) A net borrower country must also be a debtor nation. Answer: FALSE Topic: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual Status: Old AACSB: Reflective Thinking 32) If net exports increases, but neither government expenditure nor net taxes change, saving must increase. Answer: TRUE Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking

9 Extended Problems 1) The price of a computer in the United States is $1,000. The price of a car in Germany is 10,000 euros. The current exchange rate is 0.9 euros per dollar. a) If a computer is exported from the United States to Germany with no barriers to trade, what will be the price of the computer in Germany? b) If a car is imported to the United States from Germany with no barriers to trade, what will be the price of the car in the United States? c) Suppose the dollar appreciates by 10 percent against the euro. How will the price of a computer exported from the United States change in Germany? d) Suppose the dollar appreciates by 10 percent against the euro. How will the price of a car imported to the United States from Germany change in the United States? Answer: a) The price of an American computer in Germany is $1,000 × 0.9 euros per dollar, which is 900 euros. b) The price of a German car in the United States is 10,000 euros/0.9 euros per dollar = $11,111. c) The new exchange rate is 0.9 euros per dollar × 1.1 = 0.99 euros per dollar. So the new price of a U.S. computer in Germany is $1,000 × 0.99 euros per dollar = 990 euros. The price of a U.S. computer in Germany rises by 10 percent. d) The new price of a German car in the United States is 10,000 euros/0.99 euros per dollar = $10,101. So the price of a German car in the United States falls by about 10 percent. Topic: The Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills

2) Suppose that the price of a Big Mac is a good approximation of the price level in the country. A Big Mac costs £2 in London and $3 in New York. a) If purchasing power parity holds, what is the exchange rate between the U.S. dollar and the British pound? b) If the current exchange rate is $1.6 per pound, what is the dollar price of a Big Mac in London? What do you predict will happen to the exchange rate? Explain. c) The exchange rate between the U.S. dollar and the Russian ruble is 30 rubles per dollar. If purchasing power parity holds, what is the price of a Big Mac in Moscow? Answer: a) If purchasing power parity holds, the dollar price of a Big Mac in London must be the same as that in New York. This is the case when the exchange rate is $1.5 per pound. With this exchange rate, the dollar price of a Big Mac in London is £2 × 1.5 dollars per pound = $3. b) If the current exchange rate is $1.6 per pound, the dollar price of a Big Mac in London is £2 × 1.6 dollars per pound, which is $3.20. If the price of a Big Mac represents the price level in the country, British goods are relatively more expensive than American goods. The quantity of the U.K. imports demanded decreases in the United States and the quantity of U.S. exports demanded increases in the United Kingdom. The demand for dollars in the foreign exchange market increases and the demand for pounds decreases. As a result, the dollar appreciates against the pound until the purchasing-power-parity exchange rate is restored. c) If purchasing power parity holds, the dollar price of a Big Mac in Moscow must be the same as in New York, that is, $3. Given the ruble/dollar exchange rate, the price of a Big Mac in Moscow is $3 × 30 rubles per dollar, which is 90 rubles. Topic: Purchasing Power Parity Skill: Analytical Status: Old AACSB: Analytical Skills

Item Imports of goods and services Exports of goods and services Foreign investment in Exland Exland's investment abroad Increase in the official holdings of foreign currency

Billions of buns 600 700 350 430 20

3) The citizens of Exland, whose currency is the bun, conduct the transactions outlined in the table above. a) What is Exland's current account balance? b) What is Exland's capital account balance? c) What is Exland's official settlement balance? d) What is Exland's net foreign borrowing? Answer: a) The current account balance equals exports minus imports: buns. b) The capital account balance equals foreign investment in Exland minus Exland's investment abroad: c) A country's official settlement balance is the change in its official reserves. If official reserves increase, the official settlement balance is negative. So Exland's official settlement balance is -20 billion buns. d) A country's net foreign borrowing is the difference between its borrowing from the rest of the world and its lending to the rest of the world. Exland's foreign borrowing is the foreign investment in Exland (350 billion buns). Exland's foreign lending is its investment abroad (430 billion buns) plus the increase in the official holdings of foreign currency (20 billion buns). So Exland's net foreign borrowing is which means the country is a net foreign lender. Topic: Balance of Payments Accounts Skill: Analytical Status: Old AACSB: Analytical Skills

Item GDP Consumption expenditure Government expenditure on goods and services Investment Exports of goods and services Government budget deficit

Billions of bonts 320 200 60 80 40 25

4) The table above shows some data for Wiland, a country whose currency is the bont. The official settlement balance, net interest income, and net transfers from abroad are zero. a) What is Wiland's imports of goods and services? b) What is Wiland's current account balance? c) What is Wiland's capital account balance? d) What is Wiland's net taxes? e) What is Wiland's private sector balance? Answer: a) The country's net exports are GDP minus consumption minus investment minus government purchases, which is 320 - 200 - 80 - 60 = -20 billion bonts. Net exports are the difference between imports and exports. Because Wiland's exports are 40 billion bonts and its net exports are -20 billion bonts, then it imports must equal 60 billion bonts. b) Because net interest income and net transfers from abroad are zero, the current account balance equals net exports, so the current account balance is -20 billion bonts. c) Because the official settlement balance is zero, the sum of the capital account balance and current account balance is zero, which means that the capital account balance is 20 billion bonts. d) The government budget deficit is the difference between government purchases and net taxes, which means net taxes equal government purchases minus the budget deficit. So in Wiland, net taxes are 60 - 25, which is 35 billion bonts. e) The private sector balance is saving minus investment. Saving is GDP minus net taxes minus consumption. In Wiland, saving is 320 - 35 - 200 = 85 billion bonts. So the country's private sector balance is 85 - 80 = 5 billion bonts, that is, a surplus of 5 billion bonts. Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical Status: Old AACSB: Analytical Skills

Economics, 11e, Global Edition (Parkin) Chapter 27 Aggregate Supply and Aggregate Demand 1 Aggregate Supply 1) The supply of real GDP is a function of A) the total expenditures of consumers, investors and government. B) the sum of wages, salaries, corporate profits, rents and interest. C) only the state of technology. D) the quantities of labor, capital and the state of technology. Answer: D Topic: Aggregate Supply Fundamentals Skill: Conceptual Status: Old AACSB: Reflective Thinking 2) The quantity of real GDP supplied depends on the A) level of aggregate demand. B) quantity of capital, bonds, and stocks. C) quantity of labor, the quantity of capital, and the state of technology. D) price level, the unemployment rate, and the quantity of government expenditures on goods and services. Answer: C Topic: Aggregate Supply Fundamentals Skill: Recognition Status: Old AACSB: Reflective Thinking 3) An aggregate supply curve depicts the relationship between A) the price level and nominal GDP. B) household expenditures and household income. C) the price level and the aggregate quantity supplied. D) the price level and the aggregate quantity demanded. Answer: C Topic: Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking

4) In the macroeconomic short run, A) actual real GDP may be less than or more than potential GDP. B) the unemployment rate is zero. C) by definition, the economy is always moving away from full employment. D) actual real GDP always equals potential GDP. Answer: A Topic: Macroeconomic Long Run and Short Run Skill: Recognition Status: Old AACSB: Reflective Thinking 5) When talking about aggregate supply, it is necessary to A) focus on the short run. B) focus on the long run. C) distinguish between long-run aggregate supply and short-run aggregate supply. D) distinguish between long-run full employment and short-run full-employment. Answer: C Topic: Macroeconomic Long Run and Short Run Skill: Recognition Status: Old AACSB: Reflective Thinking 6) We distinguish between the long-run aggregate supply curve and the short-run aggregate supply curve. In the long run A) technology is fixed but not in the short run. B) the price level is constant but in the short run it fluctuates. C) the aggregate supply curve is horizontal while in the short run it is upward sloping. D) real GDP equals potential GDP. Answer: D Topic: Macroeconomic Long Run and Short Run Skill: Recognition Status: Old AACSB: Reflective Thinking 7) In the macroeconomic long run, A) GDP always is below potential GDP. B) there is full employment with no unemployment. C) output always is above potential GDP. D) there is full employment and real GDP is equal to potential GDP. Answer: D Topic: Macroeconomic Long Run and Short Run Skill: Recognition Status: Old AACSB: Reflective Thinking

8) In the macroeconomic long run, A) real GDP equals potential GDP. B) the economy is at full employment. C) regardless of the price level, the economy is producing at potential GDP. D) All of the above are correct. Answer: D Topic: Macroeconomic Long Run and Short Run Skill: Recognition Status: Old AACSB: Reflective Thinking 9) In the long-run A) the aggregate supply curve is upward sloping. B) real GDP is equal to potential GDP. C) aggregate supply depends on the price level. D) All of the above answers are correct. Answer: B Topic: Macroeconomic Long Run and Short Run Skill: Recognition Status: Old AACSB: Reflective Thinking 10) The long-run aggregate supply (LAS) curve A) has a positive slope. B) has a negative slope. C) is vertical. D) is horizontal. Answer: C Topic: Long-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 11) When the labor market is at full employment, A) real GDP equals potential GDP. B) the price level is stable. C) the price level equals the potential price level. D) the SAS curve is horizontal. Answer: A Topic: Long-Run Aggregate Supply Skill: Recognition Status: Revised AACSB: Reflective Thinking

12) The long-run aggregate supply curve is vertical because A) at full employment prices are stable. B) there is no cyclical inflation. C) potential GDP is independent of the price level. D) the money wage rate increases faster than the price level. Answer: C Topic: Long-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 13) The long-run aggregate supply curve is A) horizontal at the full employment price level. B) vertical at the full employment level of real GDP. C) upward sloping because of the effects of price level changes on real GDP. D) the same as the short-run aggregate supply curve. Answer: B Topic: Long-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 14) Which of the following statements is TRUE? A) The long-run aggregate supply curve is upward sloping. B) The long-run aggregate demand curve is upward sloping. C) The short-run aggregate supply curve is vertical. D) The long-run aggregate supply curve is vertical. Answer: D Topic: Long-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 15) The long-run aggregate supply curve is ________ because along it, as prices rise, the money wage rate ________. A) vertical; falls B) vertical; rises C) upward sloping; falls D) upward sloping; stays constant Answer: B Topic: Long-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking

16) The long-run aggregate supply curve illustrates the A) relationship of the price level and real GDP when the economy is at full employment. B) relationship of aggregate supply and aggregate demand. C) amount of products producers offer at various prices when money wages and other resource prices do not change. D) surpluses, shortages and equilibrium level of GDP. Answer: A Topic: Long-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 17) The long-run aggregate supply curve is the relationship between the quantity of real GDP supplied and ________ when ________. A) the price level; real GDP equals potential GDP B) real GDP demanded; the wage rate is constant C) the price level; real GDP equals nominal GDP D) real GDP demanded; the price level does not change Answer: A Topic: Long-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 18) When the price level rises, the long-run aggregate supply curve ________. A) shifts rightward B) does not shift C) slopes upward D) shifts leftward Answer: B Topic: Long-Run Aggregate Supply Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 19) For movements along the long-run aggregate supply curve, A) potential GDP is dependent on the price level. B) the prices of goods and services change while the prices of productive resources hold steady. C) the price level and the money wage rate change by the same percentage. D) All of the above are correct. Answer: C Topic: Long-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking

20) The long-run aggregate supply curve shows the A) maximum GDP the nation will ever produce. B) full-employment level of real GDP. C) level of real GDP associated with a constant price level. D) level of output at which real GDP equals nominal GDP. Answer: B Topic: Long-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 21) Which of the following is true about the long-run aggregate supply curve? A) It is vertical at the level of potential GDP. B) It shows the relationship between the price level and real GDP when the economy is at full employment. C) It does not shift in response to temporary changes in aggregate demand. D) All of the above are true. Answer: D Topic: Long-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 22) Which of the following events will increase long-run aggregate supply? A) an increase in the interest rate B) an increase in resource prices C) a decrease in expected profit D) an advance in technology Answer: D Topic: Long-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking

23) The curve labeled A in the above figure is a A) short-run aggregate demand curve. B) short-run aggregate supply curve. C) long-run aggregate demand curve. D) long-run aggregate supply curve. Answer: D Topic: Long-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills 24) The curve labeled A in the above figure will shift rightward when A) the price level falls. B) technology increases. C) population falls. D) the price level rises. Answer: B Topic: Changes in Aggregate Supply, Technology Skill: Analytical Status: Old AACSB: Analytical Skills

25) The short-run aggregate supply curve A) shows what each producer is willing and able to produce at each level of income holding constant potential GDP and all resource prices. B) shows the relationship between aggregate production and the price level holding constant potential GDP and all resource prices. C) becomes vertical if there is excess production capacity within the economy. D) shows a negative relationship between the price level and real national income holding constant potential GDP and all resource prices. Answer: B Topic: Short-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 26) The short-run aggregate supply curve A) is vertical. B) has a negative slope. C) has a positive slope. D) is horizontal. Answer: C Topic: Short-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 27) The short-run aggregate supply curve is upward sloping because in the short run the A) money wage rate changes but the price level does not. B) price level changes but the money wage rate does not. C) both the money wage rate and the price level change. D) neither the money wage rate nor the price level can change. Answer: B Topic: Short-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 28) The positive relationship between short-run aggregate supply and the price level indicates that, in the short run, A) firms produce more output as the price level falls. B) firms produce more output as the price level rises. C) the money wage rate increases when moving along the short-run aggregate supply curve. D) lower price levels are more profitable for firms. Answer: B Topic: Short-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 8 Copyright © 2014 Pearson Education, Inc.

29) Moving upward along the SAS curve results in a ________ in the price level and ________ in real GDP. A) rise; an increase B) rise; a decrease C) fall; an increase D) fall; a decrease Answer: A Topic: Short-Run Aggregate Supply Skill: Recognition Status: Revised AACSB: Reflective Thinking 30) The short-run aggregate supply curve is upward sloping because A) a lower price level creates a wealth effect. B) lower taxes motivate people to work more. C) money wage rates do not immediately change when the price level changes. D) most business firms operate with long-term contracts for output but not labor. Answer: C Topic: Short-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 31) The short-run aggregate supply curve A) is vertical. B) shows the impact changes in the price level have on the quantity of real GDP when resource prices are constant. C) illustrates the level of potential real GDP. D) shifts whenever the price level changes. Answer: B Topic: Short-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 32) In the short-run A) the aggregate supply curve is upward sloping. B) real GDP is always equal to potential GDP. C) the money wage rate can change. D) the price level does not change. Answer: A Topic: Short-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 9 Copyright © 2014 Pearson Education, Inc.

33) Along a short-run aggregate supply curve, a decrease in the price level means that A) more output is produced as consumer demand increases. B) less output is produced as firms decrease production. C) more output is produced as firms increase production because wages fall more than the price level falls, making it profitable to hire more workers. D) output does not change because firms do not change the quantity they produce. Answer: B Topic: Short-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 34) In the short run, firms expand their production when the price level rises because A) the money wage rate remains constant so the higher prices for their products makes it profitable for firms to expand production. B) each firm must keep its production up to the level of its rivals, and some firms will expand production as the price level increases. C) the higher prices allow the firm to hire more workers by offering higher wages, thereby increasing productivity and profits. D) firms can increase their profits by increasing their maintenance. Answer: A Topic: Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 35) Moving along the short-run aggregate supply curve, ________. A) the real wage rate is constant B) real GDP equals potential GDP C) the money wage rate, the prices of other resources, and potential GDP remain constant D) real GDP equals nominal GDP Answer: C Topic: Short-Run Aggregate Supply Curve Skill: Recognition Status: Old AACSB: Reflective Thinking

36) If the money wage rate and other resource prices do not change when the price level rises by 10 percent, ________. A) the long-run aggregate supply curve shifts leftward B) the short-run aggregate supply curve shifts leftward C) the long-run aggregate supply curve shifts rightward D) there is movement along the short-run aggregate supply curve Answer: D Topic: Movements Along the SAS Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 37) A change in ________ results in a movement along the short-run aggregate supply curve but does not shift the short-run aggregate supply curve. A) the money wage rate B) technology C) the quantity of capital D) the price level Answer: D Topic: Movements Along the SAS Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 38) Which of the following does NOT shift the short-run aggregate supply curve? A) a change in the money wage rate B) technological progress C) a reduction in the price of a raw material D) a change in the price level Answer: D Topic: Movements Along the SAS Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 39) Which of the following occurs while moving along a short-run aggregate supply curve? A) The money wage rate and the price level change by the same percentage. B) The money wage rate changes and the price level is constant. C) The price level changes and the money wage rate is constant. D) Neither the price level nor the money wage rate changes. Answer: C Topic: Movements Along the SAS Curve Skill: Recognition Status: Old AACSB: Reflective Thinking

40) For movements along the short-run aggregate supply curve, A) the money wage rate is constant. B) the real wage rate changes. C) potential GDP remains constant. D) All of the above are correct. Answer: D Topic: Movements Along the SAS Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 41) Moving along a short-run aggregate supply curve, resource prices ________, the money rate wage ________, and potential GDP ________. A) do not change; changes; does not change B) do not change; does not change; changes C) change; does not change; does not change D) do not change; does not change; does not change Answer: D Topic: Movements Along the SAS Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 42) A decrease in the price level accompanied by no change in the money wage rate leads to ________ movement along the ________ aggregate supply curve. A) a downward; short-run B) an upward; short-run C) a downward; long-run D) an upward; long-run Answer: A Topic: Movements Along the SAS Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 43) The SAS curve and the LAS curve A) intersect at potential GDP. B) are parallel at potential GDP. C) are perpendicular to one another at potential GDP. D) None of the above answers is correct. Answer: A Topic: The LAS and SAS Curves Skill: Recognition Status: Old AACSB: Reflective Thinking

44) Suppose the price level, the money wage, and the price of all other resources rise by 10 percent. This set of changes leads to A) an upward movement along the LAS curve. B) a downward movement along the LAS curve. C) an upward movement along the SAS curve. D) a leftward shift of the LAS curve. Answer: A Topic: Movements Along the LAS and SAS Curves Skill: Recognition Status: Old AACSB: Reflective Thinking 45) Suppose the price level rises and the money wage remains constant. This set of changes leads to A) an upward movement along the LAS curve. B) an upward movement along the SAS curve. C) a leftward shift of the SAS curve. D) a leftward shift of the SAS curve and the LAS curve. Answer: B Topic: Movements Along the LAS and SAS Curves Skill: Recognition Status: Old AACSB: Reflective Thinking 46) Which of the following statements regarding aggregate supply are correct? A) Moving along the long-run aggregate supply curve, both the price level and the money wage rate change by the same percentage. B) Moving along the short-run aggregate supply curve, both the price level and the money wage rate change by the same percentage. C) Moving along the long-run aggregate supply curve, the money wage rate changes but the price level is constant. D) Moving along the short-run aggregate supply curve, the money wage rate changes but the price level is constant. Answer: A Topic: Movements Along the LAS and SAS Curves Skill: Recognition Status: Old AACSB: Reflective Thinking

47) In the figure above, potential GDP equals A) $12.5 trillion. B) $13.0 trillion. C) $13.5 trillion. D) None of the above answers is correct. Answer: B Topic: Long-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills 48) In the figure above, the economy is at point A when the price level rises to 120. Money wage rates and other resource prices remain constant. Firms are willing to supply output equal to A) $12.5 trillion. B) $13.0 trillion. C) $13.5 trillion. D) None of the above answers is correct. Answer: C Topic: Short-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills

49) In the figure above, the economy is at point A when the price level falls to 100. Money wage rates and all other resource prices remain constant. Firms are willing to supply output equal to A) $12.5 trillion. B) $13.0 trillion. C) $13.5 trillion. D) None of the above answers is correct. Answer: A Topic: Short-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills

50) In the above figure, the economy will be at full employment if the price level A) is 110. B) is above 110. C) is below 100. D) All of the above are possible because the economy will be at full employment at any price level at, above, or below 110. Answer: A Topic: Short-Run and Long-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills

51) In the above figure, which movement illustrates the impact of a falling price level and a constant money wage rate? A) E to I B) E to F C) E to J D) E to H Answer: A Topic: Movements Along the LAS and SAS Curves Skill: Analytical Status: Old AACSB: Analytical Skills 52) In the above figure, which movement illustrates the impact of a rising price level and a constant money wage rate? A) E to I B) E to F C) E to G D) E to K Answer: B Topic: Movements Along the LAS and SAS Curves Skill: Analytical Status: Old AACSB: Analytical Skills

53) In the above figure, which movement illustrates the impact of the price level and money wage rate falling at the same rate? A) E to H B) E to K C) E to J D) E to G Answer: C Topic: Movements Along the LAS and SAS Curves Skill: Analytical Status: Old AACSB: Analytical Skills 54) In the above figure, which movement illustrates the impact of a constant price level and a rising money wage rate? A) E to I B) E to F C) E to J D) E to H Answer: D Topic: Movements Along the LAS and SAS Curves Skill: Analytical Status: Old AACSB: Analytical Skills 55) Which of the following events will increase short-run aggregate supply? A) an advance in technology B) an increase in resource prices C) an increase in the natural unemployment rate D) an increase in foreign income Answer: A Topic: Changes in Short-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 56) The short-run aggregate supply curve shifts when I. the full-employment quantity of capital changes. II. technology advances. A) I only B) II only C) neither I nor II D) I and II Answer: D Topic: Changes in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 17 Copyright © 2014 Pearson Education, Inc.

57) The SAS curve shifts if there is a change in A) the price level. B) real GDP. C) nominal GDP. D) potential GDP. Answer: D Topic: Changes in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 58) Which of the following changes does NOT shift the short-run aggregate supply curve? A) an increase in the price level B) an increase in technology C) an increase in the quantity of capital D) an increase in the money wage rate Answer: A Topic: Changes in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 59) Which of the following changes does NOT shift the long-run aggregate supply curve? A) a decrease in the labor force B) a fall in the price level C) a rise in number of college graduates in the labor force D) a tax hike that reduces the capital stock Answer: B Topic: Changes in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 60) In a change to immigration policy during 2012, "people younger than 30 who came to the United States before the age of 16, pose no criminal or security threat, and were successful students or served in the military can get a two-year deferral from deportation, Homeland Security Secretary Janet Napolitano said," according to CNN, 06/16/2012. If many of these immigrates had previously been afraid to work, now as a result of being able to work legally, A) both the short-run and long-run aggregate supply curves shift rightward. B) only the long-run aggregate supply curve shifts rightward. C) only the short-run aggregate supply curve shifts rightward. D) neither the short-run nor the long-run supply curve shift. Answer: A Topic: Fluctuations in Aggregate Supply Skill: Conceptual Status: New AACSB: Reflective Thinking 18 Copyright © 2014 Pearson Education, Inc.

61) In a change to immigration policy during 2012, "people younger than 30 who came to the United States before the age of 16, pose no criminal or security threat, and were successful students or served in the military can get a two-year deferral from deportation, Homeland Security Secretary Janet Napolitano said," according to CNN, 06/16/2012. If many of these immigrates had previously been afraid to work, now as a result of being able to work legally, A) the long-run aggregate supply curve shifts leftward and potential GDP decreases. B) the short-run aggregate supply curve shifts rightward but potential GDP does not increase. C) the long-run aggregate supply curve shifts rightward and potential GDP increases. D) neither the short-run nor the long-run supply curve shifts. Answer: C Topic: Fluctuations in Aggregate Supply Skill: Conceptual Status: New AACSB: Reflective Thinking 62) All of the following shift the LAS curve EXCEPT A) a change in the capital stock. B) an increase in the money wage rate. C) an increase in the stock of human capital. D) technological progress. Answer: B Topic: Changes in Long-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 63) All of the following shift the short-run aggregate supply curve EXCEPT A) a change in the price level. B) a change in the money wage rate. C) a change in the price of a raw material. D) technological progress. Answer: A Topic: Changes in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 64) Which of the following directly shifts the short-run aggregate supply curve? A) a change in aggregate demand B) a change in the price level C) a change in resource prices D) all of the above Answer: C Topic: Changes in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 19 Copyright © 2014 Pearson Education, Inc.

65) Which of the following shifts the short-run aggregate supply curve? I. changes in the size of the labor force II. changes in the money wage rate A) I only B) II only C) both I and II D) neither I nor II Answer: C Topic: Changes in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 66) The short-run aggregate supply curve shifts leftward when the A) price level increases. B) general level of technology advances. C) money wage rate increases. D) availability of on-the-job training expands to all workers. Answer: C Topic: Changes in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 67) Suppose there is a temporary increase in the price of oil. This is represented by A) a leftward shift of the SAS and the LAS curve. B) a leftward shift of the LAS curve. C) a rightward shift of the SAS curve. D) a leftward shift of the SAS curve. Answer: D Topic: Changes in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking

68) In the above figure, the short-run aggregate supply curve is SAS1. Suppose that the price level in the economy increases. As a result there is A) an upward movement along SAS1. B) a downward movement along SAS1. C) a shift to SAS0. D) a shift to SAS2. Answer: A Topic: Changes in Short-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills 69) In the above figure, the short-run aggregate supply curve is SAS1. If technology advances, there is A) an upward movement along SAS1. B) a downward movement along SAS1. C) a shift to SAS0. D) a shift to SAS2. Answer: D Topic: Changes in Short-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills

70) In the above figure, the short-run aggregate supply curve is SAS1. If the money wage rate increases, there is A) an upward movement along SAS1. B) a downward movement along SAS1. C) a shift to SAS0. D) a shift to SAS2. Answer: C Topic: Changes in Short-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills 71) In the above figure, the short-run aggregate supply curve is SAS1. If the prices of resources fall, there is A) an upward movement along SAS1. B) a downward movement along SAS1. C) a shift to SAS0. D) a shift to SAS2. Answer: D Topic: Changes in Short-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills 72) A change in the full-employment quantity of labor ________ the short-run aggregate supply curve and ________ the long-run aggregate supply curve. A) shifts; shifts B) shifts; does not shift C) does not shift; shifts D) does not shift; does not shift Answer: A Topic: Change in Aggregate Supply; Full Employment Quantity of Labor Skill: Conceptual Status: Old AACSB: Reflective Thinking 73) If the full-employment quantity of labor increases, then the A) LAS curve shifts rightward and the SAS curve does not shift. B) SAS curve shifts rightward and the LAS curve does not shift. C) SAS curve shifts rightward and the LAS curve shifts rightward. D) SAS curve shifts rightward and the LAS curve does shifts leftward. Answer: C Topic: Changes in Aggregate Supply; Full-Employment Quantity of Labor Skill: Conceptual Status: Old AACSB: Reflective Thinking 22 Copyright © 2014 Pearson Education, Inc.

74) When the quantity of capital increases, then the A) LAS curve shifts rightward and the SAS curve does not shift. B) SAS curve shifts rightward and the LAS curve does not shift. C) SAS curve shifts rightward and the LAS curve shifts rightward. D) SAS curve shifts rightward and the LAS curve does shifts leftward. Answer: C Topic: Changes in Aggregate Supply, Capital Skill: Conceptual Status: Old AACSB: Reflective Thinking 75) With an increase in the capital stock, the short-run aggregate supply curve A) remains as it is. B) shifts rightward. C) shifts leftward. D) becomes steeper. Answer: B Topic: Changes in Aggregate Supply, Capital Skill: Conceptual Status: Old AACSB: Reflective Thinking 76) An increase in the amount of human capital ________ the short-run aggregate supply curve and ________ the long-run aggregate supply curve. A) shifts; shifts B) shifts; does not shift C) does not shift; shifts D) does not shift; does not shift Answer: A Topic: Changes in Aggregate Supply, Capital Skill: Conceptual Status: Old AACSB: Reflective Thinking 77) A change in the capital stock ________ the short-run aggregate supply curve and ________ the long-run aggregate supply curve. A) shifts; shifts B) shifts; does not shift C) does not shift; shifts D) does not shift; does not shift Answer: A Topic: Changes in Aggregate Supply, Capital Skill: Conceptual Status: Old AACSB: Reflective Thinking

78) The land of Ur increases its capital stock. As a result, the long-run aggregate supply curve shifts ________ and so does the ________ curve. A) rightward; aggregate demand B) leftward; aggregate demand C) rightward; short-run aggregate supply D) leftward; short-run aggregate supply Answer: C Topic: Changes in Aggregate Supply, Capital Skill: Conceptual Status: Old AACSB: Reflective Thinking 79) Which of the following shifts both the LAS and SAS curves? A) a change in the price level B) a change in the money wage rate C) a simultaneous change in both the price level and the money wage rate D) an advance in technology Answer: D Topic: Changes in Aggregate Supply, Technology Skill: Conceptual Status: Old AACSB: Reflective Thinking 80) A technological advance ________ the long-run aggregate supply curve and ________ the short-run aggregate supply curve. A) shifts; shifts B) shifts; does not shift C) does not shift; shifts D) does not shift; does not shift Answer: A Topic: Changes in Aggregate Supply, Technology Skill: Conceptual Status: Old AACSB: Reflective Thinking 81) Technological progress will A) shift the LAS curve rightward but will not shift the SAS curve. B) not shift either the LAS or the SAS curve. C) shift both the LAS and SAS curves rightward. D) shift the SAS curve rightward but will not shift the LAS curve. Answer: C Topic: Changes in Aggregate Supply, Technology Skill: Conceptual Status: Old AACSB: Reflective Thinking

82) The short-run aggregate supply curve shifts because of changes in all of the following EXCEPT A) the capital stock. B) technological progress. C) money wage rates. D) the price level. Answer: D Topic: Changes in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 83) If the money prices of resources changes, A) the LAS curve shifts. B) the SAS curve shifts. C) the AD curve shifts. D) the macroeconomic equilibrium is unaffected. Answer: B Topic: Change in Aggregate Supply-Money Wages & Prices of Resources Skill: Conceptual Status: Old AACSB: Reflective Thinking 84) If the money wage rate rises, then the A) SAS curve shifts rightward. B) SAS curve shifts leftward. C) LAS curve shifts rightward. D) LAS curve shifts leftward. Answer: B Topic: Change in Aggregate Supply-Money Wages & Prices of Resources Skill: Conceptual Status: Old AACSB: Reflective Thinking 85) If the money price of a resource such as oil falls, then the A) LAS curve shifts rightward. B) LAS curve shifts leftward. C) SAS curve shifts leftward. D) SAS curve shifts rightward. Answer: D Topic: Change in Aggregate Supply-Money Wages & Prices of Resources Skill: Conceptual Status: Old AACSB: Reflective Thinking

86) Suppose that the money wage in the economy increases by 8 percent. As a result the A) long-run aggregate supply will decrease. B) long-run and the short-run aggregate supply both decrease. C) short-run aggregate supply will decrease. D) long-run aggregate supply will increase and the short-run aggregate supply will decrease. Answer: C Topic: Change in Aggregate Supply-Money Wages & Prices of Resources Skill: Conceptual Status: Old AACSB: Reflective Thinking 87) A decrease in the money wage rate A) increases the long-run aggregate supply. B) decreases the long-run aggregate supply. C) increases the short-run aggregate supply. D) decreases the short-run aggregate supply. Answer: C Topic: Changes in Money Wages and Other Resource Prices Skill: Conceptual Status: Old AACSB: Reflective Thinking 88) An increase in the money wage rate A) increases the long-run aggregate supply. B) decreases the long-run aggregate supply. C) increases the short-run aggregate supply. D) decreases the short-run aggregate supply. Answer: D Topic: Changes in Money Wages and Other Resource Prices Skill: Conceptual Status: Old AACSB: Reflective Thinking 89) A change in the money wage rate shifts A) both the SAS and LAS curves. B) the LAS curve but not the SAS curve. C) the SAS curve but not the LAS curve. D) neither the SAS nor the LAS curve. Answer: C Topic: Changes in Money Wages and Other Resource Prices Skill: Conceptual Status: Old AACSB: Reflective Thinking

90) An increase in the money wage rate shifts the short-run aggregate supply curve ________; an increase in technology shifts the long-run aggregate supply curve ________. A) rightward; rightward B) rightward; leftward C) leftward; rightward D) leftward; leftward Answer: C Topic: Changes in Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 91) A decrease in the money wage rate increases ________ and an increase in the full employment quantity of labor increases ________. A) the SAS and the LAS; only the SAS B) the SAS and the LAS; only the LAS C) only the SAS; the SAS and the LAS D) only the LAS; the SAS and the LAS Answer: C Topic: Changes in Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 92) An increase in the quantity of capital increases ________ and increase in the full employment quantity of labor increases ________. A) the SAS and the LAS; only the SAS B) the SAS and the LAS; only the LAS C) the SAS and the LAS; the SAS and the LAS D) only the LAS; the SAS and the LAS Answer: C Topic: Changes in Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 93) Suppose there is a increase in short-run aggregate supply with no change in long-run aggregate supply. This situation could be the result of A) an increase in the price of oil. B) a decrease in the money wage rate. C) a technological advancement. D) an increase in the quantity of capital. Answer: B Topic: Changes in Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 27 Copyright © 2014 Pearson Education, Inc.

94) In the above figure, the economy is at point A when the money wage rate and the price level both fall by 10 percent. Firms will be willing to supply output equal to A) less than $13.0 trillion B) $13.0 trillion C) more than $13.0 trillion D) Without more information, it is impossible to determine which of the above answers is correct. Answer: B Topic: Long-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills 95) In the above figure, the economy is at point A. Then the price level falls to 90 while the money wage rate does not change. Firms will be willing to supply output equal to A) less than $13.0 trillion B) $13.0 trillion C) more than $13.0 trillion D) Without more information, it is impossible to determine which of the above answers is correct. Answer: A Topic: Short-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills

96) In the above figure, the economy is at point A. Then the price level rises to 110 while the money wage rate remains constant. Firms will be willing to supply output equal to A) less than $13.0 trillion B) $13.0 trillion C) more than $13.0 trillion D) Without more information, it is impossible to determine which of the above answers is correct. Answer: C Topic: Short-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills 97) In the above figure, the economy is at point A and the money wage rate falls by 10 percent. If the price level is constant, firms will be willing to supply output equal to A) less than $13.0 trillion B) $13.0 trillion C) more than $13.0 trillion D) Without more information, it is impossible to determine which of the above answers is correct. Answer: C Topic: Changes in Money Wages and Other Resource Prices Skill: Analytical Status: Old AACSB: Analytical Skills 98) In the above figure, the economy is at point A and the money wage rate rises by 10 percent. If the price level is constant, firms will be willing to supply output equal to A) less than $13.0 trillion B) $13.0 trillion C) more than $13.0 trillion D) Without more information, it is impossible to determine which of the above answers is correct. Answer: A Topic: Changes in Money Wages and Other Resource Prices Skill: Analytical Status: Old AACSB: Analytical Skills

99) In the above figure, B is the current long-run aggregate supply curve and E is the current short-run aggregate supply curve. If there is an increase in the full-employment quantity of labor, then the long-run aggregate supply curve and the short-run aggregate supply curve A) remain B and E. B) shift to A and D, respectively. C) shift to C and F, respectively. D) shift to A and F, respectively. Answer: C Topic: Changes in Aggregate Supply; Full-Employment Quantity of Labor Skill: Analytical Status: Old AACSB: Analytical Skills 100) In the above figure, B is the current long-run aggregate supply curve and E is the current short-run aggregate supply curve. Technological advances mean the long-run aggregate supply curve and short-run aggregate supply curve A) remain B and E. B) shift to A and D, respectively. C) shift to C and F, respectively. D) shift to C and remain E, respectively. Answer: C Topic: Changes in Aggregate Supply, Technology Skill: Analytical Status: Old AACSB: Analytical Skills

101) In the above figure, which part corresponds to a destruction of part of the nation's capital stock? A) Figure A B) Figure B C) Figure C D) Figure D Answer: A Topic: Changes in Aggregate Supply, Capital Skill: Analytical Status: Old AACSB: Analytical Skills 102) In the above figure, which point corresponds to an increase in technology? A) Figure A B) Figure B C) Figure C D) Figure D Answer: C Topic: Changes in Aggregate Supply, Technology Skill: Analytical Status: Old AACSB: Analytical Skills

103) In the above figure, which part corresponds to an increase in the money wage rate? A) Figure A B) Figure B C) Figure C D) Figure D Answer: B Topic: Changes in Money Wages and Other Resource Prices Skill: Analytical Status: Old AACSB: Analytical Skills 104) In the above figure, which part corresponds to a fall in the money wage rate? A) Figure A B) Figure B C) Figure C D) Figure D Answer: D Topic: Changes in Money Wages and Other Resource Prices Skill: Analytical Status: Old AACSB: Analytical Skills 105) Moving along which curve does the money wage rate and the price level change in the same proportions? A) the AD curve B) the SAS curve C) the LAS curve D) None of the above because there is no curve along which both the money wage rate and the price level change in the same proportions. Answer: C Topic: Study Guide Question, Long-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 106) Long-run aggregate supply will decrease for all of the following reasons EXCEPT A) reduced money wages. B) decreased human capital. C) decrease in the level of full employment. D) decreased capital. Answer: A Topic: Study Guide Question, Long-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking

107) A fall in the money wage rate shifts A) both the SAS and LAS curves rightward. B) both the SAS and LAS curves leftward. C) the SAS curve rightward but leaves the LAS curve unchanged. D) the LAS curve rightward but leaves the SAS curve unchanged. Answer: C Topic: Study Guide Question, Change in Money Wages & Other Resource Skill: Conceptual Status: Old AACSB: Reflective Thinking 108) An increase in the level of technology shifts A) both the SAS and LAS curves rightward. B) both the SAS and LAS curves leftward. C) the SAS curve rightward but leaves the LAS unchanged. D) the LAS curve rightward but leaves the SAS curve unchanged. Answer: A Topic: Study Guide Question, Changes in Aggregate Supply, Technology Skill: Conceptual Status: Old AACSB: Reflective Thinking 2 Aggregate Demand 1) The aggregate demand curve shows A) total expenditures at different levels of national income. B) the quantity of real GDP demanded at different price levels. C) that real income is directly (positively) related to the price level. D) All of the above answers are correct. Answer: B Topic: The Aggregate Demand Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 2) The AD curve shows the sum of A) the price level, employment, and real GDP. B) consumption expenditure, investment, and real GDP. C) consumption expenditure, investment, government expenditures on goods and services, and net exports. D) consumption expenditure, investment, the price level, and real GDP. Answer: C Topic: The Aggregate Demand Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 33 Copyright © 2014 Pearson Education, Inc.

3) The aggregate demand curve A) has a negative slope. B) has a positive slope. C) is vertical. D) is horizontal. Answer: A Topic: Aggregate Demand Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 4) Aggregate demand is the relationship between the quantity of real GDP demanded and the ________. A) price level B) money wage rate C) real wage rate D) nominal GDP demanded Answer: A Topic: Aggregate Demand Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 5) Moving along the aggregate demand curve, a decrease in the quantity of real GDP demanded is a result of A) an increase in the price level. B) a decrease in the price level. C) an increase in income. D) a decrease in income. Answer: A Topic: Aggregate Demand Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 6) Other things constant, the economy's aggregate demand curve shows that A) as the price level falls, real GDP decreases. B) any change in the price level shifts the aggregate demand curve. C) the quantity of real GDP demanded decreases when the price level rises. D) the quantity of real GDP demanded and the price level are not related. Answer: C Topic: The Aggregate Demand Curve Skill: Recognition Status: Old AACSB: Reflective Thinking

7) The aggregate demand curve shows the ________ relationship between the price level and ________. A) positive; the quantity of real GDP demanded B) negative; aggregate labor demanded C) positive; aggregate labor demand D) negative; the quantity of real GDP demanded Answer: D Topic: The Aggregate Demand Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 8) Other things equal, along the aggregate demand curve, a higher price level is associated with A) an increase in the quantity of real GDP demanded. B) a decrease in the quantity of real GDP demanded. C) a decrease in the quantity of nominal GDP demanded. D) higher income levels. Answer: B Topic: Aggregate Demand Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 9) The aggregate demand curve shows that, if other factors are held constant, the higher the price level, the A) greater the quantity of real GDP demanded. B) smaller the quantity of real GDP demanded. C) larger consumption expenditure. D) None of the above answers is correct. Answer: B Topic: The Aggregate Demand Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 10) The aggregate demand curve shows that, if other factors are held constant, a A) higher price level results in a decrease in the quantity of real GDP demanded. B) higher price level results in an increase in the quantity of real GDP demanded. C) higher price level results in a lower interest rate. D) lower price level results in inflationary conditions. Answer: A Topic: The Aggregate Demand Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking

11) The quantity of real GDP demanded equals $12.2 trillion when the price level is 90. If the price level rises to 95, the quantity of real GDP demanded equals A) less than $12.2 trillion. B) $12.2 trillion. C) more than $12.2 trillion. D) more information is needed to determine if the quantity of real GDP demanded increases, decreases, or does not change. Answer: A Topic: The Aggregate Demand Curve Skill: Conceptual Status: Old AACSB: Analytical Skills 12) The quantity of real GDP demanded equals $12.4 trillion when the price level is 95. If the price level falls to 90, the quantity of real GDP demanded equals A) less than $12.4 trillion. B) $12.4 trillion. C) more than $12.4 trillion. D) more information is needed to determine if the quantity of real GDP demanded increases, decreases, or does not change. Answer: C Topic: The Aggregate Demand Curve Skill: Conceptual Status: Old AACSB: Analytical Skills 13) Which of the following changes while moving along the aggregate demand curve? A) future incomes of households B) the price level C) the amount of money in the economy D) future profits from investment projects Answer: B Topic: Aggregate Demand Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 14) The AD curve slopes A) downward due to the wealth and price effects. B) downward due to the wealth and substitution effects. C) upward due to the price and substitution effects. D) upward due to the wealth and substitution effects. Answer: B Topic: The Aggregate Demand Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 36 Copyright © 2014 Pearson Education, Inc.

15) Your real wealth is measured as the A) amount of assets you have in dollar terms. B) amount of money you have. C) amount of goods and services your wealth will buy. D) amount of goods you have divided by the price level. Answer: C Topic: Aggregate Demand, Wealth Effect Skill: Recognition Status: Old AACSB: Reflective Thinking 16) As the price level falls and other things remain the same, real wealth ________ and ________. A) decreases; short-run aggregate supply decreases B) decreases; the quantity of real GDP demanded decreases C) increases; aggregate demand increases D) increases; the quantity of real GDP demanded increases Answer: D Topic: Aggregate Demand, Wealth Effect Skill: Recognition Status: Old AACSB: Reflective Thinking 17) If you have $1,000 of money in the bank and the price level rises 5 percent, your A) money is worth more in terms of what it can purchase. B) money is worth less in terms of what it can purchase. C) money is worth the same in terms of what it can purchase. D) purchasing power has risen. Answer: B Topic: Aggregate Demand, Wealth Effect Skill: Conceptual Status: Revised AACSB: Reflective Thinking 18) According to the wealth effect, if real wealth decreases then people A) decrease their consumption expenditure. B) increase their consumption expenditure. C) do not respond if their nominal wealth does not change. D) decrease their consumption expenditure only if their nominal wealth also decreases. Answer: A Topic: Aggregate Demand, Wealth Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking

19) An individual holds $10,000 in a checking account and the price level rises significantly. Hence A) the individual's real wealth and consumption expenditure decrease. B) the individual's real wealth decreases but real national wealth increases. C) there is no change in the individual's real wealth. D) the individual's wealth increases. Answer: A Topic: Aggregate Demand, Wealth Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking 20) If you have $1,000 in wealth and the price level increases 20 percent, then A) the $1,000 will buy fewer goods and services. B) the $1,000 dollars will buy 20 percent more goods and services. C) the real value of the $1,000 increases. D) you will be able to buy fewer goods, but the real value of those goods will increase. Answer: A Topic: Aggregate Demand, Wealth Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking 21) If you have $5,000 in wealth and the price level decreases 20 percent, then A) the $5,000 will buy fewer goods and services. B) the $5,000 will buy more goods and services. C) the real value of the $5,000 decreases. D) the real value of the $5,000 remains constant. Answer: B Topic: Aggregate Demand, Wealth Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking 22) A rise in the price level changes aggregate demand because A) firms increase their investment when prices are higher. B) the real value of people's wealth varies directly with the price level and so does their spending. C) the real value of people's wealth decreases and so they decrease their consumption. D) the more money people have, the more it is worth and hence the more goods and services they demand. Answer: C Topic: Aggregate Demand, Wealth Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking 38 Copyright © 2014 Pearson Education, Inc.

23) One reason that the aggregate demand curve has a negative slope is because A) people buy fewer goods and save more when the price level rises because their real wealth decreases. B) firms produce more when the price rises. C) people earn more money when output rises. D) The premise of the question is wrong because the aggregate demand curve has a positive slope. Answer: A Topic: Aggregate Demand, Wealth Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking 24) The intertemporal substitution effect refers to substitution of A) goods for services. B) goods and services for less expensive goods and services. C) goods and services today for goods and services in the future. D) goods and services produced domestically for goods and services produced in another country. Answer: C Topic: Aggregate Demand, Intertemporal Substitution Effect Skill: Recognition Status: Old AACSB: Reflective Thinking 25) According to the intertemporal substitution effect, when the price level rises and other things remain the same A) the interest rate falls. B) the interest rate rises. C) the quantity of money increases. D) government taxes rise. Answer: B Topic: Aggregate Demand, Intertemporal Substitution Effect Skill: Recognition Status: Old AACSB: Reflective Thinking

26) Substitution effects help explain the slope of the aggregate demand curve. One substitution effect refers to the A) inverse relationship between the interest rate and the price level. B) direct relationship between the interest rate and the real value of wealth. C) effect on investment expenditures that result from a change in interest rates produced by a change in the price level. D) change in wealth that results from a change in the interest rate. Answer: C Topic: Aggregate Demand, Intertemporal Substitution Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking 27) According to the intertemporal substitution effect, a fall in the price level will A) decrease the real value of wealth, which increases the quantity of real GDP demanded. B) cause the interest rate to fall so that investment increases and the quantity of real GDP demanded increases. C) increase net exports, which causes the quantity of real GDP demanded to increase. D) increase the real value of wealth, which raises the interest rate so that the quantity of real GDP demanded decreases. Answer: B Topic: Aggregate Demand, Intertemporal Substitution Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking 28) According to the intertemporal substitution effect, when the price level increases, the interest rate A) rises and the quantity of real GDP demanded increases. B) rises and the quantity of real GDP demanded decreases. C) falls and the quantity of real GDP demanded decreases. D) is not affected. Answer: B Topic: Aggregate Demand, Intertemporal Substitution Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking

29) According to the intertemporal substitution effect, a higher price level A) decreases the quantity of real GDP demanded. B) lowers the costs of building new plants and equipment. C) increases the quantity of real GDP demanded. D) makes it less costly for people to buy houses and cars. Answer: A Topic: Aggregate Demand, Intertemporal Substitution Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking 30) The intertemporal substitution effect of the price level on aggregate demand A) is the same as the real wealth effect. B) is one reason that the aggregate demand curve has a negative slope. C) explains why aggregate demand increases when the amount of money increases. D) is one reason that the aggregate demand curve has a positive slope. Answer: B Topic: Aggregate Demand, Intertemporal Substitution Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking 31) One reason that the aggregate demand curve has a negative slope is that when the domestic price level rises, A) firms produce more goods and services. B) firms produce fewer goods and services. C) people substitute toward more imported goods and services. D) peoples' wealth increases. Answer: C Topic: Aggregate Demand, International Price Substitution Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking 32) One reason that the aggregate demand curve has a negative slope is because A) firms supply more when prices rise. B) people buy more foreign goods when the domestic price level rises. C) the amount of money in the economy increases when the price level rises. D) firms supply less when prices rise. Answer: B Topic: Aggregate Demand, International Price Substitution Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking

33) There are several reasons why the aggregate demand curve is downward sloping. Which of the following correctly describes one of these explanations? A) A rise in the price level raises the purchasing power wealth and increases desired consumption. B) A rise in the price level raises interest rates and increases investment spending. C) A fall in the price level, holding foreign prices and the exchange rate constant, increases net exports. D) A rise in the price level lowers the interest rate and increases investment spending. Answer: C Topic: Aggregate Demand, International Price Substitution Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking 34) When the prices of U.S.-produced goods rise and the price of foreign-produced goods do not change, the result is A) an increase in exports. B) a decrease in exports. C) a decrease in imports. D) no change in imports or exports. Answer: B Topic: Aggregate Demand, International Price Substitution Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking 35) When the price level in France increases while the exchange rate and the price level in the United States remain the same, the result is A) U.S.-made goods become relatively cheaper compared to French-made goods. B) French citizens are more likely to buy U.S.-made goods. C) U.S. citizens are less likely to buy French-made goods. D) All of the above answers are correct. Answer: D Topic: Aggregate Demand, International Price Substitution Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking

36) A change in ________ creates a movement along the aggregate demand curve but does not shift the aggregate demand curve. A) tax rates B) the price level C) fiscal policy D) None of the above because they all shift the aggregate demand curve. Answer: B Topic: The Aggregate Demand Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking

37) In the above figure, the economy is initially at point B. Then the price level falls by 10. The wealth effect will help A) move the economy to point A. B) move the economy to point C. C) move the economy to point D. D) keep the economy to point B. Answer: A Topic: Aggregate Demand, Wealth Effect Skill: Analytical Status: Old AACSB: Analytical Skills

38) In the above figure, the economy initially is at point B. Then price level rises by 10. The wealth effect will help A) move the economy to point A. B) move the economy to point C. C) move the economy to point D. D) keep the economy to point B. Answer: B Topic: Aggregate Demand, Wealth Effect Skill: Analytical Status: Old AACSB: Analytical Skills 39) In the above figure, the economy initially is at point C. Then the domestic price level rises by 10. A A) substitution effect would help move the economy to point D. B) substitution effect would help move the economy to point B. C) substitution effect would keep the economy at point C. D) wealth effect would help move the economy to point B. Answer: A Topic: Aggregate Demand, International Price Substitution Effect Skill: Analytical Status: Old AACSB: Analytical Skills 40) An increase in aggregate demand is shown by a A) rightward shift the AD curve. B) movement upward along the AD curve. C) movement downward along the AD curve. D) leftward shift the AD curve. Answer: A Topic: Changes in Aggregate Demand Skill: Recognition Status: Old AACSB: Reflective Thinking 41) Which of the following does NOT shift the aggregate demand curve? A) a decrease in the quantity of money B) an increase in people's expected future incomes C) an increase in the price level D) an increase in current foreign income Answer: C Topic: Changes in Aggregate Demand Skill: Recognition Status: Old AACSB: Reflective Thinking

42) Which of the following would NOT shift the U.S. aggregate demand curve? A) a change in income in Canada B) a change in the quantity of capital in the United States C) an expectation that inflation will be lower in the future D) U.S. monetary and fiscal policy Answer: B Topic: Changes in Aggregate Demand Skill: Recognition Status: Old AACSB: Reflective Thinking 43) Which of the following changes would NOT shift the aggregate demand curve? A) a change in fiscal policy B) a change in monetary policy C) a change in expectations about future income D) an increase in technology Answer: D Topic: Changes in Aggregate Demand Skill: Recognition Status: Old AACSB: Reflective Thinking 44) Aggregate demand increases when A) foreign incomes fall. B) interest rates rise. C) the exchange rate rises. D) None of the above answers is correct. Answer: D Topic: Changes in Aggregate Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking 45) Which of the following does NOT shift the aggregate demand curve? A) a decrease in the quantity of money B) an increase in investment C) an increase in the price level D) a decrease in taxes Answer: C Topic: Changes in Aggregate Demand Skill: Recognition Status: Old AACSB: Reflective Thinking

46) A key issue in the presidential election of 2012 between President Obama and Mr. Romney concerned tax rates. President Obama favored increasing taxes, especially on the rich. As a result of a tax increase, A) the aggregate demand curve shifts leftward. B) the aggregate demand curve shifts rightward. C) the aggregate supply curve shifts leftward. D) the aggregate supply curve shifts rightward. Answer: A Topic: Changes in Aggregate Demand Skill: Conceptual Status: New AACSB: Reflective Thinking 47) Which of the following issues prominent in the presidential election of 2012 shifts the aggregate demand curve rightward? A) raising taxes on the rich B) increasing Medicare, Medicaid, and Social Security payments C) loosening immigration policies D) allowing more oil drilling on Federal lands Answer: B Topic: Changes in Aggregate Demand Skill: Conceptual Status: New AACSB: Reflective Thinking 48) A change in ________ creates a movement along the aggregate demand curve, while a change in ________ shifts the aggregate demand curve. A) expected profits; tax rates B) the price level; government expenditures C) foreign income; the foreign exchange rate D) real wealth; human capital Answer: B Topic: Changes in Aggregate Demand Skill: Recognition Status: Old AACSB: Reflective Thinking 49) Which of the following shifts the aggregate demand curve rightward? A) a decrease in consumption B) an increase in investment C) a decrease in net exports D) a decrease in government expenditure on goods and services Answer: B Topic: Changes in Aggregate Demand, Investment Skill: Conceptual Status: Old AACSB: Reflective Thinking 46 Copyright © 2014 Pearson Education, Inc.

50) Suppose consumers decrease their consumption expenditure because they worry about what their income will be in the future. There is A) a rightward shift of the aggregate demand curve. B) an upward movement along the aggregate demand curve. C) a downward movement along the aggregate demand curve. D) a leftward shift of the aggregate demand curve. Answer: D Topic: Changes in Aggregate Demand, Expectations Skill: Conceptual Status: Old AACSB: Reflective Thinking 51) If the expected future inflation rate decreases, then A) aggregate demand increases. B) short-run aggregate supply increases. C) aggregate demand decreases. D) long-run aggregate supply decreases. Answer: C Topic: Changes in Aggregate Demand, Expectations Skill: Conceptual Status: Old AACSB: Reflective Thinking 52) If higher inflation is expected in the future, then the A) SAS curve shifts rightward. B) AD curve shifts rightward. C) LAS curve shifts rightward. D) None of the above answers is correct. Answer: B Topic: Changes in Aggregate Demand, Expectations Skill: Conceptual Status: Old AACSB: Reflective Thinking 53) People expect their incomes will decrease next year. As a result, the ________ will shift ________. A) short-run aggregate supply curve; rightward B) aggregate demand curve; rightward C) aggregate demand curve; leftward D) long-run aggregate supply curve; rightward Answer: C Topic: Changes in Aggregate Demand, Expectations Skill: Conceptual Status: Old AACSB: Reflective Thinking 47 Copyright © 2014 Pearson Education, Inc.

54) People expect that the El Nino effect will cause drought in Australia in coming years. If most Australian firms expect their profits will fall during the next five years, Australia's ________ this year. A) aggregate demand will increase B) long-run aggregate supply will increase C) aggregate demand will decrease D) short-run aggregate supply will increase Answer: C Topic: Changes in Aggregate Demand, Expectations Skill: Conceptual Status: Old AACSB: Reflective Thinking 55) Which of the following statements is FALSE? A) Fiscal policy is the attempt to influence the economy using taxes, transfer payments, and government expenditures. B) Government expenditure affects aggregate demand directly because government expenditure is a component of aggregate demand. C) Taxes and transfer payments affect aggregate demand by changing disposable income. D) An increase in disposable income leads to a decrease in aggregate demand. Answer: D Topic: Changes in Aggregate Demand, Fiscal Policy Skill: Conceptual Status: Old AACSB: Reflective Thinking 56) A decrease in government transfer payments A) increases aggregate demand. B) increases the aggregate quantity demanded. C) decreases the aggregate quantity demanded. D) decreases aggregate demand. Answer: D Topic: Changes in Aggregate Demand, Transfer Payments Skill: Conceptual Status: Old AACSB: Reflective Thinking 57) An increase in government expenditure on goods and services A) increases aggregate demand. B) increases the aggregate quantity demanded. C) decreases the aggregate quantity demanded. D) decreases aggregate demand. Answer: A Topic: Changes in Aggregate Demand, Government Expenditure Skill: Conceptual Status: Old AACSB: Reflective Thinking 48 Copyright © 2014 Pearson Education, Inc.

58) A decrease in government expenditure on goods and services A) increases aggregate demand. B) increases the aggregate quantity demanded. C) decreases the aggregate quantity demanded. D) decreases aggregate demand. Answer: D Topic: Changes in Aggregate Demand, Government Expenditure Skill: Conceptual Status: Old AACSB: Reflective Thinking 59) A decrease in government expenditure shifts the AD curve ________ and a decrease in taxes shifts the AD curve ________. A) rightward; rightward B) rightward; leftward C) leftward; rightward D) leftward; leftward Answer: C Topic: Changes in Aggregate Demand, Government Expenditure Skill: Conceptual Status: Old AACSB: Reflective Thinking 60) Which of the following shifts the aggregate demand curve leftward? A) an increase in consumption expenditures B) a decrease in taxes C) a decrease in government expenditures on goods and services D) an increase in net exports of goods and services Answer: C Topic: Changes in Aggregate Demand, Government Expenditure Skill: Conceptual Status: Old AACSB: Reflective Thinking 61) Disposable income ________ when ________. A) decreases; taxes increase B) decreases; transfer payments increase C) increases; government expenditures decrease D) decreases; aggregate income increases Answer: A Topic: Changes in Aggregate Demand, Taxes Skill: Conceptual Status: Old AACSB: Reflective Thinking

62) The aggregate demand curve A) shifts rightward when the price level increases and leftward when the price level falls. B) shifts rightward when taxes are decreased. C) shifts rightward when foreign incomes decrease and shifts leftward when foreign incomes increase. D) does not shift, unlike market demand curves. Answer: B Topic: Changes in Aggregate Demand, Taxes Skill: Conceptual Status: Old AACSB: Reflective Thinking 63) If taxes are increased, the AD curve A) is not affected because a change in taxes is a nominal change not real change. B) shifts rightward and aggregate demand decreases. C) shifts leftward and aggregate demand decreases. D) does not shift but there is a movement down along the curve. Answer: C Topic: Changes in Aggregate Demand, Taxes Skill: Conceptual Status: Old AACSB: Reflective Thinking 64) Which of the following shifts the aggregate demand curve rightward? A) a decrease in government expenditure B) expectations that future incomes will fall C) a decrease in the quantity of money and an increase in interest rates D) a tax cut Answer: D Topic: Changes in Aggregate Demand, Taxes Skill: Conceptual Status: Old AACSB: Reflective Thinking 65) Which of the following decreases aggregate demand? A) The government increases taxes on both business and personal income. B) Foreign incomes rise. C) The quantity of money in the economy increases. D) Households believe that the economy is headed for good times, with higher future incomes. Answer: A Topic: Changes in Aggregate Demand, Taxes Skill: Conceptual Status: Old AACSB: Reflective Thinking

66) Which of the following increases aggregate demand? A) a decrease in taxes B) a decrease in foreign income C) a decrease in government expenditure D) a rise in the interest rate Answer: A Topic: Changes in Aggregate Demand, Taxes Skill: Conceptual Status: Old AACSB: Reflective Thinking 67) Which of the following shifts the aggregate demand curve rightward? A) an increase in the tax rate B) a decrease in the price level C) an increase in the quantity of money D) an increase in the exchange rate Answer: C Topic: Changes in Aggregate Demand, Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 68) Which of the following increases aggregate demand? A) an increase in taxes B) an increase in the quantity of money C) an increase in the exchange rate D) a decrease in government expenditures Answer: B Topic: Changes in Aggregate Demand, Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 69) If the quantity of money increases, the A) price level rises and the AD curve does not shift. B) AD curve shifts leftward and aggregate demand decreases. C) AD curve does not shift and there is a movement upward along the curve. D) AD curve shifts rightward and aggregate demand increases. Answer: D Topic: Changes in Aggregate Demand, Money Skill: Conceptual Status: Old AACSB: Reflective Thinking

70) Which of the following shifts the aggregate demand curve rightward? A) a decrease in the price level B) a decrease in government expenditures C) an increase in the quantity of money D) a decrease in transfer payments Answer: C Topic: Changes in Aggregate Demand, Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 71) The U.S. aggregate demand curve shifts leftward if A) the economic conditions in Europe improve so that European incomes increase. B) there is a tax cut. C) the Federal Reserve hikes the interest rate. D) the exchange rate falls. Answer: C Topic: Changes in Aggregate Demand, Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 72) Which of the following increases aggregate demand and shifts the AD curve rightward? A) a fall in the price level B) an increase in the quantity of money and a resulting fall in the interest rate C) predictions of a recession that lead to expectations of lower future income D) an increase in the exchange rate that makes imports less expensive Answer: B Topic: Changes in Aggregate Demand, Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 73) Aggregate demand increases if the quantity of money ________. A) decreases or tax rates increase B) or transfer payments decrease C) remains constant or tax rates increase D) increases or tax rates decrease Answer: D Topic: Changes in Aggregate Demand, Money Skill: Conceptual Status: Old AACSB: Reflective Thinking

74) The U.S. exchange rate rises. As a result, there is a A) movement along the U.S. aggregate demand curve but the curve does not shift. B) rightward shift in the U.S. aggregate demand curve. C) leftward shift in the U.S. aggregate demand curve. D) rightward shift in the long-run U.S. aggregate supply curve. Answer: C Topic: Changes in Aggregate Demand, Foreign Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 75) When the exchange rises, then the A) AD curve shifts rightward. B) AD curve shifts leftward. C) LAS curve shifts rightward. D) LAS curve shifts leftward. Answer: B Topic: Changes in Aggregate Demand, Foreign Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 76) Suppose the exchange rate falls from $1.20 Canadian per U.S. dollar to $1.10 Canadian per U.S. dollar. U.S. exports will ________, U.S. imports will ________, and U.S. aggregate demand will ________. A) decrease; increase; decrease B) decrease; increase; increase C) increase; decrease; increase D) increase; increase; increase Answer: C Topic: Changes in Aggregate Demand, Foreign Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 77) A decrease in foreign incomes A) increases aggregate demand in the United States. B) increases the aggregate quantity demanded in the United States. C) decreases the aggregate quantity demanded in the United States. D) decreases aggregate demand in the United States. Answer: D Topic: Changes in Aggregate Demand, Foreign Incomes Skill: Conceptual Status: Old AACSB: Reflective Thinking

78) An increase in foreign incomes A) increases aggregate demand in the United States. B) increases the aggregate quantity demanded in the United States. C) decreases the aggregate quantity demanded in the United States. D) decreases aggregate demand in the United States. Answer: A Topic: Changes in Aggregate Demand, Foreign Incomes Skill: Conceptual Status: Old AACSB: Reflective Thinking

79) In the above figure, the economy is initially at point B. If the government decreases transfer payments, there is A) a movement to point C. B) a movement to point A. C) a shift to AD2. D) a shift to AD1. Answer: C Topic: Changes in Aggregate Demand, Transfer Payments Skill: Analytical Status: Old AACSB: Analytical Skills

80) In the above figure, the economy is initially at point B. If taxes increase, there is A) a movement to point C. B) a movement to point A. C) a shift to AD2. D) a shift to AD1. Answer: C Topic: Changes in Aggregate Demand, Taxes Skill: Analytical Status: Old AACSB: Analytical Skills 81) In the above figure, the economy is initially at point B. If the Fed decreases the quantity of money, there is A) a movement to point C. B) a movement to point A. C) a shift to AD2. D) a shift to AD1. Answer: C Topic: Changes in Aggregate Demand, Money Skill: Analytical Status: Old AACSB: Analytical Skills 82) In the above figure, the economy is initially at point B. If the Fed increases the quantity of money, there is A) a movement to point C. B) a movement to point A. C) a shift to AD2. D) a shift to AD1. Answer: D Topic: Changes in Aggregate Demand, Money Skill: Analytical Status: Old AACSB: Analytical Skills

83) In the above figure, if the economy is at point a, an increase in ________ will move the economy to ________. A) real wealth from the fall in the price level; point b B) real wealth from the fall in the price level; point c C) expected future income; point c D) expected future income; point d Answer: B Topic: Aggregate Demand, Wealth Effect Skill: Analytical Status: Old AACSB: Analytical Skills 84) In the above figure, if the economy is at point a, an increase in ________ will move the economy to ________. A) real wealth; point d B) real wealth from a fall in the price level; point d C) expected future income; point b D) expected future income; point d Answer: C Topic: Changes in Aggregate Demand, Expectations Skill: Analytical Status: Old AACSB: Analytical Skills

85) In the above figure, the movement from point B to point A might be the result of A) an increase in government expenditures because of a war. B) an increase in government expenditures because of increases in education expenditures. C) an increase in the demand for manufacturing goods because of new technology. D) a fall in the price level. Answer: D Topic: The Aggregate Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills 86) In the above figure, the shift from point C to point B might be the result of A) an increase in the price level. B) a decrease in the price level. C) a decrease in government expenditures. D) an increase in the quantity of money. Answer: C Topic: Changes in Aggregate Demand, Government Expenditure Skill: Analytical Status: Old AACSB: Analytical Skills

87) The curve labeled A in the above figure is A) a short-run aggregate supply curve. B) an aggregate demand curve. C) a long-run aggregate supply curve. D) a production possibilities curve. Answer: B Topic: The Aggregate Demand Curve Skill: Analytical Status: Old AACSB: Analytical Skills 88) In the above figure, the curve labeled A shifts rightward if A) expected future profits decrease. B) the quantity of money decreases. C) the substitution effect occurs. D) taxes decrease. Answer: D Topic: Changes in Aggregate Demand, Taxes Skill: Analytical Status: Old AACSB: Analytical Skills

89) The U.S. fiscal policy implemented in 2008 was an attempt to A) give billions of dollars to businesses and low- and middle-income Americans in order stimulate business investment and consumption expenditure, thereby increasing AD. B) give billions of dollars to businesses and low- and middle-income Americans in order stimulate business investment and consumption expenditure, thereby increasing SAS. C) decrease interest rates in order to stimulate business investment and consumption expenditure, thereby increasing AD. D) decrease the exchange rate in order to boost net exports, thereby increasing AD. Answer: A Topic: Recession of 2008 Skill: Recognition Status: Old AACSB: Reflective Thinking 90) The U.S. monetary policy implemented in 2008 was an attempt to A) give billions of dollars to businesses and low- and middle-income Americans in order stimulate business investment and consumption expenditure, thereby increasing AD. B) decrease interest rates in order to stimulate business investment and consumption expenditure, thereby increasing SAS. C) decrease interest rates in order to stimulate business investment and consumption expenditure, thereby increasing AD. D) decrease the exchange rate in order to boost net exports, thereby increasing AD. Answer: C Topic: Recession of 2008 Skill: Recognition Status: Old AACSB: Reflective Thinking 91) The aggregate demand curve illustrates that, as the price level rises, A) the quantity of real GDP demanded increases. B) the quantity of real GDP demanded decreases. C) the AD curve shifts rightward. D) the AD curve shifts leftward. Answer: B Topic: Study Guide Question, Aggregate Demand Skill: Recognition Status: Old AACSB: Reflective Thinking

92) As the price level falls, the quantity of real wealth ________ and the aggregate quantity of real GDP demanded ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: A Topic: Study Guide Question, Aggregate Demand, Wealth Effect Skill: Recognition Status: Old AACSB: Reflective Thinking 3 Explaining Macroeconomic Trends and Fluctuations 1) The AS/AD model studies the relationship between A) the price level and unemployment. B) the price level and real GDP. C) unemployment and real GDP. D) nominal GDP and inflation. Answer: B Topic: The AS-AD Model Skill: Recognition Status: Old AACSB: Reflective Thinking 2) By using only the aggregate demand curve, we can determine A) only the price level. B) only the quantity of real GDP. C) both the price level and quantity of real GDP. D) neither the price level nor the quantity of real GDP. Answer: D Topic: Macroeconomic Equilibrium Skill: Recognition Status: Old AACSB: Reflective Thinking 3) In short-run macroeconomic equilibrium A) real GDP equals potential GDP and aggregate demand determines the price level. B) the price level is fixed and short-run aggregate supply determines real GDP. C) real GDP and the price level are determined by short-run aggregate supply and aggregate demand. D) real GDP is less than potential GDP. Answer: C Topic: Short-Run Macroeconomic Equilibrium Skill: Recognition Status: Old AACSB: Reflective Thinking 60 Copyright © 2014 Pearson Education, Inc.

4) The economy is in its short run equilibrium at the point where the A) price level is stable. B) SAS curve intersects the LAS curve. C) AD curve intersects the LAS curve. D) AD curve intersects the SAS curve. Answer: D Topic: Short-Run Macroeconomic Equilibrium Skill: Recognition Status: Old AACSB: Reflective Thinking 5) Short-run equilibrium occurs at the intersection of A) the SAS and AD curves. B) the SAS, LAS, and AD curves. C) the SAS and LAS curves. D) the LAS and AD curves. Answer: A Topic: Short-Run Macroeconomic Equilibrium Skill: Recognition Status: Old AACSB: Reflective Thinking 6) If the economy is in short run equilibrium then A) real GDP equals potential GDP. B) nominal GDP equals potential GDP. C) real GDP cannot be equal to potential GDP. D) real GDP can be greater than, less than, or equal to potential GDP. Answer: D Topic: Short-Run Macroeconomic Equilibrium Skill: Recognition Status: Old AACSB: Reflective Thinking 7) In the short-run, real GDP can be greater than or less than potential GDP because in the short run the A) money wage rate is fixed. B) quantity of capital is fixed. C) full-employment level of employment is fixed. D) price level is fixed. Answer: A Topic: Short-Run Macroeconomic Equilibrium Skill: Recognition Status: Old AACSB: Reflective Thinking

8) Short-run macroeconomic equilibrium occurs when the quantity of real GDP demanded ________. A) equals potential GDP B) equals full-employment GDP C) does not equal full-employment GDP D) equals the quantity of real GDP supplied Answer: D Topic: Short-Run Macroeconomic Equilibrium Skill: Recognition Status: Old AACSB: Reflective Thinking 9) In the short run, the equilibrium level of real GDP A) is necessarily less than potential GDP. B) is necessarily equal to potential GDP. C) is necessarily greater than potential GDP. D) could be less than, equal to, or greater than potential GDP. Answer: D Topic: Short-Run Macroeconomic Equilibrium Skill: Recognition Status: Old AACSB: Reflective Thinking 10) In the short run, the intersection of the aggregate demand and the short-run aggregate supply curves, A) determines the equilibrium price level. B) is a point where there is neither a surplus nor a shortage of goods. C) determines the equilibrium level of real GDP. D) All of the above answers are correct. Answer: D Topic: Short-Run Macroeconomic Equilibrium Skill: Recognition Status: Old AACSB: Reflective Thinking

11) A short-run macroeconomic equilibrium occurs A) at the intersection of the short-run aggregate supply curve and the long-run aggregate supply curve. B) at the intersection of the short-run aggregate supply curve and the aggregate demand curve. C) at the intersection of the short-run aggregate supply curve, the long-run aggregate supply curve, and the aggregate demand curve. D) when the rate at which prices of goods and services increase equals the rate at which money wage rates increase. Answer: B Topic: Short-Run Macroeconomic Equilibrium Skill: Recognition Status: Old AACSB: Reflective Thinking 12) Last year in the country of Union, the price level increased and real GDP increased. Such an outcome might have occurred because short-run aggregate supply ________ and aggregate demand ________. A) decreased; decreased B) increased; did not change C) increased; decreased D) did not change; increased Answer: D Topic: Short-Run Macroeconomic Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 13) At long-run macroeconomic equilibrium, ________. A) an inflationary gap exists B) real GDP equals potential GDP C) a recessionary gap exists D) real GDP is less than potential GDP but is as close as it is possible to be Answer: B Topic: Long-Run Macroeconomic Equilibrium Skill: Recognition Status: Old AACSB: Reflective Thinking

14) If the economy is at long run equilibrium then A) real GDP equals potential GDP. B) nominal GDP equals potential GDP. C) real GDP cannot be equal to potential GDP. D) real GDP can be greater than, less than, or equal to potential GDP. Answer: A Topic: Long-Run Macroeconomic Equilibrium Skill: Recognition Status: Old AACSB: Reflective Thinking 15) Full-employment equilibrium occurs when A) real GDP exceeds potential GDP. B) real GDP equals potential GDP. C) potential GDP exceeds real GDP. D) a result of an increase in long-run aggregate supply. Answer: B Topic: Long-Run Macroeconomic Equilibrium Skill: Recognition Status: Old AACSB: Reflective Thinking 16) In long-run macroeconomic equilibrium, A) real GDP equals potential GDP. B) the price level is fixed and aggregate demand determines real GDP. C) real GDP and the price level are determined by short-run aggregate supply and aggregate demand and long-run aggregate supply is irrelevant. D) real GDP is less than potential GDP. Answer: A Topic: Long-Run Macroeconomic Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking

Real GDP supplied Real GDP Short run Long run Price level demanded (dollars) (dollars) (dollars) 90 700 300 600 100 600 400 600 110 500 500 600 120 400 600 600 17) The table above gives the aggregate demand and aggregate supply schedules in Lotus Land. With no changes in aggregate demand or long-run aggregate supply, in long-run macroeconomic equilibrium, the price level will be ________ and real GDP will be ________. A) 120; $400 B) 110; $500 C) 90; $400 D) 100; $600 Answer: D Topic: Long-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

Aggregate Price demand level (trillions of 2005 dollars) 130 120 110 100 90

8 9 10 11 12

Short-run Long-run aggregate aggregate supply supply (trillions of (trillions of 2005 dollars) 2005 dollars) 12 10 11 10 10 10 9 10 8 10

18) The data in the above table indicate that when the price level is 120, A) inventories fall and the price level rises. B) the economy is in a long-run macroeconomic equilibrium. C) inventories rise and the price level falls. D) the unemployment rate is at its equilibrium level. Answer: C Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

19) The data in the above table indicate that when the price level is 100, A) inventories fall and the price level rises. B) the economy is in a long-run macroeconomic equilibrium. C) inventories rise and the price level falls. D) the unemployment rate is at its equilibrium level. Answer: A Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 20) The data in the above table indicate that when the price level is 100, A) firms have unexpectedly low inventories, so prices will rise. B) inventories are at levels planned by firms. C) firms will plan to decrease the level of output. D) firms have unexpectedly high inventories, so prices fall. Answer: A Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 21) The data in the above table indicate that when the price level is 120, A) firms have unexpectedly low inventories, so prices will rise. B) inventories are at levels planned by firms. C) firms will plan to increase the level of output. D) firms have unexpectedly high inventories, so prices fall. Answer: D Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

22) In the above figure, curve A is the ________ curve, curve B is the ________ curve, and curve C is the ________ curve. A) long-run aggregate supply; short-run aggregate supply; aggregate demand B) aggregate demand; short-run aggregate supply; long-run aggregate supply C) short-run aggregate supply; long-run aggregate supply; aggregate demand D) long-run aggregate supply; aggregate demand; short-run aggregate supply Answer: A Topic: Long-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

23) In the figure above, in the short-run macroeconomic equilibrium, A) there is no structural unemployment. B) real GDP is greater than potential GDP. C) real GDP equals potential GDP. D) real GDP is less than potential GDP. Answer: D Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

24) The above figure depicts an economy with a short-run equilibrium A) at full employment. B) below full employment. C) at higher than full-employment. D) None of the above answers are correct. Answer: A Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

25) In the above figure, at the price level of 140 and real GDP of A) $12 trillion, firms will not be able to sell all their output. B) $4 trillion, firms will not be able to sell all their output. C) $4 trillion, consumers will not be able to buy all the goods and services they demand. D) $12 trillion, consumers will not be able to buy all the goods and services they demand. Answer: A Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 26) Based on the figure above, short-run equilibrium occurs at the price level of A) 120 and real GDP of $4 trillion. B) 130 and real GDP of $8 trillion. C) 140 and real GDP of $12 trillion. D) 130 and real GDP of $12 trillion. Answer: B Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

27) The data in the above figure indicate that the economy will be in a long-run macroeconomic equilibrium at a price level of A) 140. B) 130. C) 100. D) 120. Answer: D Topic: Long-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 28) Which of the following can be said about economic growth? I. Economic growth is the result of increases in long-run aggregate supply. II. Economic growth is the result of increases in aggregate demand. A) I only B) II only C) I and II D) neither I or II Answer: A Topic: Economic Growth Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 29) Economic growth is best defined as A) decreases in potential GDP. B) increases in potential GDP. C) rightward shifts of the AD curve. D) rightward shifts of the SAS curve. Answer: B Topic: Economic Growth Rate Skill: Recognition Status: Old AACSB: Reflective Thinking

30) Which of the following helps determine the growth rate of potential GDP? I. capital accumulation II. technology advances III. growth in the quantity of money A) I B) I and II C) I and III D) I, II and III Answer: B Topic: Economic Growth Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 31) Economic growth A) occurs when the long-run aggregate supply curve shifts upward. B) is an increase in potential GDP as the long-run aggregate supply curve shifts rightward. C) requires a compensating decrease in aggregate demand to offset the increase in aggregate supply. D) All of the above answers are correct. Answer: B Topic: Economic Growth Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 32) Over time in a growing economy, the long-run aggregate supply curve will A) become horizontal at the long-run potential price level. B) shift rightward. C) shift leftward. D) become increasingly steep. Answer: B Topic: Economic Growth Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking

33) The country of Mu has continuous strong economic growth and a steady price level. This situation is most likely the result of aggregate demand growing ________ aggregate supply. A) at the same pace as long-run B) slower than long-run C) slower than short-run D) faster than long-run Answer: A Topic: Economic Growth Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 34) If aggregate demand grows only slightly faster than potential GDP, then the economy will ________. A) experience economic growth with high inflation B) experience recession C) experience economic growth with low inflation D) be at a business-cycle peak Answer: C Topic: Economic Growth Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 35) In the United States, of the following decades economic growth was most rapid during the ________. A) 1960s B) 1990s C) 1970s D) 2000s Answer: A Topic: Economic Growth Rate Skill: Recognition Status: Old AACSB: Reflective Thinking 36) In the United States, of the following decades inflation was highest during the ________., A) 1970s B) 1990s C) 1960s D) 2000s Answer: A Topic: Inflation Skill: Recognition Status: Old AACSB: Reflective Thinking 73 Copyright © 2014 Pearson Education, Inc.

37) Inflation occurs over time as a result of A) long-run aggregate supply increasing faster than aggregate demand. B) long-run aggregate supply increasing faster than short-run aggregate supply. C) decreases in aggregate demand. D) aggregate demand increasing faster than long-run aggregate supply. Answer: D Topic: Inflation Skill: Conceptual Status: Old AACSB: Reflective Thinking 38) If the aggregate demand curve shifts ________ faster than the long-run aggregate supply curve, then ________ occurs. A) leftward; economic growth B) leftward; inflation C) rightward; economic growth D) rightward; inflation Answer: D Topic: Inflation Skill: Conceptual Status: Old AACSB: Reflective Thinking 39) When an increase in aggregate demand exceeds the increase in aggregate supply, A) real GDP decreases while nominal GDP increases. B) the price level falls while real GDP increases. C) nominal GDP decreases and real GDP decreases. D) the economy will experience inflation as the price level rises. Answer: D Topic: Inflation Skill: Conceptual Status: Old AACSB: Reflective Thinking 40) Business cycles are the result of A) regular shifts of the AD curve only. B) irregular shifts of the SAS curve only. C) regular shifts of both the AD and SAS curves. D) irregular shifts of both the AD and SAS curves. Answer: D Topic: Business Cycle Skill: Recognition Status: Old AACSB: Reflective Thinking

41) One result of a decrease in aggregate demand and no change in aggregate supply is A) a recession. B) an increase in employment levels. C) an economic expansion. D) a rise in the price level. Answer: A Topic: Business Cycle Skill: Conceptual Status: Old AACSB: Reflective Thinking 42) Starting at full employment, a business cycle can be described by the following sequence: ________ equilibrium, ________ equilibrium, ________ equilibrium. A) full-employment; below full-employment; above full-employment B) below full-employment; full-employment; above full-employment C) above full-employment; below full-employment; full-employment D) below full-employment; full-employment; below full-employment Answer: B Topic: Business Cycle Skill: Conceptual Status: Old AACSB: Reflective Thinking 43) When real GDP exceeds potential GDP, then the economy has A) an inflationary gap. B) a below full-employment equilibrium. C) a recessionary gap. D) None of the above answers are correct. Answer: A Topic: Inflationary Gap Skill: Recognition Status: Old AACSB: Reflective Thinking 44) An inflationary gap is occurs when A) real GDP is less than potential GDP. B) real GDP exceeds potential GDP. C) real GDP equals potential GDP. D) the economy is at full employment. Answer: B Topic: Inflationary Gap Skill: Recognition Status: Old AACSB: Reflective Thinking

45) When the economy is at an above full-employment equilibrium, ________. A) nominal GDP exceeds real GDP B) an inflationary gap exists C) a recessionary gap exists D) real GDP is less than potential GDP Answer: B Topic: Inflationary Gap Skill: Recognition Status: Old AACSB: Reflective Thinking 46) An above full-employment equilibrium is A) a theoretical possibility but cannot happen in reality. B) the equilibrium in which the economy is in most of the time. C) when real GDP exceeds potential GDP. D) the period of time when prices are falling. Answer: C Topic: Inflationary Gap Skill: Recognition Status: Old AACSB: Reflective Thinking 47) A recessionary gap means that short-run macroeconomic equilibrium GDP A) is less than full-employment GDP. B) equals full-employment GDP. C) is more than full-employment GDP. D) may be less than, more than, or the same as full-employment GDP depending on the level of potential GDP. Answer: A Topic: Recessionary Gap Skill: Recognition Status: Old AACSB: Reflective Thinking 48) If real GDP is less than potential GDP, then the economy is ________ equilibrium. A) at an above full-employment B) not in short-run macroeconomic C) at a below full-employment D) in long-run macroeconomic Answer: C Topic: Recessionary Gap Skill: Recognition Status: Old AACSB: Reflective Thinking

49) A recessionary gap occurs when A) real GDP is less than potential GDP. B) nominal GDP is less than potential GDP. C) high rates of inflation occur. D) nominal GDP is greater than potential GDP. Answer: A Topic: Recessionary Gap Skill: Recognition Status: Old AACSB: Reflective Thinking 50) If aggregate demand decreases and neither short-run nor long-run aggregate supply changes, then A) the price level increases in the short-run and decreases in the long-run. B) there is an inflationary gap. C) there is a recessionary gap. D) in the long run, the long-run aggregate supply will decrease. Answer: C Topic: Recessionary Gap Skill: Conceptual Status: Old AACSB: Reflective Thinking 51) A below full-employment equilibrium A) is not possible in the U.S. economy. B) occurs when real GDP is less than potential GDP. C) occurs when the price level is rising very quickly. D) occurs when real GDP exceeds potential GDP. Answer: B Topic: Recessionary Gap Skill: Conceptual Status: Old AACSB: Reflective Thinking 52) An economy is at full employment. Which of the following events can create a recessionary gap? A) an increase in foreign income B) an increase in taxes C) a decrease in the quantity of capital D) a decrease in money wages Answer: B Topic: Recessionary Gap Skill: Conceptual Status: Old AACSB: Reflective Thinking

53) The Great Depression, in which real GDP fell and unemployment rose, can be characterized as a ________. A) inflationary gap B) long-run equilibrium C) recessionary gap D) full-employment equilibrium Answer: C Topic: Recessionary Gap Skill: Conceptual Status: Old AACSB: Reflective Thinking 54) Suppose the economy is experiencing a recessionary gap. In the long run, if aggregate demand does not change the money wage rate ________, unemployment ________, and the price level ________. A) falls; rises; falls B) falls; falls; falls C) rises; rises; rises D) rises; falls; rises Answer: B Topic: Recessionary Gap Skill: Conceptual Status: Old AACSB: Reflective Thinking 55) An above full-employment equilibrium occurs when A) aggregate demand decreases while neither the short-run nor long-run aggregate supply changes. B) short-run aggregate supply decreases while neither aggregate demand nor long-run aggregate supply changes. C) the equilibrium level of real GDP is greater than potential GDP. D) the equilibrium level of real GDP is less than potential GDP. Answer: C Topic: Above Full-Employment Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking

Real GDP supplied Real GDP Short run Long run Price level demanded (dollars) (dollars) (dollars) 90 700 300 600 100 600 400 600 110 500 500 600 120 400 600 600 56) The table above gives the aggregate demand and aggregate supply schedules in Lotus Land. The short-run macroeconomic equilibrium is a price level of ________ and a real GDP of ________. A) 90; $400 B) 100; $400 C) 110; $500 D) 120; $400 Answer: C Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 57) The table above gives the aggregate demand and aggregate supply schedules in Lotus Land. In short-run equilibrium, there is ________. A) an inflationary gap of $100 B) a recessionary gap of $100 C) a recessionary gap of $200 D) an inflationary gap of $200 Answer: B Topic: Recessionary Gap Skill: Analytical Status: Old AACSB: Analytical Skills 58) The table above gives the aggregate demand and aggregate supply schedules in Lotus Land. Lotus Land is in short-run macroeconomic equilibrium. In the long run, if aggregate demand does not change then Lotus Land will return to full-employment as ________. A) the money wage rate rises B) the money wage rate falls C) businesses cut their imports D) the government cuts taxes Answer: B Topic: Recessionary Gap Skill: Analytical Status: Old AACSB: Analytical Skills 79 Copyright © 2014 Pearson Education, Inc.

59) In the above figure, the inflationary gap when AD2 is the aggregate demand curve equals A) the difference between 110 and 100. B) the difference between $13.5 trillion and $13.0 trillion. C) LAS minus SAS at a price level of 100. D) AD1. Answer: B Topic: Inflationary Gap Skill: Analytical Status: Revised AACSB: Analytical Skills 60) The reason that it is possible for the economy in the above figure to be at equilibrium E2 rather than at E1 is that A) in the long run there is always less than full employment. B) in the short run the economy can produce more than it can in a long-run situation. C) AD always shifts rightward and never shifts leftward. D) the economy must be in a recession. Answer: B Topic: Inflationary Gap Skill: Analytical Status: Old AACSB: Analytical Skills

61) The above figure illustrates A) a recessionary gap. B) a full-employment equilibrium. C) an inflationary gap. D) an equilibrium at the economy's physical limits. Answer: B Topic: Full-Employment Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 62) An inflationary gap means that short-run macroeconomic equilibrium GDP A) is less than full-employment GDP. B) equals full-employment GDP. C) is more than full-employment GDP. D) may be less than, more than, or the same as full-employment GDP depending on the level of potential GDP. Answer: C Topic: Inflationary Gap Skill: Analytical Status: Old AACSB: Analytical Skills

63) The above figure illustrates A) a recessionary gap. B) a full-employment equilibrium. C) an inflationary gap. D) an equilibrium at the economy's physical limits. Answer: C Topic: Inflationary Gap Skill: Analytical Status: Old AACSB: Analytical Skills

64) In the above figure, point A represents A) a recessionary gap. B) a full-employment equilibrium. C) an inflationary gap. D) an increase in aggregate demand. Answer: A Topic: Recessionary Gap Skill: Analytical Status: Old AACSB: Analytical Skills 65) In the above figure, point B represents A) a recessionary gap. B) a full-employment equilibrium. C) an inflationary gap. D) a decrease in aggregate demand. Answer: B Topic: Full-Employment Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

66) In the above figure, point C represents A) a recessionary gap. B) a full-employment equilibrium. C) an inflationary gap. D) a decrease in aggregate demand. Answer: C Topic: Inflationary Gap Skill: Analytical Status: Old AACSB: Analytical Skills

67) In the above figure, the short-run aggregate supply curve is SAS and the aggregate demand curve is AD. A recessionary gap exists A) if the long-run aggregate supply curve is LAS1. B) if the long-run aggregate supply curve is LAS2. C) if the long-run aggregate supply curve is LAS3. D) All of the above answers are correct. Answer: C Topic: Recessionary Gap Skill: Analytical Status: Old AACSB: Analytical Skills

68) In the above figure, the short-run aggregate supply curve is SAS and the aggregate demand curve is AD. An inflationary gap exists A) if the long-run aggregate supply curve is LAS1. B) if the long-run aggregate supply curve is LAS2. C) if the long-run aggregate supply curve is LAS3. D) All of the above answers are correct. Answer: A Topic: Inflationary Gap Skill: Analytical Status: Old AACSB: Analytical Skills

69) In the above figure, if the economy is at point A, which of the following is true? A) Point A is the long-run equilibrium point. B) The economy is in a recession. C) Money wages can be expected to fall. D) The economy might be at point A as a result of a recent cut in the tax rate. Answer: D Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

70) In the above figure, if the economy is at point A, which of the following is true? A) There is a recessionary gap. B) There is an inflationary gap. C) Point A is the long-run equilibrium point. D) None of the above answers are correct. Answer: B Topic: Inflationary Gap Skill: Analytical Status: Old AACSB: Analytical Skills

71) The above figure depicts an economy A) with an inflationary gap. B) with a recessionary gap. C) producing at full employment. D) None of the above answers is correct. Answer: A Topic: Inflationary Gap Skill: Analytical Status: Old AACSB: Analytical Skills

72) In the above figure, the short-run equilibrium will eventually adjust to a long-run equilibrium with a A) lower price level and smaller real GDP B) higher price level and larger real GDP. C) higher price level and smaller real GDP. D) lower price level and larger real GDP. Answer: C Topic: Long-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

73) The above figure illustrates A) a recessionary gap. B) a full-employment equilibrium. C) an inflationary gap. D) an equilibrium at the economy's physical limits. Answer: A Topic: Recessionary Gap Skill: Analytical Status: Old AACSB: Analytical Skills

74) In the above figure, if aggregate demand does not change the short-run equilibrium will A) eventually adjust to a long-run equilibrium with a higher price level. B) will not adjust on its own. C) eventually adjust to a long-run equilibrium with a lower price level. D) None of the above answers are correct. Answer: C Topic: Long-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 75) Suppose the economy was initially in a long-run equilibrium. Then the world economy expands so that foreign incomes rise. U.S. aggregate demand ________ and eventually the money wage rate ________. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls Answer: A Topic: Fluctuations in Aggregate Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking 76) If the economy is in long run equilibrium and aggregate demand increases, then in the short run A) nothing happens because the economy is in long run equilibrium. B) the price level rises and real GDP does not change. C) real GDP increases and the price level does not change. D) the price level rises and real GDP increases. Answer: D Topic: Fluctuations in Aggregate Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking 77) The Federal Reserve lowers interest rates. As a result, in the short run, real GDP ________ and the price level ________. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls Answer: A Topic: Fluctuations in Aggregate Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking 88 Copyright © 2014 Pearson Education, Inc.

78) The government increases taxes. As a result, in the short run, real GDP ________ and the price level ________. A) increases; rises B) decreases; falls C) decreases; rises D) increases; falls Answer: B Topic: Fluctuations in Aggregate Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking 79) In the short run, an increase in government expenditure on goods and services ________ real GDP and ________ the price level. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls Answer: A Topic: Fluctuations in Aggregate Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking 80) In the short-run, a decrease in government expenditure ________ real GDP and ________ the price level. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: D Topic: Fluctuations in Aggregate Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking 81) In the short run, an increase in aggregate demand A) lowers the price level and decreases real GDP. B) lowers the price level and increases real GDP. C) raises the price level and increases real GDP. D) raises the price level and decreases real GDP. Answer: C Topic: Fluctuations in Aggregate Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking 89 Copyright © 2014 Pearson Education, Inc.

82) A lower price level combined with a decrease in real GDP occurs when the A) short-run aggregate supply curve shifts rightward. B) short-run aggregate supply curve shifts leftward. C) aggregate demand curve shifts rightward. D) aggregate demand curve shifts leftward. Answer: D Topic: Fluctuations in Aggregate Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking

83) In the above figure, suppose the economy had been at point A and now is at B. What could have lead to the movement to B? A) A tax hike. B) Government expenditures on goods and services increased. C) Winter storms cause factories in the north to be shut down for several weeks. D) Money wage rates rose. Answer: B Topic: Fluctuations in Aggregate Demand Skill: Analytical Status: Old AACSB: Analytical Skills

84) Suppose the economy is at point B. If firms expect profits will be higher in the future, to what point might the economy's move in the short run? A) It stays at point B. B) It shifts to a point such as A. C) It shifts to a point such as C. D) None of the above answers are correct because it is the SAS curve that shifts, not the AD curve. Answer: C Topic: Fluctuations in Aggregate Demand Skill: Analytical Status: Old AACSB: Analytical Skills 85) Suppose the economy is at point B. If a recession in another country decreases exports, to what point might economy move in the short run? A) It stays at point B. B) It shifts to a point such as A. C) It shifts to a point such as C. D) None of the above answers are correct because it is the SAS curve that shifts, not the AD curve. Answer: B Topic: Fluctuations in Aggregate Demand Skill: Analytical Status: Old AACSB: Analytical Skills

86) The figure illustrates aggregate demand and aggregate supply in Sparta. Which of the following events will decrease Sparta's real GDP in the short run? A) a decrease in taxes B) a fall in resource prices C) a decrease in government expenditure D) an increase in investment Answer: C Topic: Fluctuations in Aggregate Demand Skill: Conceptual Status: Old AACSB: Analytical Skills 87) The figure above illustrates aggregate demand and aggregate supply in Sparta. Sparta's price level will rise above 100 if ________. A) government expenditure decreases B) the quantity of money increases C) the quantity of capital increases D) taxes increase Answer: B Topic: Fluctuations in Aggregate Demand Skill: Conceptual Status: Old AACSB: Analytical Skills

88) In November, 2012, U.S. lawmakers were faced with a "fiscal cliff:" if they did not agree on how to reduce the federal deficit, automatic tax increases and drastic cuts in government spending would take effect. What would happen if the fiscal cliff occurred? A) The aggregate demand curve shifts leftward, the price level falls and real GDP decreases. B) The aggregate demand curve shifts rightward, the price level rises and real GDP increases. C) The short run aggregate supply curve shift leftward, the price level rises and real GDP decreases. D) The short run aggregate supply curve shifts rightward, the price level falls and real GDP increases. Answer: A Topic: Fluctuations in Aggregate Demand Skill: Conceptual Status: New AACSB: Reflective Thinking 89) In November, 2012, U.S. lawmakers were faced with a "fiscal cliff:" if they did not agree on how to reduce the federal deficit, automatic tax increases and drastic cuts in government spending would take effect. What would be the result if the fiscal cliff occurred? A) a recessionary gap B) an inflationary gap C) stagflation D) nothing Answer: A Topic: Fluctuations in Aggregate Demand Skill: Conceptual Status: New AACSB: Reflective Thinking 90) In a short-run macroeconomic equilibrium, potential GDP exceeds real GDP. If aggregate demand does not change, then the A) short-run aggregate supply curve will shift rightward as the money wage rate falls. B) short-run aggregate supply curve will shift leftward as the money wage rate rises. C) long-run aggregate supply curve will shift leftward as the money wage rate rises. D) long-run aggregate supply curve will shift leftward as the money wage rate falls. Answer: A Topic: Movement to the Long-Run Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking

91) In a short-run macroeconomic equilibrium, real GDP exceeds potential GDP. If aggregate demand does not change, then the A) short-run aggregate supply curve will shift rightward as the money wage rate falls. B) short-run aggregate supply curve will shift leftward as the money wage rate rises. C) long-run aggregate supply curve will shift leftward as the money wage rate rises. D) long-run aggregate supply curve will shift leftward as the money wage rate falls. Answer: B Topic: Movement to the Long-Run Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 92) The country of Stanley is at an above-full employment equilibrium. Which of the following events will return Stanley to full-employment? A) an increase in government expenditures B) a decrease in the interest rate C) an increase in the money wage rate D) an increase in the quantity of money Answer: C Topic: Movement to the Long-Run Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 93) An economy currently has a inflationary gap. An increase in the money wage rate will ________ the inflationary gap and ________ the price level. A) decrease; decrease B) increase; increase C) increase; decrease D) decrease; increase Answer: D Topic: Movement to the Long-Run Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking

94) Suppose the current situation is such that the price level is 120, real GDP is $13 trillion, and GDP along the long-run aggregate supply curve is $12.6 trillion. What will take place to restore the long-run equilibrium? A) The price level will fall until long-run aggregate supply increases to $13 trillion. B) The price level will fall and money wage rates will rise until real GDP along the long-run aggregate supply curve is $13 trillion. C) Money wage rates will rise until real GDP is $12.6 trillion. D) Aggregate demand will increase until both short-run and long-run aggregate supply equal $13 trillion. Answer: C Topic: Movement to the Long-Run Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 95) The long-run aggregate supply curve is vertical at $12 trillion but the short-run aggregate supply curve intersects the aggregate demand curve at $13 trillion. We know that A) the economy is producing below full employment in the short run, and will adjust by hiring more workers, thus decreasing unemployment. B) the price level is too high. The long-run equilibrium will occur with a lower price level. C) adjustments will occur so that the long-run aggregate supply equals $13 trillion. D) adjustments will occur so that the short-run aggregate supply eventually intersects the aggregate demand curve at $12 trillion. Answer: D Topic: Movement to the Long-Run Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 96) In long-run macroeconomic equilibrium, the A) real wage rate has adjusted so that the economy is on the short-run aggregate supply curve but not on the long-run aggregate supply curve. B) long-run aggregate supply curve has shifted so that potential GDP equals real GDP. C) aggregate demand curve adjusts to the point where the long-run aggregate supply curve and the short-run aggregate supply curve intersect. D) None of the above answers is correct. Answer: D Topic: Movement to the Long-Run Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking

97) If the economy is in long run equilibrium and then aggregate demand increases, in the long run the increase in aggregate demand means that the A) price level will be higher but real GDP will be unaffected. B) real GDP will be larger but the price level will be unaffected. C) the price level will be higher and real GDP will be larger. D) neither the price level nor real GDP will be unaffected. Answer: A Topic: Long-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 98) In the long-run equilibrium, an increase in the quantity of capital leads to A) an increase in the equilibrium price level and an increase in equilibrium real GDP. B) a decrease in the equilibrium price level and an increase in equilibrium real GDP. C) a decrease in the equilibrium price level, but no change in equilibrium real GDP. D) no change in the equilibrium price level, but an increase in equilibrium real GDP. Answer: B Topic: Long-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

99) In the above figure, at the point where AD equals SAS, A) real GDP exceeds potential GDP. B) potential GDP exceeds real GDP. C) the economy is in a recession. D) the unemployment rate is zero. Answer: A Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 100) In the above figure, as the economy adjusts toward equilibrium, the A) AD curve will shift rightward. B) SAS curve will shift rightward. C) AD curve will shift leftward. D) SAS curve will shift leftward. Answer: D Topic: Movement to the Long-Run Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

101) In the above figure, when the economy is in a long-run equilibrium, the price level will be A) 90. B) 100. C) 110. D) 120. Answer: D Topic: Long-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 102) In the above figure, when the economy is in a long-run equilibrium, real GDP will be A) $12.5 trillion. B) $13.0 trillion. C) $13.5 trillion. D) $14.0 trillion. Answer: B Topic: Long-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

Aggregate Price demand level (trillions of 2005 dollars) 140 130 120 110 100

9.0 9.5 10.0 10.5 11.0

Short-run Long-run aggregate aggregate supply supply (trillions of (trillions of 2005 dollars) 2005 dollars) 11.5 10.0 11.0 10.0 10.5 10.0 10.0 10.0 9.5 10.0

103) The data in the above table indicate that the economy will be in a short-run macroeconomic equilibrium at a price level A) between 130 and 121. B) between 119 and 111. C) of 120. D) of 110. Answer: B Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

104) From the data in the above table, when the economy is at its short-run equilibrium, if aggregate demand does not change, then as time passes the A) short-run aggregate supply curve shifts rightward. B) short-run aggregate supply curve shifts leftward. C) long-run aggregate supply curve shifts rightward. D) long-run aggregate supply curve shifts leftward. Answer: B Topic: Movement to the Long-Run Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills Aggregate demand Short-run aggregate Long-run aggregate Price level (trillions of 2005 supply (trillions of supply (trillions of dollars) 2005 dollars) 2005 dollars) 100 11 7 10 110 10 8 10 120 9 9 10 130 8 10 10 140 7 11 10 105) Based on the data in the table above, the economy will be in short-run equilibrium at a price level of A) 90. B) 110. C) 100. D) 120. Answer: D Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 106) Based on the data in the table above, at the short-run equilibrium A) the unemployment rate is less than the natural unemployment rate. B) the unemployment rate is greater than the natural unemployment rate. C) money wage rates will rise in long-run. D) the economy is at full employment. Answer: B Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

107) Based on the data in the table above, in the adjustment towards the long-run equilibrium A) money wage rates will rise. B) the aggregate demand curve will shift leftward. C) the short-run aggregate supply curve will shift leftward. D) the short-run aggregate supply curve will shift rightward. Answer: D Topic: Movement to the Long-Run Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

Aggregate Price demand level (trillions of 2005 dollars) 140 130 120 110 100

4 5 6 7 8

Short-run Long-run aggregate aggregate supply supply (trillions of (trillions of 2005 dollars) 2005 dollars) 8 7 7 7 6 7 5 7 4 7

108) The data in the above table show that the economy will be in a short-run macroeconomic equilibrium at a price level of A) 90. B) 110. C) 100. D) 120. Answer: D Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 109) The data in the above table show that when the price level is 120, A) the unemployment rate is below its natural rate. B) the unemployment rate is above its natural rate. C) money wages rates will rise in the future. D) the long-run aggregate supply curve will shift leftward in the future. Answer: B Topic: Recessionary Gap Skill: Analytical Status: Old AACSB: Analytical Skills

110) The data in the above table show that when the price level is 120, the economy A) is in a long-run macroeconomic equilibrium. B) has an inflationary gap. C) has a recessionary gap. D) will have falling money wage rates sometime in the future. Answer: C Topic: Recessionary Gap Skill: Analytical Status: Old AACSB: Analytical Skills 111) The data in the above table show that when the price level is 120, if aggregate demand does not change then the A) money wage rate will rise in the future. B) money wage rate will fall in the future. C) short-run aggregate supply curve will shift leftward. D) long-run aggregate supply curve will shift leftward. Answer: B Topic: Movement to the Long-Run Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 112) The data in the above table show that when the price level is 120, if aggregate demand does not change then the A) short-run aggregate supply curve will shift rightward. B) short-run aggregate supply curve will shift leftward. C) long-run aggregate supply curve will shift rightward. D) long-run aggregate supply curve will shift leftward. Answer: A Topic: Movement to the Long-Run Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

113) In the above figure, point B depicts A) an inflationary gap with real GDP in excess of potential GDP. B) an inflationary gap with real GDP less than potential GDP. C) a recessionary gap with real GDP in excess of potential GDP. D) a recessionary gap with real GDP less than potential GDP. Answer: A Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 114) In the above figure, real GDP at full employment is A) $13 trillion. B) $13.5 trillion. C) more than $13 and less than $13.5 trillion. D) None of the above answers is correct. Answer: A Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

115) In the above figure, the aggregate demand curve is AD2, so the short-run equilibrium level of real GDP is A) $13 trillion. B) $13.5 trillion. C) more than $13 and less than $13.5 trillion. D) None of the above answers is correct. Answer: B Topic: Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 116) In the above figure, the aggregate demand curve is AD2, so the long-run equilibrium level of real GDP is A) $13 trillion. B) $13.5 trillion. C) more than $13 and less than $13.5 trillion. D) None of the above answers is correct. Answer: A Topic: Long-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 117) In the above figure, the shift from AD1 to AD2 might have been the result of A) an increase in government expenditure. B) a decrease in taxes. C) an increase in the quantity of money. D) All of the above answers are correct. Answer: D Topic: Fluctuations in Aggregate Demand Skill: Analytical Status: Old AACSB: Analytical Skills

118) Higher resource prices shift the A) long-run aggregate supply curve leftward, decreasing real GDP and increasing potential GDP. B) short-run aggregate supply curve leftward, raising the price level and decreasing potential GDP. C) short-run aggregate supply curve leftward, raising the price level and decreasing real GDP so it is less than potential GDP. D) short-run aggregate supply curve rightward, raising the price level and decreasing real GDP so it is less than potential GDP. Answer: C Topic: Fluctuations in Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 119) Suppose that the economy begins at a long-run equilibrium. Which of the following raises the price level and decrease real GDP in the short run? A) a decrease in the quantity of money B) an increase in the price of oil that decreases aggregate supply C) an increase in the stock of capital that increases aggregate supply D) an increase in government expenditures Answer: B Topic: Fluctuations in Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 120) A decrease in short-run aggregate supply ________ the equilibrium price level and ________ the equilibrium quantity of real GDP. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: B Topic: Fluctuations in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking

121) In the short run, a rightward shift of the short-run aggregate supply curve ________ real GDP and ________ the price level. A) decreases; lowers B) increases; raises C) decreases; raises D) increases; lowers Answer: D Topic: Fluctuations in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 122) In the short run, a supply shock that shifts the short-run aggregate supply curve leftward ________ real GDP and ________ the price level. A) increases; raises B) decreases; raises C) increases; lowers D) decreases; lowers Answer: B Topic: Fluctuations in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 123) Assume the economy is at long run equilibrium and oil prices rise. As a result, the ________ shifts ________. A) AD; rightward B) AD; leftward C) SAS; rightward D) SAS; leftward Answer: D Topic: Fluctuations in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 124) In the short-run, a rise in the money wage rate leads to A) an increase in the price level and an increase in real GDP. B) an increase in the price level and a decrease in real GDP. C) an increase in the price level, but no change in real GDP. D) no change in the price level, but an increase in real GDP. Answer: B Topic: Fluctuations in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 105 Copyright © 2014 Pearson Education, Inc.

125) Stagflation is the combination of A) inflation and increasing real GDP. B) deflation and recession. C) inflation and recession. D) deflation with increasing real GDP. Answer: C Topic: Stagflation Skill: Recognition Status: Old AACSB: Reflective Thinking

126) In the above figure, the economy is at point A when changes occur. If the new equilibrium has a price level of 120 and real GDP of $12.0 trillion, then it must be the case that A) aggregate demand has increased. B) aggregate demand has decreased. C) aggregate supply has decreased. D) aggregate supply has increased. Answer: C Topic: Fluctuations in Short-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills

127) In the above figure, the economy is at point A when changes occur. If the new equilibrium has a price level of 100 and real GDP of $14.0 trillion, then it must be the case that A) aggregate demand has decreased. B) aggregate supply has decreased. C) aggregate demand has increased. D) aggregate supply has increased. Answer: D Topic: Fluctuations in Short-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills 128) In the above figure, the economy is at point A when changes occur. If the new equilibrium has a price level of 100 and real GDP of $12.0 trillion, then it must be the case that A) aggregate demand has increased. B) aggregate demand has decreased. C) aggregate supply has decreased. D) aggregate supply has increased. Answer: B Topic: Fluctuations in Aggregate Demand Skill: Analytical Status: Old AACSB: Analytical Skills 129) If the actual real GDP is less than potential real GDP, the economy is A) not in macroeconomic equilibrium. B) at full employment. C) in an above full-employment equilibrium. D) in a below full-employment equilibrium. Answer: D Topic: Study Guide Question, Below Full-Employment Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking

Aggregate Price demand level (trillions of 2005 dollars) 100 105 110 115

13 12 11 10

Short-run Long-run aggregate aggregate supply supply (trillions of (trillions of 2005 dollars) 2005 dollars) 9 10 10 10 11 10 13 10

130) Using the data in the above table, in the short-run macroeconomic equilibrium, the price level is ________ and the level of real GDP is ________. A) 105; $10 trillion B) 110; $10 trillion C) 110; $11 trillion D) 115; $10 trillion Answer: C Topic: Study Guide Question, Short-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 131) Using the data in the above table, in the short-run macroeconomic equilibrium, there is A) an inflationary gap of $1 trillion. B) an inflationary gap of $2 trillion. C) a recessionary gap of $1 trillion. D) a recessionary gap of $2 trillion. Answer: A Topic: Study Guide Question, Inflationary Gap Skill: Analytical Status: Old AACSB: Analytical Skills 132) Using the data in the above table, in the long-run macroeconomic equilibrium, the price level is ________ and the level of real GDP is ________. A) 115; $10 trillion B) 110; $10 trillion C) 105; $11 trillion D) 115; $11 trillion Answer: A Topic: Study Guide Question, Long-Run Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

4 Macroeconomic Schools of Thought 1) ________ economists believe that the economy is self-regulating and always at full employment. A) Keynesian B) Monetarist C) Classical D) All Answer: C Topic: Classical View Skill: Recognition Status: Old AACSB: Reflective Thinking 2) A classical economist believes that A) if the economy was left alone, it would rarely operate at full employment. B) the economy is self-regulating and always at full employment. C) the economy is self-regulating and will normally, though not always, operate at full employment if monetary policy is not erratic. D) the economy is self-regulating and will normally, though not always, operate at full employment if fiscal policy is not erratic. Answer: B Topic: Classical View Skill: Recognition Status: Old AACSB: Reflective Thinking 3) Which of the following statements is INCORRECT? A) A monetarist believes that recessions are the result of erratic monetary policy. B) A new classical macroeconomist believes the business cycle is the efficient response to the uneven pace of technological change. C) A Keynesian believes the business cycle is mainly influenced by changes in people's expectations. D) A classical macroeconomist believes that the money wage rate adjusts slowly. Answer: D Topic: Classical View Skill: Recognition Status: Old AACSB: Reflective Thinking

4) Which of the following statements correctly describes the policy stance of a macroeconomist? A) A monetarist believes that the quantity of money should be constantly changed in order to offset changes in aggregate demand. B) A new classical macroeconomist believes that fiscal and monetary policy are required to maintain full employment. C) A Keynesian would believes that if taxes are always kept low and the quantity of money is kept on a steady growth path, no policy actions will be needed to maintain full employment. D) A classical macroeconomist believes that maintaining consistently low taxes will allow the economy to expand at an appropriate and rapid pace. Answer: D Topic: Schools of Thought Skill: Recognition Status: Old AACSB: Reflective Thinking 5) A Keynesian economist believes that A) if the economy was left alone, it would rarely operate at full employment. B) the economy is self-regulating and always at full employment. C) the economy is self-regulating and will normally, though not always, operate at full employment if monetary policy is not erratic. D) the economy is self-regulating and will normally, though not always, operate at full employment if fiscal policy is not erratic. Answer: A Topic: Keynesian View Skill: Recognition Status: Old AACSB: Reflective Thinking 6) ________ economists believe that active help from fiscal and monetary policy is needed to insure that the economy is operating at full employment. A) Keynesian B) Monetarist C) Classical D) All Answer: A Topic: Keynesian View Skill: Recognition Status: Old AACSB: Reflective Thinking

7) In 2009, just after taking office, President Obama approved an $800 billion stimulus package of tax cuts and increased government spending to combat the recession brought on by the financial crisis of 2007. Which group of economists most approved of President Obama's actions? A) Keynesian economists B) classical economists C) monetarists D) free market economists Answer: A Topic: Keynesian View Skill: Conceptual Status: New AACSB: Reflective Thinking 8) What could Keynes have meant by his now famous statement, "in the long run we are all dead?" A) Government intervention is destabilizing, will lead to slower growth in the long run, and will prevent an economy from self-regulating. B) Government intervention in the economy is necessary in times of recession because an economy rarely restores itself to full-employment. C) Government intervention in the economy is useless because it takes too long to take effect. D) Government intervention in the economy is only effective if it is not erratic. Answer: B Topic: Keynesian View Skill: Conceptual Status: New AACSB: Reflective Thinking 9) ________ economists believe that the economy is self-regulating and will be at full employment as long as monetary policy is not erratic. A) Keynesian B) Monetarist C) Classical D) All Answer: B Topic: Monetarist View Skill: Recognition Status: Old AACSB: Reflective Thinking

10) A monetarist economist believes that A) if the economy was left alone, it would rarely operate at full employment. B) the economy is self-regulating and always at full employment. C) the economy is self-regulating and will normally, though not always, operate at full employment if monetary policy is not erratic. D) the economy is self-regulating and will normally, though not always, operate at full employment if fiscal policy is not erratic. Answer: C Topic: Monetarist View Skill: Recognition Status: Old AACSB: Reflective Thinking 11) Which school of thought believes that recessions are the result of inappropriate monetary policy? A) only classical B) only Keynesian C) Monetarist D) both Keynesian and classical Answer: C Topic: Study Guide Question, Monetarist View Skill: Recognition Status: Old AACSB: Reflective Thinking 12) Which school of thought believes that real GDP always equals potential GDP? A) only classical B) only Keynesian C) Monetarist D) both Keynesian and classical Answer: A Topic: Study Guide Question, Classical View Skill: Recognition Status: Old AACSB: Reflective Thinking

5 News Based Questions 1) Consider a BMW automobile plant. If the price of BMWs increase by 10 percent and the money wage rate and other costs ________, there will be ________. A) increase by 10 percent; an increase in BMWs profits B) do not change; an increase in BMW's production and profit C) increase by 10 percent; an increase in BMWs production D) do not change; no change in production Answer: B Topic: Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 2) In Japan in 2000 the price level fell by 5 percent and the money wage rate did not change. As a result, there was a A) movement down along Japan's short-run aggregate demand curve. B) movement down along Japan's short-run aggregate supply curve. C) rightward shift in Japan's short-run aggregate supply curve. D) movement down along Japan's long-run aggregate supply curve. Answer: B Topic: Short-Run Aggregate Supply Curve Skill: Analytical Status: Old AACSB: Analytical Skills 3) In recent years, Japan's capital stock has increased by about 6 percent from one year to the next. As a result, we would expect A) a leftward shift in Japan's aggregate demand curve. B) a movement up along Japan's short-run aggregate supply curve. C) only Japan's long-run aggregate supply curve to shift rightward. D) rightward shifts in both Japan's short-run aggregate supply and long-run aggregate supply curves. Answer: D Topic: Short-Run and Long-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills

4) According to www.oecd.org, the United States spends a larger portion of expenditures on higher education compared to any other country. Increasing the amount of higher education produces I. rightward shifts in the U.S. long-run aggregate supply curve II. movements up along the U.S. aggregate demand curve III. increases in U.S. human capital. A) I and III only. B) I, II and III. C) II and III only. D) III only. Answer: A Topic: Aggregate Supply Skill: Analytical Status: Old AACSB: Reflective Thinking 5) In 2008 the money wage rate in Ireland increased by 4 percent while the price level increased by 8 percent. As a result, Ireland's A) short-run aggregate supply curve shifted leftward. B) short-run aggregate supply curve shifted rightward. C) long-run aggregate supply curve shifted rightward. D) short-run and long-run aggregate supply curves shifted rightward. Answer: B Topic: Short-Run Aggregate Supply Skill: Analytical Status: Old AACSB: Analytical Skills 6) If the price level in Great Britain increases from 102 to 105 (holding all else constant), real wealth ________ and there is a movement ________ along Great Britain's aggregate demand curve. A) decreases; upward B) increases; upward C) decreases; downward D) increases; downward Answer: A Topic: Aggregate Demand, Wealth Effect Skill: Conceptual Status: Old AACSB: Analytical Skills

7) The price level in India increases from 131 to 137 while its trading partners' price levels remain constant. As a result, people will buy ________ Indian-made goods and there will be a movement ________ along India's aggregate demand curve. A) more; upward B) more; downward C) less; downward D) less; upward Answer: D Topic: Aggregate Demand, International Price Substitution Effect Skill: Analytical Status: Old AACSB: Analytical Skills 8) In 2008, the Bank of England increased the country's money supply and lowered its interest rate. This policy was designed to A) encourage people to buy more goods and services. B) shift the aggregate demand curve rightward. C) cause a movement up along the aggregate demand curve. D) Both A and B are correct. Answer: D Topic: Changes in Aggregate Demand, Monetary Policy Skill: Analytical Status: Old AACSB: Analytical Skills 9) In 2008, Japan's government approved a $1 trillion fiscal stimulus plan comprised of both tax cuts and government expenditure increases. As a result, A) Japan's aggregate demand curve shifted rightward. B) Japan's aggregate supply curve shifted leftward. C) Japan's aggregate demand curve shifted leftward. D) Japan's long-run aggregate supply curve shifted leftward. Answer: A Topic: Changes in Aggregate Demand, Fiscal Policy Skill: Analytical Status: Old AACSB: Analytical Skills

10) China is one of the world's largest exporters. As the world's economies slipped into a worldwide recession in 2008, there was a ________ China's aggregate demand curve as China's exports ________. A) rightward shift of; decreased B) movement upward along; increased C) leftward shift of; decreased D) movement upward along; decreased Answer: C Topic: Changes in Aggregate Demand, Foreign Incomes Skill: Analytical Status: Old AACSB: Analytical Skills 11) In 2008, the dollar appreciated relative to the euro. This appreciation caused ________ and a ________. A) a movement up along the U.S. aggregate demand curve; decrease in U.S. exports to Europe B) a decrease in U.S. exports to Europe; leftward shift in the U.S. aggregate demand curve C) an increase in U.S. exports to Europe; movement up along the U.S. aggregate demand curve D) a decrease in U.S. exports to Europe; a movement up along the U.S. aggregate demand curve Answer: B Topic: Changes in Aggregate Demand, Foreign Exchange Rate Skill: Analytical Status: Old AACSB: Analytical Skills 12) As world economies start to recover from the 2008 financial crisis and firms expect profits to increase, A) the price level in the U.S. will decrease as firms increase investment. B) the U.S. short-run aggregate supply curve immediately will shift rightward. C) investment will increase and there will be a movement up along the aggregate demand curve. D) both investment and aggregate demand will increase. Answer: D Topic: Changes in Aggregate Demand, Investment Skill: Analytical Status: Old AACSB: Analytical Skills

13) Use the figure above to answer this question. At a price level of 110, A) real GDP is greater than the aggregate quantity demanded and firms will cut production. B) real GDP is less than the aggregate quantity demanded and firms will increase production. C) inventories will decrease. D) real GDP less than the aggregate quantity demanded and firms will increase prices. Answer: A Topic: Equilibrium GDP and the Price Level Skill: Analytical Status: Old AACSB: Analytical Skills 14) Use the figure above to answer this question. At a price level of 90, A) people will be forced to cut consumption so that aggregate demand will decrease. B) the aggregate quantity demanded exceeds real GDP and inventories will decrease. C) inventories increase and firms will increase production. D) the aggregate quantity demanded exceeds real GDP, inventories increase and the price level will rise. Answer: B Topic: Equilibrium GDP and the Price Level Skill: Analytical Status: Old AACSB: Analytical Skills

15) The table below shows data for India's economy. Real GDP is measured in millions of rupees.

Price level a b c d e

114 120 125 131 138

Real GDP supplied in the short Real GDP demanded run 23,501 35,898 25,355 32,341 27,670 27,670 30,366 18,569 33,164 15,898

If potential GDP in India is ________ million rupees, India is experiencing ________. A) 26,500; an inflationary gap B) 28,500; an above full-employment gap C) 26,500; a recessionary gap D) 30,000; a potential GDP gap Answer: A Topic: Inflationary Gap Skill: Analytical Status: Old AACSB: Analytical Skills 16) Economic growth in India has averaged about 8.5 percent in recent years and while inflation averaged almost 9 percent. The AS-AD model shows this process as A) rightward shifts in the short-run aggregate supply curve. B) rightward shifts in the both the aggregate demand and long-run aggregate supply curves. C) movements upward along the aggregate demand curve. D) rightward shifts in the aggregate demand curve and leftward shifts in the short-run aggregate supply curve. Answer: B Topic: Fluctuations in Aggregate Demand Skill: Analytical Status: Old AACSB: Analytical Skills 17) Aggregate demand in India increased in 2008. In addition, real GDP grew strongly and inflation approached 10 percent. The best explanation for this inflation is that A) aggregate supply did not change. B) potential GDP decreased. C) there was a movement up along the aggregate demand curve in 2008. D) potential GDP increased, but at a slower rate than aggregate demand. Answer: D Topic: Fluctuations in Aggregate Demand Skill: Analytical Status: Old AACSB: Analytical Skills 118 Copyright © 2014 Pearson Education, Inc.

18) The table below shows data for India's economy. Real GDP is measured in millions of rupees. Suppose that full employment occurs when real GDP is 27,000 million rupees.

Price level a b c d e

114 120 125 131 138

Real GDP supplied in the short Real GDP demanded run 23,501 35,898 25,355 32,341 27,670 27,670 30,366 18,569 33,164 15,898

The economy is experiencing ________ gap and firms will ________. A) an inflationary gap; increase production B) an inflationary gap; increase money wages paid to workers C) a recessionary gap; increase production D) a recessionary gap; decrease money wages paid to workers Answer: B Topic: Inflationary Gap Skill: Analytical Status: Old AACSB: Analytical Skills 19) In the first half of 2008, food and energy costs in the United States increased. At the same time, the financial crisis slowed production. As a result, economists warned that the economy would A) suffer an inflationary gap. B) see a decrease in aggregate demand and an increase in long-run aggregate supply. C) experience stagflation. D) see an increase in potential GDP. Answer: C Topic: Stagflation Skill: Conceptual Status: Old AACSB: Reflective Thinking

20) In the first half of 2008, food and energy costs in the United States increased. At the same time, the financial crisis slowed production as firms predicted lower profits. A ________ macroeconomist would support the use of ________. A) classical; taxes to push the economy back to full employment B) Keynesian; fiscal or monetary policy to stimulate aggregate demand C) classical; monetary policy to stimulate aggregate demand D) Keynesian; technology to push the economy back to full employment Answer: B Topic: Keynesian Theory Skill: Conceptual Status: Old AACSB: Reflective Thinking 21) In 2008, Japan's economy suffered as world economies slowed. If authorities in Japan followed the monetarist viewpoint, ________ to bring the economy back to full employment. A) taxes would be decreased and the money supply should be increased B) nothing should be done C) aggregate supply would shift leftward D) the money supply would be kept growing at a steady pace Answer: D Topic: Monetarist Theory Skill: Conceptual Status: Old AACSB: Reflective Thinking 22) In 2008, Germany passed a stimulus package of $29 billion as its economy slowed. This policy action follows the ________ to restore full employment. A) Keynesian viewpoint that supports increases in federal government expenditure B) Keynesian viewpoint that supports increases in the money supply C) monetarist viewpoint that supports increases in expenditure by the federal government D) new classical viewpoint that discourages the use of expenditure by the federal government Answer: A Topic: Keynesian Theory Skill: Conceptual Status: Old AACSB: Reflective Thinking

6 Essay Questions 1) In the aggregate demand-aggregate supply framework, how does an increase in the price level affect potential GDP? Answer: An increase in the price level has no effect on potential GDP. Potential GDP is independent of the price level, so increases or decreases in the price level have no effect on potential GDP. Topic: Changes in Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 2) How are potential GDP, full employment and the LAS curve related? Answer: When the economy is at full employment there is no cyclical unemployment and the economy is at its potential level of real GDP. The LAS curve is vertical at the level of potential real GDP. Topic: Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 3) Give examples of factors that decrease short-run aggregate supply. Which way does the SAS curve shift? Answer: Aggregate supply decreases if potential GDP decreases. In addition, cost hikes such as a rise in the money wage rate or the price of oil, decreases short-run aggregate supply. Whenever short-run aggregate supply decreases, the SAS curve shifts leftward. Topic: Changes in Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 4) What is the difference between the long-run aggregate supply and the short-run aggregate supply curves? Answer: The long-run aggregate supply curve, LAS, is the relationship between the price level and real GDP when real GDP equals potential GDP. The LAS curve is vertical. Along the LAS curve, both the prices of goods and services and the prices of resources, such as the money wage rate, change. The short-run aggregate supply curve, SAS, is the relationship between the price level and the quantity of real GDP supplied in the short run when the money wage rate and other resource prices are constant. The SAS curve slopes upward. Along the SAS curve, only the price level changes; the money wage rate and other resource prices are constant. The SAS curve shifts leftward when the money wage rate (or other costs) rise. Topic: Long-Run and Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Communication

5) How do changes in the money wage rate affect the LAS and SAS curves? Explain your answer. Answer: If the money wage rate changes, the LAS curve is not affected but the SAS curve shifts. For instance, if the money wage rate rises, the LAS curve does not change but the SAS curve shifts leftward. The difference occurs because moving along the LAS curve both the money wage rate and price level change in the same proportion. So in this case, a change in the money wage rate is matched by a change in the price level and firms have no incentive to change their production of goods and services. But moving along the SAS curve, only the price level changes. So when the money wage rate changes and the price level does not change, firms have an incentive to change their production. For instance, if the money wage rate rises and the price level does not change, then firms decrease their production of goods and services and the SAS curve shifts leftward. Topic: Long-Run and Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Communication 6) What are the factors that can shift the short-run aggregate supply curve but not the long-run aggregate supply curve? Explain your answer. Answer: The only factor that shifts the short-run aggregate supply curve but not the long-run aggregate supply curve is a change in the money wage rate or the money prices of other resources. For instance, an increase in the money wage rate shifts the SAS curve leftward, but does not shift the LAS curve. Topic: Long-Run and Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 7) Explain the reasons why the AD curve slopes downward. Answer: There are two reasons why the AD curve slopes downward: the wealth effect and substitution effects. The wealth effect points out how changes in the price level cause changes in the real value of wealth. Price increases decrease real wealth and so people consume less in order to increase their wealth through saving. As a result, an increase in the price level decreases the aggregate quantity of goods and services demanded. There are two substitution effects. The first is the intertemporal substitution effect: an increase in the price level raises the interest rate because the amount of real loans banks can make decreases. The higher interest rate leads consumers to decrease their consumption expenditure and firms to decrease their investment spending. The second substitution effect is the international price substitution effect: an increase in the U.S. price level raises the price of U.S.-made goods relative to foreign-made goods. So people and firms decrease the quantity of U.S.-made goods they purchase and increase the quantity of foreign-made goods they purchase. So both substitution effects also lead to a rise in the price level decreasing the aggregate quantity demanded. Topic: The Aggregate Demand Curve Skill: Conceptual Status: Old AACSB: Communication 122 Copyright © 2014 Pearson Education, Inc.

8) What is the effect on the aggregate demand curve from an increase in the price level? In particular, does the aggregate demand curve shift leftward or rightward? Answer: When the price level increases, there is a movement along the aggregate demand curve. The quantity of real GDP demanded decreases in response to an increase in the price level. However, the aggregate demand curve does not shift. Factors that change aggregate demand and shift the aggregate demand curve are changes in the interest rate, in the quantity of money, in government expenditure, in taxes, in the exchange rate, and in real GDP in the rest of the world. Topic: The Aggregate Demand Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 9) What are the substitution effects that affect aggregate demand? Answer: There are two substitution effects that affect aggregate demand and help account for the negative slope of the AD curve. First, an increase in the price level raises the interest rate, which reduces the quantity of real GDP demanded. Second, an increase in the U.S. price level raises the price of U.S. goods relative to foreign goods which also decreases the quantity of U.S. real GDP demanded. Topic: Aggregate Demand, Substitution Effect Skill: Conceptual Status: Old AACSB: Reflective Thinking 10) How does the aggregate demand curve reflect an increase in aggregate demand? Answer: A rightward shift of the aggregate demand curve reflects an increase in aggregate demand. Topic: Changes in Aggregate Demand Skill: Recognition Status: Old AACSB: Reflective Thinking 11) Give examples of factors that decrease aggregate demand. Which way does the aggregate demand curve shift? Answer: Anything that decreases aggregate spending decreases aggregate demand. A rise in the interest rate, a decrease in the quantity of money, a decrease in government expenditure, a tax hike, a rise in the exchange rate, and a decrease in real GDP in the rest of the world all decrease aggregate demand. The aggregate demand curve shifts leftward. Topic: Changes in Aggregate Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking

12) What are fiscal and monetary policies? Do they have an immediate effect on the AD curve or the SAS curve? Answer: Fiscal policy is defined as changes in government spending and taxation to affect the level of economic activity. Monetary policy consists of changing interest rates and changing the quantity of money in the economy in order to affect the level of economic activity. Both policies have an impact on the AD curve. Topic: Changes in Aggregate Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking 13) What are the components of fiscal policy? Explain how fiscal policy affects aggregate demand. Answer: Fiscal policy affects aggregate demand through government expenditure, transfer payments and taxes. Because government purchases are a component of total spending, a change in government expenditure directly changes aggregate demand. A change in transfer payments changes disposable income which, in turn, changes consumption expenditure and aggregate demand. Finally, taxes alter disposable income and thus impact consumption expenditure and aggregate demand. Topic: Changes in Aggregate Demand, Fiscal Policy Skill: Conceptual Status: Old AACSB: Reflective Thinking 14) What happens to the aggregate demand curve in the United States if the exchange rate increases so that U.S.-made products become more expensive? Answer: Net exports decrease so U.S. aggregate demand decreases. Topic: Changes in Aggregate Demand, Foreign Exchange Rate Skill: Conceptual Status: Old AACSB: Reflective Thinking 15) What two variables are determined in an aggregate supply-aggregate demand figure? Is the slope of the short-run aggregate supply curve positive or negative? Is the slope of the aggregate demand curve positive or negative? Answer: The aggregate supply-aggregate demand framework determines the equilibrium price level and equilibrium real GDP. The aggregate supply curve is positively sloped, indicating that an increase in the price level increases the aggregate quantity of goods and services supplied. The aggregate demand curve is negatively sloped, indicating that an increase in the price level decreases the aggregate quantity of goods and services demanded. Topic: Macroeconomic Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking

16) Explain the relationship of the long-run aggregate supply curve, the short-run aggregate supply curve and the aggregate demand curve in determining a long-run and short-run macroeconomic equilibrium. Answer: Short-run macroeconomic equilibrium occurs when the quantity of GDP demanded equals the quantity supplied, which is where the AD and SAS curves intersect. The short-run equilibrium does not necessarily take place at full employment. The long-run macroeconomic equilibrium occurs when real GDP equals potential GDP. This means that the economy is on the LAS curve, where the AD and SAS curves both intersect the LAS curve. Topic: Macroeconomic Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 17) Assume the equilibrium price level is 140 and the equilibrium real GDP is $15 trillion. What happens if the current price level equals 125? Answer: The quantity of real GDP demanded is greater than the quantity of real GDP supplied. The price level rises to 140 because of the excess aggregate demand and when the price level reaches 140, macroeconomic equilibrium would be established. Topic: Macroeconomic Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 18) Suppose that during 2009, the actual real GDP of Chile was 3.5 billion pesos at the same time the potential GDP was 3.4 billion pesos. What sort of equilibrium existed in Chile? Answer: Chile's actual real GDP exceeded its potential GDP, so Chile was in an above fullemployment, inflationary gap equilibrium. Topic: Macroeconomic Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 19) What is the difference between a recessionary gap and an inflationary gap? Answer: A recessionary gap exists when the economy is in a below full-employment equilibrium when potential GDP exceeds real GDP. The recessionary gap is the amount by which potential GDP exceeds real GDP. An inflationary gap occurs when the economy is in an above full-employment equilibrium when real GDP exceeds potential GDP. In this case, the inflationary gap is the difference between real GDP and potential GDP. Topic: Inflationary Gap and Recessionary Gap Skill: Conceptual Status: Old AACSB: Reflective Thinking

20) What happens if the economy is at its long-run equilibrium and aggregate demand increases? Answer: The increase in aggregate demand means that the AD curve shifts rightward. Initially short-run aggregate supply does not change, so the SAS curve remains stationary. As a result, the price level rises and real GDP increases. The economy is an above full-employment equilibrium. Eventually, however, the tight labor market leads to a rise in the money wage rate. When the money wage rate rises, short-run aggregate supply decreases and the SAS curve shifts leftward. The price level rises and real GDP decreases. In the long run, the short-run aggregate supply decreases so that real GDP returns to potential level of GDP and the only effect is that the price level is permanently higher. Topic: Fluctuations in Aggregate Demand Skill: Conceptual Status: Old AACSB: Communication 21) If the world economy expands so that foreign demand for U.S.-made goods increases, in the short run what will happen to aggregate demand, the price level, and real GDP in the U.S.? Answer: Net exports increase so U.S. aggregate demand increases. The U.S. price level and real GDP both increase. Topic: Fluctuations in Aggregate Demand Skill: Conceptual Status: Old AACSB: Reflective Thinking 22) Compare the policy prescriptions of Keynesian, Classical, and Monetarist economists. Answer: Keynesians believe that without assistance the economy would almost never be at full employment. They prescribe activist fiscal and monetary policy to drive the economy to full employment. Classical economists believe the economy is self-regulating and will always tend towards full employment. Their main policy initiatives center on removing tax created disincentives for growth. Monetarists call for low taxes and consistent money growth because Monetarists believe that recessions are the result of fluctuations in the quantity of money. Topic: Schools of Thought Skill: Conceptual Status: Old AACSB: Reflective Thinking

7 Numeric and Graphing Questions Quantity of real Quantity of real Price level GDP demanded GDP supplied (GDP deflator, (trillions of 2005 (trillions of 2005 2005 = 100) dollars) dollars) 115 8.8 12.0 110 9.4 11.0 105 10.0 10.0 100 10.6 9.0 95 11.2 8.0 90 11.8 7.0 1) Based on the table above, a) What is the equilibrium price level and real GDP? b) If potential GDP is $11.0 trillion, what does that imply about the economy's level of employment? c) If potential GDP is $9.0 trillion, what does that imply about the economy's level of employment? Answer: a) The equilibrium price level is 105; the equilibrium real GDP is $10.0 trillion. b) If potential GDP is $11.0 trillion, then the economy is at an equilibrium that is a below fullemployment equilibrium. c) If potential GDP is $9.0 trillion, then the economy is at an equilibrium that is an above fullemployment equilibrium. Topic: Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills

2) In the above figure, what is the short-run equilibrium real GDP and the short-run equilibrium price level? Answer: The short-run equilibrium occurs where the AD curve intersects the SAS curve. So in the figure the short run equilibrium real GDP is $13.5 trillion and the short-run equilibrium price level is 110. Topic: Macroeconomic Equilibrium Skill: Analytical Status: Old AACSB: Analytical Skills 8 True or False 1) The long-run aggregate supply curve is upward sloping. Answer: FALSE Topic: Long-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 2) The long-run aggregate supply curve is vertical. Answer: TRUE Topic: Long-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking

3) The level of output when there is full employment is called actual GDP. Answer: FALSE Topic: Short-Run Aggregate Supply Skill: Recognition Status: Old AACSB: Reflective Thinking 4) In the long-run, the quantity of real GDP supplied increases when the price level increases. Answer: FALSE Topic: Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 5) The short-run aggregate supply curve shows a positive relationship between the price level and real GDP. Answer: TRUE Topic: Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 6) The SAS curve shifts if there is a change in the price level. Answer: FALSE Topic: Changes in Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 7) If there is an increase in technology, the long-run aggregate supply curve shifts rightward, but the short-run aggregate supply curve does not shift. Answer: FALSE Topic: Changes in Aggregate Supply, Technology Skill: Conceptual Status: Old AACSB: Reflective Thinking 8) If the money prices of resources changes, the LAS curve shifts. Answer: FALSE Topic: Change in Aggregate Supply; Money Wages & Prices of Resource Skill: Conceptual Status: Old AACSB: Reflective Thinking

9) If the money prices of resources changes, the SAS curve shifts. Answer: TRUE Topic: Change in Aggregate Supply; Money Wages & Prices of Resource Skill: Conceptual Status: Old AACSB: Reflective Thinking 10) An increase in the quantity of capital shifts both the long-run and short-run aggregate supply curves. Answer: TRUE Topic: Changes in Aggregate Supply, Capital Skill: Conceptual Status: Old AACSB: Reflective Thinking 11) If the money wage rate increases, the short-run aggregate supply curve shifts rightward. Answer: FALSE Topic: Changes in Money Wages and Other Resource Prices Skill: Conceptual Status: Old AACSB: Reflective Thinking 12) The aggregate demand curve shows total expenditures at different levels of national income. Answer: FALSE Topic: The Aggregate Demand Curve Skill: Recognition Status: Old AACSB: Reflective Thinking 13) A change in the price level does not shift the aggregate demand curve. Answer: TRUE Topic: The Aggregate Demand Curve Skill: Conceptual Status: Old AACSB: Reflective Thinking 14) The wealth effect points out that consumption decreases when people's real wealth decreases. Answer: TRUE Topic: Aggregate Demand Curve, Wealth and Substitution Effects Skill: Conceptual Status: Old AACSB: Reflective Thinking

15) Wealth and substitution effects explain why the aggregate demand curve has a positive slope. Answer: FALSE Topic: Aggregate Demand Curve, Wealth and Substitution Effects Skill: Conceptual Status: Old AACSB: Reflective Thinking 16) An increase in the quantity of money shifts the aggregate demand curve rightward. Answer: TRUE Topic: Changes in Aggregate Demand, Money Skill: Conceptual Status: Old AACSB: Reflective Thinking 17) In the short-run, real GDP can be greater than or less than potential GDP because in the short run the money wage rate is fixed. Answer: TRUE Topic: Short-Run Macroeconomic Equilibrium Skill: Recognition Status: Old AACSB: Reflective Thinking 18) The level of output at which the short-run aggregate supply curve and the aggregate demand curve intersect is the full employment level of GDP. Answer: FALSE Topic: Short-Run Macroeconomic Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 19) In the short run, a supply shock that shifts the short-run aggregate supply curve leftward raises the price level and increases real GDP. Answer: FALSE Topic: Fluctuations in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking 20) In the short run, a supply shock that shifts the short-run aggregate supply curve leftward raises the price level and decreases real GDP. Answer: TRUE Topic: Fluctuations in Short-Run Aggregate Supply Skill: Conceptual Status: Old AACSB: Reflective Thinking

21) Long-run macroeconomic equilibrium is achieved when the money wage rate has adjusted so that employment is such that real GDP equals potential GDP. Answer: TRUE Topic: Long-Run Macroeconomic Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 22) During an above full-employment equilibrium, actual GDP is greater than potential GDP. Answer: TRUE Topic: Above Full-Employment Equilibrium Skill: Conceptual Status: Old AACSB: Reflective Thinking 23) Fluctuations in aggregate demand and aggregate supply explain why real GDP fluctuates. Answer: TRUE Topic: U.S. Economic Growth, Inflation and Cycles Skill: Conceptual Status: Old AACSB: Reflective Thinking 24) The business cycle occurs because aggregate demand and aggregate supply change at uneven rates. Answer: TRUE Topic: U.S. Economic Growth, Inflation and Cycles Skill: Conceptual Status: Old AACSB: Reflective Thinking 25) The Keynesian theory of business cycle views volatile expectations of future sales and profits as the main source of economic fluctuations. Answer: TRUE Topic: Keynesian Theory Skill: Recognition Status: Old AACSB: Reflective Thinking 26) A monetarist economist believes that if the economy was left alone, it would rarely operate at full employment. Answer: FALSE Topic: Monetarist View Skill: Recognition Status: Old AACSB: Reflective Thinking

9 Extended Problems

Price level 70 80 90 100 110 120 130 140

Real GDP Real GDP demanded supplied (billions (billions of 2005 of 2005 dollars) dollars) 825 375 750 450 675 525 600 600 525 675 450 750 375 825 300 900

1) The table above shows Purpleland's economy aggregate demand and supply schedules. Purpleland's potential GDP is $675 billion. a) Plot the aggregate demand curve, the short-run aggregate supply curve, and the long-run aggregate supply curve. b) What are the short-run equilibrium real GDP and price level in Purpleland? c) What is the long-run equilibrium real GDP? d) Is Purpleland's short-run macroeconomic equilibrium a full-employment equilibrium, below full-employment equilibrium, or above full-employment equilibrium? What is the recessionary gap (if any)? What is the inflationary gap (if any)? e) Suppose aggregate demand increases by $150 billion. Plot the new aggregate demand curve. How do real GDP and the price level change in the short run? f) Is Purpleland's new short-run macroeconomic equilibrium a full-employment equilibrium, below full-employment equilibrium, or above full-employment equilibrium? What is the recessionary gap (if any)? What is the inflationary gap (if any)?

Answer:

a) See the figure above. The aggregate demand curve is AD0. b) A short-run macroeconomic equilibrium occurs where the aggregate demand curve, AD0, intersects the short-run aggregate supply curve, SAS. As the figure shows, the short-run equilibrium real GDP is $600 billion, and the short-run equilibrium price level is 100. c) Long-run equilibrium real GDP equals potential GDP. So the long-run equilibrium real GDP in Purpleland is $675 billion. d) Purpleland's short-run macroeconomic equilibrium is a below full-employment equilibrium because the short-run equilibrium GDP is less than potential GDP. The amount by which potential GDP exceeds real GDP is a recessionary gap, so the recessionary gap is $75 billion. An inflationary gap exists when real GDP is above potential GDP, so there is no inflationary gap in Purpleland. e) As the figure above shows, the aggregate demand curve shifts from AD0 to AD1. As a result, real GDP increases from $600 billion to $675 billion, and the price level rises from 100 to 110. f) Purpleland's new short-run macroeconomic equilibrium is a full-employment equilibrium because the equilibrium real GDP equals the potential GDP. When real GDP equals potential GDP, there is neither a recessionary gap nor an inflationary gap. Topic: Recessionary Gap Skill: Analytical Status: Old AACSB: Analytical Skills

Price level 90 100 110 120 130

Real GDP demanded Real GDP supplied (billions of 2005 (billions of 2005 dollars) dollars) 450 150 400 250 350 350 300 450 250 550

2) The table above shows Yellowland's economy aggregate demand and supply schedules. Yellowland's potential GDP is $300 billion. a) Plot the aggregate demand curve, the short-run aggregate supply curve, and the long-run aggregate supply curve. b) What are the short-run equilibrium real GDP and price level in Yellowland? c) What is the long-run equilibrium real GDP? d) Is Yellowland's short-run macroeconomic equilibrium a full-employment equilibrium, below full-employment equilibrium, or above full-employment equilibrium? What is the recessionary gap (if any)? What is the inflationary gap (if any)? e) Suppose aggregate supply decreases by $150 billion. Plot the new aggregate supply curve. How do real GDP and the price level change in the short run? f) Is Yellowland's new short-run macroeconomic equilibrium a full-employment equilibrium, below full-employment equilibrium, or above full-employment equilibrium? What is the recessionary gap (if any)? What is the inflationary gap (if any)?

Answer:

a) See the figure above. The short-run aggregate supply curve is SAS0. b) A short-run macroeconomic equilibrium occurs where the aggregate demand curve, AD, intersects the short-run aggregate supply curve, SAS0. As the figure shows, the short-run equilibrium real GDP is $350 billion, and the short-run equilibrium price level is 110. c) Long-run equilibrium real GDP equals potential GDP. So the long-run equilibrium real GDP in Yellowland is $300 billion. d) Yellowland's short-run macroeconomic equilibrium is an above full-employment equilibrium because the short-run equilibrium GDP exceeds potential GDP. The amount by which real GDP exceeds potential GDP is an inflationary gap. So the inflationary gap is $50 billion. A recessionary gap exists when real GDP is below potential GDP. So there is no recessionary gap in Yellowland. e) As the figure above shows, the short-run aggregate supply curve shifts from SAS0 to SAS1. As a result, real GDP decreases from $350 billion to $300 billion, and the price level rises from 110 to 120. f) Yellowland's new short-run macroeconomic equilibrium is a full-employment equilibrium because the equilibrium real GDP equals the potential GDP. When real GDP equals potential GDP, there is neither a recessionary gap nor an inflationary gap. Topic: Inflationary Gap Skill: Analytical Status: Old AACSB: Analytical Skills

Economics, 11e, Global Edition (Parkin) Chapter 28 Expenditure Multipliers 1 Fixed Prices and Expenditure Plans 1) In the Keynesian model of aggregate expenditure, real GDP is determined by the A) price level. B) level of aggregate demand. C) level of aggregate supply. D) level of taxes. Answer: B Topic: Keynesian Model Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 2) The Keynesian model of aggregate expenditure describes the economy in A) the short run. B) the long run. C) both the short run and the long run. D) only a strong expansion. Answer: A Topic: Keynesian Model Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 3) The Keynesian model of aggregate expenditure assumes that A) individual firms' prices are flexible but the price level is fixed. B) both individual firms' prices and the price level are flexible. C) both individual firms' prices and the price level are fixed. D) individual firms' prices are fixed but the price level is flexible. Answer: C Topic: Keynesian Model Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

4) In the Keynesian model of aggregate expenditure, we assume that firms will A) not change prices. B) change prices only when inventory levels rise. C) raise prices when inventory levels fall. D) lower prices when inventory levels rise. Answer: A Topic: Keynesian Model Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 5) According to the Keynesian theory, the typical firm A) changes its prices frequently in response to fluctuations in aggregate demand. B) lowers its prices when inventories are decreasing. C) does not change its prices immediately when aggregate demand fluctuates. D) lowers its prices if sales exceed production. Answer: C Topic: Aggregate Implications of Fixed Prices Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 6) If firms set prices and then keep them fixed for a period of time, their fixed prices imply that A) the aggregate price level is fixed and that aggregate demand determines the quantity of goods and services sold. B) prices are set by aggregate demand and supply. C) the aggregate price level adjusts continuously. D) the aggregate price level is fixed and that aggregate supply determines the quantity of goods and services sold. Answer: A Topic: Aggregate Implications of Fixed Prices Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 7) In the very short term, in the Keynesian model, which of the following is fixed and does not change when GDP changes? A) planned investment B) planned consumption C) planned imports D) All of the above answers are correct Answer: A Topic: Expenditure Plans Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 2 Copyright © 2014 Pearson Education, Inc.

8) In the very short term, planned investment ________ when GDP changes and planned consumption expenditure ________ when GDP changes. A) changes; changes. B) changes; does not change C) does not change; changes D) does not change; does not change Answer: C Topic: Expenditure Plans Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 9) The components of aggregate expenditure include I. imports. II. consumption. III. government transfer payments. A) I and II B) II only C) II and III D) I, II and III Answer: A Topic: Expenditure Plans Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 10) In the very short run, the components of aggregate planned expenditure that depend on the level of real GDP are A) planned consumption expenditure and planned imports. B) planned investment and planned imports. C) planned investment and planned exports. D) planned government expenditure on goods and services and planned imports. Answer: A Topic: Expenditure Plans Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

11) An increase in real GDP leads to A) a decrease aggregate planned expenditure. B) no change in aggregate planned expenditure. C) an increase in aggregate planned expenditure. D) a change in aggregate planned expenditure but whether the change is an increase or a decrease depends on whether nominal GDP increases or decreases. Answer: C Topic: Expenditure Plans Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 12) Disposable income is A) income minus saving. B) income minus taxes plus transfer payments. C) income plus transfer payments minus consumption expenditure. D) total income divided by the price level. Answer: B Topic: Consumption Function Basics Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 13) Which of the following statements is FALSE? A) Disposable income - saving = consumption expenditure. B) Consumption expenditure + saving = disposable income. C) Saving = disposable income - consumption expenditure. D) Consumption expenditure = saving - disposable income. Answer: D Topic: Consumption Function Basics Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 14) Disposable income is equal to A) consumption expenditure minus taxes plus transfer payments. B) aggregate income minus taxes plus government expenditures on goods and services. C) aggregate income minus taxes plus transfer payments. D) aggregate income plus transfer payments. Answer: C Topic: Consumption Function Basics Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

15) Real GDP A) is always greater then aggregate income. B) is always less than aggregate income. C) might be less than or more than aggregate income depending on consumption. D) is equal to aggregate income. Answer: D Topic: Consumption Function Basics Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 16) Disposable income is divided into A) consumption and taxes. B) saving and taxes. C) consumption, saving, and taxes. D) consumption and saving. Answer: D Topic: Consumption Function Basics Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 17) Saving equals A) disposable income minus taxes. B) disposable income minus consumption expenditure. C) disposable income plus consumption expenditure. D) consumption expenditure minus disposable income. Answer: B Topic: Consumption Function Basics Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 18) A consumption function shows a A) negative (inverse) relationship between consumption expenditure and saving. B) positive (direct) relationship between consumption expenditure and price level. C) negative (inverse) relationship between consumption expenditure and disposable income. D) positive (direct) relationship between consumption expenditure and disposable income. Answer: D Topic: Consumption Function Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

19) The consumption function relates consumption expenditure to A) the interest rate. B) disposable income. C) saving. D) the price level. Answer: B Topic: Consumption Function Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 20) The consumption function relates the consumption expenditure decisions of households to A) the level of disposable income. B) investment decisions of firms. C) saving decisions of households. D) the nominal interest rate. Answer: A Topic: Consumption Function Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 21) The graph of the consumption function has consumption expenditure on the vertical axis and A) the interest rate on the horizontal axis. B) time on the horizontal axis. C) disposable income on the horizontal axis. D) the Consumer Price Index on the horizontal axis. Answer: C Topic: Consumption Function Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 22) The consumption function shows how much A) all households plan to consume at each level of real disposable income. B) all households plan to consume at each possible real interest rate. C) real disposable income people will earn at each income tax bracket. D) all households plan to consume at each level of savings. Answer: A Topic: Consumption Function Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

23) The slope of the consumption function is A) less than 1. B) 1. C) greater than 1. D) negative. Answer: A Topic: Consumption Function Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 24) The slope of the consumption function is A) less than the slope of the 45-degree line but not equal to zero. B) greater than the slope of the 45-degree line. C) equal to the slope of the 45-degree line. D) equal to zero. Answer: A Topic: Consumption Function and the 45-Degree Line Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 25) A movement along the consumption function is the result of changes in A) the real interest rate. B) disposable income. C) expected future income. D) All of the above answers are correct. Answer: B Topic: Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 26) There is a movement along the consumption function if there is ________. A) an increase in autonomous consumption B) a decrease in the real interest rate C) an increase in the expected future income D) an increase in disposable income Answer: D Topic: Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

27) A movement along the consumption function to higher levels of consumption expenditure arises because A) the level of disposable income decreases. B) household wealth rises. C) the level of disposable income increases. D) the level of desired saving rises. Answer: C Topic: Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 28) If disposable income increases, A) the consumption function shifts upward. B) there is a movement upward along the consumption function. C) the consumption function shifts downward. D) there is movement downward along the consumption function. Answer: B Topic: Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 29) The positive slope of the consumption function indicates that A) consumers spend less out of each extra dollar of income. B) the amount of household wealth is subject to change. C) when prices fall consumers spend more. D) consumers increase their total consumption expenditure when disposable income increases. Answer: D Topic: Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 30) As disposable income increases, consumption expenditures A) increase by the same amount. B) increase by a smaller amount. C) increase by a larger amount. D) remain constant. Answer: B Topic: Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

31) If real disposable income increases by $1500, consumption expenditures will A) stay constant. B) decrease by less than $1500. C) increase by less than $1500. D) increase by more than $1500. Answer: C Topic: Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 32) Between 2008 and 2009 the government estimates that disposable income in the United States decreased. Consequently, as a result of this change consumption expenditure A) remained constant. B) decreased. C) increased. D) More information is needed about how taxes changed between 2008 and 2009. Answer: B Topic: Consumption Function Skill: Conceptual Status: New AACSB: Reflective Thinking 33) Which of the following will NOT shift the consumption function upward? A) an increase in disposable income B) a fall in the real interest rate C) an increase in wealth D) None of the above shift the consumption function upward. Answer: A Topic: Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 34) An increase in expected future income ________. A) decreases consumption expenditure B) increases saving C) shifts the consumption function upward D) shifts the saving function upward Answer: C Topic: Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

35) Autonomous consumption is that portion of consumption expenditure that is not influenced by A) income. B) preferences. C) prices. D) the legal authorities. Answer: A Topic: Autonomous Consumption Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 36) Autonomous consumption A) increases with income. B) is independent of income. C) is independent of income and must be equal to zero. D) decreases with income. Answer: B Topic: Autonomous Consumption Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 37) ________ consumption is consumption that will occur ________ the level of GDP and disposable income. A) Autonomous; independent of B) Autonomous; depending on C) Induced; independent of D) None of the above answers is correct. Answer: A Topic: Autonomous Consumption Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 38) Autonomous consumption is equal to A) saving when consumption equals disposable income. B) consumption when disposable income is zero. C) consumption caused by an increase in disposable income. D) dissaving when disposable income is greater than zero. Answer: B Topic: Autonomous Consumption Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

39) In the above figure, consumption and disposable income are equal at A) any point along the consumption function. B) a saving level of $1 trillion and disposable income level of $4 trillion. C) a disposable income level of $0. D) a disposable income level of $2 trillion. Answer: D Topic: Consumption Function Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 40) In the above figure, at a disposable income level of $2 trillion, saving equals A) disposable income. B) zero. C) $4 trillion. D) consumption expenditures. Answer: B Topic: Saving Function Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

41) In the above figure, the line AB is called A) the saving function. B) the consumption function. C) the 45-degree line. D) the expenditure function. Answer: C Topic: Consumption Function and the 45-Degree Line Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 42) Induced consumption is equal to A) saving when consumption equals disposable income. B) consumption when disposable income is zero. C) consumption caused by an increase in disposable income. D) dissaving when disposable income is greater than zero. Answer: C Topic: Induced Consumption Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 43) In a diagram with the consumption function, the 45-degree line indicates all points where A) consumption expenditures and saving are equal. B) saving and investment are equal. C) consumption expenditures and disposable income are equal. D) saving and disposable income are equal. Answer: C Topic: Consumption Function and the 45-Degree Line Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 44) In a diagram with the consumption function, the ________ shows all points where disposable income equals consumption expenditures. A) consumption function B) aggregate demand curve C) 45-degree line D) saving function Answer: C Topic: Consumption Function and the 45-Degree Line Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

45) Consumption expenditures equal disposable income A) at every point on the consumption function. B) at every point on the saving function. C) at every point on the 45-degree line. D) when saving equals disposable income. Answer: C Topic: Consumption Function and the 45-Degree Line Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 46) With consumption expenditure on the vertical axis and disposable income on the horizontal axis, the consumption function intersects the 45-degree line at $8 trillion. This result indicates that A) autonomous consumption spending is $8 trillion. B) consumption spending is $8 trillion when disposable income is $8 trillion. C) consumption spending is less than $8 trillion because taxes must be paid. D) consumption spending is more than $8 trillion because taxes have been paid. Answer: B Topic: Consumption Function and the 45-Degree Line Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

47) In the above figure, line ABC is called A) the 45-degree line. B) the consumption function. C) the saving function. D) aggregate supply. Answer: B Topic: Consumption Function Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 48) In the above figure, autonomous consumption equals A) 0. B) $4 trillion. C) $12 trillion. D) -$4 trillion. Answer: B Topic: Autonomous Consumption Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

49) When disposable income equals $800 billion, planned consumption expenditure equals $600 billion, and when disposable income equals $1,000 billion, planned consumption expenditure equals $640 billion. What is planned saving when disposable income is $800 billion? A) $200 billion B) $360 billion C) $560 billion D) $1,400 billion Answer: A Topic: Consumption and Saving Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 50) As real disposable income increases, consumption expenditure ________ and saving ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: A Topic: Consumption Function and Saving Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 51) Planned saving equals A) disposable income minus planned consumption expenditure. B) planned consumption expenditure minus disposable income. C) zero when disposable income is less than planned consumption expenditure. D) planned consumption expenditure plus disposable income. Answer: A Topic: Saving Function Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 52) "Dissaving" occurs when A) income exceeds consumption expenditure. B) saving is negative. C) the consumption function is below the 45-degree line drawn from the origin. D) saving is positive. Answer: B Topic: Saving Function Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 15 Copyright © 2014 Pearson Education, Inc.

53) Dissaving A) is equal to consumption expenditure when disposable income is greater than zero. B) is equal to the amount of saving when consumption is less than disposable income. C) is equal to taxation when disposable income is zero. D) occurs when consumption is greater than disposable income. Answer: D Topic: Saving Function Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 54) ________ consumption expenditure is greater than disposable income. A) It is always the case that B) Saving is positive whenever C) Dissaving occurs whenever D) None of the above answers is correct because it is impossible for consumption expenditure to be greater than disposable income. Answer: C Topic: Saving Function Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 55) When disposable income equals consumption expenditure, then A) saving is zero. B) the MPC = zero. C) the MPS = zero. D) None of the above is correct. Answer: A Topic: Saving Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 56) Where the consumption function crosses the 45° line A) consumption expenditure equals saving. B) saving is positive. C) saving is negative. D) consumption expenditure equals disposable income. Answer: D Topic: Saving Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

57) When the consumption function lies above the 45-degree line, households A) spend on consumption an increasing percentage of any increase in income. B) spend on consumption a decreasing percentage of any increase in income. C) are dissaving. D) save all of any increase in income. Answer: C Topic: Saving Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 58) If the consumption function lies below the 45-degree line, then saving at these levels of disposable income will A) be positive. B) be negative. C) equal zero. D) be some amount that cannot be determined without additional information. Answer: A Topic: Saving Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 59) The vertical distance between the 45-degree line and the consumption line represents A) investment. B) total consumption expenditure. C) the difference between consumption expenditure and investment. D) saving or dissaving. Answer: D Topic: Saving Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 60) Saving rather than dissaving occurs at any level of disposable income at which A) the consumption function is above the 45-degree line. B) the consumption function intersects the saving/income curve. C) the consumption function is below the 45-degree line. D) autonomous consumption is positive. Answer: C Topic: Saving Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

61) The saving function shows a ________ relationship between ________. A) positive; disposable income and saving B) positive; disposable income and dissaving C) negative; disposable income and consumption expenditure D) negative; real GDP and saving Answer: A Topic: Saving Function Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 62) An increase in disposable income A) shifts the saving function upward. B) results in a movement upward along the saving function. C) shifts the saving function downward. D) results in a movement downward along the saving function. Answer: B Topic: Saving Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 63) A movement along the saving function occurs when A) the real interest rate rises. B) wealth increases. C) disposable income decreases. D) None of the above answers is correct. Answer: C Topic: The Saving Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 64) As disposable income increases, there is a ________ the saving function. A) leftward shift of the B) movement along C) rightward shift of D) change in the slope of Answer: B Topic: Saving Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

65) At a level of disposable income of $0, consumption expenditure is $3500. Therefore when disposable income is $0, A) saving and dissaving equal $0. B) saving equals -$3500. C) saving equals $3500. D) the MPC = zero. Answer: B Topic: Saving Function Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 66) When disposable income is 0, consumption is $2000. Then A) saving = $0. B) saving = -$2000. C) saving = $2000. D) the MPC = 0.2. Answer: B Topic: Saving Function Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 67) An increase in disposable income shifts A) both the consumption and savings functions upward. B) the consumption function upward and leads to a movement along the savings function. C) both the consumption and savings functions downward. D) neither the consumption function or the savings function because it leads to a movement along both the consumption and savings function. Answer: D Topic: The Consumption Function and the Saving Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 68) What is the marginal propensity to consume? A) the change in consumption expenditure divided by the change in disposable income B) the percentage of disposable income that is consumed C) one minus the fraction of total disposable income that is saved D) the percentage of total income that is consumed Answer: A Topic: Marginal Propensity to Consume Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

69) The marginal propensity to consume refers to A) the additional saving that occurs out of an additional dollar of disposable income. B) the additional consumption expenditure that occurs out of an additional dollar of disposable income. C) the additional consumption expenditure that occurs out of an additional dollar of investment. D) total consumption expenditure divided by total disposable income. Answer: B Topic: Marginal Propensity to Consume Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 70) The marginal propensity to consume is the A) fraction of a change in disposable income spent on consumption expenditure. B) amount saving increases when consumption expenditure decreases. C) fraction of a change in saving spent on consumption expenditure. D) fraction of a change in consumption expenditure that is not saved. Answer: A Topic: Marginal Propensity to Consume Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 71) The marginal propensity to consume is the ________. A) fraction of total disposable income consumed B) fraction of GDP consumed C) fraction of a change in disposable income that is consumed. D) total amount of disposable income consumed Answer: C Topic: Marginal Propensity to Consume Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 72) The MPC is the fraction of A) total disposable income that is consumed. B) total disposable income that is not consumed. C) a change in disposable income that is consumed. D) a change in disposable income that is saved. Answer: C Topic: Marginal Propensity to Consume Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

73) The marginal propensity to consume is equal to A) what people spend out of total disposable income. B) the desired amount of consumption expenditure as a proportion of disposable income. C) the average, after-tax consumption amount. D) the change in consumption expenditure from a change in disposable income. Answer: D Topic: Marginal Propensity to Consume Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 74) The marginal propensity to consume measures A) how much of a given level of disposable income is consumed. B) what percentage of disposable income goes to saving. C) how much consumption expenditure occurs at the equilibrium level of income. D) the fraction of a change in disposable income that is spent on consumption expenditure. Answer: D Topic: Marginal Propensity to Consume Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 75) The marginal propensity to consume is A) total consumption expenditure divided by the change in disposable income. B) the change in consumption expenditure divided by total disposable income. C) the change in consumption expenditure divided by the change in disposable income. D) the change in consumption expenditure divided by total saving. Answer: C Topic: Marginal Propensity to Consume Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 76) The marginal propensity to consume is found by A) dividing consumption expenditure by disposable income. B) dividing disposable income by consumption expenditure. C) dividing the change in disposable income by the change in consumption expenditure. D) dividing the change in consumption expenditure by the change in disposable income. Answer: D Topic: Marginal Propensity to Consume Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

77) The MPC is equal to A) △C / △S. B) △S / △C. C) △C / △YD. D) △S / △YD. Answer: C Topic: Marginal Propensity to Consume Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 78) The value of the marginal propensity to consume is A) between 0 and 1. B) between 1 and 10. C) between -1 and +1. D) between 1 percent and 10 percent. Answer: A Topic: Marginal Propensity to Consume Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 79) The marginal propensity to consume is A) the slope of the savings function. B) never greater than 1. C) the percentage or fraction of income that is consumed. D) the percentage change in disposable income. Answer: B Topic: Marginal Propensity to Consume Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 80) The size of the marginal propensity to consume A) is negative if dissaving is present. B) is between 0 and 1. C) equals 1. D) exceeds 1. Answer: B Topic: Marginal Propensity to Consume Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

81) If consumption expenditures for a household increase from $1000 to $1800 when disposable income rises from $1000 to $2000, the marginal propensity to consume is A) 0.8. B) 0.18. C) 0.3. D) 0.2. Answer: A Topic: Marginal Propensity to Consume Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 82) If the marginal propensity to consume is 0.8, every $10 increase in disposable income increases A) consumption expenditure by $0.80. B) consumption expenditure by $18.00. C) saving by $0.20. D) consumption expenditure by $8.00. Answer: D Topic: Marginal Propensity to Consume Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 83) Suppose disposable income increases from $7 trillion to $8 trillion. At the same time, consumption expenditure increases from $6.8 trillion to ________. Thus the MPC must equal ________. A) $7.8 trillion; 0.80 B) $7.6 trillion; 0.80 C) $7.4 trillion; 0.40 D) $8 trillion; 1.00 Answer: B Topic: Marginal Propensity to Consume Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

84) When disposable income increases from $6 trillion to $6.5 trillion, consumption expenditure increase from $5.5 trillion to $5.9 trillion. The MPC equals A) 0.75. B) 0.76. C) 0.8. D) 0.2. Answer: C Topic: Marginal Propensity to Consume Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 85) Between 2008 and 2009 the government reported that disposable income decreased by $300 billion. If the MPC equals 0.8, then consumption expenditure A) decreases by $40 billion. B) decreases by $1,500 billion. C) decreases by $24 billion. D) decreases by $32 billion. Answer: C Topic: Marginal Propensity to Consume Skill: Analytical Status: New AACSB: Analytical Skills 86) Between 2008 and 2009 the government reported that disposable income decreased by $300 billion and consumption expenditure decreased by $180 billion. Based on these data, the MPC equals A) 4.4. B) 0.80. C) 0.60. D) $120 billion. Answer: C Topic: Marginal Propensity to Consume Skill: Analytical Status: New AACSB: Analytical Skills

87) Suppose disposable income increases from $5 trillion to $6 trillion. As a result, consumption expenditure increases from $4 trillion to ________. This result means the MPC equals ________. A) $4.5 trillion; 4.50 B) $5 trillion; 0.80 C) $4.8 trillion; 0.80 D) $6 trillion; 1.00 Answer: C Topic: Marginal Propensity to Consume Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 88) The marginal propensity to save is A) total saving divided by total disposable income. B) total saving divided by the change in disposable income. C) the change in saving divided by the change in consumption expenditure. D) the change in saving divided by the change in disposable income. Answer: D Topic: Marginal Propensity to Save Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 89) The size of the marginal propensity to save A) is negative if dissaving is present. B) is between 0 and 1. C) equals 1. D) exceeds 1. Answer: B Topic: Marginal Propensity to Save Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 90) The MPS equals the ratio of A) saving to real GDP. B) the change in saving to the change in consumption expenditure. C) saving to consumption expenditure. D) None of the above answers is correct. Answer: D Topic: Marginal Propensity to Save Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

91) The marginal propensity to save equals the A) change in savings resulting from a one dollar change in disposable income. B) change in savings from a change in consumption expenditure. C) average amount of income saved. D) ability to save the same percentage of income each month. Answer: A Topic: Marginal Propensity to Save Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 92) When disposable income increases from $7 trillion to $7.5 trillion, consumption expenditure increase from $6.5 trillion to $6.9 trillion. The MPS is equal to A) 0.75. B) 0.76. C) 0.8. D) 0.2. Answer: D Topic: Marginal Propensity to Save Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 93) When disposable income equals $800 billion, planned consumption expenditure equals $600 billion, and when disposable income equals $1,000 billion, planned consumption expenditure equals $760 billion. What is the marginal propensity to save? A) 0.80 B) 0.64 C) 0.25 D) 0.20 Answer: D Topic: Marginal Propensity to Save Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 94) Suppose real GDP increases from $13 trillion to $14 trillion. Consequently, consumption expenditure increases from $13 trillion to $13.75 trillion. This result implies the MPS equals A) 0.75. B) 0.25. C) 0. D) some amount that cannot be determined without more information. Answer: B Topic: Marginal Propensity to Save Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills 26 Copyright © 2014 Pearson Education, Inc.

95) Between 2008 and 2009 the government reported that disposable income decreased by $300 billion and consumption expenditure decreased by $180 billion. Based on these data, the MPS equals A) 2.5. B) 0.40. C) 0.60. D) $120 billion. Answer: C Topic: Marginal Propensity to Save Skill: Analytical Status: New AACSB: Analytical Skills 96) The MPC and MPS measure changes in consumption expenditure and saving that result from changes in A) expected inflation. B) disposable income. C) expected future income. D) government expenditures on goods and services. Answer: B Topic: Marginal Propensity to Consume & Marginal Propensity to Save Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 97) Which of the following is true? A) MPS = MPC B) MPS + MPC = 1 C) MPS + MPC = 0 D) MPS - MPC = 1 Answer: B Topic: Marginal Propensity to Consume & Marginal Propensity to Save Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 98) The MPC and MPS A) sum to 1. B) can sum to anything greater than 0. C) sum to 100. D) each are usually less than .5. Answer: A Topic: Marginal Propensity to Consume & Marginal Propensity to Save Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 27 Copyright © 2014 Pearson Education, Inc.

99) If the marginal propensity to save is 0.6, then the marginal propensity to consume is A) 0.6. B) 0.4. C) 1.0. D) not determinable. Answer: B Topic: Marginal Propensity to Consume & Marginal Propensity to Save Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 100) For a household, the marginal propensity to save plus the marginal propensity to consume A) equals 1. B) equals 0. C) equals a number that is larger the larger the household's disposable income. D) equals a number that is smaller the larger the household's disposable income. Answer: A Topic: Marginal Propensity to Consume & Marginal Propensity to Save Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 101) 1 - MPC equals A) autonomous consumption. B) the marginal propensity to save. C) induced consumption. D) the net national product. Answer: B Topic: Marginal Propensity to Consume & Marginal Propensity to Save Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 102) If the MPC equals 0.75, then A) for every $100 increase in consumption expenditure, disposable income increases by $75. B) consumption expenditure is always more than disposable income. C) for every $100 increase in disposable income, saving increases by $75. D) for every $100 increase in disposable income, saving increases by $25. Answer: D Topic: Marginal Propensity to Consume & Marginal Propensity to Save Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Disposable income (thousands of dollars) 200 300 400 500

Consumption expenditure (thousands of dollars) 225 300 375 450

103) According to the data in the above table, at what level of disposable income is savings negative? A) 200 B) 300 C) 400 D) Never because saving cannot be negative. Answer: A Topic: The Consumption Function and the Saving Function Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 104) According to the data in the above table, what is the marginal propensity to consume? A) 75. B) 100. C) 0.75. D) 1. Answer: C Topic: Marginal Propensity to Consume Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Disposable income (dollars) 0 100 300 500 700 900

Consumption expenditure (dollars) 100 180 340 500 660 820

105) In the above table, savings are positive when disposable income is greater than A) zero. B) $100. C) $300. D) $500. Answer: D Topic: Saving Function Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 106) In the above table, savings equal zero when disposable income equals A) 0. B) $200. C) $300. D) $500. Answer: D Topic: Saving Function Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 107) In the above table, the marginal propensity to consume equals A) 0.90. B) 0.75. C) 0.80. D) 0.85. Answer: C Topic: Marginal Propensity to Consume Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Disposable income Consumption expenditure (billions of dollars) (billions of dollars) 400 450 600 600 800 750 1000 900 1200 1050 108) Based upon the above table, if disposable income is $400 billion, saving equals A) -$50 billion. B) $0 billion. C) $50 billion. D) $100 billion. Answer: A Topic: Saving Function Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 109) Based upon the above table, saving equals $100 billion when disposable income equals A) $800 billion. B) $1000 billion. C) $1200 billion. D) some amount but we need more information to calculate the amount. Answer: B Topic: Saving Function Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 110) Based upon the above table, the MPC for the consumption function is A) increasing as income rises. B) equal to 1.0 at $600 billion. C) constant at 0.75. D) constant at 0.25. Answer: C Topic: Marginal Propensity to Consume Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Disposable income (dollars) 100 200 300 400 500 600

Consumption expenditure (dollars) 225 300 375 450 525 600

111) Using the above table, if disposable income is $400, saving is A) -$50. B) $0. C) $50. D) $100. Answer: A Topic: Saving Function Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 112) Using the data in above table, the marginal propensity to consume is A) increasing as disposable income increases. B) equal to 1.0 when disposable income equals $600. C) constant at 0.75. D) constant at 0.25. Answer: C Topic: Marginal Propensity to Consume Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 113) Using the data from the above table, the marginal propensity to save is A) falling as disposable income is rising. B) 0 when disposable income is $600. C) constant at 0.25. D) constant at 0.75. Answer: C Topic: Marginal Propensity to Save Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

114) The slope of the consumption function A) is positive and equals 1 - MPC. B) is negative. C) equals the MPC. D) is undefined below the 45-degree line. Answer: C Topic: Slopes and Marginal Propensities Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 115) The slope of the consumption function is A) perfectly horizontal at the equilibrium level. B) equal to 1. C) equal to the MPC. D) vertical at the full employment level of income. Answer: C Topic: Slopes and Marginal Propensities Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 116) When the consumption function becomes steeper, A) less of every dollar is consumed. B) the saving function also become steeper. C) the MPC rises. D) the MPC falls. Answer: C Topic: Slopes and Marginal Propensities Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 117) Which of the following concerning the marginal propensity to consume and the consumption function is true? I. The larger the marginal propensity to consume, the greater the amount of autonomous consumption. II. The larger the marginal propensity to consume, the steeper the consumption function. A) I is true. B) II is true. C) I and II are true. D) Neither I nor II is true. Answer: B Topic: Slopes and Marginal Propensities Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 33 Copyright © 2014 Pearson Education, Inc.

118) If an increase in a household's disposable income from $10,000 to $12,000 boosts its consumption expenditure from $8,000 to $9,000, the A) household is dissaving. B) slope of the consumption function is 0.2 C) slope of the consumption function is 0.5 D) slope of the consumption function is 1000. Answer: C Topic: Slopes and Marginal Propensities Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 119) The marginal propensity to save is ________. A) always greater than the marginal propensity to consume B) equal to the slope of the saving function C) equal to 1 plus the slope of the consumption function D) equal to the inverse of the marginal propensity to consume Answer: B Topic: Slopes and Marginal Propensities Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 120) The marginal propensity to save (MPS) is equal to the A) slope of the savings function. B) slope of the 45 degree. C) reciprocal value of the MPC. D) difference between consumption and income. Answer: A Topic: Slopes and Marginal Propensities Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 121) The slope of the saving function is equal to A) the MPS. B) the MPC. C) 1- MPS. D) None of the above answers is correct. Answer: A Topic: Slopes and Marginal Propensities Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

122) If the slope of the saving function is 0.27, then the marginal propensity to ________. A) import is less than 0.27 B) save is 0.73 C) consume is 0.73 D) consume is 0.27 Answer: C Topic: Slopes and Marginal Propensities Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

123) In the figure above, autonomous consumption is A) zero. B) $2 trillion. C) $4 trillion. D) $6 trillion. Answer: C Topic: Consumption Function Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

124) In the figure above, the induced consumption when real GDP is $12 trillion is A) zero. B) $2 trillion. C) $8 trillion. D) $12 trillion. Answer: C Topic: Consumption Function Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 125) In the figure above, negative saving occurs A) at all levels of disposable income. B) when disposable income is $8 trillion. C) when disposable income is $12 trillion. D) when disposable income is $16 trillion. Answer: B Topic: Saving Function Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 126) In the figure above, the marginal propensity to consume is A) 3.00. B) 1.00. C) 0.67. D) 0.25. Answer: C Topic: Slopes and Marginal Propensities Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

127) The figure above illustrates an economy's consumption function. What is the marginal propensity to consume in this economy? A) 0.67 B) 1.00 C) 0.75 D) 0.33 Answer: D Topic: Slopes and Marginal Propensities Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 128) The figure above illustrates an economy's consumption function. What is the marginal propensity to save in this economy? A) 0.67 B) 1.00 C) 0.75 D) 0.33 Answer: A Topic: Slopes and Marginal Propensities Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

129) The figure above illustrates an economy's consumption function. What is autonomous consumption in this economy? A) $0 B) $4 trillion C) $6 trillion D) None of the above answers is correct. Answer: B Topic: Consumption Function Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

130) In the above figure, when disposable income is greater than $12 trillion, then A) savings are negative. B) the MPC is greater than 1. C) savings are positive. D) the MPS is negative. Answer: C Topic: Saving Function Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

131) In the above figure, the marginal propensity to consume equals A) 0.80. B) 0.90. C) 0.75. D) 0.85. Answer: B Topic: Marginal Propensity to Consume Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 132) In the above figure, a change in autonomous consumption to $4 trillion with no change to the MPC would cause the consumption function to A) become steeper. B) become flatter. C) shift downward. D) shift upward. Answer: D Topic: Shifts in the Consumption Function Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 133) In the short run, a factor that leads to changes in U.S. imports is A) the level of income in foreign nations. B) the real interest rate. C) U.S. real GDP. D) U.S. exports. Answer: C Topic: Import Function Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 134) When U.S. real GDP increases, then quantity of U.S. imports A) decreases. B) increases. C) remains constant. D) at first decreases and then increases. Answer: B Topic: Import Function Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

135) The marginal propensity to import reflects the relationship between changes in imports and changes in A) consumption expenditure. B) investment spending. C) exports. D) real GDP. Answer: D Topic: Import Function Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 136) As globalization has increased, the trend in the U.S. marginal propensity to import has been for it to A) decrease to less than 0.8. B) increase. C) remain steady. D) decrease to more than 0.8. Answer: B Topic: Import Function Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 137) The marginal propensity to import is the ________ that is spent on imports. A) fraction of an increase in real GDP B) total amount of real GDP C) total amount of potential GDP D) fraction of an increase in potential GDP Answer: A Topic: Marginal Propensity to Import Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 138) Between 2011 and 2012 real GDP increased by $600 billion and imports increased by $80 billion. Based on these data, the marginal propensity to import equals A) 0.13. B) 7.5. C) 0.87 D) 0.08. Answer: A Topic: Marginal Propensity to Import Skill: Analytical Status: New AACSB: Reflective Thinking 40 Copyright © 2014 Pearson Education, Inc.

139) The U.S. consumption function A) has shifted upward over time. B) has a positive slope. C) has a slope of about 0.9. D) All of the above answers are correct. Answer: D Topic: The U.S. Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 140) Since 1970, U.S. consumption function has generally shifted ________ because of ________. A) upward; higher expected future income and rising wealth B) upward; higher real interest rates C) downward; higher real interest rates D) downward; falling wealth Answer: A Topic: The U.S. Consumption Function Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 141) Consumption expenditure decreases when ________ decreases. A) the interest rate B) the price level C) disposable income D) saving Answer: C Topic: Study Guide Question, Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 142) The slope of the saving function is equal to the A) marginal propensity to save. B) marginal propensity to consume. C) marginal propensity to consume divided by the marginal propensity to save. D) marginal propensity to save divided by the marginal propensity to consume. Answer: A Topic: Study Guide Question, Saving Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

2 Real GDP with a Fixed Price Level 1) Read the two statements below and indicate if they are true or false. I. Autonomous expenditures change when GDP changes. II. Aggregate planned expenditure is the sum of planned consumption expenditure, investment, government expenditure, and net exports. A) I and II are both true. B) I and II are both false. C) I is true and II is false D) I is false and II is true. Answer: D Topic: Aggregate Planned Expenditure Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 2) Aggregate expenditure equals A) C + I + G + X - M. B) G + X - M. C) C + I + G. D) C + I + G + X. Answer: A Topic: Aggregate Expenditure Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 3) The aggregate expenditure curve shows A) how consumption changes in response to a change in disposable income. B) how planned aggregate expenditure and real GDP are related. C) a negative relationship between the price level and real GDP. D) Both answers B and C are correct. Answer: B Topic: Aggregate Expenditure Curve Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

4) The graph of the aggregate expenditure curve has ________ on the y-axis and ________ on the x-axis. A) real GDP; aggregate planned expenditure B) aggregate actual expenditure; real GDP C) household expenditures; real GDP D) aggregate planned expenditure; real GDP Answer: D Topic: Aggregate Expenditure Curve Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 5) The slope of the aggregate expenditure curve equals the change in A) planned expenditure divided by the change in real GDP. B) autonomous expenditure divided by the change in real GDP. C) government expenditure divided by the change in real GDP. D) real GDP divided by the change in planned expenditure. Answer: A Topic: Aggregate Expenditure Curve Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 6) The slope of the aggregate expenditure curve is A) 0. B) greater than 0 and less than 1. C) 1. D) greater than 1. Answer: B Topic: Aggregate Expenditure Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 7) One reason the aggregate expenditure curve slopes upward is because ________ increases when real GDP increases. A) investment B) consumption expenditure C) government expenditure on goods and services D) exports Answer: B Topic: Aggregate Expenditure Curve Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

8) The sum of the components of aggregate expenditure that vary with real GDP is called A) induced expenditures. B) the MPC. C) autonomous expenditures. D) autonomous consumption. Answer: A Topic: Induced Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 9) Induced expenditure includes ________. A) induced consumption and government expenditure B) induced consumption expenditure and imports C) all autonomous expenditure D) induced consumption expenditure and exports Answer: B Topic: Induced Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 10) Any expenditure component that depends on the level of real GDP is called A) spurious expenditure. B) equilibrium expenditure. C) induced expenditure. D) autonomous expenditure. Answer: C Topic: Induced Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 11) As a nation's GDP increases, that nation's A) autonomous consumption increases. B) autonomous consumption decreases. C) exports increase. D) imports increase. Answer: D Topic: Induced Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

12) A change in imports caused by rising U.S. incomes is A) an increase in autonomous expenditure. B) a decrease in autonomous expenditure. C) an increase in induced exports. D) a change in induced expenditure. Answer: D Topic: Induced Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 13) The part of aggregate planned expenditure that does not vary with real GDP ________. A) equals equilibrium expenditure B) is autonomous expenditure C) is induced expenditure D) equals zero Answer: B Topic: Autonomous Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 14) The sum of the components of aggregate expenditure that are not influenced by real GDP is called A) induced expenditures. B) the MPC. C) autonomous expenditures. D) autonomous consumption. Answer: C Topic: Autonomous Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 15) Autonomous expenditure is not influenced by A) the price level. B) the interest rate. C) real GDP. D) any other variable. Answer: C Topic: Autonomous Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

16) Expenditure that does NOT depend on real GDP is called A) spurious expenditure. B) equilibrium expenditure. C) induced expenditure. D) autonomous expenditure. Answer: D Topic: Autonomous Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 17) Autonomous expenditure refers to A) aggregate expenditure solely prompted by policy. B) changes in short-run aggregate supply. C) aggregate expenditure that does not change when real GDP changes. D) aggregate expenditure that varies because of changes in real GDP. Answer: C Topic: Autonomous Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 18) All else being constant, autonomous expenditure A) increases as real GDP increases. B) increases as real GDP decreases. C) does not change with changes in real GDP. D) is assumed to be zero. Answer: C Topic: Autonomous Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 19) An increase in U.S. exports because of increasing foreign incomes is ________ in the United States. A) an increase in autonomous expenditure B) a decrease in autonomous expenditure C) an increase in induced expenditure D) a decrease in induced expenditure Answer: A Topic: Autonomous Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

20) An increase in investment by U.S. firms that is intended to maintain U.S. competitiveness in world markets is ________ in the United States. A) an increase in autonomous expenditure B) a decrease in autonomous expenditure C) an increase in induced expenditure D) a decrease in induced expenditure Answer: A Topic: Autonomous Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 21) Which of the following is NOT an autonomous expenditure in the aggregate expenditures model? A) investment B) government expenditures C) imports D) exports Answer: C Topic: Autonomous Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 22) A decrease in autonomous consumption will A) shift the aggregate expenditure function downward. B) decrease the marginal propensity to save. C) decrease the marginal propensity to consume. D) change the slope of the aggregate expenditure curve Answer: A Topic: Autonomous Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 23) Aggregate planned expenditure A) always equals actual aggregate expenditure. B) is always less than actual aggregate expenditure. C) is always greater than actual aggregate expenditure. D) equals actual aggregate expenditure at the equilibrium level of real GDP. Answer: D Topic: Actual Expenditures and Planned Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

24) Actual aggregate expenditure is A) always equal to real GDP. B) only equal to real GDP at the equilibrium level of aggregate planned expenditure. C) never greater than real GDP but can be less than real GDP. D) never less than real GDP but can be greater than real GDP. Answer: A Topic: Actual Expenditures and Planned Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 25) When aggregate planned expenditure is less than real GDP, unplanned A) consumption expenditure occurs. B) investment occurs. C) government expenditures are made. D) exports are made. Answer: B Topic: Actual Expenditures and Planned Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 26) The difference between planned and unplanned spending is ________. A) always negative B) inventories C) unplanned changes in inventories D) always positive Answer: C Topic: Actual Expenditures and Planned Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 27) When there is unplanned inventory investment, aggregate planned expenditure is ________ real GDP and actual investment is ________ planned investment. A) greater than; greater than B) greater than; less than C) less than; greater than D) less than; less than Answer: C Topic: Actual Expenditures and Planned Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

28) If aggregate planned expenditure exceeds real GDP, A) firms are not maximizing their profits. B) planned investment is greater than planned savings. C) actual inventories decrease below their target. D) planned consumption expenditure is less than actual consumption expenditure. Answer: C Topic: Actual Expenditures and Planned Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 29) If planned expenditures equal $13 trillion when real GDP is $13.5 trillion, then A) inventories will decrease by $0.5 trillion. B) actual investment will exceed planned investment. C) there will be excess demand for most goods. D) the economy must have a trade surplus to sell the excess goods and services. Answer: B Topic: Actual Expenditures and Planned Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 30) Suppose that in 2013, firms discover that their inventories are falling below their planned levels. Which of the following statements is correct? A) The level of aggregate savings must equal the level of desired investment. B) Even though firms are trying, they are unable to maximize profits. C) Aggregate demand is less than aggregate supply. D) Real GDP is less than equilibrium expenditure. Answer: D Topic: Actual Expenditures and Planned Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 31) Actual expenditure might differ from planned expenditure because A) actual consumption expenditure differs from planned consumption expenditure. B) actual investment differs from planned investment. C) actual government expenditure differ from planned government expenditure. D) actual net exports differ from planned net exports. Answer: B Topic: Actual Expenditures and Planned Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

32) If real GDP is $13 trillion and planned aggregate expenditure is $13.5 trillion, inventories will be A) below their target and real GDP will increase. B) below their target and real GDP will decrease. C) above their target and real GDP will decrease. D) above their target and real GDP will increase. Answer: A Topic: Actual Expenditures and Planned Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 33) Which of the following statements is correct? A) Actual aggregate expenditures does not always equal real GDP. B) Planned investment exceeds actual investment when real GDP is greater than aggregate planned expenditures. C) Actual investment exceeds planned investment when real GDP is less than aggregate planned expenditures. D) None of the above is correct. Answer: D Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 34) If prices are fixed, when aggregate planned expenditure exceeds real GDP, then A) inventories decrease, signaling firms to increase production and increase real GDP. B) inventories increase, signaling firms to decrease production and decrease real GDP. C) profits fall, signaling firms to decrease production and decrease real GDP. D) None of the above answers are correct. Answer: A Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 35) When real GDP exceeds aggregate planned expenditure, A) actual inventories decrease below their target. B) the circular flow will increase. C) GDP will decrease. D) a higher level of equilibrium income will prevail. Answer: C Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 50 Copyright © 2014 Pearson Education, Inc.

36) If aggregate planned expenditure is less than real GDP, A) real GDP will increase. B) real GDP remain unchanged. C) real GDP will either decrease or increase, depending on the MPC. D) inventories will increase above their target level and real GDP will decrease. Answer: D Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 37) Suppose the equilibrium level of expenditure is $13 trillion. If real GDP is $12 trillion, then inventories are ________ their target levels and real GDP will ________. A) above; increase B) above; decrease C) below; increase D) below; decrease Answer: C Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 38) Suppose the equilibrium level of expenditure is $13 trillion. If real GDP is $14 trillion, then planned expenditures A) exceed real GDP, and real GDP will increase. B) are less than real GDP, and real GDP will decrease. C) are equal to real GDP, and there will be no change in real GDP. D) are less than real GDP, and real GDP will increase. Answer: B Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 39) If aggregate planned expenditure is less than real GDP then A) consumers increase their planned expenditure until aggregate planned expenditure increases to equal real GDP. B) firms increase their planned expenditure until aggregate planned expenditure increases to equal real GDP. C) firms' inventories will increase and real GDP will decrease as production falls. D) firms' inventories will decrease and real GDP will decrease as production falls. Answer: C Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 51 Copyright © 2014 Pearson Education, Inc.

40) When investment is less than planned investment, aggregate planned expenditure is ________ than actual aggregate expenditure and inventories are ________ than planned. A) greater; greater B) greater; less C) less; greater D) less; less Answer: B Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 41) When investment exceeds planned investment, aggregate planned expenditure is ________ than actual aggregate expenditure and inventories are ________ than planned. A) greater; greater B) greater; less C) less; greater D) less; less Answer: C Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 42) In the aggregate expenditure model, when real GDP is greater than aggregate planned expenditure, A) unplanned inventories are being accumulated. B) inventories are being depleted. C) inventories are not being changed. D) this cannot happen, because the two variables are always equal. Answer: A Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 43) Equilibrium expenditure is defined as the level of aggregate expenditure where A) actual aggregate expenditure equals real GDP. B) total inventories equal zero. C) aggregate planned expenditure equals real GDP. D) spending equals output. Answer: C Topic: Equilibrium Expenditure Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 52 Copyright © 2014 Pearson Education, Inc.

44) When the economy is in equilibrium, A) planned investment equals actual investment. B) planned savings will equal zero. C) there can be no unemployment. D) changes in autonomous spending will have no impact on real GDP. Answer: A Topic: Equilibrium Expenditure Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 45) At equilibrium expenditure A) consumers' expenditures on goods and services equal firms' purchases of investment goods. B) firms hold no inventories of raw materials or final goods. C) aggregate planned expenditure equals real GDP. D) aggregate planned expenditure equals real GDP minus net exports. Answer: C Topic: Equilibrium Expenditure Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 46) At equilibrium expenditure, unplanned changes in inventory A) must be positive. B) must be zero. C) must be negative. D) might be either positive or negative. Answer: B Topic: Equilibrium Expenditure Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 47) Equilibrium expenditure occurs where A) the aggregate expenditure curve crosses the 45-degree line. B) planned expenditures exceed national income. C) savings exceed planned investment. D) All of the answers are correct. Answer: A Topic: Equilibrium Expenditure Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

48) Equilibrium expenditure occurs where the aggregate expenditure curve crosses the A) 45-degree line. B) horizontal axis. C) vertical axis. D) consumption function. Answer: A Topic: Equilibrium Expenditure Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking Real GDP 2500 2400 2300 2200 2100

C 1430 1360 1290 1220 1150

I 540 540 540 540 540

G 400 400 400 400 400

X-M 90 100 110 120 130

49) In the above table, C is consumption expenditure, I is investment, G is government expenditure, and X - M is net exports. All entries are in dollars. The equilibrium level of real GDP is A) $2,500. B) $2,400. C) $2,300. D) $2,200. Answer: B Topic: Equilibrium Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 50) In the above table, C is consumption expenditure, I is investment, G is government expenditure, and X - M is net exports. All entries are in dollars. The slope of the aggregate expenditure function is A) -0.10. B) 0.10. C) 0.60. D) 0.70. Answer: C Topic: Slope of the AE Curve Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Real GDP 100 200 300 400 500 600 700 800 900 1000

75 150 225 300 375 450 525 600 675 750

25 25 25 25 25 25 25 25 25 25

95 95 95 95 95 95 95 95 95 95

10 10 10 10 10 10 10 10 10 10

1 2 3 4 5 6 7 8 9 10

51) In the above table, C is consumption expenditure, I is investment, G is government expenditure, X is exports, and M is imports. All entries are in dollars. What is the marginal propensity to consume? A) 0.20 B) 0.25 C) 0.75 D) 0.80 Answer: C Topic: Marginal Propensity to Consume Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 52) In the above table, C is consumption expenditure, I is investment, G is government expenditure, X is exports, and M is imports. All entries are in dollars. What is the level of aggregate planned expenditure when real GDP is equal to $900 billion? A) $675 B) $796 C) $814 D) $1,714 Answer: B Topic: Actual Expenditures and Planned Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

53) In the above table, C is consumption expenditure, I is investment, G is government expenditure, X is exports, and M is imports. All entries are in dollars. What is the unplanned inventory change when GDP is equal to $400? A) $26 B) -$26 C) $5 D) -$5 Answer: B Topic: Actual Expenditures and Planned Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 54) In the above table, C is consumption expenditure, I is investment, G is government expenditure, X is exports, and M is imports. All entries are in dollars. What is the equilibrium expenditure? A) $200 B) $500 C) $700 D) $1,000 Answer: B Topic: Equilibrium Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 55) In the above table, C is consumption expenditure, I is investment, G is government expenditure, X is exports, and M is imports. All entries are in dollars. If investment increased by $26 to $51 then equilibrium expenditure will A) increase by $25. B) decrease by $50. C) increase by $100. D) decrease by $100. Answer: C Topic: Equilibrium Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

56) In the above figure, at the equilibrium, induced expenditure is A) $4 trillion. B) $8 trillion. C) $12 trillion. D) some amount not given in the above answers. Answer: A Topic: Induced Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 57) In the above figure, autonomous expenditure is A) $4 trillion. B) $8 trillion. C) $12 trillion. D) some amount not given in the above answers. Answer: B Topic: Autonomous Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

58) In the above figure, if real GDP is below $12 trillion, inventories will be A) below target levels, so firms increase production. B) below target levels, so firms decrease production. C) above target levels, so firms increase production. D) above target levels, so firms decrease production. Answer: A Topic: Actual Expenditures and Planned Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 59) In the above figure, if real GDP is greater than $12 trillion, inventories will be A) below target levels so firms increase production. B) below target levels so firms decrease production. C) above target levels so firms increase production. D) above target levels so firms decrease production. Answer: D Topic: Actual Expenditures and Planned Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

60) The figure shows Tropical Isle's aggregate planned expenditure curve. When aggregate planned expenditure is $2 trillion, aggregate planned expenditure is ________ than real GDP, firms' inventories ________, and firms ________ their production. A) greater; increase; decrease B) less; decrease; increase C) less; increase; decrease D) greater; decrease; increase Answer: D Topic: Actual Expenditures and Planned Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 61) Real GDP equals $20 billion and aggregate planned expenditure is $30 billion. There is an unplanned ________ in inventories of ________ and real GDP will ________. A) increase; $10 billion; increase B) increase; $50 billion; decrease C) decrease; $10 billion; increase D) decrease; $10 billion; decrease Answer: C Topic: Actual Expenditures and Planned Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

62) In the above figure, if real GDP equals $12 trillion, there would be A) an increase in autonomous consumption expenditure. B) an increase in autonomous inventories. C) no change in GDP. D) an unplanned increase in firms' inventories. Answer: C Topic: Equilibrium Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 63) In the above figure, if real GDP equals $15 trillion, A) actual and planned investment will both increase. B) unplanned inventories will increase. C) actual investment will decrease but planned investment will increase. D) unplanned inventories will decrease. Answer: B Topic: Actual Expenditures and Planned Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

64) In the above figure, if real GDP equals $11 trillion, A) actual and planned investment will both increase. B) unplanned inventories will increase. C) actual investment will decrease but planned investment will increase. D) unplanned inventories will decrease. Answer: D Topic: Actual Expenditures and Planned Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

65) In the above figure, if the marginal propensity to consume increases, the slope of the AE curve would A) increase. B) decrease. C) stay the same but the AE curve would shift upwards. D) stay the same but the AE curve would shift downwards. Answer: A Topic: Aggregate Expenditure Curve Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

66) In the above figure, point d represents planned expenditures ________ real GDP. A) greater than B) equal to C) less than D) There is not enough information to answer the question. Answer: C Topic: Actual Expenditures and Planned Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills 67) In the above figure, at point d firms would find themselves with inventories ________ their target level and so would ________ production. A) increasing above; increase B) increasing above; decrease C) decreasing below; increase D) decreasing below; decrease Answer: B Topic: Actual Expenditures and Planned Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 68) The equilibrium in the above figure is shown at point A) a. B) b. C) c. D) d. Answer: C Topic: Equilibrium Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

69) In the above figure, equilibrium expenditure is A) less than $12 trillion. B) $12 trillion. C) more than $12 trillion. D) some amount that cannot be determined without more information. Answer: B Topic: Equilibrium Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 70) In the above figure, if the level of real GDP is $13 trillion, A) inventories are above the levels planned by firms. B) inventories are below the levels planned by firms. C) inventories are equal to the levels planned by firms. D) planned expenditures are zero. Answer: A Topic: Actual Expenditures and Planned Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

71) In the above figure, if the level of real GDP is $11 trillion, A) inventories are above the levels planned by firms. B) inventories are below the levels planned by firms. C) inventories are equal to the levels planned by firms. D) planned expenditures are zero. Answer: B Topic: Actual Expenditures and Planned Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 72) If firms' inventories are less than they planned, aggregate planned expenditure is ________ real GDP and firms ________ their production. A) greater than; increase B) greater than; decrease C) less than; increase D) less than; decrease Answer: A Topic: Study Guide Question, Convergence to Equilibrium Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 73) If aggregate planned expenditure is less than real GDP, in the short run A) aggregate planned expenditure will increase. B) exports change to restore equilibrium. C) the price level will fall. D) real GDP will decrease. Answer: D Topic: Study Guide Question, Convergence to Equilibrium Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

3 The Multiplier 1) When autonomous expenditure decreases, ________. A) the AE curve shifts downward B) there is a movement down along the AE curve C) the AE curve becomes less steep D) the AE curve shifts upward Answer: A Topic: Changes in Autonomous Expenditure Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

2) In the above figure the economy is initially at point A on aggregate expenditure curve AE0. Suppose firms expect profits to increase and decide to increase investment. As a result A) the AE curve shifts upward to a curve such as AE2. B) the AE curve shifts downward to a curve such as AE1. C) there is a movement along AE1 to a point such as B. D) there is a movement along AE1 to a point such as C. Answer: A Topic: Changes in Autonomous Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

3) In the above figure the economy is initially at point A on aggregate expenditure curve AE0. Suppose investment decreases. As a result A) the AE curve shifts upward to a curve such as AE2. B) the AE curve shifts downward to a curve such as AE1. C) there is a movement along AE1 to a point such as B. D) there is a movement along AE1 to a point such as C. Answer: B Topic: Changes in Autonomous Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 4) If prices are fixed, an increase in aggregate expenditures results in an increase in equilibrium GDP that A) is greater than the change in aggregate expenditure. B) is equal to the change in aggregate expenditure. C) is less than the change in aggregate expenditure. D) has no necessary relationship to the size of the change in aggregate expenditure. Answer: A Topic: The Multiplier Effect Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 5) The multiplier effect on real GDP occurs because A) changes in price levels affect our willingness to invest, consume, import and export. B) an autonomous change in expenditure causes an induced change in consumption expenditure. C) of government stabilization policies. D) of income taxes. Answer: B Topic: The Multiplier Effect Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 6) The multiplier effect exists because a change in autonomous expenditure A) leaves the economy in the form of imports. B) leads to changes in income, which generate further spending. C) prompts further exports. D) will undergo its complete effect in one round. Answer: B Topic: The Multiplier Effect Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 66 Copyright © 2014 Pearson Education, Inc.

7) The multiplier effect A) generates instability in autonomous expenditure. B) promotes stability of the general price level. C) magnifies small changes in spending into larger changes in real GDP. D) increases the MPC. Answer: C Topic: The Multiplier Effect Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 8) When autonomous expenditure increases, equilibrium aggregate expenditure A) decreases by an equal amount to offset the unplanned portion. B) increases by an equal amount. C) decreases by a greater amount due to the multiplier. D) increases by a greater amount due to the multiplier. Answer: D Topic: The Multiplier Effect Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 9) In the short run with fixed prices, an increase in investment of $100 billion A) increases real GDP by $100 billion. B) increases real GDP by less than $100 billion. C) increases real GDP by more than $100 billion. D) decreases real GDP because of the decrease in induced expenditures. Answer: C Topic: The Multiplier Effect Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 10) The multiplier is the amount by which ________ is multiplied to determine ________. A) autonomous expenditure; real GDP B) induced expenditure; real GDP C) a change in autonomous expenditure; the change in equilibrium expenditure D) a change in induced expenditure; the change in equilibrium expenditure Answer: C Topic: The Multiplier Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

11) The multiplier is the ratio of the A) change in real GDP to the change in autonomous expenditures. B) equilibrium level of real GDP to the change in induced expenditures. C) change in induced expenditures to the change in autonomous expenditures. D) change in autonomous expenditures to the change in real GDP. Answer: A Topic: The Multiplier Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 12) When prices are fixed and there are no imports or income taxes, the value of the multiplier is A) less than one. B) greater than one. C) equal to one. D) equal to zero. Answer: B Topic: The Multiplier Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 13) The multiplier shows that as ________ changes, real GDP changes by a ________ amount. A) induced expenditure; larger B) induced expenditure; smaller C) autonomous expenditure; larger D) autonomous expenditure; smaller Answer: C Topic: The Multiplier Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 14) Because of the multiplier, a one-time change in expenditure will A) have little secondary effect on real GDP. B) expand real GDP by an infinite amount. C) generate more additional real GDP than the initial change in expenditure. D) decrease saving and investment activity and thereby decrease future real GDP. Answer: C Topic: The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

15) The multiplier is greater than 1 because A) most households are unable to save. B) household spending exceeds income. C) one person's spending becomes another's income. D) corporate spending exceeds corporate income. Answer: C Topic: The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 16) The multiplier is greater than 1 because the change in autonomous expenditure leads to ________. A) more investment B) more saving C) less consumption expenditure D) more induced expenditure Answer: D Topic: The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 17) If a $75 billion increase in autonomous expenditure increases equilibrium expenditure by $150 billion, then the multiplier is ________. A) $225 billion B) 0.625 C) $75 billion D) 2 Answer: D Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 18) If investment increases by $300 and, in response, equilibrium aggregate expenditure increases by $600, the multiplier is A) 0.2. B) 0.5. C) 2. D) 5. Answer: C Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 69 Copyright © 2014 Pearson Education, Inc.

19) If the multiplier is 6 and exports decrease by $30, what impact will that have on aggregate expenditure? A) increase by $30 B) increase by $180 C) decrease by $30 D) decrease by $180 Answer: D Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 20) The multiplier is larger if the A) marginal propensity to consume is larger. B) marginal propensity to save is larger. C) income tax rate is higher. D) marginal propensity to import is larger. Answer: A Topic: The Multiplier and the MPC Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 21) If the MPC increases from 0.75 to 0.80 and there are no income taxes or imports, A) the multiplier becomes larger. B) the multiplier becomes smaller. C) the slope of the consumption function becomes smaller. D) the slope of the savings function becomes larger. Answer: A Topic: The Multiplier and the MPC Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills 22) An increase in the size of the multiplier can be caused by A) an increase in the MPS. B) an increase in the MPC. C) a decrease in induced expenditures. D) an increase in the marginal propensity to import. Answer: B Topic: The Multiplier and the MPC Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

23) The relationship between the multiplier and the MPC is A) that as the MPC increases, so does the value of the multiplier. B) that as the MPC increases, the value of the multiplier decreases. C) unrelated because the multiplier relates to the MPS not the MPC. D) converging at higher incomes. Answer: A Topic: The Multiplier and the MPC Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 24) Which of the following makes the multiplier larger? A) an increase in the marginal propensity to import B) an increase in the tax rate C) an increase in the marginal propensity to consume D) an increase in the marginal propensity to save Answer: C Topic: The Multiplier and the MPC Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 25) An increase in the value of the 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 autonomous consumption expenditure. D) an increase in the marginal propensity to consume. Answer: D Topic: The Multiplier and the MPC Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 26) In an economy with no income taxes or imports, the multiplier equals A) 1/MPC. B) 1/MPS. C) 1/(1 - MPS). D) 1/(MPC + MPS). Answer: B Topic: The Multiplier and the MPS Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

27) The larger the slope of the AE curve, the A) larger the value of the multiplier. B) smaller the value of the multiplier. C) less likely that the multiplier will be affected. D) more likely that the multiplier will be inconsequential. Answer: A Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 28) If the slope of the AE curve increases, the multiplier A) decreases. B) increases. C) stays the same. D) can either increase or decrease depending on what happens to the MPC. Answer: B Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 29) The expenditure multiplier equals A) APC - APS where APC is the average propensity to consume and APS is the average propensity to save. B) 1/(1 - slope of AE curve). C) MPC - MPS where MPC is the marginal propensity to consume and MPS is the marginal propensity to consume. D) 1/(slope of AE curve). Answer: B Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 30) If there are no income taxes or imports, the multiplier equals A) 1/(1 - marginal propensity to consume). B) 1/(1 - marginal propensity to save). C) 1/(1 - marginal propensity to import). D) 1/(1 - marginal propensity to invest). Answer: A Topic: The Multiplier and the MPC Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

31) If there are no taxes or imports and MPC = 0.67, the multiplier is A) 1.5. B) 3. C) 6. D) 0.33. Answer: B Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 32) If there are no taxes or imports and MPC = 0.75, the multiplier equals A) 0.25. B) 1.33. C) 4.0. D) 6.0. Answer: C Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 33) If there are no taxes or imports and MPC = 0.5, the multiplier equals A) 0.5. B) 5.0. C) 6.0. D) 2.0. Answer: D Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 34) Assume there are no taxes or imports. The government estimates that between 2008 and 2009 disposable income decreased by $300 billion and consumption expenditure decreased by $180 billion. Based on these data, the multiplier equals A) 0.4. B) 1.67. C) 0.6. D) 2.5. Answer: D Topic: The Multiplier Skill: Analytical Status: New AACSB: Analytical Skills

35) If the marginal propensity to consume is 0.8 and there no income taxes or imports, the multiplier for a change in autonomous expenditure equals A) 0.8. B) 1.0 C) 4.0. D) 5.0. Answer: D Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 36) If the MPC is .9 and there are no income taxes or imports, the multiplier for a change in autonomous expenditure equals A) 0.1. B) 9.0. C) 10.0. D) 100.0. Answer: C Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 37) If the multiplier for a change in autonomous expenditure is 10 and there are no income taxes or imports, then the MPC is A) 0.9. B) 0.1. C) 1.0. D) 9.0. Answer: A Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 38) If the multiplier is 4 and there are no imports or income taxes, the marginal propensity to consume is A) 0.25. B) 0.50. C) 0.75. D) 1.00. Answer: C Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 74 Copyright © 2014 Pearson Education, Inc.

39) If the multiplier is 3.33 and there are no imports or income taxes, then the A) MPC is 0.7. B) MPS is 0.3. C) Both of the above answers are correct. D) None of the above answers are correct. Answer: C Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 40) If the slope of the AE curve is 0.60, the value of the multiplier is A) 2.5. B) 0.4. C) 1.67. D) 4.0. Answer: A Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 41) Suppose that last year the slope of the AE curve is 0.67 and this year the slope of the AE curve changes to 0.8. Which of the following best describes what happens to the multiplier? A) It rises from 3 to 5. B) It falls from 5 to 3. C) It rises from 1.25 to 1.49. D) It falls from 1.49 to 1.25. Answer: A Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 42) In general, the steeper the aggregate expenditure curve, the A) greater autonomous expenditure. B) lower the marginal propensity to consume. C) larger the multiplier. D) smaller the multiplier. Answer: C Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

43) In general, the flatter the aggregate expenditure curve, the A) greater the autonomous expenditure. B) larger the marginal propensity to consume. C) larger the multiplier. D) smaller the multiplier. Answer: D Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 44) The smaller the slope of the AE curve, ________. A) the greater is the value of the multiplier B) the smaller is slope of the saving function C) the steeper is the consumption function D) the smaller is the value of the multiplier Answer: D Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 45) The slope of the aggregate expenditure curve increases when the marginal propensity to consume ________ or the marginal propensity to import ________. A) increases; decreases B) decreases; increases C) decreases; decreases D) increases; increases Answer: A Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 46) A change in which of the following changes the slope of the aggregate expenditure curve? A) an increase in autonomous government expenditures B) an increase in the marginal propensity to consume C) a decrease in autonomous consumption expenditures D) All of the above answers are correct because they all change the slope of the aggregate expenditure curve. Answer: B Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

47) Given an MPC of 0.80, if there are no income taxes or imports and prices are constant, then when investment increases by $50 million, when prices are fixed equilibrium GDP would A) increase by $50 million. B) increase by $250 million. C) increase by $400 million. D) To answer the question more information on income is needed. Answer: B Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 48) In a simple economy in which prices are constant and with no income taxes or imports, the marginal propensity to save is 0.2. If exports increase $50, what impact will that have on aggregate expenditure? A) increase by $250 B) increase by $100 C) decrease by $250 D) decrease by $100 Answer: A Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 49) Between 2008 and 2009 the government reports that investment decreased by $ 530 billion. The government also estimates that the multiplier is 2.0. If the entire decrease in investment is autonomous, then real GDP A) decreases by $1,060 billion. B) increases by $265 billion. C) decreases by $265 billion. D) None of the above answers are correct. Answer: A Topic: The Multiplier Skill: Analytical Status: New AACSB: Analytical Skills

50) Suppose that the slope of the AE curve is 0.80. Then an increase of investment of $10 billion leads to an increase in equilibrium real GDP equal to A) $8.0 billion. B) $10.0 billion. C) $12.5 billion. D) $50.0 billion. Answer: D Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 51) The slope of the AE curve is 0.9. Investment decreases by $100 million and the price level is constant. Real GDP A) decreases by $10 million. B) increases by $90 million. C) decreases by $1 billion. D) increases by $1 billion. Answer: C Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 52) If the price level is constant and the slope of the AE curve is 0.75, a decrease in investment of $100 leads to a decrease in real GDP of A) $25. B) $100. C) $400. D) $800. Answer: C Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

53) An economy has no imports and no taxes. The marginal propensity to save is 0.2. The multiplier is ________ so a ________ increase in autonomous expenditure increases equilibrium expenditure by $60 billion. A) 1.25; $48 billion B) 5; $12 billion C) 10; $6 billion D) none of the above answers are correct. Answer: B Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 54) In a simple economy in which prices are constant and with no income taxes or imports, the slope of the AE curve is 0.8. In order to increase real GDP by $500 billion, then A) consumption expenditure needs to increase by $500 billion. B) saving needs to be reduced by $500 billion will lead to the increase of $500 billion. C) an increase in investment of $200 billion will lead to the increase of $500 billion. D) an increase in autonomous expenditure of $100 billion will lead to the increase of $500 billion. Answer: D Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 55) Suppose that the slope of the AE curve is 0.75. Then a $100 increase in autonomous spending means equilibrium expenditure will A) decrease by $400. B) increase by $400. C) decrease by $750. D) increase by $750. Answer: B Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

56) Suppose that the slope of the AE curve is 0.75. Then a $100 decrease in autonomous spending means equilibrium expenditure will A) decrease by $400. B) increase by $400. C) decrease by $750. D) increase by $750. Answer: A Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 57) Suppose that the slope of the AE curve is 0.67. Then a $100 decrease in autonomous spending means equilibrium expenditure will A) decrease by $200. B) increase by $200. C) decrease by $300. D) increase by $300. Answer: C Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 58) Suppose that the slope of the AE curve is 0.67. Then a $100 increase in autonomous spending means equilibrium expenditure will A) decrease by $200. B) increase by $200. C) decrease by $300. D) increase by $300. Answer: D Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 59) Suppose that the slope of the AE curve is 0.80. If prices remain constant and government expenditure increases by $10 billion, what will be the change in real GDP? A) $8 billion B) $2 billion C) $10 billion D) $50 billion Answer: D Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 80 Copyright © 2014 Pearson Education, Inc.

60) The government estimates that the fiscal policy multiplier is 2.0. If this estimate is accurate, then the slope of the AE curve is ________. A) 0.20 B) 0.80 C) 2.00 D) 0.50 Answer: D Topic: The Multiplier Skill: Analytical Status: New AACSB: Analytical Skills 61) The government estimates that the fiscal policy multiplier is 2.0. In this case an increase in government expenditure of $500 billion increases real GDP by ________ and results in an increase in induced expenditure of ________. A) $500 billion; $0 B) $500 billion; $500 billion C) $1,000 billion; $1,000 billion D) $1,000 billion; $500 billion Answer: D Topic: The Multiplier Skill: Analytical Status: New AACSB: Analytical Skills 62) An economy saves 20 percent of any increase in income and there are no income taxes or imports. Then, an increase in investment of $2 billion leads to a short run increase in real GDP of A) $2 billion. B) $10 billion. C) $0.4 billion. D) $1.6 billion. Answer: B Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

63) Equilibrium real GDP is $400 billion, the MPC = 0.9, and there are no income taxes or imports. Investment increases $40 billion. If the price level is constant, after the increase in investment, equilibrium real GDP will be A) $440 billion. B) $360 billion. C) $600 billion. D) $800 billion. Answer: D Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Real GDP Aggregate (trillions of 2005 expenditure (trillions dollars) of 2005 dollars) 0 0.3 1.0 1.2 2.0 2.1 3.0 3.0 4.0 3.9 5.0 4.8 64) The data in the above table indicate that autonomous expenditure is A) $0.3 trillion. B) $3.0 trillion. C) $4.8 trillion. D) None of the above answers is correct. Answer: A Topic: Autonomous Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 65) In the above table, equilibrium expenditure is A) $0.3 trillion. B) $3.0 trillion. C) $4.8 trillion. D) None of the above answers are correct. Answer: B Topic: Equilibrium Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

66) The data in the above table indicate that the slope of the AE curve is A) 0.30. B) 0.50. C) 0.90. D) None of the above answers are correct. Answer: C Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 67) In the above table, suppose investment decreases by $0.1 trillion. The multiplier equals A) 5.0. B) 9.0. C) 10.0. D) None of the above answers are correct. Answer: C Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Real GDP (dollars) 3,000 4,000 5,000 6,000 7,000 8,000

Consumption expenditure (dollars) 2,500 3,250 4,000 4,750 5,500 6,250

Investment (dollars) 500 500 500 500 500 500

Government expenditure (dollars) 500 500 500 500 500 500

68) In the above table, there are no taxes (so that that real GDP equals disposable income) and no imports or exports. If real GDP decreases from $6,000 to $5,000, the marginal propensity to consume is A) -750. B) -0.75. C) 0.75. D) 0.80. Answer: C Topic: Marginal Propensity to Consume Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

69) In the above table, there are no taxes and no imports or exports. The equilibrium level of expenditure for this economy is A) any level because investment always equals government expenditures. B) no level because consumption expenditure is always less than real GDP. C) $3,000. D) $5,000. Answer: D Topic: Equilibrium Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 70) In the above table, there are no taxes and no imports or exports. The total level of expenditure in the economy when real GDP is $7,000 is A) $7,000. B) $6,500. C) $13,500. D) 0.75. Answer: B Topic: Actual Expenditures and Planned Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 71) In the above table, there are no taxes and no imports or exports. The change in unplanned inventories when real GDP is $7,000 is A) $6,500. B) $500. C) -$500. D) $1,500. Answer: B Topic: Convergence to Equilibrium Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 72) In the above table, there are no taxes and no imports or exports. If current real GDP is equal to $7,000, then firms will A) not change production because $7,000 is the equilibrium level of real GDP. B) increase production to rebuild inventories to their target level. C) decrease production to restore inventories to their target level. D) None of the above answers is correct. Answer: C Topic: Convergence to Equilibrium Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 84 Copyright © 2014 Pearson Education, Inc.

73) In the above table, there are no taxes and no imports or exports. The value of the multiplier for this economy is A) 0.75. B) 1.33. C) 4.0. D) 0.25. Answer: C Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 74) In the above table, there are no taxes and no imports or exports. Suppose that investment increases from $500 to $750 at each level of real GDP. After the increase, what is the level of planned expenditure when real GDP equals $5,000? A) $5,000 B) $5,250 C) $1,000 D) $250 Answer: B Topic: Actual Expenditures and Planned Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 75) In the above table, there are no taxes and no imports or exports. Investment increases from $500 to $750. After the increase in investment, the new equilibrium level of output is A) $5,000. B) $7,000. C) $6,000. D) $5,750. Answer: C Topic: The Multiplier Effect Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

76) Suppose the price level is fixed. If investment increases by $1 trillion and the aggregate expenditure curve is shown in the figure above, in response equilibrium expenditure increases by ________. A) $1 trillion. B) $3 trillion. C) less than $1 trillion. D) None of the above answers are correct. Answer: B Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

77) In the above figure, an increase in autonomous expenditure is depicted by the movement from point E to A) point F. B) point G. C) point H. D) point I. Answer: A Topic: Autonomous Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 78) In the above figure, the increase in autonomous expenditure moves the economy from point E to A) point F. B) point G. C) point H. D) point I. Answer: B Topic: The Multiplier Effect Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

79) In the above figure, the multiplier is equal to A) zero. B) one. C) two. D) three. Answer: C Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

80) In the above figure, autonomous expenditure along AE1 equals A) $3 trillion. B) $6 trillion. C) $12 trillion. D) an amount not given in the above answers. Answer: A Topic: Autonomous Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

81) In the above figure, autonomous expenditure along AE2 equals A) $3 trillion. B) $6 trillion. C) $12 trillion. D) an amount not given in the above answers. Answer: B Topic: Autonomous Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 82) If AE0 is the aggregate planned expenditure curve, then equilibrium real GDP in the figure above is A) $3 trillion. B) $6 trillion. C) $12 trillion. D) None of the above answers is correct. Answer: B Topic: Equilibrium Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 83) In the above figure, equilibrium expenditure along AE2 is A) $3 trillion. B) $6 trillion. C) $12 trillion. D) an amount not given in the above answers. Answer: C Topic: Equilibrium Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 84) In the above figure, the shift from AE0 to AE1 might have been caused by A) an increase in government expenditures. B) an increase in the real interest rate. C) an increase in the price level. D) All of the above answers are correct. Answer: A Topic: Autonomous Expenditures Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

85) The value of the multiplier in the economy illustrated in the figure above is A) 2.0. B) 2.5. C) 4.0. D) 10.0. Answer: A Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 86) In the above figure, AE0 is the aggregate planned expenditure curve and then investment increases by an additional $3 trillion. As a result, the new equilibrium GDP will be A) $3 trillion. B) $6 trillion. C) $12 trillion. D) None of the above answers is correct. Answer: C Topic: Changes in Autonomous Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 87) The presence of income taxes and imports make the slope of the aggregate expenditure curve A) the same as it would be without income taxes and exports. B) steeper than it would be without income taxes and exports. C) flatter than it would be without income taxes and exports. D) probably different than it would be without income taxes and exports but income taxes make it steeper while imports make it flatter. Answer: C Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

88) In the figure above, the multiplier equals A) 0.5. B) 2.5. C) 10.0. D) some amount that cannot be calculated without additional information. Answer: B Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 89) In the figure above, if income taxes increase, A) the AE curve becomes steeper. B) the AE curve becomes flatter. C) there is a movement leftward along the unchanged AE curve. D) there is a movement rightward along the unchanged AE curve. Answer: B Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

90) Imports A) increase the size of the multiplier because imports make disposable income less than real GDP. B) decrease the size of the multiplier because spending on imports does not increase real GDP in the domestic nation. C) increase the size of the multiplier because imports are paid for by exports. D) decrease the size of the multiplier because imports lead to an increase in taxes and government purchases. Answer: B Topic: The Multiplier and Imports Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 91) The relationship between net exports and GDP makes the slope of the aggregate expenditure curve A) flatter than it would be otherwise. B) steeper than it would be otherwise. C) neither flatter nor steeper than it would be otherwise. D) steeper at low levels of GDP and flatter at high levels of GDP. Answer: A Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 92) If the marginal propensity to import increases, then the A) multiplier will decrease in value. B) multiplier will increase in value. C) multiplier will not change in value. D) effect on the multiplier will depend on what happens to exports. Answer: A Topic: The Multiplier and Imports Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

93) The presence of imports ________ the size of the U.S. multiplier because with an increase of U.S. real GDP, ________. A) increases; U.S. consumers buy goods from other countries B) increases; U.S. firms can sell goods to other countries C) decreases; U.S. consumers buy goods from other countries D) decreases; U.S. firms can sell goods to other countries Answer: C Topic: The Multiplier and Imports Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 94) Changes in which of the following will affect the size of the multiplier? I. marginal propensity to import II. marginal propensity to consume III. marginal income tax rate A) I only B) II only C) I and II only D) I, II, and III Answer: D Topic: The Multiplier, Imports, and Income Taxes Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 95) The presence of income taxes and imports make the multiplier A) fall in value but remain positive. B) rise in value. C) not change in value. D) become negative. Answer: A Topic: The Multiplier, Imports, and Income Taxes Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

96) In 2013 the government increased Social Security income taxes by 2 percentage points and increased the income tax rate on Americans making more than $400,000 by 4.6 percentage points. These tax hikes A) decreased the size of the multiplier. B) increased the size of the multiplier. C) had no effect on the size of the multiplier. D) None of the above answers are correct because the effect on the size of the multiplier is ambiguous. Answer: A Topic: The Multiplier and Income Taxes Skill: Analytical Status: New AACSB: Reflective Thinking 97) You observe that unplanned inventories are increasing. You predict that there will be ________. A) a business cycle B) an expansion C) a trough D) a recession Answer: D Topic: The Multiplier and Business Cycle Turning Points Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 98) Business cycle turning points are A) unaffected by, and unrelated to the multiplier. B) easy to predict. C) brought about by changes in autonomous expenditures that are then subject to the multiplier effect. D) None of the above is correct. Answer: C Topic: The Multiplier and Business Cycle Turning Points Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

99) Which of the following does NOT occur as the economy moves from an expansion to a recession? A) An initial decrease in autonomous spending is the trigger that creates the business cycle turning point. B) The change in planned spending exceeds the change in real GDP. C) The multiplier process reinforces any decrease in spending and pushes the economy into recession. D) Incomes fall during recessions as firms cut production in response to unplanned increases in inventories. Answer: B Topic: The Multiplier and Business Cycle Turning Points Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 100) Which of the following is INCORRECT? A) Expansions usually begin with an increase in autonomous spending. B) Firms experience unplanned decreases in inventories as expansions begin. C) Firms increase production in response to unplanned decreases in inventories. D) The multiplier dampens the increase in income that occurs during expansions and brings the economy to a new equilibrium GDP. Answer: D Topic: The Multiplier and Business Cycle Turning Points Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 101) A decrease in autonomous expenditure shifts the AE curve A) downward and leaves its slope unchanged. B) downward and makes it steeper. C) downward and makes it flatter. D) upward and makes it steeper. Answer: A Topic: Study Guide Question, Autonomous Expenditure Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

102) If investment increases by $150 and, in response, equilibrium expenditure rises by $600, A) the multiplier is 0.25. B) the multiplier is 4.0. C) the MPC is 4. D) the slope of the AE curve is 3.0. Answer: B Topic: Study Guide Question, The Multiplier Effect Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 4 The Multiplier and the Price Level 1) The aggregate demand curve slopes downward because of A) the multiplier. B) the MPC. C) wealth and substitution effects. D) import and taxation effects. Answer: C Topic: Aggregate Demand Curve and the Price Level Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 2) If the price level rises, the purchasing power of wealth A) increases. B) does not change. C) decreases. D) increases at first but in the long run decreases. Answer: C Topic: Aggregate Demand Curve and the Price Level Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 3) The intertemporal substitution effect of a change in the price level results from a A) change in the price of current goods relative to future goods. B) change in the purchasing power of wealth. C) change in the price of foreign goods relative to domestic goods. D) Both answers B and C are correct. Answer: A Topic: Aggregate Demand Curve and the Price Level Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

4) Intertemporal substitution means changes in purchases A) through time. B) between imports and exports. C) across different stores. D) across different goods and services. Answer: A Topic: Aggregate Demand Curve and the Price Level Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 5) The larger the multiplier, the ________ the AE curve and the ________ the AD curve from an increase in investment. A) steeper; smaller the shift in B) steeper; larger the shift in C) flatter; larger the movement along D) flatter; smaller the movement along Answer: B Topic: AE, AD, and Change in Autonomous Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 6) If investment decreases, the AE curve shifts A) upward and the AD curve shifts rightward. B) downward and the AD curve shifts leftward. C) upward and there is a movement along the AD curve. D) downward and there is a movement along the AD curve. Answer: B Topic: AE, AD, and Change in Autonomous Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 7) Which of the following shifts the aggregate demand curve rightward? A) an increase in the price level B) an increase in the income tax rate C) an increase in government expenditure D) a decrease in investment Answer: C Topic: AE, AD, and Change in Autonomous Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

8) An increase in investment spending results in a ________ the aggregate expenditure curve and ________ the aggregate demand curve. A) movement along; a shift in B) shift in; a movement along C) shift in; has no effect on D) shift in; a shift in Answer: D Topic: AE, AD, and Change in Autonomous Expenditure Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 9) Which of the following shifts the aggregate expenditure curve AND shifts the aggregate demand curve? I. a decrease in investment II. a change in the price level III. an increase in exports A) I and II B) I and III C) II and III D) III only Answer: B Topic: AE, AD, and Change in Autonomous Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 10) Because the short-run aggregate expenditure model assumes that the price level is ________, its predicted effect of changes in autonomous expenditure on equilibrium output is ________ than the prediction of the AD/SAS model. A) fixed; greater B) fixed; less C) flexible; greater D) flexible; less Answer: A Topic: AE Curve, AD Curve, and the Price Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

11) A fall in the price level A) shifts the aggregate expenditure curve upward and increases the quantity of real GDP demanded. B) shifts the aggregate demand curve rightward and increases equilibrium GDP. C) decreases aggregate planned expenditures and shifts the aggregate demand curve leftward. D) shifts both the aggregate expenditures curve and aggregate demand curve upward. Answer: A Topic: AE Curve, AD Curve, and the Price Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 12) An increase in the price level results in a A) downward shift in the AE curve and a movement up along the AD curve. B) downward shift in both the AE and AD curves. C) downward shift in the AD curve and a movement down along the AE curve. D) leftward movement along both the AE and AD curves. Answer: A Topic: AE, AD, and the Price Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 13) A shift in the aggregate expenditure curve as a result of an increase in the price level results in a A) leftward shift in the aggregate demand curve. B) movement down along the aggregate demand curve. C) rightward shift in the aggregate demand curve. D) movement up along the aggregate demand curve. Answer: D Topic: AE, AD, and the Price Level Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 14) Any change in the price level will result in a A) shift in the AE curve and a movement along the AD curve. B) movement along the AE curve and a shift of the AD curve. C) shift in the AE and AD curves in the same direction. D) shift in the AE and AD curves in opposite directions. Answer: A Topic: AE Curve, AD Curve, and the Price Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

15) If the price level increases, the AE curve shifts A) upward and the AD curve shifts leftward. B) downward and the AD curve shifts rightward. C) upward and we move along the AD curve. D) downward and we move along the AD curve. Answer: D Topic: AE Curve, AD Curve, and the Price Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 16) An increase in ________ shifts the AE curve ________ and an increase in ________ shifts the aggregate demand curve ________. A) autonomous expenditure; upward; the price level; leftward B) the price level; downward; autonomous expenditure; rightward C) the price level; upward; autonomous expenditure; leftward D) autonomous expenditure; upward; the price level; rightward Answer: B Topic: AE, AD, and the Price Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 17) The multiplier measures the A) horizontal shift in the aggregate demand curve from an increase in autonomous spending. B) vertical shift in the aggregate demand curve from an increase in autonomous spending. C) horizontal difference between two points on the same aggregate demand curve. D) vertical difference between two points on the same aggregate demand curve. Answer: A Topic: The Multiplier and the Change in Aggregate Demand Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 18) An increase in the price level decreases planned expenditure because A) real wealth decreases, thus decreasing expenditure. B) current prices rise relative to future prices, increasing expenditure. C) domestic prices rise relative to foreign prices, increasing net exports. D) the real interest rate rises, increasing consumption expenditure. Answer: A Topic: Aggregate Expenditure and the Price Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

19) An increase in the price level decreases planned expenditures because A) real wealth increases, decreasing expenditure. B) current prices rise relative to future prices, decreasing expenditure. C) domestic prices rise relative to foreign prices, increasing net exports. D) the real interest rate rises, increasing expenditure. Answer: B Topic: Aggregate Expenditure and the Price Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 20) When autonomous expenditure changes, the horizontal distance by which the aggregate demand curve shifts A) depends on the size of the multiplier. B) depends on the size of the wealth effect. C) is increased by the existence of automatic stabilizers. D) is determined by the inverse of the multiplier. Answer: A Topic: Aggregate Demand Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 21) In general, an increase in autonomous expenditure that is NOT created by a change in the price level results in a A) rightward shift of the AD curve. B) movement upward along the AD curve. C) movement downward along the AD curve. D) leftward shift of the AD curve. Answer: A Topic: Change in Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

22) Suppose that in a particular economy, the multiplier is equal to 5. In terms of aggregate demand and aggregate supply, this value for the multiplier means that after an increase in investment A) at each level of real GDP, the aggregate demand curve shifts upward by an amount equal to 5 times the change in investment. B) at each level of real GDP, the aggregate supply curve shifts upward by an amount equal to 5 times the change in investment. C) at each price level, the aggregate supply curve shifts rightward by an amount equal to 5 times the change in investment. D) at each price level, the aggregate demand curve shifts rightward by an amount equal to 5 times the change in investment. Answer: D Topic: The Multiplier and the Price Level Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills 23) In an economy, the multiplier is 3. If government expenditure increases by $1 million, then in the short run, the price level ________ and real GDP ________ $3 million. A) falls; decreases by less than B) rises; equals C) rises; increases by less than D) rises; decreases by less than Answer: C Topic: The Multiplier and the Price Level Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 24) The government increases its expenditures. The steeper the SAS curve, the ________ will be the increase in the price level and the ________ will be the increase in real GDP. A) larger; larger B) larger; smaller C) smaller; larger D) smaller; smaller Answer: B Topic: The Multiplier and the Price Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

25) With a steep short-run aggregate supply curve, A) an increase in government expenditure will not have an impact on the price level. B) fiscal policy will be an effective tool to reduce unemployment without raising prices too much. C) an increase in taxes that does not change potential GDP will not decrease real GDP by much. D) there is a large change in real GDP whenever the price level rises. Answer: C Topic: Contractionary Fiscal Policy Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 26) Taking into account the upward-sloping short-run aggregate supply curve, the short-run effect of an increase in government expenditure on real GDP is that A) real GDP increases by more in the short run than in the long run. B) real GDP increases by the same amount in the short run as in the long run. C) real GDP increases by less in the short run than in the long run. D) real GDP does not change in the short run because the price level increases. Answer: A Topic: The Multiplier and the Price Level Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills 27) Because of changes in the ________, the long-run effect of a $10 increase in investment on real GDP equals ________. A) interest rate; zero B) interest rate; $10 C) money wage rate and price level; zero D) money wage rate and price level; $10 Answer: C Topic: The Multiplier and the Price Level Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills 28) The size of the multiplier A) is unaffected by the amount of time that elapses. B) increases in the long run. C) decreases in the long run. D) is constant in the long run. Answer: C Topic: Long-Run Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 103 Copyright © 2014 Pearson Education, Inc.

29) The multiplier effect is smallest A) in the long run. B) in the short run. C) when the price level is fixed. D) when the economy is in a recession. Answer: A Topic: Long-Run Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 30) The short-run multiplier is equal to 3, real GDP equals potential GDP of $8,000, and the price level is equal to 100. Suppose that government expenditure decreases by $200. The longrun effect of the decrease in government expenditure changes real GDP by A) a decrease of 600. B) an increase of 600. C) nothing; that is, in the long run real GDP equals $8,000. D) a decrease of $200 because the long-run multiplier is 1. Answer: C Topic: Long-Run Multiplier Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Analytical Skills 31) After an increase in autonomous spending, in the long run, changes in the price level A) will make the AE curve steeper. B) will make the AE curve flatter. C) will reduce the effect of the multiplier. D) will not affect the multiplier. Answer: C Topic: Long-Run Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 32) In the long run, the multiplier A) is greater than 1 because of the position and slope of the SAS curve. B) is twice the short-run multiplier. C) is 0. D) depends on the slope of the AD curve. Answer: C Topic: Long-Run Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

33) When the economy is at full employment and investment increases, in the long run the price level will ________ and, if potential GDP does not change, in the long run real GDP will ________. A) increase; increase B) decrease; not change C) decrease; decrease D) increase; not change Answer: D Topic: Long-Run Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 34) A fall in the price level shifts the AE curve ________ and ________ equilibrium expenditure. A) upward; increases B) upward; decreases C) downward; increases D) downward; decreases Answer: A Topic: Study Guide Question, Aggregate Demand and the Price Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 35) If the multiplier is 4.0 and investment decreases by $2.5 billion, the AD curve A) shifts rightward by $10 billion. B) shifts rightward by less than $10 billion. C) shifts leftward by $10 billion. D) shifts leftward by more than $30 billion. Answer: C Topic: Study Guide Question, The Multiplier and Aggregate Demand Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 36) The multiplier is 2.5 and the SAS curve is upward sloping. Investment increases by $20 billion. In the short run, equilibrium real GDP will A) increase by $50 billion. B) increase by less than $50 billion. C) decrease by $50 billion. D) decrease by less than $50 billion. Answer: B Topic: Study Guide Question, Short-Run Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 105 Copyright © 2014 Pearson Education, Inc.

37) The multiplier is 5.0 and autonomous expenditure increases by $30 billion. If potential real GDP is unaffected, in the long run, equilibrium real GDP will A) increase by $50 billion. B) increase by more than $50 billion. C) increase by less than $50 billion. D) not change. Answer: D Topic: Study Guide Question, Long-Run Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 5 Mathematical Note: The Algebra of the Keynesian Model 1) Suppose the consumption function is given by the equation C = 100 + 0.8YD, where YD is disposable income. What is the marginal propensity to consume? A) 0.2 B) 0.8 C) 2.0 D) 100 Answer: B Topic: Marginal Propensity to Consume Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 2) Suppose the consumption function is given by the equation C = 100 + 0.8YD, where YD is disposable income. What is the marginal propensity to save? A) 0.2 B) 0.8 C) 2.0 D) 100 Answer: A Topic: Marginal Propensity to Save Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

6 News Based Questions 1) In 2007, investment in France increased by 7 billion euros. Assume the price level was constant, the multiplier was 5 and the economy was at full employment. As a result, equilibrium expenditure A) increased by 35 billion euros. B) increased by 1.4 billion euros C) decreased by 35 billion euros. D) decreased by .71 billion euros. Answer: A Topic: The Multiplier Effect Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 2) In 2007, investment in France increased by 7 billion euros, consumption increased by 4 billion euros and government spending increased by 1.5 billion euros. Assume the price level was constant and the economy was at full employment. As a result, suppose that equilibrium expenditure increased by 21 billion euros. In this example, ________ is the induced expenditure and ________ is autonomous expenditure. A) consumption; government spending B) investment; consumption C) investment; government spending D) government spending; equilibrium expenditure Answer: B Topic: Autonomous Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 3) "Few if any economists anticipated the extent of the inventory adjustment... Production cutbacks have been much greater than expected. Those cuts have weakened the industrial sector considerably." As a result of these changes, the U.S. government lowered its estimate of fourthquarter growth in real GDP. www.businessweek.com 3/12/2007 The article suggests that ________. A) planned expenditures exceeded real GDP in 2006. B) real GDP exceeded planned expenditures in 2006. C) the AE curve shifted upward in 2007. D) the AD curve shifted rightward in 2007. Answer: B Topic: Real GDP with a Fixed Price Level Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 107 Copyright © 2014 Pearson Education, Inc.

4) The software and related services sector has a multiplier effect on the Indian economy with every one-rupee input spent by the" information technology sector" producing an increase in real GDP by two rupees. www.ft.com, 2/28/2008 According to the story, if ________ in the software and related services sector increases by $15 billion, real GDP will increase by ________. A) investment; $30 billion. B) consumption; $30 billion. C) consumption; $2 billion. D) investment; $2 billion. Answer: A Topic: The Multiplier Effect Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 5) Mauritius, an island off the coast of Africa, competes with other countries producing goods with low-skilled labor. In 2006, it was reported that its "... factories have been exposed to ... competition from China, India and other Asian mass producers." As a result, "the main export industry has seen a 30 per cent reduction in volume ..." www.ft.com, 3/13/2006 The story describes A) a decrease in autonomous expenditure. B) a decrease in induced expenditure. C) an unplanned decrease in inventories. D) an increase in equilibrium expenditure. Answer: A Topic: Autonomous Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication

6) Mauritius, an island off the coast of Africa, competes with other countries producing goods with low-skilled labor. In 2006, it was reported that ..."its clothing factories have been exposed to frontal competition from China, India and other Asian mass producers." As a result, "the main export industry has seen a 30 per cent reduction in volume ..." www.ft.com, 3/13/2006 Suppose real GDP is $14 billion, exports total $2 billion and the multiplier is 4. If exports decline by $600,000,000, real GDP in Mauritius will A) increase by $2.4 billion B) decrease by $2.4 billion. C) decrease by $8 billion. D) increase by $4 billion. Answer: B Topic: The Multiplier Effect Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 7) In an article regarding Bangladesh's economy, the author suggests that the government ..."[g]ive double tax breaks on investment dollars. Give a tax break to R&D [research and development]. Give a tax break on donations to educational institutions." www.groundreport.com, March 24, 2008 The increase in investment is considered ________ and will generate a larger increase in ________. A) equilibrium spending; autonomous expenditure B) autonomous expenditure; induced expenditure C) induced expenditure; autonomous expenditure D) autonomous expenditure; multiplier spending. Answer: B Topic: Autonomous Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

8) In an article regarding Bangladesh's economy, the author suggests that the government ..."[g]ive double tax breaks on investment dollars. Give a tax break to R&D [research and development]. Give a tax break on donations to educational institutions." www.groundreport.com, March 24, 2008 Suppose the multiplier in Bangladesh is 2. If the government enacts the proposed policies and ________, aggregate expenditure ________ in the short run. A) induced expenditure increases by $5 billion; increases by $10 billion. B) autonomous expenditure decreases by $10; decreases by $5 billion. C) equilibrium expenditure increases by $8 billion; increases by $16 billion. D) autonomous expenditure increases by $10 billion; increases by $20 billion. Answer: D Topic: The Multiplier Effect Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 9) In an article regarding Bangladesh's economy, the author suggests that the government ..."[g]ive double tax breaks on investment dollars. Give a tax break to R&D [research and development]. Give a tax break on donations to educational institutions." www.groundreport.com, March 24, 2008 Suppose the multiplier in Bangladesh is 2. As a result of enacting the proposed policies, which of the following describe possible outcomes in the short run? I. an $20 billion increase in investment will increase aggregate expenditure by $40 billion. II. the AE curve will shift upward. III. there will be an unplanned increase in inventories. A) I,II and III. B) I and II only. C) I and III only. D) II and III only. Answer: B Topic: The Multiplier Effect Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

10) In the third quarter of 2008, investment in the U.S. totaled $1.4 trillion and in 2007, investment was $1.3 trillion. The change in investment A) is a change in autonomous expenditure. B) is a change in equilibrium expenditure. C) is a change in induced expenditure. D) will increase the multiplier. Answer: A Topic: Autonomous Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 11) An estimate of the MPC in the U.S. is 0.90. Paul Krugman, the 2008 Nobel Prize winner in economics, stated, "... you'd be hard pressed to argue for an overall multiplier as high as 2." www.nytimes.com, 11/10/2008 What factors could explain the difference between the MPC and Krugman's estimate of the multiplier? A) exports and investment. B) investment and imports. C) imports and taxes. D) taxes and investment. Answer: C Topic: The Multiplier, Imports, and Income Taxes Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 12) In the third quarter of 2008, investment in the U.S. totalled $1.4 trillion and in 2007, investment was $1.3 trillion. In addition, third quarter real GDP was $11 trillion. Suppose the MPC in the U.S. is 0.80. Ignoring the effects of imports and taxes, the multiplier is ________ and the change in investment will decrease equilibrium expenditure by ________. A) 2; $1 trillion. B) 5; $1 trillion. C) 2; $200 million. D) 5; $500 million. Answer: D Topic: The Multiplier Effect Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

13) In an article regarding Bangladesh's economy, the author suggests that the government ..."[g]ive double tax breaks on investment dollars. Give tax break to R&D [research and development]. Give tax break on donations to educational institutions." www.groundreport.com, March 24, 2008 As a result of enacting the policies, the AE curve will shift ________ and the AD curve will shift ________. A) upward; leftward B) upward; rightward C) downward; rightward D) downward; leftward Answer: B Topic: AE, AD, and Change in Autonomous Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 14) Mauritius, an island off the coast of Africa, competes with other countries producing goods with low-skilled labor. In 2006, it was reported that its "... factories have been exposed to ... competition from China, India and other Asian mass producers." As a result, "the main export industry has seen a 30 per cent reduction in volume ..." www.ft.com, 3/13/2006 The decrease in exports represents a change in ________ expenditure and will cause ________. A) induced; a downward shift in the AE curve and a leftward shift in the AD curve B) autonomous; a downward shift in the AE curve and a leftward shift in the AD curve C) induced; an upward shift in the AE curve and a leftward shift in the AD curve D) autonomous; a downward shift in the AE curve and a rightward shift in the AD curve Answer: B Topic: AE, AD, and Change in Autonomous Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

15) Mauritius, an island off the coast of Africa, competes with other countries producing goods with low-skilled labor. In 2006, it was reported that its "... factories have been exposed to ... competition from China, India and other Asian mass producers." As a result, "the main export industry has seen a 30 per cent reduction in volume ..." www.ft.com, 3/13/2006 The decrease in exports will cause ________ and the price level will ________. A) a downward shift in the AE curve; decrease as the AD curve shifts leftward in the short run B) an upward shift in the AE curve; increase as the AD curve shifts rightward in the long run C) a leftward shift in the AD curve; fall in the short run and rise in the long run D) a leftward shift in the AD curve; rise in the long run as goods become more scarce Answer: A Topic: AE, AD, and the Price Level Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 16) In 2007, investment in France increased by 7 billion euros. Which of following occurs? I. an upward shift in the AE curve. II. a leftward shift in the AD curve. III. an increase in the price level and real GDP in the short run. IV. an increase in the price level and no change in real GDP in the long run. A) I, II, III and IV. B) I and III only. C) I, III and IV only. D) III and iv only. Answer: C Topic: AE, AD, and the Price Level Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

17) "The global financial crisis has had a considerable impact on China's export growth, which will continue to show weakness with recession in the U.S. and Europe," said a report by JP Morgan & Co. www.money.cnn.com, 11/11/2008 If Chinese exports continue to decline, the AE curve will shift ________, the price level will ________ in the short run and real GDP will ________ in the short run. A) upward; decrease; decrease B) downward; decrease; decrease C) upward; decrease; not change D) downward; decrease; not change Answer: B Topic: AE, AD, and Change in Autonomous Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 18) "The global financial crisis has had a considerable impact on China's export growth, which will continue to show weakness with recession in the U.S. and Europe," said a report by JP Morgan & Co. www.money.cnn.com, 11/11/2008 If Chinese exports continue to decline, the AE curve will shift ________, the price level will ________ in the long run and real GDP will ________ in the long run. A) downward; decrease; not change B) downward; decrease; decrease C) decrease; not change; not change D) upward; decrease; not change Answer: A Topic: AE, AD, and Change in Autonomous Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

7 Essay Questions 1) List the four components of aggregate expenditure. Explain the two-way link with real GDP. Answer: The four components of aggregate expenditure are consumption expenditure, investment, government expenditure on goods and services, and net exports. These four components sum to real GDP. The two-way link between these four parts and real GDP exists through consumption expenditure and imports, both of which are influenced by the level of real GDP. Specifically, an increase in real GDP increases these components of aggregate expenditure and an increase in aggregate expenditure increases real GDP. Topic: Expenditure Plans Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication 2) What is the consumption function? What factor leads to a movement along the consumption function? Answer: The consumption function is the relationship between disposable income and the amount of consumption expenditure, other things remaining the same. A change in disposable income results in a movement along the consumption function. Topic: Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 3) Please explain the relationship between consumption, disposable income and saving. Answer: In general, the greater the level of disposable income the greater the level of consumption. Therefore, as disposable income rises consumption rises. Any amount of disposable income not spent, or consumed, is saved. Disposable income is split between consumption and saving. Consumption, however, is not solely determined by disposable income. In fact at low levels of disposable income consumption can be greater than disposable income. This is true in the extreme when disposable income is zero and consumption is greater than zero. At times when consumption is greater than disposable income saving is negative. We are dissaving. On the other hand, if disposable income is high enough, consumption can be less than disposable income. In this case we have positive saving. Lastly, as disposable income rises, consumption rises but by less. Topic: Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication

4) What is the difference between movements along the consumption function and shifts in the consumption function? What factor or factors lead to movements along the consumption function and what factor or factors lead to shifts in the consumption function? Answer: The consumption function describes the relationship between disposable income and consumption expenditure: If disposable income increases, consumption increases and if disposable income decreases consumption decreases. Because the consumption function is illustrated using disposable income along the horizontal axis, changes in disposable income lead to movements along the consumption function. Changes in other factors that affect consumption expenditure, such as the real interest rate, wealth, and expected future income, shift the consumption function. Specifically, if the real interest rate falls, if wealth increases, or if future income is expected to increase, the consumption function shifts upward so that at any level of disposable income, consumption is greater than it otherwise would have been. Topic: Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication 5) List and explain factors that influence consumption expenditure. Answer: Disposable income is an important factor that influences consumption expenditure. There is a direct relationship between the two, so that an increase in disposable income leads to an increase in consumption expenditure. There also are three other factors that influence consumption expenditure: the real interest rate, the buying power of money, and expected future disposable income. When the real interest rate falls, the buying power of money increases, or expected future disposable income increases, consumption increases. Alternatively, when the real interest rate rises, the buying power of money decreases, or expected future income decreases, consumption expenditure decreases. Topic: Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication 6) How is it possible for consumption expenditure to be positive even when disposable income is zero? Answer: Consumption expenditure can be positive when disposable income is zero because people can "dissave," that is, they can use their past saving to finance current consumption expenditure. Dissaving cannot occur indefinitely because eventually people's savings will be dissipated. Topic: Autonomous Consumption Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

7) What is the marginal propensity to consume? Why it is an important concept? Answer: The marginal propensity to consume, MPC, is the fraction of a change in disposable income that is consumed, or where △ means "change in." The MPC tells what fraction of an increase in disposable income is spent on consumption. The MPC is an important concept because it affects the multiplier: The larger the MPC, everything else the same, the larger the multiplier. Topic: Marginal Propensity to Consume Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 8) What is the marginal propensity to consume? Can the marginal propensity to consume be greater than 1? Answer: The marginal propensity to consume is the change in consumption expenditure divided by the change in disposable income that brought it about. The marginal propensity to consume cannot be greater than 1. Indeed, it is less than 1 because people save part of an increase in disposable income. Topic: Marginal Propensity to Consume Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 9) What does the marginal propensity to consume measure and how is it related to the consumption function? Answer: The marginal propensity to consume, or MPC, is the change in consumption expenditure divided by the change in disposable income. The MPC, tells the proportion of any change in disposable income spent on consumption expenditure. The marginal propensity to consume is equal to the slope of the consumption function. Topic: Marginal Propensity to Consume Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 10) What is the relationship between U.S. real GDP and U.S. imports? Answer: When U.S. real GDP increases, so does U.S. income. And the increase in income leads to an increase in U.S. imports. Topic: Import Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

11) Discuss the link between real GDP and imports. Answer: Imports are one of two components that are influenced by changes in U.S. real GDP and so imports are referred to as an induced expenditure. Other things the same, an increase in U.S. real GDP leads to an increase in U.S. imports. As U.S. income increases, households purchase more domestic as well as more foreign goods and services. Topic: Import Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 12) What is the difference between induced and autonomous expenditure? Which components of aggregate expenditure fall under which category? Answer: Induced expenditure is expenditure that depends on the level of real GDP, so that when real GDP changes, induced expenditure changes. Autonomous expenditure is independent of the level of real GDP, so that when real GDP changes, autonomous expenditure does not change. Consumption expenditure includes elements of both autonomous and induced expenditure. So, too, do imports. However, investment, government expenditure on goods and services, and exports are all autonomous expenditures. Topic: Induced Versus Autonomous Expenditure Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 13) Define induced expenditure and autonomous expenditure. Which expenditure items are induced expenditure and which are autonomous expenditure? Answer: Induced expenditure is aggregate expenditure that changes as real GDP changes. Consumption expenditure and imports respond to changes in real GDP, so they have induced components. Autonomous expenditure is aggregate expenditure that does not change as real GDP changes. Investment, government expenditure, and exports are autonomous expenditures. Consumption expenditure also has an autonomous component. Topic: Induced Versus Autonomous Expenditure Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 14) List the components of aggregate expenditure and describe how each of them change as real GDP increases. Answer: The components of aggregate expenditure are consumption expenditure, investment, government expenditure on goods and services, exports, and imports. As real GDP increases, consumption expenditure and imports increase. However, investment, government expenditure on goods and services, and exports do not change—they are examples of autonomous expenditure, spending that does not change when real GDP changes. Topic: Induced Versus Autonomous Expenditure Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 118 Copyright © 2014 Pearson Education, Inc.

15) "Similar to imports, U.S. exports depend on the level of U.S. real GDP so that if real GDP increases, U.S. exports increase." Explain whether the previous sentence is correct or incorrect. Answer: The sentence is incorrect along two dimensions. First, U.S., exports do not depend on U.S. real GDP. Indeed, U.S. exports are part of autonomous spending. Second, because U.S. exports do not depend on U.S. real GDP, they definitely do not increase when U.S. real GDP increases. Topic: Autonomous Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 16) "Aggregate planned expenditure is the sum of planned consumption expenditure, investment, government expenditure on goods and services, and exports minus imports." Is the previous statement correct or incorrect? Answer: The statement accurately describes aggregate planned expenditure. Topic: Aggregate Expenditure Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 17) Explain the relationships between real GDP, aggregate planned expenditure, induced expenditure, and unplanned investment. Answer: All buyers in the economy make expenditure plans. Aggregate planned expenditure equals the sum of these buying plans. Aggregate planned expenditure is divided into four components: consumption expenditure, investment, government expenditure on goods and services, and net exports. Investment, government expenditure, and exports are autonomous expenditures because they do not vary with the level of real GDP. Consumption expenditure and imports, however, are affected by the level of real GDP and so are induced expenditures. If aggregate planned expenditure differs from real GDP, not all planned expenditure can be carried out. In this situation, firms' inventories change in an unplanned manner. When aggregate planned expenditure is less that real GDP, inventories increase beyond what was planned and when aggregate planned expenditure is greater than real GDP, inventories decrease beyond what was planned. Because changes in inventories are included in investment, when there are unplanned changes in inventories there is unplanned investment. Topic: Aggregate Expenditure Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication

18) At the equilibrium level of aggregate expenditure, what does aggregate planned expenditure equal? What happens at other levels of real GDP to bring about an equilibrium? Answer: At the equilibrium level of aggregate expenditure, aggregate planned expenditure is equal to real GDP. At levels of real GDP where aggregate planned expenditure is greater than real GDP, business inventories are less than their target levels. In this situation, businesses increase their production, so output increases and real GDP increases. At levels of real GDP where aggregate planned expenditure is less than real GDP, business inventories are greater than their target levels. In this situation, businesses decrease their production, so output decreases and real GDP decreases. Topic: Equilibrium Expenditure Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication 19) "If aggregate planned expenditure exceeds real GDP, then real GDP will increase." Explain whether the previous sentence is correct or incorrect. Answer: The sentence is correct. If aggregate planned expenditure exceeds real GDP, then firms find that their inventories are being decreased more than planned. As a result, firms increase production in order to restore their inventories back to their planned levels. When firms increase their production of goods and services, real GDP increases. Topic: Equilibrium Expenditure Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 20) What is unplanned investment? How does it occur? Answer: Unplanned investment occurs when inventories grow larger than planned. The difference between the actual change in inventories and the planned change is unplanned investment. Unplanned investment occurs when aggregate planned expenditure is less than real GDP so firms sell less output than they had planned. Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 21) If real GDP exceeds aggregate planned expenditure, what happens to firm's unplanned inventories? Answer: If real GDP exceeds aggregate planned expenditure, firms are producing more goods and services than households, firms, and governments are planning to buy. As a result, firms will not be able to sell all of their production. The unsold amounts will wind up in their inventories and so unplanned inventory increases. Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

22) If unplanned inventory changes are positive, what is the relationship between aggregate planned expenditure and real GDP? Answer: If unplanned inventory changes are positive, firms are not selling all the goods and services they had produced. In this case, aggregate planned expenditure is less than real GDP. Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 23) How do firms respond to unplanned inventory changes? What is the effect on their production and GDP? Answer: If inventories are above their target levels, that is, more than planned so there is an unplanned increase in inventories, firms decrease their production. As a result, GDP decreases. Conversely, if inventories are below their target levels, that is, less than planned so there is an unplanned decrease in inventories, firms increase their production. In this case, GDP increases. Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 24) Explain the relationship between real GDP and aggregate planned expenditure, AE. What change to inventories takes place when the two are not equal? Answer: If the GDP and aggregate planned expenditure are equal, then there is an equilibrium. But if aggregate planned expenditure is not equal to real GDP, the economy is out of equilibrium. If aggregate planned expenditure is greater than real GDP, then households, firms, and governments plan to buy more goods and services than firms are producing. Firms meet the extra demand by allowing their inventories to decrease. The decrease is unplanned on the part of firms. So when aggregate planned expenditure exceeds real GDP, there is an unplanned decrease in inventories. Similarly, if aggregate planned expenditure is less than real GDP, households, firms, and governments plan to buy less than firms produce and so there is an unplanned increase in firms' inventories. Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 25) Does aggregate planned expenditure always equal real GDP? Answer: No, aggregate planned expenditure does not always equal real GDP. Actual aggregate expenditure always equals real GDP, but aggregate planned expenditure equals real GDP only when the economy is at an expenditure equilibrium. Topic: Actual Expenditures and Planned Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

26) Suppose that firms find that their inventories are less than planned. In this case, what is the initial relationship between aggregate planned expenditure and real GDP? Using the aggregate expenditure model, what adjustments, if any, take place? Answer: If inventories are less than planned, aggregate planned expenditure exceeds real GDP. In order to restore their inventories to their desired levels, firms will increase their production. As a result, real GDP increases. Inventories remain less than planned and real GDP continues to increase until eventually real GDP reaches its equilibrium level, at which point actual and planned inventories are equal. Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 27) How does the economy adjust so that aggregate planned expenditure equals real GDP? Answer: Equilibrium occurs when real GDP equals the aggregate planned expenditure so that unplanned inventory change is zero. The unplanned changes to inventory are the key signal that induces firms to change their production and drive the economy to its equilibrium. For example, if aggregate planned expenditure is greater than real GDP, firms find their inventory levels falling. This change is an unplanned reduction so firms respond by increasing production and, as a result, real GDP and disposable income increase. The increase in real GDP moves the economy closer to equilibrium but the increase in disposable income leads to an increase in induced aggregate expenditures. However the increase in induced aggregate expenditures is less than the increase in real GDP, so the difference between aggregate planned expenditure and real GDP shrinks. As long as there is unplanned decreases in inventories, firms continue to increase their production so that real GDP continues to increase. Ultimately equilibrium is reached when unplanned inventory changes are zero and so aggregate planned expenditures equal real GDP. Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication 28) A country reports that it has an unplanned inventory increase of $1.0 trillion. Discuss how the economy adjusts until it reaches an unplanned inventory change of $0.0 trillion. Answer: When unplanned inventory changes are positive, real GDP exceeds aggregate planned expenditures. There is an inventory build up, so firms decrease production and as a result real GDP decreases. Firms continue to decrease production until real GDP equals aggregate planned expenditures and unplanned inventory changes equal zero. Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

29) Explain the basic idea of the expenditure multiplier and the role consumers play in determining its magnitude. Answer: The basic idea of the multiplier is that any increase in expenditure will increase real GDP by a larger (a multiple) amount. The magnitude of the multiplier basically depends on how strongly consumers respond to additional income. Any initial increase in expenditure increases aggregate expenditure, which leads to more production and an increase in real GDP and income. Thus an increase, say in investment, generates an increase in income and this increase, in turn, induces an increase in consumption expenditure. The second round, the increase in consumption expenditure, is the result of the first round, the increase in investment. But the story does not stop with just two rounds. The initial increase in expenditure sets off a chain of increases because the second round increase in consumption leads to yet another increase in GDP and income. As a result of this next increase in income, consumption expenditure increases another time and a third round of expenditure increases occurs. The final result of all the rounds has real GDP increasing many fold compared to the initial increase in investment. Topic: The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication 30) Explain why the multiplier is greater than 1. Answer: The multiplier is greater than 1 because increases in real GDP induce further increases in expenditure. For instance, suppose Intel spends $500 million building a new factory. As a result, the disposable income of the workers constructing the factory increase. With the increase in their disposable income, these workers increase their consumption expenditure. Perhaps they all purchase new Ford SUVs. Ford must employ additional workers to build these SUVs, and so these workers' incomes increase. Possibly the Ford workers all buy new stoves. Hence the initial increase in Intel's investment has induced additional consumption expenditure upon SUVs and stoves. And the process won't stop with the stoves because the workers who make the stoves will increase their consumption expenditure. All of the added consumption expenditure makes the multiplier greater than 1. Topic: The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication 31) What effect does an increase in the MPC have on the slope of the AE curve? Answer: An increase in the MPC increases the slope of the AE curve and thereby makes it steeper. Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

32) What is the relationship between the MPC and the slope of the AE curve? Answer: If there are no imports or income taxes, then the slope of the AE curve equals the MPC. If there are imports and income taxes, then the slope of the AE curve is less than the MPC. In either case, an increase in the MPC increases the slope of the AE curve. Topic: The Slope of the Aggregate Expenditure Curve and the Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 33) What is the relationship between the slope of the aggregate expenditure curve and the multiplier? Answer: The multiplier equals . This result does not change regardless of the existence or absence of imports or income taxes. Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 34) What is the mathematical formula for the multiplier? Why is there a multiplier? Answer: In general, the multiplier equals . If, however, there are no income taxes or imports, the multiplier equals

, or, equivalently,

. There is a

multiplier because a change in autonomous expenditure creates an additional change in induced expenditure. As a result, the equilibrium total change in aggregate expenditure exceeds the initial autonomous change. The multiplier is the amount by which the initial change in autonomous expenditure is multiplied to determine the change in equilibrium expenditure. Topic: The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 35) Explain what happens to equilibrium expenditure if autonomous expenditure increases by $100 million. Answer: Equilibrium expenditure will increase by more than $100 million because of the multiplier. Basically, the $100 million increase in spending induces further increases in aggregate expenditure because the initial increase in expenditure increases income, which, in turn, causes further increases in expenditure and income. Topic: The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

36) Suppose the MPC = 0.90 and there are no taxes or imports. What dos the multiplier equal? If the initial equilibrium aggregate expenditure is $12 trillion, what will be the effect on aggregate expenditure of a $100 billion increase in investment? Answer: The multiplier equals 1/(1 - MPC), so the multiplier equals 1/(1 - 0.9) = 1/(0.1) = 10. With a multiplier of 10, a $100 billion increase in investment results in a (10) × ($100 billion) = $1 trillion increase in aggregate expenditure, so the new equilibrium aggregate expenditure is $13 trillion. Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 37) How do imports and income taxes affect the multiplier? Why do they have this effect? Answer: Income taxes and imports shrink the multiplier. They have this effect because they mean that increases in GDP translate into smaller increases of spending on domestic goods and services. Topic: The Multiplier, Imports, and Income Taxes Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 38) "If the income tax rate is high enough, the multiplier can be negative." Is the previous statement correct or incorrect? Answer: The statement is incorrect. The higher the income tax rate, the smaller the multiplier, but the multiplier always remains positive. Topic: The Multiplier, Imports, and Income Taxes Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 39) Discuss how the marginal propensity to consume, imports, and income tax rates influence the multiplier. Answer: The simple multiplier, in an economy with no imports or income taxes, is 1/(1 - MPC), where MPC is the marginal propensity to consume. The MPC measures how much consumption changes when disposable income changes. The larger is the MPC, the larger is the multiplier. Both the taxes and imports decrease the size of the multiplier because both taxes and imports "divert" changes in GDP from consumption expenditure on domestic goods and services. The larger the income tax rate and the larger the marginal propensity to import, the smaller the multiplier. The larger the income tax rate, the smaller the change in disposable income from any change in GDP and, as a result, the smaller than induced change in consumption expenditure. The larger the marginal propensity to import, the more increased consumption expenditure falls on imported goods and so the smaller the effect on domestically produced goods and services. Topic: The Multiplier, Imports, and Income Taxes Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 125 Copyright © 2014 Pearson Education, Inc.

40) List and explain factors that determine the size of the multiplier in the aggregate expenditure model when prices are constant. Answer: The size of the multiplier depends on three factors: the marginal propensity to consume, the marginal propensity to import, and the income tax rate. The larger the marginal propensity to import and the larger the tax rate, the smaller the multiplier. These two factors decrease the size of the multiplier because imports reduce spending on U.S. produced products and income taxes reduce the impact of a change in real GDP on consumption expenditure. On the other hand, the larger the marginal propensity to consume, the larger the multiplier. Topic: The Multiplier, Imports, and Income Taxes Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 41) How does the concept of the multiplier help explain business cycle turning points? Answer: Business cycle turning points are the point in the business cycle during which the economy either goes from expansion to recession, or recession to expansion. If the economy is at a peak, an expansion is turning into a recession. At this point, aggregate planned expenditures decrease because of a decrease in an autonomous component of expenditure. Real GDP is now greater than aggregate planned expenditure. Inventories rise and firms respond to rising inventories by cutting production, so that real GDP decreases. The multiplier process works and consumption falls by a multiple of the decrease in real GDP. The economy moves into recession. Just the reverse occurs at a trough. At a trough the economy moves from a recession to an expansion. Expansions start as an increase in an autonomous component of aggregate expenditure. This increase boosts aggregate planned expenditures so that it exceeds real GDP. Inventories unexpectedly fall. Firms respond by raising their production, so that real GDP and disposable income increase. Induced expenditure rises by more because of the multiplier effect and so the expansion has begun. Topic: The Multiplier and Business Cycle Turning Points Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication 42) Discuss the relationship between the business cycle and changes in autonomous expenditures. Answer: An increase in autonomous expenditure increases aggregate planned expenditure. At the moment the economy turns the corner into expansion, aggregate planned expenditure exceeds real GDP. Firms' inventories become less than their target levels, so firms increase production in order to build up their inventories. The reverse happens when a recession begins. A decrease in autonomous expenditure decreases aggregate planned expenditure. When the economy turns the corner into recession, aggregate planned expenditure is less than real GDP. As a result firms' inventories exceed their target levels, and so firms decrease production in order to decrease their inventories. Topic: The Multiplier and Business Cycle Turning Points Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Communication 126 Copyright © 2014 Pearson Education, Inc.

43) "When the price level increases, aggregate planned expenditure increases and equilibrium expenditure increases." Is the preceding statement correct or incorrect? Briefly explain your answer. Answer: The statement is incorrect. An increase in the price level decreases aggregate planned expenditure because the purchasing power of money falls, the real interest rises, and the price of imports become less expensive relative to domestically produced goods. Because aggregate planned expenditure decreases, equilibrium expenditure decreases. Topic: AE Curve, AD Curve, and the Price Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 44) How does an increase in the price level affect the aggregate expenditure curve and the aggregate demand curve? Answer: An increase in the price level shifts the aggregate expenditure curve downward and leads to a movement upward along the aggregate demand curve. Topic: AE Curve, AD Curve, and the Price Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 45) An increase in the price level shifts the aggregate expenditure curve downward and results in a movement along the aggregate demand curve. Why does an increase in the price level result in a shift in the aggregate expenditure curve rather than a movement along it? Answer: The increase in the price level shifts the aggregate expenditure curve because the aggregate expenditure curve plots expenditure against real GDP. In other words, the curve shows how aggregate planned expenditure changes when real GDP changes. Thus a change in real GDP results in a movement along the aggregate expenditure curve. But the effect from an increase in the price level creates a shift in the curve because at any level of real GDP, a higher price level means a lower level of expenditure. Because the effect of the higher price level applies at all levels of real GDP, the aggregate expenditure curve shifts downward. Topic: AE Curve, AD Curve, and the Price Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 46) What is the relationship between the aggregate expenditure curve and the aggregate demand curve? Explain the relationship. Answer: The aggregate demand curve is derived using the aggregate expenditure curve. The aggregate expenditure curve shows how equilibrium expenditure changes when the price level changes. Then the aggregate demand curve plots the price level and the resulting equilibrium expenditure to illustrate how equilibrium expenditure (and hence the aggregate quantity of real GDP demanded) depends on the price level. Topic: AE Curve, AD Curve, and the Price Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 127 Copyright © 2014 Pearson Education, Inc.

8 Numeric and Graphing Questions Consumption Disposable expenditure income (trillions (trillions of 2005 of 2005 dollars) dollars) 0.0 0.8 1.0 1.6 2.0 2.4 3.0 3.2 4.0 4.0 1) The above table has data on the consumption function in the nation of Mojo. a) What is the amount of autonomous consumption expenditure? b) What is the marginal propensity to consume? Answer: a) Autonomous consumption expenditure equals the consumption expenditure when disposable income is $0, so autonomous consumption expenditure is $0.8 trillion. b) The marginal propensity to consume equals 0.80. Topic: Consumption Function Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 2) When disposal income is $5.0 trillion, consumption expenditure is $4.5 trillion. When disposal income is $6.0 trillion, consumption expenditure is $5.0 trillion. What is the marginal propensity to consume? Answer: The marginal propensity to consume is the change in consumption expenditure divided by the change in disposable income that brought it about. In this case, the marginal propensity to consume equals ($0.5 trillion)/($1.0 trillion) = 0.50. Topic: Marginal Propensity to Consume Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 3) When Audrey's disposable income is $40,000, her consumption expenditure is $39,000. When her disposable income is $50,000, Audrey's consumption expenditure is $47,000. What is Audrey's marginal propensity to consume? Answer: The marginal propensity to consume is the change in consumption expenditure divided by the change in disposable income that brought it about. In this case, the marginal propensity to consume equals ($8,000)/($10,000) = 0.80. Topic: Marginal Propensity to Consume Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Real GDP C I G (billions of (billions of (billions of (billions of 2005 dollars) 2005 dollars) 2005 dollars) 2005 dollars) 100 150 150 150 200 200 150 150 300 250 150 150 400 300 150 150 500 350 150 150 600 400 150 150 700 450 150 150 800 500 150 150 900 550 150 150 4) The above table gives information for the nation of North Hampton. There are no imports to or exports from North Hampton. a) Find aggregate planned expenditure for each level of real GDP. b) What is the equilibrium level of real GDP? Answer: Aggregate Real GDP expenditure (trillions of 2005 (trillions of 2005 dollars) dollars) 100 450 200 500 300 550 400 600 500 650 600 700 700 750 800 800 a) To calculate aggregate expenditure, for each level of real GDP sum consumption expenditure plus investment plus government purchases. The above table has the answers for each level of real GDP. b) Equilibrium real GDP is $800 billion because that is the level of real GDP that equals aggregate planned expenditure. Topic: Equilibrium Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

5) The above figure shows the AE curve and 45° line for an economy. a) If real GDP equals $8 trillion, how do firms' inventories compare to their planned inventories? b) If real GDP equals $16 trillion, how do firms' inventories compare to their planned inventories? c) What is the equilibrium level of expenditure? Why is this amount the equilibrium? Answer: a) If real GDP equals $8 trillion, aggregate expenditure exceeds GDP and so firms' inventories are less than planned. b) If real GDP equals $16 trillion, aggregate expenditure is less than GDP and so firms' inventories are more than planned. c) The equilibrium level of expenditure is $12 trillion because at this level of GDP, aggregate expenditure equals GDP. As a result, firms' inventories equal planned inventories so firms have no incentive to either increase or decrease production. Topic: Equilibrium Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

6) The slope of the AE curve is .80. What is the multiplier? Everything else the same, by how much does equilibrium aggregate expenditure increase if a) exports increase from $1.75 trillion to $2.25 trillion. b) government expenditure on goods and services decrease from $2.0 trillion to $1.8 trillion. c) investment increases from $1.2 trillion to $2.3 trillion. Answer: a) The change in equilibrium aggregate expenditure equals the multiplier times the change in autonomous expenditure, which is $0.5 trillion. So the change in equilibrium expenditure is 5 × ($0.5 trillion) = $2.5 trillion. b) The change in equilibrium aggregate expenditure equals the multiplier times the change in autonomous expenditure, which is -$0.2 trillion, that is, government expenditure decreases by $0.2 trillion. So the change in equilibrium expenditure is 5 × (-$0.2 trillion) = -$1.0 billion. c) The change in equilibrium aggregate expenditure equals the multiplier times the change in autonomous expenditure, which is $1.1 trillion. So the change in equilibrium expenditure is 5 × ($1.1 trillion) = $5.5 trillion. Topic: Slope of the Aggregate Expenditure Curve and The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 7) Suppose a country has no income taxes or imports. If the MPC is 0.75, what does the multiplier equal? Answer: The multiplier equals , so in this case it equals = = 4.0. Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 8) Suppose the economy has no income taxes or imports. The MPC equals 0.8. What does the expenditure model predict will be the change in real GDP if investment increases by $200 billion? Answer: The multiplier equals , so for the case in the question, the multiplier equals =

= 5.0. The change in real GDP equals the multiplier times the change in

investment, or 5.0 × $200 billion = $1,000 billion. Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

9) Suppose the economy has no income taxes or imports. How is the size of the expenditure multiplier related to the marginal propensity to consume? What is the multiplier if the MPC equals 0.25? If the MPC equals 0.50? If the MPC equals 0.90? Answer: The multiplier equals , so the larger the MPC, the larger the multiplier. If the MPC is 0.25, the multiplier is =

= 1.3. If the MPC is 0.50, the multiplier equals

= 2.0. And if the MPC is 0.90, the multiplier equals

= 10.0. So,

the larger the MPC, the larger the multiplier. Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 9 True or False 1) Components of aggregate expenditure include saving, consumption expenditure, investment and government expenditure. Answer: FALSE Topic: Expenditure Plans Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 2) In the very short term, planned investment, planned government expenditure, planned exports, planned consumption, and planned imports are all fixed and do not change when GDP changes. Answer: FALSE Topic: Fixed Prices and Expenditure Plans Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 3) The positive relationship between consumption expenditure and disposable income is shown by a movement along the consumption function. Answer: TRUE Topic: Consumption Function Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

4) A change in the real interest rate creates a movement along the consumption function. Answer: FALSE Topic: Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 5) A movement along the consumption function is the result of changes in disposable income. Answer: TRUE Topic: Consumption Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 6) If wealth increases, the consumption function shifts upward. Answer: TRUE Topic: Shifts in the Consumption Function, Wealth Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 7) As disposable income increases, saving increases. Answer: TRUE Topic: Saving Function Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 8) The marginal propensity to consume must increase as disposable income increases. Answer: FALSE Topic: Marginal Propensity to Consume Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 9) The autonomous components of aggregate expenditures are consumption, savings, and investment. Answer: FALSE Topic: Autonomous Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

10) Components of induced aggregate expenditure include government expenditure, investment and consumption expenditure. Answer: FALSE Topic: Induced Expenditures Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 11) When aggregate planned expenditure is greater than real GDP, inventories decrease. Answer: TRUE Topic: Actual Expenditures and Planned Expenditures Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 12) Actual aggregate expenditure does not always equal real GDP. Answer: FALSE Topic: Convergence to Equilibrium Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 13) If the price level is constant, a change in investment has a multiplied impact on real GDP. Answer: TRUE Topic: The Multiplier Effect Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 14) In the short run, the multiplier typically is less than 1. Answer: FALSE Topic: The Multiplier Skill: Recognition Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 15) If the change in autonomous investment equals $1 trillion and the change in real GDP equals $4 trillion, the multiplier equals 1/4. Answer: FALSE Topic: The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills

16) If the multiplier is 3, a $750,000 increase in autonomous expenditure increases equilibrium expenditure by $2.25 million. Answer: TRUE Topic: The Multiplier Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Analytical Skills 17) If there are no income taxes or imports, the multiplier equals 1/(1 - marginal propensity to consume). Answer: TRUE Topic: The Multiplier and the MPC Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 18) Income taxes reduce the size of the multiplier. Answer: TRUE Topic: The Multiplier, Imports, and Income Taxes Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 19) Imports and income taxes make the multiplier larger than it would otherwise be. Answer: FALSE Topic: The Multiplier, Imports, and Income Taxes Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 20) In the short run, an upward shift in the aggregate expenditure curve leads to a leftward shift in the short-run aggregate supply curve. Answer: FALSE Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking 21) A fall in the price level shifts the aggregate expenditure curve upward and increases the quantity of real GDP demanded. Answer: TRUE Topic: AE Curve, AD Curve, and the Price Level Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

22) The short-run impact changes in autonomous spending have on real GDP and the price level depends on aggregate supply. Answer: TRUE Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual Status: Previous edition, Chapter 11 AACSB: Reflective Thinking

10 Extended Problems 1) In the country of Midland, autonomous consumption expenditure is $60 million, and the marginal propensity to consume is 0.6. Investment is $110 million, government expenditure is $70 million, and there are no income taxes. Investment and government expenditure are constant—they do not vary with income. The nation does not trade with the rest of the world. a) Draw the aggregate expenditure curve. b) What is the autonomous aggregate expenditure? c) What is the size of the multiplier in Midland's economy? d) What is aggregate planned expenditure and what is happening to inventories when real GDP is $800 million? e) What is the economy's equilibrium aggregate expenditure? Answer:

a) See the figure above. Because the nation does not trade with the rest of the world, net exports are zero. When net exports are zero, aggregate expenditure, or AE, is given by Consumption equals $60 million plus 0.6 of income, so the consumption function is where $60 million is autonomous consumption, 0.60 is the marginal propensity to consume, and Y is real GDP which equals real income. Using the formula in the equation for aggregate expenditure gives so the formula for aggregate expenditure is b) Autonomous expenditure is expenditure that does not vary with real GDP; it is the amount of aggregate expenditure when real GDP equals zero. In Midland, if so autonomous expenditure is $240 million, shown by point A in the figure above. c) The multiplier is the amount by which a change in autonomous expenditure is multiplied to determine the change in equilibrium expenditure and real GDP. The multiplier equals So in Midland, the multiplier is

d) When real GDP is $800 million, aggregate planned expenditure, AE, equals which is $720 million. This level of aggregate planned expenditure is point B in the figure above. Because this level of aggregate planned expenditures is less than real GDP, point C in the figure, inventories increase. e) Equilibrium expenditure is the level of aggregate expenditure that occurs when aggregate planned expenditure, AE, equals real GDP. Midland's equilibrium expenditure is at point E in the figure, when real GDP and aggregate expenditure equal $600 million. Equilibrium expenditure also can be calculated by solving the equation for Y. Start by subtracting 0.6Y from both sides to give Then divide both sides by 0.4 to obtain so that Y, which is real GDP, equals $600 million. Topic: Equilibrium Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills 2) In the economy of St. Maynard Island, autonomous consumption expenditure is $185 million, and the marginal propensity to consume is 0.75. Investment is $150 million, government expenditure is $100 million, and net taxes are $80 million. Investment, government expenditure, and taxes are constant—they do not vary with income. The island does not trade with the rest of the world. a) Draw the aggregate expenditure curve. b) What is the island's autonomous aggregate expenditure? c) What is the size of the multiplier in St. Maynard Island's economy? d) What is the island's aggregate planned expenditure and what is happening to inventories when real GDP is $1,100 million? e) What is the economy's equilibrium aggregate expenditure? Answer:

a) See the figure above. Because the island does not trade with the rest of the world, net exports are zero. When net exports are zero, aggregate expenditure, or AE, is given by Consumption equals $185 million plus 0.75 of disposable income, so the consumption function is where $185 million is autonomous consumption, 0.75 is the marginal propensity to consume, and is disposable income, real income minus net taxes. (Real income also equals real GDP.) Because net taxes are constant, the consumption function is Using the formula in the equation for aggregate expenditure gives so aggregate expenditure is given by b) Autonomous expenditure is expenditure that does not vary with real GDP; it is the level of aggregate expenditure if real GDP were equal to zero. In the economy of St. Maynard Island, if ( 0, so autonomous expenditure is $375 million, which is point A in the figure above. c) The multiplier is the amount by which a change in autonomous expenditure is multiplied to determine the change in equilibrium expenditure and real GDP. The multiplier equals The slope of the AE curve is 0.75, so in the economy of St. Maynard Island, the multiplier is d) When real GDP is $1,100 million, aggregate planned expenditure, AE, equals which is $1,200 million. This level of aggregate planned expenditure is point B in the figure above. Because this level of aggregate planned expenditures exceeds real GDP, point C in the figure, inventories decrease. e) Equilibrium expenditure is the level of aggregate expenditure that occurs when aggregate planned expenditure, AE, equals real GDP. In the economy of St. Maynard Island equilibrium is at point E in the figure, when real GDP and aggregate expenditure equal $1,500 million. Equilibrium expenditure also can be calculated by solving the equation for Y. Start by subtracting 0.75Y from both sides to give Then divide both sides by 0.25 to obtain so that Y, which is real GDP, equals $1,500 million. Topic: Equilibrium Expenditure Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

3) In the economy of Keynesian Island, autonomous consumption expenditure is $50 million, and the marginal propensity to consume is 0.8. Investment is $160 million, government expenditure is $190 million, and net taxes are $250 million. Investment, government purchases, and taxes are constant—they do not vary with income. The island does not trade with the rest of the world. a) Draw the aggregate expenditure curve. b) What is equilibrium real GDP for Keynesian Island? c) What is the size of the multiplier in Keynesian Island's economy? d) If the government increases its purchases by $200 million, what will be the change in the economy's equilibrium real GDP? Answer:

a) See the figure above. The aggregate expenditure line is AE0. Because the island does not trade with the rest of the world, net exports are zero. When net exports are zero, aggregate expenditure, is given by Consumption equals $50 million plus 0.8 of disposable income, so the consumption function is where $50 million is autonomous consumption, 0.8 is the marginal propensity to consume, and is disposable income, real income minus net taxes. (Real income also equals real GDP.) Because net taxes are constant, the consumption function is Using the formula in the equation for aggregate expenditure gives so aggregate expenditure is given by b) Equilibrium expenditure is the level of aggregate expenditure that occurs when aggregate planned expenditure, AE, equals real GDP. In the economy of Keynesian Island equilibrium is at point E in the figure, when real GDP and aggregate expenditure equal $1,000 million. Equilibrium expenditure also can be calculated by solving the equation for Y. Start by subtracting 0.8Y from both sides to give Then divide both sides by 0.2 to obtain so that Y, which is real GDP, equals $1,000 million.

c) The multiplier is the amount by which a change in autonomous expenditure is multiplied to determine the change in equilibrium expenditure and real GDP. The multiplier equals The slope of the AE curve is 0.80, so in the economy of Keynesian Island, the multiplier is d) If the government increases its expenditure by $200 million, the aggregate expenditure curve shifts up by the amount of additional purchases to the aggregate expenditure line AE1. (The new formula for aggregate expenditure is The economy's equilibrium real GDP increases by the amount of the additional expenditure multiplied by the multiplier. So the increase in real GDP is which equals $1,000 million. So the new equilibrium level of real GDP is $2,000 million, point C in the figure above. Topic: The Multiplier Skill: Analytical Status: Previous edition, Chapter 11 AACSB: Analytical Skills

Economics, 11e, Global Edition (Parkin) Chapter 29 Inflation, Jobs, and the Business Cycle 1 Inflation Cycles 1) Which of the following can start an inflation? A) an increase in aggregate demand B) an increase in aggregate supply C) a decrease in aggregate supply D) Both answers A and C are correct. Answer: D Topic: Inflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 2) Inflation can be started by A) a decrease in aggregate supply or a decrease in aggregate demand. B) a decrease in aggregate supply or an increase in aggregate demand. C) an increase in aggregate supply or an increase in aggregate demand. D) an increase in aggregate supply or a decrease in aggregate demand. Answer: B Topic: Inflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 3) Demand-pull inflation starts with A) an increase in aggregate demand. B) a decrease in aggregate demand. C) an increase in short-run aggregate supply. D) a decrease in short-run aggregate supply. Answer: A Topic: Initial Effect of an Increase in Aggregate Demand Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

4) Demand-pull inflation is an inflation that results from an initial ________. A) increase in aggregate demand B) decrease in aggregate demand C) increase in wage rates D) increase in natural resource prices Answer: A Topic: Demand-Pull Inflation Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 5) Demand-pull inflation starts with a shift of the A) SAS curve rightward. B) AD curve rightward. C) SAS curve leftward. D) AD curve leftward. Answer: B Topic: Initial Effect of an Increase in Aggregate Demand Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 6) Demand-pull inflation starts as the A) LAS curve shifts leftward. B) LAS curve shifts rightward. C) AD curve shifts rightward. D) AD curve shifts leftward. Answer: C Topic: Initial Effect of an Increase in Aggregate Demand Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

7) Which of the above figures best shows the start of a demand-pull inflation? A) Figure A B) Figure B C) Figure C D) Figure D Answer: A Topic: Initial Effect of an Increase in Aggregate Demand Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

8) Which of the above figures best shows the start of a demand-pull inflation? A) Figure A B) Figure B C) Figure C D) Figure D Answer: A Topic: Initial Effect of an Increase in Aggregate Demand Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 9) Demand-pull inflation can start when A) money wage rates rise but the price level does not change. B) money wage rates rise faster than prices. C) the short-run aggregate supply curve shifts rightward. D) the aggregate demand curve shifts rightward. Answer: D Topic: Initial Effect of an Increase in Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

10) Demand pull inflation can be started by A) a decrease in the quantity of money. B) an increase in government expenditure. C) a decrease in net exports. D) an increase in the price of oil Answer: B Topic: Initial Effect of an Increase in Aggregate Demand Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 11) Which of the following factors could start a demand-pull inflation ? A) an increase in tax rates B) a decrease in government expenditure C) a decrease in wage rates D) an increase in exports Answer: D Topic: Initial Effect of an Increase in Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 12) Which of the following could lead to demand-pull inflation? A) an increase in the money wage rate B) an increase in the quantity of money C) a decrease in exports D) an increase in oil prices Answer: B Topic: Initial Effect of an Increase in Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 13) Which of the following could start a demand-pull inflation? A) an increase in government expenditure B) an increase in imports C) a decrease in the quantity of money D) an increase in the money prices of raw materials Answer: A Topic: Initial Effect of an Increase in Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

14) Increases in the quantity of money can start a ________ inflation and an increase in government expenditure can start a ________ inflation. A) demand-pull; demand-pull B) demand-pull; cost-push C) cost-push; cost-push D) cost-push; demand-pull Answer: A Topic: Initial Effect of an Increase in Aggregate Demand Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 15) Which of the following can start a demand-pull inflation? A) An improvement in technology B) A decrease in productivity C) An increase in imports D) None of the above can start a demand-pull inflation. Answer: D Topic: Initial Effect of an Increase in Aggregate Demand Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 16) Demand-pull inflation could start with A) an increase in government expenditure followed by an increase in the money wage rate. B) an increase in the quantity of money followed by a decrease in the money wage rate. C) a rise in prices of raw materials followed by an increase in the quantity of money. D) a decrease in exports followed by a decrease in the quantity of money. Answer: A Topic: Initial Effect of an Increase in Aggregate Demand Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 17) Which of the following is NOT a potential start of a demand-pull inflation? A) an increase in the money wage rate B) an increase in the quantity of money C) an increase in government expenditure D) an increase in exports Answer: A Topic: Initial Effect of an Increase in Aggregate Demand Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

18) Which of the following is NOT a potential start of a demand-pull inflation? A) an increase in the quantity of money B) an increase in government expenditure C) an increase in taxes D) an increase in exports Answer: C Topic: Initial Effect of an Increase in Aggregate Demand Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 19) Which of the following is a change that would NOT start a demand-pull inflation? A) an increase in exports B) an increase in labor productivity C) an increase in government expenditure on goods and services D) an increase in the quantity of money Answer: B Topic: Initial Effect of an Increase in Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 20) Which of the following could NOT start a demand-pull inflation? A) increases in government expenditure B) increases in net exports C) increases in oil prices D) increases in the quantity of money Answer: C Topic: Initial Effect of an Increase in Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 21) Initially, demand-pull inflation will A) increase the price level and not change real GDP. B) increase both the price level and increase real GDP. C) increase the price level and decrease real GDP. D) shift the aggregate supply curve rightward. Answer: B Topic: Initial Effect of an Increase in Aggregate Demand Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

22) A demand-pull inflation initially is characterized by A) increasing real output and a labor shortage. B) increasing real output and a labor surplus. C) decreasing real output and a labor shortage. D) decreasing real output and a labor surplus. Answer: A Topic: Initial Effect of an Increase in Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 23) If demand pull inflation occurs when the economy is already at potential GDP, then following the initial increase in aggregate demand, the A) SAS curve shifts rightward. B) LAS curve shifts rightward. C) SAS curve shifts leftward. D) LAS curve shifts leftward. Answer: C Topic: Wage Response Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills 24) If an economy at potential GDP experiences a demand shock that shifts the aggregate demand curve rightward, there will be A) an eventual leftward shift in the short-run aggregate supply curve. B) unemployment below the natural rate. C) upward pressure on money wage rates. D) All of the above answers are correct. Answer: D Topic: Wage Response Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

25) In the above figure, suppose that the economy is at point A when the quantity of money increases. In the short run, the economy will move to point ________. A) A, that is, the price level and level of real GDP will not change. B) B C) C D) D Answer: B Topic: Initial Effect of an Increase in Aggregate Demand Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 26) In the above figure, suppose that the economy is at point A when foreign countries begin an expansion and buy more U.S.-made goods. In the short run, this change creates a movement to point ________ and an eventual increase in ________. A) B; money wage rates B) D; the natural unemployment rate C) B; the natural unemployment rate D) D; money wage rates Answer: A Topic: Wage Response Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

27) An initial increase in aggregate demand that is NOT followed by an increase in the quantity of money results in a long-run equilibrium with A) a higher price level but the same real GDP. B) a higher price level and an increased level of real GDP. C) the same price level and a lower level of real GDP. D) None of the above answers are correct. Answer: A Topic: Initial Effect of an Increase in Aggregate Demand Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 28) Suppose that a shock causes the aggregate demand curve to shift rightward. If the Fed does nothing, A) the economy will experience a temporary reduction in employment but will eventually return to full employment. B) output initially will exceed potential GDP, but the economy will return to potential GDP with a higher price level. C) the short-run aggregate supply curve will not shift leftward and there will be continued inflation. D) eventually the short-run aggregate supply curve will shift leftward and there will be continued inflation. Answer: B Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 29) For an economy at full employment, an increase in the quantity of money will lead to which of the following sequences of shifts in aggregate demand and supply curves? A) decreased aggregate demand, increased short-run aggregate supply, constant long-run aggregate supply B) decreased aggregate demand, decreased short-run aggregate supply, decreased long-run aggregate supply C) increased aggregate demand, increased short-run aggregate supply, increased long-run aggregate supply D) increased aggregate demand, decreased short-run aggregate supply, constant long-run aggregate supply Answer: D Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

30) A one-time rise in the price level can turn into a demand-pull inflation when ________. A) the money wage rate continues to increase B) the quantity of money persistently decreases C) taxes consistently increase D) the quantity of money persistently increases Answer: D Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 31) A demand-pull inflation consists of ________ shifts in the AD curve and ________ shifts in the SAS curve. A) rightward; rightward B) rightward; leftward C) leftward; rightward D) leftward; leftward Answer: B Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 32) In a persisting demand-pull inflation A) short-run aggregate supply decreases and aggregate demand increases. B) aggregate demand and short-run aggregate supply both decrease. C) aggregate demand increases and long-run aggregate supply decreases. D) None of the above answers are correct. Answer: A Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 33) Demand-pull inflation results from continually increasing the quantity of money, which leads to a continually A) decreasing long-run aggregate supply. B) increasing aggregate supply. C) decreasing aggregate demand. D) increasing aggregate demand. Answer: D Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

34) Demand-pull inflation persists because of A) continuing increases in government expenditures. B) continuing increases in the quantity of money. C) continuing increases in real wage rates. D) continuing increases in aggregate supply. Answer: B Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 35) A demand-pull inflation requires persistent increases in A) tax rates. B) real wages. C) the quantity of money. D) government expenditures. Answer: C Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 36) If the Fed responds to an initial increase in aggregate demand by increasing the quantity of money, A) there will be no inflationary gap. B) real GDP will begin to decrease more rapidly than if the quantity of money had remained constant. C) money wages will fall to reduce the unemployment. D) there is the risk of continued inflation. Answer: D Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 37) In a demand-pull inflation brought about by increases in the quantity of money, real GDP might increase at times because A) tax rates decline. B) real wages fall. C) money wages fall. D) real wages rise. Answer: B Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 12 Copyright © 2014 Pearson Education, Inc.

38) If the Fed responds to an increase in aggregate demand by increasing the quantity of money, A) nothing happens because aggregate demand had already increased. B) output will begin to decrease more rapidly than otherwise. C) money wage rates will fall to reduce the unemployment. D) there will be continued inflation. Answer: D Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 39) If the economy is at potential GDP and the Fed increases the quantity of money, then A) potential GDP rises. B) real GDP rises temporarily above potential GDP. C) real GDP rises permanently above potential GDP. D) potential GDP and real GDP both decrease. Answer: B Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 40) During a demand-pull inflation, if the Fed tries to maintain a level of real GDP above potential GDP, A) there will be a one-time shift in the AD and the SAS curves. B) the AD curve will shift rightward continuously and SAS curves will shift leftward continuously. C) the AD curve will shift rightward continuously and the SAS curve will not shift. D) the SAS curve will shift leftward continuously and the AD curve will not shift. Answer: B Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills 41) In a demand-pull inflation, money wage rates rise because A) a decrease in aggregate demand creates a labor shortage. B) an increase in aggregate demand creates a labor surplus. C) an increase in aggregate demand creates a labor shortage. D) a decrease in aggregate demand creates a labor surplus. Answer: C Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

42) As the money wage rate rises, A) the long-run aggregate supply curve shifts rightward. B) the short-run aggregate supply curve shifts rightward. C) both the long-run aggregate supply curve and the short-run aggregate supply curve shift leftward. D) the short-run aggregate supply curve shifts leftward. Answer: D Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills 43) When the AD and SAS curves intersect at a level of real GDP which exceeds potential GDP and there is no government policy undertaken, which of the following will occur? A) The AD curve shifts rightward because the Fed decreases the money supply. B) The SAS curve shifts leftward because the money wage rate rises. C) The AS curve shifts leftward because the money wage rate falls. D) The AD curve shifts leftward because the money wage rate rises. Answer: B Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills 44) To prevent demand-pull inflation A) firms must refuse to increase wages. B) the Fed must not let the quantity of money persistently rise. C) the natural unemployment rate must increase. D) real GDP must increase. Answer: B Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 45) To stop a demand-pull inflation using monetary policy, you would recommend that the Fed A) increase the quantity of money. B) not increase the quantity of money. C) increase tax rates. D) purchase government bonds in the open market. Answer: B Topic: A Demand-Pull Inflation Process Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

46) In a demand-pull inflation, if the Fed stops expanding the quantity of money, A) a cost-push inflation will occur. B) government expenditure will cause the demand-pull inflation to continue. C) a deflation will occur. D) the demand-pull inflation ends. Answer: D Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

47) The figure above shows the aggregate demand, short-run aggregate supply, and long-run aggregate supply curves for the U.S. economy. The economy is currently at point A. A demandpull rise in the price level will initially move the economy to point ________ and to point ________. A) E when aggregate demand increases; D when the wage rate rises B) B when aggregate demand decreases; C when the wage rate rises C) E; A when aggregate demand changes D) C when the wage rate rises; D when aggregate demand increases Answer: A Topic: A Demand-Pull Inflation Process Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

48) In the above figure, the movement from point A to B to C to D to E represents A) demand-pull inflation resulting solely from wage responses to excess labor demand. B) demand-pull inflation resulting from persistent increases in the quantity of money. C) cost-push inflation resulting solely from wage responses to excess labor demand. D) cost-push inflation resulting from persistent increases in the quantity of money. Answer: B Topic: A Demand-Pull Inflation Process Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 49) In the above figure, suppose the economy is at point A initially. For real GDP to increase to and consistently remain above $13 trillion, I. the price level must increase to above 90. II. there must be continued increases in the quantity of money. A) only I B) only II C) Both I and II are correct. D) Neither I nor II is correct. Answer: D Topic: A Demand-Pull Inflation Process Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

50) In the above figure, if the economy moves from point A to point E, A) money wage rates have increased. B) there may have been demand-pull inflation. C) there has been economic growth. D) Both answers A and B are correct. Answer: D Topic: A Demand-Pull Inflation Process Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

51) In the above figure, which path represents a demand-pull inflation? A) point A to C to D to F to G B) point A to B to D to E to G C) point A to C to D to E to G D) point A to B to D to F to G Answer: A Topic: A Demand-Pull Inflation Process Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

52) In the above figure, the economy initially is at point A and then an increase in the quantity of money moves the economy to point D. At point D, the real wage rate has A) risen by the same percentage as the price level. B) remained constant. C) risen. D) fallen. Answer: D Topic: Initial Effect of an Increase in Aggregate Demand Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills 53) In the above figure, the economy initially is at point A and then an increase in the quantity of money moves the economy to point D. The money wage rate will A) rise because a labor shortage now exists. B) fall because a labor shortage now exists. C) rise because a labor surplus now exists. D) fall because a labor surplus now exists. Answer: A Topic: Wage Response Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

54) In the above figure, the economy initially is at point A and then an increase in the quantity of money moves the economy to point D. If the quantity of money remains constant, the economy will adjust with A) short-run aggregate supply shifting leftward to SAS1. B) short-run aggregate supply shifting leftward to SAS2. C) aggregate demand shifting back to AD0. D) aggregate demand shifting to AD2. Answer: A Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills 55) A demand-pull inflation occurred in the United States during most of the later part of the A) 1960s. B) 2000s. C) 1980s. D) 1990s. Answer: A Topic: Demand-Pull Inflation in the United States Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 56) As far as demand-pull inflation goes, the United States A) has never experienced this type of inflation. B) experienced this type of inflation during the 1990s. C) experienced this type of inflation during the 1960s. D) experienced this type of inflation during the 1950s. Answer: C Topic: Demand-Pull Inflation in the United States Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

57) In the above, which figure shows the start of a cost-push inflation? A) Figure A B) Figure B C) Figure C D) Figure D Answer: C Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 58) The main sources of cost-push inflation are increases in A) money wage rates and the cost of raw materials. B) real wage rates and the cost of raw materials. C) money wage rates and aggregate demand. D) aggregate demand and real wage rates. Answer: A Topic: Cost-Push Inflation Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

59) Assuming that GDP currently equals potential GDP, a cost-push inflation could result from which of the following? A) a decrease in tax rates B) an increase in the labor force C) a large crop failure that boosts the prices of raw food materials D) an increase in the nation's capital stock Answer: C Topic: Cost-Push Inflation Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 60) Cost-push inflation can be started by A) a decrease in the money wage rate. B) an increase in the money prices of raw materials. C) an increase in the quantity of money. D) a decrease in government expenditure on goods and services. Answer: B Topic: Cost-Push Inflation Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 61) Cost-push inflation can start with A) lower taxes. B) an increase in government expenditure. C) higher money wage rates. D) an increase in transfer payments. Answer: C Topic: Cost-Push Inflation Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 62) Cost-push inflation can start with A) a decrease in investment. B) an increase in oil prices. C) an increase in government expenditure. D) a decrease in the quantity of money. Answer: B Topic: Cost-Push Inflation Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

63) Cost-push inflation might initially result from A) an increase in the quantity of money. B) the use of new technology. C) an increase in government expenditure. D) an increase in the cost of resources. Answer: D Topic: Cost-Push Inflation Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 64) In April 2008 the price of oil was approximately $130 per barrel; in April 2013, it was approximately $90 per barrel. This change in the price of oil could have started A) a cost-push inflation. B) a demand-pull inflation. C) both a cost-push and a demand-pull inflation. D) None of the above are correct because the fall in the price of oil does not start an inflation. Answer: D Topic: Cost-Push Inflation Skill: Conceptual Status: New AACSB: Reflective Thinking 65) Cost-push inflation is an inflation that results from an initial ________. A) increase in money wage rates or money prices of raw materials B) decrease in taxes C) increase in investment D) increase in taxes Answer: A Topic: Cost-Push Inflation Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 66) The initial factors that can create a cost-push inflation do NOT include A) increases in money wage rates. B) increases in the money prices of raw materials. C) increases in the quantity of money. D) None of the above answers is correct because all of the above could be the initial cause of a cost-push inflation. Answer: C Topic: Cost-Push Inflation Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

67) At the start of a cost-push inflation, A) productivity rises. B) real GDP increases faster than the quantity of money. C) the short-run aggregate supply curve shifts rightward. D) prices and unemployment are rising. Answer: D Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 68) Cost-push inflation starts with a A) falling GDP and falling unemployment rate. B) raising GDP and rising unemployment rate. C) falling GDP and rising unemployment rate. D) raising GDP and falling unemployment rate. Answer: C Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 69) Cost-push inflation starts with A) an increase in aggregate demand. B) a decrease in aggregate demand. C) an increase in short-run aggregate supply. D) a decrease in short-run aggregate supply. Answer: D Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 70) A leftward shift in the aggregate supply curve A) is the result of the Fed increasing the quantity of money. B) is the result of a rise in the price of a key resource. C) is the result of consumer expenditures exceeding available output. D) increases both the price level and real GDP. Answer: B Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

71) When a cost-push inflation starts A) the price level falls and the money wages rises. B) real GDP rises faster than the quantity of money. C) the short-run aggregate supply curve shifts rightward. D) the price level rises and real GDP decreases. Answer: D Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 72) At the start of a cost-push inflation, A) only real GDP changes while the price level remains constant. B) the price level and real GDP both increase. C) the price level rises and real GDP decreases. D) the price level rises and real GDP does not change. Answer: C Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 73) Suppose that the money prices of raw materials increase so that short-run aggregate supply decreases. If the Federal Reserve does not respond, the higher money price of raw materials will I. repeatedly shift the aggregate demand curve rightward and raise the price level. II. shift the aggregate demand curve rightward and the aggregate supply curve leftward, raising prices. III. result initially in lower employment and a higher price level. A) I only B) both I and II C) both II and III D) III only Answer: D Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

74) An increase in the money wage rate shifts the SAS curve ________ and an increase in the money prices of raw materials shifts the SAS curve ________. A) rightward; rightward B) leftward; leftward C) rightward; leftward D) leftward; rightward Answer: B Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Analytical Skills 75) A higher price for oil shifts the A) SAS curve leftward. B) LAS curve leftward. C) SAS curve rightward. D) AD curve rightward. Answer: A Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Analytical Skills 76) By itself, an increase in the price of oil shifts the A) short-run aggregate supply curve leftward and does not shift the aggregate demand curve. B) short-run aggregate supply curve rightward and does not shift the aggregate demand curve. C) aggregate demand curve leftward and does not shift the short-run aggregate supply curve. D) aggregate demand curve rightward and does not shift the short-run aggregate supply curve. Answer: A Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills 77) By itself, a fall in the price of oil shifts the A) short-run aggregate supply curve leftward and does not shift the aggregate demand curve. B) short-run aggregate supply curve rightward and does not shift the aggregate demand curve. C) aggregate demand curve leftward and does not shift the short-run aggregate supply curve. D) aggregate demand curve rightward and does not shift the short-run aggregate supply curve. Answer: B Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

78) The SAS curve shifts leftward if A) good weather increases agricultural harvests. B) OPEC reduces world oil prices. C) tax cuts stimulate labor supply. D) the money wage rate increases. Answer: D Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills 79) If the prices of crucial raw materials increase, A) the short-run aggregate supply curve shifts leftward. B) stagflation could occur. C) a cost-push inflation could occur depending on the behavior of the Federal Reserve. D) All of the above answers are correct. Answer: D Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 80) An increase in the price of a resource such as oil I. shifts the aggregate demand curve leftward. II. shifts the long-run aggregate supply curve rightward. III. shifts the short-run aggregate supply curve leftward. IV. increases the price level and decreases real GDP in the short run. A) Only I is correct. B) Both I and II are correct. C) Only III is correct. D) Both III and IV are correct. Answer: D Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

81) If oil prices increase, then in the short run, real GDP will ________ and the price level will ________. A) increase; rise B) increase; fall C) decrease; rise D) decrease; fall Answer: C Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills 82) In the short-run, an increase in the price of raw materials will ________ the price level and ________ real GDP. A) raise; increase B) raise; decrease C) lower; increase D) lower; decrease Answer: B Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 83) In the short run, if there is an increase in the money wage rate, then A) short-run aggregate supply increases and the price level rises. B) short-run aggregate supply decreases and the price level rises. C) aggregate demand decreases and the price level falls. D) aggregate demand increases and the price level rises. Answer: B Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 84) By itself, a supply shock such as a hike in the price of oil, can A) cause real GDP to permanently decrease year after year. B) not cause inflation. C) be inflationary as long as there is no policy response. D) cause a wage-price spiral. Answer: B Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

85) Stagflation occurs when the price level ________ and real GDP ________. A) falls; increases B) falls; decreases C) rises; decreases D) rises; increases Answer: C Topic: Stagflation Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 86) Stagflation is the result of A) an increase in aggregate demand. B) a decrease in short-run aggregate supply. C) a decrease in aggregate demand. D) an increase in short-run aggregate supply. Answer: B Topic: Stagflation Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 87) Stagflation is the combination of a ________ and ________. A) falling inflation rate; an increasing real GDP B) falling price level; an increasing real GDP C) rising price level; a decreasing real GDP D) rising inflation rate; a decreasing real GDP Answer: C Topic: Stagflation Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 88) Stagflation occurs when the A) price level and real GDP are increasing at the same time. B) price level and real GDP are decreasing at the same time. C) price level is increasing and real GDP is decreasing. D) price level is decreasing and real GDP is increasing. Answer: C Topic: Stagflation Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

89) The term "stagflation" refers to the situation when A) the aggregate supply curve shifts leftward, prices increase and real GDP decreases. B) real GDP and the price level both rise because of an increase in aggregate demand. C) prices become stagnant and do not increase or decrease. D) the short-run aggregate supply curve and the aggregate demand curve shift in opposite directions. Answer: A Topic: Stagflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 90) Stagflation is associated with A) cost-push inflation. B) demand-pull inflation. C) both types of inflation. D) neither cost-push inflation or demand-pull inflation because it is a different concept altogether. Answer: A Topic: Stagflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 91) When the price level is rising and simultaneously real GDP is decreasing, A) the natural unemployment rate increases. B) stagflation occurs. C) there is an expansionary gap. D) the Fed has increased the discount rate. Answer: B Topic: Stagflation Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 92) Stagflation results from A) a leftward shift in the short-run aggregate supply curve. B) a rightward shift in the aggregate demand curve. C) a rightward shift in the short-run aggregate supply curve. D) an increase in government expenditures financed by an increase in the quantity of money. Answer: A Topic: Stagflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

93) Stagflation is characterized by A) an increase in both output and the price level. B) a decrease in output and the price level. C) an increase in the unemployment rate and an increase in the price level. D) an economy which is growing at a rate equal to its historical average growth rate. Answer: C Topic: Stagflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 94) A one-time increase in the price of oil followed by a one-time increase in aggregate demand produce A) continuing cost-push inflation. B) continuing demand-pull inflation. C) a one-time decrease in the price level. D) a one-time increase in the price level. Answer: D Topic: Aggregate Demand Response Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 95) A cost-push inflation spiral results if the Fed's response to stagflation is to keep A) decreasing aggregate demand. B) decreasing aggregate supply. C) increasing aggregate demand. D) increasing aggregate supply. Answer: C Topic: A Cost-Push Inflation Process Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 96) During a cost-push inflation spiral, the money wage rate ________ and the quantity of money ________. A) increases; increases B) increases; does not change C) does not change; increases D) does not change; does not change Answer: A Topic: A Cost-Push Inflation Process Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

97) For a cost-push inflation to occur, oil price increases must be accompanied by A) decreased investment spending. B) lower personal tax rates. C) increases in the quantity of money. D) increases in government expenditures. Answer: C Topic: A Cost-Push Inflation Process Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 98) Oil prices increase sharply, raising the price level and decreasing real GDP. The Fed has an incentive to A) increase the quantity of money in order to reduce unemployment. B) decrease the quantity of money in order to reduce unemployment. C) increase the quantity of money in order to reduce the price level. D) increase the quantity of money in order to reduce the price level and unemployment. Answer: A Topic: A Cost-Push Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 99) Suppose oil prices rise and short-run aggregate supply decreases. If the Fed responds by increasing the quantity of money, then in the short run A) real GDP increases and the price level falls. B) real GDP increases and the price level rises still higher. C) the Fed is more concerned about fighting inflation than unemployment. D) None of the above answers is correct. Answer: B Topic: A Cost-Push Inflation Process Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 100) Suppose oil prices rise. The Fed can ________ the quantity of money to ________ the unemployment rate back to its natural rate. A) increase; raise B) increase; lower C) decrease; raise D) decrease; lower Answer: B Topic: A Cost-Push Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 31 Copyright © 2014 Pearson Education, Inc.

101) One example of cost-push inflation is an increase in A) the money prices of raw materials followed by no government policy. B) the money prices of raw materials followed by increases in the quantity of money. C) the money prices of raw materials followed by decreases in the quantity of money. D) government expenditure followed by increases in the quantity of money. Answer: B Topic: A Cost-Push Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 102) In a cost-push inflation, A) increases in AD lead to increases in SAS. B) decreases in AD lead to increases in SAS. C) increases in SAS lead to decreases in AD. D) decreases in SAS lead to increases in AD. Answer: D Topic: A Cost-Push Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 103) If the Fed responds to repeated decreases in the short-run aggregate supply with repeated increases in the quantity of money, the economy will be faced with A) a one-time increase in prices. B) continuous inflation. C) alternating periods of inflation and deflation. D) steady decreases in real GDP. Answer: B Topic: A Cost-Push Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 104) When there is a cost-push inflation, A) workers demand higher money wages because of the inflation. B) the short-run aggregate supply curve shifts rightward. C) the aggregate demand curve shifts leftward because of the cost hikes. D) None of the above answers is correct. Answer: A Topic: A Cost-Push Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

105) To prevent cost-push inflation A) there must not be an excess demand for money. B) interest rates must not rise. C) there must not be an increase in government purchases. D) the Fed must not let the quantity of money rise persistently. Answer: D Topic: A Cost-Push Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

106) In the above figure, which path represents a cost-push inflation? A) point A to C to D to F to G B) point A to B to D to E to G C) point A to C to D to E to G D) point A to B to D to F to G Answer: B Topic: A Cost-Push Inflation Process Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

107) The figure above shows the aggregate demand, short-run aggregate supply, and long-run aggregate supply curves for the U.S. economy. The economy is currently at point A. A cost-push rise in the price level will initially move the economy to point ________ and to point ________. A) E when aggregate demand increases; D when the money prices of raw materials rise B) C when the money prices of raw materials rise; D when aggregate demand increases C) F; A when the money prices of raw materials change D) B when aggregate demand decreases; C when the money prices of raw materials rise Answer: B Topic: A Cost-Push Inflation Process Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

108) In the above figure, the economy is at point A. An increase in oil prices that sets off a costpush inflation will initially move the economy from point A to point A) A, that is, the economy does not change. B) B. C) C. D) D. Answer: D Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 109) In the above figure, the economy is at point A. An increase in money wage rates that sets off a cost-push inflation will initially move the economy from point A to point A) A, that is, the economy does not change. B) B. C) C. D) D. Answer: D Topic: Initial Effect of a Decrease in Aggregate Supply Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

110) In the above figure, the economy is at point A. An increase in oil prices occurs after which the Fed responds by increasing the quantity of money. The economy moves from point A to A) D to point C. B) B to point C. C) C to point D. D) C to point B. Answer: A Topic: A Cost-Push Inflation Process Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 111) During which decade did the United States suffer from the worst cost-push inflation? A) 1960s B) 1970s C) 1980s D) 1990s Answer: B Topic: Cost-Push Inflation in the United States Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 112) As far as cost-push inflation goes, the United States A) has never experienced this type of inflation. B) has experienced only this type of inflation. C) experienced this type of inflation in the 1970s. D) experienced this type of inflation during the 1990s. Answer: C Topic: Cost-Push Inflation in the United States Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 113) If people correctly anticipate an increase in aggregate demand, a result is A) an increase in the real value of outstanding government debt. B) workers demanding higher money wages to keep the real wage unchanged. C) a lower rate of inflation in the current time period. D) there are no predictable results associated with an anticipated increase in aggregate demand. Answer: B Topic: Anticipated Inflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

114) The anticipated inflation rate is 5 percent. In order for purchasing power to remain constant, the money wage rate must rise by A) 2 percent. B) 5 percent. C) 7 percent. D) 12 percent. Answer: B Topic: Anticipated Inflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills 115) When workers and employers correctly anticipate an increase in inflation caused by an increase in aggregate demand, A) there will be no unemployment. B) workers will overestimate the real wage rate. C) unemployment will be at the natural rate. D) workers will underestimate the real wage rate. Answer: C Topic: Anticipated Inflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 116) The economy is at potential GDP when people correctly anticipate an increase in government expenditure on goods and services. If the money wage rate adjusts immediately, then A) real GDP and the price level will increase in the short run, but the real wage rate will fall. B) real GDP remains at potential GDP. C) real GDP, the price level, and the real wage rate all increase in the short run. D) real GDP remains at potential GDP, there is no change in the price level, and the real wage rate rises in the short run. Answer: B Topic: Anticipated Inflation Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

117) If the economy is initially at potential GDP and people correctly anticipate an increase in inflation so that their money wage rate adjusts immediately, then A) only real GDP increases with no change in the price level. B) only the price level rises with no change in real GDP. C) both the price level and real GDP increase. D) neither the price level nor real GDP increase. Answer: B Topic: Anticipated Inflation Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 118) If people correctly expect an increase in aggregate demand, their money wage rate ________ immediately, the SAS curve shifts ________. A) rises; rightward B) rises; leftward C) falls; rightward D) fall; leftward Answer: B Topic: Anticipated Inflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills 119) Suppose aggregate demand increases by more than expected. Which of the following describes what will occur? A) Real GDP will be greater than potential GDP. B) The price level will increase. C) Unemployment will fall. D) All of the above answers are correct. Answer: D Topic: Unanticipated Inflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 120) Suppose aggregate demand increases by less than expected. Which of the following describes what will occur? A) Real GDP will be less than potential GDP. B) The price level will fall. C) Real GDP will be more than potential GDP. D) Both answers A and B are correct. Answer: A Topic: Unanticipated Inflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 38 Copyright © 2014 Pearson Education, Inc.

121) In the above figure, if people correctly anticipate the increases in aggregate demand and the resulting inflation, the path will be from A) point A to C to D to F to G. B) point A to B to D to E to G. C) point A to D to G. D) point A to B to D to F to G. Answer: C Topic: Anticipated Inflation Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

122) In the above figure, the economy is initially at point A. If workers and firms correctly anticipate the increase in aggregate demand and the resulting inflation rate, the economy will move to point A) A, that is, the price level and level of real GDP will not change. B) B. C) C. D) D. Answer: C Topic: Anticipated Inflation Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

123) An economy is at potential GDP and the price level is 100 in the figure above. If aggregate demand unexpectedly increases so that the aggregate demand curve shifts to AD1, the inflation rate is ________. A) 0 percent a year B) 10 percent a year C) 20 percent a year D) More than 20 percent a year Answer: B Topic: Unanticipated Inflation Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 124) An economy is in long-run equilibrium and the price level is 100 in the figure above. Aggregate demand increases and the aggregate demand curve shifts to AD1. If the increase in aggregate demand is expected, then the inflation rate is ________. A) 0 percent a year B) 10 percent a year C) 20 percent a year D) More than 20 percent a year Answer: C Topic: Anticipated Inflation Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

125) Suppose that the economy is at full employment and aggregate demand increases by more than it is anticipated to increase. Other things remaining the same, ________. A) long-run aggregate supply decreases B) real GDP remains at potential GDP C) real GDP increases above potential GDP D) real GDP decreases below potential GDP Answer: C Topic: Unanticipated Inflation Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 126) A rational expectation is A) a forecast devoid of all emotions. B) a forecast which perfectly foretells the future. C) the best possible forecast based upon all relevant information. D) the forecast that automatically carries over from past forecasts. Answer: C Topic: Rational Expectation Theories Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 127) A rational expectation of inflation is A) how economists make perfect forecasts of inflation. B) how unexpected inflation affects the economy. C) why unexpected inflation redistributes income. D) a forecast of inflation that uses all relevant information. Answer: D Topic: Rational Expectation Theories Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 128) A rational expectation is A) a correct forecast but it might not be the best available forecast. B) an incorrect forecast. C) not necessarily correct but is the best available forecast. D) necessarily correct because it is the best available forecast. Answer: C Topic: Rational Expectation Theories Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

129) If Samantha predicts future inflation based on rational expectations, then A) her forecast of inflation will always be correct. B) she uses all relevant information to forecast inflation. C) she looks only to the past to help her predict future inflation. D) she never under estimates inflation. Answer: B Topic: Rational Expectation Theories Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 130) The Cleveland Federal Reserve Bank's estimate of expected inflation in 2013 is 1.5 percent. In 2013, if aggregate demand grows faster than expected, the actual inflation rate will A) exceed 1.5 percent. B) equal 1.5 percent because the actual inflation rate must equal the expected inflation rate. C) be less than 1.5 percent. D) None of the above answers are correct because there is no relationship between the actual inflation rate and aggregate demand. Answer: A Topic: Rational Expectation Theories Skill: Conceptual Status: New AACSB: Reflective Thinking 131) Which of the following would shift the aggregate demand curve leftward year after year? A) a one-time tax cut B) a one-time increase in government expenditures on goods and services C) inflation D) negative growth in the quantity of money Answer: D Topic: Study Guide Question, A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 132) Which of the following results in the aggregate demand curve shifting rightward year after year? A) a one-time tax cut B) a one-time increase in government expenditures on goods and services C) inflation D) growth in the quantity of money Answer: D Topic: Study Guide Question, A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 43 Copyright © 2014 Pearson Education, Inc.

133) Demand-pull inflation occurs when A) aggregate demand increases persistently. B) aggregate supply and aggregate demand decrease persistently. C) the government increases its expenditures. D) oil prices increase substantially. Answer: A Topic: Study Guide Question, A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 134) In a demand-pull inflation, the AD curve shifts ________ and the SAS curve shifts ________. A) rightward; rightward B) rightward; leftward C) leftward; rightward D) leftward; leftward Answer: B Topic: Study Guide Question, A Demand-Pull Inflation Process Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 135) A rise in the price level because of an increase in the money wage rate A) definitely triggers a cost-push inflation. B) definitely triggers a demand-pull inflation. C) might trigger a cost-push inflation. D) might trigger a demand-pull inflation. Answer: C Topic: Study Guide Question, Initial Effect of a Decrease in Aggregate Supply Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 136) A rise in the price level because of an increase in the price of oil A) definitely triggers a cost-push inflation. B) definitely triggers a demand-pull inflation. C) might trigger a cost-push inflation. D) might trigger a demand-pull inflation. Answer: C Topic: Study Guide Question, Initial Effect of a Decrease in Aggregate Supply Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

137) Cost-push inflation might start with A) a rise in money wage rates. B) an increase in government expenditures. C) an increase in the quantity of money. D) a fall in the prices of raw materials. Answer: A Topic: Study Guide Question, Initial Effect of a Decrease in Aggregate Supply Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 138) Which of the following statements about a cost-push inflation is correct? A) Cost-push inflation starts when an increase in aggregate demand "pushes" costs higher. B) Cost-push inflation might start with a rise in the price of raw materials, but it requires increases in the quantity of money to persist. C) To persist, cost-push inflation needs a continual series of cost hikes with no change in aggregate demand. D) The United States has never experienced a cost-push inflation. Answer: B Topic: Study Guide Question, Cost-Push Inflation Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 2 Inflation and Unemployment: The Phillips Curve 1) Phillips curves show the relationship between the A) nominal interest rate and the real interest rate. B) expected rate of inflation and the nominal interest rate. C) real interest rate and the unemployment rate. D) unemployment rate and the inflation rate. Answer: D Topic: Inflation and Unemployment: The Phillips Curve Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 2) Phillips curves describe the relationship between A) aggregate expenditures and aggregate demand. B) the quantity of money and interest rates. C) unemployment and inflation. D) aggregate demand and the price level. Answer: C Topic: Inflation and Unemployment: The Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 45 Copyright © 2014 Pearson Education, Inc.

3) A Phillips curve measures the relationship between A) the unemployment rate and inflation. B) the level of money wage rates and GDP. C) unemployment and GDP. D) inflation and GDP. Answer: A Topic: Inflation and Unemployment: The Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 4) A Phillips curve shows the relationship between the A) price level and real GDP. B) unemployment rate and real GDP. C) inflation rate and the unemployment rate. D) inflation rate and real GDP. Answer: C Topic: Inflation and Unemployment: The Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 5) For a given level of anticipated inflation and natural unemployment rate, the short-run Phillips curve shows the relationship between A) potential GDP and real GDP. B) real GDP growth and the unemployment rate. C) inflation and money growth. D) inflation and the unemployment rate. Answer: D Topic: The Short-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 6) In 2012 the Cleveland Federal Reserve estimated that the expected inflation rate was 1.5 percent, the actual inflation rate was 2.1 percent, and the unemployment rate was 8.1 percent. A point on the short-run Phillips curve is the A) difference between the actual and expected inflation rates (0.6 percent) and the unemployment rate of 8.1 percent. B) inflation rate of 2.1 percent and the expected inflation rate of 1.5 percent. C) expected inflation rate of 1.5 percent and the unemployment rate of 8.1 percent. D) inflation rate of 2.1 percent and the unemployment rate of 8.1 percent. Answer: D Topic: The Short-Run Phillips Curve Skill: Recognition Status: New AACSB: Reflective Thinking 46 Copyright © 2014 Pearson Education, Inc.

7) The short-run Phillips curve gives much the same information as A) the AD curve. B) the SAS curve. C) the LAS curve. D) none of the above Answer: B Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 8) A movement along the SAS curve that brings a lower price level and a decrease in real GDP is equivalent to a A) movement along a short-run Phillips curve that brings a decrease in the inflation rate and an increase in the unemployment rate. B) movement along a short-run Phillips curve that brings an increase in the inflation rate and an increase in the unemployment rate. C) shift in the short-run Phillips curve that brings a decrease in the inflation rate and an increase in the unemployment rate. D) shift in the short-run Phillips curve that brings an increase in the inflation rate and an increase in the unemployment rate. Answer: A Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 9) The short-run Phillips curve A) slopes downward. B) slopes upward. C) is horizontal. D) is vertical. Answer: A Topic: The Short-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

10) Moving along a short-run Phillips curve, A) the price level is constant. B) unemployment is constant. C) the expected inflation rate is constant. D) the inflation rate is constant. Answer: C Topic: The Short-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 11) Which of the following is held constant when moving along a short-run Phillip's curve? A) the inflation rate B) the unemployment rate C) the expected inflation rate D) the growth rate of the quantity of money Answer: C Topic: The Short-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 12) The short-run Phillips curve shows the tradeoff between ________, holding the expected inflation rate and the natural unemployment rate constant. A) the price level and real GDP B) inflation and unemployment C) the price level and unemployment D) inflation and employment Answer: B Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 13) The short-run Phillips curve shows a A) positive relationship between the quantity of money and interest rates. B) positive relationship between the price level and real GDP. C) negative relationship between interest rates and the price level. D) negative relationship between the unemployment rate and the inflation rate. Answer: D Topic: The Short-Run Phillips Curve Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

14) In the short run, an unexpected increase in the inflation rate leads to A) a higher unemployment rate. B) a decrease in aggregate demand. C) a lower unemployment rate. D) workers thinking the money wage rate has fallen. Answer: C Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 15) Moving along the short-run Phillips curve indicates A) that higher inflation leads to a higher unemployment rate. B) that higher unemployment leads to a higher inflation rate. C) a tradeoff between inflation and unemployment so that higher inflation is related to lower unemployment. D) that the natural unemployment rate falls when the inflation rate rises. Answer: C Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 16) Movements upward along the short-run Phillips curve result from A) expected increases in the inflation rate. B) unexpected increases in the inflation rate. C) expected decreases in the inflation rate. D) unexpected decreases in the inflation rate. Answer: B Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 17) If the unemployment rate initially equals its natural rate, then if the inflation rate rises above its expected rate, the unemployment rate ________. A) equals the natural rate B) remains constant C) falls below its natural rate D) rises above its natural rate Answer: C Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

18) Along a short-run Phillips curve, suppose the expected inflation rate is 6 percent. If the inflation rate turns out to be 8 percent instead, A) there is a movement upward along the short-run Phillips curve. B) there is a movement downward along the short-run Phillips curve. C) there is a downward shift of the short-run Phillips curve. D) None of the above answers are correct. Answer: A Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 19) Suppose the expected inflation rate is 8 percent and the unemployment rate is 3 percent. If the inflation rate rises to 10 percent and the expected inflation rate does not change, A) the short-run Phillips curve will shift upward. B) the short-run Phillips curve will shift downward. C) there will be a movement along the short-run Phillips curve. D) the natural unemployment rate will rise. Answer: C Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 20) Suppose that last year the economy of Suffera was experiencing an expected inflation rate of 8 percent and unemployment rate of 12 percent. An unexpected increase in the inflation rate would A) increase the unemployment rate. B) increase the inflation rate and decrease the unemployment rate. C) increase the inflation rate but have no effect on the unemployment rate. D) None of the above answers is correct. Answer: B Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

21) Which of the following leads to a rightward shift in the short-run Phillips curve? I. a reduction in the expected inflation rate II. an increase in the natural unemployment rate A) I only B) II only C) I and II D) neither I nor II Answer: B Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 22) An increase in the expected inflation rate shifts the A) short-run Phillips curve downward. B) short-run Phillips curve upward. C) long-run Phillips curve upward. D) long-run Phillips curve downward. Answer: B Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 23) An increase in the expected inflation rate leads to ________ the short-run Phillips curve. A) a movement upward along B) a movement downward along C) an upward shift of D) a downward shift of Answer: C Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 24) Which of the following leads to a downward shift in the short-run Phillips curve? A) People expected inflation to be 5 percent last year and now expect inflation to be 3 percent this year. B) People expect the unemployment rate to increase. C) The long-run Phillips curve shifts rightward. D) Unexpected inflation increases. Answer: A Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 51 Copyright © 2014 Pearson Education, Inc.

25) Suppose the expected inflation rate is 12 percent and the unemployment rate is 5 percent. If the expected inflation rate increases to 13 percent, A) the short-run Phillips curve will shift upward. B) the short-run Phillips curve will shift downward. C) there will be a movement along the short-run Phillips curve. D) the natural unemployment rate will rise. Answer: A Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 26) The Cleveland Federal Reserve Bank's estimate of expected inflation has fallen from 3.5 percent in 2000 to 1.5 percent in 2013. This fall means that A) the short-run Phillips curve shifted upward. B) the short-run Phillips curve shifted downward. C) there was a movement along the short-run Phillips curve. D) the natural unemployment rate increased. Answer: B Topic: The Short-Run Phillips Curve Skill: Conceptual Status: New AACSB: Reflective Thinking 27) The government estimates that the natural unemployment rate has increased from 4.8 percent in 2006 to 5.2 percent in late 2012. If these estimates are accurate, the short-run Phillips curve has ________. A) shifted rightward B) shifted leftward C) not shifted D) None of the above answers are correct because the effect on the short-run Phillips curve is ambiguous. Answer: A Topic: The Short-Run and Long-Run Phillips Curve Skill: Conceptual Status: New AACSB: Reflective Thinking

28) In the above figure, suppose the economy is at point A. An unexpected increase in the inflation rate to 6 percent will result in a movement to point A) A, that is, there is no movement. B) B. C) C. D) D. Answer: B Topic: The Short-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 29) In the above figure, suppose the economy is at point A. An expected increase in the inflation rate to 6 percent will result in a movement to point A) A, that is, there is no movement. B) B. C) C. D) D. Answer: C Topic: The Short-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

30) The long-run Phillips curve shows the relationship between the inflation rate and the unemployment rate when the A) real interest rate equals the nominal interest rate. B) real interest rate is zero. C) actual inflation rate equals the expected inflation rate. D) inflation rate is zero. Answer: C Topic: The Long-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 31) The long-run Phillips curve is A) vertical at potential GDP. B) the horizontal sum of the short-run Phillips curves. C) vertical at the natural unemployment rate. D) the vertical sum of the short-run Phillips curves. Answer: C Topic: The Long-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 32) The long-run Phillips curve is ________. A) horizontal at the expected inflation rate B) vertical at the natural unemployment rate C) horizontal at the actual inflation rate D) vertical at the actual inflation rate Answer: B Topic: The Long-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 33) Along the long-run Phillips curve, A) actual inflation is greater than expected inflation. B) actual inflation is equal to expected inflation. C) actual inflation is less than expected inflation. D) None of the above answers is correct. Answer: B Topic: The Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

34) The long-run Phillips curve shows that in the long run, policymakers can A) lower unemployment if they are willing to accept more inflation forever. B) lower inflation if they are willing to accept higher unemployment forever. C) choose the unemployment rate but not the inflation rate. D) lower inflation without increasing unemployment. Answer: D Topic: The Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 35) The position of the long-run Phillips curve is determined by A) the quantity of money. B) the natural unemployment rate. C) the inflation rate. D) the expected inflation rate. Answer: B Topic: The Long-Run Phillips Curve Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 36) The Cleveland Federal Reserve Bank's estimate of expected inflation has fallen from 3.5 percent in 2000 to 1.5 percent in 2013. This fall means that A) the long-run Phillips curve shifted leftward. B) the long-run Phillips curve shifted rightward. C) the long-run Phillips curve shifted downward. D) None of the above answers are correct because a change in the expected inflation rate does not shift the long-run Phillips curve. Answer: D Topic: The Long-Run Phillips Curve Skill: Conceptual Status: New AACSB: Reflective Thinking 37) Which of the following statements about the long-run Phillips curve is correct? A) The long-run Phillips curve is horizontal. B) The long-run Phillips curve shifts leftward if the natural unemployment rate decreases. C) The long-run Phillips curve shifts rightward and upward if the expected inflation rate increases. D) None of the above statements is correct. Answer: B Topic: The Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 55 Copyright © 2014 Pearson Education, Inc.

38) In the above figure, which of the following curves represents the long-run Phillips curve? A) 1 B) 2 C) 3 D) 4 Answer: A Topic: The Long-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Analytical Skills

39) Which of the diagrams in the above figure best illustrates a short-run Phillips curve? A) Figure A B) Figure B C) both Figure A and Figure B D) neither Figure A nor Figure B Answer: B Topic: The Short-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 40) In Figure B above, which of the following are being held constant while moving along the curve in the figure? A) the expected inflation rate B) the natural unemployment rate C) the AD curve D) Both answers A and B are correct. Answer: D Topic: The Short-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 41) Which of the diagrams in the above figure best illustrates a long-run Phillips curve? A) Figure A B) Figure B C) both Figure A and Figure B D) neither Figure A nor Figure B Answer: A Topic: The Long-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

42) The short-run Phillips curve intersects the long-run Phillips curve at the A) natural interest rate. B) nominal interest rate. C) natural inflation rate. D) expected inflation rate. Answer: D Topic: The Short-Run and Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 43) The Cleveland Federal Reserve Bank estimates the expected inflation rate is 1.5 percent in 2013. This estimate means that A) the long-run and short-run Phillips curve cross at an inflation rate of 1.5 percent. B) the long-run Phillips curve is vertical at 1.5 percent. C) the short-run Phillips curve is vertical at 1.5 percent. D) the short-run Phillips curve shifts upward by 1.5 percentage points per year. Answer: A Topic: The Short-Run and Long-Run Phillips Curve Skill: Conceptual Status: New AACSB: Reflective Thinking 44) The short-run Phillips curve and the long-run Phillips curve intersect at the ________ and ________. A) expected inflation rate; the expected unemployment rate B) expected inflation rate; the natural unemployment rate C) natural inflation rate; the expected employment rate D) expected inflation rate; the expected employment rate Answer: B Topic: The Short-Run and Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 45) An increase in the expected inflation rate shifts A) both the short-run and the long-run Phillips curves upward. B) the short-run but not the long-run Phillips curve upward. C) the long-run but not the short-run Phillips curve upward. D) neither the short-run nor the long-run Phillips curve. Answer: B Topic: The Short-Run and Long-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

46) A decrease in the expected inflation rate shifts the short-run Phillips curve A) downward and shifts the long-run Phillips curve leftward. B) upward and shifts long-run Phillips curve rightward. C) downward and creates a movement downward along the long-run Phillips curve. D) upward and creates a movement upward along the long-run Phillips curve. Answer: C Topic: The Short-Run and Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 47) An increase in the natural unemployment rate shifts A) both the short-run and the long-run Phillips curves rightward. B) the short-run but not the long-run Phillips curve rightward. C) the long-run but not the short-run Phillips curve rightward. D) neither the short-run nor the long-run Phillips curve. Answer: A Topic: The Short-Run and Long-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 48) A change in the natural unemployment rate ________. A) shifts only the short-run Phillips curve B) causes a movement along the short-run Phillips curve C) shifts only the long-run Phillips curve D) shifts both the short-run and long-run Phillips curves Answer: D Topic: The Short-Run and Long-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 49) If the natural unemployment rate increases, then the short-run Phillips curve shifts ________ and the long-run Phillips curve shifts ________. A) rightward; rightward B) rightward; leftward C) leftward; rightward D) leftward; leftward Answer: A Topic: The Short-Run and Long-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

50) The government estimates that the natural unemployment rate has increased from 4.8 percent in 2006 to 5.2 percent in late 2012. If these estimates are accurate, the short-run Phillips curve has shifted ________ and the long-run Phillips curve has shifted ________. A) rightward; rightward B) rightward; leftward C) leftward; rightward D) leftward; leftward Answer: A Topic: The Short-Run and Long-Run Phillips Curve Skill: Conceptual Status: New AACSB: Reflective Thinking Inflation rate Unemployment rate (percent per year) (percent) 8 3 6 4 4 5 2 6 51) An economy's natural unemployment rate is 4 percent. The table above gives some points on the economy's short-run Phillips curve. When the unemployment rate is 4 percent ________. A) actual inflation is greater than expected inflation B) actual inflation is less than expected inflation C) and the inflation rate is 6 percent a year, the short-run and long-run Phillips curves intersect D) and the expected inflation rate is 8 percent a year, the short-run Phillips curve shifts downward Answer: C Topic: The Short-Run Phillips Curve and the Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills 52) An economy's natural unemployment rate is 4 percent. The table above gives some points on the economy's short-run Phillips curve. If the expected inflation rate becomes 8 percent per year, then the ________. A) short-run Phillips curve shifts upward B) long-run Phillips curve shifts rightward C) long-run Phillips curve shifts leftward D) short-run Phillips curve shifts downward Answer: A Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

53) In the above figure, suppose that the economy currently is at point A. If the inflation rate falls and this fall is unanticipated by the public, the economy moves to a point such as point A) B. B) C. C) D. D) E. Answer: D Topic: The Short-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 54) In the above figure, suppose that the economy currently is at point A. If the inflation rate rises and this rise is NOT expected by the public, the economy moves to a point such as point A) B. B) C. C) D. D) E. Answer: A Topic: The Short-Run Phillips Curve Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

55) In the above figure, what might have shifted the short-run Phillips curve from SRPC1 to SRPC2 while leaving the long-run Phillips curve unchanged at LRPC? A) The natural unemployment rate increased. B) The natural unemployment rate decreased. C) The expected inflation rate increased. D) The expected inflation rate decreased. Answer: C Topic: The Short-Run Phillips Curve Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 56) In the above figure, suppose that the economy currently is at point A. If the inflation rate rises and this rise is anticipated by the public, the economy moves to a point such as point A) B. B) C. C) D. D) E. Answer: B Topic: The Long-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 57) In the above figure, suppose that the economy is at point C. If the inflation rate is lower than expected, A) the LRPC will shift rightward. B) the SRPC will shift downward. C) the SRPC will shift upward. D) Neither the LRPC nor the SRPC will shift. Answer: D Topic: The Short-Run and Long-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

58) In the above figure, the economy is at point A. The inflation rate unexpectedly falls by two percentage points. As a result, the economy moves to point A) A, that is, there is no movement. B) B. C) C. D) D. Answer: D Topic: The Short-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 59) In the above figure, the economy is at point A. The inflation rate falls by two percentage points and people correctly expected the fall. As a result, the economy moves to point A) A, that is, there is no movement. B) B. C) C. D) D. Answer: C Topic: The Long-Run Phillips Curve Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

60) The figure above shows an economy's Phillips curves. Currently, the inflation rate is 6 percent a year. The natural unemployment rate is ________ percent and the expected inflation rate is ________ percent a year. A) 6; 6 B) 6; 10 C) 4; 6 D) 6; 4 Answer: D Topic: The Short-Run and Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills 61) The figure above shows an economy's Phillips curves. Currently, the inflation rate is 6 percent a year. If inflation expectations remain unchanged, the current unemployment rate is ________. A) less than the natural rate B) greater than the natural rate C) equal to the natural rate D) 6 percent Answer: A Topic: The Short-Run and Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills

62) Consider the U.S. data for inflation and the unemployment rate for the last five decades. Which of the following statements describes the relationship between the two variables? A) The natural unemployment rate did not change but the expected inflation rate did change over these years. B) Several different short-run Phillips curves representing different natural unemployment rates and different expected inflation rates existed. C) There is a positive relationship. D) None of the above answers is correct. Answer: B Topic: The U.S. Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 63) During the 1970s when both the unemployment rate and inflation rate rose, it is reasonable to conclude that A) both the short-run and long-run Phillips curves shifted rightward. B) both the short-run and long-run Phillips curves shifted leftward. C) only the short-run Phillips curve shifted. D) only the long-run Phillips curve shifted. Answer: A Topic: The U.S. Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 64) The short-run Phillips curve shows the relationship between A) the price level and real GDP in the short run. B) the price level and unemployment in the short run. C) inflation and unemployment when expected inflation equals the actual inflation. D) inflation and unemployment when expected inflation does not change. Answer: D Topic: Study Guide Question, The Short-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 65) The short-run Phillips curve shows the ________ relationship between ________. A) negative; unemployment and real GDP B) positive; unemployment and real GDP C) negative; inflation and unemployment D) positive; real GDP and inflation Answer: C Topic: Study Guide Question, The Short-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 65 Copyright © 2014 Pearson Education, Inc.

66) The long-run Phillips curve shows the relationship between A) the price level and real GDP in the long run. B) the price level and unemployment in the long run. C) inflation and unemployment when expected inflation equals the actual inflation. D) inflation and unemployment when expected inflation does not change. Answer: C Topic: Study Guide Question, The Long-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 67) A decrease in the natural unemployment rate shifts the long-run Phillips curve ________ and ________ the short-run Phillips curve. A) rightward; does not shift B) leftward; shifts rightward C) rightward; shifts rightward D) leftward; shifts leftward Answer: D Topic: Study Guide Question, Short-Run and Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 68) A rise in the expected inflation rate leads to ________ in the long-run Phillips curve and ________ in the short-run Phillips curve. A) an upward shift; no shift B) a leftward shift; an upward shift C) no shift; no shift D) no shift; an upward shift Answer: D Topic: Study Guide Question, Short-Run and Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 69) A decrease in the expected inflation rate leads to ________ in the long-run Phillips curve and ________ in the short-run Phillips curve. A) an upward shift; no shift B) a leftward shift; an upward shift C) no shift; no shift D) no shift; a downward shift Answer: D Topic: Study Guide Question, Short-Run and Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 66 Copyright © 2014 Pearson Education, Inc.

3 The Business Cycle 1) Business cycle events that arise solely from aggregate demand shifts are emphasized by the A) Keynesian and real business cycle theories. B) monetarist and real business cycle theories. C) Keynesian and monetarist cycle theories. D) none of the major theories Answer: C Topic: Aggregate Demand Theories of the Business Cycle Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 2) Which of the following are business cycle theories that regard fluctuations in aggregate demand as the factor creating business cycles? I. Keynesian cycle theory II. real business cycle theory III. monetarist cycle theory A) I only B) I and II C) I and III D) I, II and III Answer: C Topic: Aggregate Demand Theories of the Business Cycle Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 3) Which of the following is NOT an aggregate demand, mainstream theory of the business cycle? A) Keynesian cycle theory B) monetarist cycle theory C) new Keynesian cycle theory D) real business cycle theory Answer: D Topic: Aggregate Demand Theories of the Business Cycle Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

4) In 2008, when a recession started, the growth of government expenditures on goods and services doubled from its growth in 2007. According to the aggregate demand theories of the business cycle A) government expenditure was at least a partial cause of the recession. B) government expenditure was not a cause of the recession. C) government expenditure was definitely the cause of the recession D) None of the above answers are correct because aggregate demand theories of the business cycle focus only on investment and consumption expenditure. Answer: B Topic: Aggregate Demand Theories of the Business Cycle Skill: Conceptual Status: New AACSB: Reflective Thinking 5) In the Keynesian business cycle theory, business cycles begin with changes in A) inflation expectations. B) consumer sentiment. C) business confidence. D) the public's expectations about Fed policies. Answer: C Topic: Keynesian Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 6) The ________ states that the main source of economic fluctuations is volatile business confidence. A) real business cycle theory B) new classical cycle theory C) Keynesian cycle theory D) monetarist cycle theory Answer: C Topic: Keynesian Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 7) Fluctuations in business confidence is the factor leading to business cycles in the ________. A) Keynesian cycle theory B) new Keynesian cycle theory C) new classical cycle theory D) monetarist cycle theory Answer: A Topic: Keynesian Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 68 Copyright © 2014 Pearson Education, Inc.

8) The factor leading to business cycles in the Keynesian model is ________. A) changes in business confidence B) a speed up in money growth C) unanticipated changes in aggregate demand D) unanticipated changes in aggregate supply Answer: A Topic: Keynesian Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 9) The Keynesian explanation of the business cycle is based on A) the inability of government policy-makers to predict the future course of the economy. B) shifts in monetary policy undertaken by the Federal Reserve. C) fluctuations in business confidence. D) unstable inflationary expectations. Answer: C Topic: Keynesian Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 10) The factor that leads to business cycles within Keynesian cycle theory is A) the growth rate in labor productivity. B) the growth rate in the quantity of money. C) adverse shocks to international trade. D) fluctuations in business confidence. Answer: D Topic: Keynesian Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 11) Keynes used the term "animal spirits" to represent A) changes in people's consumption expenditures. B) the ease of forecasting. C) fluctuations in business confidence. D) investment based on hard facts about the future. Answer: C Topic: Keynesian Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

12) Which theory emphasizes frequent changes in investment because of "animal spirits" as the main source of economic fluctuations? A) real business cycle theory B) new classical cycle theory C) Keynesian cycle theory D) monetarist cycle theory Answer: C Topic: Keynesian Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 13) One model of the business cycle claims that volatile business confidence is the primary factor in starting a business cycle. This model is the A) real business cycle model. B) Keynesian cycle theory. C) aggregate supply model. D) new classical theory. Answer: B Topic: Keynesian Theory Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 14) Which theory assumes that business cycles occur because of changes in business confidence? A) monetarist cycle theory B) real business cycle theory C) new classical cycle theory D) Keynesian cycle theory Answer: D Topic: Keynesian Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

15) Which of the following describes the Keynesian approach to the business cycle? I. Unanticipated shocks to aggregate supply drive expansions and recessions. II. The Keynesian theory is a real business cycle model of the economy. III. A decrease in business confidence can trigger a recession. A) I only B) III only C) I and II D) II and III Answer: B Topic: Keynesian Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 16) Suppose that managers forecasted a large decline in expected sales and profits and so their confidence plummets. According to the ________, this forecast might start a business cycle. A) Keynesian cycle theory B) circular flow theory C) monetarist cycle theory D) new classical cycle theory Answer: A Topic: Keynesian Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 17) Keynesians believe that A) money wage rate adjustments will quickly eliminate unemployment. B) aggregate demand changes tend to induce aggregate supply changes, offsetting any effect from changes in government expenditures. C) the economy will normally operate at full employment. D) a change in business confidence can affect the amount of investment in the economy. Answer: D Topic: Keynesian Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

18) The Keynesian explanation of the business cycle rests on several concepts, including A) rigid money wage rates. B) unstable monetary policy by the Fed. C) shocks to the rate of technological change. D) the desire of politicians to be re-elected. Answer: A Topic: Keynesian Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 19) Based on the Keynesian theory of the business cycle, if the economy is at its fullemployment equilibrium and aggregate demand increases then A) the price level and real GDP both increase. B) the price level rises but real GDP remains unchanged. C) the price level and GDP both decrease. D) real GDP decreases and the price level remains unchanged. Answer: A Topic: Keynesian Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 20) For monetarists the main cause of economic fluctuations is changes in A) investment. B) consumption expenditure. C) the growth rate of the quantity of money. D) the levels of household debt. Answer: C Topic: Monetarist Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 21) The monetarist theory of the business cycle regards ________ as the factor that leads to business cycles. A) unexpected increases in aggregate demand B) changes in the growth rate of the quantity of money C) volatility in the interest rate D) volatility in the demand for money Answer: B Topic: Monetarist Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

22) What, according to the monetarist theory of the business cycle, leads to changes in real GDP? A) a change in profit expectations B) a change in the growth rate in tax revenue C) a change in the growth rate of the quantity of money D) an unanticipated change in aggregate demand Answer: C Topic: Monetarist Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 23) In monetarist business cycle theory, the factor leading to a business cycle is changes in A) consumer spending. B) investment spending. C) the growth rate of the quantity of money. D) net exports. Answer: C Topic: Monetarist Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 24) In monetarist business cycle theory, decreasing the growth rate of the quantity of money ________ and increasing the growth rate of the quantity of money ________. A) increases real GDP; decreases the inflation rate B) decreases real GDP; decreases the inflation rate C) causes the economy to enter a recession; causes the economy to enter an expansion D) causes the economy to enter an expansion; causes the economy to enter a recession Answer: C Topic: Monetarist Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 25) In monetarist business cycle theory, increases in money growth temporarily ________ real GDP and ________ the price level. A) increase; rise B) increase; lower C) decrease; rise D) decrease; lower Answer: A Topic: Monetarist Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 73 Copyright © 2014 Pearson Education, Inc.

26) Using the monetarist model, place the following events in the order in which they occur in a business cycle. I. Money wages fall and the SAS curve shifts rightward. II. The Federal Reserve decreases the growth rate of the quantity of money. III. The AD curve shifts leftward. A) II, III, I B) III, II, I C) I, III, II D) The events are not part of a monetarist model of the business cycle. Answer: A Topic: Monetarist Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 27) Suppose the growth rate of the quantity of money increased from 5 percent per year to 8 percent per year. According to the ________, this event would trigger a business cycle expansion. A) Keynesian cycle model B) real business cycle model C) aggregate supply cycle model D) monetarist cycle model Answer: D Topic: Monetarist Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 28) Which of the following is TRUE regarding the monetarist theory of the business cycle? I. Monetarists assume that the quantity of money increases at a constant rate. II. Fluctuations in interest rates cause business cycles. III. Changes in the growth rate of the quantity of money affect aggregate demand. A) I only B) III only C) I and II D) II and III Answer: B Topic: Monetarist Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

29) Which of the following pieces of evidence is most consistent with the monetarist theory? A) Labor supply decisions do not seem to depend on real interest rates. B) Changes in real GDP and the quantity of money move closely together. C) Money wage rates take some time to adjust to price changes. D) Productivity and GDP move closely together. Answer: B Topic: Monetarist Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

30) In the above figure, suppose the economy has moved from point A to point C. According to the monetarist theory of the business cycle, what could have caused this movement? A) an increase in the money wage rate B) an increase in the growth rate of the quantity of money C) a decrease in the growth rate of the quantity of money D) an increase in uncertainty Answer: C Topic: Monetarist Theory Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

31) In the above figure, suppose the economy has moved from point D to point B. According to the monetarist theory of the business cycle, what could have caused this movement? A) a decrease in the money wage rate B) an increase in uncertainty about future sales and profits C) an increase in the growth rate of the quantity of money D) an increase in the money wage rate Answer: C Topic: Monetarist Theory Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

32) Using the above figure, a recession in the monetarist model would start with a A) rightward shift in the AD curve. B) leftward shift in the AD curve. C) leftward shift in the SAS curve. D) leftward shift in the LAS curve. Answer: B Topic: Monetarist Theory Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

33) In the above figure, the economy is initially at point A. Which point best represents the shortrun response to a decrease in the growth rate of the quantity of money, according to the monetarists? A) A, that is, there is no change. B) B C) C D) D Answer: D Topic: Monetarist Theory Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

34) In the above figure, suppose the economy starts at point A. The short-run response to a decrease in the growth rate of the quantity of money in monetarist business cycle theory moves the economy to point A) B. B) C. C) D. D) E. Answer: C Topic: Monetarist Theory Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 35) In the above figure, suppose the economy starts at point A. The short-run response to an increase in the growth rate of the quantity of money in monetarist business cycle theory moves the economy to point A) B. B) C. C) D. D) E. Answer: A Topic: Monetarist Theory Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

36) In the above figure, suppose the economy starts at point A. The short-run response to an increase in the growth rate of the quantity of money in the monetarist business cycle theory is for the price level to ________ and real GDP to ________. A) fall to 90; remain at $13 trillion B) rise to 120; increase to $15 trillion C) rise to 130; remain at $13 trillion D) remain at 110; remain at $13 trillion Answer: B Topic: Monetarist Theory Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 37) The new classical cycle theory predicts that an unexpected increase in aggregate demand ________ create a business cycle and an expected increase in aggregate demand ________ create a business cycle. A) will; will B) will; will not C) will not; will D) will not; will not Answer: B Topic: Rational Expectation Theories Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 38) The ________ cycle theory states that only unexpected fluctuations in aggregate demand are the main source of business cycles. A) new Keynesian B) new classical C) Keynesian D) monetarist Answer: B Topic: New Classical Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

39) The business cycle impulse in the new classical theory of the business cycle is A) unexpected changes in aggregate demand. B) expected changes in aggregate demand. C) fluctuations in money growth with rigid wages. D) fluctuations in investment coupled with rigid wages. Answer: A Topic: New Classical Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 40) The new classical theory argues that the primary factor leading to business cycles are A) expected changes in aggregate demand. B) expected changes in aggregate supply. C) unexpected changes in aggregate demand. D) unexpected changes in aggregate supply. Answer: C Topic: New Classical Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 41) Which theory distinguishes between expected and unexpected fluctuations in aggregate demand and asserts that only unexpected changes can affect real GDP? A) new classical cycle theory B) Keynesian cycle theory C) monetarist cycle theory D) real business cycle theory Answer: A Topic: New Classical Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 42) According to the new classical model, changes in aggregate demand change real GDP A) all of the time. B) only when the short-run aggregate supply curve is vertical. C) only when the changes in aggregate demand are expected. D) only when the changes in aggregate demand are unexpected. Answer: D Topic: New Classical Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

43) Suppose that forecasters have incorrectly estimated aggregate demand. According to the ________, this mistake could trigger a business cycle. A) Keynesian cycle model B) the monetarist cycle model C) the new classical cycle model D) the real business cycle model Answer: C Topic: New Classical Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 44) A larger than expected increase in aggregate demand will lead to ________ in the ________ of the business cycle. A) a recession; new Keynesian cycle theory B) a recession; Keynesian cycle theory C) an expansion; new classical cycle theory D) an expansion; real business cycle theory Answer: C Topic: New Classical Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 45) Which of the following correctly describes the new classical cycle theory of the business cycle? A) An unexpected change in the quantity of money can trigger a business cycle. B) An expected tax rate change can trigger a business cycle. C) An expected change in the level of exports can trigger a business cycle. D) Rational expectations keep the money wage from changing quickly. Answer: A Topic: New Classical Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 46) One assumption of the new classical model is that A) money wage rates are rigid. B) prices are "sticky" upward. C) people make rational expectations about aggregate demand. D) markets are not purely competitive. Answer: C Topic: New Classical Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 81 Copyright © 2014 Pearson Education, Inc.

47) Both new Keynesian and new classical cycle theories claim that ________. A) animal spirits can trigger a business cycle B) shifts in the SAS curve are the main impulse for a business cycle C) unexpected changes in aggregate demand trigger a business cycle D) expected changes in the quantity of money can trigger a business cycle Answer: C Topic: New Classical and New Keynesian Theories Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 48) Both the new classical and new Keynesian business cycle theories agree that A) expected changes in aggregate demand lead to the business cycle. B) unexpected changes in aggregate demand cannot result in a business cycle. C) the money wage rate is influenced by rational expectations of the price level. D) the long-term nature of wage contracts allow expected changes in the price level to cause business cycles. Answer: C Topic: New Classical and New Keynesian Theories Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 49) A key difference between the new classical and the new Keynesian views of the business cycle is the role played by A) unexpected changes in aggregate demand. B) government expenditure on goods and services. C) expected changes in aggregate demand. D) the growth rate of the quantity of money. Answer: C Topic: New Classical and New Keynesian Theories Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

50) The key difference between the new classical theory of the business cycle and the new Keynesian theory of the business cycle is that the new classical theory believes that ________ while the new Keynesian theory believes that ________. A) expected changes in aggregate demand will change real GDP; expected changes in aggregate demand will not change real GDP B) only unexpected changes in aggregate demand will change real GDP; only expected changes in aggregate demand will change real GDP C) only unexpected changes in aggregate demand will change real GDP; both expected and unexpected changes in aggregate demand will change real GDP D) the short-run aggregate supply curve is horizontal; the short-run aggregate supply curve is vertical Answer: C Topic: New Classical and New Keynesian Theories Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 51) The factor leading to business cycles in the ________ cycle theory is unexpected fluctuations in aggregate demand while in the ________ cycle theory both unexpected and expected fluctuations in aggregate demand are factors that lead to business cycles. A) new classical; monetarist B) new classical; new Keynesian C) new Keynesian; Keynesian D) monetarist; new Keynesian Answer: B Topic: New Classical and New Keynesian Theories Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 52) According to the new classical theory, ________ policy changes have no effect on real GDP and according to the new Keynesian theory, ________ policy changes have an effect on real GDP. A) expected; expected B) unexpected; expected C) fiscal; monetary D) fiscal; fiscal Answer: A Topic: New Classical and New Keynesian Theories Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

53) An unexpected decrease in aggregate demand will trigger a recession in the ________ theory of the business cycle. A) new Keynesian cycle B) new classical cycle C) Keynesian cycle D) Both answers A and B are correct. Answer: D Topic: New Classical and New Keynesian Theories Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 54) The new Keynesian cycle theory of the business cycle regards ________ as the main source of economic fluctuations. A) unexpected fluctuations in aggregate demand B) expected and unexpected fluctuations in aggregate demand C) expected fluctuations in aggregate supply D) changes in business confidence Answer: B Topic: New Keynesian Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 55) New Keynesian economists believe that ________ is influenced by ________. A) yesterday's money wage rate; today's rational expectations of the money wage B) today's money wage rate; yesterday's rational expectations of the price level C) yesterday's rational expectations of the price level; today's money wage rate D) today's money wage rate; today's rational expectations of the price level Answer: B Topic: New Keynesian Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 56) Which business cycle theory emphasizes that, because of long-term wage agreements, both expected and unexpected fluctuations in aggregate demand can change real GDP? A) the new classical cycle theory B) the new Keynesian cycle theory C) monetarist cycle theory D) Keynesian cycle theory Answer: B Topic: New Keynesian Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 84 Copyright © 2014 Pearson Education, Inc.

57) The ________ theory of the business cycle asserts that expected and unexpected changes in aggregate demand lead to fluctuations in real GDP. A) real business cycle B) new classical cycle C) new Keynesian cycle D) None of the above answers are correct. Answer: C Topic: New Keynesian Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 58) According to the new Keynesian cycle theory of the business cycle, which of the following can trigger a business cycle expansion? I. an unexpected increase in the quantity of money II. an expected increase in the quantity of money III. an expected increase in government expenditure A) I only B) II and III C) I, II and III D) None of the three will trigger an expansion. Answer: C Topic: New Keynesian Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 59) In the new Keynesian business cycle theory, ________ can effect real GDP. A) only expected changes in aggregate demand B) expected and unexpected changes in aggregate demand C) only unexpected changes in aggregate demand D) only unexpected changes in the money wage rate Answer: B Topic: New Keynesian Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

60) Suppose that the Federal Reserve is expected to expand the quantity of money by 5 percent but ends up expanding it by only 2 percent. If the new Keynesian theory is correct, which of the following describes the effect on the economy? A) The economy experience a boom because the quantity of money is still growing. B) Inflation will be higher than expected. C) Workers' decisions about when to work will be affected. D) A recession will ensue. Answer: D Topic: New Keynesian Theory Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 61) Suppose the data show that an unexpected change in tax rates caused a recent recession. These data support which model of the business cycle? A) new classical cycle theory B) new Keynesian cycle theory C) real business cycle theory D) Both answers A and B are correct. Answer: D Topic: New Classical and New Keynesian Theories Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 62) Which of the following are TRUE? I. New Keynesian economists believe that money wage rates are influenced by rational expectations of the price level. II. New classical economists believe that money wage rates are influenced by rational expectations of the price level. III. New classical economists believe expected changes in aggregate demand trigger business cycles. A) I and II B) I and III C) II and III D) I, II and III Answer: A Topic: New Classical and New Keynesian Theories Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

63) Real business cycle theory says that the factor leading to the business cycle is changes in A) animal spirits. B) the growth rate of the quantity of money. C) only aggregate demand. D) productivity. Answer: D Topic: RBC Impulse Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 64) The real business cycle theory asserts that changes in ________ lead to changes in ________. A) the quantity of money; real GDP B) technology; productivity C) animal spirits; real GDP D) consumption expenditure; real GDP Answer: B Topic: RBC Impulse Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 65) The factor leading to business cycles according to the real business cycle theory is changes in A) the growth rate of the quantity of money. B) technological change caused by changes in productivity. C) productivity caused by changes in technology. D) investment caused by changes in business confidence. Answer: C Topic: RBC Impulse Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 66) Real business cycle (RBC) theory predicts that the main source of economic fluctuations is A) sticky money wage rates. B) rational expectations based on complete information. C) changes in the growth rate of productivity. D) None of the above answers is correct. Answer: C Topic: RBC Impulse Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

67) Real business cycle theory explains the business cycle as the result of A) excess growth of the quantity of money. B) unstable investment demand. C) shocks to consumer spending habits. D) fluctuations in productivity. Answer: D Topic: RBC Impulse Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 68) The factor that leads to business cycle events within real business cycle theory is A) changes in growth rate in productivity. B) changes in the growth rate in the quantity of money. C) adverse shocks to international trade. D) changes in expected future sales and profits of firms. Answer: A Topic: RBC Impulse Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 69) In real business cycle theory, the factor leading to a business cycle is A) changes in investment. B) changes in the quantity of money. C) unexpected changes in aggregate demand. D) fluctuations in the pace of technological change. Answer: D Topic: RBC Impulse Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 70) The factor leading to business cycles in the real business cycle theory is changes in the growth rate of A) the quantity of money. B) productivity. C) labor supply. D) the money wage rate. Answer: B Topic: RBC Impulse Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

71) According to the real business cycle (RBC) theory, recessions are the result of A) a fall in growth rate of productivity. B) an increase in growth rate of the quantity of money. C) an increase in investment. D) a decrease in growth rate of the quantity of money. Answer: A Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 72) The theory that regards random fluctuations in productivity as the main source of economic fluctuations is the ________ of the business cycle. A) real business cycle theory B) productivity theory C) dynamic general equilibrium theory D) Keynesian cycle theory Answer: A Topic: RBC Impulse Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 73) Which theory views fluctuations in productivity as the main source of business cycle fluctuations? A) real business cycle theory B) Keynesian cycle theory C) monetarist cycle theory D) new classical cycle theory Answer: A Topic: RBC Impulse Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 74) When the recession started in 2008, the government estimates that labor productivity for the year was -2.8 percent. This result is most in line with which theory of business cycle fluctuations? A) real business cycle theory B) Keynesian cycle theory C) monetarist cycle theory D) new classical cycle theory Answer: A Topic: RBC Impulse Skill: Conceptual Status: New AACSB: Reflective Thinking 89 Copyright © 2014 Pearson Education, Inc.

75) According to the real business cycle theory, technological change A) occurs at a constant rate. B) happens only occasionally. C) happens at an uneven pace. D) is increasing in recent years at an increasing rate. Answer: C Topic: RBC Impulse Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 76) According to the real business cycle theory, technological change A) always increases productivity. B) never increases productivity. C) can initially decrease productivity. D) is caused by changes in productivity. Answer: C Topic: RBC Impulse Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 77) The real business cycle (RBC) theory assets that the impact on real GDP of technological change is A) always positive. B) usually positive but occasionally negative. C) always negative. D) nonexistent. Answer: B Topic: RBC Impulse Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 78) According to the ________ theory, technological change can be so rapid that some existing capital becomes obsolete and ________. A) real business cycle; aggregate demand increases B) new classical; productivity falls C) new classical; aggregate demand increases D) real business cycle; productivity falls Answer: D Topic: RBC Impulse Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 90 Copyright © 2014 Pearson Education, Inc.

79) Evidence indicates that a recession occurs at about the same time as a decrease in investment. According to the real business cycle theory, the decrease in investment is attributable to A) a fall in animal spirits. B) a decrease in productivity. C) a decrease in the growth rate of the quantity of money. D) intertemporal substitution in working decisions. Answer: B Topic: RBC Impulse Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 80) Which of the following pieces of evidence is most consistent with the real business cycle theory? A) Labor supply decisions do not seem to depend on real interest rates. B) Real GDP and the quantity of money move closely together. C) Money wage rates take some time to adjust to price changes. D) Productivity and GDP move closely together. Answer: D Topic: RBC Impulse Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 81) Looking at U.S. economic history between 1964 and 2009, we see that growth in real GDP A) was not correlated with fluctuations in productivity growth. B) falls following an increase in productivity growth. C) rises following an increase in productivity growth. D) rises following a decrease in productivity growth. Answer: C Topic: RBC Impulse Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 82) The key ripple effect in real business cycle theory is the ________ decision and it depends on the ________. A) when-to-invest; real interest rate B) when-to-work; real interest rate C) what-to-save; nominal interest rate D) where-to-work; real wage rate Answer: B Topic: Real Business Cycle Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 91 Copyright © 2014 Pearson Education, Inc.

83) According to the real business cycle theory, the immediate effects from a change in productivity include which of the following? I. Investment demand changes. II. Demand for labor changes. III. Government expenditures change. A) I B) I and II C) I and III D) II and III Answer: B Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 84) "Intertemporal substitution" in labor supply describes changes in labor supply in response to changes in A) personal tax rates. B) investment spending. C) the real interest rate. D) consumer demand for goods. Answer: C Topic: RBC Mechanism Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 85) Which theory maintains that the money wage rate always adjusts freely? A) Keynesian cycle theory B) monetarist cycle theory C) both the new classical cycle theory and the new Keynesian cycle theory D) real business cycle theory Answer: D Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

86) In real business cycle theory, a decrease in productivity leads to all of the following events EXCEPT ________. A) a decrease in the demand for labor B) a decrease in investment demand C) a rise in the real wage rate D) a fall in the real interest rate Answer: C Topic: RBC Mechanism Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 87) In a real business cycle model, labor supply A) increases if the nominal interest rate rises. B) is independent of the real interest rate. C) decreases if the real interest rate rises. D) decreases if the real interest rate falls. Answer: D Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 88) In the real business cycle framework, a technology shock that increases investment demand and the demand for loanable funds leads to a ________ quantity of saving and a ________ real interest rate. A) higher; higher B) higher; lower C) lower; higher D) lower; lower Answer: A Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

89) Suppose that a severe shock that decreases the demand for loanable funds hits the United States. Which of the following can we expect to occur according to the real business cycle model? A) The real interest rate will fall. B) People will work fewer hours. C) The real wage rate will fall. D) All of the above are true. Answer: D Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 90) According to the real business cycle theory, an increase in the price of a resource, such as oil, that decreases the demand for loanable funds will ________ employment and ________ real GDP. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: D Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 91) According to real business proponents, in an increase in productivity ________ the demand for loanable funds, ________ the demand for labor, and ________ the supply of labor. The real interest rate will ________. A) increases; increases; there is no change in; fall B) increases; increases; there is no change in; rise C) decreases; decreases; decreases; fall D) increases; increases; increases; rise Answer: D Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

92) According to the real business cycle (RBC) theory, during a recession the demand for labor ________ and the supply of labor ________. A) increases; decreases B) decreases; does not change C) does not change; decreases D) decreases; decreases Answer: D Topic: Real Business Cycle Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 93) According to real business cycle theory, a fall in the real interest rate ________ current labor supply and ________ current employment. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: D Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 94) Real business cycle economists claim that the intertemporal substitution effect A) plays a small role in the labor market. B) depends on the real interest rate. C) plays a large role in the economy only during expansions. D) has unpredictable effects on the economy. Answer: B Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 95) According to real business cycle theory, workers' decisions to work now versus later depend on A) the real wage rate today but not the real wage rate in the future. B) the money wage rate. C) the real interest rate. D) labor productivity. Answer: C Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 95 Copyright © 2014 Pearson Education, Inc.

96) Suppose that in response to a decrease in real interest rates, a person decides to reduce his labor supply today and increase it in the future. This behavior is most consistent with the A) new classical theory of the business cycle. B) Keynesian theory of the business cycle. C) new Keynesian theory of the business cycle. D) real business cycle theory. Answer: D Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 97) If the real interest rate is 4 percent and workers expect real wages to be 2 percent year higher next year, according to real business cycle theory, workers will work A) more this year and less next year. B) less this year and less next year. C) more this year and more next year. D) less this year and more next year. Answer: A Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 98) If the real interest rate is 2 percent and workers expect real wages to be 4 percent higher next year, according to real business cycle theory, workers will work A) more this year and less next year. B) less this year and less next year. C) more this year and more next year. D) less this year and more next year. Answer: D Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Analytical Skills 99) In the real business cycle model, the quantity of money A) can change the real wage rate. B) can increase the real interest rate. C) has no effect on real GDP. D) can decrease the effect from technology shocks. Answer: C Topic: Real Business Cycle Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 96 Copyright © 2014 Pearson Education, Inc.

100) According to real business cycle (RBC) theory, a change in the quantity of money leads to A) a change in the price level and in real GDP. B) a change in the price level but no change in real GDP. C) a change in investment and real GDP. D) a change in the real wage rate and the money wage rate. Answer: B Topic: Real Business Cycle Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 101) According to which theory of the business cycle do changes in the quantity of money never play a role in helping to explain fluctuations in real variables? A) Keynesian B) monetarist C) new Keynesian D) real business cycle Answer: D Topic: Real Business Cycle Theory Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 102) In real business cycle models, in order to increase real GDP after a negative technology shock, the government can I. increase the quantity of money. II. decrease the quantity of money. A) only I B) only II C) both I and II D) neither I nor II Answer: D Topic: Real Business Cycle Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 103) Critics of the real business cycle model argue that A) investment spending is strongly related to the real interest rate. B) labor supply is only weakly related to the real interest rate. C) investment spending is only weakly related to the real interest rate. D) labor supply is very strongly related to the real interest rate. Answer: B Topic: Criticisms of Real Business Cycle Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 97 Copyright © 2014 Pearson Education, Inc.

104) Which of the following is NOT one of the criticisms of real business cycle theory? A) The money wage rate is sticky in the short run. B) Inter-temporal substitution is too weak. C) Productivity fluctuations are the result of the business cycle, not the cause of business cycles. D) The theory is built on weak microeconomic foundations. Answer: D Topic: Criticisms of Real Business Cycle Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 105) Critics of the real business cycle theory claim that A) both real and nominal variables change during the business cycle. B) the intertemporal substitution effect is too weak to account for changes in labor supply. C) changes in technology cannot cause economic growth. D) Both answers B and C are correct. Answer: B Topic: Criticisms of Real Business Cycle Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 106) Suppose that an economist finds that in most recessions, which are times when employment is low, that real interest rates are extremely high. This finding would pose the biggest problem for the A) new classical theory of the business cycle. B) real business cycle theory. C) new Keynesian theory of the business cycle. D) Keynesian theory of the business cycle. Answer: B Topic: Criticisms of Real Business Cycle Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 107) A criticism of the real business cycle (RBC) theory is that A) the money wage rate is flexible. B) potential GDP does not vary with changes in the quantity of money. C) productivity fluctuations might be caused by the business cycle. D) All of the above answers are correct. Answer: C Topic: Criticisms of Real Business Cycle Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

108) Which of the following is a criticism of real business cycle theory? A) Real business cycle theory fails to explain the phenomenon of economic growth. B) Real business cycle theory assumes that money wage rates are sticky. C) Real business cycle theory believes that productivity changes are caused by technology changes when in fact they are caused by changes in aggregate demand. D) None of the above are criticisms of real business cycle theory. Answer: C Topic: Criticisms of Real Business Cycle Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 109) Which of the following theories is criticized for assuming the money wage rate is not sticky? A) monetarist cycle theory B) real business cycle theory C) Keynesian cycle theory D) new Keynesian cycle theory Answer: B Topic: Criticisms of Real Business Cycle Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 110) Which of the following is the factor the creates business cycles in the real business cycle theory? A) an unexpected change in aggregate demand B) a change by the Fed in the growth rate of the quantity of money C) a change in expectations about future sales and profits D) a change in the growth rate of productivity Answer: D Topic: Study Guide Question, Real Business Cycle Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 111) By itself, an increase in aggregate demand increases GDP by the least amount in the ________. A) Keynesian theory B) monetarist theory C) new Keynesian theory D) real business cycle theory Answer: D Topic: Study Guide Question, Real Business Cycle Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 99 Copyright © 2014 Pearson Education, Inc.

112) Which of the following is the factor that leads to business cycles in the Keynesian business cycle theory? A) an unexpected change in aggregate demand B) a change by the Fed in the growth rate of the quantity of money C) a change in business confidence D) a change in the growth rate of productivity Answer: C Topic: Study Guide Question, Keynesian Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 113) Which of the following is the factor that leads to business cycles in the monetarist business cycle theory? A) an unexpected change in aggregate demand B) a change by the Fed in the growth rate of the quantity of money C) a change in business confidence D) a change in the growth rate of productivity Answer: B Topic: Study Guide Question, Monetarist Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 114) Which of the following is the factor that leads to business cycles in the new classical business cycle theory? A) an unexpected change in aggregate demand B) a change by the Fed in the growth rate of the quantity of money C) a change in business confidence D) a change in the growth rate of productivity Answer: A Topic: Study Guide Question, New Classical Theory Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

4 News Based Questions 1) The data below show data for Germany including real GDP (in billions of euros) and the price level.

2002 2003 2004 2005 2006 2007

Real GDP 2088 2083 2105 2121 2182 2237

Price Level 102.6 103.6 106 108.2 109.7 109.5

In which of the following year(s) did Germany experience inflation? A) 2003, 2004, 2005 and 2006 B) 2006 and 2007 C) 2007 D) 2002, 2005 and 2006 only Answer: A Topic: Inflation Rate Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 2) "UK Inflation Surges to 16-year High" According to the story, "High inflation in July will also lead to ... "further rises next January ..." Economists also noted that inflation may get worse because the current data did not yet include "announced rises in gas and electricity prices." www.ft.com, 8/12/2008 The story reflects the concept of A) cost-push inflation. B) the short-run Phillips curve. C) demand-pull inflation. D) the long-run Phillips curve. Answer: A Topic: Cost-Push Inflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

3) "Inflation Gives Saudis Food for Thought" "My boss sent me back to return the milk – it's too expensive," said the Pakistani driver for a middle-class Saudi family at the checkout counter of the Al-Othaim supermarket. ... Saudi Arabia is enjoying an unprecedented economic boom ...as sectors [have] increased activity to meet the big internal demand." www.ft.com, 1/18/2008 The type of inflation described in the story A) begins with stagflation. B) starts with an increase in aggregate demand. C) is the result of money wage rate spiral. D) starts with a decrease in aggregate demand. Answer: B Topic: Demand-Pull Inflation Skill: Conceptual Status: Modified 10th edition AACSB: Communication 4) "Inflation Gives Saudis Food for Thought" "My boss sent me back to return the milk – it's too expensive," said the Pakistani driver for a middle-class Saudi family at the checkout counter of the Al-Othaim supermarket. ... Saudi Arabia is enjoying an unprecedented economic boom ...as sectors [have] increased activity to meet the big internal demand." www.ft.com, 1/18/2008 The story describes A) cost-push inflation. B) demand-pull inflation. C) a rightward shift in the short-run Phillips curve. D) stagflation. Answer: B Topic: Demand-Pull Inflation Skill: Conceptual Status: Modified 10th edition AACSB: Communication

5) "Shoe Industry under Pressure Amid Rising Costs " Rising costs have forced about 15 per cent of shoe manufacturers in a major south China industrial centre to shut down or relocate in the past year... [the firms have] identified rising wages as a key factor behind the closures and relocations from Dongguan...The problems in the footwear industry reflect broader issues affecting manufacturers across China's Pearl River Delta..." www.ft.com, 2/26/2008 As the same pressures affect other industries across China, we expect to see A) demand-pull inflation. B) a combination of cost-push and demand-pull inflation. C) cost-push inflation. D) a downward movement along the short-run Phillips curve. Answer: C Topic: Cost-Push Inflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication 6) "Shoe Industry under Pressure Amid Rising Costs" Rising costs have forced about 15 per cent of shoe manufacturers in a major south China industrial centre to shut down or relocate in the past year... [the firms have] identified rising wages as a key factor behind the closures and relocations from Dongguan...The problems in the footwear industry reflect broader issues affecting manufacturers across China's Pearl River Delta..." www.ft.com, 2/26/2008 Using an AS/AD framework to describe the events in the story, there would be a A) leftward shift in the AD curve. B) leftward shift in the SAS curve. C) rightward shift in the AD curve. D) rightward shift in the SAS curve. Answer: B Topic: Cost-Push Inflation Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

7) "All for One, but None for All" In an article regarding how Great Britain and France are addressing the economic crisis in 2008, Britain's prime minister "is eager to encourage consumer spending" while France's president "wants to boost investment in both the private and public sectors." Both leaders are concerned because "hardly a day goes by without some manufacturing company announcing painful restructuring, plant closures or temporary lay-offs." www.ft.com, 11/24/2008 If the governments can increase consumption or investment while holding the expected inflation constant, there would be A) a rightward shift of the long-run Phillips curve. B) a movement down along the short-run Phillips curve C) a movement up along the short-run Phillips curve. D) a leftward shift of the AD curve. Answer: C Topic: The Short-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 8) "All for One, but None for All" In an article regarding how Great Britain and France are addressing the economic crisis in 2008, Britain's prime minister "is eager to encourage consumer spending" while France's president "wants to boost investment in both the private and public sectors." Both leaders are concerned because "hardly a day goes by without some manufacturing company announcing painful restructuring, plant closures or temporary lay-offs." www.ft.com, 11/24/2008 If consumption and investment are increased by the governments' policies, we would expect ________ and a ________ the short-run Phillips curve. A) increase in aggregate demand; rightward shift of B) increase in aggregate demand; movement up along C) movement up along the AD curve; rightward shift of D) movement down along the AD curve; movement down along Answer: B Topic: Inflation and Unemployment: The Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

9) In a speech to Asia Pacific Economic Cooperation summit in Peru in November 2008, President Hu of China commented on his country's $586 billion fiscal stimulus plan by saying, "Instead of relying mainly on investment and export we will adopt a coordinated approach that combines consumption, investment and export to boost the economy. And instead of relying heavily on higher consumption of material resources we will achieve development by making scientific and technological progress." If his country's plan works and the expected inflation rate does not change, there will be a A) movement up along the short-run Phillips curve. B) movement down along the short-run Phillips curve. C) rightward shift of the long-run Phillips curve. D) leftward shift of the long-run Phillips curve. Answer: A Topic: The Short-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 10) In late 2008, Great Britain's inflation rate fell from 5.2 percent to 4.5 percent while unemployment was increased from 5.4 percent to 6 percent. These changes would be shown as a A) leftward shift of the long-run Phillips curve. B) movement up along the short-run Phillips curve. C) movement down the short-run Phillips curve. D) rightward shift of the long-run Phillips curve. Answer: C Topic: The Short-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 11) As world economies recover from the financial crisis in 2008 and 2009, the U.S. economy returns to full employment and expected inflation equals actual inflation, A) there will be a movement back to the long-run Phillips curve. B) the long-run Phillips curve will shift leftward. C) there will be a movement upward along the short-run Phillips curve. D) there will be a movement downward along the short-run Phillips curve. Answer: A Topic: Inflation and Unemployment: The Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

12) A story from www.ft.com (1/31/2005) describing Ireland's transformation to a prosperous economy noted that "Ireland's story is unique: a small, English-speaking, non-industrialized country on the edge of Europe was able to secure structural funds from the EU, cut taxes, deregulate faster than its neighbours and attract lots of foreign companies in the process." If the natural rate of unemployment in Ireland decreased as a result of these policies, then ________ would shift ________. A) the long-run and short-run Phillips curves; rightward B) the long-run and short-run Phillips curves; leftward C) only the long-run Phillips curve; leftward D) only the short-run Phillips curve; rightward Answer: B Topic: The Long-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 13) Over the last several years, the money supply in Indonesia as increased by 9 percent in 2003 to 14 percent in 2005 and 23 percent in 2007. At the same time, real GDP has grown steadily at over 4 percent annually. These changes would be shown as I. rightward shifts of the AD curve II. a movement down along the short-run Phillips curve III. rightward shifts of the LAS curve A) I and III. B) I, II and III. C) II only. D) I only. Answer: A Topic: The Business Cycle Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

14) In a story from www.Forbes.com (5/30/2003), it was reported that the Chief Technology Officer of the U.S. plans for the country to spend $58.1 billion on technology that year. He was planning to buy technology from Cisco Systems, Oracle and Sun Microsystems in addition to other software makers. This story reports on technological change which is the stressed in the ________ of business cycles. A) real business cycle theory B) new Keynesian cycle theory C) new classical cycle theory D) monetarist cycle theory Answer: A Topic: RBC Impulse Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication 5 Essay Questions 1) What is demand-pull inflation? Answer: An inflation that starts from an initial increase in aggregate demand is a demand-pull inflation. Topic: Demand-Pull Inflation Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 2) What are sources that can start a demand-pull inflation? Answer: Demand-pull inflation starts with an increase in aggregate demand. This increase can arise by increases in the quantity of money, increases in government expenditure, or increases in net exports because any of these three shift increase aggregate demand and shift the AD curve rightward. The increase in aggregate demand leads to a higher price level and, temporarily, a higher level of real GDP. If the economy began at full employment, then temporarily the level of real GDP will be above potential. In the long run, however, the money wage rate rises to offset the increase in the price level, so the short-run aggregate supply decreases and the SAS curve shifts leftward. The decrease in aggregate supply also raises the price level. So the only way the inflation can continue is if aggregate demand continues to increase. Topic: Demand-Pull Inflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

3) Describe how a demand-pull inflation can occur. Answer: Demand-pull inflation starts from an initial increase in aggregate demand. But if this increase is a one-time only event, the result is a higher price level but not inflation. For inflation to occur, aggregate demand needs to continue to increase. Continuing increases in the quantity of money result in continuing increases in aggregate demand, so monetary growth is necessary for a demand-pull inflation. Topic: Demand-Pull Inflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 4) What was the U.S. experience with demand pull inflation during the 1960s and early 1970s? Answer: The United States experienced demand pull inflation notably during the late 1960s. Government spending increased enormously during the decade because of spending on the Vietnam War and on social programs related to the Great Society of Lyndon Johnson. These increases in spending were matched by increases in the quantity of money. The AD curve shifted rightward, driving prices higher. The decade had begun with inflation of 2 percent per year. By the end of the decade the rate was 5 percent and would reach 10 percent by 1975. Topic: Demand-Pull Inflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 5) What is a cost-push inflation? Answer: A cost-push inflation is an inflation that starts as a result of an increase in costs. Money wage rates and the cost of raw materials are the main sources of cost-push inflation. Topic: Cost-Push Inflation Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 6) What factors can start a cost-push inflation? What must the Fed's response be for the inflation to continue? Answer: Cost push inflation starts with a decrease in the short-run aggregate supply, that is, a leftward shift of the SAS curve. The decrease in short-run aggregate supply can be the result of an increase in the money wage rate or an increase in the money price of other raw materials. In either instance firms' costs have risen and they respond by decreasing production, which decreases the short-run aggregate supply. The dilemma for the Fed is that the decreases in shortrun aggregate supply means that real GDP falls below potential GDP and the price level rises. If the Fed responds by increasing the quantity of money in order to increase aggregate demand and move real GDP back to potential GDP, the price level will rise still higher. And if the initial agent that raised costs responds to the higher price level by again raising its costs, then a costpush inflation might well occur. Topic: Cost-Push Inflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication 108 Copyright © 2014 Pearson Education, Inc.

7) What is the Phillips curve? Discuss both the short-run and long-run Phillips curve. Answer: In general, a Phillips curve shows a relationship between the inflation rate and the unemployment rate. There is a short-run Phillips curve and a long-run Phillips curve. Moving along a short-run Phillips curve, expected inflation and the natural unemployment rate are constant. The short-run Phillips curve shows the relationship between the inflation rate and unemployment rate: a higher inflation rate results in a lower unemployment rate. The long-run Phillips curve shows the relationship between the inflation rate and unemployment rate when the inflation rate equals the expected inflation rate. Moving along the long-run Phillips curve there is no tradeoff between the inflation rate and the unemployment rate: a higher inflation rate has no effect on unemployment rate, which remains equal to the natural unemployment rate. Topic: Inflation and Unemployment: The Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Communication 8) "The short-run Phillips curve shows the relationship between real GDP and inflation." Is the previous statement correct or incorrect? Briefly explain you answer. Answer: The statement is incorrect. The short-run Phillips curve shows the relationship between the unemployment rate and the inflation rate. Topic: The Short-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 9) Define and describe the short-run Phillips curve. Answer: The short-run Phillips curve shows the relationship between the inflation rate and the unemployment rate when the natural unemployment rate and the expected inflation rate do not change. The short-run Phillips curve is downward sloping, indicating that there is a tradeoff between inflation and unemployment: inflation can be lowered only at the cost of higher unemployment and unemployment can be lowered only at the cost of higher inflation. Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 10) "The short-run Phillips curve is vertical at the natural unemployment rate." Is the previous statement correct or incorrect? Answer: The statement is incorrect. The long-run Phillips curve is vertical at the natural unemployment rate but the short-run Phillips curve is downward sloping. Topic: The Short-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

11) What does the short-run Phillips curve indicate about the relationship between inflation and unemployment? Answer: Because the slope of the short-run Phillips curve is negative, the short-run Phillips curve indicates that a tradeoff between inflation and unemployment exists. Lower inflation can be obtained, but the price is higher unemployment. Similarly, lower unemployment is possible but the price is higher inflation. Topic: The Short-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 12) "The short-run Phillips curve shifts leftward when the inflation rate rises." Is the previous statement correct or incorrect? Answer: The statement is incorrect. An increase in the inflation rate leads to a movement along the short-run Phillips curve. Topic: The Short-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 13) If the short-run Phillips curve shifts rightward, what happens to the relationship between inflation and unemployment? If the short-run Phillips curve shifts leftward, what happens to the relationship between inflation and unemployment? Answer: A rightward shift of the short-run Phillips curve worsens the tradeoff between inflation and unemployment. With the rightward shift, a given level of inflation is now associated with a higher unemployment rate, or stated another way, a given unemployment rate is now associated with a higher inflation rate. A leftward shift of the short-run Phillips curve improves the tradeoff between inflation and unemployment. With the leftward shift, a given level of inflation is now associated with a lower unemployment rate, or stated another way, a given unemployment rate is now associated with a lower inflation rate. Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

14) "As the economy moves upward along its short-run aggregate supply curve, the economy also moves upward along its short-run Phillips curve." Is the previous statement correct or incorrect? Briefly explain your answer. Answer: The statement is correct. As the economy moves upward along its short-run aggregate supply curve, the price level rises so that there is inflation. And as the economy moves upward along its short-run aggregate supply curve, real GDP increases so that the unemployment rate decreases. So, moving upward along the short-run aggregate supply curve is associated with inflation and lower unemployment, which is what we see when we move along the short-run Phillips curve. Topic: Short-Run Phillips Curve & Short-Run Aggregate Supply Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 15) Discuss the relationship between the short-run aggregate supply curve and the short-run Phillips curve. Answer: The short-run Phillips curve and the short-run aggregate supply curve arise because the money wage rate does not change in the short run. When the price level increases, the inflation rate is positive. And when the price level increases, the money wage rate does not change, so the real wage rate declines. As a result of the lower real wage rate, the quantity of labor employed increases so that the quantity of real GDP increases and the unemployment rate decreases. Therefore the higher price level is associated with an increase in real GDP and a higher inflation rate is associated with a decrease in unemployment. Topic: Short-Run Phillips Curve & Short-Run Aggregate Supply Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 16) Explain how the expected inflation rate affects the short-run Phillips curve. Be sure to mention the role played by the money wage rate. Answer: When the expected inflation rate falls, the short-run Phillips curve shifts downward and when the expected inflation rate rises, the short-run Phillips curve shifts upward. To see why the expected inflation rate affects the short-run Phillips curve, the key is that the expected inflation rate affects the money wage rate. Suppose the expected inflation rate increases. As a result, labor contracts will now specify higher money wage rates in the present and in the future. In turn, the higher the money wage rates, the more the aggregate supply decreases. And, the more the aggregate supply decreases, the lower the level of employment and the higher the level of unemployment. Therefore for a given price level and inflation rate, an increase in the expected inflation rate increases the unemployment rate, which means that the short-run Phillips curve shifts higher. Topic: The Short-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

17) "The long-run Phillips curve is downward sloping." Is the previous statement correct or incorrect? Answer: The statement is incorrect because the long-run Phillips curve is vertical. The short-run Phillips curve is downward sloping. Topic: The Long-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 18) "The long-run Phillips curve is vertical at the expected inflation rate." Is the previous statement correct or incorrect? Answer: The statement is incorrect because the long-run Phillips curve is vertical at the natural unemployment rate. Topic: The Long-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 19) In the long run, what is the tradeoff between inflation and unemployment? Explain your answer using Phillips curve analysis. Answer: In the long run, there is no tradeoff between inflation and unemployment. In particular, in the long run, changes in the inflation rate have no effect on the unemployment rate. The longrun Phillips curve is vertical, thereby showing that in the long run, any inflation rate can occur but in the long run the unemployment rate will equal the natural unemployment rate. Topic: The Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 20) Distinguish between the short-run and long-run Phillips curves. Answer: The long-run Phillips curve shows the relationship between inflation and unemployment when the unemployment rate equals the natural rate and the inflation rate equals the expected inflation rate. There is no long-run tradeoff between inflation and unemployment. The short-run Phillips curve, however, shows the relationship between the inflation rate and the unemployment rate when the natural unemployment rate and the expected inflation rate do not change. The short-run Phillips curve is downward sloping, so that it shows a tradeoff between inflation and unemployment. Topic: The Short-Run and Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

21) Explain how the short-run and long-run Phillips curves are related. Answer: The short-run Phillips curve is the relationship between the inflation rate and the unemployment rate when the natural unemployment rate and the expected inflation rate remain constant. The long-run Phillips curve is the relationship between the inflation rate and the unemployment rate when the economy is at full employment. The short-run Phillips curve is downward sloping, indicating that if the expected inflation rate and natural unemployment rate do not change, a higher inflation rate decreases the unemployment rate. The long-run Phillips curve is a vertical line illustrating that in the long run, the economy at full employment can have any inflation rate. The short-run Phillips curve intersects the long-run Phillips curve at the expected inflation rate. A change in the expected inflation rate shifts the short-run Phillips curve but has no effect on the long-run Phillips curve. An increase in the natural unemployment rate shifts both the short-run and the long-run Phillips curve. Topic: The Short-Run and Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication 22) When the expected inflation rate changes, what happens to the short-run Phillips curve? To the long-run Phillips curve? Answer: When the expected inflation rate changes, the short-run Phillips curve shifts but the long-run Phillips curve does not shift. In particular, if the expected inflation rate increases, the short-run Phillips curve shifts upward and if the expected inflation rate decreases, the short-run Phillips curve shifts downward. Topic: The Short-Run and Long-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 23) When the natural unemployment rate changes, what happens to the short-run Phillips curve? To the long-run Phillips curve? Answer: When the natural unemployment rate changes, both the short-run Phillips curve and the long-run Phillips curve shift. If the natural unemployment rate increases, both Phillips curves shift rightward; if the natural unemployment rate decreases, both Phillips curves shift leftward. Topic: The Short-Run and Long-Run Phillips Curve Skill: Analytical Status: Modified 10th edition AACSB: Reflective Thinking

24) Using the Phillips curves, what are the short-run and long-run effects of a decrease in the inflation rate? Answer: In the short run, there is first a downward movement along the short-run Phillips curve as the inflation rate falls and the unemployment rate increases. In the long run, however, the expected inflation rate falls and the short-run Phillips curve shifts downward. Therefore in the long run the inflation rate remains low and the unemployment rate returns to the natural unemployment rate. Topic: The Short-Run and Long-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 25) What is the factor that leads to business cycles in the Keynesian cycle theory? Answer: The impulse in the Keynesian theory is changes in firms' expectations about future sales and profits, which changes investment. Keynes referred to these expectations as "animal spirits." Topic: Keynesian Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 26) What is the factor that leads to business cycles in the monetarist cycle theory? Answer: The factor leading to business cycles in the monetarist theory is changes in the growth rate of the quantity of money. Topic: Monetarist Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 27) Compare and contrast the Keynesian and Monetarist business cycle theories. Answer: Both theories are centered about changes in aggregate demand as the central cause of the business cycle. Keynesian's use the concept of 'animal spirits' and the inability to forecast the future as the factor that leads to changes in investment. Monetarists assert that changes in the growth rate of the quantity of money is the factor that leads to business cycles. As for the adjustment following the initial shock of a change in the level of investment, both theories envision a multiplier effect. This effect causes a greater change in aggregate demand (and hence real GDP) than would occur strictly as a result of the initial change in real GDP. Both theories also believe that sticky wages limit the ability of the money wage rate to adjust to changes in aggregate demand. Topic: Keynesian and Monetarist Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

28) What is the factor that leads to business cycles in the new classical cycle theory? Answer: The factor leading to business cycles in the new classical theory is unexpected changes in aggregate demand. Topic: New Classical Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 29) What is the factor that leads to business cycles in the new Keynesian cycle theory? Answer: The major factor in the new Keynesian cycle theory is unexpected changes in aggregate demand, but expected changes in aggregate demand also play a role in creating business cycles. Topic: New Keynesian Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 30) What is the impulse in the real business cycle theory of the business cycle? Answer: The impulse in the real business cycle theory is technological changes that affect the growth rate of productivity. Topic: RBC Impulse Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 31) What is the impulse that leads to business cycle in the real business cycle, RBC, theory? Answer: The real business cycle theory focuses on changes in the growth rate of productivity as the main source of economic fluctuations. Furthermore, the RBC theory views these changes as random and mainly as a result of changes in the rate of technological change. It asserts that most of the time technological change is steady, allowing for productivity to grow at a moderate pace. Occasionally productivity growth speeds up or slows down. If it speeds up, an expansion can be triggered while if it slows down a recession can result. Topic: RBC Impulse Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

32) What is the intertemporal substitution effect and what role does it play in the real business cycle model? Answer: The intertemporal substitution effect is the idea that people choose when they will work by comparing the real wage rate they receive this year to the real wage rate next year, taking into account the real interest rate. Basically, employees compare how much they would have earned if they worked this year (and received the real wage rate) and then saved this amount (and thereby increased the amount by the real interest rate) to the real interest rate they would earn by working next year. This effect plays a key role in the real business cycle theory because it means that the supply of labor changes when the real interest rate changes. For instance, as the economy heads into a recession with investment demand decreasing, the decrease in investment demand lowers the real interest rate, so the intertemporal substitution effect decreases the supply of labor and hence employment. As a result, potential GDP decreases. Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication 33) What are criticisms of the real business cycle theory? Answer: Four criticisms of the real business cycle theory are frequently made. First is the criticism that money wage rates are sticky, whereas the real business cycle theory assumes they are flexible. Second is the assertion that intertemporal substitution is too weak to account for large fluctuations in employment. Third is the criticism that technology shocks are implausible as an impulse that causes a business cycle. Fourth is the comment is that productivity shocks, as measured, are correlated with factors that change aggregate demand and so are the result of the business cycle not a cause of the business cycle. Topic: Criticisms of Real Business Cycle Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication 34) How do defenders of the real business cycle theory, (RBC theory) respond to critics of the theory? Answer: The defenders of the real business cycle theory state that the theory works because it accurately describes the real-life experiences of both growth and the cyclical nature of growth. The theory is also consistent with much microeconomic evidence about labor supply, labor demand and investment demand decisions. They believe that although the quantity of money is correlated with real GDP, real GDP changes cause the changes in the quantity of money. Lastly, RBC theory proponents assert that the theory is important because it points out that business cycles might be a normal state of affairs, which suggests that government attempts to dampen them are futile. Topic: Defenses of Real Business Cycle Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Communication

6 Numeric and Graphing Questions

1) Suppose the natural unemployment rate is 4 percent and the expected inflation rate is 6 percent. In the above figure, illustrate the long-run Phillips curve. What does the long-run Phillips curve reveal abut the long-run tradeoff between inflation and unemployment? Answer:

The long-run Phillips curve is illustrated in the above figure. It is vertical at the natural unemployment rate. The fact that the long-run Phillips curve is vertical means that in the long run there is no tradeoff between inflation and unemployment. In other words, in the long run higher inflation does not decrease unemployment nor does low inflation increase unemployment. Topic: The Long-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 117 Copyright © 2014 Pearson Education, Inc.

2) In the above figure, what factor might have lead to the shift in the short-run Phillips curve from SRPC1 to SRPC2? Answer: The long-run Phillips curve did not shift. Therefore the factor that shifted the short-run Phillips curve was an increase in the expected inflation rate. Topic: The Short-Run and Long-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

3) In the figure above, draw a short-run Phillips curve and a long-run Phillips curve if the expected inflation rate is 4 percent and the natural unemployment rate is 6 percent. Explain how the two change in the short run if: a) slower growth in aggregate demand causes a recession. b) the inflation rate increases. c) the natural unemployment rate increases. Answer:

The figure with the Phillips curves is above. a) There is a downward movement along the short-run Phillips curve. b) There is an upward movement along the short-run Phillips curve. c) There is a rightward shift of both the long-run and short-run Phillips curves. Topic: The Short-Run and Long-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills 119 Copyright © 2014 Pearson Education, Inc.

7 True or False 1) Inflation describes the event of increasing output and rising prices. Answer: FALSE Topic: Inflation and the Price Level Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 2) A one-time increase in aggregate demand creates inflation. Answer: FALSE Topic: Inflation and the Price Level Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 3) Increases in the quantity of money can create demand-pull inflation. Answer: TRUE Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 4) For a persistent demand-pull inflation to occur, government expenditure must persistently increase. Answer: FALSE Topic: A Demand-Pull Inflation Process Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 5) The early 1990s were the last period of substantial demand-pull inflation in the U.S. Answer: FALSE Topic: Demand-Pull Inflation in the United States Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 6) Increases in government expenditure can create cost-push inflation. Answer: FALSE Topic: Cost-Push Inflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

7) Increases in the prices of raw materials can create cost-push inflation. Answer: TRUE Topic: Cost-Push Inflation Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 8) For a persistent cost-push inflation to occur, the Fed must persistently increase the quantity of money. Answer: TRUE Topic: A Cost-Push Inflation Process Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 9) Stagflation occurs when the SAS curve shifts leftward. Answer: TRUE Topic: A Cost-Push Inflation Process Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 10) The Phillips curve describes the relationship between real GDP and inflation. Answer: FALSE Topic: Inflation and Unemployment: The Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 11) The short-run Phillips curve is vertical at the natural unemployment rate. Answer: FALSE Topic: The Short-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 12) An increase in the expected inflation rate leads to a movement upward along the short-run Phillips curve. Answer: FALSE Topic: The Short-Run Phillips Curve Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

13) The long-run Phillips curve slopes downward. Answer: FALSE Topic: The Long-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 14) The long-run Phillips curve is vertical at the natural unemployment rate. Answer: TRUE Topic: The Long-Run Phillips Curve Skill: Recognition Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 15) The short-run Phillips curve intersects the long-run Phillips curve at the actual inflation rate. Answer: FALSE Topic: The Short-Run Phillips Curve and the Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 16) The short-run Phillips curve intersects the long-run Phillips curve at the expected inflation rate. Answer: TRUE Topic: The Short-Run Phillips Curve and the Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 17) An increase in the natural unemployment rate shifts both the long-run Philips curve and the short-run Phillips curve rightward. Answer: TRUE Topic: The Short-Run Phillips Curve and the Long-Run Phillips Curve Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 18) Monetarists believe in changes in animal spirits are the factor that leads to business cycles. Answer: FALSE Topic: Monetarist Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

19) The monetarist theory of the business cycle views fluctuations in the growth rate of the quantity of money as the main source of economic fluctuations. Answer: TRUE Topic: Monetarist Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 20) The new classical cycle theory views anticipated fluctuations in aggregate demand as the main source of business cycle economic fluctuations. Answer: FALSE Topic: New Classical Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 21) The new Keynesian cycle theory views only anticipated changes in aggregate demand as the source of business cycle economic fluctuations. Answer: FALSE Topic: New Keynesian Theory Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 22) The real business cycle theory views fluctuations in the quantity of money as the main source of business cycles. Answer: FALSE Topic: RBC Impulse Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 23) The real business cycle theory views fluctuations in productivity as the main source of business cycles. Answer: TRUE Topic: RBC Impulse Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 24) The intertemporal substitution effect is the factor that creates business cycles in the Keynesian theory of the business cycle. Answer: FALSE Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking 123 Copyright © 2014 Pearson Education, Inc.

25) According to the real business cycle theory, a decrease in the real interest rate today increases current labor supply. Answer: FALSE Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Chapter 12 AACSB: Reflective Thinking

8 Extended Problems

1) The figure above shows the initial aggregate demand curve, AD0, the initial short-run aggregate supply curve, SAS0, and the long-run aggregate supply curve, LAS. The points in the figure show possible combinations of real GDP and the price level at which the economy of Atlantia is in macroeconomic equilibrium. The economy is initially at point A. Then, the government increases its expenditure on goods and services. Draw the new aggregate demand and short-run aggregate supply curves in the figure to show the effects of this event on Atlantia's real GDP and price level. a) What happens to Atlantia's potential GDP? b) In the short run, what happens to aggregate supply and aggregate demand? c) What are the new short-run equilibrium real GDP and price level? d) In the long run, what happens to the short-run aggregate supply and aggregate demand? e) What are the new long-run equilibrium real GDP and price level? Answer: a) Atlantia's potential GDP is not affected. Potential GDP depends on the economy's factors of production and available technology, not on aggregate spending.

b) See the figure above. The increase in government expenditure increases aggregate demand. The aggregate demand curve shifts from AD0 to AD1. Because there is no change in potential GDP and no change in the money wage rate, short run aggregate supply is not affected. The short-run aggregate supply curve remains at SAS0. c) In the short run the economy is at point B, where real GDP is $400 million and the price level is 105. d) Because at point B real GDP is above potential GDP, unemployment is less than the natural rate so the tight conditions in the labor market means that the money wage rate begins to rise. As it does, short-run aggregate supply decreases. The short-run aggregate supply curve shifts from SAS0 to SAS1. Because nothing further affects aggregate demand, the aggregate demand curve remains at AD1. e) In the long run the economy is at point D, where real GDP is $300 million and the price level is 115. Topic: Demand-Pull Inflation Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

2) The figure above shows the initial aggregate demand curve, AD0, the initial short-run aggregate supply curve, SAS0, and the long-run aggregate supply curve, LAS. The points in the figure show possible combinations of real GDP and the price level at which the economy of Atlantia is in macroeconomic equilibrium. The economy is initially at point A. Atlantia's Central Bank then increases the quantity of money year after year. Draw the necessary curves in the figure to show the effects of this on Atlantia's real GDP and price level. a) What happens to Atlantia's potential GDP? b) In the short run, what happens to aggregate supply and aggregate demand? c) What are the new short-run equilibrium real GDP and price level? d) In the long run, what happens to aggregate supply and aggregate demand? e) In the long run, what process is unfolding? Answer: a) Atlantia's potential GDP is not affected. Potential GDP depends on the economy's factors of production and available technology, not on monetary factors.

b) See the figure above. The increase in the quantity of money lowers the interest rate and increases aggregate demand. The aggregate demand curve shifts rightward from AD0 to AD1. Because there is no change in potential GDP and no change in the money wage rate, the shortrun aggregate supply is not affected. The short-run aggregate supply curve remains at SAS0. c) In the short run the economy is at point B, where real GDP is $400 million and the price level is 105.

d) Because at point B real GDP exceeds potential GDP, unemployment is less than the natural rate so the tight conditions in the labor market means that the money wage rate begins to rise. As it does, short-run aggregate supply decreases. The short-run aggregate supply curve shifts from SAS0 to SAS1, bringing the economy to point D. But the Central Bank increases the quantity of money again, and aggregate demand continues to increase. The aggregate demand curve shifts rightward to AD2. The economy moves to point G, so that the price level rises still more to 120 and real GDP again exceeds potential GDP at $400 million. The money wage rate rises once again, further decreasing short-run aggregate supply. The short-run aggregate supply curve shifts from SAS1 to SAS2, bringing the economy to point F. As the quantity of money continues to grow, aggregate demand continues to increase and short-run aggregate supply continues to decrease. e) In the long run, the price level rises continuously as the economy moves from point A to point B to point D to point G to point F and so on. An ongoing demand-pull inflation process is the result. Topic: Demand-Pull Inflation Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

3) The figure above shows the initial aggregate demand curve, AD0, the initial short-run aggregate supply curve, SAS0, and the long-run aggregate supply curve, LAS. The points in the figure show possible combinations of real GDP and the price level at which the economy of Atlantia is in macroeconomic equilibrium. The economy is initially at point A. Then, Atlantia's oil producers form a price-fixing organization and increase the price of oil. Suppose that potential GDP does not change and that Atlantia's Central Bank takes no action. Draw the new aggregate demand and short-run aggregate supply curves in the figure to show the effects of this event on Atlantia's real GDP and price level. a) What happens to aggregate supply and aggregate demand? b) What are the new equilibrium real GDP and price level? c) Will the rise in the price of oil lead to inflation in Atlantia? Why or why not? Answer:

a) See the figure above. The increase in the price of oil raises the cost of production and decreases short-run aggregate supply. The short-run aggregate supply curve shifts leftward from SAS0 to SAS1. Aggregate demand is not affected, so the aggregate demand curve remains at AD0. b) In the short run the economy moves to point C, where real GDP is $200 million and the price level is 110. c) The rise in the price of oil results in a one-time rise in the price level, but not ongoing inflation. A one-time rise in the price level can only be converted into inflation if it is accompanied by growth in the quantity of money. Topic: Cost-Push Inflation Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

4) The figure above shows the initial aggregate demand curve, AD0, the initial short-run aggregate supply curve, SAS0, and the long-run aggregate supply curve, LAS. The points in the figure show possible combinations of real GDP and the price level at which the economy of Atlantia is in macroeconomic equilibrium. The economy is initially at point A. Then, Atlantia's oil producers form a price-fixing organization and increase the price of oil. Suppose that potential GDP does not change and that Atlantia's Central Bank responds by increasing the quantity of money. Draw necessary curves in the figure to show the effects of this on Atlantia's real GDP and price level. a) In the short run, what happens to aggregate supply and aggregate demand? b) What are the new short-run equilibrium real GDP and price level? c) In the long run, if Atlantia's continue to hike the price of oil and the Central Bank continues to increase the quantity of money, what happens to aggregate supply and aggregate demand? d) If Atlantia's oil producers continue to hike the price of oil and Atlantia's Central Bank responds by increasing the quantity of money, what process unfolds? Answer:

a) See the figure above. The increased price of oil raises the cost of production and decreases short-run aggregate supply. The short-run aggregate supply curve shifts from SAS0 to SAS1. As the Central Bank increases the quantity of money, the interest rate falls, and aggregate demand increases. The aggregate demand curve rightward shifts from AD0 to AD1. b) In the short run, the economy moves to point D, where real GDP is $300 million and the price level is 115. c) As the oil producers respond to the higher price level by raising the price of oil, short-run aggregate supply decreases again and the short-run aggregate supply curve shifts leftward again, from SAS1 to SAS2. As the Central Bank increases the quantity of money again, aggregate demand increases once more and the aggregate demand curve shifts rightward from AD1 to AD2. The economy moves to point F, where the price level is even higher. This invites another oil price hike that will call forth yet a further increase in the quantity of money. So short-run aggregate supply continues to decrease and aggregate demand continues to increase. 130 Copyright © 2014 Pearson Education, Inc.

d) If Atlantia's oil producers continue to hike the price of oil and Atlantia's central bank continues to increase the quantity of money, a cost-push inflation process unfolds. The price level rises continuously as the economy moves from point A to point C to point D to point H to point F and so on. Topic: Cost-Push Inflation Skill: Analytical Status: Previous edition, Chapter 12 AACSB: Analytical Skills

Economics, 11e, Global Edition (Parkin) Chapter 30 Fiscal Policy 1 The Federal Budget 1) Prior to the Great Depression, the purpose of the federal budget was to ________. A) stabilize the economy B) finance the activities of the government C) maintain low interest rates D) decrease unemployment Answer: B Topic: The Federal Budget Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 2) The use of the U.S. federal budget to help stabilize the economy grew in reaction to the ________ and is known as ________. A) stagflation of the 1970s; fiscal policy B) Great Depression of the 1930s; fiscal policy C) stagflation of the 1970s; government policy D) Great Depression of the 1930s; monetary policy Answer: B Topic: The Federal Budget Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 3) Fiscal policy includes A) only decisions related to government expenditure on goods and services. B) only decisions related to government expenditure on goods and services and the value of transfer payments. C) only decisions related to the value of transfer payments and tax revenue. D) decisions related to government expenditure on goods and services, the value of transfer payments, and tax revenue. Answer: D Topic: Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

4) Fiscal policy involves A) the use of interest rates to influence the level of GDP. B) the use of tax and spending policies by the government. C) decreasing the role of the Federal Reserve in the everyday life of the economy. D) the use of tax and money policies by government to influence the level of interest rates. Answer: B Topic: Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 5) Fiscal policy A) is enacted by the Federal Reserve. B) involves changing interest rates. C) involves changing taxes and government spending. D) involves changing the money supply. Answer: C Topic: Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 6) Fiscal policy attempts to achieve all of the following objectives EXCEPT ________. A) a stable money supply B) price level stability C) full employment D) sustained economic growth Answer: A Topic: Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 7) Changes in which of the following is included as part of fiscal policy? A) the quantity of money B) the level of interest rates C) monetary policy D) tax rates Answer: D Topic: Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

8) All of the following are part of fiscal policy EXCEPT A) setting tax rates. B) setting government spending. C) choosing the size of the government deficit. D) controlling the money supply. Answer: D Topic: Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 9) The budget process includes the A) President proposing and Congress passing the budget. B) President passing the budget as proposed by Congress. C) House of Representatives proposing and the Senate passing the budget. D) Senate proposing and the House of Representatives passing the budget. Answer: A Topic: The Federal Budget Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 10) Which branches of the government play a role in the enacting the federal budget? I. the President. II. the House of Representatives. III. the Senate. A) I and II B) II and III C) I, II and III D) I Answer: C Topic: The Federal Budget Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 11) Which of the following government bodies does NOT participate directly in formulating U.S. fiscal policy? A) the President and his cabinet B) the Federal Reserve Board C) the House of Representatives D) the Senate Answer: B Topic: The Federal Budget Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 3 Copyright © 2014 Pearson Education, Inc.

12) The purpose of the Employment Act of 1946 was to A) establish goals for the federal government that would promote maximum employment, purchasing power, and production. B) establish an unemployment compensation system. C) set up the Federal Reserve System. D) set targets for the unemployment rate to be achieved by the president. Answer: A Topic: The Employment Act of 1946 Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 13) The Employment Act of 1946 made it the responsibility of the federal government to A) balance its budget because that policy would create the maximum level of employment. B) promote maximum employment. C) provide full employment and a stable balance of payments. D) improve the distribution of income. Answer: B Topic: The Employment Act of 1946 Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 14) The Employment Act of 1946 states that it is the responsibility of the federal government to A) promote full employment. B) promote economic equality. C) maintain the inflation rate at below 10 percent per year. D) All of the above answers are correct. Answer: A Topic: The Employment Act of 1946 Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 15) The Council of Economic Advisers A) proposes the president's budget each year. B) approves fiscal policy changes. C) helps the president and the public stay informed about the state of the economy. D) helps the president make changes in monetary policy. Answer: C Topic: Council of Economic Advisers Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

16) The Council of Economic Advisors advises the A) President. B) Congress. C) Senate. D) House of Representatives. Answer: A Topic: Council of Economic Advisers Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 17) The largest source of government revenues is ________. A) personal income taxes B) indirect taxes C) corporate income taxes D) social security taxes Answer: A Topic: Tax Revenues Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 18) What is the largest source of revenue for the federal government? A) Social Security taxes B) corporate income taxes C) personal income taxes D) sales tax Answer: C Topic: Tax Revenues Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 19) Which of the following is the largest source of federal government revenue? A) corporate income taxes B) Social Security taxes C) personal income taxes D) borrowing Answer: C Topic: Tax Revenues Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

20) The government receives tax revenues from several sources. Rank the following sources from largest to the smallest. I. corporate income taxes II. personal income taxes III. Social Security taxes A) I, II, III B) II, III, I C) I, III, II D) III, II, I Answer: B Topic: Tax Revenues Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 21) Which of the following is NOT a revenue source for the Federal government? A) personal income taxes B) indirect taxes C) interest on corporate bond holdings D) social security taxes Answer: C Topic: Tax Revenues Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 22) The largest item of government outlays is ________. A) debt interest B) transfer payments C) expenditures on goods and services D) debt reduction Answer: B Topic: The Federal Budget Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 23) Expenditures such as Social Security benefits, farm subsidies and grants are considered A) expenditures on goods and services B) transfer payments C) debt reduction D) debt interest Answer: B Topic: The Federal Budget Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 6 Copyright © 2014 Pearson Education, Inc.

24) Social Security benefits and expenditures on Medicare and Medicaid are classified as A) debt interest. B) purchases of goods and services. C) production of goods and services. D) transfer payments. Answer: D Topic: Government Expenditures Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 25) Rank the following federal government outlays from the largest to the smallest. I. debt interest II. transfer payments III. expenditure on goods and services A) I, II, III B) III, II, I C) III, I, II D) II, III, I Answer: D Topic: Government Expenditures Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 26) Which of the following is NOT a government outlay? A) transfer payments B) expenditure on goods and services C) debt interest on the government's debt D) purchases of foreign bonds Answer: D Topic: Government Expenditures Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 27) All of the following are government outlays EXCEPT A) interest on the government's debt. B) transfer payments. C) purchases of corporate bonds. D) expenditure on goods and services. Answer: C Topic: Government Expenditures Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 7 Copyright © 2014 Pearson Education, Inc.

28) Federal government outlays as a percentage of GDP are approximately A) 10 percent. B) 25 percent. C) 50 percent. D) 66 percent. Answer: B Topic: Government Expenditures Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking Component Personal income taxes Social security taxes Corporate income taxes Indirect taxes Transfer payments Expenditure on goods and services Debt interest

Dollars (billion) 500 400 150 75 1,200 225 75

29) The table above has data for a country's government budget. The country has government revenues of ________ billion. A) $900 B) $1125 C) $725 D) $1700 Answer: B Topic: Tax Revenues Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 30) The table above has data for a country's government budget. Government outlays for the economy equal ________ billion. A) $1200 B) $1275 C) $1500 D) $1425 Answer: C Topic: Government Expenditures Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 8 Copyright © 2014 Pearson Education, Inc.

31) The table above has data for a country's government budget. The data show the government is running a ________ billion. A) budget surplus of $300 B) budget deficit of $375 C) budget deficit of $550 D) budget surplus of $650 Answer: B Topic: Budget Surplus and Deficit Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 32) The largest source of revenue for the federal government is ________ and the largest outlay is for ________. A) corporate taxes; Social Security B) personal income taxes; Medicare C) personal income taxes; interest on national debt D) personal income taxes; transfer payments Answer: D Topic: Government Revenues and Expenditures Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 33) The government's budget deficit or surplus equals the A) change in outlays divided by change in revenue. B) average outlay divided by average revenue. C) change in revenue minus change in outlays. D) total tax revenue minus total government outlays. Answer: D Topic: Budget Surplus and Deficit Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 34) A budget surplus occurs when government A) outlays exceeds tax revenues. B) tax revenues exceeds outlays. C) tax revenues equals outlays. D) tax revenues equal social security expenditures. Answer: B Topic: Budget Surplus and Deficit Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

35) Whenever the federal government spends more than it receives in tax revenue, then by definition it A) runs a budget surplus. B) operates a balanced budget. C) runs a budget deficit. D) increases economic growth. Answer: C Topic: Budget Surplus and Deficit Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 36) The budget deficit A) is the total outstanding borrowing by the government. B) is the difference between government outlays and tax revenues. C) decreased during the Obama Administration. D) reached its peak in the year 2000. Answer: B Topic: Budget Surplus and Deficit Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 37) A government incurs a budget deficit when A) taxes are greater than government outlays. B) taxes are less than government outlays. C) exports are greater than imports. D) exports are less than imports. Answer: B Topic: Budget Surplus and Deficit Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 38) In January 2013 certain tax rates increased, which were predicted to increase the federal government's tax revenue. An increase in tax revenue ________ the government's budget deficit and over time thereby ________ the amount of government debt. A) increases; decreases B) decreases; decreases C) decreases; increases D) increases; increases Answer: B Topic: Budget Surplus and Deficit Skill: Conceptual Status: New AACSB: Reflective Thinking 10 Copyright © 2014 Pearson Education, Inc.

39) If taxes exactly equaled government outlays the A) federal government debt would be zero. B) federal government debt would decrease. C) budget deficit would not change. D) budget deficit would be zero. Answer: D Topic: Budget Surplus and Deficit Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 40) If the federal government's tax revenues are greater than its outlays, then the federal budget has a A) deficit. B) surplus. C) transfer payment. D) balanced budget. Answer: B Topic: Budget Surplus and Deficit Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 41) By definition, a government budget deficit is the situation that occurs when the A) government outlays exceed what it receives in taxes. B) government miscalculated how much it will receive in taxes. C) government spends money on things which do not produce revenue, such as schools. D) economy goes into a recession. Answer: A Topic: Budget Surplus and Deficit Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 42) The U.S. government's budget A) must be balanced each year. B) has mostly been in surplus during the past 30 years. C) has mostly been in deficit during the past 30 years. D) has always been in deficit during the past 30 years. Answer: C Topic: Budget Surplus and Deficit Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

43) When tax revenues exceed outlays, the government has a ________, and when outlays exceed tax revenues, the government has a ________. A) budget surplus; budget debt B) budget deficit; budget surplus C) budget debt; budget surplus D) budget surplus; budget deficit Answer: D Topic: Budget Surplus and Deficit Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 44) A government that currently has a budget deficit can balance its budget by ________. A) increasing tax revenues by more than it increases outlays B) increasing both tax revenues and outlays by the same amount C) decreasing tax revenues by more than it decreases outlays D) decreasing tax revenues by more than it increases outlays Answer: A Topic: Budget Surplus and Deficit Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 45) In 2013, the U.S. government budget had a deficit. By definition, then, A) tax revenues were less than government outlays. B) tax revenues were equal to government outlays. C) tax revenues were greater than government outlays. D) the government debt became negative. Answer: A Topic: Budget Surplus and Deficit Skill: Conceptual Status: Revised AACSB: Reflective Thinking 46) Suppose the only revenue taken in by the government is in the form of income tax, and the tax rate is 10 percent. If aggregate income is $800 billion, and government outlays are $100 billion then the government budget has A) a deficit of $20 billion. B) a surplus of $20 billion. C) neither a surplus nor a deficit. D) a deficit of $80 billion. Answer: A Topic: Budget Surplus and Deficit Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 12 Copyright © 2014 Pearson Education, Inc.

47) In 2013, the federal government of Happy Isle had tax revenues of $1 million, and spent $500,000 on transfer payments, $250,000 on goods and services and $300,000 on debt interest. In 2011, the government of Happy Isle had a ________. A) balanced budget B) budget deficit of $50,000 C) budget surplus of $50,000 D) budget deficit of $1,050,000 Answer: B Topic: Budget Surplus and Deficit Skill: Analytical Status: Revised AACSB: Analytical Skills 48) The federal government debt is equal to the A) obligations of benefits from federal taxes and expenditures. B) sum of all annual federal government outlays. C) sum of past budget deficits minus the sum of past budget surpluses. D) annual difference between federal government tax revenues and outlays. Answer: C Topic: Deficits and Debt Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 49) The sum of past budget deficits minus the sum of past budget surpluses refers to A) the national debt. B) the cyclically unbalanced budget. C) the structural national debt. D) the federal government net worth. Answer: A Topic: Deficits and Debt Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 50) If the government has a balanced budget, the total amount of government debt is A) increasing. B) decreasing. C) constant. D) zero. Answer: C Topic: Deficits and Debt Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

51) If the government runs a surplus, the total amount of government debt is A) increasing. B) decreasing. C) constant. D) zero. Answer: B Topic: Deficits and Debt Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 52) If the government runs a deficit, the total amount of government debt is A) increasing. B) decreasing. C) constant. D) zero. Answer: A Topic: Deficits and Debt Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 53) An increase in the government ________ reduces the government's ________. A) budget deficit; debt B) budget surplus; debt C) debt; budget deficit D) None of the above answers is correct. Answer: B Topic: Deficits and Debt Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 54) Suppose a country has been running a persistent government budget deficit. If the deficit is reduced, but remains positive, A) government debt will increase. B) government debt will decrease. C) the country will experience a budget surplus. D) interest payments on the debt immediately will decrease. Answer: A Topic: Deficits and Debt Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

55) If tax revenue equal $1.5 billion and government outlays equal $1.6 billion, then the A) government budget has a deficit of $0.1 billion. B) government budget has a surplus of $0.1 billion. C) government debt is equal to $0.1 billion. D) government debt declines by $0.1 billion. Answer: A Topic: Deficits and Debt Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills 56) The gross public debt was approximately $6 trillion in 2002 and approximately $16 trillion in 2012. These numbers definitely indicate that in the 10 years between 2002 and 2012, A) the government had budget deficits that totaled about $10 trillion. B) the government had budget deficits of about $10 trillion per year. C) government outlays increased by about $1 trillion per year. D) government receipts decreased by about $1 trillion per year. Answer: A Topic: Deficits and Debt Skill: Conceptual Status: New AACSB: Analytical Skills 57) A country has been in existence for only two years. In the first year, tax revenues were $1.0 million and outlays were $1.5 million. In the second year, tax revenues were $1.5 million and outlays were $2.0 million. At the end of the second year, the total government debt was ________. A) $0.5 million B) $1 million C) $2.5 million D) $3.5 million Answer: B Topic: Deficits and Debt Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

Year 1 2 3 4 5

Government Government tax revenues expenditures (billions of (billions of dollars) dollars) 240 240 250 245 260 255 300 320 325 340

58) What is the amount of the surplus or deficit incurred in year 1 by the government shown in the above table? A) $0 B) $25 billion deficit C) $25 billion surplus D) $240 billion surplus Answer: A Topic: Budget Surplus or Deficit Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 59) What is the amount of the surplus or deficit incurred in year 2 by the government shown in the above table? A) $0 B) $5 billion surplus C) $5 billion deficit D) $250 billion surplus Answer: B Topic: Budget Surplus or Deficit Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 60) What is the amount of the surplus or deficit incurred in year 3 by the government shown in the above table? A) $0 B) $5 billion surplus C) $5 billion deficit D) $260 billion surplus Answer: B Topic: Budget Surplus or Deficit Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 16 Copyright © 2014 Pearson Education, Inc.

61) What is the amount of the surplus or deficit incurred in year 4 by the government shown in the above table? A) $20 billion deficit B) $35 billion surplus C) $5 billion surplus D) $320 billion surplus Answer: A Topic: Budget Surplus or Deficit Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 62) What is the amount of the surplus or deficit incurred in year 5 by the government shown in the above table? A) $15 billion deficit B) $35 billion surplus C) $5 billion surplus D) $325 billion surplus Answer: A Topic: Budget Surplus or Deficit Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 63) The government begins year 1 with $25 billion of debt. Based on the information in the above table, what is the amount of debt following year 1? A) $0 B) $25 billion C) $240 billion D) Not enough information is provided to answer the question. Answer: B Topic: Deficits and Debt Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 64) The government begins year 1 with $25 billion of debt. Based on the information in the above table, what is the amount of debt following year 2? A) $245 billion B) $5 billion C) $250 billion D) $20 billion Answer: D Topic: Deficits and Debt Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 17 Copyright © 2014 Pearson Education, Inc.

65) The government begins year 1 with $25 billion of debt. Based on the information in the above table, what is the amount of debt following year 3? A) $15 billion B) $5 billion C) $20 billion D) $260 billion Answer: A Topic: Deficits and Debt Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 66) The government begins year 1 with $25 billion of debt. Based on the information in the above table, what is the amount of debt following year 4? A) -$20 billion (The government has net saving rather than debt.) B) $35 billion C) $5 billion D) $320 billion Answer: B Topic: Deficits and Debt Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 67) The government begins year 1 with $25 billion of debt. Based on the information in the above table, what is the amount of debt following year 5? A) -$20 billion (The government has net saving rather than debt.) B) $35 billion C) $50 billion D) $325 billion Answer: C Topic: Deficits and Debt Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 68) The U.S. federal budget over the past 30 years has been A) in balance most years. B) in deficit most of the years. C) in surplus most of the years. D) in surplus about half the time and deficit the other half. Answer: B Topic: Federal Budget History Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 18 Copyright © 2014 Pearson Education, Inc.

69) Comparing the U.S. budget position for 2012 to the rest of the world, we see that as a percentage of GDP, the ________ than in most other countries. A) U.S. budget deficit is smaller B) U.S. budget deficit is larger C) U.S. budget surplus is smaller D) U.S. budget surplus is larger Answer: B Topic: Federal Budget History Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 70) If the government's outlays are $1.5 trillion and its tax revenues are $2.2 trillion, the government is running a budget A) surplus of $0.7 trillion. B) surplus of $3.7 trillion. C) deficit of $0.7 trillion. D) deficit of $3.7 trillion. Answer: A Topic: Study Guide Question, Budget Surplus and Deficit Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

2 Supply-Side Effects of Fiscal Policy 1) Looking at the supply-side effects on aggregate supply shows that a tax hike on labor income A) weakens the incentive to work. B) decreases potential GDP. C) increases potential GDP because people work more to pay the higher taxes. D) Both answers A and B are correct. Answer: D Topic: Supply Side Effects of an Income Tax Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 2) Once supply side effects are taken into account, tax cuts for labor income can change I. the supply of labor II. potential GDP. A) I only B) I and II C) II only D) Neither I nor II. Answer: B Topic: Supply Side Effects of an Income Tax Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 3) Taking account of the supply-side effects, a tax cut on labor income ________ employment and ________ potential GDP. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: A Topic: Supply Side Effects of an Income Tax Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

4) If a tax cut increases people's labor supply, then A) tax cuts increase potential GDP. B) tax cuts decrease aggregate demand. C) tax cuts cannot affect aggregate demand. D) Both answers A and B are correct. Answer: A Topic: Supply Side Effects of an Income Tax Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 5) The supply side effects of a change in taxes on labor income means that ________ in taxes on labor income shift the ________. A) an increase; labor supply curve rightward B) an increase; labor supply curve leftward C) a decrease; labor demand curve rightward D) a decrease; labor demand curve leftward Answer: B Topic: Supply Side Effects of an Income Tax Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 6) An increase in taxes on labor income ________ the labor supply curve and ________ the labor demand curve. A) shifts; does not shift B) shifts; shifts C) does not shift; does not shift D) does not shift; shifts Answer: A Topic: Supply Side Effects of an Income Tax Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 7) An increase in taxes on labor income shifts the labor supply curve ________ and the ________. A) leftward; after-tax wage rate falls B) rightward; before-tax wage rate rises C) leftward; after-tax wage rate rises D) rightward; before-tax wage rate falls Answer: A Topic: Supply Side Effects of an Income Tax Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 21 Copyright © 2014 Pearson Education, Inc.

8) An income tax ________ potential GDP by shifting the ________ curve ________. A) increases; labor demand; rightward B) decreases; labor demand; leftward C) increases; labor supply; rightward D) decreases; labor supply; leftward Answer: D Topic: Supply Side Effects of an Income Tax Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills 9) On January 1, 2013 the income tax rate for single taxpayers making more than $400,000 per year increased from 35 percent to 39.6 percent. This tax increase ________ potential GDP. A) increases B) does not change C) decreases D) None of the above answers are correct because the tax increase might increase, decrease, or not change potential GDP. Answer: C Topic: Supply Side Effects of an Income Tax Skill: Conceptual Status: New AACSB: Analytical Skills 10) The difference between the before-tax and after-tax rates is referred to as the A) tax plug. B) deadweight gain. C) tax wedge. D) taxation penalty. Answer: C Topic: Tax Wedge Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 11) In January 2013 the Social Security payroll tax increased by 2 percentage points. This increase ________ the U.S tax wedge. A) decreased B) did not change C) increased D) More information about the total amount of the tax is needed to determine the impact on the tax wedge. Answer: C Topic: Tax Wedge Skill: Conceptual Status: New AACSB: Reflective Thinking 22 Copyright © 2014 Pearson Education, Inc.

12) If we compare the United States to France, the U.S. tax wedge is ________ the French tax wedge. A) larger than B) equals to C) smaller than D) not comparable to Answer: C Topic: Tax Wedge Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 13) If we compare the United States to France, we see that potential GDP per person in France is ________ than that in the United States because the French tax wedge is ________ than the U.S. tax wedge. A) greater; larger B) greater; smaller C) less; larger D) less; smaller Answer: C Topic: Tax Wedge Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 14) An increase in taxes on interest income ________ supply of loanable funds curve and ________ the demand for loanable funds curve. A) shifts; does not shift B) does not shift; shifts C) does not shift; does not shift D) shifts; shifts Answer: A Topic: Fiscal Policy and Aggregate Supply Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

15) The supply side effects of a cut in tax rates include ________ in the supply of labor and ________ in the supply of loanable funds. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease Answer: A Topic: Fiscal Policy and Aggregate Supply Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 16) When interest income is taxed and the inflation rate rises, the tax revenue collected by the government A) increases. B) doesn't change. C) decreases. D) could either increase or decrease. Answer: A Topic: After-Tax Real Interest Rate Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 17) Suppose the tax rate on interest income is 50 percent, the real interest rate is 3 percent, and the inflation rate is 4 percent. In this case, the real after-tax interest rate is A) -0.5 percent. B) 3.5 percent. C) 3.0 percent. D) 4.0 percent. Answer: A Topic: After-Tax Real Interest Rate Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 18) Suppose the tax rate on interest income is 25 percent, the real interest rate is 4 percent, and the inflation rate is 4 percent. In this case, the real after-tax interest rate is A) .5 percent. B) 3.5 percent. C) 4.0 percent. D) 2.0 percent. Answer: D Topic: After-Tax Real Interest Rate Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 24 Copyright © 2014 Pearson Education, Inc.

19) The Laffer curve is the relationship between A) government purchases and potential GDP. B) tax rates and potential GDP. C) tax revenue and potential GDP. D) tax rates and tax revenue. Answer: D Topic: Laffer Curve Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 20) During the Reagan administration in the 1980s, tax rates were ________ and the budget deficit ________. A) raised; increased B) raised; decreased C) cut; increased D) cut; decreased Answer: C Topic: Laffer Curve Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 21) According to the Laffer curve, raising the tax rate A) always increases the amount of tax revenue. B) always decreases the amount of tax revenue. C) does not change the amount of tax revenue. D) might increase, decrease, or not change the amount of tax revenue. Answer: D Topic: Laffer Curve Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 22) The Laffer curve shows that increasing ________ increases ________ when ________ low. A) tax revenue; potential GDP; tax revenue is B) tax rates; tax revenue; tax rates are C) potential GDP; tax revenue; tax revenue is D) None of the above answers is correct. Answer: B Topic: Laffer Curve Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

23) A decrease in the income tax rate A) decreases potential GDP. B) increases the supply of labor. C) increases the tax wedge. D) decreases the demand for labor. Answer: B Topic: Study Guide Question, Supply Side Effects of an Income Tax Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 24) An increase in the income tax rate ________ employment and ________ potential GDP. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: D Topic: Study Guide Question, Supply Side Effects of an Income Tax Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 25) An increase in the tax on interest income ________ the supply of loanable funds and ________ the equilibrium investment. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: D Topic: Study Guide Question, Supply Side Effects of Tax on Interest Income Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

3 Generational Effects of Fiscal Policy 1) The system that measures the lifetime tax burden and benefits of each generation is called A) actuarial genealogy. B) generational actuary. C) generational accounting. D) actuarial accounting. Answer: C Topic: Generational Accounting Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 2) Generational accounting does NOT investigate issues involving A) the budget deficit B) government obligations such as Social Security C) the ownership of corporate stock D) the burden of taxes Answer: C Topic: Generational Accounting Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 3) The ________ the interest rate, the ________ the present value of a given future amount. A) higher; larger B) higher; smaller C) lower; lower D) None of the above answers is correct because the interest rate has nothing to do with the present value. Answer: C Topic: Present Value Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 4) If $1,000 is invested at 3 percent per year for 10 years the investment grows to $1,343.92. This means the present value $1,343.92 at an interest rate of 3 percent 10 years from now is A) 3 percent. B) $1,000. C) $343.92. D) $1,343.92. Answer: B Topic: Present Value Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 27 Copyright © 2014 Pearson Education, Inc.

5) The present value of the government's commitments to pay benefits minus the present value of its tax revenues is called A) calculated fiscal obligations. B) fiscal imbalance. C) fiscal balance. D) fiscal obligations. Answer: B Topic: Fiscal Imbalance Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 6) The largest component of the fiscal imbalance is A) Social Security. B) Medicare. C) Defense spending. D) none of the above Answer: B Topic: Fiscal Imbalance Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 7) Splitting the fiscal imbalance between current and future generations is called A) genealogical accounting. B) actuarial accounting. C) generational imbalance. D) actuarial balance. Answer: C Topic: Fiscal Imbalance Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 8) Comparing the fiscal imbalance for the current generation versus future generations, it is the case that A) future generations pay a larger share of the fiscal imbalance. B) the current generation pays a larger share of the fiscal imbalance. C) each generation pays half of the fiscal imbalance. D) each generation pays all of its fiscal imbalance. Answer: A Topic: Fiscal Imbalance Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 28 Copyright © 2014 Pearson Education, Inc.

9) For the years 2011 and 2012, the Social Security payroll tax was reduced by 2 percentage points. This reduction ________ the fiscal imbalance. A) increased B) did not change C) decreased D) None of the above answers are correct because the impact on the fiscal imbalance depends on factors other than the Social Security tax. Answer: A Topic: Fiscal Imbalance Skill: Analytical Status: New AACSB: Reflective Thinking 10) Beginning in 2013, Americans will pay an additional Medicare tax of 0.9 percent on all wage income that exceeds $200,000. By increasing the amount the current generation pays for Medicare, this tax ________ the generational imbalance. A) increased B) did not change C) decreased D) None of the above answers are correct because the impact on the generational imbalance depends on factors other than the Medicare tax. Answer: A Topic: Fiscal Imbalance Skill: Analytical Status: New AACSB: Reflective Thinking 11) To eliminate the fiscal imbalance the government could A) lower benefits and lower tax revenues. B) increase benefits and increase tax revenues. C) lower benefits and increase tax revenues. D) increase benefits and lower tax revenues. Answer: C Topic: Fiscal Imbalance Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

12) In order for the United States to repay its international debt, the United States would need to A) have a current account deficit. B) cut taxes. C) have a surplus of imports over exports. D) have a surplus of exports over imports. Answer: D Topic: International Debt Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 13) In January 2013 the Chinese government held approximately $1 trillion U.S. government debt. The Chinese government accumulated such a large amount of U.S. government debt because for the past decade the United States A) government made substantial foreign aid available to the Chinese government. B) has grown more rapidly than has the Chinese economy. C) has exported more to China than it has imported from China. D) has imported more from China than it has exported to China. Answer: D Topic: International Debt Skill: Conceptual Status: New AACSB: Reflective Thinking 14) Generational accounting shows that the present value of the government's commitments to pay benefits are ________ the present value of its taxes. A) greater than B) less than C) equal to D) not comparable to Answer: A Topic: Study Guide Question, Fiscal Imbalance Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

4 Fiscal Stimulus 1) Taxes and government expenditures that, without need for additional government action, change in response to changes in the level of economic activity are examples of A) discretionary fiscal variables. B) automatic fiscal policy. C) built-in monetary stabilizers. D) cyclically balanced budgets. Answer: B Topic: Automatic Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 2) One characteristic of automatic fiscal policy is that it A) requires no legislative action by Congress to be made effective. B) automatically produces surpluses during recessions and deficits during inflation. C) has no effect on unemployment. D) reduces the size of the federal government debt during times of recession. Answer: A Topic: Automatic Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 3) A fiscal action that is triggered by the state of the economy is called A) the government expenditure multiplier. B) discretionary fiscal policy. C) automatic fiscal policy. D) generational fiscal policy. Answer: C Topic: Automatic Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 4) A discretionary fiscal policy is a fiscal policy that A) involves a change in government defense spending. B) is triggered by the state of the economy. C) requires action by the Congress. D) involves a change in corporate tax rates. Answer: C Topic: Discretionary Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 31 Copyright © 2014 Pearson Education, Inc.

5) A fiscal action that is initiated by an act of Congress is called A) the government expenditure multiplier. B) discretionary fiscal policy. C) automatic fiscal policy. D) generational fiscal policy. Answer: B Topic: Discretionary Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 6) Deliberate changes in government expenditures and taxes to influence GDP A) are examples of automatic fiscal policy because the politicians automatically respond. B) are discretionary fiscal policy. C) are enacted by the Council of Economic Advisers. D) operate without time lags. Answer: B Topic: Discretionary Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 7) The stimulus package passed by Congress in 2009 is an example of A) automatic fiscal policy B) discretionary fiscal policy C) monetary policy D) increased taxation Answer: B Topic: Discretionary Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 8) The difference between automatic fiscal policy and discretionary fiscal policy is that A) Congress initiates automatic fiscal policy. B) the President has nothing to do with discretionary fiscal policy. C) Congress must pass laws implementing discretionary fiscal policy. D) the President initiates discretionary fiscal policy. Answer: C Topic: Discretionary Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

9) When the economy is hit by spending fluctuations, the government can try to minimize the effects by A) changing government expenditures on goods. B) changing taxes. C) changing government expenditures on services. D) all of the above Answer: D Topic: Discretionary Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 10) An example of a discretionary fiscal policy is when A) tax receipts fall as incomes fall. B) unemployment compensation payments rise with unemployment rates. C) food stamp payments rise when the economy is in a recession. D) Congress passes a law that raises personal marginal tax rates. Answer: D Topic: Discretionary Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 11) An increase in the tax rates as a result of a new tax law passed by Congress is an example of ________. A) discretionary fiscal policy B) increasing the government debt C) increasing the government deficit D) needs-tested taxing change. Answer: A Topic: Discretionary Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 12) The tax rebates passed by Congress in 2008 to help move the economy more rapidly toward potential GDP are an example of A) automatic fiscal policy. B) discretionary fiscal policy. C) non-needs spending. D) contractionary fiscal policy. Answer: B Topic: Discretionary Fiscal Policy Skill: Conceptual Status: Revised AACSB: Reflective Thinking 33 Copyright © 2014 Pearson Education, Inc.

13) Unemployment insurance are payments made to unemployed workers. Typically workers are paid for no more than 26 weeks. In December 2012, the federal government passed legislation that would extend the payments to a maximum of 73 weeks. This extension is an example of A) automatic fiscal policy. B) discretionary fiscal policy. C) non-needs spending. D) contractionary fiscal policy. Answer: B Topic: Discretionary Fiscal Policy Skill: Conceptual Status: New AACSB: Reflective Thinking 14) Tax revenues A) are autonomous. B) are independent of real GDP. C) vary with real GDP. D) are fixed over time. Answer: C Topic: Automatic Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 15) A fall in income that results in a decrease in tax revenues is an example of ________. A) automatic fiscal policy B) needs-tested tax programs C) a recession D) discretionary fiscal policy Answer: A Topic: Automatic Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 16) When the economy grows, ________ increase because real GDP ________. A) tax revenues; decreases B) tax revenues; increases C) structural deficits; decreases D) recognition lags; increases Answer: B Topic: Automatic Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

17) Income taxes in the United States are part of automatic fiscal policy because A) tax revenues increase when income increases, thus offsetting some of the increase in aggregate demand. B) tax revenues decrease when income increases, intensifying the increase in aggregate demand. C) the President can increase tax rates whenever the President deems such a policy appropriate. D) tax rates can be adjusted by the Congress to counteract economic fluctuations. Answer: A Topic: Automatic Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 18) An example of automatic fiscal policy is when A) tax revenues decrease as real GDP decreases. B) Congress passes a law that raises tax rates. C) Congress decides to cut government expenditure. D) the president drafts a bill to reduce defense spending. Answer: A Topic: Automatic Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 19) Tax revenues ________ during recessions and ________ during expansions. A) decrease; decrease B) decrease; increase C) increase; expansions D) increase; increase Answer: B Topic: Automatic Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 20) Spending on programs that result in transfer payments that depend on the economic state of individuals and businesses is called ________. A) transfer spending B) welfare C) needs-tested spending D) business subsidies Answer: C Topic: Automatic Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

21) Needs-tested spending ________ during recessions and ________ during expansions. A) decreases; decreases B) decreases; increases C) increases; decreases D) increases; increases Answer: C Topic: Automatic Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 22) If the economy falls into a recession, which of the following responses constitutes the use of automatic fiscal policy? A) an income tax cut voted on by Congress and quickly signed by the President B) an existing system to make government payments to the growing ranks of unemployed workers C) a new program to fund local governments' hiring of 100,000 street sweepers within a year D) All of the above answers are correct. Answer: B Topic: Automatic Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 23) Automatic fiscal policy occurs A) because monetary policy is effective. B) because tax revenues and transfer payments fluctuate with real GDP. C) because government expenditures on goods and services fluctuate with real GDP. D) when the Congress makes changes to transfer payment programs. Answer: B Topic: Automatic Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 24) Automatic fiscal policy is at work if, as real GDP increases, ________. A) transfer payments decrease and interest rates decrease B) transfer payments increase and tax revenues decrease C) tax revenues increase and transfer payments decrease D) tax revenues decrease and interest rates increase Answer: C Topic: Automatic Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

25) Because of automatic fiscal policy, when real GDP decreases A) government expenditures decrease and tax revenues increase. B) government expenditures increase and tax revenues decrease. C) government expenditures equal tax revenues. D) the economy will automatically go to full employment. Answer: B Topic: Automatic Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 26) Government transfer payments ________ during expansions and ________ during recessions. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: C Topic: Budget Deficit Over the Business Cycle Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 27) During an expansion, tax revenues ________, while during a recession, tax revenues ________. A) decrease; increase B) increase; decrease C) remain stable; decrease D) fail to cover expenditures; fail to match transfer payments Answer: B Topic: Budget Deficit Over the Business Cycle Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 28) During an expansion, tax revenues ________ and government transfer payments ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Topic: Budget Deficit Over the Business Cycle Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

29) The government budget deficit tends to decrease during the expansion phase of a business cycle because tax revenues ________ and government transfer payments ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Topic: Budget Deficit Over the Business Cycle Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 30) The structural deficit or surplus is the A) difference between actual government outlays and actual government receipts. B) change in national debt that will result from current budgetary policies. C) government budget deficit or surplus that would occur if the economy were at potential GDP. D) actual government budget deficit or surplus minus expenditures for capital improvements. Answer: C Topic: Cyclical and Structural Balances Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 31) The structural deficit is the deficit A) during a recession. B) during an expansion. C) that would occur at full employment. D) caused by the business cycle. Answer: C Topic: Cyclical and Structural Balances Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 32) The structural deficit is the deficit that occurs when A) real GDP departs from potential GDP. B) real GDP equals potential GDP. C) aggregate demand is greater than short-run aggregate supply. D) short-run aggregate supply is greater than aggregate demand. Answer: B Topic: Cyclical and Structural Balances Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

33) The structural surplus A) equals the actual surplus plus the cyclical surplus. B) is the government budget surplus that would exist if the economy was at potential GDP. C) is, by definition, equal to the negative of the cyclical deficit. D) is legally required to be positive. Answer: B Topic: Cyclical and Structural Balances Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 34) A structural deficit occurs when the government budget has a deficit A) even though real GDP is less than potential GDP. B) even though real GDP is greater than structural GDP. C) even though real GDP is equal to potential GDP. D) that is nominal, as opposed to a real budget deficit. Answer: C Topic: Cyclical and Structural Balances Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 35) The structural deficit is that deficit that would exist A) with the taxes and outlays that would occur if the economy was at the equilibrium level of real GDP. B) with the taxes and outlays that would occur if the economy was at the full employment level of real GDP. C) if tax rates were set to maximize tax revenues. D) if there were no discretionary fiscal interventions into the economy. Answer: B Topic: Cyclical and Structural Balances Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

36) At the start of 2013, the U.S. government predicted that economic growth would rise by 2016 and that the government's deficit would also increase. The government therefore was predicting that in 2016 the cyclical deficit would ________ and the structural deficit would ________. A) increase; increase B) decrease; increase C) increase; decrease D) decrease; decrease Answer: B Topic: Cyclical and Structural Balances Skill: Conceptual Status: New AACSB: Reflective Thinking 37) The cyclical deficit is the portion of the deficit A) created by fluctuations in real GDP. B) that is the result of nondiscretionary federal spending. C) that would exist if the economy were at potential real GDP. D) the result of discretionary federal spending. Answer: A Topic: Cyclical and Structural Balances Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 38) A cyclical surplus is a A) budget surplus only because real GDP is less than potential GDP. B) budget surplus only because real GDP is greater than potential GDP. C) budget surplus only because real GDP is equal to potential GDP. D) nominal, as opposed to real, budget surplus. Answer: B Topic: Cyclical and Structural Balances Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

39) In early 2013, economists predicted that the U.S. economy would grow more rapidly than had been predicted. If this prediction comes true, then the structural deficit will ________ than had been predicted. A) shrink more rapidly B) shrink more slowly C) increase more slowly D) None of the above are correct because the growth of the economy does not affect the size of the structural deficit. Answer: D Topic: Cyclical and Structural Balances Skill: Conceptual Status: New AACSB: Reflective Thinking 40) In early 2013, economists predicted that the U.S. economy would grow more rapidly than had been predicted. If this prediction comes true, then the cyclical deficit will ________ than had been predicted. A) shrink more rapidly B) shrink more slowly C) increase more slowly D) None of the above are correct because the growth of the economy does not affect the size of the cyclical deficit. Answer: A Topic: Cyclical and Structural Balances Skill: Conceptual Status: New AACSB: Reflective Thinking 41) Which of the following relationships is correct? A) actual budget deficit = structural deficit - cyclical deficit B) cyclical surplus = actual budget deficit - cyclical deficit C) actual budget deficit = structural deficit + cyclical deficit D) cyclical deficit = actual budget deficit + structural deficit Answer: C Topic: Cyclical and Structural Balances Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

42) When an economy is above full employment and the government has a budget deficit, that deficit ________. A) exceeds the structural deficit B) is equal to the structural deficit minus the cyclical deficit C) is equal to the cyclical deficit minus the structural deficit D) is less than the structural deficit Answer: D Topic: Cyclical and Structural Balances Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 43) The actual budget deficit is equal to the A) structural deficit. B) cyclical deficit. C) structural deficit minus the cyclical deficit. D) structural deficit plus the cyclical deficit. Answer: D Topic: Cyclical and Structural Balances Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 44) If the budget deficit is $50 billion and the structural deficit is $10 billion, the cyclical deficit is A) $10 billion. B) $40 billion. C) $60 billion. D) $50 billion Answer: B Topic: Cyclical and Structural Deficits Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 45) If the economy has a structural deficit of $25 billion and a cyclical deficit of $75, we can conclude that the current budget deficit is ________ billion. A) $25 B) $50 C) $75 D) $100 Answer: D Topic: Cyclical and Structural Deficits Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 42 Copyright © 2014 Pearson Education, Inc.

46) In December 2012 the structural deficit was estimated to be $325 billion and the cyclical deficit was estimated to be $700 billion. The total deficit equaled ________ billion. A) $1,025 B) $375 C) $700 D) None of the above answers are correct. Answer: A Topic: Cyclical and Structural Deficits Skill: Analytical Status: New AACSB: Analytical Skills

47) Economic data for a mythical economy in the years 2006-2010 are summarized in the figure above. Assume that the spending formulas and tax schedules are identical for all years. When the economy is at full employment, the government has a A) budget surplus. B) balanced budget. C) budget deficit. D) procyclical policy. Answer: B Topic: Cyclical and Structural Balances Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

48) Economic data for a mythical economy in the years 2006-2010 are summarized in the figure above. Assume that the spending formulas and tax schedules are identical for all years. When the economy is above full employment, the government has a A) budget surplus. B) balanced budget. C) budget deficit. D) procyclical policy. Answer: A Topic: Cyclical and Structural Balances Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 49) Economic data for a mythical economy in the years 2006-2010 are summarized in the figure above. Assume that the spending formulas and tax schedules are identical for all years. When the economy is at less than full employment, the government has a A) budget surplus. B) balanced budget. C) budget deficit. D) procyclical policy. Answer: C Topic: Cyclical and Structural Balances Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

50) Using the above figure, if full employment occurs at $15 trillion and the economy is actually producing $15 trillion, then there is a A) cyclical deficit. B) cyclical surplus. C) structural deficit. D) structural surplus. Answer: D Topic: Cyclical and Structural Deficits Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 51) Using the above figure, if full employment occurs at $13 trillion, but the economy is actually producing $15 trillion, then there is a A) cyclical deficit. B) cyclical surplus. C) structural deficit. D) structural surplus. Answer: B Topic: Cyclical and Structural Deficits Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

52) In the above figure, if actual GDP = $15 trillion, there is a budget ________ equal to ________. A) surplus; $0.2 trillion B) surplus; $1.3 trillion C) deficit; $0.2 trillion D) deficit; $1.1 trillion Answer: A Topic: Cyclical and Structural Balances Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 53) In the above figure, A) the structural deficit equals zero. B) any surpluses are cyclical surpluses. C) any deficits are cyclical deficits. D) All of the above answers are correct. Answer: D Topic: Cyclical and Structural Balances Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

54) The figure above shows tax revenues and government expenditures in the economy of Meadowlake. Potential GDP is $13 trillion. If real GDP is $13 trillion, then the government has a ________. A) cyclical surplus B) structural surplus C) balanced budget D) cyclical deficit Answer: C Topic: Cyclical and Structural Balances Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 55) The figure above shows tax revenues and government expenditures in the economy of Meadowlake. Potential GDP is $15 trillion. If real GDP is $11 trillion, then the government has a ________. A) cyclical deficit B) structural deficit C) structural surplus D) cyclical surplus Answer: A Topic: Cyclical and Structural Balances Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

56) In the short run, an increase in government expenditure will I. shift the aggregate demand curve rightward. II. increase real GDP. III. increase the government expenditure multiplier. IV. increase the tax multiplier. A) I and II B) I and III C) I, II and III D) III and IV Answer: A Topic: Government Expenditure Multiplier Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills 57) A reason the government expenditure multiplier is larger than 1 is because A) investment increases when government expenditure increases. B) government expenditure always increases. C) government expenditure generates changes in consumption expenditure. D) taxes are left unchanged. Answer: C Topic: Government Expenditure Multiplier Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 58) The magnitude of the tax multiplier ________ the magnitude of the government expenditure multiplier. A) is smaller than B) is larger than C) is equal to D) is not comparable to Answer: A Topic: Tax Multiplier Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

59) Suppose the government increases taxes. One effect of this change is that it decreases A) disposable income, which decreases consumption expenditure and aggregate demand. B) government expenditure, which decreases aggregate demand. C) the size of the government expenditure multiplier. D) disposable income which then decreases aggregate supply. Answer: A Topic: Tax Multiplier Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 60) The demand-side effect of a change in taxes is less than the same sized change in government expenditure because A) only part of the increase in disposable income from the tax cut is spent. B) the amount by which taxes change is affected by the MPC. C) changes in government expenditure do not directly affect consumption. D) tax rates are the same regardless of income levels. Answer: A Topic: Tax Multiplier Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 61) The aggregate demand curve is shifted rightward by A) an increase in tax rates. B) a decrease in government expenditure. C) an increase in the federal budget surplus. D) an increase in government expenditure. Answer: D Topic: Fiscal Stimulus Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 62) An increase in government expenditure shifts the AD curve ________ and an increase in taxes shifts the AD curve ________. A) rightward; rightward B) rightward; leftward C) leftward; rightward D) leftward; leftward Answer: B Topic: Fiscal Stimulus Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

63) Suppose the government of Japan increases its expenditure on goods and services. In the short run, this increase will A) shift the AD curve in Japan rightward. B) shift the AD curve in Japan leftward. C) cause the price level in Japan to fall. D) None of the above answers is correct. Answer: A Topic: Fiscal Stimulus Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 64) If the government wants to engage in fiscal policy to increase real GDP, it could A) increase government expenditure in order to increase short-run aggregate supply. B) decrease government expenditure in order to increase short-run aggregate supply. C) increase government expenditure in order to increase aggregate demand. D) decrease government expenditure in order to decrease aggregate demand. Answer: C Topic: Fiscal Stimulus Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills 65) If real GDP is less than potential GDP, which of the following fiscal policies would increase real GDP? A) only a decrease government expenditure B) only an increase taxes C) increase government expenditure and/or decrease taxes D) decrease government expenditure and/or increase taxes Answer: C Topic: Fiscal Stimulus Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 66) Using the AD-AS model, an increase in government expenditure A) has no impact on real GDP. B) has no impact on real GDP, but will increase potential GDP. C) increases both real GDP and the price level. D) has a full multiplier effect on real GDP, leaving the price level unchanged in the long run. Answer: C Topic: Fiscal Stimulus Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills

67) Using fiscal policy, to increase real GDP and employment the government could ________ government expenditure on goods and services or ________ taxes. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Topic: Fiscal Stimulus Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills 68) When real GDP is less than potential GDP, an increase in government expenditures will ________ real GDP and ________ the price level. A) increase; raise B) increase; lower C) decrease; raise D) decrease; lower Answer: A Topic: Fiscal Stimulus Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 69) Suppose the economy is at a short-run equilibrium with real GDP greater than potential GDP. Which of the following fiscal policies would decrease real GDP and the price level? A) an increase in government expenditure B) a decrease in taxes C) an increase in taxes D) None of the above answers is correct. Answer: C Topic: Equilibrium GDP and the Price Level Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 70) Suppose real GDP exceeds potential real GDP. If the government decreases its expenditures on goods and services, then real GDP ________ and the price level ________. A) decreases; rises B) increases; falls C) decreases; falls D) increases; rises Answer: C Topic: Equilibrium GDP and the Price Level Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 51 Copyright © 2014 Pearson Education, Inc.

71) Suppose that the government decreases its expenditures on goods and services. Within the AS-AD model, the result will be ________ in real GDP and ________ in the price level. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease Answer: D Topic: Equilibrium GDP and the Price Level Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

72) In the above figure, if the economy is initially at point D and government expenditure increases, the economy will move to point A) move to point C. B) move to point A. C) move to point B. D) stay at point D. Answer: A Topic: Fiscal Stimulus Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

73) In the above figure, if the economy is initially at point B and government expenditure decreases, the economy will A) move to point C. B) move to point A. C) move to point D. D) stay at point B. Answer: B Topic: Equilibrium GDP and the Price Level Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 74) In the above figure, if the economy is initially at point D and taxes are cut, if potential GDP does not change then the economy will move to point A) move to point C. B) move to point A. C) move to point B. D) stay at point D. Answer: A Topic: Fiscal Stimulus Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 75) In the above figure, if the economy is initially at point B and taxes are raised, if potential GDP does not change then the economy will move to point A) move to point C. B) move to point A. C) move to point D. D) stay at point B. Answer: B Topic: Equilibrium GDP and the Price Level Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

76) In the above figure, if the economy initially is at point A and government expenditure increases, in the short run the economy will move to point A) B. B) C. C) A, that is, the equilibrium will NOT change. D) None of the above answers is correct. Answer: A Topic: Fiscal Stimulus Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

77) The figure above illustrates the aggregate demand, short-run aggregate supply, and long-run aggregate supply in Lotus Land. The economy is currently at point D and the government increases its expenditure on goods and services. The economy will move to ________. The price level will ________, and the change in real GDP will be ________ the increase in aggregate demand. A) point A; fall; less than B) point D; rise; less than C) point C; rise; less than D) point B; remain constant; the same as Answer: C Topic: Fiscal Stimulus Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 78) The figure above illustrates the aggregate demand, short-run aggregate supply, and long-run aggregate supply in Lotus Land. The economy is currently at point D and the government decreases its taxes. The economy will move to ________. The price level will ________, and the change in real GDP will be ________ the increase in aggregate demand. A) point A; fall; less than B) point D; rise; less than C) point C; rise; less than D) point B; remain constant; the same as Answer: C Topic: Fiscal Stimulus Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

79) In the above figure, which fiscal policy could help move the economy to potential GDP? A) decreasing government expenditure B) decreasing autonomous taxes C) increasing government expenditure D) Both answers A and B are correct. Answer: A Topic: Equilibrium GDP and the Price Level Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 80) In the above figure, which of the following policies could move the economy to potential GDP? A) decreasing government expenditures and increasing taxes B) decreasing taxes and not changing government expenditures C) increasing government expenditures and decreasing taxes D) None of the above answers is correct. Answer: A Topic: Equilibrium GDP and the Price Level Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

81) Suppose that real GDP equals potential GDP, but the government believes that the economy is in a below full-employment equilibrium. As a result, the government increases its expenditure on goods and services. In response to the government's fiscal policy, A) aggregate demand will increase. B) an equilibrium with real GDP less than potential GDP will occur. C) potential GDP decreases. D) None of the above answers is correct. Answer: A Topic: Limitations of Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 82) The use of fiscal policy is limited because A) there is never a long enough time lag. B) the economy is almost always at full employment. C) the President may have different goals than Congress. D) time lags associated with fiscal policy may cause the policy to take effect too late to solve the problem it was supposed to address. Answer: D Topic: Limitations of Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 83) The use of discretionary fiscal policy to end a recession is limited because A) the legislative process is slow. B) potential GDP changes too rapidly. C) the real-world multiplier is too small to have an impact on real GDP. D) in the real world, taxes are not induced. Answer: A Topic: Limitations of Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

84) Which of the following are a limitation of fiscal policy? I. There is a lag between recognizing that fiscal policy might be needed and when it actually takes effect. II. Economic forecasts might be incorrect. III. Monetary policy might counter fiscal policy. A) I only B) I and II C) I and III D) I, II and III Answer: B Topic: Limitations of Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 85) Which of the following policies shifts the AD curve the farthest leftward? A) a rise in taxes of $10 billion B) a cut in taxes of $10 billion C) a decrease in government expenditure of $10 billion D) a decrease in both government expenditure and taxes of $10 billion Answer: C Topic: Study Guide Question, Multipliers Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills 86) If the government's budget is in surplus even when the economy is at full employment, the surplus is said to be A) persisting. B) cyclical. C) discretionary. D) structural. Answer: D Topic: Study Guide Question, Cyclical and Structural Balances Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

5 News Based Questions 1) In 2007, Norway's government had revenue of $226.3 billion and expenditures of $158.7 billion. At the same time, GDP totalled $392 billion and government debt was about 67 percent of GDP. In 2007, Norway's government ran a government budget ________ and government debt ________. A) surplus; decreased B) deficit; decreased C) surplus; increased D) deficit; increased Answer: A Topic: Deficits and Debt Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 2) In 2007, France's government had revenue of $1.287 trillion while expenditures totalled $1.356 trillion. GDP was $2.56 trillion. In 2007, the government budget balance was ________ and government debt ________. A) -$0.69 billion; increased B) $1.27 trillion; increased C) $0.69 billion; decreased D) $1.02 trillion; decreased Answer: A Topic: Deficits and Debt Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 3) In 2007, Denmark's government had expenditures of $157 billion and spending of $171 billion. GDP in 2007 was $312 billion. The government ran a budget ________ and government debt ________. A) deficit; decreased B) deficit; increased C) surplus; decreased D) surplus; increased Answer: B Topic: Deficits and Debt Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

4) In October 2008, President Bush enacted the Alternative Minimum Tax Relief Act of 2008, which resulted in lower taxes on labor income. According the supply-side view, this would result in A) an increase in the tax wedge. B) a leftward shift in the supply of labor curve. C) a movement along the supply of labor curve. D) a rightward shift in the supply of labor curve. Answer: D Topic: Tax Wedge Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 5) In October 2008, President Bush enacted the Alternative Minimum Tax Relief Act of 2008, which resulted in lower taxes on labor income. According the supply-side view, as a result of this act the incentive to work ________ and the tax wedge ________. A) decreases; increases B) increases; does not change C) increases; decreases D) increases; increases Answer: C Topic: Tax Wedge Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 6) In 2007, Germany increased the value added tax (VAT) on consumption from 16 percent to 19 percent. The supply-side view, this will ________. A) increase the tax wedge and lower the incentive to work. B) decrease the tax wedge and lower the incentive to work. C) shift the labor supply curve to the right. D) increase the incentive to work in order to pay the higher tax. Answer: A Topic: Tax Wedge Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

7) In 2007, Germany increased the value added tax (VAT) on consumption from 16 percent to 19 percent. According to the supply-side view, A) the incentive to work increases. B) the supply of labor increases. C) there will be an increase in potential GDP due to the increase tax revenue. D) the after-tax wage rate falls. Answer: D Topic: Tax Wedge Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 8) In 2008, Britain decided to cut its value added tax (VAT) to 15 percent from 17.5 percent. The VAT is similar to a sales tax. According to the supply-side view, this change will increase I. the after-tax wage II. the incentive to work III. the supply of labor A) II only. B) I and II only. C) I, II and III. D) II and III only. Answer: C Topic: Tax Wedge Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 9) A report on the EU economic stimulus plan suggested that "... Governments must consider ... cutting VAT [value added tax] and labor taxes ..." The VAT is similar to a sales tax. If governments follow the suggestions, there will be ________ according to the supply-side view. A) an increase in labor supply and a decrease in the tax wedge B) an upward shift in the aggregate production function C) an increase in the labor supply and an increase in the tax wedge D) an increase in saving and an increase in the tax wedge Answer: A Topic: Tax Wedge Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

10) In response to the economic crisis in 2008, President Merkel "highlighted in her speech what the German government has already done: a financial sector rescue package worth up to €500 billion, and a proposed stimulus package of tax breaks [on income] and spending measures aimed at triggering investments of up to €50 billion over the next two years." www.iht.com, 11/26/2008 Which parts of the stimulus plan will increase labor supply? A) financial sector rescue package B) spending measures targeted at investment C) tax breaks D) all of the above Answer: C Topic: Fiscal Policy and Aggregate Supply Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 11) Norway has a lower tax on dividend and interest income than does United Kingdom. We would expect Norway to have a ________ tax wedge and a ________ growth rate of real GDP. A) smaller; slower B) larger; faster C) larger; slower D) smaller; faster Answer: D Topic: Supply-Side Effects of Fiscal Policy Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 12) Between 2000 and 2005, Finland increased its tax on interest income. As a result, the supply curve for loanable funds shifted ________ and the tax wedge ________. A) leftward; increased B) rightward; increased C) leftward; decreased D) rightward; decreased Answer: A Topic: After-Tax Real Interest Rate Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

13) Between 2000 and 2005, Finland increased its tax on interest income. As a result, the tax wedge ________ and the growth rate of real GDP ________. A) decreased; slowed B) increased; slowed C) decreased; increased D) increased; increased Answer: B Topic: Fiscal Policy and Aggregate Supply Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 14) "More than 9,000 laid-off Nevada workers will qualify for a second 13-week round of extended unemployment benefits, under federal legislation signed by President Bush. [The] workers exhausted their first 13 weeks of extended benefits and will now be eligible for the new benefits, which pay an average of $293 a week." www.mercurynews.com 11/24/2008 Unemployment benefits are considered part of ________ fiscal policy. The extension of benefits would ________ fiscal policy. A) automatic; be discretionary B) discretionary; be automatic C) automatic; also be considered automatic D) discretionary; also be considered discretionary Answer: A Topic: Discretionary Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 15) In response to the economic downturn, New Zealand's government had enacted a $3.8 stimulus package. www.iht.com, 11/26/2008 The stimulus plan is considered A) automatic fiscal policy. B) contractionary fiscal policy. C) discretionary fiscal policy. D) needs-tested spending. Answer: C Topic: Discretionary Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

16) "European Economic Recovery Plan" "The European Commission urged EU governments to jointly combat the economic slowdown with 200 billion euros ($256 billion) in spending and tax cuts to boost growth and consumer and business confidence." The plan "...would see the 27 EU governments spend 1.5 percent of the bloc's gross domestic product to halt the slowdown that has already pushed some European nations into recession." www.iht.com, 11/26/2008 Which of the following describe the EU's plan? I. It is discretionary fiscal policy II. It will generate a cyclical surplus. A) I and II. B) II only. C) I only. D) neither I nor II. Answer: C Topic: Cyclical and Structural Deficits Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 17) In response to the 2008 recession, New Zealand's Finance Minister Bill English stated that "... the 7 billion New Zealand dollars would be allocated to new infrastructure spending, providing financial aid to workers hit by layoffs as the economy slows and includes tax cuts planned for April." www.iht.com, 11/26/2008 New Zealand's government expects the policies to shift the ________ but at this point in time the ________ might weaken its ability to affect real GDP. A) AD curve rightward; recognition lag B) LAS curve leftward; impact lag. C) SAS curve rightward; law-making lag D) AD curve rightward; impact lag Answer: D Topic: Stabilizing the Business Cycle Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

18) "European Economic Recovery Plan" "The European Commission urged EU governments to jointly combat the economic slowdown with 200 billion euros ($256 billion) in spending and tax cuts to boost growth and consumer and business confidence." The plan "...would see the 27 EU governments spend 1.5 percent of the bloc's gross domestic product to halt the slowdown that has already pushed some European nations into recession." www.iht.com, 11/26/2008 The plan is expected to A) shift the AD curve rightward and increase real GDP. B) shift the AD curve leftward and decrease the recessionary gap. C) decrease the recessionary gap and decrease the price level. D) use the autonomous tax multiplier to eliminate the inflationary gap. Answer: A Topic: Equilibrium GDP and the Price Level Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 19) "Obama Considers Delaying Tax Increase" "U.S. President-elect Barack Obama is considering delaying his proposal to repeal the Bush tax cuts for the wealthiest Americans in light of the economic downturn." www.nytimes.com 11/23/2008 Obama's possible decision to delay the tax increase recognizes the fact that a tax increase will ________ disposable income and ________ real GDP. A) decrease; increase B) decrease; decrease C) increase; increase D) increase; decrease Answer: B Topic: Stabilizing the Business Cycle Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

20) In January 2008, the unemployment rate was only 4.9 percent and real GDP was growing. But President Bush "acknowledged that Americans were 'anxious about the economy.' As a result, it was reported that "...the Bush administration and Congressional leaders, increasingly concerned about a possible recession, are moving closer to agreeing that an economic stimulus package is needed soon." In order for the package to be approved, the leaders in Washington implied that "... they might be able to put aside longstanding partisan differences." www.nytimes.com 1/12/2008 Which of the following lags are government officials trying to avoid? A) the recognition lag B) the impact lag C) the law-making lag D) all of the above Answer: D Topic: Limitations of Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication 6 Essay Questions 1) What is fiscal policy and what are its purposes? Answer: Fiscal policy is the use of the federal budget (for instance, government expenditure or government taxes) to achieve macroeconomic objectives such as full employment or low inflation. Topic: Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 2) What does the Employment Act of 1946 specify? Why is it an important economic milestone? Answer: The Employment Act of 1946 said that the Federal Government would use all practicable means to promote maximum employment, production, and purchasing power. It also established the President's Council of Economic Advisors. The Employment Act of 1946 is an important economic milestone because it explicitly recognizes that the Federal government has a role to play in attempting to stabilize the business cycle. Topic: The Employment Act of 1946 Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

3) According to tax receipt and outlay categories, what are the main components of the federal government budget? Answer: The budget is divided between the tax receipt side and the outlay side. On the taxation side, the largest components are personal income taxes and social security taxes. Between them they account for over 80 percent of total government tax receipts. The remainder of tax revenue comes from corporate income taxes and indirect taxes, such as taxes on items such as gasoline. On the outlay side, the major three categories are transfer payments, the expenditure on goods and service, and interest payments on the government debt. The first category is the largest and continues to grow, accounting for well over half of all payments. These include payments to individuals, businesses, other levels of government, and governments around the world. These payments come in the form of Social Security benefits, unemployment payments, and subsidies, grants and loans to farmers, local and state governments and foreign governments. The last category, debt interest, is the smallest and even fell during the late 2000s because the interest rate was low. Topic: The Federal Budget Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 4) Depending on the relative size of the federal government's outlays and tax receipts, the federal government's budget can be in three possible conditions. What are the three possible conditions and what is the relationship of federal government outlays and tax receipts for each? Answer: The federal government's budget could have a budget surplus, a budget deficit, or a balanced budget. A budget surplus occurs when tax receipts are greater than government outlays; a deficit occurs when tax receipts are less than government outlays; and a balanced budget occurs when tax receipts are equal to government outlays. Topic: Budget Surplus and Deficit Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 5) What is the difference between budget surplus, budget deficit and a balanced budget? Which of these three budget outcomes is currently the case in the United States? Answer: A budget surplus occurs if tax revenues exceed outlays; a budget deficit occurs if tax revenues are less than outlays; and a balanced budget occurs if tax revenues equal outlays. Currently the United States is running a budget deficit. Topic: Budget Surplus and Deficit Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

6) "The federal budget is required by law to balance." Is the previous statement correct or incorrect? Answer: The statement is incorrect because the federal budget is not legally required to balance. It is legal for the government to run a budget surplus or a budget deficit. Topic: The Federal Budget Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 7) How has the federal government debt as a percentage of GDP changed since the end of World War II? Answer: As a percentage of GDP, the federal government debt hit its high at the end of World War II when it was about 120 percent of GDP. The percentage then fell steadily into the 1970s. The large deficits of the 1980s raised the percentage during the 1980s and into the 1990s. From 1995 to 2001, the percentage feel but since then has risen, rapidly in the last few years. Topic: Federal Government Debt Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 8) How does a tax on labor income affect potential GDP? Answer: The income tax reduces the incentive to work by driving a wedge between gross and net income. The tax shifts the supply of labor curve leftward and decreases the supply of labor as workers decide to work fewer hours. The decrease in the supply of labor decreases the equilibrium level of employment, which decreases potential GDP. Topic: Tax on Labor Income Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 9) What is the Laffer curve? Where on their Laffer curves are the United States, the United Kingdom and France located? Answer: The Laffer curve is graphed with tax revenue on the y-axis and tax rates on the x-axis. The Laffer curve captures the concept that raising the tax rate eventually leads to lower tax revenues being collected. At low tax rates, an increase in the tax rate raises the total tax revenue collected. But if government raises the tax rate high enough, an increase in the tax rate leads to lowers the total tax revenue collected. This effect takes place because when the tax rate is high enough, the disincentive effect of the tax becomes so large that enough people give up working and saving so that the total tax revenue declines. While most economists believe the United States is on the upward sloping part of its Laffer curve, so that an increase in the tax rate raises total tax revenue. The United Kingdom is believed to be also on the upward sloping part of its Laffer curve. But France might be at the peak of its curve or even on the downward sloping part, where an increase in the tax rate lowers total tax revenue. Topic: Laffer Curve Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Communication 68 Copyright © 2014 Pearson Education, Inc.

10) If the government raises taxes on labor income and interest income, explain how potential GDP and economic growth are affected. Answer: Tax increases on labor income decrease the supply of labor and so decrease equilibrium employment, which decreases potential GDP. Tax increases on the income from capital decrease saving and so decrease the supply of capital, which decreases equilibrium investment and capital and so decreases economic growth. Topic: Supply Side Effects Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 11) What is the difference between discretionary fiscal policy and automatic fiscal policy? Answer: Discretionary fiscal policy is a policy action initiated by an act of Congress. Automatic fiscal policy are mechanisms that help stabilize GDP and operate without the need for explicit action. Both taxes (such as income taxes, whose receipts rise when the economy expands and fall when the economy contracts) and needs-tested spending (such as welfare spending, which decreases when the economy expands and increases when the economy contracts) are examples of automatic fiscal policy. Topic: Discretionary Fiscal Policy Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 12) What is automatic fiscal policy? How does it affect the budget deficit and/or budget surplus during a recession and during an expansion? Answer: Automatic fiscal policy are features of fiscal policy that stabilize real GDP without the need for explicit policy action by the government. Automatic fiscal policy includes automatic changes in taxes and needs-tested spending. The government often sets tax rates rather than a total dollar amount of taxes. During a recession, taxes receipts automatically decrease and needstested spending increases, so the budget deficit increases (or the budget surplus decreases). During an expansion, tax receipts automatically increase and means-tested spending decreases, so the budget deficit decreases (or the budget surplus increases). Topic: Automatic Fiscal Policy Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

13) What is the government expenditure multiplier? Answer: The government expenditure multiplier is the magnification effect of a change in government expenditure on aggregate demand. It exists because an increase in government expenditure increases aggregate and thereby increases real GDP. In turn the increase in real GDP induces increases in consumption expenditure which future increase aggregate expenditure and real GDP. So the ultimate increase in aggregate demand exceeds the initiating increase in government expenditure. Topic: Government Expenditure Multiplier Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 14) What is needs-tested spending and how does it affect the government expenditure multiplier? Answer: Needs-tested spending is government spending that changes when GDP changes. Unemployment compensation payments is an example: They decrease when the economy expands and increase when the economy contracts. Needs-tested spending decreases the magnitude of the government expenditure multiplier. For instance, when government expenditure increases, people's disposable income increases but needs-tested spending thereby decreases. The decrease in needs-tested spending offsets some of the initial increase in disposable income, thereby decreasing the multiplier. Topic: Government Expenditure Multiplier Skill: Analytical Status: Modified 10th edition AACSB: Reflective Thinking 15) Ignoring any supply-side effects, how does the magnitude of the government expenditure multiplier compare to the magnitude of the tax multiplier? Explain your answer. Answer: The magnitude of the government expenditure multiplier is larger than the magnitude of the tax multiplier. The government expenditure multiplier is larger because a $1 change in government expenditure has an initial effect on aggregate demand of $1. In other words, a $1 increase in government expenditure initially increases aggregate demand by the entire $1. However, a $1 change in taxes does not initially affect aggregate demand by the entire $1. Instead, it affects aggregate demand by less than $1. For instance, a $1 decrease in taxes increases aggregate demand by less than $1. Why? Because part of the $1 decrease in taxes is saved and the amount saved does not increase aggregate demand. Topic: Fiscal Policy Multipliers Skill: Recognition Status: Modified 10th edition AACSB: Analytical Skills

16) What is the effect on aggregate demand and the AD curve from either an increase in government expenditure or a cut in taxes? Answer: Both an increase in government expenditure and a cut in taxes increase aggregate demand and shift the AD curve rightward. Topic: Fiscal Stimulus Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 17) If employment is less than full employment, what fiscal policy should the government pursue? Answer: To restore full employment, the government should increase its expenditure on goods or services or decrease its taxes. Topic: Fiscal Stimulus Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 18) How can discretionary fiscal policy be used to close a recessionary gap? Answer: If real GDP is less than potential GDP, then the economy is experiencing a recessionary gap. To close this gap the government could use discretionary fiscal policy. In this case, the proper fiscal policy is either an increase in government expenditure or a cut in taxes. Topic: Fiscal Stimulus Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 19) If employment exceeds full employment, what fiscal policy actions could eliminate the gap? Answer: To restore the economy to full employment, the government could decrease its expenditure on goods and services, increase its taxes, or do both. Both a decrease in government expenditure and an increase in taxes decrease aggregate demand and move the economy back toward full employment. Topic: Contractionary Fiscal Policy Skill: Analytical Status: Modified 10th edition AACSB: Reflective Thinking 20) What are some of the limitations of fiscal policy? Briefly discuss them. Answer: One limitation of fiscal policy is the fact that implementing fiscal policy is slow and so it is difficult to have the proper policy in place. Another limitation is that at times it is difficult to determine if GDP is less than, equal to, or greater than potential GDP. As a result, it is difficult to determine if fiscal policy should be expansionary or contractionary. Topic: Limitations of Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 71 Copyright © 2014 Pearson Education, Inc.

7 Numeric and Graphing Questions 1) A country reports that its government outlays total $1.8 trillion and its receipts total $1.6 trillion. Does the country have a budget surplus or deficit and what is the surplus or deficit? Answer: The country has a budget deficit. The deficit equals $0.2 trillion. Topic: Budget Surplus and Deficit Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

Year 2007 2008 2009 2010 2011

Government Tax receipts outlays (trillions of (trillions of 2005 dollars) 2005 dollars) 0.75 0.80 0.80 0.83 0.87 0.86 0.95 0.95 1.06 1.02

2) The above table gives a country's government outlays and tax receipts for 2007 through 2011. During which years did the country have a balanced budget, budget surplus, and budget deficit? Answer: The country had a balanced budget in 2010 because in that year government outlays equaled tax receipts. The country had a budget surplus in 2007 and 2008 because in those years tax receipts exceeded government outlays. The country had a budget deficit in 2009 and 2011 because in those years government outlays exceeded tax receipts. Topic: Budget Surplus and Deficit Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

3) Does the figure above illustrate a recessionary or an inflationary gap? What do potential GDP and real GDP equal? What is an appropriate fiscal policy to restore real GDP to potential real GDP? Answer: A recessionary gap occurs when real GDP is less than potential GDP, which is precisely what the figure illustrates. In the figure, potential GDP equals $13 trillion but real GDP equals only $12.5 trillion. In order to restore real GDP back to potential GDP using fiscal policy, the government could increase government expenditure on goods and services and/or decrease taxes. Topic: Fiscal Stimulus Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

4) Does the figure above illustrate a recessionary or an inflationary gap? What do potential GDP and real GDP equal? What is an appropriate fiscal policy to restore real GDP to potential real GDP? Answer: A inflationary gap occurs when real GDP is less than potential GDP, which is precisely what the figure illustrates. In the figure, potential GDP equals $13 trillion but real GDP equals $13.5 trillion. In order to restore real GDP back to potential GDP using fiscal policy, the government could decrease government expenditure on goods and services and/or increase taxes. Topic: Fiscal Policy and Aggregate Demand Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills 8 True or False 1) Each president can decide when to submit a budget to Congress. Answer: FALSE Topic: The Federal Budget Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 2) Government expenditure on goods and services is the largest component of total federal government expenditures. Answer: FALSE Topic: The Federal Budget Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

3) Corporate income taxes are the largest source of revenue for the federal government. Answer: FALSE Topic: Tax Revenues Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 4) Personal income taxes are the largest source of revenue for the federal government. Answer: TRUE Topic: Tax Revenues Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 5) Federal government expenditures as a percentage of GDP are currently equal to approximately 10 percent. Answer: FALSE Topic: Government Expenditures Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 6) If tax receipts are greater than government outlays the government has a budget surplus. Answer: TRUE Topic: Financing Investment Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 7) If tax receipts exactly equaled government outlays in a year, the federal government debt would be zero. Answer: FALSE Topic: Budget Surplus and Deficit Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 8) If tax receipts exactly equaled government outlays in a year, the budget deficit would be zero. Answer: TRUE Topic: Budget Surplus and Deficit Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

9) The main goal of fiscal policy is to produce a balanced budget. Answer: FALSE Topic: Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 10) All developed countries have about the same ratio of government deficit to GDP. Answer: FALSE Topic: The Budget Deficit in Global Perspective Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 11) An increase in taxes on labor income decreases potential GDP. Answer: TRUE Topic: Supply Side Effects Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 12) An increase in taxes on labor income shifts the labor supply curve leftward and the after-tax wage rate falls. Answer: TRUE Topic: Supply Side Effects Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 13) A tax cut decreases government saving and can thereby crowd out investment. Answer: TRUE Topic: Fiscal Policy and Crowding Out Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 14) The Ricardo-Barro effect implies that a budget deficit will not raise interest rates or reduce investment. Answer: TRUE Topic: Ricardo-Barro Effect Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

15) Deliberate changes in government expenditures and taxes to influence GDP are discretionary fiscal policy. Answer: TRUE Topic: Discretionary Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 16) Discretionary policy requires an act of Congress. Answer: TRUE Topic: Discretionary Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 17) The structural surplus measures whether a budget surplus is cyclical or structural. Answer: TRUE Topic: Cyclical and Structural Balances Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 18) By its very definition, every budget deficit is structural in nature. Answer: FALSE Topic: Cyclical and Structural Balances Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 19) A fiscal stimulus is used to increase production and employment. Answer: TRUE Topic: Fiscal Policy Skill: Recognition Status: New 10th edition AACSB: Reflective Thinking 20) An increase in government expenditure leads to rightward shift of the AD curve. Answer: TRUE Topic: Fiscal Policy and Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

21) The aggregate demand curve is shifted rightward by an increase in tax rates. Answer: FALSE Topic: Expansionary Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 22) The aggregate demand curve is shifted rightward by an increase in government expenditure. Answer: TRUE Topic: Expansionary Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 23) Automatic fiscal policy is not subject to all the same time lags to which discretionary fiscal policy is subject. Answer: TRUE Topic: Limitations of Fiscal Policy Skill: Analytical Status: Modified 10th edition AACSB: Reflective Thinking

9 Extended Problems Labor (millions of hours per year) 200 240 280 320 360

Real GDP (millions of 2005 dollars) 6,800 7,680 8,400 8,960 9,360

1) The table above shows the aggregate production function in the economy of Prescottia. The people of Prescottia pay no taxes and are willing to work 248 million hours a year for a real wage rate of $8 an hour, and for each dollar increase in the real wage, they are willing to work 4 million additional hours per year. a) Draw the economy's aggregate production function. Wage rate Quantity of labor demanded (dollars per hour) (millions of hours per year) 24 200 20 240 16 280 12 320 b) Prescottia's demand for labor schedule is in the table above. Draw Prescottia's demand for labor and supply of labor curves. c) What are the economy's full-employment quantity of labor and real wage rate? What is the country's potential GDP? d) Suppose that Prescottia's government introduces a 25 percent income tax. Using your graph, what happens to the demand for labor? What happens to the supply of labor? Explain. e) After the tax is imposed, what happens to Prescottia's full-employment quantity of labor? What happens to Prescottia's potential GDP?

Answer:

a) See the figure above.

b) See the figure above. Prescottia's demand for labor curve is LD and the supply of labor curve is LS. c) As shown in the second figure, the labor market is in equilibrium when the quantity of labor employed is 280 million hours and the real wage rate is $16 per hour. So the economy's fullemployment quantity of labor is 280 million hours at a real wage rate of $16 per hour. Potential GDP is the level of real GDP at full employment. The production function in the first figure shows that if 280 million hours of labor are employed, the country's real GDP is $8,400 million. So the economy's potential GDP is $8.4 billion.

d) The income tax has no effect on the demand for labor because the quantity of labor that firms plan to hire depends only on how productive labor is and what it costs—its real wage. But the tax weakens the incentive to work and decreases the supply of labor. When the income tax is imposed, workers look at the after-tax wage rate and, to supply the same quantity of labor as with no tax, they demand a before-tax wage rate that is 25 percent higher than before. So the supply of labor decreases and the supply of labor curve shifts from LS to LST. e) As shown in the second figure illustrating the labor market, with the tax Prescottia's fullemployment quantity of labor decreases from 280 to 270 million hours per year. And the production function shown in the first figure illustrates that as the full-employment quantity of labor decreases from 280 to 270 million hours per year, the economy's potential GDP falls from $8,400 million to (approximately) $8,235 million. Topic: Supply Side Effects of an Income Tax Skill: Analytical Status: Previous edition, Chapter 13 AACSB: Analytical Skills

Economics, 11e, Global Edition (Parkin) Chapter 31 Monetary Policy 1 Monetary Policy Objectives and Framework 1) Which of the following is one of the Fed's policy goals? A) help the President win reelection B) exchange rate C) monetary base D) price level stability Answer: D Topic: Policy Goals Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 2) The Fed's goals include A) open market operations. B) price level stability. C) the monetary base. D) the federal funds rate. Answer: B Topic: Policy Goals Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 3) Federal Reserve monetary policy goals include A) ensuring banks can meet their profit maximization objectives. B) discount rate stability C) zero percent unemployment in the domestic economy. D) price level stability Answer: D Topic: Policy Goals Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

4) The Federal Reserve monetary policy goals of maximum employment means A) a zero percent unemployment rate. B) a zero percent natural unemployment rate. C) keeping the unemployment rate close to the natural unemployment rate. D) cyclical unemployment should not necessarily be minimized. Answer: C Topic: Policy Goals Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 5) Which of the following are NOT Federal Reserve monetary policy goals? A) moderate long-term interest rates B) price level stability C) maximum employment D) zero percent unemployment. Answer: D Topic: Policy Goals Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 6) The key goal of monetary policy is to A) reverse the productivity growth slowdown. B) keep the budget deficit small and/or the budget surplus large. C) lower taxes. D) maintain low inflation. Answer: D Topic: Policy Goals Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 7) The key aim of monetary policy is to A) change government spending to spur innovation. B) maintain price stability. C) change tax rates to boost investment. D) change tax rates to boost saving. Answer: B Topic: Policy Goals Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

8) Which of the following is the most important Federal Reserve monetary policy goal? A) moderate long-term interest rates B) minimum unemployment C) maximum employment D) price level stability Answer: D Topic: Policy Goals Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 9) In the short run, the Federal Reserve faces a tradeoff between A) economic growth and employment. B) inflation and price stability. C) inflation and unemployment. D) real GDP growth and potential GDP growth. Answer: C Topic: Policy Goals Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 10) In the short run, the Federal Reserve faces a tradeoff between A) economic growth and employment. B) inflation and price stability. C) inflation and real GDP. D) interest rates and unemployment. Answer: C Topic: Policy Goals Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 11) The core inflation rate, measured by the core PCE deflator, measures changes in the A) price of only two consumer goods: food and fuel. B) prices of all consumer goods. C) prices of consumer goods except food and fuel. D) prices of consumer goods except health care. Answer: C Topic: Price Stability Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

12) To determine whether the goal of stable prices is being achieved, the Federal Reserve monitors the ________ but uses as its operational guide the ________. A) core CPI; core inflation rate B) core inflation rate; CPI inflation rate C) CPI; core inflation rate D) GDP price deflator; CPI Answer: C Topic: Price Stability Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 13) Ben Bernanke has been more precise than his predecessor, suggesting a core inflation rate of ________ per year is the same as price stability. A) 0 to 1 percent B) 0 to 2 percent C) 1 to 2 percent D) 1 to 4 percent Answer: C Topic: Price Stability Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 14) Federal Reserve Chairman Ben Bernanke has defined price stability as occurring when core inflation is A) exactly 0 percent. B) less than 10 percent. C) between 1 and 2 percent. D) used in wage-setting contracts. Answer: C Topic: Price Stability Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 15) Ben Bernanke has suggested that a core inflation rate of ________ is the equivalent of price stability. A) between 1 percent to 2 percent B) zero C) less than 5 percent D) less than zero Answer: A Topic: Price Stability Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 4 Copyright © 2014 Pearson Education, Inc.

16) In 2012, U.S. core inflation was 2.1 percent. This inflation rate A) is lower than the inflation rate the Fed accepts as creating stable prices. B) is about equal to the inflation rate the Fed accepts as creating stable prices. C) is more than 2 percentage points higher than the inflation rate the Fed accepts as creating stable prices. D) None of the above answers are correct because the Fed has never associated an inflation rate with stable prices. Answer: B Topic: Price Stability Skill: Recognition Status: New AACSB: Reflective Thinking 17) The output gap is the A) percentage deviation of real GDP from potential GDP. B) difference between actual inflation and core inflation. C) difference in graduation levels between high school and college. D) percentage increase in the economic growth rate of real GDP. Answer: A Topic: Output Gap Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 18) When the output gap is positive, it represents ________ gap, and when it is negative, it represents ________ gap. A) a recessionary; an inflationary B) an inflationary; an employment C) an inflationary; a recessionary D) an employment; an unemployment Answer: C Topic: Output Gap Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 19) The output gap can be used to estimate the extend to which the Fed misses its goal of A) maximum employment. B) stable prices. C) moderate long-term interest rates. D) monetary policy. Answer: A Topic: Output Gap Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 5 Copyright © 2014 Pearson Education, Inc.

20) Which of the following bodies are responsible for the conduct of monetary policy? A) the Federal Reserve System B) Congress C) the President D) Congress and the President, jointly Answer: A Topic: The Federal Reserve System Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 21) Monetary policy is controlled by A) Congress. B) the president. C) the Federal Reserve. D) the Treasury Department. Answer: C Topic: The Federal Reserve System Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 22) The current chairman of the Federal Reserve is A) Ben Bernanke. B) Alan Greenspan. C) Paul Volcker. D) Milton Friedman. Answer: A Topic: The Federal Reserve System Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 23) The Federal Open Market Committee meets ________ times per year. A) 8 B) 2 C) 26 D) 52 Answer: A Topic: The Federal Reserve System Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

24) Read the following statements and determine if they are true or false. I. The Federal Reserve's monetary policy must be approved by the President of the United States. II. The Federal Reserve Board of Governors meets approximately every six months to review the state of the economy and determine monetary policy. A) I and II are both true. B) I and II are both false. C) I is true and II is false. D) I is false and II is true. Answer: B Topic: The Federal Reserve System Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 25) Price level stability A) has no relationship to growth in potential GDP. B) is thought by most economists to be reached with a measured inflation rate of between 0 and 2 percent a year. C) is the most important tool of the Federal Reserve. D) was attained by the Fed for the period between 1979 and 2001. Answer: B Topic: Study Guide Question, Price Stability Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking

2 The Conduct of Monetary Policy 1) Which of the following are policy instruments available to the Fed as it tries to achieve its macroeconomic goals? I. government expenditures on goods and services and taxes II. the government budget deficit or surplus III. changes in the federal funds rate A) I and II B) III only C) II and III D) II only Answer: B Topic: Policy Instruments Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 2) Which of the following is a potential monetary policy instrument for the Fed? A) federal funds rate B) government budget deficit C) income tax rates D) profit rates Answer: A Topic: Policy Instruments Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 3) The monetary policy instrument the Federal Reserve choose to use is the A) quantity of money. B) exchange rate. C) federal funds rate. D) required reserves rate. Answer: C Topic: Policy Instruments Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

4) The federal funds rate is the interest rate A) banks charge each other on overnight loans. B) on the 3-month Treasury bill. C) on the 30-year treasury bond. D) also known as the prime rate. Answer: A Topic: Policy Instruments Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 5) Currently the Fed targets A) both the monetary base and the federal funds rate simultaneously. B) the exchange rate. C) the federal funds rate. D) the price level. Answer: C Topic: Policy Instruments Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 6) Usually, the Federal Reserve changes its target for the federal funds rate in units of A) 1/4 of 1 percentage point. B) 1 percentage point. C) 2 percentage points. D) 5 percentage points. Answer: A Topic: Policy Instruments Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 7) Federal Reserve open market operations directly influence A) firms. B) consumers. C) banks. D) Congress. Answer: C Topic: Policy Instruments Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

8) The higher the federal funds rate, the ________ the opportunity cost of holding reserves, which ________ the incentive to economize on reserves. A) higher; increases B) higher; decreases C) lower; increases D) lower; decreases Answer: A Topic: The Market for Reserves Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 9) In 2012, the federal funds rate was 0.15 percent, which means that the opportunity cost of holding reserves was ________ and consequently banks had a ________ incentive to economize on reserves. A) low; small B) low; large C) high; small D) high; large Answer: A Topic: The Market for Reserves Skill: Recognition Status: New AACSB: Reflective Thinking 10) Equilibrium in the market for bank reserves determines the A) federal funds rate. B) inflation rate. C) 30-year Treasury bond rate. D) exchange rate. Answer: A Topic: The Market for Reserves Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 11) If the federal funds rate is greater than the federal funds rate target, there is a ________ of reserves and the federal funds rate ________. A) surplus; falls B) surplus; rises C) shortage; falls D) shortage; rises Answer: A Topic: The Market for Reserves Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 10 Copyright © 2014 Pearson Education, Inc.

12) Within the market for reserves, an increase in the quantity of reserves results in a A) rise in the equilibrium federal funds rate. B) fall in the equilibrium federal funds rate. C) rise in the equilibrium real wage rate. D) fall in the equilibrium money wage rate. Answer: B Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 13) If the demand for reserves is unchanged, an increase in the quantity of reserves will A) increase the federal funds rate. B) lower the federal funds rate. C) not affect the federal funds rate. D) None of the above answers is correct. Answer: B Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 14) In the market for bank reserves, if the federal funds rate target is higher than the federal funds rate, the Fed will take action to ________ reserves. A) decrease the supply of B) increase the supply of C) increase the demand for D) decrease the demand for Answer: A Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 15) Open market operations by the Fed lead to A) changes in the number of banks. B) immediate changes in aggregate supply. C) changes in the federal funds rate. D) shifts in the demand curve for reserves. Answer: C Topic: Changing the Interest Rate, Fed Policy Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

16) If the Fed sells U.S. government securities, A) the federal funds rate rises. B) the U.S. Treasury gains some revenue. C) bank reserves increase. D) None of the above answers is correct. Answer: A Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 17) If the Fed carries out an open market operation and sells U.S. government securities, the federal funds rate ________ and the quantity of reserves ________. A) falls; increases B) rises; increases C) falls; decreases D) rises; decreases Answer: D Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 18) An increase in the quantity of reserves leads to a A) fall in the federal funds rate. B) decrease in the price level. C) reduction in the velocity of circulation. D) leftward shift in the demand curve for reserves. Answer: A Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 19) An open market sale of government securities by the Federal Reserve shifts the ________ reserves curve ________. A) supply of; leftward B) supply of; rightward C) demand for; rightward D) demand for; leftward Answer: A Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

20) The Fed engages in open market operations and sells government securities. The result is A) a lower federal funds rate. B) a higher federal funds rate. C) an unchanged federal funds rate because other interest rates did not change. D) More information is needed to determine what happens to the federal funds rate. Answer: B Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 21) If the Fed wants to raise the federal funds rate it will A) buy government securities in order to increase the quantity of reserves. B) sell government securities in order to decrease the quantity of reserves. C) buy government securities in order to decrease the quantity of reserves. D) sell government securities in order to increase the quantity of reserves. Answer: B Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 22) If the Fed buys U.S. government securities, A) the federal funds rate will fall. B) the federal funds rate will rise. C) bank reserves will decrease. D) the discount rate will rise. Answer: A Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 23) If the Fed carries out an open market operation to buy U.S. government securities, the federal funds rate ________ and the quantity of reserves ________. A) falls; increases B) rises; increases C) falls; decreases D) rises; decreases Answer: A Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

24) The Fed buys U.S. government securities from banks in order to A) lower the federal funds rate. B) reduce the government's budget deficit. C) decrease banks' reserves. D) None of the above answers are correct. Answer: A Topic: Changing the Interest Rate, Fed Policy Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 25) If the Fed wants to lower the federal funds rate, it can A) decrease the budget deficit. B) sell government securities in the open market. C) instruct banks to print more money. D) buy government securities on the open market. Answer: D Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 26) An open market purchase of government securities by the Federal Reserve shifts the ________ reserves curve ________. A) supply of; leftward B) supply of; rightward C) demand for; rightward D) demand for; leftward Answer: B Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 27) In 2012 the Fed announced it would purchase $40 billion of mortgage securities per month. These purchases shifted the ________ reserves curve ________. A) supply of; leftward B) supply of; rightward C) demand for; rightward D) demand for; leftward Answer: B Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: New AACSB: Reflective Thinking

28) If the Fed increases the quantity of reserves, a new equilibrium is reached by a A) rightward shift of the demand for reserves curve. B) movement down the demand for reserves curve. C) leftward shift of the demand for reserves curve. D) movement up the demand for reserves curve. Answer: B Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 29) To lower the federal funds rate, the Federal Reserve should A) buy government securities. B) raise the Treasury bill rate. C) raise the exchange rate. D) decrease bank reserves. Answer: A Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

30) The figure above shows the market for bank reserves in Futureland. If the Bank of Futureland undertakes an open market purchase of government securities that changes the quantity of reserves by $100 billion, then the federal funds rate will ________. A) rise to 8 percent a year B) remain at 6 percent a year C) fall to 4 percent a year D) None of the above answers is correct. Answer: C Topic: Changing the Interest Rate, Fed Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 31) The figure above shows the market for bank reserves in Futureland. If the Bank of Futureland undertakes an open market sale of government securities that changes the quantity of reserves by $100 billion, then the federal funds rate will ________. A) rise to 8 percent a year B) remain at 6 percent a year C) fall to 4 percent a year D) None of the above answers is correct. Answer: A Topic: Changing the Interest Rate, Fed Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

32) By using open market operations, the Federal Reserve A) adjusts the supply of reserves to keep the federal funds interest rate equal to its target. B) adjusts the supply and demand of reserves to keep the federal funds interest rate equal to its target. C) adjusts the demand of reserves to keep bank rates in line with the federal funds rate target. D) controls banks' demand for reserves, thereby keeping the federal funds rate equal to its target. Answer: A Topic: The Market for Reserves Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 33) When the federal funds interest rate is 6 percent, the quantity of reserves demanded is $100 billion. If the quantity of reserves is actually $110 billion, then the A) demand for reserves increases and the demand for reserves curve shifts rightward. B) demand for reserves decreases and the demand for reserves curve shifts leftward. C) federal funds rate rises. D) federal funds rate falls. Answer: D Topic: Study Guide Question, The Market for Reserves Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 3 Monetary Policy Transmission 1) Monetary policy affects real GDP by A) changing aggregate supply. B) creating budget surpluses. C) changing aggregate demand. D) creating budget deficits. Answer: C Topic: Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 2) Monetary policy includes adjustments in ________ so as to change ________. A) the federal funds rate; short-run aggregate supply B) open market operations; long-run aggregate supply C) the quantity of money; short-run aggregate supply D) the federal funds rate; aggregate demand Answer: D Topic: Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 17 Copyright © 2014 Pearson Education, Inc.

3) Monetary policy produces ripple effects, some of which happen quickly and some that can take years to produce change. Which of the following takes the longest to change? A) inflation rate B) federal funds rate C) exchange rate D) monetary base Answer: A Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 4) If the interest rate on Treasury bills is higher than the federal funds rate, the quantity of overnight loans supplied ________ and the ________ for Treasury bills increases. A) decreases; demand B) decreases; supply C) increases; demand D) increases; supply Answer: A Topic: The Ripple Effects of Monetary Policy Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 5) Long-term interest rates are ________ than short-term because long-term loans are ________ than short-term loans. A) higher; riskier B) higher; safer C) lower; safer D) lower; riskier Answer: A Topic: The Ripple Effects of Monetary Policy Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 6) If the Fed lowers the federal funds rate, then A) investment and consumption expenditure decrease. B) the price of the dollar rises on the foreign exchange market and so net exports decrease. C) a multiplier process that affects aggregate demand occurs. D) All of the above answers are correct. Answer: C Topic: The Ripple Effects of Monetary Policy Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 18 Copyright © 2014 Pearson Education, Inc.

7) When the Fed lowers the federal funds rate, aggregate demand A) increases. B) decreases. C) stays the same. D) could increase, decrease or stay the same. Answer: A Topic: The Ripple Effects of Monetary Policy Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 8) To increase the quantity of money in the economy, the Federal Reserve is likely to A) print more money and give it to the banks. B) lower tax rates C) sell government securities in an open market operation. D) buy government securities in an open market operation. Answer: D Topic: How an Open Market Operation Works Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 9) If the Fed wants to increase the quantity of money, it can A) lower income tax rates. B) purchase U.S. government securities. C) increase the government budget deficit. D) raise the exchange rate. Answer: B Topic: How an Open Market Operation Works Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 10) If the Fed wants to decrease the quantity of money, it can A) decrease the government budget deficit. B) purchase U.S. government securities. C) sell U.S. government securities. D) raise income tax rates. Answer: C Topic: How an Open Market Operation Works Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

11) Which of the following increases the quantity of money? A) an individual's cash withdrawal from a bank B) an individual's purchase of a government security from the Fed C) the Fed's purchase of a government security D) an increase in the government's budget deficit Answer: C Topic: How an Open Market Operation Works Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 12) Open market purchases by the Federal Reserve System (the Fed) A) raise the federal funds rate. B) increase bank reserves. C) occur when the Fed wants to decrease the quantity of money. D) All of the above answers are correct. Answer: D Topic: How an Open Market Operation Works Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 13) When the Fed raises the federal funds rate, A) net exports increase. B) the value of the dollar falls on the foreign exchange market. C) the value of the dollar rises on the foreign exchange market. D) consumption increases. Answer: C Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 14) At the end of 2012, the Fed was buying about $100 billion of securities per month, a much higher amount than normal. These purchases would ________ the value of the dollar on foreign exchange markets thereby ________ U.S. exports. A) raise; increasing B) raise; decreasing C) lower; increasing D) lower; decreasing Answer: C Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: New AACSB: Reflective Thinking

15) If the Fed raises the federal funds rate so that the exchange rate rises, then imports ________ and exports ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 16) If the Fed lowers the federal funds rate so that the exchange rate falls, then imports ________ and exports ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: C Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 17) If the U.S. interest rate rises, the exchange rate ________ and net exports ________. A) rises; increase B) rises; decrease C) falls; increase D) falls; decrease Answer: B Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 18) When the Fed lowers the federal funds rate, the U.S. dollar ________ on the foreign exchange market and ________. A) depreciates; aggregate demand decreases B) appreciates; aggregate demand decreases C) depreciates; the increase in imports is greater than the increase in exports D) depreciates; aggregate demand increases Answer: D Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 21 Copyright © 2014 Pearson Education, Inc.

19) The ripple effects that occur when the Fed changes the federal funds rate include ________. A) a decrease in consumption and investment B) an increase in net exports C) a decrease in interest rates D) an increase in short-run aggregate supply Answer: A Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 20) When the Fed raises the federal funds rate, in the foreign exchange market people ________ dollars and the price of the dollar ________ on the foreign exchange market. A) sell; rises B) sell; falls C) buy; rises D) buy; falls Answer: C Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 21) If the Federal Reserve lowers the Federal funds rate, A) other short-term interest rates fall. B) other short-term interest rates rise. C) the exchange rate falls. D) Both answers A and C are correct. Answer: D Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 22) When the Federal Reserve increases the Federal funds rate, the U.S. interest rate differential ________ and the U.S. exchange rate ________. A) rises; appreciates B) rises; depreciates C) falls; appreciates D) falls; depreciates Answer: A Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

23) If the Federal Reserve decreases the Federal funds rate, other short-term interest rates ________ and the exchange rate ________. A) fall; falls B) fall; does not change C) fall; rises D) do not change; falls Answer: A Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 24) When the Fed raises the federal funds rate, other A) interest rates fall, consumption, investment and net exports increase, and the aggregate demand curve shifts rightward. B) interest rates fall, consumption, investment and net exports decrease, and the aggregate demand curve shifts leftward. C) interest rates rise, consumption, investment and net exports decrease, and the aggregate demand curve shifts leftward. D) interest rates rise, consumption, investment and net exports increase, and the aggregate demand curve shifts rightward. Answer: C Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 25) A decrease in the federal funds rate A) increases other short-term interest rates, decreases investment, and decreases aggregate demand. B) lowers the exchange rate, increases the supply of loanable funds, and increases aggregate demand. C) lowers other sort-term interest rate, raises the real interest rate, and increases aggregate demand. D) decreases the demand for loanable funds, lowers the real interest rate, and decreases aggregate demand. Answer: B Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

26) In 2012, the Federal Reserve announced it would hold the federal rates near 0 percent "at least through mid-2015." This policy attempted to shift the A) aggregate demand curve leftward. B) aggregate demand curve rightward. C) aggregate supply curve leftward. D) aggregate supply curve rightward. Answer: B Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: New AACSB: Reflective Thinking 27) A decrease in the federal funds rate leads to A) an increase in the quantity of money. B) a fall in the exchange rate. C) an increase in exports. D) All of the above answers are correct. Answer: D Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 28) If the Fed increases the quantity of reserves, the federal funds rate ________ and the quantity of money ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases Answer: C Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 29) Suppose that the market for reserves is in equilibrium and then the Federal Reserve decreases the quantity of reserves by $2 billion. The federal funds rate will ________ and the supply of loanable funds will ________. A) rise; increase B) rise; decrease C) fall; increase D) fall; decrease Answer: B Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 24 Copyright © 2014 Pearson Education, Inc.

30) In the short run, an increase in the federal funds rate ________ the real interest rate and ________ investment. A) lowers; increases B) raises; increases C) lowers; decreases D) raises; decreases Answer: D Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 31) When the Federal Reserve increases the Federal funds rate, A) the quantity of reserves, the quantity of deposits, and bank loans all decrease. B) the quantity of reserves decreases, while the quantity of deposits and bank loans both increase. C) both the quantity of reserves and the quantity of deposits decrease, while bank loans increase. D) the quantity of reserves, the quantity of deposits, and bank loans all increase. Answer: A Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 32) When the Federal Reserve increases the Federal funds rate, A) both the supply of bank loans and the supply of loanable funds decrease, thereby increasing the real interest rate. B) the supply of bank loans decreases, while the supply of loanable funds and the real interest rate both increase. C) both the supply of bank loans and the supply of loanable funds increase, while the real interest rate increases. D) both the supply of bank loans and the supply of loanable funds increase, thereby decreasing the real interest rate. Answer: A Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

33) When the Fed lowers the federal funds rate, A) consumption expenditures decrease. B) the dollar increases in value on foreign exchange markets. C) net exports decrease. D) investment expenditures increase. Answer: D Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 34) The Fed lowers the federal funds rate. A mechanism through which aggregate demand increases is that the lower federal funds rate A) increases other short-term interest rates, which decreases investment, thereby decreasing aggregate demand. B) decreases other short-term interest rate, which decreases investment, thereby increasing aggregate demand. C) raises the exchange rate so that net exports decrease, which increases investment, thereby increasing aggregate demand. D) decreases other short-term interest rates, which increases investment, thereby increasing aggregate demand. Answer: D Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 35) In the short run, a decrease in the federal funds rate by the Fed A) lowers the real interest rate, decreases investment, and shifts the AD curve rightward. B) lowers the real interest rate, increases investment, and shifts the AD curve leftward. C) raises the real interest rate, decreases investment, and shifts the AD curve rightward. D) None of the above answers is correct. Answer: D Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

36) In the short run, monetary policy can A) raise the federal funds rate, thereby decreasing the supply of loanable funds, raising the real interest rate, and decreasing investment. B) lower the federal funds rate, thereby increasing the supply of loanable funds, and lowering the exchange rate. C) raise the federal funds rate and shift the aggregate demand curve leftward. D) All of the above answers are correct. Answer: D Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 37) In the short run, a cut in the federal funds rate A) raises other interest rates as people increase their saving. B) increases potential GDP. C) increases aggregate demand. D) decreases aggregate demand. Answer: C Topic: Effect of Monetary Policy on Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 38) When the Federal Reserve lowers the federal funds rate, in the short run A) the long-run aggregate supply curve shifts leftward. B) the aggregate demand curve shifts rightward. C) the economy moves along a given aggregate demand curve. D) banks decrease the quantity of loans they make. Answer: B Topic: Effect of Monetary Policy on Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 39) If the Fed lowers the federal funds rate, the Fed's goal is to A) increase aggregate demand. B) decrease aggregate supply. C) increase aggregate supply. D) decrease the inflation rate as firms produce more goods and services. Answer: A Topic: Effect of Monetary Policy on Aggregate Demand Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

40) In an AS/AD figure, lowering the federal funds rate initially shifts the A) AD curve leftward. B) AD curve rightward. C) long-run AS curve leftward. D) long-run AS curve rightward. Answer: B Topic: Effect of Monetary Policy on Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Analytical Skills 41) In the aggregate supply-aggregate demand model, raising the federal funds rate initially A) increases aggregate demand. B) decreases aggregate demand. C) increases long-run aggregate supply. D) decreases long-run aggregate supply. Answer: B Topic: Effect of Monetary Policy on Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Analytical Skills 42) Which of the following is NOT a short-run effect of a decrease in the federal funds rate? A) Aggregate demand increases. B) Net exports increase. C) Aggregate supply increases. D) Inflation rate increases. Answer: C Topic: Effect of Monetary Policy on Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 43) In 2012, Ben Bernanke said that Fed policy had raised real GDP by almost 3 percent. Mr. Bernanke believes that the Fed's policy of keeping the federal funds rate ________ had resulted in an increase in ________. A) high; aggregate demand B) high; aggregate supply C) low; aggregate demand D) low; aggregate supply Answer: C Topic: Effect of Monetary Policy on Aggregate Demand Skill: Conceptual Status: New AACSB: Reflective Thinking

44) In the above figure, if the economy is initially at point a, the short-run effect of a cut in the federal funds rate is given by movement from point A) a to point b, increasing output and the unemployment rate. B) a to point b, increasing output and decreasing the unemployment rate. C) a to point d, decreasing output and increasing the unemployment rate. D) a to point c, keeping output and the unemployment rate constant. Answer: B Topic: Effect of Monetary Policy on Aggregate Demand Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 45) In the above figure, if the economy is initially at point c, the short-run effect of a hike in the federal funds rate is given by movement from point A) c to point d, decreasing output and increasing the unemployment rate. B) c to point d, increasing output and decreasing the unemployment rate. C) c to point b, increasing output and decreasing the unemployment rate. D) c to point a, keeping output and the unemployment rate constant. Answer: A Topic: Effect of Monetary Policy on Aggregate Demand Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

46) In the above figure, if the economy is initially at point d, the short-run effect of a cut in the federal funds rate is given by movement from point A) d to point c, increasing output and decreasing the unemployment rate. B) d to point a, increasing output and decreasing the unemployment rate. C) d to point b, increasing output and decreasing the unemployment rate. D) d to point b, keeping output and the unemployment rate constant. Answer: A Topic: Effect of Monetary Policy on Aggregate Demand Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 47) To fight a recession the Fed will A) raise the federal funds rate. B) lower the federal funds rate. C) increase the budget deficit. D) decrease taxes. Answer: B Topic: Fed Eases to Fight Recession Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 48) If the Fed is concerned with recession it will ________ the federal funds rate in order to ________ aggregate demand. A) raise; increase B) lower; increase C) raise; decrease D) lower; decrease Answer: B Topic: Fed Eases to Fight Recession Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 49) The Federal Reserve fights recession via open market operations, the supply of loanable funds curve shifts ________ and the aggregate demand curve shifts ________. A) leftward; leftward B) leftward; rightward C) rightward; leftward D) rightward; rightward Answer: D Topic: Fed Eases to Fight Recession Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Analytical Skills 30 Copyright © 2014 Pearson Education, Inc.

50) If the Fed wanted to stimulate the economy to limit the effects of a recessionary gap, then it should ________ the federal funds rate in order to ________ the real interest rate and thereby ________ investment. A) lower; lower; increase B) lower; raise; increase C) raise; raise; decrease D) lower; lower; decrease Answer: A Topic: Fed Eases to Fight Recession Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 51) If the Fed lowers the federal funds rate, the first effect in an AS/AD figure is a ________ shift of the ________ curve. A) rightward; AD B) leftward; AD C) rightward; SAS D) leftward; SAS Answer: A Topic: Fed Eases to Fight Recession Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 52) In the short-run, lowering the federal funds rate will shift the ________ and ________ real GDP. A) aggregate demand curve leftward; decrease B) aggregate demand curve rightward; increase C) aggregate supply curve rightward; increase D) aggregate demand curve leftward; increase Answer: B Topic: Fed Eases to Fight Recession Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

53) The central bank of Cobra sells securities in an open market operation. In the short run, aggregate demand ________, real GDP ________, and the price level ________. A) does not change; increases; falls B) decreases; decreases; falls C) increases; increases; rises D) does not change; decreases; rises Answer: B Topic: Effect of Monetary Policy on Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 54) The short-run effect of lowering the federal funds rate A) raises the price level and increases real GDP. B) raises the price level and decreases real GDP. C) lowers the price level and increases real GDP. D) lowers the price level and decreases real GDP. Answer: A Topic: Fed Eases to Fight Recession Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 55) When the Fed cuts the Federal funds rate, real GDP growth ________ and the inflation rate ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: A Topic: Fed Eases to Fight Recession Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 56) The Federal Reserve fights recession via open market operations, the supply of reserves curve shifts ________ and the supply of money curve shifts ________. A) leftward; leftward B) leftward; rightward C) rightward; leftward D) rightward; rightward Answer: D Topic: Fed Eases to Fight Recession Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 32 Copyright © 2014 Pearson Education, Inc.

57) In the short run, ________ in the federal funds rate ________ the price level and ________ real GDP. A) lowering; increases; decreases B) lowering; increases; does not change C) lowering; increases; increases D) raising; decreases; does not change Answer: C Topic: Fed Eases to Fight Recession Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 58) Suppose the economy is in a recession and the Fed lowers the federal funds rate. Then A) real GDP and the price level will both decrease. B) real GDP will increase and the price level will decrease. C) real GDP will decrease and the price level will increase. D) real GDP and the price level will both increase. Answer: D Topic: Fed Eases to Fight Recession Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 59) Which of the following describes the chain of events the Fed uses to fight recession? A) Raise the federal funds rate target, sell government securities, decrease reserves and loans, increase aggregate demand. B) Raise the federal funds rate target, buy government securities, increase reserves and loans, decrease aggregate demand. C) Lower the federal funds rate target, buy government securities, decrease reserves and loans, decrease aggregate demand. D) Lower the federal funds rate target, buy government securities, increase reserves and loans, increase aggregate demand. Answer: D Topic: Fed Eases to Fight Recession Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

60) In order to combat a recession, the Fed will ________ the federal funds rate thereby ________ the quantity of money. A) raise; increase B) lower; increase C) raise; decrease D) lower; decrease Answer: B Topic: Fed Eases to Fight Recession Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 61) In September 2012 unemployment was high and the Fed was concerned that the economy would re-enter a recession. Therefore the Fed announced it would ________ its purchases of securities in an effort to ________. A) decrease; keep the federal funds rate low B) increase; keep the federal funds rate low C) decrease; raise the federal funds rate D) increase; raise the federal funds rate Answer: B Topic: Fed Eases to Fight Recession Skill: Conceptual Status: New AACSB: Reflective Thinking 62) If the aggregate demand curve shifts rightward following a decrease in the federal funds rate, what can be concluded if the short-run aggregate supply curve is rather steep? A) There will be a significant increase in real GDP with little impact on the price level. B) There will be a significant increase in both real GDP and the price level. C) There will be little increase in real GDP but a significant increase in the price level. D) There is significant unemployment and slack in the economy. Answer: C Topic: Fed Eases to Fight Recession Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 63) In response to an inflationary gap, the Fed A) waits until the price level falls before acting. B) lowers the federal funds rate by buying U.S. government securities. C) raises the federal funds rate by selling U.S. government securities. D) raises the federal funds rate by buying U.S. government securities. Answer: C Topic: Fed Tightens to Fight Inflation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 34 Copyright © 2014 Pearson Education, Inc.

64) If the Fed wished to eliminate an inflationary gap, which of the following would be an appropriate policy? A) raise the federal funds rate B) lower the federal funds rate C) buy government securities D) decease the government budget deficit Answer: A Topic: Fed Tightens to Fight Inflation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 65) If the Fed is concerned with inflation it will ________ the federal funds rate in order to ________ aggregate demand. A) raise; increase B) lower; increase C) raise; decrease D) lower; decrease Answer: C Topic: Fed Tightens to Fight Inflation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 66) If the Fed fears inflation it will undertake an open market ________ of securities, the federal funds rate will ________ and the long-term real interest rate will ________. A) sale; rise; fall B) sale; rise; rise C) purchase; rise; fall D) purchase; fall; rise Answer: B Topic: Fed Tightens to Fight Inflation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

67) In March 2013 the Fed announced that it might decrease its open market purchases of securities by the end of the year. This announcement suggests that the Fed is concerned that A) the unemployment rate will increase. B) the inflation rate will rise. C) the federal funds interest rate will fall too low for the Fed to control it. D) the federal funds interest rate will rise too high for the Fed to control it. Answer: B Topic: Fed Tightens to Fight Inflation Skill: Conceptual Status: New AACSB: Reflective Thinking 68) The Federal Reserve fights inflation via open market operations, the supply of reserves curve shifts ________ and the supply of money curve shifts ________. A) leftward; leftward B) leftward; rightward C) rightward; leftward D) rightward; rightward Answer: A Topic: Fed Tightens to Fight Inflation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Analytical Skills 69) The Federal Reserve fights inflation via open market operations, the supply of loanable funds curve shifts ________ and the aggregate demand curve shifts ________. A) leftward; leftward B) leftward; rightward C) rightward; leftward D) rightward; rightward Answer: A Topic: Fed Tightens to Fight Inflation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Analytical Skills 70) If the Fed raises the interest rate, the first effect in an AS/AD figure is a ________ shift of the ________ curve. A) rightward; AD B) leftward; AD C) rightward; SAS D) leftward; SAS Answer: B Topic: Fed Tightens to Fight Inflation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Analytical Skills 36 Copyright © 2014 Pearson Education, Inc.

71) If the Fed wants to fight inflation, it will ________ the federal funds rate, which in the short run shifts the ________. A) lower; AD curve rightward B) lower; AD curve leftward C) raise; AD curve rightward D) raise; AD curve leftward Answer: D Topic: Fed Tightens to Fight Inflation Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills 72) In the short run, the Fed's actions to fight inflation shift the A) aggregate demand curve rightward. B) aggregate demand curve leftward. C) short-run aggregate supply curve rightward. D) short-run aggregate supply curve leftward. Answer: B Topic: Fed Tightens to Fight Inflation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Analytical Skills 73) According to the AS/AD model, in the short run an increase in the federal funds rate will A) decrease the price level and decrease real GDP. B) increase the price level and decrease real GDP. C) decrease the price level but leave real GDP unchanged. D) decrease real GDP but leave the price level unchanged. Answer: A Topic: Fed Tightens to Fight Inflation Skill: Conceptual Status: Modified 10th edition AACSB: Analytical Skills

74) In the above figure, suppose the economy is at point D. Which of the following occurs as a result of an open market purchase of government securities by the Fed? A) a decrease in the real interest rate B) an increase in exports C) an increase in investment D) All of the above occur. Answer: D Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 75) In the above figure, suppose the economy was initially in an equilibrium at point D. Where would the economy move if the Fed makes an open market purchase of government securities? A) A B) B C) C D) D, that is, the economy would not change its equilibrium. Answer: C Topic: Monetary Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

76) In the above figure, suppose the economy is at point B. Which of the following policy options for the Fed will move the economy toward its LAS? A) lower the federal funds rate B) raise the federal funds rate C) decrease the government's budget deficit D) decrease taxes Answer: B Topic: Fed Tightens to Fight Inflation Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 77) In the above figure, if the economy is initially at point D, then if the Fed lowers the federal funds rate A) the supply of loanable funds decreases, the real interest rate falls, and the AD curve shifts rightward. B) other short-term interest rates fall, net exports increase, and the AD curve shifts rightward. C) the exchange rate rises, investment increases, and the SAS curve shifts rightward. D) the demand for loanable fund and supply of loanable funds both increase by the same amount so that the AD curve shifts rightward. Answer: B Topic: Monetary Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 78) In the above figure, suppose the economy is at point D. If the Fed eases to fight the recession, the economy will move to A) point A. B) point B. C) point C. D) Either point A or point C, depending on precisely how the Fed eased. Answer: C Topic: Fed Eases to Fight Recession Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

79) Suppose that several European countries enter a recession decreasing U.S. exports. To move U.S. GDP back to potential GDP, the Fed should A) lower the federal funds rate. B) raise the federal funds rate. C) increase the government's budget deficit. D) decrease the government's budget deficit. Answer: A Topic: Stabilizing Aggregate Demand Shocks Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 80) Consumer confidence in the economy rises, and as a result, real GDP increases above potential GDP. To move U.S. GDP back to potential GDP, the Fed should A) lower the federal funds rate. B) raise the federal funds rate. C) increase the government's budget deficit. D) decrease the government's budget deficit. Answer: B Topic: Stabilizing Aggregate Demand Shocks Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 81) A worldwide recession reduces the amount of U.S. exports, and as a result, aggregate demand decreases. To move U.S. GDP back to potential GDP, the Fed should A) lower the federal funds rate. B) raise the federal funds rate. C) increase the government's budget deficit. D) decreasing the quantity of money of money. Answer: A Topic: Stabilizing Aggregate Demand Shocks Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

82) In the above figure, suppose point C is the original equilibrium. If the Fed hikes the federal funds rate, the new equilibrium is given by point A) A. B) B. C) C (that is, the equilibrium does not change). D) D. Answer: A Topic: Fed Tightens to Fight Inflation Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

83) Which aggregate supply-aggregate demand diagram above shows the effect on real GDP and the price level of monetary policy when it is used to fight a recession? A) Only Figure A B) Only Figure B C) Both Figure A and Figure B D) Neither Figure A nor Figure B Answer: A Topic: Stabilizing Aggregate Demand Shocks Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

84) In the above figure, the economy experiences a decrease in aggregate demand so that the aggregate demand curve shifts from AD0 to AD1. If the Fed wants to offset this change, it would ________. A) purchase government securities on the open market B) sell government securities on the open market C) lower taxes D) increase government expenditures Answer: A Topic: Stabilizing Aggregate Demand Shocks Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 85) In the above figure, the economy experiences an increase in aggregate demand so that the aggregate demand curve shifts from AD0 to AD2. If the Fed wants to offset this change, it would ________. A) purchase government securities on the open market B) sell government securities on the open market C) raise taxes D) increase government expenditures Answer: B Topic: Stabilizing Aggregate Demand Shocks Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

86) Suppose that initially real GDP equals potential GDP. Then an increase in aggregate demand occurs. According to the Taylor rule, the Fed should ________ the federal funds rate by ________ government securities in the open market. A) raise; selling B) lower; selling C) raise; buying D) lower; buying Answer: A Topic: Stabilizing Aggregate Demand Shocks Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 87) Suppose that initially real GDP equals potential GDP. Then a decrease in aggregate demand occurs. According to the Taylor rule, the Fed should ________ the federal funds rate by ________ government securities in the open market. A) raise; selling B) lower; selling C) raise; buying D) lower; buying Answer: D Topic: Stabilizing Aggregate Demand Shocks Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 88) Which of the following is a problem in pursuing monetary policy? A) The lag between a change in the quantity of money and its effect on economic activity may be long. B) Monetary policy must be approved by the Congress. C) The Fed cannot control the federal funds rate. D) None of the above answers is correct. Answer: D Topic: Problems with Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

89) One problem with the ripple effect from the Fed's monetary policy is A) the fact that the monetary policy transmission process is long and drawn out. B) that changing the Federal funds target rate seldom has an effect on the markets for reserves and loanable funds. C) the tight relationship between that the Federal funds rate has to aggregate spending. D) the frequent misalignment of the spread between the Federal funds rate and the Federal funds rate target. Answer: A Topic: Problems with Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 90) In order to combat inflation, the Fed will ________ the federal funds rate thereby ________ the quantity of money. A) raise; increase B) lower; increase C) raise; decrease D) lower; decrease Answer: C Topic: Study Guide Question, Fed Tightens to Fight Inflation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 91) In the short run, the Fed's actions to fight an inflationary gap shift the A) aggregate demand curve rightward. B) aggregate demand curve leftward. C) short-run aggregate supply curve rightward. D) short-run aggregate supply curve leftward. Answer: B Topic: Study Guide Question, Fed Tightens to Fight Inflation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 92) In the short run, a rise in the federal funds rate shifts the A) AD curve leftward. B) SAS curve leftward. C) LAS curve leftward. D) None of the above because a decrease in the quantity of money does not shift a curve. Answer: A Topic: Study Guide Question-Monetary Policies Effect on Agg. Demand Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Analytical Skills 45 Copyright © 2014 Pearson Education, Inc.

93) The Fed's actions to fight an inflation shift the A) aggregate demand curve rightward. B) aggregate demand curve leftward. C) long-run aggregate supply curve rightward. D) long-run aggregate supply curve leftward. Answer: B Topic: Study Guide Question, Fed Tightens to Fight Inflation Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 94) In the short run, a rise in the federal funds rate ________ the price level and ________ real GDP. A) lowers; decreases B) lowers; does not change C) lowers; increases D) does not change; increases Answer: A Topic: Study Guide Question, Fed Tightens to Fight Inflation Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 95) Businesses become convinced that future profits from investment will be less than initially believed. This conviction leads to a change in aggregate ________ and so the Fed should ________ the federal funds rate if it wants to try to offset this change. A) demand; raise B) demand; lower C) supply; raise D) supply; lower Answer: B Topic: Study Guide Question, Stabilizing Aggregate Demand Shocks Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 96) A rise in the federal funds rate A) raises the long-term real interest rate. B) does not change the long-term real interest rate. C) lowers the long-term real interest rate. D) may raise or lower the long-term real interest rate, depending on whether the demand for loanable funds curve has a negative or a positive slope. Answer: A Topic: Study Guide Question, Changing the Interest Rate Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 46 Copyright © 2014 Pearson Education, Inc.

4 Extraordinary Monetary Stimulus 1) A widespread fall in asset prices means that banks might become A) insolvent. B) solvent. C) illiquid. D) too liquid. Answer: A Topic: Financial Crisis Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 2) During the financial crisis of 2008-2009, the Fed was concerned about A) the bubble that was forcing asset prices higher. B) the publics rush to deposit its currency into banks. C) keeping the federal funds rate from falling too far. D) providing the banking system with enough liquidity. Answer: D Topic: Financial Crisis Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 3) During the financial crisis of 2008-2009, the Fed's actions to supply reserves to the banking system was an attempt to A) limit the troubling rise in asset prices. B) increase the public's belief that their deposits were insured. C) help the U.S. Treasury finance the TARP. D) make certain that banks had enough liquidity to avoid collapse. Answer: D Topic: Financial Crisis Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 4) Uncertainty about monetary policy A) was the factor that started the financial crisis in 2008. B) can keep investment low. C) is why the Fed does not use inflation rate targeting. D) makes deposits in banks more desirable because they become safer. Answer: B Topic: Financial Crisis Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 47 Copyright © 2014 Pearson Education, Inc.

5) In September 2012 the Fed announced that because of weak labor market conditions, it would ________ $40 billion of mortgage backed securities per month. Critics of the action said that banks have ________ excessive reserves so the action would be futile. A) sell; huge amounts of B) buy; huge amounts of C) buy; very little D) sell; very little Answer: B Topic: At Issue: QE3 Skill: Conceptual Status: New AACSB: Reflective Thinking 6) In September 2012 the Fed announced that it would buy $40 billion of mortgage backed securities per month. One goal of this policy was to ________ the price of these securities and thereby help ________. A) raise; prices of housing to fall to their new equilibrium B) raise; lower long-term interest rates C) lower; make the short-term interest rate more responsive to Fed actions D) raise; raise long-term interest rates Answer: B Topic: At Issue: QE3 Skill: Conceptual Status: New AACSB: Reflective Thinking 7) The Taylor rule A) focuses on only fluctuations in real GDP. B) ignores price level stability to focus on responding to fluctuations in real GDP. C) is the rule actually followed by the Fed. D) shows how the Fed could set the federal funds rate. Answer: D Topic: Taylor Rule Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

8) The Taylor Rule states that the A) Fed should target the monetary base and not the federal funds rate. B) use of an exchange rate target, although costly, is economically efficient. C) Fed should adjust the federal funds rate to take account of deviations of inflation from its target and real GDP from potential GDP. D) None of the above is correct. Answer: C Topic: The Taylor Rule Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 9) The Taylor rule uses three variables to determine the target for the federal funds rate. Which of the following is NOT one of those variables? A) monetary base B) equilibrium real interest rate C) inflation rate D) output gap Answer: A Topic: Taylor Rule Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 10) If the Fed follows the Taylor rule and the economy goes into a recession, the Fed would A) lower the federal funds rate. B) reduce tax rates. C) increase government expenditures. D) None of the above answers are correct. Answer: A Topic: Taylor Rule Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 11) Suppose the equilibrium real interest rate is 2 percent per year, inflation is 2.5 percent and the output gap is 1 percent. Using the Taylor rule, what is the federal funds rate? A) 3 percent B) 3.5 percent C) 5.25 percent D) 5.5 percent Answer: C Topic: The Taylor Rule Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 49 Copyright © 2014 Pearson Education, Inc.

12) Suppose the inflation rate is 3 percent and the output gap is -1 percent. Assuming the equilibrium real interest rate is 2 percent, using the Taylor rule, what target should the Fed set for the federal funds rate? A) 5 percent B) 6 percent C) 4 percent D) 1 percent Answer: A Topic: Taylor Rule Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 13) An inflation rate targeting rule A) reduces uncertainty about monetary policy. B) will not work if the Fed continues to sue open market operations. C) has been adopted the by the Fed in response to the financial crisis of 2008-2009. D) means that the inflation rate must exceed 5 percent in order for the rule to be effective. Answer: A Topic: Inflation Rate Targeting Rule Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Analytical Skills

5 News Based Questions 1) The People's Bank of China announced that it was lowering by 1.08 percentage points the one-year lending rate in response to the slowdown in the Chinese economy. This rate is the Chinese equivalent of the federal funds rate in the United States. www.nytimes.com, 11/26/2008 This policy ________ the supply of loanable funds. As a result, the long-term real interest rate ________, and planned expenditures ________. A) increases; increases; increase B) decreases; decreases; decrease C) increases; decreases; increase D) decreases; increases; increase Answer: C Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 2) The People's Bank of China announced that it was lowering by 1.08 percentage points the one-year lending rate in response to the slowdown in the Chinese economy. This rate is the Chinese equivalent of the federal funds rate in the United States. www.nytimes.com, 11/26/2008 Other things remaining the same, there will be ________ in the exchange rate, ________ in imports and ________ in exports. A) a decrease; a decrease; an increase B) a decrease; an increase; a decrease C) an increase; a decrease; a increase D) an increase; an increase; a decrease Answer: A Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

3) The People's Bank of China announced that it was lowering by 1.08 percentage points the one-year lending rate in response to the slowdown in the Chinese economy. This rate is the Chinese equivalent of the federal funds rate in the United States. www.nytimes.com, 11/26/2008 Other things remaining the same, which of the following components will decrease in response to the bank's actions? I. exchange rate II. interest rate III. investment A) I and II only. B) I, II and III. C) II and III only. D) II only. Answer: A Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 4) In October 2008, central banks around the world coordinated a decrease in interest rates. Ben Bernanke, Chairman of the Federal Reserve stated that "policy makers will remain in close contact, monitor developments closely and stand ready to take additional steps should conditions warrant." If all the banks enacted the policy simultaneously, the U.S. interest rate differential would ________ and so the U.S. exchange rate would ________. A) increase; fall B) decrease; rise C) not change; not change D) not change; rise Answer: C Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

5) In October 2008, central banks around the world coordinated a decrease in interest rates. Ben Bernanke, Chairman of the Federal Reserve stated that "policy makers will remain in close contact, monitor developments closely and stand ready to take additional steps should conditions warrant." If all the banks enacted the policy simultaneously, which of the following expenditure components would increase in the United States? I. exports II. consumption III. investment A) I, II and III. B) II and III only. C) II only. D) I and III only. Answer: B Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 6) In November 2008, the Reserve Bank of India (RBI) lowered its "repo" rate, the rate at which it lends to banks, from 8 percent to 7.5 percent. Only two weeks earlier, it had lowered the rate from 9 percent to 8 percent. The Economist, 11/6/2008 The Reserve Bank of India is lowering its rates to fight A) inflation B) recession C) rising net exports. D) a decrease in money demand. Answer: B Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

7) In November 2008, the Reserve Bank of India (RBI) lowered its "repo" rate, the rate at which it lends to banks, from 8 percent to 7.5 percent. Only two weeks earlier, it had lowered the rate from 9 percent to 8 percent. The Economist, 11/6/2008 In its attempt to change real GDP, which of following sequences correctly describes the transmission of RBI's monetary policy? I. the real interest rate falls II. the money supply increases III. bank reserves increase IV. supply of loanable funds increases V. aggregate demand increases A) III, II, IV, I,V. B) II, I, III, V, IV. C) V, I, II, IV, III D) III, IV, I, III, V Answer: A Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 8) "As the Fed Chases Inflation, Critics Shout, 'Faster!' "For weeks, the Fed has broadcast its intention to raise interest rates glacially." The Fed was moving slowly, according to an economist because "... the declining price of oil, economic fundamentals, including productivity and global competition, will keep inflation in check." The Fed, recognizing that the economy was improving stated it planned to "respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability." Other economists disagree with the Fed's restrained policy as a "mistake." www.nytimes, 7/1/2004 By increasing the federal funds target, the Fed will ________ reserves and ________ the quantity of money. A) increase; increase B) decrease; decrease C) decrease; increase D) increase; decrease Answer: B Topic: How an Open Market Operation Works Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

9) "As the Fed Chases Inflation, Critics Shout, 'Faster!' "For weeks, the Fed has broadcast its intention to raise interest rates glacially." The Fed was moving slowly, according to an economist because "... the declining price of oil, economic fundamentals, including productivity and global competition, will keep inflation in check." The Fed, recognizing that the economy was improving stated it planned to "respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability." Other economists disagree with the Fed's restrained policy as a "mistake." www.nytimes, 7/1/2004 Economists estimate that if the Fed's policy was enacted in July 2004, the impact on the economy A) will occur to its fullest extent within one month. B) can be expected to stretch over one to two years. C) will not be evident in the exchange rate market until 2005. D) will reach its fullest extent, affecting real GDP, in three to six months. Answer: B Topic: Monetary Policy Skill: Conceptual Status: Modified 10th edition AACSB: Communication 10) "As the Fed Chases Inflation, Critics Shout, 'Faster!' "For weeks, the Fed has broadcast its intention to raise interest rates glacially." The Fed was moving slowly, according to an economist because "... the declining price of oil, economic fundamentals, including productivity and global competition, will keep inflation in check." The Fed, recognizing that the economy was improving stated it planned to "respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability." Other economists disagree with the Fed's restrained policy as a "mistake" www.nytimes, 7/1/2004 The Fed's policy will ________ the quantity of money and ________ the supply of loanable funds. A) decrease; decrease B) increase; decrease C) decrease; increase D) increase; increase Answer: A Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

11) "As the Fed Chases Inflation, Critics Shout, 'Faster!' "For weeks, the Fed has broadcast its intention to raise interest rates glacially." The Fed was moving slowly, according to an economist because "... the declining price of oil, economic fundamentals, including productivity and global competition, will keep inflation in check." The Fed, recognizing that the economy was improving stated it planned to "respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability." Other economists disagree with the Fed's restrained policy as a "mistake" www.nytimes, 7/1/2004 As a result of the Fed's policy, which of the rates will increase? A) the long-term interest rate B) the short-term interest rate C) the exchange rate D) All of the above answers are correct. Answer: D Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 12) "As the Fed Chases Inflation, Critics Shout, 'Faster!' "For weeks, the Fed has broadcast its intention to raise interest rates glacially." The Fed was moving slowly, according to an economist because "... the declining price of oil, economic fundamentals, including productivity and global competition, will keep inflation in check." The Fed, recognizing that the economy was improving stated it planned to "respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability." Other economists disagree with the Fed's restrained policy as a "mistake" www.nytimes, 7/1/2004 The goal of the Fed's policy in 2004 was to decrease A) the exchange rate B) consumption expenditure C) the long-term interest rate D) the short-term interest rate Answer: B Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

13) In December, the Bank of England reduced interest rates by another 50 basis points (a basis point is 0.01 percentage point) after it had cut them by 150 basis points in November. But the rate cut may even be larger. Economists "... expect the Monetary Policy Committee [MPC] to cut rates to 2.5 percent,"...while others "...saw a bigger 75 point cut"...or "a 100 basis point move." Reuters, 11/27/2008 In order to ________, the Bank of England's rate cut must ________. A) decrease consumption; increase the long-run interest rate B) increase real GDP; decrease the nominal long-run interest rate C) decrease real GDP; increase the real long-run interest rate D) increase consumption; decrease the real long-run interest rate Answer: D Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills 14) In December, the Bank of England reduced interest rates by another 50 basis points after points (a basis point is 0.01 percentage point) it had cut them by 150 basis points in November. But the rate cut may even be larger. Economists "... expect the Monetary Policy Committee [MPC] to cut rates to 2.5 percent,"...while others "...saw a bigger 75 point cut"...or "a 100 basis point move." Data show that "... inflation staged its biggest drop since records began ...potentially opening the door to even bigger cuts." Reuters, 11/27/2008 If the Bank's policies given above can ________ the real long-term interest rate, the Bank will be able to ________. A) lower; decrease investment B) lower; increase aggregate demand C) raise; increase short-run aggregate supply D) lower; raise the exchange rate Answer: B Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Modified 10th edition AACSB: Analytical Skills

15) "The Bank of Israel lowered its benchmark lending rate by half a percentage point, the fourth cut in seven weeks, as the global financial turmoil slows economic growth and inflation expectations ease." www.bloomberg.com 11/24/2008 The Bank of Israel's actions ________ bank reserves and have the goal of ________ consumption. A) decrease; decreasing B) increase; decreasing C) increase; increasing D) decrease; increasing Answer: C Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 16) In an effort to address the troubled economy, ..."For the ninth time in just over a year, the Federal Reserve is expected to cut interest rates, quite possibly its last reduction in this downturn." Rates have not been this low "... since 2003, when the economy was growing at a snail's pace." www.csmonitor.com, 10/28/2008 The "interest rates" the Fed is cutting is the ________. A) reserve interest rate B) Federal Funds rate C) nominal long-term interest rate D) real long-term interest rate Answer: B Topic: The Ripple Effects of Monetary Policy Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

17) In an effort to address the troubled economy, ..."For the ninth time in just over a year, the Federal Reserve is expected to cut interest rates, quite possibly its last reduction in this downturn." Rates have not been this low "... since 2003, when the economy was growing at a snail's pace." www.csmonitor.com, 10/28/2008 The Fed's rate cuts will ________ bank reserves and ________. A) increase; increase the money supply and real GDP B) decrease; decrease the money supply and real GDP C) increase; increase the exchange rate and real GDP D) decrease bank reserves; decrease the exchange rate and real GDP Answer: A Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 18) In an effort to address the troubled economy, ..."For the ninth time in just over a year, the Federal Reserve is expected to cut interest rates, quite possibly its last reduction in this downturn." Rates have not been this low "... since 2003, when the economy was growing at a snail's pace." www.csmonitor.com, 10/28/2008 The Fed's rates cuts will initially impact ________ and eventually ________. A) bank reserves; government spending B) the money supply; bank reserves C) bank reserves; real GDP D) investment; the real interest rate Answer: C Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

19) In an effort to address the troubled economy, ..."For the ninth time in just over a year, the Federal Reserve is expected to cut interest rates, quite possibly its last reduction in this downturn." Rates have not been this low "... since 2003, when the economy was growing at a snail's pace." www.csmonitor.com, 10/28/2008 These rate cuts are designed to A) decrease the real long-term interest rate and increase real GDP. B) increase the exchange rate and decrease government spending. C) increase bank reserves and the exchange rate. D) decrease the exchange rate and investment. Answer: A Topic: The Ripple Effects of Monetary Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 6 Essay Questions 1) Why does the Fed pursue price stability as its ultimate goal? Answer: The economy works best when the price level is stable and is predictable. Uncertainty increases if the inflation rate fluctuates unpredictably because these fluctuations increase the risk to borrowers and lenders and to employers and employees. In both instances, long-term agreements are made and if inflation differs from what was expected, one person wins and the other loses. With the lower risk from the lower inflation, more transactions are conducted, which means more economic activity and more rapid economic growth. Topic: Price Stability Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication 2) Describe how open market operations change the quantity of money. Answer: Open market operations affect the quantity of banks' reserves. Suppose the Fed buys U.S. government securities. When the Fed buys government securities, banks' reserves increase. (These reserves rise whether the Fed buys securities from a bank or from a member of the public.) The rise in banks' reserves leads them to increase their lending, so the quantity of money increases. Topic: How an Open Market Operation Works Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

3) Does an open market operation in which the Fed buys securities from the general public decrease or increase the banking system's reserves? Answer: An open market purchase of government securities by the Fed increases the banking system's reserves. Topic: How an Open Market Operation Works Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 4) Suppose in the money market the equilibrium interest rate is 5 percent and quantity of money demanded and supplied are both equal to $2 trillion dollars. If the Fed increases the quantity of money, what is the effect on the interest rate? Answer: If the Fed increases the quantity of money, the supply of money curve shifts rightward and the interest rate falls. Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 5) Assume the Fed is concerned with a possible recession so it wants to lower the interest rate. How does the Fed lower the interest rate in the short run? Answer: In order to lower the interest rate, the Fed lowers the federal funds rate by increasing banks' reserves. With the increase in reserves, the quantity of money increases. In the short run, when the quantity of money increases, the interest rate falls. Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 6) What is the effect of lowering the interest rate on net exports? Explain your answer. Answer: A decrease in the interest rate increases net exports. Net exports equals the value of exports minus the value of imports. Lowering the interest rate makes U.S. securities less attractive to foreign buyers. As a result, the demand for U.S. dollars decreases because foreigners no longer need to purchase as many dollars in order to buy U.S. securities. The decrease in the demand for the U.S. dollar lowers the exchange rate on the foreign exchange market. The fall in the exchange rate makes U.S. exports less expensive to foreigners because it now takes less foreign currency to buy a U.S. dollar and hence less foreign currency to buy U.S. exports. Simultaneously, the price of U.S. imports rises to U.S. residents. Therefore U.S. exports increase and U.S. imports decrease, both of which increase net exports. Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

7) List and briefly explain the steps in how monetary policy affects real GDP in the AS/AD model. Tell what is the impact when the Fed eases monetary policy to fight a recession. Answer: There are several steps. Step one is a change in the federal funds rate. To fight a recession, the Fed lowers the federal funds rate. It does so by using open market operations to increase banks' reserves. With the increase in reserves, the quantity of money increases, which then lowers the interest rate. Next the fall in the interest rate increases investment, net exports (though a fall in the exchange rate), and other interest sensitive parts of aggregate demand and thereby increases aggregate demand. Aggregate demand increases with a multiplied effect. The increase in aggregate demand raises the price level and increases real GDP. Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication 8) Discuss how the Fed raising the federal funds rate ripples through the different sectors of the economy. Answer: To raise the federal funds rate, the Fed sells securities in the open market. When the Fed sells securities in the open market, banks' reserves decrease, which raises the federal funds. In addition, the decrease in reserves decreases the quantity of money. The decrease in the quantity of money leads to a higher interest rate. A higher interest rate decreases investment and consumption expenditure, especially consumption expenditure on durable goods. In the foreign exchange market, the higher interest rate increase the attractiveness of U.S. securities. Foreigners increase their demand for U.S. dollars in order to purchase these securities and so the exchange rate of the dollar rises on the foreign exchange market. The rise in the exchange rate makes exports more expensive to foreigners and imports less expensive to U.S. residents. As a result, exports decrease and imports increase so that net exports decrease. All of the changes decrease aggregate demand. Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication 9) Explain the ripple effects of a sale of securities in an open market operation. Answer: The Fed's actions ripple through the economy. For instance, if the Fed tries to fight a recession, the Fed lowers the federal funds rate by buying securities in open market operations. The Fed pays for its purchases of securities by increasing banks' reserves, which lowers the federal funds rate. In addition, the increase in banks' reserves increases the quantity of money. The interest rate falls and thereby consumption expenditure and investment increase. In addition, the value of the dollar on the foreign exchange market falls as fewer foreign investors demand dollars to purchase assets in the United States. As a result, net exports increase. All these changes in expenditure lead to a multiplier effect that increases aggregate demand, thereby raising the price level and increasing real GDP. Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication 62 Copyright © 2014 Pearson Education, Inc.

10) Suppose the economy is in recession. Write a letter to the brand-new chairman of the Federal Reserve suggesting how the Fed might help end the recession. Be sure to explain how a change in monetary policy will affect economic activity. Answer: The Fed needs to lower the federal funds rate. It can do so by conducting open market operations that buy government securities. This action supplies banks with new excess reserves that result in lowering the federal funds rate and allowing banks to make additional loans, thereby expanding the quantity of money. When the quantity of money increases, the interest rate falls. The fall in the interest rate stimulates consumption expenditure and investment, and also reduce the value of the dollar in foreign exchange markets, thereby stimulating net exports. These increases in spending will shift the AD curve rightward and real GDP will increase, although the price level might also rise, depending on the slope of the SAS curve. Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication 11) In the aggregate demand/aggregate supply framework, lowering the federal funds rate has what short-run effects on real GDP? Answer: In the aggregate demand/aggregate supply framework, lowering the federal funds rate increases the quantity of money and lowers the interest rate, which then increases aggregate demand. In the short run, the economy moves along its short-run aggregate supply curve so that the price level rises and real GDP increases. Topic: Effect of Monetary Policy on Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 12) Explain how the Fed's response to inflation works its through the economy to ultimately affecting real GDP and the price level. Answer: When the Fed is concerned with inflation, the Fed raises the federal funds rate target. To then boost the federal funds rate up to the new target, the Fed conducts open market operations that sell government securities. This sale requires that banks and other purchasers pay for their purchases by using banks' reserves, which decreases the amount of reserves available for banks. The decrease in reserves raises the federal funds rate. It also decreases the quantity of money. The decrease in the quantity of money shifts the supply of money curve leftward and the interest rate rises. The higher interest rate leads to a decrease in the demand for investment and other interest-sensitive sectors of the economy. These decreases mean that aggregate demand decreases so that the AD curve shifts leftward. Following the original decrease in aggregate demand, a multiplier process begins which decreases aggregate demand even further, so that there is a further leftward shift of the AD curve. As a result of the decrease in aggregate demand, the price level falls and real GDP decreases. Topic: Fed Tightens to Fight Inflation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication

13) "When the Fed is concerned with inflation, it buys government securities." Is the previous statement correct or incorrect? Explain your answer. Answer: The statement is incorrect. When the Fed is concerned with inflation, the Fed wants to decrease aggregate demand and thereby decrease inflation. In order to decrease aggregate demand, the Fed needs to raise the federal funds rate. But when the Fed buys government securities, it lowers the federal funds rate. Therefore the proper Fed policy when it is concerned about inflation is to sell government securities and thereby raise the federal funds rate. Topic: Fed Tightens to Fight Inflation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 14) If the Fed is concerned about inflation, in the short run what is the proper monetary policy to restore price stability? What actions can the Fed undertake to restore price stability? Answer: In order to avoid the inflation, the Fed needs to decrease aggregate demand. To decrease aggregate demand, the Fed must raise the federal funds rate and decrease the quantity of money. To do so, the Fed will sell government securities, which decreases banks' reserves because the reserves are used to pay the Fed for the government securities. The decrease in banks' reserves raises the federal funds rate and decreases the quantity of money. Topic: Fed Tightens to Fight Inflation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 15) When would the Fed want to carry out a monetary policy that decreases aggregate demand? Answer: The Fed wants to decrease aggregate demand when it is worried about inflation. In this case, real GDP exceeds potential GDP and during the adjustment back to potential GDP, the price level will rise (so that inflation occurs) as aggregate supply decreases. In this situation, the Fed might well want to decrease aggregate demand in order to restore the economy to potential GDP and avoid the rising price level. Topic: Fed Tightens to Fight Inflation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

16) Explain how the Fed's response to a recession works its through the economy to ultimately affecting real GDP and the price level. Answer: When the Fed is concerned with recession, the Fed lowers the federal funds rate target. To then lower the federal funds rate to the new target, the Fed conducts open market operations that buy government securities. The Fed pays for its purchases by increasing banks' reserves. The increase in reserves lowers the federal funds rate. It also increases the quantity of money. The increase in the quantity of money shifts the supply of money curve rightward and the interest rate falls. The lower interest rate leads to an increase in the demand for investment and other interestsensitive sectors of the economy. These increases mean that aggregate demand increases so that the AD curve shifts rightward. Following the original increase in aggregate demand, a multiplier process begins which increases aggregate demand even further, so that there is a further rightward shift of the AD curve. As a result of the increase in aggregate demand, the price level rises and real GDP increases. Topic: Fed Eases to Fight Recession Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication 17) In the short run, if the Fed wants to fight a recession, should it buy or sell government securities? Why? Answer: The Fed should buy government securities. When the Fed buys government securities, the federal funds rate falls and banks' reserves increase. The increase in reserves increases the quantity of money and the interest rate falls. As a result, consumption expenditure, investment, and net exports increase, which increases aggregate demand. The increase in aggregate demand increases real GDP, which is the policy required when real GDP is less than potential GDP, that is, when the economy is in a recession. Topic: Fed Eases to Fight Recession Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Communication 18) When the economy is in recession, does the Fed want to raise the interest rate so as to increase aggregate demand and increase real GDP? Explain your answer. Answer: When the economy is in a recession, the Fed wants to increase aggregate demand and hence GDP, but raising the interest rate is the wrong policy. A boost in the interest rate decreases consumption expenditure, investment, and net exports and therefore decreases aggregate demand. The proper policy for the Fed to pursue is a cut in the interest rate. Topic: Fed Eases to Fight Recession Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

7 True or False 1) The core inflation rate is more volatile than the total CPI inflation rate. Answer: FALSE Topic: Core CPI Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 2) A positive output gap is an inflationary gap. Answer: TRUE Topic: Output Gap Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 3) The President of the United States is also the chairman of the Federal Reserve. Answer: FALSE Topic: The Federal Reserve System Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 4) The Fed targets the 30-year bond rate as its monetary policy instrument. Answer: FALSE Topic: Monetary Policy Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 5) When the Fed purchases U.S. government securities in the open market, the federal funds falls. Answer: TRUE Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 6) If the Fed carries out an open market operation and sells U.S. government securities, the federal funds rate falls and the quantity of money increases. Answer: FALSE Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

7) If the Fed carries out an open market operation and sells U.S. government securities, the federal funds rises and the quantity of money decreases. Answer: TRUE Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 8) If the federal funds rate is below the Fed target, the Fed will conduct an open market sale to increase the federal funds rate to the desired level. Answer: TRUE Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 9) Long-term interest rates fluctuate more than short-term rates. Answer: FALSE Topic: The Ripple Effects of Monetary Policy Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 10) If the Fed sells bonds in the open market, net exports will increase. Answer: FALSE Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 11) If the Fed sells bonds in the open market, net exports will decrease. Answer: TRUE Topic: The Ripple Effects of Monetary Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 12) A decrease in the supply of loanable funds decreases the real interest rate. Answer: FALSE Topic: The Ripple Effects of Monetary Policy Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking

13) When the Fed lowers the federal funds rate, it increases reserves and increases the quantity of deposits and loans created. Answer: TRUE Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 14) To decrease inflation, the Federal Reserve would adjust its target for the federal funds rate upward. Answer: TRUE Topic: Changing the Interest Rate, Fed Policy Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 15) If the Fed lowers the federal funds rate, aggregate demand decreases. Answer: TRUE Topic: Effect of Monetary Policy on Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 16) The less sensitive to the interest rate are consumption expenditure and investment, the smaller is the shift in the AD curve when the Fed changes the federal funds rate. Answer: TRUE Topic: Effect of Monetary Policy on Aggregate Demand Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 17) In the short run, the Fed's actions to fight inflation shift the aggregate demand curve leftward. Answer: TRUE Topic: Fed Tightens to Fight Inflation Skill: Conceptual Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 18) The Taylor Rule maintains that the Fed should set the growth rate of the quantity of money equal to the growth rate of real GDP. Answer: FALSE Topic: The Taylor Rule Skill: Recognition Status: Previous edition, Chapter 14 AACSB: Reflective Thinking 68 Copyright © 2014 Pearson Education, Inc.

8 Extended Problems

1) The figure above shows the demand for money in Kiteland. a) If the Kiteland Central Bank has set the quantity of money so that the equilibrium interest rate is 4 percent, draw the supply of money curve. b) Suppose that Kiteland's Central Bank wants to raise the interest rate by 1 percentage point. By how much must it change the quantity of real money? c) In order to change the quantity of money to raise the interest rate by one percentage point, if the Central Bank uses an open market operation, does it make an open market purchase or an open market sale? Explain your answer.

Answer:

a) See the figure above. When the supply of money is 250 billion yuks, or MS0, the interest rate is 4 percent b) See the figure above. To raise the interest rate from 4 percent to 5 percent, the Central Bank decreases the supply of money from 250 billion yuks, MS0, to 150 billion yuks, MS1. So the Central Bank decreases the quantity of real money by 100 billion yuks. c) The Central Bank conducts an open market sale. As it does so, the bank reserves decrease, the banks cut their lending until the amount of loans is consistent with the new level of reserves. As bank loans decrease, the quantity of money decreases. Topic: Changing the Interest Rate, Fed Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills 2) The figure above shows the demand for money in Kiteland. a) If the Kiteland Central Bank has set the quantity of money so that the equilibrium interest rate is 4 percent, draw the supply of money curve. b) Suppose Kiteland's real GDP increases so that the demand for money changes by 100 billion yaks. The Kiteland Central Bank takes no actions. Show the effects of this event on your figure. What happens to the interest rate? What happens to the quantity of money in the economy? c) If the Central Bank wants to prevent the interest rate from changing, what must it do to the quantity of money? Draw the new supply of money curve. d) In order to change the quantity of money to keep the interest rate constant, suppose the Kiteland Central Bank uses open market operations. Does it make an open market purchase or an open market sale? Explain your answer.

Answer:

a) See the figure above. When the demand for of money is the initial demand, MD0, and the supply of money is MS, 250 billion yuks, then the interest rate is 4 percent. b) When real GDP increases, the demand for money increases. In this case, the increase in real GDP increases the demand for money so that the demand for money curve shifts rightward from MD0 to MD1. Because the Kiteland Central Bank takes no action, the quantity of money remains the same, 250 billion yuks, and the supply of money curve remains MS0. With no change in the quantity of money, the increase in the demand for money raises the interest rate from 4 percent to 5 percent. c) To prevent the interest rate from rising, the Kiteland Central Bank increases the quantity of money from MS0 to MS1. d) The Kiteland Central Bank makes an open market purchase. As it does so, the bank reserves increase, the banks increase their lending and so the quantity of money increases. Topic: Changing the Interest Rate, Fed Policy Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

3) In the economy of Rulewania, the current inflation rate is 6 percent and the Central Bank's target inflation rate is 2 percent. Real GDP exceeds potential GDP by 1 percent, and the longterm growth rate of real GDP is 5 percent. The medium-term growth rate of the velocity of circulation of the monetary base is 2 percent. According to the Taylor rule, what federal funds rate should the Central Bank set? Answer: The Taylor rule is to set the federal funds rate equal to 2 percent plus the inflation rate plus one half of the gap between the actual inflation rate and the target inflation rate plus one half of the percentage deviation of real GDP from potential GDP. So the federal funds rate is equal to: . Topic: Taylor Rule and McCallum Rule Skill: Analytical Status: Previous edition, Chapter 14 AACSB: Analytical Skills

Economics, 11e, Global Edition (Parkin) Part 1 Review 1 Introduction 1) All economic questions arise because A) of scarcity. B) production possibilities are unlimited. C) our wants are limited. D) people are irrational. Answer: A Topic: Scarcity Skill: Recognition Status: Previous edition, Part Review 1 AACSB: Reflective Thinking

2) Which of the following is NOT a factor of production? A) mineral resources B) money C) a computer programmer D) a commercial aircraft Answer: B Topic: Factors of Production Skill: Recognition Status: Previous edition, Part Review 1 AACSB: Reflective Thinking

3) The opportunity cost of a good is A) the income you forgo to get it. B) the lowest valued alternative you give up to get it. C) the highest valued alternative you give up to get it. D) all alternatives you give up to get it. Answer: C Topic: Opportunity Cost Skill: Recognition Status: Previous edition, Part Review 1 AACSB: Reflective Thinking

4) Jen won $900 in a lottery. She has a choice between using the money to buy a sofa, a television, or going on a vacation. If she chooses to buy a television, the opportunity cost of this decision is A) zero because she won the money. B) the sofa and the vacation trip. C) the sofa, the vacation trip, and $900. D) the sofa if that was her second choice. Answer: D Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Part Review 1 AACSB: Reflective Thinking 1 Copyright © 2014 Pearson Education, Inc.

Cheese (tons) 0 2 4 6 8 10

DVDs (thousands) 60 56 48 36 20 0

5) The table above lists six points on the production possibilities frontier for cheese and DVDs. Given this information, which of the following combinations is unattainable? A) 2 tons of cheese and 56 thousand DVDs B) 8 tons of cheese and 21 thousand DVDs C) 6 tons of cheese and 34 thousand DVDs D) 7 tons of cheese and 20 thousand DVDs Answer: B Topic: Production Possibilities Frontier Skill: Analytical Status: Previous edition, Part Review 1 AACSB: Analytical Skills

6) The table above lists six points on the production possibilities frontier for cheese and DVDs. From this information you can conclude that production is inefficient if this economy produces A) 2 tons of cheese and 56 thousand DVDs. B) 8 tons of cheese and 21 thousand DVDs. C) 5 tons of cheese and 48 thousand DVDs. D) 7 tons of cheese and 20 thousand DVDs. Answer: D Topic: Production Possibilities Frontier Skill: Analytical Status: Previous edition, Part Review 1 AACSB: Analytical Skills

7) The table above lists six points on the production possibilities frontier for cheese and DVDs. What is the opportunity cost of producing the 7th ton of cheese? A) 16 DVDs B) 8 DVDs C) 20 DVDs D) 28 DVDs Answer: B Topic: Opportunity Cost Skill: Analytical Status: Previous edition, Part Review 1 AACSB: Analytical Skills

8) An opportunity cost of economic growth is A) the capital accumulation given up to increase present consumption. B) the increased future consumption. C) the present consumption given up to accumulate capital. D) None of the above because there is no opportunity cost since if an economy grows, it can produce more of all goods. Answer: C Topic: Economic Growth Skill: Conceptual Status: Previous edition, Part Review 1 AACSB: Reflective Thinking

9) Country X devoted 70 percent of its resources to consumption, while Country Y devoted 80 percent to consumption. Other things being equal, you can predict that A) Country X's opportunity cost of economic growth is lower than Country Y's. B) Country Y's rate of capital accumulation is higher than Country X's C) Country Y's economy will grow faster than Country X's. D) Country X's economy will grow faster than Country Y's. Answer: D Topic: Economic Growth Skill: Conceptual Status: Previous edition, Part Review 1 AACSB: Reflective Thinking

10) Lizzie takes 20 seconds to stuff an envelope and 10 seconds to seal it. Arnold takes 15 seconds to stuff an envelope and 5 seconds to seal it. Lizzie has a comparative advantage in ________ and Arnold has a comparative advantage in ________. A) sealing envelopes; stuffing them B) stuffing envelopes; sealing them C) neither of these activities; both activities D) both activities; neither of these activities Answer: B Topic: Comparative Advantage Skill: Analytical Status: Previous edition, Part Review 1 AACSB: Analytical Skills

11) According to the principle of comparative advantage, if the United States trades with Mexico, most likely, A) the United States will benefit and Mexico will lose. B) the United States will lose and Mexico will benefit. C) neither of the countries will benefit. D) both countries will benefit. Answer: D Topic: Comparative Advantage and Trade Skill: Conceptual Status: Previous edition, Part Review 1 AACSB: Reflective Thinking

Economics, 11e, Global Edition (Parkin) Part 2 Review 1 How Markets Work 1) Gadgets, Inc. can increase its total revenue by raising the price of its product. From this result we can conclude that the A) price increase increases demand for the firm's product. B) firm sells an inferior good. C) demand for the firm's product is price inelastic. D) demand for the firm's product is price elastic. Answer: C Topic: Total Revenue and Elasticity Skill: Conceptual Status: Previous edition, Part Review 2 AACSB: Reflective Thinking

2) Widgets, Inc. can increase its total revenue by lowering the price of its product. From this result we can conclude that the A) decrease in price increases demand for the firm's product. B) firm sells an inferior good. C) demand for the firm's product is price inelastic. D) demand for the firm's product is price elastic. Answer: D Topic: Total Revenue and Elasticity Skill: Conceptual Status: Previous edition, Part Review 2 AACSB: Reflective Thinking

3) If OPEC cuts oil production to increase their total revenue, we know that A) the demand for gasoline will decrease. B) the price of gasoline will fall. C) the demand for oil in the global market is inelastic. D) OPEC faces a horizontal demand for oil curve. Answer: C Topic: Total Revenue and Elasticity Skill: Conceptual Status: Previous edition, Part Review 2 AACSB: Reflective Thinking

4) If OPEC cuts oil production to increase their total revenue, we know that the A) demand for gasoline will decrease. B) price of gasoline will rise. C) demand for oil in the global market is elastic. D) supply of gasoline will increase. Answer: B Topic: Total Revenue and Elasticity Skill: Conceptual Status: Previous edition, Part Review 2 AACSB: Reflective Thinking

5) If OPEC cuts oil production to increase their total revenue, we know that the A) demand for gasoline will decrease. B) price of gasoline will fall. C) demand for oil in the global market is elastic. D) supply of gasoline will decrease. Answer: D Topic: Change in Supply Skill: Conceptual Status: Previous edition, Part Review 2 AACSB: Reflective Thinking

6) The figure above shows the market for digital cameras. If the price of film cameras falls, the efficient quantity of digital cameras will be ________ thousand cameras and the marginal cost of a digital camera will be ________. A) less than 300; less than $300 B) greater than 300; less than $300 C) 300; greater than $300 D) greater than 400; greater than $310 Answer: A Topic: Efficient Quantity Skill: Analytical Status: Previous edition, Part Review 2 AACSB: Analytical Skills

7) The figure above shows the market for digital cameras. If consumers' incomes rise and a digital camera is a normal good, the efficient quantity of digital cameras to produce will be ________ thousand cameras and the marginal cost of a digital camera will be ________. A) less than 300; less than $300 B) greater than 300; less than $300 C) 300; greater than $300 D) greater than 300; greater than $300 Answer: D Topic: Equilibrium Quantity Skill: Analytical Status: Previous edition, Part Review 2 AACSB: Analytical Skills

8) The figure above shows the market for digital cameras. If consumers' income rise and a digital camera is a normal good, the efficient quantity of digital cameras will be ________ thousand cameras and the equilibrium quantity will be ________ thousand cameras. A) less than 300; less than 300 B) greater than 300; less than 300 C) 300; greater than 300 D) greater than 300; greater than 300 Answer: D Topic: Equilibrium and Efficient Quantity Skill: Analytical Status: Previous edition, Part Review 2 AACSB: Analytical Skills

9) The figure above shows the market for digital cameras. The price of film cameras falls. In the new equilibrium, the price of a digital camera will be ________ and the marginal benefit from the last digital camera purchased will be ________. A) less than $300; less than $300 B) greater than $300; less than $300 C) $300; greater than $300 D) greater than $300; greater than $300 Answer: D Topic: Equilibrium Price and Marginal Cost Skill: Analytical Status: Previous edition, Part Review 2 AACSB: Analytical Skills

10) The figure above shows the market for digital cameras. If there are technological advances in making digital cameras, the efficient quantity of digital cameras will be ________ thousand cameras and the equilibrium quantity will be ________ thousand cameras. A) less than 300; less than 300 B) greater than 300; less than 300 C) 300; greater than 300 D) greater than 300; greater than 300 Answer: D Topic: Equilibrium and Efficient Quantity Skill: Analytical Status: Previous edition, Part Review 2 AACSB: Analytical Skills

11) The figure above shows the market for digital cameras. If new technology lowers the cost of producing digital cameras, the efficient quantity of digital cameras will be ________ and compared to the original equilibrium, the consumer surplus will ________. A) less than 300; increase B) less than 300; decrease C) greater than 300; increase D) greater than 300; decrease Answer: C Topic: Efficient Quantity and Consumer Surplus Skill: Analytical Status: Previous edition, Part Review 2 AACSB: Analytical Skills

12) The figure above shows the market for digital cameras. If a tax on digital cameras of $30 per camera is imposed on sellers of digital cameras, how many cameras are sold? A) 150 thousand B) 200 thousand C) 250 thousand D) 300 thousand Answer: B Topic: Tax Skill: Analytical Status: Previous edition, Part Review 2 AACSB: Analytical Skills

13) The figure above shows the market for digital cameras. If a tax on digital cameras of $30 per camera is imposed on sellers of digital cameras, buyers will pay a ________ fraction of the tax than sellers will pay because the demand is ________ elastic than the supply is. A) smaller; more B) smaller; less C) greater; more D) greater; less Answer: A Topic: Tax Incidence Skill: Analytical Status: Previous edition, Part Review 2 AACSB: Analytical Skills

14) The figure above shows the market for digital cameras. If a tax on digital cameras of $30 per camera is imposed, the equilibrium quantity of digital cameras is ________ thousand cameras and the efficient quantity of digital cameras to produce is ________ thousand cameras. A) 300; 200 B) 200; 300 C) 200; 200 D) 300; 300 Answer: B Topic: Equilibrium and Efficient Quantity Skill: Analytical Status: Previous edition, Part Review 2 AACSB: Analytical Skills 5 Copyright © 2014 Pearson Education, Inc.

15) The figure above shows the market for digital cameras. If a tax on digital cameras of $30 per camera is imposed, the marginal cost of the last digital camera produced is ________ and the marginal benefit that consumers receive from it is ________. A) $330; $300 B) $310; $280 C) $280; $310 D) $300; $300 Answer: C Topic: Marginal Cost and Marginal Benefit Skill: Analytical Status: Previous edition, Part Review 2 AACSB: Analytical Skills

16) The figure above shows the market for digital cameras. If a tax on digital cameras of $30 per camera is imposed, consumer surplus will A) not change. B) decrease by $1,500. C) increase by $1,000. D) decrease by $2,500. Answer: D Topic: Consumer Surplus Skill: Analytical Status: Previous edition, Part Review 2 AACSB: Analytical Skills

17) The figure above shows the market for digital cameras. If a tax on digital cameras of $30 per camera is imposed, and at the same time new technology lowers the marginal cost of producing a digital camera by $30 at each level of output, the equilibrium quantity of digital cameras is ________ thousand cameras and the efficient quantity of digital cameras to produce is ________ thousand cameras. A) 300; 400 B) 400; 300 C) 300; 200 D) 300; 300 Answer: A Topic: Equilibrium and Efficient Quantity Skill: Analytical Status: Previous edition, Part Review 2 AACSB: Analytical Skills

18) The figure above shows the market for digital cameras. If a tax on digital cameras of $30 per camera is imposed, and at the same time new technology lowers the marginal cost of producing a digital camera by $30 at each level of output, the marginal cost of the last camera produced is ________ and the marginal benefit that consumers receive from it is ________. A) $300; $300 B) $270; $300 C) $290; $320 D) $290; $290 Answer: B Topic: Marginal Cost and Marginal Benefit Skill: Analytical Status: Previous edition, Part Review 2 AACSB: Analytical Skills

19) The figure above shows the demand for and supply of rental housing in Steppeville. If a rent ceiling is set at $900, the quantity of apartment units rented is ________ , and the efficient quantity of apartment units to rent is ________. A) 400; 1,000 B) 400; 800 C) 800; 800 D) 800; 1,000 Answer: C Topic: Rent Ceiling and Efficient Quantity Skill: Analytical Status: Previous edition, Part Review 2 AACSB: Analytical Skills

20) The figure above shows the demand for and supply of rental housing in Steppeville. If a rent ceiling is set at $900, the marginal benefit from renting an apartment unit is ________ and the quantity of apartments supplied is ________. A) $900; 1,000 B) $900; 400 C) $800; 400 D) $800; 800 Answer: D Topic: Rent Ceiling and Marginal Benefit Skill: Analytical Status: Previous edition, Part Review 2 AACSB: Analytical Skills

21) The figure above shows the demand for and supply of rental housing in Steppeville. If a rent ceiling is set at $700, the quantity of apartment units rented is ________, and the efficient quantity of apartment units to rent is ________. A) 1,200; 600 B) 600; 600 C) 600; 800 D) 800; 800 Answer: C Topic: Rent Ceiling and Efficient Quantity Skill: Analytical Status: Previous edition, Part Review 2 AACSB: Analytical Skills

22) The figure above shows the demand for and supply of rental housing in Steppeville. If a rent ceiling is set at $700, the marginal benefit from renting an apartment unit is ________ and the quantity of apartment units supplied is ________. A) $700; 600 B) $850; 600 C) $800; 800 D) $700; 800 Answer: B Topic: Rent Ceiling and Marginal Benefit Skill: Analytical Status: Previous edition, Part Review 2 AACSB: Analytical Skills

23) The figure above shows the demand for and supply of rental housing in Steppeville. A rent ceiling is set at $700. The rent ceiling creates a ________ and there ________ a deadweight loss. A) surplus of 1,200 apartments; is not B) surplus of 600 apartments; is C) shortage of 600 apartments; is D) shortage; 1,200 apartments; is not Answer: C Topic: Rent Ceiling and Efficient Quantity Skill: Analytical Status: Previous edition, Part Review 2 AACSB: Analytical Skills 8 Copyright © 2014 Pearson Education, Inc.

24) The figure above shows the demand for and supply of rental housing in Steppeville. A rent ceiling is set at $700. Rental housing is a normal good and people's incomes increase. As a result, the, A) gap between the efficient quantity of housing to rent and the actual quantity rented will increase. B) gap between the efficient quantity of housing to rent and the actual quantity rented will decrease. C) shortage of housing will decrease. D) quantity of housing supplied will increase. Answer: A Topic: Rent Ceiling Skill: Analytical Status: Previous edition, Part Review 2 AACSB: Analytical Skills

25) ________ occurs when a foreign firm sells its exports at a lower price than its cost of production. A) A quota B) Dumping C) A tariff D) A nontariff barrier Answer: B Topic: Trade Skill: Recognition Status: Previous edition, Part Review 2 AACSB: Reflective Thinking

Economics, 11e, Global Edition (Parkin) Part 3 Review 1 Households' Choices 1) Simon spends $150 per month on DVD movie rentals and music CDs. The price of a movie rental is $3 and a CD is $15. If Simon buys 10 CDs per month, how many DVDs will he rent? A) 0 B) 1 C) 2 D) It is impossible to determine how many DVDs Simon will rent without more information. Answer: A Topic: Consumption Possibilities Skill: Analytical Status: Previous edition, Part Review 3 AACSB: Analytical Skills

2) Dudley plans to spend £210 on ice cream and chocolate bars. The price of ice cream is £3 per gallon and a chocolate bar £1.50. If Dudley buys 50 gallons of ice cream, how many chocolate bars is he able to buy? A) 50 B) 40 C) 70 D) 140 Answer: B Topic: Consumption Possibilities Skill: Analytical Status: Previous edition, Part Review 3 AACSB: Analytical Skills

3) As Matt's consumption of root beer increases, his A) marginal utility from root beer increases. B) marginal utility from root beer decreases. C) total utility from root beer decreases. D) both total and marginal utility from root beer increase. Answer: B Topic: Marginal Utility Skill: Conceptual Status: Previous edition, Part Review 3 AACSB: Reflective Thinking

Quantity of Ron's total utility from chocolate frogs chocolate frogs 1 40 2 75 3 105 4 125 5 130 4) In the table above, Ron's marginal utility from the 4th chocolate frog is A) 20. B) 30. C) 115. D) 125. Answer: A Topic: Marginal Utility Skill: Analytical Status: Previous edition, Part Review 3 AACSB: Analytical Skills

5) In the table above, Ron's marginal utility is A) constant. B) diminishing. C) increasing. D) negative. Answer: B Topic: Marginal Utility Skill: Conceptual Status: Previous edition, Part Review 3 AACSB: Analytical Skills

6) Basil spends all his income on apples and bananas. Apples cost $2.50 per pound and bananas cost $1.50 per pound. The marginal utility is 20 for the last pound of apples purchased and 10 for the last pound of bananas. To maximize his utility, Basil should buy A) more apples and fewer bananas. B) more bananas and fewer apples. C) the present combination of goods. D) only apples. Answer: A Topic: The Utility-Maximizing Choice Skill: Analytical Status: Previous edition, Part Review 3 AACSB: Analytical Skills

Quantity 1 2 3 4 5 6 7

CDs Marginal utility 50 42 34 26 18 10 4

Quantity 1 2 3 4 5 6 7

Computer games Marginal utility 134 124 114 104 94 84 79

7) Jason's budget for CDs and computer games is $210. His marginal utility from these goods is shown in the table above. If the price of a CD is $15 and the price of a computer game is $30, which of the following combinations maximizes Jason's utility? A) 4 CDs and 5 computer games B) 6 CDs and 4 computer games C) 2 CDs and 6 computer games D) 5 CDs and 5 computer games Answer: C Topic: The Utility-Maximizing Choice Skill: Analytical Status: Previous edition, Part Review 3 AACSB: Analytical Skills

8) Rick's preferences are shown in the figure above. Which of the following combinations of goods does Rick prefer the most? A) 2 CDs and 18 sandwiches B) 5 CDs and 10 sandwiches C) 8 CDs and 5 sandwiches D) 9 CDs and 4 sandwiches Answer: B Topic: Indifference Curves Skill: Conceptual Status: Previous edition, Part Review 3 AACSB: Analytical Skills

9) Rick's income is $54 a week and he spends all of it on CDs and sandwiches. The price of a CD is $18 and the price of a sandwich is $3. The figure above illustrates Rick's preferences. What is Rick's best affordable combination of CDs and sandwiches? A) 2 CDs and 8 sandwiches a week B) 3 CDs a week and no sandwiches C) 1 CD and 12 sandwiches a week D) 3 CDs and 6 sandwiches a week Answer: C Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Analytical Status: Previous edition, Part Review 3 AACSB: Analytical Skills

10) Rick's income is $54 a week and he spends all of it on CDs and sandwiches. The price of a CD is $18 and the price of a sandwich is $3. The figure above illustrates Rick's preferences. At Rick's best affordable point, the marginal rate of substitution is A) 6 sandwiches per CD. B) 3 sandwiches per CD. C) 2 sandwiches per CD. D) 1/6 of a sandwich per CD. Answer: A Topic: Predicting Consumer Behavior, Marginal Rate of Substitution Skill: Analytical Status: Previous edition, Part Review 3 AACSB: Analytical Skills

11) Rick's income is $54 a week and he spends all of it on CDs and sandwiches. The price of a CD is $6 and the price of a sandwich is $3. The figure above illustrates Rick's preferences. What is Rick's best affordable combination of CDs and sandwiches? A) 3 CDs and 12 sandwiches a week B) 4 CDs and 10 sandwiches a week C) 6 CDs and 12 sandwiches a week D) 8 CD and 2 sandwiches a week Answer: B Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Analytical Status: Previous edition, Part Review 3 AACSB: Analytical Skills

12) Rick's income is $54 a week and he spends all of it on CDs and sandwiches. The price of a CD is $6 and the price of a sandwich is $3. The figure above illustrates Rick's preferences. At Rick's best affordable point, the marginal rate of substitution is A) 0.5 sandwiches per CD. B) 1 sandwich per CD. C) 1.5 sandwiches per CD. D) 2 sandwiches per CD. Answer: D Topic: Predicting Consumer Behavior, Marginal Rate of Substitution Skill: Analytical Status: Previous edition, Part Review 3 AACSB: Analytical Skills

13) Rick's income is $54 a week and he spends all of it on CDs and sandwiches. The price of a CD is $18 and the price of a sandwich is $3. The figure above illustrates Rick's preferences. If the price of a CD falls to $6, Rick's consumption of CDs will increase by A) 1 CD per week. B) 2 CDs per week. C) 3 CDs per week. D) 4 CDs per week. Answer: C Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Analytical Status: Previous edition, Part Review 3 AACSB: Analytical Skills

14) Rick's income is $54 a week and he spends all of it on CDs and sandwiches. The price of a CD is $18 and the price of a sandwich is $3. The figure above illustrates Rick's preferences. If the price of a CD falls to $6, Rick's consumption of sandwiches will A) increase by 4 sandwiches per week. B) increase by 2 sandwiches per week. C) not change. D) decrease by 2 sandwiches per week. Answer: D Topic: Predicting Consumer Behavior, Best Affordable Point Skill: Analytical Status: Previous edition, Part Review 3 AACSB: Analytical Skills

Economics, 11e, Global Edition (Parkin) Part 4 Review 1 Firms and Markets 1) Ms. Lollipop opened a candy store in December 2013. She rented a building for $25,000 a year and used $30,000 from her savings account, which earned an annual interest rate of 5 percent, to buy capital equipment. In December 2014, the market value of her capital equipment was $26,000. What is the economic depreciation of Lollipop's capital? A) $3,000 B) $4,000 C) $1,000 D) $25,000 Answer: B Topic: Economic Depreciation Skill: Conceptual Status: Previous edition, Part Review 4 AACSB: Analytical Skills

2) Ms. Lollipop opened a candy store in December 2013. She rented a building for $25,000 a year and used $30,000 from her savings account, which earned an annual interest rate of 5 percent, to buy capital equipment. During the first year of operation, Lollipop paid $28,000 to her employees, $10,000 for utilities, and $16,000 for goods she bought from other firms. In December 2014, the market value of Lollipop's capital equipment was $26,000. Lollipop's best alternative to running her candy store is to work as a sales clerk at Winn-Dixie for $15,000 a year. What is Lollipop's total opportunity cost? A) $99,500 B) $94,000 C) $79,000 D) $20,500 Answer: A Topic: Opportunity Costs Skill: Conceptual Status: Previous edition, Part Review 4 AACSB: Analytical Skills

3) Ms. Lollipop opened a candy store in December 2013. She rented a building for $25,000 a year and used $30,000 from her savings account, which earned an annual interest rate of 5 percent, to buy capital equipment. During the first year of operation, Lollipop paid $28,000 to her employees, $10,000 for utilities, and $16,000 for goods she bought from other firms. In December 2014, the market value of Lollipop's capital equipment was $26,000. Lollipop's best alternative to running her candy store is to work as a sales clerk at Winn-Dixie for $15,000 a year. What is Lollipop's economic profit? A) $21,000 B) $500 C) $5,000 D) -$9,000 Answer: B Topic: Economic Profit Skill: Conceptual Status: Previous edition, Part Review 4 AACSB: Analytical Skills

Labor (workers) 0 1 2 3 4 5 6

Total product (units per week) 0 40 100 140 170 190 200

4) In the table above, what is the marginal product of the 5th worker? A) 190 units per week B) 4 units per week C) 20 units per week D) 38 units per week Answer: C Topic: Marginal Product of Labor Skill: Analytical Status: Previous edition, Part Review 4 AACSB: Analytical Skills

5) Given the information in the table above, suppose labor is the only variable input. The price of labor is $400 per week and total fixed costs are $1,000 per week. What is the total cost of producing 100 units? A) $1,700 B) $1,800 C) $1,900 D) $2,000 Answer: B Topic: Total Cost Skill: Analytical Status: Previous edition, Part Review 4 AACSB: Analytical Skills 2 Copyright © 2014 Pearson Education, Inc.

6) Given the information in the table above, suppose labor is the only variable input. The price of labor is $400 per week and total fixed costs are $1,000 per week. If 170 units are produced, the average total cost is A) $15.29. B) $5.88. C) $9.41. D) $7.99 Answer: A Topic: Average Total Cost Skill: Analytical Status: Previous edition, Part Review 4 AACSB: Analytical Skills

7) Given the information in the table above, suppose labor is the only variable input. The price of labor is $400 per week and total fixed costs are $1,000 per week. What is the marginal cost of producing the 120th unit? A) $400.00 B) $40.00 C) $20.00 D) $10.00 Answer: D Topic: Marginal Cost Skill: Analytical Status: Previous edition, Part Review 4 AACSB: Analytical Skills

8) Given the information in the table above, suppose labor is the only variable input. The price of labor is $400 per week and total fixed costs are $1,000 per week. If the firm wants to minimize its average total cost, it should produce A) 100 units. B) 140 units. C) 170 units. D) 190 units. Answer: C Topic: Average Total Cost Skill: Analytical Status: Previous edition, Part Review 4 AACSB: Analytical Skills

9) The profit maximizing condition for any competitive firm is A) MR = P. B) MC = MR. C) P = ATC. D) None of the above answers is correct because each type of competitive firm has a different condition of maximizing its profit. Answer: B Topic: Profit Maximization Skill: Conceptual Status: Previous edition, Part Review 4 AACSB: Reflective Thinking 3 Copyright © 2014 Pearson Education, Inc.

10) Firms in which of the following industries can incur an economic loss in the short run? A) Any firm can incur an economic loss profit in the short run. B) only perfect competition and monopolistic competition C) only monopolistic competition D) only perfect competition Answer: A Topic: Economic Loss Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking

11) Which of the following statements is FALSE? A) In the short run, a monopolist might operate even though it is incurring an economic loss, but in the short run a perfectly competitive firm always shuts down if it is incurring an economic loss. B) A monopoly can earn an economic profit in the long run, but a perfectly competitive firm cannot. C) A monopoly can set its price while a perfectly competitive firm cannot. D) A monopoly is protected by barriers to entry while a perfectly competitive firm is not. Answer: A Topic: Single-Price Monopoly's Output and Price Decisions Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking

Output (pizzas per day) 0 1 2 3 4 5 6

Total cost (dollars per day) 20 35 45 60 80 105 135

12) Vito's Pizza is a perfectly competitive firm. The firm's costs are shown in the table above. If the market price is $22.50 per pizza, what is Vito's profit-maximizing output? A) 2 pizzas per day B) 3 pizzas per day C) 4 pizzas per day D) 5 pizzas per day Answer: C Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Part Review 4 AACSB: Analytical Skills

13) Vito's Pizza is a perfectly competitive firm. The firm's costs are shown in the table above. If the market price is $22.50 per pizza, how much economic profit per day does the firm make? A) zero B) $10 C) $20 D) -$7.50 Answer: B Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Part Review 4 AACSB: Analytical Skills

14) Vito's Pizza is a perfectly competitive firm. The firm's costs are shown in the table above. If the market price is $17.50 per pizza, what is Vito's profit-maximizing output? A) 2 pizzas per day B) 3 pizzas per day C) 4 pizzas per day D) 5 pizzas per day Answer: B Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Part Review 4 AACSB: Analytical Skills

15) Vito's Pizza is a perfectly competitive firm. The firm's costs are shown in the table above. If the market price is $17.50 per pizza, how much economic profit does the firm make? A) zero B) $10 C) -$7.50 D) $15 Answer: C Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Part Review 4 AACSB: Analytical Skills

16) Vito's Pizza is a perfectly competitive firm. The firm's costs are shown in the table above. What is Vito's shut-down point? A) $10.00 per pizza B) $12.50 per pizza C) $15.00 per pizza D) $17.50 per pizza Answer: B Topic: Profit-Maximizing Output Skill: Analytical Status: Previous edition, Part Review 4 AACSB: Analytical Skills

17) For the monopoly shown in the figure above, the profit maximizing output is A) 20 units. B) more than 40 units and less than 60 units. C) 40 units. D) 60 units. Answer: C Topic: Single-Price Monopoly's Output and Price Decisions Skill: Analytical Status: Previous edition, Part Review 4 AACSB: Analytical Skills

18) For the monopoly shown in the figure above, the profit maximizing price is A) less than $1.00. B) $3.00. C) $4.00. D) $6.00. Answer: D Topic: Single-Price Monopoly's Output and Price Decisions Skill: Analytical Status: Previous edition, Part Review 4 AACSB: Analytical Skills

19) For the monopoly shown in the figure above, the maximum total economic profit is A) zero. B) $32. C) $80. D) $240. Answer: C Topic: A Monopoly's Economic Profit Skill: Analytical Status: Previous edition, Part Review 4 AACSB: Analytical Skills 6 Copyright © 2014 Pearson Education, Inc.

20) For the monopoly shown in the figure above, the markup is A) zero. B) $1. C) $2. D) $4. Answer: C Topic: Markup Skill: Analytical Status: Previous edition, Part Review 4 AACSB: Analytical Skills

21) For the monopoly shown in the figure above, the efficient output level is A) 20 units. B) more than 40 units and less than 60 units. C) 40 units. D) 60 units. Answer: B Topic: Comparing Output and Price Skill: Analytical Status: Previous edition, Part Review 4 AACSB: Analytical Skills

22) The firm shown in the figure above is A) not a natural monopoly because it experiences diseconomies of scale where its LRAC curve intersects the demand curve. B) a natural monopoly because it experiences economies of scale where its LRAC curve intersects the demand curve. C) a natural monopoly because its marginal cost is constant, so it experiences constant returns to scale. D) not a natural monopoly because its LRAC curve is above its MC curve. Answer: B Topic: Natural Monopoly Skill: Recognition Status: Previous edition, Part Review 4 AACSB: Analytical Skills

23) If the firm in the figure above is unregulated, it will charge a price of A) $4 per unit. B) $16 per unit. C) $20 per unit. D) $40 per unit. Answer: C Topic: Natural Monopoly, Unregulated Skill: Analytical Status: Previous edition, Part Review 4 AACSB: Analytical Skills

24) If the firm in the figure above is unregulated, it will produce A) 500 units per day. B) 600 units per day. C) 900 units per day. D) zero units. Answer: A Topic: Natural Monopoly, Unregulated Skill: Analytical Status: Previous edition, Part Review 4 AACSB: Analytical Skills

25) If the firm in the figure above is unregulated, the deadweight loss will be A) zero. B) $1,800. C) $3,200. D) $16,200. Answer: C Topic: Natural Monopoly, Unregulated Skill: Analytical Status: Previous edition, Part Review 4 AACSB: Analytical Skills

26) If a marginal cost pricing rule is imposed on the firm in the figure above, the price will be A) $4 per unit. B) $16 per unit. C) $20 per unit. D) $40 per unit. Answer: A Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Analytical Status: Previous edition, Part Review 4 AACSB: Analytical Skills

27) If a marginal cost pricing rule is imposed on the firm in the figure above, the firm will produce A) 500 units per day. B) 600 units per day. C) 900 units per day. D) zero units. Answer: C Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Analytical Status: Previous edition, Part Review 4 AACSB: Analytical Skills

28) If a marginal cost pricing rule is imposed on the firm in the figure above, the firm's economic profit is A) zero. B) $1,000. C) -$7,200. D) $320. Answer: C Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Analytical Status: Previous edition, Part Review 4 AACSB: Analytical Skills

29) If a marginal cost pricing rule is imposed on the firm in the figure above, the deadweight loss will be A) zero. B) $1,800. C) $3,200. D) $16,200. Answer: A Topic: Natural Monopoly, Marginal Cost Pricing Rule Skill: Analytical Status: Previous edition, Part Review 4 AACSB: Analytical Skills

30) If an average cost pricing rule is imposed on the firm in the figure above, the price will be A) $4 per unit. B) $16 per unit. C) $20 per unit. D) $40 per unit. Answer: B Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Analytical Status: Previous edition, Part Review 4 AACSB: Analytical Skills

31) If an average cost pricing rule is imposed on the firm in the figure above, the firm will produce A) 500 units per day. B) 600 units per day. C) 900 units per day. D) zero units. Answer: B Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Analytical Status: Previous edition, Part Review 4 AACSB: Analytical Skills

32) If an average cost pricing rule is imposed on the firm in the figure above, the firm's economic profit is A) zero. B) $1,000. C) -$7,200. D) $320. Answer: A Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Analytical Status: Previous edition, Part Review 4 AACSB: Analytical Skills

33) If an average cost pricing rule is imposed on the firm in the figure above, the deadweight loss is A) zero. B) $1,800. C) $3,200. D) $16,200. Answer: B Topic: Natural Monopoly, Average Cost Pricing Rule Skill: Analytical Status: Previous edition, Part Review 4 AACSB: Analytical Skills

34) Monopolistic competition is a market structure in which a ________ number of firms compete and each firm produces ________ product. A) large; an identical B) small; an identical C) large; a differentiated D) small; a differentiated Answer: C Topic: Monopolistic Competition Skill: Conceptual Status: Previous edition, Part Review 4 AACSB: Reflective Thinking

35) In some industries it is important for each firm to predict how all the other firms will react to their decisions. A) This is not true for monopolistic competition because there are too many firms and no barriers to entry. B) This is not true of any industry with barriers to entry. C) This is not true for monopolistic competition because firms do not sell homogeneous goods. D) This is true for oligopoly because these firms sell a homogeneous good. Answer: A Topic: Oligopoly Skill: Conceptual Status: Previous edition, Part Review 4 AACSB: Reflective Thinking

36) Oligopoly is a market structure in which a ________ number of firms compete and there ________ barriers to entry. A) small; are B) large; are C) small; are no D) large; are no Answer: A Topic: Oligopoly Skill: Conceptual Status: Previous edition, Part Review 4 AACSB: Reflective Thinking

37) A cartel tries to ________ its members' economic profit and thereby the cartel ________ consumer surplus. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases Answer: B Topic: Cartel Skill: Analytical Status: Previous edition, Chapter 15 AACSB: Reflective Thinking

38) Cheating by a member of a cartel ________ consumer surplus and ________ the total economic profit earned by all the firms in the cartel. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: B Topic: Cartel Skill: Analytical Status: Previous edition, Chapter 15 AACSB: Reflective Thinking

Economics, 11e, Global Edition (Parkin) Part 5 Review 1 Market Failure and Government 1) A non-crowded freeway is A) rival and nonexcludable. B) nonrival and excludable. C) nonrival and nonexcludable. D) rival and excludable. Answer: C Topic: Public Goods Skill: Analytical Status: New 10th edition AACSB: Analytical Skills

2) A crowded freeway during the rush hour is A) rival and nonexcludable. B) nonrival and excludable. C) nonrival and nonexcludable. D) rival and excludable. Answer: A Topic: Common Resource Skill: Analytical Status: New 10th edition AACSB: Analytical Skills

3) Street lights are a public good. If street lights were provided by the private market, at the equilibrium quantity, it would be the case that A) MSB = MSC B) MSC > MC C) MSB > MSC D) MSB > MB Answer: C Topic: Public Goods Skill: Analytical Status: New 10th edition AACSB: Analytical Skills

4) The marginal private cost of a chemical is $80 per ton and its marginal external cost is $10 per ton. What is the marginal social cost of the chemical? A) $70 per ton B) $85 per ton C) $90 per ton D) $45 per ton Answer: C Topic: Marginal Social Cost Skill: Analytical Status: Previous edition, Part Review 5 AACSB: Analytical Skills

5) The marginal social cost of a chemical is $45 per ton and its marginal private cost is $30 per ton. What is the marginal external cost of the chemical? A) $75 per ton B) $30 per ton C) $15 per ton D) zero Answer: C Topic: Marginal External Cost Skill: Analytical Status: Previous edition, Part Review 5 AACSB: Analytical Skills

6) At the current level of output, the marginal social cost of paper is $30 per ton and its marginal private cost is $20 per ton. The marginal social benefit from paper is $20 per ton. The market for paper is competitive and unregulated. This means that at the current level of production, A) the market for paper is in equilibrium. B) the efficient quantity of paper is produced. C) there is a shortage of paper. D) the quantity of paper produced is less than the efficient level of output. Answer: A Topic: An Unregulated Market Skill: Conceptual Status: Previous edition, Part Review 5 AACSB: Analytical Skills

7) At the current level of output, the marginal social cost of paper is $30 per ton and its marginal private cost is $20 per ton. The marginal social benefit from paper is $30 per ton. This means that the current level of production is A) greater than the efficient level. B) efficient. C) less than the efficient level. D) the equilibrium quantity attained in an unregulated perfectly competitive market. Answer: B Topic: Efficiency Skill: Conceptual Status: Previous edition, Part Review 5 AACSB: Reflective Thinking

8) To increase efficiency, A) taxes can be used to overcome the problems created by both external benefits and external costs. B) subsidies can be used to overcome problems created by both external benefits and external costs. C) taxes can be used to overcome the problems created by external benefits, and subsidies can be used to overcome the problems created by external costs. D) subsidies can be used to overcome the problems created by external benefits, and taxes can be used to overcome the problems created by external costs. Answer: D Topic: Subsidies and Taxation Skill: Analytical Status: Previous edition, Chapter 16 AACSB: Reflective Thinking

9) An unregulated market produces too ________ of a good with an external cost and too ________ of a good with an external benefit. A) much; much B) little; much C) much; little D) little; little Answer: C Topic: Externalities Skill: Analytical Status: Previous edition, Chapter 16 AACSB: Reflective Thinking

10) Compare the inefficient market equilibriums for the case of an external benefit and the case of an external cost. Which of the following is true? A) Both result in a deadweight loss. B) Both result in too much production. C) Both result in too little production. D) The market with the negative externality is the only one with a deadweight loss. Answer: A Topic: An Unregulated Market Skill: Conceptual Status: Previous edition, Part Review 5 AACSB: Reflective Thinking

11) A crowded freeway during the rush hour is a ________ and so it is ________. A) common resource; overutilized B) private good; efficiently utilized C) public good; overutilized D) natural monopoly; underutilized Answer: A Topic: Common Resource Skill: Analytical Status: New 10th edition AACSB: Analytical Skills

Economics, 11e, Global Edition (Parkin) Part 6 Review 1 Factor Markets, Inequality, and Uncertainty 1) If the interest rate is 5 percent, the present value of $2,000 to be received one year from today is about A) $2,005. B) $1,995. C) $1,905. D) $2,100. Answer: C Topic: Present Value Skill: Analytical Status: Previous edition, Part Review 6 AACSB: Analytical Skills

2) If the interest rate is 5 percent, the present value of $2,000 to be received two years from today is about A) $2,010. B) $1,814. C) $1,905. D) $1,980. Answer: B Topic: Present Value Skill: Analytical Status: Previous edition, Part Review 6 AACSB: Analytical Skills

3) Abigail's Tax Help, is a firm that sells advice to taxpayers. Abigail is considering buying a new computer that costs $1,500. She expects that the computer will generate an additional profit of $1,200 at the end of the first year and $500 at the end of the second year, after which it will be worthless. If the annual interest rate in the next two years is 5 percent, what is the present value of the profit from the computer? A) $1,596 B) $1,500 C) $1,361 D) $1,654 Answer: A Topic: Present Value Skill: Analytical Status: Previous edition, Part Review 6 AACSB: Analytical Skills

4) Abigail's Tax Help, is a firm that sells advice to taxpayers. Abigail is considering buying a new computer that costs $1,600. She expects that the computer will generate additional profit of $1,200 at the end of the first year and $500 at the end of the second year, after which it will be worthless. If the annual interest rate in the next two years is 8 percent, what is the present value of the profit from the the computer? A) $1,600 B) $1,286 C) $1,540 D) $1,750 Answer: C Topic: Present Value Skill: Analytical Status: Previous edition, Part Review 6 AACSB: Analytical Skills

5) In the figure above, the demand and supply of high-skilled workers has an H subscript and the demand and supply of low-skilled workers as an L subscript. In the market for low-skilled labor, the equilibrium wage rate is A) $4. B) $6. C) $10. D) $14. Answer: A Topic: Wage Rates of High-Skilled and Low-Skilled Labor Skill: Analytical Status: Previous edition, Part Review 6 AACSB: Analytical Skills

6) In the figure above, the demand and supply of high-skilled workers has an H subscript and the demand and supply of low-skilled workers as an L subscript. The quantity of low-skilled labor employed is A) 6,000 hours per day. B) 2,000 hours per day. C) 4,000 hours per day. D) 5,000 hours per day. Answer: D Topic: Employment of High-Skilled and Low-Skilled Labor Skill: Analytical Status: Previous edition, Part Review 6 AACSB: Analytical Skills

7) In the figure above, the demand and supply of high-skilled workers has an H subscript and the demand and supply of low-skilled workers as an L subscript. The quantity of high-skilled labor employed is A) 2,000 hours per day. B) 4,000 hours per day. C) 5,000 hours per day. D) 6,000 hours per day. Answer: B Topic: Employment of High-Skilled and Low-Skilled Labor Skill: Analytical Status: Previous edition, Part Review 6 AACSB: Analytical Skills

8) In the figure above, the demand and supply of high-skilled workers has an H subscript and the demand and supply of low-skilled workers as an L subscript. In the market for high-skilled labor, the equilibrium wage rate is A) $6. B) $4. C) $14. D) $10. Answer: C Topic: Wage Rates of High-Skilled and Low-Skilled Labor Skill: Analytical Status: Previous edition, Part Review 6 AACSB: Analytical Skills

9) In the figure above, the demand and supply of high-skilled workers has an H subscript and the demand and supply of low-skilled workers as an L subscript. The difference in wage rate between lowskilled and high-skilled labor is A) $8. B) $10. C) $4. D) $14. Answer: B Topic: Wage Rates of High-Skilled and Low-Skilled Labor Skill: Analytical Status: Previous edition, Part Review 6 AACSB: Analytical Skills

10) Contests can help explain why A) the super rich earn vastly more than other people who have similar amounts of human capital. B) human capital among the poor has been increasing. C) the world distribution of income is becoming more equal. D) the average woman earns less than the average man. Answer: A Topic: Contests Skill: Conceptual Status: New 10th edition AACSB: Reflective Thinking

11) The big tradeoff is a tradeoff between A) equity and efficiency. B) equality and inequality. C) marginal cost and marginal benefit. D) monopoly and perfect competition. Answer: A Topic: The Big Tradeoff Skill: Recognition Status: Previous edition, Chapter 19 AACSB: Ethical Reasoning

12) Jennifer has the utility of wealth curve shown in the figure above. She owns a car worth $15,000, and that is her only wealth. There is a 10 percent chance that Jennifer will have an accident within a year. If she does have an accident, her car is worthless. What is Jennifer's expected wealth? A) $15,000 B) $12,000 C) $13,500 D) $9,000 Answer: C Topic: Expected Wealth Skill: Analytical Status: Previous edition, Part Review 6 AACSB: Analytical Skills

13) Jennifer has the utility of wealth curve shown in the figure above. She owns a car worth $15,000, and that is her only wealth. There is a 10 percent chance that Jennifer will have an accident within a year. If she does have an accident, her car is worthless. What is Jennifer's expected utility? A) 60 B) 90 C) 98 D) 50 Answer: B Topic: Expected Utility Skill: Analytical Status: Previous edition, Part Review 6 AACSB: Analytical Skills

14) Jennifer has the utility of wealth curve shown in the figure above. She owns a car worth $15,000, and that is her only wealth. There is a 10 percent chance that Jennifer will have an accident within a year. If she does have an accident, her car is worthless. Jennifer would have the same expected utility as she currently has if her wealth was ________ with no risk. A) $13,500 B) $12,000 C) $4,500 D) $9,000 Answer: D Topic: Expected Utility Skill: Analytical Status: Previous edition, Part Review 6 AACSB: Analytical Skills

15) Jennifer has the utility of wealth curve shown in the figure above. She owns a car worth $15,000, and that is her only wealth. There is a 10 percent chance that Jennifer will have an accident within a year. If she does have an accident, her car is worthless. The maximum amount that Jennifer is willing to pay for auto insurance is A) $3,500. B) $2,000. C) $4,500. D) $9,000. Answer: C Topic: Maximum Value of Insurance Skill: Analytical Status: Previous edition, Part Review 6 AACSB: Analytical Skills

16) Oligopoly differs from perfect competition because a single competitive firm's behavior does not affect the behavior of its competitors while the behavior of a single oligopolistic firm does affect the behavior of its rivals. Answer: TRUE Topic: Oligopoly Skill: Conceptual Status: Previous edition, Part Review 6 AACSB: Analytical Skills

17) Jennifer owns a car worth $15,000, and that is her only wealth. There is a 10 percent chance that Jennifer will have an accident within a year. An insurance company agrees to pay a car owner like Jennifer the full value her car, if the car owner buys the company's insurance policy. The company's operating expenses are $1,000. What is the minimum insurance premium that the company is willing to accept? A) $2,500 B) $2,000 C) $1,500 D) $1,000 Answer: A Topic: Minimum Cost of Insurance Skill: Analytical Status: Previous edition, Part Review 6 AACSB: Analytical Skills

18) Jennifer has the utility of wealth curve shown in the figure above. She owns a car worth $15,000, and that is her only wealth. There is a 10 percent chance that Jennifer will have an accident within a year. If she does have an accident, her car is worthless. An insurance company agrees to pay a car owner like Jennifer the full value her car, if the car owner buys the company's insurance policy. The company's operating expenses are $1,000. Jennifer will A) not buy the company's policy because the minimum premium that the company is willing to accept is greater than the maximum premium Jennifer is willing to pay. B) buy the company's policy because the minimum premium that the company is willing to accept is lower than the maximum premium Jennifer is willing to pay. C) buy the company's policy because the minimum premium that the company is willing to accept is the same as the maximum premium Jennifer is willing to pay. D) not buy the company's policy because Jennifer is risk neutral. Answer: B Topic: Choice Under Uncertainty Skill: Analytical Status: Previous edition, Part Review 6 AACSB: Analytical Skills 7 Copyright © 2014 Pearson Education, Inc.

Economics, 11e, Global Edition (Parkin) Part 7 Review 1 Monitoring Macroeconomic Performance 1) GDP is defined as A) gross demanded prices. B) generally demanded product. C) gross domestic product. D) generally demanded prices. Answer: C Topic: GDP Skill: Recognition Status: Previous edition, Part 2 Review AACSB: Reflective Thinking 2) In the United States, over time GDP A) stays relatively constant with occasional increases. B) increases most of the time and decreases occasionally. C) increases and decreases roughly about the same amount. D) decreases more often than it increases. Answer: B Topic: GDP Skill: Recognition Status: Previous edition, Part 2 Review AACSB: Reflective Thinking 3) A significant decline in activity spread across the economy, lasting more than a few months is called A) a recession. B) an expansion. C) a peak. D) inflation. Answer: A Topic: Business Cycle Skill: Recognition Status: Previous edition, Part 2 Review AACSB: Reflective Thinking

4) In the expenditure approach to measuring GDP, the components of GDP are A) consumption, investment, government expenditure, and net exports. B) consumption, taxes, saving, and investment. C) inflation, unemployment, saving, and investment. D) frictional unemployment, structural unemployment, and cyclical unemployment. Answer: A Topic: GDP Skill: Recognition Status: Previous edition, Part 2 Review AACSB: Reflective Thinking 5) The labor force is defined as A) all people aged 16 and over and not institutionalized. B) the entire population. C) those people employed and unemployed. D) only those people with jobs. Answer: C Topic: Labor Force Skill: Recognition Status: Previous edition, Part 2 Review AACSB: Reflective Thinking 6) The circular flow model shows that GDP can be calculated by A) both the expenditure and income methods because aggregate expenditure equals aggregate income. B) only the expenditure method in which the four components of aggregate expenditure must be measured in the aggregate. C) both the expenditure and income methods, even though aggregate expenditure is usually less than aggregate income. D) only the income method in which the four components of aggregate income must be measured separately. Answer: A Topic: Circular Flow Skill: Recognition Status: Previous edition, Part 2 Review AACSB: Reflective Thinking

7) Comparing the unemployment rate and the business cycle we see that A) the unemployment rate generally increases during expansions and generally decreases during recessions. B) there is virtually no relationship between the business cycle and the unemployment rate. C) the unemployment rate eventually falls during expansions and rises during recessions. D) higher unemployment rates are the cause of most business cycles. Answer: C Topic: Unemployment and the Business Cycle Skill: Conceptual Status: Previous edition, Part 2 Review AACSB: Reflective Thinking 8) In the United States over the past 40 years, the A) labor force participation rate has remained relatively constant and the unemployment rate has trended upwards. B) both the unemployment rate and real GDP have tended to increase. C) labor force participation rate has fallen and real GDP has increased. D) unemployment rate has fluctuated and the labor force participation rate has risen. Answer: D Topic: Trends in Employment Skill: Recognition Status: Previous edition, Part 2 Review AACSB: Reflective Thinking 9) The accumulated loss of output that results from a slowdown in the growth rate of GDP per person is called the A) Keynesian gap. B) Okun gap. C) Lucas wedge. D) unemployment wedge. Answer: C Topic: GDP Skill: Recognition Status: Previous edition, Part 2 Review AACSB: Reflective Thinking 10) The difference between nominal GDP and real GDP is that real GDP eliminates the effects from A) depreciation. B) inflation. C) the unemployment rate. D) changes in productivity. Answer: B Topic: Nominal versus Real Skill: Conceptual Status: Previous edition, Part 2 Review AACSB: Reflective Thinking 3 Copyright © 2014 Pearson Education, Inc.

11) At full employment, A) real GDP equals potential GDP. B) the unemployment rate is zero. C) real GDP is above potential GDP. D) the business cycle is at its peak. Answer: A Topic: Full Employment Skill: Recognition Status: Previous edition, Part 2 Review AACSB: Reflective Thinking

Economics, 11e, Global Edition (Parkin) Part 8 Review 1 Macroeconomic Trends 1) ________ increases real GDP. A) A fall in the price level B) An increase in employment C) An increase in the natural rate of unemployment D) A decrease in government spending Answer: B Topic: Economic Growth Rate Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 2) An increase in the amount of capital leads to ________ the aggregate production function and a technological advance leads to ________ the aggregate production function. A) a movement along; a movement along B) a movement along; an upward shift C) an upward shift; an upward shift D) a downward shift; an upward shift Answer: C Topic: Aggregate Production Function Skill: Conceptual Status: Previous edition, Part 3 Review AACSB: Reflective Thinking 3) Purchasing new capital ________. A) creates an upward movement along the aggregate production function B) creates a downward movement along the aggregate production function C) shifts the aggregate production function upward D) shifts the aggregate production function downward Answer: C Topic: Aggregate Production Function Skill: Recognition Status: Previous edition, Part 3 Review AACSB: Reflective Thinking

4) The demand for labor ________ and the accumulated skill and knowledge of human is called ________. A) increases when productivity rises; technology B) depends on the nominal wage rate; human capital C) depends on the real wage rate; human capital D) is independent of technology; the marginal product of labor Answer: C Topic: Labor and Growth Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 5) An increase in the productivity will ________ potential GDP, ________ employment, and ________ the real wage. A) decrease; increase; raise B) increase; increase; raise C) increase; decrease; lower D) increase; increase; lower Answer: B Topic: Increase in Productivity Skill: Analytical Status: Previous edition, Part 3 Review AACSB: Analytical Skills 6) An increase in the population will ________ potential GDP, ________ employment, and ________ the real wage. A) decrease; increase; raise B) increase; increase; raise C) increase; decrease; lower D) increase; increase; lower Answer: D Topic: Increase in Population Skill: Analytical Status: Previous edition, Part 3 Review AACSB: Analytical Skills 7) If productivity constantly increases, then the real wage rate ________ and employment ________. A) constantly rises; constantly increases B) does not change; constantly decreases C) constantly decreases; does not change D) constantly rises; does not change Answer: A Topic: Increase in Productivity Skill: Conceptual Status: Previous edition, Part 3 Review AACSB: Reflective Thinking 2 Copyright © 2014 Pearson Education, Inc.

8) The ________ growth theory assumes that population growth is not driven by real GDP per person and the ________ growth theory predicts that differences in the economic growth rate can last indefinitely. A) new; classical B) neoclassical; new C) classical; neoclassical D) neoclassical; neoclassical Answer: B Topic: Growth Theories Skill: Conceptual Status: Previous edition, Part 3 Review AACSB: Reflective Thinking 9) When money is accepted as payment in a market transaction, it is functioning as A) a factor that shifts the aggregate production function B) the velocity of circulation. C) a medium of exchange. D) the real interest rate. Answer: C Topic: Medium of Exchange Skill: Conceptual Status: Previous edition, Part 3 Review AACSB: Reflective Thinking 10) The opportunity cost of holding money is the A) price level. B) real interest rate. C) velocity of circulation. D) nominal interest rate. Answer: D Topic: Influences on Money Holding, The Interest Rate Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 11) If the Fed makes an open market ________ of securities, in the quantity theory M ________ and V ________. A) purchase; increases; increases B) sale; increases; decreases C) purchase; does not change; does not change D) sale; decreases; does not change Answer: D Topic: Monetary Policy Skill: Conceptual Status: Modified 10th edition AACSB: Reflective Thinking 3 Copyright © 2014 Pearson Education, Inc.

12) The velocity of circulation is A) equal to the price level multiplied by real GDP. B) the same as the aggregate demand curve. C) the average number of times a dollar bill is used in a year to buy the goods and services in GDP. D) increased when the Fed lowers the required reserve ratio. Answer: C Topic: Quantity Theory of Money, Velocity of Circulation Skill: Conceptual Status: Previous edition, Part 3 Review AACSB: Reflective Thinking 13) According to the quantity theory of money, A) the only way the Fed can change the quantity of money without affecting the velocity of circulation is by using open market operations. B) a change in the discount rate changes real GDP. C) a decrease in the quantity of money will decrease the velocity of circulation. D) a decrease in the quantity of money will decrease the price level. Answer: D Topic: Predictions of the Quantity Theory of Money Skill: Conceptual Status: Previous edition, Part 3 Review AACSB: Reflective Thinking 14) The major component of the capital and finance account is A) net exports. B) investment both abroad and domestically. C) imports and exports of services. D) the official settlements account. Answer: B Topic: Capital Account Skill: Recognition Status: Modified 10th edition AACSB: Reflective Thinking 15) The main component of the current account is A) net exports. B) investment both abroad and domestically. C) net interest income. D) the official settlements account. Answer: A Topic: Current Account Balance Skill: Recognition Status: Previous edition, Part 3 Review AACSB: Reflective Thinking 4 Copyright © 2014 Pearson Education, Inc.

16) If the U.S. interest rate differential ________, the demand for dollars ________ and the U.S. exchange rate ________. A) increases; increase; appreciates B) decreases; increase; appreciates C) increases; decrease; depreciates D) decreases; decreases; appreciates Answer: A Topic: The Exchange Rate Skill: Conceptual Status: Previous edition, Part 3 Review AACSB: Reflective Thinking 17) If the Fed hikes the U.S. interest rate relative to interest rates in other countries, in the foreign exchange market the demand for dollars will ________, the supply of dollars will ________, and the exchange rate will ________. A) increase; increase; rise B) decrease; decrease; fall C) increase; decrease; rise D) decrease; increase; fall Answer: C Topic: The Exchange Rate Skill: Conceptual Status: Previous edition, Part 3 Review AACSB: Reflective Thinking 18) In the foreign exchange market, if the supply of dollars ________ and simultaneously the demand for dollars ________, then the exchange rate definitely ________. A) increases; increases; depreciates B) decreases; increases; depreciates C) increases; decreases; depreciates D) decreases; decreases; appreciates Answer: C Topic: The Exchange Rate Skill: Conceptual Status: Previous edition, Part 3 Review AACSB: Reflective Thinking

19) If two currencies allow for the equal value of money so that the same bundle of goods cost the same in two countries, there is A) trade equalization parity. B) interest rate parity. C) tariff application parity. D) purchasing power parity. Answer: D Topic: Purchasing Power Parity Skill: Recognition Status: Previous edition, Part 3 Review AACSB: Reflective Thinking

Economics, 11e, Global Edition (Parkin) Part 9 Review 1 Macroeconomic Fluctuations 1) The level of potential GDP A) increases when the inflation rate rises. B) rises and falls with the business cycle. C) determines the location of the long-run aggregate supply curve. D) changes when cyclical unemployment changes. Answer: C Topic: The AS-AD Model Skill: Conceptual Status: Previous edition, Part 4 Review AACSB: Reflective Thinking 2) Business cycles result when A) aggregate demand grows faster than potential GDP. B) the labor force participation rate changes. C) aggregate supply and aggregate demand change at an uneven pace. D) real GDP equals potential GDP. Answer: C Topic: Business Cycle Skill: Conceptual Status: Previous edition, Part 4 Review AACSB: Reflective Thinking 3) Long-run macroeconomic equilibrium occurs when A) real GDP is equal to potential GDP. B) real GDP is at a point along the short-run aggregate supply curve. C) the unemployment rate is zero. D) all able-bodied adults have jobs. Answer: A Topic: Long-Run Equilibrium Skill: Conceptual Status: Previous edition, Part 4 Review AACSB: Reflective Thinking

4) If the economy is at the natural unemployment rate, A) real GDP > potential GDP. B) real GDP < potential GDP. C) real GDP = potential GDP. D) All of the above can occur when the economy is at the natural unemployment rate. Answer: C Topic: Long-Run Equilibrium Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking 5) At potential GDP A) there is no unemployment but there is not necessarily full employment. B) there is no unemployment and there is full employment. C) unemployment is at its natural rate. D) None of the above is correct. Answer: C Topic: Macroeconomic Long Run and Short Run Skill: Conceptual Status: Previous edition, Chapter 10 AACSB: Reflective Thinking 6) Japan's population increased by 3 percent in 2010. As a result, which of the following occurred? I. an increase in potential GDP II. a rightward shift in the long-run aggregate supply curve III. a rightward shift in the short-run aggregate supply curve. A) I, II and III. B) III only. C) I and II only. D) II and III. Answer: A Topic: Short-Run and Long-Run Aggregate Supply Skill: Analytical Status: Previous edition, Chapter 10 AACSB: Analytical Skills 7) Keynesian economists believe that A) the economy automatically adjusts towards full employment. B) monetary policy causes business cycles. C) there are no business cycles. D) activist government policy is needed to get the economy to full employment. Answer: D Topic: Keynesian View Skill: Recognition Status: Previous edition, Part 4 Review AACSB: Reflective Thinking 2 Copyright © 2014 Pearson Education, Inc.

8) A recessionary gap occurs when A) the short-run aggregate supply curve shifts rightward. B) real GDP is less than potential GDP. C) the economy is at its long-run equilibrium. D) government interferes with the economy. Answer: B Topic: Recessionary Gap Skill: Recognition Status: Previous edition, Part 4 Review AACSB: Reflective Thinking 9) Classical economists believe that the economy A) requires activist government intervention to reach its potential level of GDP. B) is self-regulating and does not require government intervention. C) can be affected by only monetary policy. D) is persistently below its potential level of GDP. Answer: B Topic: Classical View Skill: Recognition Status: Previous edition, Part 4 Review AACSB: Reflective Thinking 10) The impulse leading to business cycles in the Keynesian model is changes in A) the structural deficit. B) open market operations. C) business confidence. D) the expected future price level. Answer: C Topic: Keynesian Model Skill: Conceptual Status: Previous edition, Part 4 Review AACSB: Reflective Thinking 11) The order for the chain of events for the Keynesian model is for a change in ________ to lead to a change in ________, which is then multiplied resulting in a change in ________. A) investment; animal spirits; the price level B) business confidence; investment; real GDP C) the Fed's intermediate targets; the Fed's goals; real GDP D) real GDP; income; consumption Answer: B Topic: Keynesian Model Skill: Conceptual Status: Previous edition, Part 4 Review AACSB: Reflective Thinking

12) If the Fed increases the quantity of money, ________ economists believe that the ________. A) Keynesian; aggregate supply curve shifts rightward B) Keynesian; structural deficit increases C) monetarist; cyclical deficit increases D) monetarist; aggregate demand curve shifts rightward Answer: D Topic: The Monetarist Model Skill: Recognition Status: Previous edition, Part 4 Review AACSB: Reflective Thinking 13) Keynesians and monetarists believe that economic fluctuations are caused A) by shifts in both the AS and AD curves. B) largely by shifts in the AD curve. C) changes in the structural deficit. D) by fiscal policy. Answer: B Topic: The Monetarist Model Skill: Conceptual Status: Previous edition, Part 4 Review AACSB: Reflective Thinking 14) The growth rate of productivity is a major feature of A) Keynesian and monetarist economists. B) monetarist economists. C) real business cycle economists. D) why the marginal propensity to consume is less than 1.0. Answer: C Topic: Real Business Cycle Model Skill: Recognition Status: Previous edition, Part 4 Review AACSB: Reflective Thinking 15) Suppose that a severe shock that decreases investment demand hits the United States. Which of the following can we expect to occur according to the real business cycle model? A) The Fed will lower the federal funds rate. B) The structural deficit will increase. C) The real wage rate will rise. D) The real interest rate will fall. Answer: D Topic: RBC Mechanism Skill: Conceptual Status: Previous edition, Part 4 Review AACSB: Reflective Thinking

16) The Keynesian aggregate expenditure model best describes the economy in the ________ run when prices are ________. A) long; fixed B) short; variable C) long; variable D) short; fixed Answer: D Topic: Keynesian Model Skill: Recognition Status: Previous edition, Part 4 Review AACSB: Reflective Thinking 17) The Keynesian aggregate expenditure model focuses on changes in A) the price level. B) real GDP. C) potential GDP. D) the SAS curve. Answer: B Topic: Keynesian Model Skill: Recognition Status: Previous edition, Part 4 Review AACSB: Reflective Thinking 18) The marginal propensity to consume measures A) the cyclical deficit. B) the structural deficit. C) how much consumption expenditure occurs at the equilibrium level of income. D) how much of a change in consumption expenditure results from a change in disposable income. Answer: D Topic: Marginal Propensity to Consume Skill: Recognition Status: Previous edition, Part 4 Review AACSB: Reflective Thinking 19) Suppose disposable income increases from $11 trillion to $12 trillion. At the same time, consumption expenditure increases from $4.2 trillion to ________. Thus the MPC must equal ________. A) $5.0 trillion; 0.50 B) $5.0 trillion; 0.80 C) $4.4 trillion; 0.40 D) $5.5 trillion; 0.50 Answer: B Topic: Marginal Propensity to Consume Skill: Conceptual Status: Previous edition, Part 4 Review AACSB: Analytical Skills 5 Copyright © 2014 Pearson Education, Inc.

20) Which of the following is true? A) The structural deficit changes over the business cycle. B) MPS + MPC = 1. C) At equilibrium expenditure, unplanned changes in inventory must be positive. D) In the real business cycle model, there is no AD curve. Answer: B Topic: Marginal Propensities to Consume and Save Skill: Recognition Status: Previous edition, Part 4 Review AACSB: Reflective Thinking 21) The multiplier effect A) is nonexistent in the Keynesian model. B) has no effect if the cyclical deficit is positive. C) magnifies small changes in spending into larger changes in output and income. D) increases the MPC. Answer: C Topic: The Multiplier Effect Skill: Conceptual Status: Previous edition, Part 4 Review AACSB: Reflective Thinking 22) The presence of imports ________ the size of the ________. A) increases; government budget deficit B) increases; multiplier C) decreases; multiplier D) decreases; government budget deficit Answer: C Topic: The Multiplier and Imports Skill: Conceptual Status: Previous edition, Part 4 Review AACSB: Reflective Thinking 23) Which of the following leads to an rightward shift in the short-run Phillips curve? I. a reduction in inflationary expectations. II. an increase in the natural rate of unemployment. III. an increase in the velocity of circulation A) I only B) II only C) I and II D) I and III Answer: B Topic: The Short-Run Phillips Curve Skill: Conceptual Status: Previous edition, Part 4 Review AACSB: Reflective Thinking 6 Copyright © 2014 Pearson Education, Inc.

Economics, 11e, Global Edition (Parkin) Part 10 Review 1 Macroeconomic Policy 1) Fiscal policy entails changes in A) the quantity of money. B) the MPC. C) government spending and taxes. D) the multiplier. Answer: C Topic: Fiscal Policy Skill: Recognition Status: Previous edition, Part 5 Review AACSB: Reflective Thinking 2) If we compare the United States to France, we see that potential GDP per person in France is ________ than that in the United States because the French ________ is greater than that in the United States. A) greater; tax wedge B) less; structural deficit C) less; tax wedge D) less; MPC Answer: C Topic: Tax Wedge Skill: Conceptual Status: Previous edition, Part 5 Review AACSB: Reflective Thinking 3) A fiscal action that is triggered by the state of the economy is called A) monetarist policy. B) the tax wedge. C) automatic fiscal policy. D) the multiplier. Answer: C Topic: Automatic Fiscal Policy Skill: Recognition Status: Previous edition, Part 5 Review AACSB: Reflective Thinking

4) An example of a fiscal policy designed to decrease real GDP is A) a cut in taxes. B) an increase in taxes. C) an increase in government expenditure. D) None of the above answers is correct. Answer: B Topic: Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 5) A decrease in government expenditures on goods and services is an example of ________. A) a fiscal policy designed to increase real GDP B) decreasing needs-tested spending programs C) increasing induced taxes D) a fiscal policy designed to decrease real GDP Answer: D Topic: Fiscal Policy Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 6) An increase in taxes I. violates the Taylor rule. II. decreases real GDP. III. forces the Fed to change its instruments. A) I only B) II only C) I and III D) I and II Answer: B Topic: Fiscal Policy Skill: Conceptual Status: Previous edition, Part 5 Review AACSB: Reflective Thinking 7) An example of a fiscal policy designed to increase real GDP is A) a cut in taxes. B) an increase in taxes. C) a decrease in government expenditure. D) None of the above answers is correct. Answer: A Topic: Fiscal Policy Skill: Recognition Status: Previous edition, Chapter 13 AACSB: Reflective Thinking 2 Copyright © 2014 Pearson Education, Inc.

8) An economy has real GDP of $300 billion and potential GDP of $240 billion. To move the economy to potential GDP, the government should ________ taxes and/or ________ government expenditure. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Topic: Equilibrium GDP and the Price Level Skill: Conceptual Status: Previous edition, Chapter 13 AACSB: Analytical Skills 9) The crowding out effect refers to A) the presence of the Ricardo-Barro effect. B) how a cyclical budget deficit changes over the business cycle. C) government investment crowding out private investment. D) the wealth effect's impact on the aggregate demand curve. Answer: C Topic: Crowding-Out Effect Skill: Recognition Status: Previous edition, Part 5 Review AACSB: Reflective Thinking 10) The Fed's instruments include A) open market operations. B) the structural budget deficit. C) the Ricardo-Barro effect. D) the federal funds rate base. Answer: D Topic: Policy Instruments Skill: Recognition Status: Previous edition, Part 5 Review AACSB: Reflective Thinking 11) The Laffer curve studies the relationship between A) open market operations and the interest rate. B) taxes and the real interest rate. C) tax rates and tax revenues. D) monetary policy and tax revenues. Answer: C Topic: Laffer Curve Skill: Recognition Status: Previous edition, Part 5 Review AACSB: Reflective Thinking

12) An income tax hike ________ potential GDP by ________. A) increases; not crowding out investment B) decreases; limiting the use of discretionary monetary policy C) increases; offsetting the Barro-Ricardo effect D) decreases; decreasing the supply of labor Answer: D Topic: Income Tax Effects Skill: Conceptual Status: Previous edition, Part 5 Review AACSB: Reflective Thinking 13) If net taxes are less than government outlays, the government sector has a budget ________ and government saving ________. A) surplus; is positive B) deficit; cannot be used for discretionary fiscal policy C) deficit; is negative D) None of the above answers is correct. Answer: C Topic: Government Saving Skill: Conceptual Status: Previous edition, Part 5 Review AACSB: Reflective Thinking 14) The Fed can change the federal funds rate A) lowering taxes. B) increasing spending. C) purchasing government securities. D) increasing aggregate demand. Answer: C Topic: The Fed Skill: Conceptual Status: Previous edition, Part 5 Review AACSB: Reflective Thinking 15) A decrease in the reserves of commercial banks could be the result of A) an increase in the velocity of circulation. B) the sale of government securities by the Federal Reserve. C) a decrease in the velocity of circulation. D) an increase in the required reserve ratio. Answer: B Topic: How an Open Market Operation Works Skill: Conceptual Status: Previous edition, Part 5 Review AACSB: Reflective Thinking

16) If the Fed makes an open market ________ of government securities, the federal funds rate will ________ as the quantity of money ________. A) purchase; rise; increases B) sale; fall; increases C) purchase; fall; decreases D) sale; rise; decreases Answer: D Topic: Monetary Policy Skill: Conceptual Status: Previous edition, Part 5 Review AACSB: Reflective Thinking 17) If the Fed makes an open market ________ of government securities, the federal funds rate ________ and the immediate impact is to shift the aggregate ________ curve. A) purchase; falls; demand B) sale; falls; demand C) sale; rises; supply D) purchase; rises; supply Answer: A Topic: Monetary Policy Skill: Conceptual Status: Previous edition, Part 5 Review AACSB: Analytical Skills 18) If the Fed makes an unexpected open market ________ of government securities, the aggregate ________ curve shifts rightward and ________. A) sale; supply; the short-run Phillips curve shifts upward B) purchase; demand; the short-run Phillips curve shifts downward C) sale; demand; there is a movement along the short-run Phillips curve D) purchase; demand; the long-run Phillips curve shifts rightward Answer: C Topic: Monetary Policy Skill: Conceptual Status: Previous edition, Part 5 Review AACSB: Analytical Skills 19) When the Fed enacts monetary policy, in the short run it changes A) the AD curve. B) the SAS curve. C) both the AD and SAS curves. D) potential GDP. Answer: A Topic: Monetary Policy Skill: Conceptual Status: Previous edition, Part 5 Review AACSB: Analytical Skills 5 Copyright © 2014 Pearson Education, Inc.

20) If the economy is at potential GDP and the Fed makes an open market sale of government securities, in the long run the aggregate ________ curve shifts ________ and the price level ________. A) demand; rightward; rises B) supply; leftward; rises C) demand; leftward; falls D) supply; leftward; falls Answer: C Topic: Monetary Policy Skill: Conceptual Status: Previous edition, Part 5 Review AACSB: Analytical Skills 21) If the economy is at potential GDP and the Fed makes an open market purchase of government securities, in the short run bank reserves ________, the nominal interest rate ________, and the aggregate demand curve ________. A) stay constant; does not change; does not shift B) increase; rises; shifts rightward C) decrease; falls; shifts rightward D) increase; falls; shifts rightward Answer: D Topic: Monetary Policy Skill: Conceptual Status: Previous edition, Part 5 Review AACSB: Analytical Skills 22) If the Fed is concerned with lowering ________ it will make an open market ________ of government securities, which will shift aggregate demand curve ________. A) inflation; sale; leftward B) unemployment; sale; leftward C) inflation; purchase; rightward D) unemployment; purchase; leftward Answer: A Topic: Monetary Policy Skill: Conceptual Status: Previous edition, Part 5 Review AACSB: Analytical Skills

23) If the Fed is concerned with lowering ________ it will make an open market ________ of government securities, which will ________ real GDP. A) unemployment; sale; increase B) inflation; purchase; decrease C) inflation; sale; decrease D) unemployment; sale; decrease Answer: C Topic: Monetary Policy Skill: Conceptual Status: Previous edition, Part 5 Review AACSB: Reflective Thinking 24) Which of the following is true? I. The quantity theory predicts that in the long run the inflation rate equals the money growth rate minus the growth rate of potential GDP. II. If the Fed decreases the federal funds rate, aggregate demand increases. III. The Fed's monetary policy works by shifting the short-run aggregate supply curve. A) I and II B) II and III C) I and III D) I, II and III Answer: A Topic: Monetary Policy Skill: Conceptual Status: Previous edition, Part 5 Review AACSB: Reflective Thinking 25) ________ occurs when a foreign firm sells its exports at a lower price than its cost of production. A) A quota B) Dumping C) A tariff D) A nontariff barrier Answer: B Topic: Trade Skill: Recognition Status: New 10th edition AACSB: Reflective Thinking