TEST BANK For Essential Foundations of Economics 8th Edition By Robin Bade Michael Parkin by welldoneassistant

Essential Foundations of Economics, 8e (Bade) Chapter 1 Getting Started 1.1 Definition and Questions 1) Scarcity exists because A) human wants exceed the resources available to satisfy them. B) some individuals have low income. C) the costs of production are high. D) some people make bad economic decisions. E) people take too much leisure time. Answer: A Topic: Scarcity Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

2) Scarcity A) is the inability to satisfy all our wants. B) leads to higher prices. C) applies only to people living in poverty. D) is not something that affects very rich people. E) used to exist everywhere but has been eliminated in advanced economies. Answer: A Topic: Scarcity Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

3) Scarcity requires that we A) produce efficiently. B) learn to limit our wants. C) have the most rapid economic growth possible. D) have unlimited resources. E) make choices about what goods and services to produce. Answer: E Topic: Scarcity Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

4) Scarcity means that A) what we can produce with our resources is greater than our material wants. B) resources are unlimited. C) wants are greater than what we can produce with our resources. D) governments must make up for shortages in resources. E) choices made in self-interest cannot be the same as those made in the social interest. Answer: C Topic: Scarcity Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Revised AACSB: Reflective thinking

5) Because human wants are insatiable and unlimited while available resources are limited, people are said to face the problem of A) scarcity. B) why to produce. C) macroeconomics. D) microeconomics. E) social interest versus self-interest. Answer: A Topic: Scarcity Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

6) Which of the following statements best describes the study of economics? Economics studies how A) to organize production so that scarcity does not occur. B) firms make profits. C) we make choices in the face of scarcity. D) to create incentives so that scarcity does not exist. E) businesses reach decisions. Answer: C Topic: Scarcity Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

7) Scarcity forces people to A) choose among available alternatives. B) cheat and steal. C) be unwilling to help others. D) live at a low standard of living. E) consume as much as they can as quickly as they can. Answer: A Topic: Scarcity Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

8) Scarcity means we must A) consume less. B) produce less. C) make choices. D) earn more. E) work more. Answer: C Topic: Scarcity Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

9) What is the reason that all economic issues and problems occur? A) All nations use some form of money to buy and sell goods and services. B) Humans are always wasteful and inefficient in production and consumption. C) Powerful governments are able to control production and consumption. D) Human wants exceed the resources available to satisfy them. E) People seek only their own self-interest. Answer: D Topic: Scarcity Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

10) The study of economics is best described as a study of A) the factors that influence the stock and bond markets. B) capitalism. C) the choices made in producing goods and services. D) coping with scarcity, and choices made as a result of scarcity in a society. E) how people earn a living. Answer: D Topic: Definition of economics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

11) Which of the following statements best describes the study of economics? Economics studies how A) to organize production so that scarcity does not occur. B) firms make profits. C) we make choices in the face of scarcity. D) to create incentives so that scarcity does not exist. E) businesses reach decisions. Answer: C Topic: Definition of economics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

12) Which of the following best defines economics? A) Economics teaches how to limit our wants. B) Economics studies how to choose the best alternative when coping with scarcity. C) Economics helps you earn as much money as possible. D) Economics analyzes all aspects of human behavior in general. E) Economics is concerned with prices and quantities of goods and services, both at the individual level and at the industry level. Answer: B Topic: Definition of economics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

13) Economics is the social science that studies A) the real reasons people buy goods and services. B) the psychology of individuals and businesses. C) whether a nation has enough natural resources. D) how people make choices to cope with scarcity. E) how choices made in the social interest could eliminate scarcity. Answer: D Topic: Definition of economics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

14) Economics is best defined as the social science that studies A) how a person can get everything he or she wants. B) the reason money exists. C) the way to eliminate choices in our decisions. D) the choices that societies, and the people and institutions that make up societies, make in dealing with the issue of scarcity. E) how choices made in the social interest must conflict with choices made in the self-interest. Answer: D Topic: Definition of economics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

15) Microeconomics includes the study of the A) aggregate effects on the national economy. B) recessions and inflation in the global economy. C) choices made by individuals and businesses. D) reasons why the government changes interest rates. E) nationwide unemployment rate. Answer: C Topic: Microeconomics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

16) The primary focus of microeconomics is A) to examine the operation of the entire (aggregate) economy. B) to examine the behavior and operation of the individual units or sectors that make up the economy. C) our government's monetary policy. D) the levels of employment and inflation. E) to study how we managed to eliminate scarcity. Answer: B Topic: Microeconomics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

17) Which of the following is a microeconomic issue? A) The price of gasoline increases in the United States this year. B) The Brazilian economy experiences rapid economic growth. C) The unemployment rate soars in Spain. D) Inflation skyrockets in Russia. E) The U.S. government cuts taxes to combat a recession. Answer: A Topic: Microeconomics Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

18) Which of the following is a microeconomic issue? A) Growth in the U.S. economy slowed. B) Increased federal government expenditures have lowered the unemployment rate. C) The inflation rate fell this year. D) The quantity of wheat grown in the United States increases this year. E) The U.S. government cuts taxes to combat a recession. Answer: D Topic: Microeconomics Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

19) Which of the following is a microeconomic topic? i. K-Mart's decision to close stores that are not making a profit ii. Home Depot's choice to hire more full-time employees because its sales increased iii. Delta Airlines changes its fares. A) i only B) ii only C) i and iii D) ii and iii E) i, ii, and iii Answer: E Topic: Microeconomics Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

20) Which of the following is a microeconomic topic? A) Northwest Airlines analyzes the benefits of adding one more flight to Salt Lake City. B) Unemployment soars as taxes increase. C) The government leaves interest rates unchanged as the economy improves. D) Germany's government increases taxes to avoid a budget deficit. E) Chinese economic growth slows. Answer: A Topic: Microeconomics Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

21) Which of the following is a microeconomic topic? i. Gas prices increase after a hurricane hits the gulf coast. ii. Xavier starts a new business designing web pages. iii. Abby decides to practice an extra hour of soccer instead of studying. A) i, ii and iii B) i only C) ii and iii D) ii only E) i and ii Answer: A Topic: Microeconomics Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

22) Macroeconomics is the study of A) the actions of individual consumers. B) national or global economies. C) the actions of individual businesses. D) the government. E) how ceteris paribus affects causation. Answer: B Topic: Macroeconomics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

23) Which of the following BEST describes macroeconomics? A) It analyzes the aggregate effects on the national economy of the choices made by individuals, firms, and governments. B) It studies the choices that individuals and businesses make when coping with scarcity. C) It examines how the choices that individuals affect governments. D) It is not a social science because its predictions cannot be tested. E) Proving causation is never a problem for macroeconomics. Answer: A Topic: Macroeconomics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

24) Which of the following is a topic studied in macroeconomics? A) the pricing decisions in the computer hardware industry B) the effect on economic growth if the government raises taxes C) how the wheat industry determines how much wheat to grow D) the impact of labor unions on wages E) the impact of higher prices for gasoline on the number of SUVs people buy Answer: B Topic: Macroeconomics Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

25) Which of the following is a macroeconomic topic? A) The federal government's decision to spend more on environmental protection B) The county government's decision to increase the sales tax for your county C) Why did production and jobs expand slowly in 2011? D) General Motors decides what prices to set for their new models. E) The effect of floods in agricultural areas on the price and quantity of wheat Answer: C Topic: Macroeconomics Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Revised AACSB: Reflective thinking

26) Which of the following is a macroeconomic issue? A) The price of a ticket to Walt Disney World in Orlando is increased. B) The National Football League signs a new television contract. C) The number of jobs and production in Zimbabwe increase. D) The Iowa corn harvest is smaller than normal. E) Utilities are required to install more anti-pollution devices. Answer: C Topic: Macroeconomics Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

27) Which of the following is a macroeconomic topic? i. China increases interest rates to slow its economic growth. ii. Congress lowers tax rates to try and lower the unemployment rate. iii. Nissan decides to produce more electric Leaf models and fewer Altima sedans. A) i and ii B) i, ii and iii C) iii only D) i and iii E) ii and iii Answer: A Topic: Macroeconomics Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

28) When you make the decision to spend your time attending class, which economic question are you answering? A) What? B) How? C) For whom? D) Why? E) Is this in the social interest? Answer: A Topic: Economic questions, what Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

29) Which of the following is the best example of a "What?" question? A) Should automobiles be produced using workers or robots? B) Should higher-income or lower-income people buy SUVs? C) Should we make faster microprocessors or pest-resistant corn? D) Should migrant workers or domestic workers be used to pick grapes? E) What should doctors be paid? Answer: C Topic: Economic questions, what Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

30) When Ford decides to increase production of hybrid cars, it directly answers the ________ question. A) what B) how C) for whom D) where E) why Answer: A Topic: Economic questions, what Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

31) When Delta decides to quit flying to Lithuania, it directly answers the ________ question. A) what B) why C) for whom D) how E) when Answer: A Topic: Economic questions, what Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

32) The question of "What goods and services get produced?" most closely relates to which of the following issues? A) the distribution of goods and services in the economy B) producing goods and services in the least costly manner C) building a missile defense system, or putting a computer in every elementary school classroom D) obtaining specialized training to increase one's income E) taxing high income workers to give payments to poor households Answer: C Topic: Economic questions, what Skill: Level 3: Using models Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

33) When a home builder decides to computerize all of its production schedule, it directly answers the ________ question. A) for whom B) what C) where D) how E) why Answer: D Topic: Economic questions, how Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

34) When Fresh Express Salads decides to mechanically pick all of its lettuce, it directly answers the ________ question. A) what B) how C) for whom D) where E) when Answer: B Topic: Economic questions, how Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

35) When the power company decides to use manpower to bury its lines, it directly answers the ________ question. A) what B) for whom C) how D) why E) when Answer: C Topic: Economic questions, how Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

36) The question of "How are goods and services produced?" most closely addresses which of the following issues? A) Should Ford build SUVs or luxury cars? B) Should Ford use expensive industrial robots or inexpensive Mexican autoworkers to produce SUVs? C) Should contractors build residential housing or shopping malls? D) Is income distributed fairly in the United States? E) Why are Christmas trees popular only in December? Answer: B Topic: Economic questions, how Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Revised AACSB: Reflective thinking

37) Of the three major economic questions, which of the following is the best example of a "How?" question? A) Should we produce more heavy fleece coats? B) Should we collect tolls on turnpikes using human toll collectors or mechanized toll machines? C) Should we build log homes or build factories from bricks? D) Should we spend more on health care? E) Should we eat more oatmeal? Answer: B Topic: Economic questions, how Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

38) Which economic question depends on the incomes that people earn and the prices they pay for goods and services? A) What? B) How? C) For whom? D) Why? E) Where? Answer: C Topic: Economic questions, for whom Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

39) When the federal government decides to pay senators more than it pays soldiers, it answers the ________ question. A) why B) how C) for whom D) what E) where Answer: C Topic: Economic questions, for whom Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

40) When a third string NFL quarterback earns more than a police officer, society answers the ________ question. A) for whom B) what C) how D) why E) social interest vs. self-interest Answer: A Topic: Economic questions, for whom Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

41) When unskilled teens earn less than college graduates, society answers the ________ question. A) how B) what C) for whom D) why E) social interest versus self-interest Answer: C Topic: Economic questions, for whom Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

42) Canada has nationalized health care, so that everyone, regardless of their ability to pay, has some access to health care. Based on this observation, Canada has decided that "everyone, regardless of their ability to pay" is the answer to what microeconomic question? A) What type of health care will be produced and in what quantity? B) How will health care be produced? C) For whom will health care be produced? D) Why will we offer health care? E) Must we offer health care? Answer: C Topic: Economic questions, for whom Skill: Level 3: Using models Section: Checkpoint 1.1 Status: Old AACSB: Analytical thinking

43) Choices that are best for the individuals that make them are choices in pursuit of A) the social interest. B) efficiency. C) incentives. D) self-interest. E) equity. Answer: D Topic: Self interest Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

44) Self-interest A) reflects choices that are best for society as a whole. B) reflects choices that are best for the individual who makes them. C) has nothing to do with determining what goods are produced. D) occurs only when wants exceed available resources. E) cannot be used to determine how goods are produced. Answer: B Topic: Self interest Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

45) Choices that are best for the society as a whole are choices in pursuit of A) answering the "how" question. B) the social interest. C) self-interest. D) incentives. E) answering the "for whom" question. Answer: B Topic: Social interest Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

46) The characteristic from which all economic problems arise is A) political decisions. B) providing a minimal standard of living for every person. C) how to make a profit. D) hunger. E) scarcity. Answer: E Topic: Scarcity Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

47) All economic questions and problems arise from A) the fact that society has more than it needs. B) turmoil in the stock market. C) the unequal distribution of income. D) a society's wants exceeding what its scarce resources can produce. E) the difference between self-interest and social interest. Answer: D Topic: Scarcity Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

48) Scarcity results from the fact that A) people's wants exceed the resources available to satisfy them. B) not all goals are desirable. C) we cannot answer the major economic questions. D) choices made in self-interest are not always in the social interest. E) the population keeps growing. Answer: A Topic: Scarcity Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Revised AACSB: Reflective thinking

49) To economists, scarcity means that A) limited wants cannot be satisfied by the unlimited resources. B) a person looking for work is not able to find work. C) the number of people without jobs rises when economic times are bad. D) there can never be answers to the what, how or for whom questions. E) unlimited wants cannot be satisfied by the limited resources. Answer: E Topic: Scarcity Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

50) Which of the following statements is true regarding scarcity? A) Scarcity affects poorer countries only. B) An economy experiences scarcity only when the incomes of its citizens decline. C) Poor people experience scarcity more often than do rich people. D) All citizens in a wealthy economy experience scarcity. E) Scarcity could be overcome if people would make all choices in the social interest. Answer: D Topic: Scarcity Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

51) People must make choices because A) most people enjoy shopping. B) of scarcity. C) there are many goods available. D) the question "What goods and services are produced?" is not adequately answered. E) making choices is in the social interest. Answer: B Topic: Scarcity Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

52) Which of the following is a microeconomic issue? A) Why has unemployment risen nationwide? B) Why has economic growth been rapid in China? C) What is the impact on the quantity of Pepsi purchased if consumers' tastes change in favor of noncarbonated drinks? D) Why is the average income lower in Africa than in Latin America? E) Why did overall production increase within the United States last year? Answer: C Topic: Microeconomics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

53) Microeconomics includes the study of A) how countries decide to fund their budget deficits. B) the choices that individuals and businesses make. C) how a nation promotes economic growth. D) the effect on the national economy of the choices that individuals make. E) the overall amount of production within the economy. Answer: B Topic: Microeconomics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

54) The question "Should we produce LCD televisions or computer monitors?" is an example of a ________ question. A) what B) how C) for whom D) where E) why Answer: A Topic: Economic questions, what Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

55) When Ferrari decides to produce 1,200 360 Modenas each year, Ferrari is answering the ________ question. A) for whom B) how C) what D) why E) scarcity Answer: C Topic: Economic questions, what Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

56) Whether a company produces fishing rods mostly by hand or using high-tech machinery is a question of A) "For whom will goods be produced?" B) "When will the goods be produced?" C) "Where will the goods be produced?" D) "How will the goods be produced?" E) "Why will the goods be produced?" Answer: D Topic: Economic questions, how Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

57) When a landscaping company decides to use drafting software and computers instead of hiring designers to draw design plans by hand, it is answering the ________ question. A) how B) what C) for whom D) opportunity cost E) why Answer: A Topic: Economic questions, how Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

58) The question "Should we produce houses using bricks or wood?" is an example of a ________ question. A) what B) how C) for whom D) where E) why Answer: B Topic: Economic questions, how Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

59) The question "Should economics majors or sociology majors earn more after they graduate?" is an example of a ________ question. A) what B) how C) for whom D) where E) why Answer: C Topic: Economic questions, for whom Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

60) If a decision is made and it is the best choice for society, the decision is said to be A) a valid economic choice. B) made in self-interest. C) made in social interest. D) consist with scarcity. E) a want-maximizing choice. Answer: C Topic: Social interest Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

1.2 The Economic Way of Thinking 1) Rational choice A) is a choice that uses the available resources to best achieve the objective of the person making the choice. B) is always efficient. C) is what you must give up to get what you want. D) is made by comparing different incentives. E) provides the answer to only the "how" question. Answer: A Topic: Rational choice Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

2) A rational choice is one that A) always turns out for the best for the decision maker. B) creates no costs for the decision maker. C) must be made with perfect information. D) uses the available resources to most effectively satisfy the wants of the person making the choice. E) is made in the social interest rather than the self-interest. Answer: D Topic: Rational choice Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

3) What is NOT true about rational choice? A) It can result in different decisions for different individuals. B) It involves comparing costs and benefits. C) It might turn out not to have been the best choice after the event. D) It is a choice that uses the available resources to best achieve the objective of the person making the choice. E) It is the same for all individuals. Answer: E Topic: Rational choice Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

4) In economics, cost is measured as ________, and benefit is measured as ________. A) what you must give up to get something; what you are willing to give up to get it B) what you are willing to give up to get it; what you must give up to get something C) the amount of money that you pay for something; the amount of money that someone else is willing to pay you D) what you are willing to pay on the margin; what the government pays you when you are unemployed or retired E) the amount of money that you pay on the margin; the amount of money that you receive on the margin Answer: A Topic: Benefits and costs Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

5) An opportunity cost is A) the dollar amount that is paid. B) anything the decision maker believes costs to be. C) the benefits of the highest-valued alternative forgone. D) whatever is paid out and cannot be reduced or reversed. E) another term for all the sunk costs. Answer: C Topic: Opportunity cost Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

6) Economists measure opportunity cost A) only when it is on the margin. B) as the best thing given up. C) as the sum of all forgone opportunities. D) as the same as marginal benefit. E) as equal to the sum of all the sunk costs. Answer: B Topic: Opportunity cost Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

7) The opportunity cost of a decision is measured in terms of A) time. B) the price of the alternative we choose. C) the next best thing given up. D) the price of a new opportunity that arises. E) sunk cost. Answer: C Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

8) You have chosen to take a trip during spring break. If you had not gone, you would either have worked at a temporary job or studied for exams. The opportunity cost of your trip is A) the wages you would have earned from working. B) the lower grade earned by not studying. C) the wages you would have earned from working and the lower grade earned by not studying. D) the value of the trip. E) We cannot determine what the opportunity cost is without knowing which alternative, working or studying, you would have preferred. Answer: E Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

9) If Jessie studies economics for two hours instead of going to the movies with her friends, then A) the benefit of studying is the missed movie. B) the opportunity cost of studying is the missed movie. C) Jesse definitely is making a rational choice. D) Jessie is ignoring a sunk cost. E) Jessie is not responding to any incentives. Answer: B Topic: Making rational choices Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

10) The value of the best thing that a person must give up when making a decision is known as the ________ cost. A) direct B) benefit's C) opportunity D) explicit E) sunk Answer: C Topic: Opportunity cost Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

11) Ali decides to attend the one-hour review session for microeconomics instead of working at his job. His job pays him $10 per hour. Ali's opportunity cost of attending the review session is A) the $10 he could have earned at his job. B) the value of the session minus the $10 he could have earned at his job. C) nothing, because the review session does not cost anything. D) equal to the benefit he gets from the review session. E) the one-hour review session. Answer: A Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Analytical thinking

12) Suppose that, instead of taking this test, you could either have worked and earned income or partied and had a pleasurable time. Your opportunity cost of taking the test is the A) forgone work. B) forgone party. C) forgone working and partying. D) forgone working or partying, depending on which was your next best choice. E) test because you are taking it. Answer: D Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

13) The benefit from a good or service that you purchase is measured by A) the dollar amount that is paid for the good or service. B) the dollar amount you can get by selling the good or service. C) what you are willing to give up to obtain the good or service. D) how strong the incentives were that lead to buying the good or service. E) None of the above answers is correct because there is no way to measure the benefit you receive from purchasing a good or service. Answer: C Topic: Benefit Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

14) Suppose you take a trip during spring break. To determine the benefit of taking the trip, you A) calculate the opportunity cost of the trip. B) measure what you are willing to give up to take the trip. C) determine the sunk cost of taking the trip. D) calculate the value of the next best alternative foregone. E) must measure what the trip is worth to you and then subtract the cost of the trip. Answer: B Topic: Benefit Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

15) The cost of a one-unit increase in an activity is called the A) opportunity benefit. B) rational cost. C) marginal cost. D) marginal benefit. E) margin. Answer: C Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

16) The opportunity cost of a one-unit increase in an activity A) is greater than the marginal benefit. B) is called rational cost. C) decreases as you do more of it. D) is called marginal cost. E) is measured by what the person is willing to give up to get one more unit of the activity. Answer: D Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

17) Mothers Against Drunk Drivers (MADD) campaigned to increase the legal penalties of drunk driving. This successful campaign ________ of drunk driving. A) increased the marginal benefit B) decreased the marginal benefit C) increased the marginal cost D) decreased the marginal cost E) had no effect on the marginal cost or marginal benefit but did affect the total benefit Answer: C Topic: Marginal cost Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

18) The marginal cost of an activity ________ as you do more of it. A) increases B) decreases C) doesn't change D) changes only if the marginal benefit of the activity does not change E) changes only if the marginal benefit of the activity changes Answer: A Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

19) A professor changes the penalty for cheating on exams from getting a 0 on the exam to getting an F in the course. The professor has A) increased the marginal cost of cheating. B) decreased the marginal benefit of cheating. C) made all the students act in the social interest. D) recognized that students don't respond to incentives. E) recognized that students don't make rational choices. Answer: A Topic: Marginal cost Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

20) The benefit of a one-unit increase in an activity A) is called marginal cost. B) is always greater than the opportunity cost of that activity. C) decreases as you do more of it. D) is measured by what you must give up. E) is called rational-choice benefit. Answer: C Topic: Marginal benefit Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

21) Huey has eaten two hamburgers and is considering a third. The marginal benefit in his decision is the pleasure from consuming A) the two previous hamburgers. B) all three hamburgers. C) just the third hamburger. D) just the second hamburger. E) the third hamburger minus the pleasure from consuming zero hamburgers. Answer: C Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Analytical thinking

22) What typically happens to benefits as the amount of an activity is increased? A) Total benefits remain constant. B) Marginal benefit increases. C) Marginal benefit remains constant. D) Marginal benefit decreases. E) The marginal benefit changes only if the marginal cost changes. Answer: D Topic: Marginal benefit Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

23) Suppose you eat two hamburgers for lunch. The marginal benefit of the first burger is ________ of the second burger. A) larger than the marginal benefit B) smaller than the marginal benefit C) equal to the marginal benefit D) not related to the marginal benefit E) equal to the marginal cost and the marginal benefit Answer: A Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Analytical thinking

24) A choice made by comparing all relevant alternatives systematically and incrementally is A) an opportunity cost. B) a choice on the margin. C) a benefit. D) a sunk cost. E) a choice made in the social interest. Answer: B Topic: On the margin Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

25) Making choices on the margin means A) scribbling on the edges of your notebook paper. B) comparing all relevant alternatives systematically and incrementally. C) making a decision based on emotions. D) making decisions in the largest possible increments. E) taking account of all marginal benefits, all opportunity costs, and all sunk costs. Answer: B Topic: On the margin Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

26) Decision making on the margin involves A) comparing the marginal cost and marginal benefits when making a decision. B) comparing the total cost and the total benefit when making a decision. C) eliminating the additional cost when making a decision. D) determining the total benefits of a decision. E) comparing the benefits from the social interest to the benefits from the person's self-interest. Answer: A Topic: On the margin Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

27) In making your decision whether to take a trip during spring break, you compare all the other activities you could undertake. As a result, you A) are making a choice on the margin. B) limit the cost and the benefits you can gain. C) are not making a rational choice. D) do not face an opportunity cost. E) must have made a choice in the social interest. Answer: A Topic: On the margin Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

28) To make a rational choice, a person A) compares the extra benefits of one more unit to the extra costs of one more unit. B) adds the total benefits and the total costs and then compares the two totals. C) adds the total benefits to determine if the total is large enough. D) adds the total costs to determine if the total is small enough. E) takes account of all benefits and all opportunity costs, including both marginal costs and sunk costs. Answer: A Topic: Making rational choices Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

29) In order to determine whether to major in economics, a rational individual compares the ________ of the decision. A) marginal benefit and marginal cost B) opportunity cost and the sunk cost C) positive benefits and normative costs D) normative benefits and positive costs E) self-interest and social-interest Answer: A Topic: Making rational choices Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

30) In order to make a rational choice, people must A) only know what they want. B) be able to afford the choice decided upon. C) decide quickly without wasting time. D) compare marginal costs and marginal benefits. E) determine what is in the social interest. Answer: D Topic: Making rational choices Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

31) Instead of studying for an additional two hours for the economics final, Leann decides to watch a movie. Leann is making A) a decision that does not involve an opportunity cost. B) a rational decision if her marginal cost from the movie is greater than her marginal benefit. C) a rational decision if her marginal benefit from the movie is greater than her marginal cost. D) an irrational decision because studying is more important than watching a movie. E) a decision that is not on the margin because she will see the entire movie. Answer: C Topic: Making rational choices Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

32) When Gabriel made a rational choice to spend his entire allowance on candy bars, he did so by comparing the A) benefits of the candy bars to the desires he had for the candy bars. B) marginal benefits of the candy bars to the marginal costs of the candy bars. C) opportunity costs of the candy bars to the scarcity of the candy bars. D) benefits of the candy bars to the scarcity candy bars. E) self-interest to the social interest. Answer: B Topic: Making rational choices Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

33) As part of its proposal to win the 2012 Olympics, London developed a carbon offset plan to reduce the Games' impact on the environment. In 2011, the organizers decided to drop this plan to reduce emissions. We can conclude that A) the marginal cost of reducing emissions exceeded the marginal benefits of reducing emissions. B) the organizers are not making a rational decision. C) the organizers are ignoring a sunk cost. D) there are no incentives to reduce carbon emissions. E) it is difficult to calculate the cost of reducing emissions. Answer: A Topic: Making rational choices Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

34) Going skiing will cost Adam $80 a day. He also loses $40 per day in wages because he has to take time off from work. Adam still decides to go skiing. A) His decision is rational if Adam's marginal benefit of spending a day skiing is greater than his marginal cost. B) The $80 price of skiing is not an opportunity cost and so did not affect Adam's decision. C) He loses a total of $120 per day, so his decision is irrational. D) Adam's lost $40 per day in wages is not an opportunity cost and so did not affect his decision. E) Adam is definitely making a decision that is in the social interest. Answer: A Topic: Making rational choices Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

35) The decision to go to graduate school is a rational one for a college student if the A) cost is not too great. B) marginal cost exceeds the marginal benefit of graduate school. C) marginal benefit of graduate school exceeds the marginal cost. D) opportunity cost of graduate school equals zero. E) student carefully compared the social benefits of this decision. Answer: C Topic: Making rational choices Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

36) An incentive is A) an inducement to take a particular action. B) the marginal cost of some course of action. C) the marginal benefit of some course of action. D) the net gain of some course of action. E) a constraint that society imposes on those who make self-interested choices. Answer: A Topic: Incentives Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

37) An incentive is A) a reward or a penalty that encourages or discourages an action. B) when people make rational choices by comparing costs and benefits. C) what you must give up to get something. D) a choice is made on the margin. E) a good or service that satisfies wants. Answer: A Topic: Incentives Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

38) A change in a marginal benefit or cost will A) increase consumption. B) decrease production. C) cause an individual to make a rational choice. D) increase sunk costs. E) change incentives. Answer: E Topic: Incentives Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

39) Proponents of cuts in income tax rates argue that when income tax rates are cut, workers have an incentive to increase their work hours. This argument is based on the assumption that A) workers are irrational. B) workers make decisions based on the marginal benefit of each hour worked compared to the marginal cost of work. C) the opportunity cost of working is negative. D) the marginal cost of each additional work hour is not important to most workers. E) workers make decisions based on the social interest. Answer: B Topic: Incentives Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

40) Your economics professor offers 10 points extra credit if you attend a review session before your next exam. This extra credit is an example of A) a decrease in marginal benefit to attend the review session. B) an increase in marginal cost to attend the review session. C) a rational choice. D) an incentive to attend the review session. E) None of the above answers is correct. Answer: D Topic: Incentives Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

41) If the marginal benefit of getting a college degree rises, rational people will A) attend college in greater numbers. B) drop out of college. C) not change their behavior. D) require that college get easier. E) raise the marginal cost of attending college. Answer: A Topic: Incentives Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

42) Correlation means A) "after this, therefore because of this." B) other things remaining the same. C) a natural experiment has been conducted. D) the tendency for the values of two variables to move in a predictable and related way. E) "on the margin." Answer: D Topic: Correlation Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

43) Correlation means A) holding everything else constant. B) after this, therefore because of this. C) the values of two variables move in a predictable and related way. D) making statements about how the world should be. E) the same as causation. Answer: C Topic: Correlation Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

44) In examining two variables, we find that as one variable changes, the other changes. These variables are said to be A) independent. B) correlated. C) statistics. D) significantly related. E) casually related. Answer: B Topic: Correlation Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

45) When economists use the term "correlation," they are referring to A) cause and effect relationships between variables. B) how two variables move together in a predictable way. C) positive economics. D) normative economics. E) economic policy. Answer: B Topic: Correlation Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

46) The tendency for the values of two variables to move in a predictable and related way is known as A) a natural experiment. B) a normative relationship. C) an economic model. D) correlation. E) a policy relationship. Answer: D Topic: Correlation Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

47) A positive statement i. makes a statement about how the world operates. ii. is a true statement. iii. can be tested against the facts. A) i and ii B) i and iii C) ii and iii D) i, ii and iii E) i only Answer: B Topic: Positive statements Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

48) Which of the following is a positive statement? A) An increase in college tuition is not fair to students. B) A recession leads to higher enrollments at universities. C) University bookstore prices are too high. D) Parking tickets on campus impose an excessive fee. E) The school needs more parking for students. Answer: B Topic: Positive statements Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

49) The statement that "increases in the tax on gasoline increase the price of gasoline" is an example of a A) normative statement. B) positive statement. C) macroeconomic statement. D) rational-decision statement. E) marginal statement. Answer: B Topic: Positive statements Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

50) "Lower ticket prices would lead to more people attending ballgames." This statement is a A) statement assessing the social interest versus the private interest. B) normative statement. C) positive statement. D) macroeconomic statement. E) statement that confuses marginal cost and sunk cost. Answer: C Topic: Positive statements Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

51) A statement that argues that "if taxes on gasoline increase, gasoline consumption will decrease" is an example of what kind of statement? A) a marginal statement B) a macroeconomic statement C) a normative statement D) a positive statement E) a statement that violates rational choice Answer: D Topic: Positive statements Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

52) Which of the following statements is a positive statement? A) Our country must increase military spending. B) There should be a computer in every elementary school classroom. C) We need to spend less on luxury items for the wealthy, and more on necessities for the less fortunate. D) Online shopping increased by 50 percent this Christmas season. E) Too many people are unemployed. Answer: D Topic: Positive statements Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

53) Which of the following is an example of a positive economic statement? A) Voter ID laws should be strictly enforced in all states. B) Illegal immigration is the biggest threat to national security that we face today. C) Medicare recipients should only be allowed to visit a doctor for non-emergency reasons on Mondays, Wednesdays, and Fridays. D) The death penalty is a strong deterrent to violent criminal activity. E) The Affordable Care Act should be repealed. Answer: D Topic: Positive and normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: New AACSB: Reflective thinking

54) Increasing income tax rates will solve the "Social Security time bomb issue" is an example of A) business economic policy. B) a positive economic statement. C) marginal cost exceeding marginal benefit. D) answering the "how" question. E) globalization. Answer: B Topic: Positive statements Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

55) Which of the following is a positive statement? A) The rich should pay more in taxes. B) Everyone should have some knowledge of economics. C) Taxes on gasoline should be lower so that gasoline is more affordable to the poor. D) If we reduce welfare payments given to the poor, they will find jobs. E) Social Security must be reformed. Answer: D Topic: Positive statements Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

56) Normative statements i. describe how the world is. ii. describe how the world ought to be. iii. depend on people's values and cannot be tested. A) i only. B) ii only. C) iii only. D) ii and iii. E) i and iii. Answer: D Topic: Normative statements Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

57) A normative statement A) depends on someone's values. B) cannot use the word "should." C) says what is currently believed about the way the world operates. D) must be tested to determine if it is correct. E) can be tested to determine if it is correct. Answer: A Topic: Normative statements Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

58) The important characteristic of normative statements is that they A) explain what really exists. B) are based on somebody's values and cannot be tested. C) explain what normally happens in the real world. D) help guide us to what will normally occur if some economic variable changes its value. E) do not use the ceteris paribus assumption. Answer: B Topic: Normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

59) A normative statement i. can be tested as to whether it is true or false. ii. is considered negative. iii. depends on a person's values. A) i only B) iii only C) i and iii D) ii and iii E) i, ii, and iii Answer: B Topic: Normative statements Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

60) Which of the following is a normative statement? A) Flood victims should pay for their own rebuilding. B) When the price of kiwi fruit increases, fewer people eat kiwi fruit. C) An increase in the supply of computers has caused computer prices to fall. D) Recessions lead to increases in the unemployment rate. E) Hurricanes strike mainly Florida and North Carolina. Answer: A Topic: Normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

61) Which of the following is an example of a normative economic statement? A) Universal access to quality health insurance is the most important domestic policy issue of our time. B) Extending the time in which laid-off workers are eligible to receive government unemployment compensation has increased the unemployment rate. C) Lowering marginal income tax rates depresses consumer spending. D) Prices rise when the government prints too much money. E) Interest rates rise when the government runs persistent budget deficits. Answer: A Topic: Normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: New AACSB: Reflective thinking

62) A statement that "All children should receive free health care" is an example of what kind of statement? A) a fair statement B) a natural experiment statement C) a normative statement D) a positive statement E) a statement on the margin Answer: C Topic: Normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

63) Which of the following statements is a normative statement? A) Inflation has been at an all-time low this year. B) The minimum wage should be increased to $8.50 per hour. C) Unemployment this month has increased by less than 0.5 percentage point. D) Additional spending on education has not produced any rise in test scores. E) Pepsi is less expensive than Coke this week. Answer: B Topic: Normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

64) Which of the following is an example of a normative statement? A) If cars become more expensive, fewer people will buy them. B) Car prices should be affordable. C) If wages increase, firms will fire some workers. D) Fewer people die in larger cars than in smaller cars. E) Cars emit pollution. Answer: B Topic: Normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

65) Which of the following statements is a normative statement? A) Every American household should have health care insurance coverage. B) Military spending as a percent of government spending decreased by 5 percent in the 1990s. C) Welfare reform has decreased the amount the government spends on welfare. D) The price of computers fell last year. E) Fewer people are unemployed this year than last year. Answer: A Topic: Normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

66) Congress and the President passed a national health care policy. This is an example of A) the government using economic tools to make policy decisions. B) answering the "how" question. C) increasing the marginal cost of health care. D) increasing the marginal benefit of health care. E) normative versus positive economics. Answer: A Topic: Government economic policy Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

67) Opportunity cost is best defined as A) how much money is paid for something. B) how much money and time it takes to consume something. C) the value of the highest-valued alternative that is forgone in making a choice. D) the total of all other alternatives that are forgone in making a choice. E) the sunk cost of any decision. Answer: C Topic: Opportunity cost Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

68) John has two hours of free time this evening. He ranked his alternatives, first go to a concert, second go to a movie, third study for an economics exam, and fourth answer his e-mail. What is the opportunity cost of attending the concert for John? A) attending a movie B) studying for an economics exam C) answering his e-mail D) attending a movie, studying for an economics exam, and answering his e-mail E) going to the concert because that is what John choose to do Answer: A Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Analytical thinking

69) Jamie has enough money to buy either a Mountain Dew, or a Pepsi, or a bag of chips. He chooses to buy the Mountain Dew. The opportunity cost of the Mountain Dew is A) the Pepsi and the bag of chips. B) the Pepsi or the bag of chips, whichever the highest-valued alternative forgone. C) the Mountain Dew. D) the Pepsi because it is a drink, as is the Mountain Dew. E) zero because he enjoys the Mountain Dew. Answer: B Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Analytical thinking

70) Amy can study for an hour or spend that hour sleeping or going out for dinner. If she decides to study for the hour, the opportunity cost of the hour spent studying is A) definitely going to sleep. B) studying since this is the choice she opted for. C) sleeping or going out for dinner, whichever she would have preferred the most. D) sleeping and going out for dinner. E) definitely going out to dinner because she must eat at some time. Answer: C Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Analytical thinking

71) If there is no scarcity, A) the opportunity cost of an action would be greater than its sunk cost. B) an action would have zero opportunity cost. C) choices are no longer rational. D) marginal cost of an action is greater than its marginal benefit. E) all marginal benefits would equal zero. Answer: B Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 1.2 Status: Old AACSB: Analytical thinking

72) The benefit of an activity is A) purely objective and measured in dollars. B) the gain or pleasure that it brings. C) the value of its opportunity cost. D) measured by what must be given up to get one more unit of the activity. E) not measurable on the margin. Answer: B Topic: Benefit Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

73) The ________ of something is the gain or pleasure that it brings. A) opportunity cost B) benefit C) marginal cost D) rational choice E) rational margin Answer: B Topic: Benefit Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

74) The cost of a one-unit increase in an activity A) is called the total one-unit cost. B) is called the marginal cost. C) decreases as more of the activity is done. D) is called the marginal benefit/cost. E) is called the unit cost. Answer: B Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

75) The marginal benefit of an activity is i. the benefit from a one-unit increase in the activity. ii. the benefit of a small, unimportant activity. iii. measured by what the person is willing to give up to get one additional unit of the activity. A) i only B) ii only C) iii only D) i and iii E) ii and iii Answer: D Topic: Marginal benefit Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

76) The additional benefit of increasing some activity by one-unit is called the A) marginal benefit. B) opportunity cost. C) total benefit. D) scarcity. E) unit cost/benefit. Answer: A Topic: Marginal benefit Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

77) If the marginal benefit of the next slice of pizza exceeds the marginal cost, you will A) eat the slice of pizza. B) not eat the slice of pizza. C) be unable to choose between eating or not eating. D) eat half the slice. E) More information is needed about how much the marginal benefit exceeds the marginal cost to determine if you will or will not eat the slice. Answer: A Topic: Making rational choices Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

78) When people make rational choices, they A) behave selfishly. B) do not consider their emotions. C) weigh the costs and benefits of their options and act to satisfy their wants. D) necessarily make a decision in the social interest. E) are necessarily making the best decision. Answer: C Topic: Rational choice Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

79) By donating $1,000 to the Salvation Army, Caroline reduces her taxable income. To Caroline, the reduction in her taxable income is A) a marginal benefit. B) an opportunity cost. C) an incentive. D) a marginal cost. E) the margin. Answer: C Topic: Incentives Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

80) When the Dallas Cowboys score more than 30 points in a game, they win the game. This is an example of A) an economic theory. B) a correlation. C) an incentive to win the game. D) a normative statement. E) a statement on the margin. Answer: B Topic: Correlation Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

81) A positive statement A) must always be right. B) cannot be tested. C) might be right or wrong. D) depends on someone's value judgment. E) cannot be negative. Answer: C Topic: Positive statements Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

82) Which of the following is a positive statement? A) Taxes should be lower because then people get to keep more of what they earn, so they will work more. B) My economics class should last for two terms because it is my favorite class. C) A 10 percent increase in income leads to a 4 percent increase in the consumption of beef. D) Given their negative impact on productivity, the government should eliminate labor unions. E) The class average on this test should be more than 80 percent. Answer: C Topic: Positive statements Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

83) Which of the following is NOT a normative economic statement? A) States should reduce the tax on heating fuel oil during the winter. B) People over the age of 75 should not be allowed to drive cars. C) Teenagers are responsible for most driving fatalities. D) We don't spend enough money on anti-smoking campaigns. E) The price of gasoline is too high. Answer: C Topic: Normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

1.3 Appendix: Making and Using Graphs 1) The horizontal axis in a graph A) measures time on a scatter diagram. B) measures the quality of a variable. C) is named the y-axis. D) is named the x-axis. E) is called the origin. Answer: D Topic: Axes Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

2) Most economic graphs have two lines perpendicular to each other. The vertical line is called the A) origin. B) y-axis. C) x-axis. D) variable. E) time axis. Answer: B Topic: Axes Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

3) The vertical axis in a graph A) is named the y-axis. B) is named the x-axis. C) measures time in a cross-section and time series graph. D) has no origin. E) measures time only in a time series graph. Answer: A Topic: Axes Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

4) Most economic graphs have two lines perpendicular to each other. Where these lines meet is called the A) origin. B) y-axis. C) x-axis. D) variable. E) point of beginning. Answer: A Topic: Origin Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

5) A graph of the value of one variable against the value of another variable is known as a A) two-dimensional graph. B) three-dimensional graph. C) time-series graph. D) scatter diagram. E) two-variable graph. Answer: D Topic: Scatter diagrams Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

6) A scatter diagram can be used to see A) if the value of a variable is rising or falling. B) the value of a variable for different groups in a population. C) if a relationship exists between two variables. D) how a variable behaves over time. E) whether a variable is positively or negatively related to itself. Answer: C Topic: Scatter diagrams Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

7) To show how a variable ________, we typically use a ________. A) relates to another variable; time series graph B) relates to another variable; pie chart C) changes over time; time series graph D) changes over time; cross section graph E) changes over time; cross time chart Answer: C Topic: Scatter diagrams Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

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

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

10) A time-series graph measures A) the value of one variable against the value of another variable. B) the value of an economic variable for different groups in a population at a point in time. C) time on the x-axis and the variable or variables in which we are interested on the y-axis. D) time on the y-axis and the variable or variables in which we are interested on the x-axis. E) time on both the x-axis and y-axis and the variable or variables in which we are interested in the rest of the figure. Answer: C Topic: Time-series graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

11) A time series graph A) shows how a variable changes over time. B) uses bars rather than lines. C) shows points in a scatter diagram. D) is similar to a cross-section graph because both can show trends over time. E) is in the shape of a pie. Answer: A Topic: Time-series graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

12) A steep slope in a time series graph means the variable is A) high. B) falling. C) rising or falling quickly. D) rising or falling slowly. E) very close to its trend point. Answer: C Topic: Time-series graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

13) Which type of economic graph reveals trends in data? A) cross-section graph B) time-series graph C) scatter diagram D) Answers A and C are correct. E) Answers A, B, and C are all correct. Answer: B Topic: Time-series graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

14) A time series graph A) shows how a certain variable changes over time. B) uses bars rather than lines. C) shows points that are scattered. D) depicts a series of good economic times a nation had. E) is not useful if the goal is to determine a variable's trend. Answer: A Topic: Time-series graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

15) A time-series graph displays the price of gold. The slope of the line is negative for periods when the A) price of gold is falling. B) price of gold is rising. C) quantity of gold is falling. D) price of gold is low and not changing. E) price of gold fluctuates. Answer: A Topic: Time-series graph Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

16) A graph shows the wage rate of factory workers. The slope of the line is positive for periods when the wage rate is A) falling. B) rising. C) high and not changing. D) low and falling. E) high and falling. Answer: B Topic: Time-series graph Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

17) A trend is A) a measure of closeness on a scatter diagram. B) a general tendency for a variable to rise or fall. C) the maximum value of a variable. D) the minimum value of a variable. E) the difference between the maximum value of a variable and the minimum value of the variable. Answer: B Topic: Trend Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

18) A time series graph reveals whether there is a ________, which represents ________. A) trend in a variable; a general tendency for the variable to rise or fall B) relationship between two variables; a cross-section relationship C) trends in two variables; unrelated variables D) relationship between two variables; a trend in a variable E) cross-section relationship; a general tendency for the variables to rise or fall Answer: A Topic: Trend Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

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

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

21) A cross-section graph A) is divided into different sections. B) shows the values of an economic variable for different groups in a population at a point in time. C) measures time on the x-axis and the variable in which we are interested on the y-axis. D) Both answers A and C are correct. E) Both answers A and B are correct. Answer: B Topic: Cross-section graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

22) A graph that shows the value of an economic variable for different groups in a population at a given time is called a A) scatter diagram. B) time-series graph. C) pie chart. D) cross-section graph. E) fixed-time diagram. Answer: D Topic: Cross-section graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

23) A graph shows the average wage of various demographic groups in 2012. The kind of graph used to show these data would be a A) scatter diagram. B) time-series graph. C) cross-section graph. D) Venn diagram. E) fixed-year figure. Answer: C Topic: Cross-section graph Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

24) A graph showing the values of an economic variable for different groups in a population at a point in time is called a A) cross-section graph. B) time-series graph. C) scatter diagram. D) Venn diagram. E) None of the above answers is correct. Answer: A Topic: Cross-section graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

25) ________ shows the values of a variable for different groups in the population at a certain point in time. A) A time-series graph B) The origin C) A cross-section graph D) A scatter plot E) A trend-line graph Answer: C Topic: Cross-section graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

26) A cross-section graph A) is divided into different sections. B) shows values of an economic variable for different groups in a population at a point in time. C) measures time on the x-axis and the variable in which we are interested on the y-axis. D) Both answers A and C are correct. E) Both answers B and C are correct. Answer: B Topic: Cross-section graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

27) You have data for the amount of rainfall in 50 cities for the month of June. The type of graph to best display these data would be a A) time-series graph. B) multi-variable time series graph. C) cross-section graph. D) scatter diagram. E) trend-line diagram. Answer: C Topic: Cross-section graph Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

28) You have data for sales of pizza for each of the 50 states in 2011. The type of graph to best display these data would be a A) cross-section graph. B) time-series graph. C) scatter diagram. D) multi-variable time-series graph. E) trend-line diagram. Answer: A Topic: Cross-section graph Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

29) A graph shows the average SAT scores for males and females in 2012. The kind of graph used to show these data would be a A) scatter diagram. B) time-series graph. C) cross-section graph. D) time-stationary graph. E) trend figure. Answer: C Topic: Cross-section graph Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

30) Demonstrating how an economic variable changes from one year to the next is best illustrated by a A) scatter diagram. B) time-series graph. C) linear graph. D) cross-section graph. E) Venn diagram. Answer: B Topic: Time-series graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

31) To show the values of an economic variable for different groups in a population at a point in time, it is best to use a A) scatter diagram. B) time-series graph. C) linear graph. D) cross-section graph E) trend-section diagram. Answer: D Topic: Cross-section graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

32) A graph that shows how the amount of advertising expenditure differs among various industries can be shown A) by a cross-section graph. B) by a time-series graph. C) as a trend. D) by a scatter diagram. E) by a trend-section graph. Answer: A Topic: Cross-section graph Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

33) A linear relationship A) when graphed is a straight line. B) when graphed is a line whose slope changes. C) can be a positive or a negative relationship. D) Both answers A and C are correct. E) Both answers A and B are correct. Answer: D Topic: Linear relationship Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

34) A positive relationship exists between two variables if A) one variable has "positively" no effect on the other variable. B) a decrease in one variable is associated with an increase in the other variable. C) a decrease in one variable is associated with a decrease in the other variable. D) an increase in one variable is associated with both a decrease and an increase in the other variable. E) None of the above answers is correct. Answer: C Topic: Positive relationship Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

35) If two variables are positively related, then A) one variable causes the other. B) an increase in one variable is accompanied by a decrease in the other. C) an increase in one variable is accompanied by an increase in the other. D) they change together, but not necessarily in the same direction. E) neither variable can be positively related to any other variable. Answer: C Topic: Positive relationship Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

36) As a person increases his or her caloric intake, the person's weight increases, ceteris paribus. The relationship between the person's caloric intake and the person's weight is an example of A) unrelated variables. B) a positive relationship. C) a negative relationship. D) a single point on a graph. E) a trended relationship. Answer: B Topic: Positive relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

37) If there is a positive relationship between two variables, A) the graph of the relationship will be upward sloping. B) the graph of the relationship will be downward sloping. C) the slope of the line graphing the relationship will be negative. D) Both answers A and C are correct. E) Both answers B and C are correct. Answer: A Topic: Positive relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

38) If the change in y = 10 and the change in x = 3, there is A) a positive relationship between y and x. B) a negative relationship between y and x. C) an independent relationship between y and x. D) no relationship between y and x. E) a +0.33 relationship between the two variables. Answer: A Topic: Positive relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

39) Whenever people's incomes increase, they buy more guitars. Hence a scatter diagram shows that the relationship between income and guitars purchased is A) a positive relationship. B) a linear relationship. C) a negative relationship. D) some sort of relationship, but whether it is positive or negative depends on whether income is plotted on the vertical or horizontal axis. E) a U-shaped relationship. Answer: A Topic: Positive relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

40) Which of the following statements is correct? A) When a line slopes downwards moving to the right, the variable measured on the x-axis and the variable measured on the y-axis are directly related. B) When a line slopes upwards moving to the right, the variable measured on the x-axis and the variable measured on the y-axis are directly related. C) The higher the temperature, the more ice cream people consume. Thus the temperature and ice cream consumption are inversely related. D) If two variables are directly related, a graph of the two variables has a negative slope. E) None of the above statements is correct. Answer: B Topic: Positive and negative relationships Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

41) If x increases whenever y decreases, then x and y are A) not related. B) positively related. C) directly related. D) negatively related. E) related but whether positively or negatively related depends on whether the x variable or the y variable is plotted on the vertical axis. Answer: D Topic: Negative relationship Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

42) Whenever one variable increases, another variable decreases. The two variables are A) definitely related through a third variable. B) negatively related. C) positively related. D) unrelated to each other. E) related but whether positively or negatively related depends on which variable is plotted on the vertical axis. Answer: B Topic: Negative relationship Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

43) If x increases and as a result y decreases, then x and y are A) not related because the relationship is a causal one. B) positively related. C) negatively related. D) directly related. E) trend-line related. Answer: C Topic: Negative relationship Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

44) "As the price of gasoline increases, fewer people buy cars that are gas guzzlers." A graph showing this relationship would A) have a negative slope. B) have a positive relationship. C) have a direct relationship. D) be a horizontal line. E) be a vertical line. Answer: A Topic: Negative relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

45) As the number of days without rain increases, the amount of wheat grown per acre declines. A graph showing this relationship shows A) a horizontal line. B) a vertical line. C) a positive relationship. D) a line with a positive slope. E) None of the above answers is correct. Answer: E Topic: Negative relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

46) As the price of home heating oil rises, families buy less home heating oil. Hence a scatter diagram with the price of home heating oil on the vertical axis and the quantity purchased on the horizontal axis reveals a ________ relationship. A) positive B) linear C) time-series D) negative E) cross-sectional Answer: D Topic: Negative relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

47) If the change in y = -4 and the change in x = 2, there is A) an independent relationship between y and x. B) a positive relationship between y and x. C) a negative relationship between y and x. D) no relationship between y and x. E) a relationship between x and y, but more information is needed to determine if it is a negative or positive relationship. Answer: C Topic: Negative relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

48) An independent relationship between two variables is shown in a graph by A) an upward-sloping line. B) a horizontal or a vertical line. C) a downward-sloping line. D) a steeply sloped line. E) any straight line curve. Answer: B Topic: Unrelated variables Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

49) If two variables are unrelated, their graph is A) either a horizontal or a vertical line. B) a downward-sloping line. C) an upward-sloping line. D) a curved line. E) None of the above answers is correct because it is not possible to graph unrelated variables. Answer: A Topic: Unrelated variables Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

50) Consider a diagram in which the variable measured on the y-axis remains constant while the variable measured on the x-axis increases. The graph of these two variables is a A) vertical line. B) horizontal line. C) line that has positive slope. D) line that has a negative slope. E) non-existent because the two variables are not related. Answer: B Topic: Unrelated variables Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

51) A graph shows the price of a pound of cucumbers on the vertical axis and the quantity of new cars sold by Honda on the horizontal axis. The price of a pound of cucumbers remains constant as the quantity of new cars sold increases. The graph of these data is a A) horizontal line. B) vertical line. C) curve with a maximum. D) positively sloped line. E) negatively sloped line. Answer: A Topic: Unrelated variables Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

52) Matt pays a $50 a month membership fee at Bruno's Gym. He can exercise at the gym as many times as he wishes. If the membership fee is measured along the vertical axis and the number of times he exercises is measured along the horizontal axis, the graph between his membership fee and the number of times he exercises will A) be a horizontal line. B) be positively sloped. C) be negatively sloped. D) be a vertical line. E) start out positively sloped and then, as Matt loses interest, become negatively sloped. Answer: A Topic: Unrelated variables Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

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

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

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

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

57) In the diagram above, which figure(s) show(s) an inverse relationship between the variables? A) both B and C B) only B C) both A and C D) only D E) only C Answer: B Topic: Negative relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

58) In the diagram above, which figure(s) show(s) no relationship between the variables? A) both B and C B) only B C) both A and C D) only D E) both A and B Answer: D Topic: Unrelated variables Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

59) If a curve rises and then falls, it has a A) maximum. B) minimum. C) linear relationship. D) constant slope relationship. E) slope that is negative and then positive. Answer: A Topic: Maximum Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

60) As a shoe factory adds more workers, shoe production grows, reaches a maximum, and then shrinks. In a diagram that has the number of workers on the horizontal axis and the number of shoes on the vertical axis, the relationship between the number of workers and the number of shoes starts as ________ and then, after the maximum point, is ________. A) positive; negative B) negative; positive C) linear; negative D) positive; linear E) positive; nonexistent Answer: A Topic: Maximum Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

61) As a curve approaches a maximum point, the slope will A) be positive and then negative after the maximum point. B) be negative and then positive after the maximum point. C) remain constant on either side of the maximum point. D) increase before and after the maximum point. E) decrease before and after the maximum point. Answer: A Topic: Maximum Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

62) In the figure above, the relationship between the x variable and the y variable A) is positive. B) is negative. C) starts by being positive and then becomes negative. D) starts by being negative and then becomes positive. E) is non-existent because the two variables are unrelated. Answer: C Topic: Maximum Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

63) If a curve falls and then rises, it A) has a maximum. B) has a minimum. C) has a linear relationship. D) has a constant slope relationship. E) shows no relationship between the two variables. Answer: B Topic: Minimum Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

64) Moving from left to right, a U-shaped curve starts with a A) positive slope, reaches a maximum, then ends with a negative slope. B) positive slope, reaches a minimum, then ends with a negative slope. C) negative slope, reaches a maximum, then ends with a positive slope. D) negative slope, reaches a minimum, then ends with a positive slope. E) negative slope, reaches a minimum, then ends with a negative slope. Answer: D Topic: Minimum Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

65) The minimum point of a U-shaped curve, A) is a point where the variable is neither increasing nor decreasing. B) has a slope equal to zero. C) has the maximum slope possible. D) Both answers A and B are correct. E) Both answers A and C are correct. Answer: D Topic: Minimum Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

66) An economist observed that as more computers are added to a factory, the costs of production initially decline, reach a minimum, and then rise. In a diagram that has costs on the vertical axis and the number of computers on the horizontal axis, the relationship always is A) negative and then linear after the minimum point. B) positive and then negative after the minimum point. C) negative and then positive after the minimum point. D) linear and then positive after the minimum point. E) negative both before and after the minimum point. Answer: C Topic: Minimum Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

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

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

69) A graph of the relationship between two variables is a line that slopes down to the right. These two variables are ________ related. A) positively B) directly C) negatively D) not E) trend-line Answer: C Topic: Negative relationship Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

70) A graph shows that the number of U.S. tourists visiting a Caribbean island increases as the temperature in the northeastern United States falls. The graph shows A) a positive relationship. B) a direct relationship. C) a negative relationship. D) no relationship. E) an invalid relationship. Answer: C Topic: Negative relationship Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

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

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

73) The graph shows A) a relationship with a minimum. B) a relationship with a maximum. C) no relationship. D) a relationship that becomes less steep. E) a cross-section relationship. Answer: A Topic: Minimum Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

74) Two variables are unrelated if their graph is i. a vertical line. ii. a 45 degree line. iii. a horizontal line. A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: D Topic: Unrelated variables Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

75) The graph shows A) a positive relationship that becomes less steep. B) a negative relationship that is linear. C) a positive relationship that is linear. D) no relationship between the variables. E) a trend relationship between the variables. Answer: D Topic: Unrelated variables Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

76) A slope is measured as the A) value of the variable measured on the y-axis divided by the value of the variable measured on the xaxis. B) value of the variable measured on the x-axis divided by the value of the variable measured on the yaxis. C) change in the value of variable on the y-axis divided by the change in the value of the variable on the x-axis. D) value of the variable measured on the y-axis minus the value of the variable measured on the x-axis. E) change in the value of variable on the x-axis divided by the change in the value of the variable on the y-axis. Answer: C Topic: Slope Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytical thinking

77) A slope is measured as the A) value of the variable measured on the y-axis divided by the value of the variable measured on the xaxis. B) value of the variable measured on the x-axis divided by the value of the variable measured on the yaxis. C) change in the value of variable on the y-axis divided by the change in the value of the variable on the x-axis. D) value of the variable measured on the y-axis minus the value of the variable measured on the x-axis. E) value of the variable measured on the x-axis minus the value of the variable measured on the y-axis. Answer: C Topic: Slope Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytical thinking

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

79) The slope of a line equals the change in the variable measured along the A) x-axis divided by the change in the variable measured along the y-axis. B) y-axis divided by the change in the variable measured along the x-axis. C) x-axis minus the change in the variable measured along the y-axis. D) x-axis multiplied by the change in the variable measured along the y-axis. E) y-axis minus the change in the variable measured along the x-axis. Answer: B Topic: Slope Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytical thinking

80) The slope A) of a straight line is the same regardless of where on the line it is calculated. B) equals the change in the value of the variable measured on the x-axis divided by the change in the variable measured on the y-axis. C) will be small if a large change in the variable measured on the y-axis is associated with a small change in the variable measured on the x-axis. D) equals the change in the value of the variable measured on the y-axis minus the change in the variable measured on the x-axis. E) falls as the x variable increases if the line has a negative slope. Answer: A Topic: Slope Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytical thinking

81) With y measured on the vertical axis and x measured on the horizontal axis, the slope of a straight line is defined as A) y/x. B) x/y. C) (change in y)/(change in x). D) (change in x)/(change in y). E) y - x. Answer: C Topic: Slope of a straight line Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytical thinking

82) In a graph, a straight line has a negative slope if the line A) is vertical. B) is horizontal. C) falls from left to right. D) rises from left to right. E) shows a trend. Answer: C Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytical thinking

83) A curve with a positive but decreasing slope represents a relationship where, every time the variable measured along the horizontal axis increases by one unit, the variable measured along the vertical axis A) increases by a constant amount. B) increases by an increasing amount. C) increases by a decreasing amount. D) decreases. E) does not change by much. Answer: C Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytical thinking

84) The slope A) of a straight line is the same regardless of where on the line it is calculated. B) equals the change in the value of the variable measured on the vertical axis divided by the change in the variable measured along the horizontal axis. C) will be small if a large change in the variable measured on the vertical axis is associated with a small change in the variable measured along the horizontal axis. D) Answers A and B are correct. E) Answers A and C are correct. Answer: D Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytical thinking

85) Which of the following statements is correct? A) The slope of a straight line changes depending where on the line it is calculated. B) The slope of a curved line is not defined because it is impossible to calculate the slope along a curved line. C) A straight line that slopes upward moving to the right has a positive slope. D) Answers A and B are correct. E) Answers A and C are correct. Answer: C Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytical thinking

86) If a small change in the x variable results in a large change in the y variable, the curve will be A) positively sloped. B) negatively sloped. C) steep. D) flat. E) trended. Answer: C Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytical thinking

87) Suppose the relationship between a person's age and his or her height is plotted with the age measured along the x-axis and the height measured along the y-axis. Then, the curve showing this relationship is A) a straight line with a positive slope. B) positively sloped and becoming less steep. C) a straight line with a negative slope. D) negatively sloped and becoming less steep. E) positively sloped and becoming more steep. Answer: B Topic: Positive slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytical thinking

88) If the quantity of the variable on the y-axis increases by 10 when the quantity of the variable on the xaxis decreases by 2, then the slope of the curve equals A) 2. B) -10. C) 10. D) -5. E) None of the above answers is correct. Answer: D Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytical thinking

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

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

91) The above figure shows the relationship between the price of a slice of pizza and how many slices of pizza Ricardo buys in a week. Between points A and B, the slope of the line is ________ the slope of the line between points B and C. A) greater than B) equal to C) less than D) unrelated to E) not comparable to Answer: B Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytical thinking

92) Moving rightward along a straight line, the slope of the line A) always increases. B) always decreases. C) stays the same. D) increases if the line slopes upward to the right. E) decreases if the line slopes downward to the right. Answer: C Topic: Slope of a straight line Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytical thinking

93) A straight line falls when moving rightward along it. Hence the slope of the line is A) positive. B) negative. C) undefined. D) zero because it is a straight line. E) perhaps positive, negative, or zero, but without more information it is impossible to determine. Answer: B Topic: Slope of a straight line Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytical thinking

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

95) The slope of the line shown in the above figure is A) -1/3. B) -5. C) -1. D) -3. E) -10. Answer: D Topic: Slope of a straight line Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytical thinking

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

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

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

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

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

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

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

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

104) In the above, which figure(s) show(s) a relationship between the variables that is always negative? A) Figure A only B) Figure D only C) Figures A and C D) Figures A, C, and D E) Figure B only Answer: B Topic: Negative relationship Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytical thinking

105) In the above, which figure(s) show(s) both a positive and a negative relationship between the variables? A) Figure A B) Figure B C) Figure C D) Figure D E) Figure A, B, and D Answer: B Topic: Positive and negative relationships Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytical thinking

106) In the above, which figure(s) has (have) at least one point at which the slope equals zero? A) Figure B only B) Figures A and C C) Figure D only D) Figures A, C, and D E) Figures A and D Answer: A Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytical thinking

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

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

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

110) The figure above shows the relationship between the price of a dozen roses and the quantity of roses a florist can sell. The slope between points B and C equals A) 16. B) 8. C) 4. D) 2. E) 14. Answer: C Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytical thinking

111) The figure above shows the relationship between the price of a dozen roses and the quantity of roses a florist can sell. The slope between points C and D equals A) 8. B) 4. C) 2. D) 1. E) 12 Answer: D Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytical thinking

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

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

114) The slope of the curve at point B A) is greater than the slope at point A. B) is less than the slope at point A. C) is equal to the slope at point A. D) cannot be compared with the slope at point A. E) can be compared with the slope at point A, but more information is needed to determine if the slope is greater than, less than, or equal to the slope at point A. Answer: B Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytical thinking

115) The Latin term "ceteris paribus" means A) "false unless proven true." B) "other things remaining the same." C) "after this, therefore because of this." D) "what is true of the whole is not necessarily true of the parts." E) "obviously true." Answer: B Topic: Ceteris paribus Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Reflective thinking

116) Which of the following statements is the best example of the term ceteris paribus? A) An economist holds other factors constant when he examines the relationship between tax rates and tax revenues. B) More money should be spent on cleaning up the environment. C) The government budget surplus was $200 billion in 2000 because the economy was growing. D) An increase in the budget surplus after an increase in tax rates implies that tax rate increases cause budget surpluses. E) When studying the effects of a budget deficit, an economist must take account of all the factors involved. Answer: A Topic: Ceteris paribus Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Reflective thinking

117) To graph a relationship involving more than two variables, we use which assumption? A) linear assumption B) positive relationship assumption C) marginal analysis D) ceteris paribus E) trend assumption Answer: D Topic: Ceteris paribus Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytical thinking

118) To graph a relationship among several variables, we hold all but ________ variable(s) constant and use the ________ assumption. A) one; scarcity B) two; ceteris paribus C) three; scarcity D) one; ceteris paribus E) one; absence of trend Answer: B Topic: Relationships among more than two variables Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytical thinking

119) We are investigating the relationship among three variables. We have graphed two of them. Suppose that the variable that is not measured on the x-axis or the y-axis changes. Then, there is A) a movement along the plotted curve. B) a shift in the plotted curve. C) no impact on the plotted curve because the variable is not measured on either of the axes. D) an omitted variable. E) a violation of the absence of trend assumption. Answer: B Topic: Relationships among more than two variables Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytical thinking

120) When analyzing graphically the relationship between more than two variables, which of the following must be used? A) positive slope assumption B) assumption of little change C) ceteris paribus D) negative slope assumption E) the assumption that only relevant factors change Answer: C Topic: Ceteris paribus Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytical thinking

121) Ceteris paribus when graphing a relationship refers to A) letting all the variables change at once. B) changing the origin of the graph. C) holding constant all but two variables. D) rescaling the coordinates. E) swapping the axes so that the x-axis is the vertical axis and the y-axis is the horizontal axis. Answer: C Topic: Ceteris paribus Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytical thinking

122) When two variables in a graph are related to a third, changing the third causes A) a movement along the curve. B) a shift of the curve. C) no change in the curve because the third variable isn't on the axes. D) either a shift or a movement in the curve but more information is needed to determine which occurs. E) None of the above answers is correct. Answer: B Topic: Relationships among more than two variables Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytical thinking

123) On a graph showing the relationship between x and y, the ceteris paribus condition implies that A) no other variables are related to x and y. B) the value of x is held constant. C) the value of y is held constant. D) other variables not shown are held constant. E) the value of x and the value of y are held constant. Answer: D Topic: Ceteris paribus Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytical thinking

124) Three variables are related and two of them are plotted in a figure. If the variable that is not measured on either the x-axis or the y-axis changes, then there is A) a movement along the drawn curve. B) a shift in the curve. C) no impact on the curve because the variable is not measured on either of the axes. D) either a shift in the curve or a movement along the curve, but more information is needed to determine which. E) None of the above answers is correct. Answer: B Topic: Changes in third variable Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytical thinking

125) The above figure shows how many pounds of peanuts farmers are willing to sell at different prices per pound of peanuts. If the price of a pound of peanuts is $1 and the price of a pound of pecans is $2, peanut farmers are willing to sell A) no peanuts. B) 1,000 pounds of peanuts. C) 2,000 pounds of peanuts. D) 4,000 pounds of peanuts. E) more than 4,000 pounds of peanuts. Answer: A Topic: Relationships among more than two variables Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytical thinking

126) In the above figure, while drawing the line showing the relationship between the price of a pound of peanuts and the quantity sold, the A) price of a pound of pecans does not change. B) price of a pound of peanuts does not change. C) the quantity of peanuts that farmers supply does not change. D) Both answers A and B are correct. E) Both answers B and C are correct. Answer: A Topic: Ceteris paribus Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytical thinking

127) In the figure above, suppose the price of a pound of pecans is negatively related to the quantity of peanuts that farmers are willing to supply. If the price of pecans increases, A) the curve will shift rightward. B) the curve will shift leftward. C) there is a movement along the curve. D) the curve will be unaffected. E) None of the above answers is correct because the graph assumes that the price of pecans does not change. Answer: B Topic: Relationships among more than two variables Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytical thinking

128) To graph a relationship that involves more than two variables, we use A) a positive relationship. B) a direct relationship. C) a negative relationship. D) ceteris paribus. E) movement up along one of the lines showing the relationship between x and y. Answer: D Topic: Relationships among more than two variables Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytical thinking

129) In the figure above, an increase in z leads to a A) movement up along one of the lines showing the relationship between x and y. B) movement down along one of the lines showing the relationship between x and y. C) rightward shift of the line showing the relationship between x and y. D) leftward shift of the line showing the relationship between x and y. E) trend change in both x and y. Answer: D Topic: Relationships among more than two variables Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytical thinking

130) In the figure above, ceteris paribus, an increase in x is associated with A) an increase in y. B) a decrease in y. C) an increase in z. D) a random change in z. E) no change in either y or z. Answer: B Topic: Ceteris paribus Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytical thinking

1.4 Integrative Questions 1) Suppose you decide to attend summer school and that this is considered a rational choice. When making this choice, A) you must ignore the problem of scarcity. B) you considered the marginal cost and marginal benefit of your choice. C) you have used the ceteris paribus assumption. D) you have made a positive statement. E) you must have considered the social interest. Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

2) John decides to leave college early and play professional sports. Which of the following economic principles does John use? i. personal economic policies ii. marginal cost versus marginal benefit analysis iii. normative versus positive economics A) i and ii B) i, ii and iii C) ii only D) i and iii E) ii and iii Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

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

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

5) Will, Bill, and Phil decide to study an extra hour for an exam. Instead of studying, they could have gone out to eat, played football, or watched TV. Which of the following statements is correct? A) The benefit the three students receive must be the same because they all make the same choice. B) The students made a rational choice as long as they face no scarcity. C) The students could each have different opportunity costs. D) The marginal cost of the decision is the same if they make the same score on the exam. E) Going out to eat, playing football, and watching TV are all called sunk costs. Answer: C Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

6) Which of the following is true regarding a normative statement? i. It uses the ceteris paribus assumption. ii. It is a value judgment. iii. It accounts for opportunity costs. A) i and iii B) ii and iii C) i only D) ii only E) i, ii, and iii Answer: D Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

7) To help unscramble cause and effect, economists A) use the concept of opportunity costs. B) must use the ceteris paribus assumption. C) answer the "what" question. D) answer the "how" question. E) must use normative statements. Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

8) Which of the following is true regarding this statement? "The president's decision to spend more money on national defense is smart." A) This is a normative statement. B) The federal government does not face scarcity. C) This topic would be studied in microeconomics. D) Social interest must always be more important than self-interest. E) Ceteris paribus does not apply to the government. Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

9) Gregory is considering attending a concert with a ticket price of $40. He estimates that the cost of driving to the concert and parking there will add an additional $20. In order to attend the concert, Gregory will have to take time off from his part-time job. He estimates that he will lose 5 hours at work, at a wage of $8 per hour. Gregory's opportunity cost of attending the concert equals A) $80. B) $100. C) $40. D) $60. E) $20. Answer: B Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: New AACSB: Application of knowledge

10) Kevin is re-finishing an antique grandfather clock that he purchased at a flea market for $300. He expects to be able to sell the clock for $450. At the last minute, Kevin discovers that he needs to repair the gears at a cost of $175 to make the clock worth $450 to potential buyers. It turns out that he could also sell the clock now, without completing the additional repairs, for $250. What should Kevin do? A) He should sell the clock now for $250. B) He should keep the clock but not make the repairs since the original $300 is a sunk cost. C) He should complete the additional repairs and sell the clock for $450. D) He should keep the clock after making the repairs since it is not rational to spend a total of $475 on an item that can only be sold for $450. E) Kevin is indifferent between selling the clock as is or selling it after completing the repairs. Answer: C Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: New AACSB: Application of knowledge

11) Which of the following scenarios describes an action that is NOT rational from an economic point of view? A) After drinking one martini (shaken, not stirred), James buys and drinks a second martini even though the marginal benefit of the second martini is lower than the marginal benefit of the first. B) Eric buys a replacement ticket to the basketball game after he realizes that he accidentally left his original ticket at home. C) Emily chooses to attend a social event on Tuesday night instead of studying even though she has an important exam on Wednesday morning. D) US Airways sells a last minute ticket to Don for $50 even though its average cost per passenger is $250. E) None of the above Answer: E Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: New AACSB: Application of knowledge

12) Because resources are scarce, economists would say that A) the best things in life are always free. B) people's wants are unlimited. C) every choice has an opportunity cost. D) anything worth doing is worth doing well. E) there are no benefits from cooperation. Answer: C Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: New AACSB: Reflective thinking

13) Wichita is building a convention center and financing it with revenues raised from a city hotel tax. Local politicians assert that the convention center is essentially free for Wichita residents because out-of-town visitors are paying for it. Someone who is practicing the economic way of thinking would disagree because A) they believe that Wichita does not need a new convention center. B) there are other projects that could be undertaken with the tax funds. C) the convention center may not pass a marginal cost-benefit test. D) the hotel tax may lead to a decline in visits to Wichita. E) the hotel tax may reduce commercial property values in the area. Answer: B Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: New AACSB: Reflective thinking

14) Suppose that your public library charges a fixed monthly membership fee of $12. Members are allowed to check out as many books as they want under this plan. The average member checks out 4 books per month. Suppose that your public library changes its policy. Now each book costs $3 to check out but there is no longer a monthly membership fee. What effect do you think the new policy will have on the total number of books checked out from your library each month? The new policy is likely to ________ the number of booked checked out because ________. A) leave unchanged; members have already shown that they are willing to pay $12 to check out 4 books per month B) leave unchanged; the average cost of the library service is the same under both plans C) reduce; the marginal benefit of checking out books is now lower under the new policy D) reduce; the marginal cost of checking out books is now higher under the new policy E) increase; the average benefit of checking out more than 4 books is now higher under the new policy Answer: A Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: New AACSB: Application of knowledge

15) In New York City, Mayor Michael Bloomberg has recently recommend that the city, with the help of private donors, make cash payments to poor and underprivileged parents who can certify that their children are attending school on a regular basis. The payments would start after third grade and go through high school, rising each year as dropout rates get higher and a child's forgone earning potential is higher. What economic concept does this policy represent? A) public goods B) technological progress C) externalities D) the "invisible hand" E) incentives Answer: E Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: New AACSB: Reflective thinking

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

1.5 Chapter Figures

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

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

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

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

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

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

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

8) In the figure above, what is the slope of the curve at point A? A) 0.75 B) -0.75 C) 1.33 D) -1.33 E) zero Answer: B Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytical thinking

1.6 Essay: Definition and Questions 1) What is the relationship between wants, resources, scarcity, and choices? Discuss the relationship for an individual and for a society. Answer: A person faces scarcity whenever his or her wants exceed what he or she can obtain using his or her resources. Because the person cannot fulfill all of his or her wants, the person is forced to choose which wants will be satisfied and which wants will remain unsatisfied. The same results hold true for a society. All societies face scarcity because people's wants are essentially infinite, so that the resources available are not sufficient to fulfill everyone's wants. Because of this fact, societies must make choices about which (and whose) wants will be satisfied and which (and whose) wants will remain unsatisfied. Topic: Scarcity Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Written and oral communication

2) Why do economists say that even very rich people face scarcity? Answer: A person faces scarcity whenever his or her wants exceed what he or she can obtain using his or her resources. Even very rich people want things that they cannot have. An older rich person, for instance, might want to have all of his or her youthful energy, but medical science cannot (yet) provide this service. Alternatively, another rich person might enjoy life so much that he or she wants 25 hours in a day in order to have more time for more enjoyment. But, such a want is impossible. By way of another, perhaps more realistic example, Malcolm Forbes was the founder of Forbes magazine and was very rich. However, he did not win every piece of art that he bid upon at auctions. Even though Mr. Forbes was very rich, he still passed on some art when the price got so high that he thought given his resources, the price exceeded what he was willing to pay. Mr. Forbes wanted the art, but he was not willing to bid higher in order to win it. Mr. Forbes faced scarcity. Topic: Scarcity Skill: Level 3: Using models Section: Checkpoint 1.1 Status: Old AACSB: Written and oral communication

3) What do economists mean when they discuss "scarcity"? Answer: Scarcity occurs whenever people's wants exceed the ability of the available resources to meet these wants. Because people's wants are effectively infinite-it is always possible to imagine more good things to want to have-wants will always exceed what can be produced with the available resources, and so scarcity will always be present. Topic: Scarcity Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Written and oral communication

4) Define economics and describe its branches of study. Answer: Economics is the social science that studies the choices made by individuals, businesses, government, and entire societies as they cope with scarcity. It has two branches, microeconomics and macroeconomics. Microeconomics is the study of the choices made by individuals and businesses, the way they interact, and the influence that governments exert on these choices. Macroeconomics is the study of the aggregate (total) effects on the national economy and the global economy of the choices that individuals, businesses, and governments make. Topic: Definition of economics Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Written and oral communication

5) Why does scarcity lead to the what, how, and for whom questions? Answer: Human wants exceed the resources available to satisfy them, thereby creating the problem of scarcity of goods and services. Everyone wants more than he or she can have, be it a student dreaming of a faster computer or an extraordinarily rich business leader wishing for more vacation time. Because not all wants can be satisfied, people must make choices about which wants to satisfy. The choices resulting from scarcity mean that people must decide what gets produced, how are the products produced, and for whom are the products produced. Topic: Scarcity and economic questions Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Written and oral communication

6) List and explain the three fundamental economic questions that must be answered by all economic systems. Answer: First, all economic systems must answer the question of "what goods and services get produced and in what quantities?" In other words, among the near infinite types of goods and services, society must decide what will be produced and how much of each good and service will be produced. Next, every economic system must decide, "how are goods and services produced?" This question needs to be answered because there are always many ways to produce a particular good or service (for instance, using a lot of workers and only a little machinery, or a lot of machinery and fewer workers), so the method that will be used must be decided. Finally, once the goods and services are produced the society must decide "for whom are the various goods and services produced?" In other words, societies must decide whether the goods and services are distributed so that everyone gets about the same amount or whether they are distributed so that some people get more than others. Topic: Economic questions Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Written and oral communication

7) Pumpkins are grown in New Mexico with the aid of fertilizer. Hence, fertilizer is a partial answer to which of the three economic questions? Answer: Fertilizer is used to help produce the pumpkins, so it is a partial answer to the "How are goods and services produced?" question. Topic: Economic questions, how Skill: Level 3: Using models Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

8) Different nations answer the what, how, and for whom questions differently. China, for instance, builds dams using many workers and only a little capital equipment. The United States builds dams using a few workers and a lot of capital equipment. Which economic question are these two nations answering and why do the answers differ? Answer: The nations are answering the "how" question because they are determining how to produce a dam. In the main part, the answers differ because the nations have different amounts of capital equipment and labor. China has more people and less capital equipment. Hence it makes sense for China to build dams using many workers and only a little capital equipment. The U.S. has more capital equipment and less labor. Thus it makes sense for the United States to build dams using a lot of capital equipment and only a few workers. Topic: Economic questions, how Skill: Level 4: Applying models Section: Checkpoint 1.1 Status: Old AACSB: Written and oral communication

9) The question "Will doctors or lawyers have higher annual incomes?" represents which of the three basic economic questions? Answer: The amount of goods and services a person can purchase depends on the person's income. Hence the question of who should be paid more, lawyers or doctors, essentially asks whether lawyers or doctors will be able to buy more goods and services. Thus the question is a microeconomic "For whom?" question. Topic: Economic questions, for whom Skill: Level 3: Using models Section: Checkpoint 1.1 Status: Old AACSB: Written and oral communication

1.7 Essay: The Economic Way of Thinking 1) What is the difference between microeconomics and macroeconomics? Answer: Microeconomics studies the decisions of smaller economic actors, such as individual consumers or individual firms, and how the government can affect these decisions, say through how it regulates an industry. Macroeconomics studies the aggregate, or economy-wide, consequences of the decisions made by individuals and firms. Macroeconomics also studies the aggregate effects of government policies, such as the Federal Reserve's decisions to raise or lower interest rates. Topic: Microeconomics and macroeconomics Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Written and oral communication

2) What is an opportunity cost? Give an example. Answer: An opportunity cost of something is the best thing you must give up to get it. For example, the cost of attending class might be the extra hour of sleep you lose, or the opportunity cost of buying a taco might be the soda you can no longer buy. Topic: Opportunity cost Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Written and oral communication

3) Your friend is preparing for this exam and in your practice session makes the following statement: "Instead of attending microeconomics class for two hours, Kiki could have played tennis or watched a movie. Therefore, the opportunity cost of attending class is the tennis and the movie she had to give up." Is your friend's analysis correct or not? Explain your answer. Answer: Your friend's analysis is incorrect. The opportunity cost of an action is the (single) best thing she had to give up, not all the things she had to give up. Kiki's opportunity cost of studying for her exam is either the tennis or the movie, whichever she would have done had she not studied. Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 1.2 Status: Old AACSB: Written and oral communication

4) Rather than go out to eat by yourself, you decide to stay at home and fix dinner for yourself and your two roommates. Your roommates applaud your decision. Your roommates tell you that your decision to eat at home has no opportunity cost because you already have all the dinner ingredients in your pantry. Is this comment correct? Answer: Your roommates' comment is incorrect. The opportunity cost of preparing dinner at home is whatever is the best thing you give up, which, given your choice boiled down to staying home or going out, is going out to eat. Hence the opportunity cost of fixing dinner at home is going out to eat. Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 1.2 Status: Old AACSB: Written and oral communication

5) Shaniq can spend the next hour studying for a finance test, hiking along the Oregon coast, watching reruns of Lost on television, or napping. If she decides to study, what is the opportunity cost of her choice: hiking, watching television, or napping? Answer: With the information given, it is impossible to determine the opportunity cost. The opportunity cost is the highest-valued alternative forgone and the problem does not give Shaniq's ranking of the options. For instance, if Shaniq thinks that if she had not studied she would have watched Lost, then watching Lost is the opportunity cost. However, if Shaniq thinks that if she were not studying, she would be strolling along the beach, then the beach walk is the opportunity cost. Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 1.2 Status: Old AACSB: Written and oral communication

6) For spring break, Melanie will either stay home or go to Daytona Beach. At home, Melanie pays $10 per day for food and earns $90 a day at her job. At Daytona Beach, Melanie will stay with friends and so has no lodging cost. She will pay $20 per day for food. In terms of dollars, Melanie's opportunity cost per day of going to Daytona Beach is how much? Answer: Melanie's opportunity cost of going to Daytona Beach is $100 per day. If she goes, she spends $10 extra for food and loses $90 income from her job, for a total opportunity cost of $100. Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

7) Why is the benefit of something measured by what you are willing to give up? Answer: The benefit of a good or service, say a slice of pizza, is the pleasure it brings the consumer. But it is impossible to measure someone's pleasure. In order to measure the benefit of the slice of pizza, we need something that we can measure. Thus, to measure the benefit of the slice of pizza, we ask the consumer what he or she is willing to give up to get the slice of pizza. So, if the consumer was willing to give up, say, three hot dogs to get the slice of pizza, we can determine that the benefit of the slice of pizza to the consumer is three hot dogs. Topic: Benefit Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Written and oral communication

8) Define marginal cost and marginal benefit. Answer: Marginal cost is the opportunity cost of a one-unit increase in an activity. Marginal benefit is the benefit of a one-unit increase in an activity. Topic: Marginal benefit, marginal cost Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

9) In New State, the bottling law requires that people get a refund of five cents when they return an empty bottle or can. Why does the state pay people to return bottles? In your answer, be sure to mention the role played by rational choice. Answer: Policy makers know that people making rational choices respond to incentives. Instead of throwing away bottles and cans, people will now bring the used bottles and cans to the designated areas for recycling in order to receive their payment. Thus policy makers have taken advantage of people's rational decision making in order to reduce litter and clean the environment. Topic: Incentives Skill: Level 3: Using models Section: Checkpoint 1.2 Status: Old AACSB: Written and oral communication

10) Must a rational choice always work out well? In other words, is it possible for someone to regret a rational decision? Answer: It is not necessarily the case that a rational choice always works out well; sometimes people will come to regret a rational decision. Decisions are made based on the information at hand. Sometimes that information is incomplete. For instance, when faced with a math midterm on Thursday, on Wednesday night a student might believe that he or she has a strong grasp of the subject and hence rationally decide to go to a movie rather than study. When the test reveals that the student actually understood little about the math and the student earns a low score, he or she likely regrets not studying. But the regret does not imply that the decision to see the movie was irrational. Topic: Making rational choices Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Written and oral communication

11) Discuss what is necessary to make rational decisions. Be sure to mention opportunity cost, marginal cost, and marginal benefit. Answer: Economists assume that people act rationally, making choices in increments and comparing marginal costs and benefits. Costs are measured as opportunity cost, which is the value of the best thing that must be given up. Benefits are subjective, measured by what you are willing to give up. Marginal cost is the additional cost of one more unit of the good and marginal benefit is the additional benefit of one more unit. Marginal cost increases and marginal benefit decreases as more of the activity is considered. A rational decision compares the marginal benefit of the decision to its marginal cost. If the marginal benefit exceeds the marginal cost, the (rational) decision is to undertake the action being contemplated. If the marginal benefit is less than the marginal cost, the (rational) decision is to not undertake the action being considered. Topic: Making rational choices Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Written and oral communication

12) What is a positive statement? Give an example. Answer: A positive statement addresses "what is" and can be tested. An example of a positive statement is "An increase in the price of gasoline decreases the quantity of gasoline demanded." Topic: Positive statements Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

13) What is the difference between positive and normative statements? Answer: Positive statements tell what is and normative statements tell what ought to be. Positive statements can be tested to determine if they are correct or not, while normative statements use value judgments and so cannot be tested. For example, two economists might agree on the positive assertion that if the government spent its funds purchasing pharmaceutical drugs for poor older Americans rather than poor children, then poor older Americans would use more drugs and poor children would use fewer. But they might disagree on the normative conclusion of whether the government should pursue this policy. One economist might argue "It is not fair to have senior citizens suffer because they cannot afford medicine" and the other economist might argue "It is not fair to have children suffer because their parents cannot afford medicine." Topic: Positive and normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Written and oral communication

14) Two economists can agree that raising the minimum wage creates unemployment yet one might argue that raising the minimum wage is a good policy and the other that it is a bad policy. Why can this difference exist? Be sure to use the terms positive and normative in your answer. Answer: Positive statements are statements that describe how the world is. Positive statements can be tested and so, ultimately, any disagreements about positive statements should be resolved. The statement that "Raising the minimum wage creates unemployment" is a positive statement and, on the basis of repeated testing, most economists agree that it is a correct positive statement. Normative statements, however, are statements that describe how the world ought to be. Normative statements depend on people's values and cannot be tested. So one economist might argue that raising the minimum wage is a good policy because this economist thinks that, although it is unfortunate that some people lose their jobs, the fact that others retain their jobs and their wages rise more than outweighs the harm created by the unemployment. Another economist might strongly differ because the second economist thinks that the harm inflicted on people who lose their jobs more than outweighs any good from some workers being paid more. This difference of opinion can last indefinitely because there is no way to test the two economists' beliefs to determine which is correct. Topic: Positive and normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Written and oral communication

15) Explain whether the statement, "There is life on Mars," is a normative or positive statement. Answer: The statement is a positive statement because it does not depend on a value judgment. Instead, it is a statement that tries to describe "what is" and hence is testable. Of course, in order to test the assertion, it would be necessary to go to Mars to ascertain if there is life present. While it is difficult (!) at present to actually carry out the test, nonetheless the statement is testable and hence is a positive statement. Topic: Positive statements Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Written and oral communication

16) Explain whether the statement, "Hillary Clinton was elected President of the United States in 2008," 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 2008, 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 2008" is a positive, albeit incorrect, statement. Topic: Positive statements Skill: Level 3: Using models Section: Checkpoint 1.2 Status: Old AACSB: Written and oral communication

17) What is a normative statement? Give an example. Answer: A normative statement is a statement about what ought to be. It is a value judgment or opinion and so cannot be proven true or false. An example of a normative statement is "Students should attend school year round to receive a better education." Topic: Normative statements Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

18) Explain whether the statement "The government should increase tariffs on Japanese cars to protect the American car industry from competition," is a normative or positive statement. Answer: The statement is normative. The statement is a normative statement because it depends on a value judgment, namely that the government should protect the American car industry from competition. Topic: Normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

1.8 Essay: Appendix: Making and Using Graphs 1) Why do economists use graphs? Answer: Graphs help economists, and others, to visualize the relationships between economic variables. Graphs that plot variables together help economists understand if the variables are related and how they are related. Graphs also help provide a visual picture of economic models that link different variables. Indeed, many other disciplines use such visual models. For example, architects work with blueprints (their model) and the blueprints represent every detail of a building. Economists' models do not reflect of every detail of the real world, but the graphs that they use nonetheless are valuable because they help clarify the linkages between the variables. Topic: Basic idea Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

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

3) In the diagram below, label the x-axis, the y-axis, and the origin.

Answer:

The figure above has the x-axis, the y-axis, and the origin labeled. Topic: Basic idea Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

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

Answer:

The figure above shows the labeled axes and has drawn in it the relationships between the price and the quantity of blouses purchased for Katie and Kim. Topic: Scatter diagrams Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

5) The figure above shows the price of a DVD player from 1996 to 2000. a. What type of graph is illustrated above? b. What is the trend in the price of a DVD player? Answer: a. The graph is a time-series graph because it plots time along the horizontal axis and the price of a DVD player along the vertical axis. b. The trend in the price of a DVD player is negative, that is, the price of a DVD player has generally decreased from one year to the next. Topic: Time-series graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

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

7) What is the difference between a positive and a negative relationship? Answer: Two variables are positively related when an increase (decrease) in one is associated with an increase (decrease) in the other. In this case, the variables move together, in the same direction. Two variables are negatively related when an increase (decrease) in one is associated with a decrease (increase) in the other. In this case, the variables move in the opposite direction. Topic: Relationships Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

8) A graph of two variables is a vertical line. What is the interpretation of this result? Answer: When the graph of two variables is a vertical line, the variables are not related because, with this graph, whenever the variable measured along the vertical axis changes, the variable measured along the horizontal axis does not change. Topic: Unrelated variables Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

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

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

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

The point is a maximum point. Examine the figure above. The slope of a curved line at any point equals the slope of a straight line that touches the curved line at only that one point. Thus to the left of the maximum point, take point A. The slope of the straight line that touches the curved line at only point A is positive, so the slope of the relationship is positive. Similarly, take point B to the right of the maximum point. As the straight line shows, the slope of the relationship at point B is negative. Indeed, whenever there is a maximum point, the slope of the relationship to the left of the maximum is positive and the slope to the right is negative. Topic: Maximum Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

12) What does the slope of a straight line equal? How is the slope of a curved line calculated? Answer: The slope of a straight line is calculated between two points on the line. Between the two points on the line, the slope equals the change in the value of the variable measured on the vertical axis (the 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 is calculated at a point on the line. At that point on the curved line, draw a straight line that touches the curved line at only that point. Then, calculate the slope of the straight line. The slope of the curved line at that point equals the slope of the straight line. Topic: Slope Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytical thinking

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

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

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

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

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

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

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

The figure labels the axes and graphs the relationship. a. The relationship between X and Y is negative. b. The slope equals -2. c. The slope equals -2. Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytical thinking

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

Answer:

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

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

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

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

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

21) What does the slope of the curved line at point A shown in the above figure equal? Answer: The slope of a curved line equals the slope of a straight line that touches the curved line at only that point. And, the slope of a straight line equals the change in variable on the y-axis divided by the change in the variable on the x-axis. Measure the slope of the straight line from point A to where the line crosses the x-axis, at 15. Thus the straight line has a slope of Therefore the curve line at point A also has a slope equal to -6. Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytical thinking

22) "It is impossible to represent a three variable relationship in a two-dimensional graph." Is this statement true or false? Explain your answer. Answer: The statement is false because it is possible to represent a three variable relationship in a two dimensional graph. To do so, start by focusing on two of the variables. Assume that the third variable does not change (the ceteris paribus assumption) and then graph the relationship between the two variables. The graph shows how these two variables are related when the third variable does not change. When the third variable does change, then the entire relationship between the two graphed variables changes. In other words, the line showing the relationship between the two graphed variables shifts so that it becomes an entirely new line. The shift in the line shows how the third variable influences the other two. Topic: Relationships among more than two variables Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytical thinking

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

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

Answer:

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

Essential Foundations of Economics, 8e (Bade) Chapter 2 The U.S. and Global Economies 2.1 What, How, and For Whom? 1) Items that are purchased by individuals for their own enjoyment are called A) consumption goods and services. B) capital goods. C) government goods and services. D) exports of goods and services. E) private goods. Answer: A Topic: Consumption goods and services Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

2) Items bought by individuals to provide personal enjoyment are termed A) consumption goods. B) personal goods. C) consumption or investment goods. D) standard goods. E) pleasure goods. Answer: A Topic: Consumption goods and services Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

3) What would be an example of consumption good? A) Antonio, the manager of the local Taco Hut, purchases a new deep fryer. B) The local driver's license office purchases a new digital camera and printer. C) Rhianna gets a haircut. D) Jake buys an iPhone. E) Donald Trump purchases furniture for his office. Answer: D Topic: What we produce Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

4) Which of the following is a consumption good or service? A) a personal computer purchased in order to play games at home B) a United Airline ticket counter C) the Endeavor space shuttle D) a United Parcel Service truck delivering Christmas gifts E) a satellite dish installed by Cox Cable to download programs that are then distributed through its cable system Answer: A Topic: Consumption goods and services Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

5) What would be an example of consumption service? A) Rhianna gets a haircut. B) Jake buys an iPhone. C) Antonio, the manager of the local Taco Hut, purchases a new deep fryer. D) The local driver's license office purchases a new digital camera and printer. E) Donald Trump purchases furniture for his office. Answer: A Topic: Consumption goods and services Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

6) The largest share of total production in the United States is A) consumption goods and services. B) capital goods. C) government goods and services. D) exported goods and services. E) imported goods and services. Answer: A Topic: Consumption goods and services Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

7) Items bought by businesses to help produce other goods and services are called A) consumption goods and services. B) capital goods. C) government goods and services. D) exports of goods and services. E) productive goods. Answer: B Topic: Capital goods Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

8) Which of the following is NOT considered a consumption good? A) Nike swimming trunks B) marriage counseling services C) a UPS truck D) a Subway sandwich E) a U.S. government bond Answer: C Topic: Capital goods Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: New AACSB: Application of knowledge

9) An item that is purchased to increase businesses' productive resources is A) an export. B) a government good. C) a capital good. D) a consumption good. E) a productive good. Answer: C Topic: Capital goods Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

10) What would be an example of capital good? A) Jeanette buys a new dress. B) The local driver's license office purchases a new digital camera and printer. C) Antonio, the manager of the local Taco Hut, purchases a new deep fryer. D) Apple sells computers to Japan. E) Rhianna gets a haircut. Answer: C Topic: Capital goods Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

11) The difference between consumption and capital goods is that A) only big corporations can afford capital goods. B) capital goods are used to produce additional goods while consumption goods are not. C) capital goods are provided by the government. D) consumption goods can be enjoyed by many people at the same time. E) it is illegal to export capital goods. Answer: B Topic: Consumption and capital goods Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

12) Which of the following is NOT considered an example of a capital good? A) a miner's cap B) a GPS tracking device C) an airport kiosk D) a U.S. government bond E) a stethoscope Answer: D Topic: Capital goods Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: New AACSB: Application of knowledge

13) Goods and services bought by the government account for about ________ percent of total production. A) 2 B) 8 C) 17 D) 35 E) 67 Answer: C Topic: Government goods and services Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

14) What would be an example of government good? A) Jake buys an iPhone. B) The local driver's license office purchases a new digital camera and printer. C) Antonio, the manager of the local Taco Hut, purchases a new deep fryer. D) Donald Trump purchases furniture for his office. E) Rhianna gets a haircut. Answer: B Topic: Government goods and services Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

15) Goods produced in the United States and sold in other countries are called A) exports. B) imports. C) foreign goods. D) capital goods. E) capital account goods. Answer: A Topic: Exports Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

16) An export good is a good produced A) in the United States and sold to foreigners living in the United States. B) by foreigners in the United States and purchased by U.S. households. C) in another country and purchased by U.S. residents. D) in the United States and sold in other countries. E) in another country and purchased by foreigners not residing in the United States. Answer: D Topic: Exports Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

17) Computers and insurance coverage produced in the United States and sold to people in other nations are categorized as A) U.S. consumption goods and services. B) foreign capital goods. C) U.S. government goods and services. D) U.S. exports of goods and services. E) U.S. imports of goods and services. Answer: D Topic: Exports Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

18) The Colorado Ski Shop sold 60 ski jackets to a Belgian company's headquarters located in Paris, France. The ski jackets are a A) U.S. export good. B) capital good. C) government good. D) U.S. consumption service. E) U.S. import. Answer: A Topic: Exports Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

19) Over the past 70 years, which of the following has occurred? i. The service sector has grown so that now about 80 percent of workers are now employed in the service industry. ii. The manufacturing sector has shrunk, so now about 20 percent of workers are now employed in the production of goods. iii. The percentage of workers employed in the service industry has increased steadily. A) i, ii and iii B) i and iii C) ii only D) i only E) ii and iii Answer: A Topic: Changes in what we produce Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

20) Which of the following is NOT considered one of the factors of production? A) land B) labor C) capital D) technology E) entrepreneurship Answer: D Topic: Factors of production Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

21) Which of the following correctly lists the categories of factors of production? A) land, labor, capital, and entrepreneurship B) land, buildings, capital, and entrepreneurship C) labor, machines, buildings, capital, and entrepreneurship D) forests, fish, buildings, capital, and entrepreneurship E) labor, money, stocks, and bonds Answer: A Topic: Factors of production Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

22) Which of the following is NOT considered a factor of production? A) money B) capital C) land D) entrepreneurial ideas E) labor Answer: A Topic: Factors of production Skill: Level 1: Definition Section: Checkpoint 2.1 Status: New AACSB: Reflective thinking

23) Goods and services are produced by using four factors of production: A) land, labor, capital, and entrepreneurship. B) land, labor, money, and equipment. C) natural resources, human resources, financial assets, and entrepreneurial resources. D) labor, human capital, physical capital, and financial capital. E) land, labor, capital, and money. Answer: A Topic: Factors of production Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

24) Factors of production are the A) goods that are bought by individuals and used to provide personal enjoyment. B) goods that are bought by businesses to produce productive resources. C) productive resources used to produce goods and services. D) productive resources used by government to increase the productivity of consumption. E) goods and services produced by the economy. Answer: C Topic: Factors of production Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

25) The productive resource that includes all the "gifts of nature" is called A) land. B) labor. C) capital. D) entrepreneurship. E) land if undeveloped and capital if developed. Answer: A Topic: Land Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

26) Economists classify energy and water as part of which factor of production? A) land B) labor C) capital D) entrepreneurship E) land if undeveloped and capital if developed Answer: A Topic: Land Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

27) As a factor of production, oil reserves are counted as A) land. B) labor. C) capital. D) entrepreneurship. E) financial capital. Answer: A Topic: Land Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

28) Over time, the percentage of total employment in services has ________ and in agriculture, employment has ________. A) increased; increased B) decreased; increased C) stayed about the same; decreased D) stayed about the same; increased E) increased; decreased Answer: E Topic: Labor Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

29) Which of the following has been the bigger contributor to increases in the quantity of labor in the Unites States during the past 50 years? A) The proportion of men taking paid jobs has trended up. B) The proportion of women taking paid jobs has trended up. C) The proportion of young adults entering college has trended down. D) The proportion of seniors taking early retirement has trended down. E) Total population growth has increased dramatically. Answer: B Topic: Labor Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: New AACSB: Reflective thinking

30) The concept of human capital describes A) human skills, that is, the quality of labor. B) human population, that is, the quantity of labor. C) the number of machines per employed worker. D) the number of workers per operating machine. E) the number of machines (capital) that have been produced by people (humans). Answer: A Topic: Human capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

31) Which factor of production does human capital enhance? i. land ii. labor iii. capital A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: B Topic: Labor, human capital Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

32) Human capital can be increased through A) investment in new technology. B) education, on-the-job training, and work experience. C) investment in new machinery. D) decreases in population. E) increasing the nation's production of consumption goods. Answer: B Topic: Human capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

33) The United States possesses a large amount of human capital. As a result of this fact, in the United States there is a A) large amount of machinery and equipment. B) large number of people and a great deal of land. C) highly skilled and educated labor force. D) large number of kind and generous humans. E) large amount of machinery (capital) that is run by people (humans). Answer: C Topic: Labor, human capital Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

34) Jan is attending college and studying to be an investment broker. To improve her chances of employment following college, she has interned at a top brokerage firm during the last two summers. Jan's internship has increased her A) natural labor. B) human capital. C) consumption services. D) natural resources. E) entrepreneurship capital. Answer: B Topic: Labor, human capital Skill: Level 4: Applying models Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

35) Which of the following is NOT directly related to human capital? A) a college education B) a summer internship C) knowledge of computer programing D) an MRI machine E) an understanding of real estate markets Answer: D Topic: Human capital Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: New AACSB: Application of knowledge

36) Human capital ________ as you work. As a result, the ________ of goods and services ________. A) increases; quantity; increases. B) declines; quality; increases. C) improves; quality; does not change. D) does not change; quality; does not change. E) decreases; quantity; decreases. Answer: A Topic: Human capital Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

37) Capital, as a factor of production, refers to A) money, stocks, and bonds. B) the production technology used by firms. C) the tools and instruments used to produce other goods and services. D) the production factors imported from abroad. E) stocks and bonds but not money. Answer: C Topic: Capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

38) The total value of capital in the United States is around A) $50 trillion. B) $10 trillion. C) $79 trillion. D) $100 trillion. E) $145 trillion. Answer: A Topic: Capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

39) Capital is a factor of production. Which of the following is an example of capital? i. $1,000 in money ii. 100 shares of Microsoft stock iii. $10,000 in bonds issued by General Motors iv. a drill press in your local machine shop A) i and ii B) ii only C) iii only D) iv only E) ii and iii Answer: D Topic: Capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

40) Capital is a factor of production. An example of capital as a factor of production is A) money. B) stocks. C) bonds. D) machines. E) education. Answer: D Topic: Capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

41) One of the productive resources is capital. Capital includes A) money borrowed from a bank. B) a company's stocks and bonds. C) tools, buildings, and machine tools. D) toys, t-shirts, CD players, and pencils. E) money in a savings account at a bank. Answer: C Topic: Capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

42) A newspaper printing press is an example of A) a capital good. B) a factor of production. C) something that influences labor productivity. D) a good that was once an output of the production process. E) All of the above are correct. Answer: E Topic: Capital Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: New AACSB: Application of knowledge

43) Which of the following is NOT considered capital? A) an assembly line at a General Motors plant B) a computer used by your instructor for presentations in class C) stocks and bonds that are sold by Pepsico D) the furniture in the President's office E) a nail gun used for building houses Answer: C Topic: How do we produce? Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

44) Entrepreneurship, as a factor of production, refers to A) the technology used by firms. B) the human capital accumulated by workers. C) the value of the firm's stock. D) the human resource that organizes labor, land, and capital. E) the capital the firm uses. Answer: D Topic: Entrepreneurship Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

45) The productive resource that organizes labor, land, and capital is A) human capital. B) financial capital. C) entrepreneurship. D) government. E) capital. Answer: C Topic: Entrepreneurship Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

46) Payments to the factors of production are A) rent, mortgage, interest, and bonds. B) rent, interest, bonds, and profit or loss. C) rent, wages, interest, and profit or loss. D) rent, wages, profit or loss, and bonus. E) land, labor, capital, and entrepreneurship. Answer: C Topic: Resource payments Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

47) ________ paid for the use of land; ________ paid for the services of labor; and ________ paid for the use of capital. A) Rent is; wages are; interest is B) Rent is; interest is; wages are C) Interest is; wages are; profit is D) Mortgages are; interest is; wages are E) Rent is; wages are; profit is Answer: A Topic: Resource payments Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

48) The income paid for the use of land is called A) rent. B) wages. C) interest. D) profit. E) land capital. Answer: A Topic: Resource payments Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

49) The income paid to labor is called A) rent. B) wages. C) interest. D) profit. E) human capital. Answer: B Topic: Resource payments Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

50) Which factor of production is paid "interest"? A) land B) labor C) capital D) entrepreneurship E) human capital Answer: C Topic: Resource payments Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

51) The owners of the resource ________ are paid ________. A) land; wages B) labor; profit C) capital; rent D) capital; interest E) entrepreneurship; wages Answer: D Topic: Resource payments Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

52) Which factor of production is paid "profit"? A) land B) labor C) capital D) entrepreneurship E) human capital Answer: D Topic: Resource payments Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

53) The functional distribution of income measures which of the following? A) how federal tax revenues are related to the business function that employs taxpayers B) the distribution of earnings by the factors of production C) the proportion of income generated by the four types of expenditures on goods and services D) the distribution of income among households E) the distribution of income among nations Answer: B Topic: Functional distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

54) In the United States, the productive factor that, as a group, receives the largest fraction of the nation's total income is A) labor. B) capital. C) consumption goods and services. D) entrepreneurship. E) land. Answer: A Topic: Functional distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

55) According to the functional distribution of income, in the United States A) capital earns most of the income. B) labor earns most of the income. C) land earns most of the income. D) entrepreneurs earned most of the income. E) the income earned by capital and labor are approximately equal. Answer: B Topic: Functional distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

56) The data show that more than 60 percent of the total income earned in the United States goes to A) labor. B) land. C) capital. D) entrepreneurship. E) profit. Answer: A Topic: Functional distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

57) The majority of the income earned in the United States is paid in A) rent. B) wages. C) interest. D) profit. E) dividends. Answer: B Topic: Functional distribution of income Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

58) The personal distribution of income measures which of the following? A) how federal tax revenues are related to the type of businesses that employs the taxpayers B) the distribution of earnings by the factors of production C) proportion of income generated by the four types of expenditures on goods and services D) the distribution of income among households E) the distribution of income among nations Answer: D Topic: Personal distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

59) In the United States, the poorest 20 percent of households earn roughly ________ percent of total income. A) 20 B) 10 C) 15 D) 3 E) 0.5 Answer: D Topic: Personal distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

60) The personal distribution of income in the United States shows that A) income is equally distributed. B) the poorest 20 percent of individuals receive approximately 20 percent of total income. C) the richest 20 percent of individuals receive approximately 50 percent of total income. D) the poorest 60 percent of individuals receive approximately 50 percent of total income. E) the richest 20 percent of individuals receive approximately 25 percent of total income. Answer: C Topic: Personal distribution of income Skill: Level 3: Using models Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

61) The richest 20 percent of individuals in the United States receive about ________ of the nation's total income. A) 21 percent B) 51 percent C) 91 percent D) 99 percent E) 23 percent Answer: B Topic: Personal distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

62) When the total U.S. production of goods and services is divided into consumption goods and services, capital goods, government goods and services, and export goods and services, the largest component is A) consumption goods and services. B) capital goods. C) government goods and services. D) export goods and services. E) capital goods and government goods and services tie for the largest component. Answer: A Topic: What we produce Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

63) An example of a capital good is A) a fiber optic cable TV system. B) an insurance policy. C) a haircut. D) an iPod. E) a slice of pizza. Answer: A Topic: What we produce Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

64) Goods and services produced in the United States and sold in other countries are called A) consumption goods and services. B) capital goods. C) government goods and services. D) export goods and services. E) import goods and services. Answer: D Topic: What we produce Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

65) Which of the following correctly lists the categories of factors of production? A) machines, buildings, land, and money B) hardware, software, land, and money C) capital, money, and labor D) owners, workers, and consumers E) land, labor, capital, and entrepreneurship Answer: E Topic: Factors of production Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

66) In economics, the factor of production "land" includes all of the following EXCEPT A) energy. B) plastics. C) wild plants. D) animals, birds, and fish. E) oil. Answer: B Topic: Land Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

67) Human capital is A) solely the innate ability we are born with. B) the money humans have saved. C) the knowledge humans accumulate through education and experience. D) machinery that needs human supervision. E) any type of machinery. Answer: C Topic: Human capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

68) When Ethan continues his education beyond high school he is increasing his A) capital. B) wage rate. C) human capital. D) quantity of labor. E) rent. Answer: C Topic: Human capital Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

69) ________ is the human resource that organizes labor, land, and capital. A) Human capital B) Human skill C) A gift of nature D) Entrepreneurship E) Profit Answer: D Topic: Entrepreneurship Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

70) Wages are paid to ________ and interest is paid to ________. A) entrepreneurs; capital B) labor; capital C) labor; land D) entrepreneurs; land E) labor; entrepreneurs Answer: B Topic: Payments for the factors of production Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

71) The income earned by entrepreneurs is A) interest. B) wages. C) profit or loss. D) rent, wages, and interest. E) a mixture of rent, wages, interest, and profit. Answer: C Topic: Profit Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

72) Dividing the nation's income among the factors of production, the largest percentage is paid to A) labor. B) land. C) capital. D) entrepreneurship. E) labor and capital, with each receiving about 41 percent of the total income. Answer: A Topic: Functional distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

73) ________ earned the highest amount of income among the factors of production in the United States. A) Labor B) Capital C) Land D) Entrepreneurship E) Investment Answer: A Topic: Functional distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

74) In the United States, the richest 20 percent of households receive about ________ percent of total income. A) 4 B) 15 C) 23 D) 50 E) 33 Answer: D Topic: Personal distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

75) In the United States, the poorest 20 percent of households receive about ________ percent of total income. A) 3 B) 15 C) 23 D) 49 E) 20 Answer: A Topic: Personal distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

76) The personal distribution of income shows A) that labor receives the largest percentage of total income. B) how profit accounts for the largest fraction of total income. C) that the richest 20 percent of households receive 23 percent of total income. D) that interest accounts for most of the income of the richest 20 percent of households. E) that the poorest 20 percent of households receive less than 4 percent of total income. Answer: E Topic: Personal distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

2.2 The Global Economy 1) Compared to the world, the rate of U.S. population growth is A) slower than in the world as a whole. B) about the same as in the world as a whole. C) much faster than in the world as a whole. D) incomparable because U.S. residents are born with a much greater chance of accumulating a lot of human capital. E) incomparable because we do not have accurate world population statistics. Answer: A Topic: World population Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

2) Approximately ________ people live in the United States and ________ people live in the world. A) 410 million; 8 billion B) 310 million; 7 billion C) 210 million; 5 billion D) 310 million; 3 billion E) 210 million; 6 billion Answer: B Topic: The people Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

3) The most people live in ________ economies and the fewest people live in ________ economies. A) developing; emerging market B) advanced; emerging market C) advanced; developing D) emerging market; developing E) developing; advanced Answer: A Topic: The countries Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

4) When describing the IMF broad country classification, the most accurate statement is that A) the category with the greatest number of countries is the advanced economies. B) the emerging market economies are countries that were, until the early 1990s, part of the Soviet Union or its satellites. C) most of the nations in Western Europe are considered emerging market economies. D) most of the world's population lives in advanced economies. E) about 50 percent of the world's population live in the advanced economies and the other 50 percent live in the emerging market and developing economies. Answer: B Topic: Classification of economies Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

5) Which of the following is NOT classified as an advanced economy? A) South Korea B) Australia C) Russia D) Hong Kong E) the United Kingdom Answer: C Topic: Advanced economies Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

6) Canada is classified by the International Monetary Fund as A) an advanced economy. B) a developing economy. C) a transition economy. D) an emerging market economy. E) a natural-resource based economy. Answer: A Topic: Advanced economies Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

7) ________ economies include ________. A) Advanced; France, Australia and South Korea B) Advanced; the U.S., Taiwan and Russia C) Advanced; Russia, Canada and Singapore D) Emerging; Taiwan, Russia and Singapore E) Emerging; Saudi Arabia, Poland and Taiwan Answer: A Topic: Advanced economies Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

8) Most countries in the world are classified as A) advanced. B) in transition. C) developing. D) industrialized. E) emerging market. Answer: C Topic: Developing economies Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

9) Most of the world's population lives in A) advanced economies. B) developing economies. C) transition economies. D) emerging market economies. E) island nations. Answer: B Topic: Developing economies Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

10) Which of the following is true? i. The advanced economies account for more than half of global production. ii. Almost four out of every five people in the world live in the developing economies. iii. In the advanced economies, agriculture accounts for a larger part of total production than in the developing economies. A) i and ii B) ii and iii C) i and iii D) i only E) i, ii, and iii Answer: A Topic: Developing economies Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

11) Nigeria would be classified by the International Monetary Fund as A) an advanced economy. B) a developing economy. C) a transition economy. D) an emerging market economy. E) a resource-based economy. Answer: B Topic: Developing economies Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

12) ________ economies include ________. A) Developing; Saudi Arabia and South Africa B) Developing; Poland and Russia C) Developing; China and Poland D) Emerging; Poland and Brazil E) Emerging; China and Canada Answer: A Topic: Developing economies Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

13) Poland is classified as A) an advanced economy. B) a developing economy. C) a transition economy. D) an emerging market economy. E) private economy. Answer: D Topic: Emerging market economies Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

14) The majority of the value of production in the world economy is produced in A) all of the developing economies taken together. B) all of Africa and the Middle East taken together. C) China and other Asian developing economies. D) all of the advanced economies taken together. E) all of the emerging market economies taken together. Answer: D Topic: What in the global economy Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

15) Which of the following correctly describes how the "global pie is baked"? A) Advanced economies account for about 50 percent of the value of the world's production. B) The United States' share of economic pie is increasing while China's share is decreasing. C) The increase in manufacturing has taken place in mainly the advanced economies. D) Asia accounts for about 40 percent of the global pie. E) Emerging economies account for about 25 percent of the global pie. Answer: A Topic: What in the global economy Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

16) Physical capital differences across countries can be seen in the fact that A) more advanced economies typically have more sophisticated technology. B) furniture factories in China use machines like those in North Carolina. C) students in India study the same subjects as those in the United States. D) advanced economies produce 53 percent of the world's income. E) the iPhone's components are produced in 30 countries. Answer: A Topic: How in the global economy Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

17) The charitable organization Creating Hope International trains women in Afghanistan to become tailors. This effort reduces A) physical capital differences between advanced and developing economies. B) entrepreneurship differences between advanced and developing economies. C) agricultural differences between advanced and developing economies. D) manufacturing differences between advanced and developing economies. E) human capital differences between advanced and developing economies. Answer: E Topic: How in the global economy Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

18) Which of the following is an example of an effort to decrease physical capital differences between an advanced and a developing economy? A) American troops build roads in Afghanistan. B) Through World Vision, women and children in Africa receive education. C) Peace Corps volunteers teach English around the world. D) Creating Hope International trains women in Afghanistan to become tailors. E) Habitat for Humanity builds houses for low income families in the United States. Answer: A Topic: How in the global economy Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

19) Of the following, the country with the highest average income per day in the world is A) Japan. B) the United States. C) France. D) Germany. E) China. Answer: B Topic: Income in the global economy Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

20) Income equality has A) increased within countries but has narrowed across countries. B) not changed in the advanced economies over the past 50 years. C) narrowed within countries but increased across countries. D) increased in developing economies as manufacturing has decreased. E) decreased in the United States as manufacturing has increased. Answer: A Topic: Income in the global economy Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

21) The world population is approximately ________ people. A) 6.8 million B) 2 trillion C) 6.8 billion D) 6.8 trillion E) 680 million Answer: C Topic: Population Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

22) Which of the following statements is true? A) Income inequality within most countries has increased during the past 20 years. B) Income inequality across the entire world has decreased during the past 20 years. C) Income inequality within most countries and across the entire world has not changed much during the past 20 years. D) Both A and B are correct. E) None of the above is correct. Answer: D Topic: Income in the global economy Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: New AACSB: Reflective thinking

23) The percentage of the world's population that lives in the advanced economies is A) more than 71 percent. B) between 51 percent and 70 percent. C) between 31 percent and 50 percent. D) between 20 percent and 30 percent. E) less than 20 percent. Answer: E Topic: Population Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

24) Which of following groups of countries are all advanced economies? A) Australia, Brazil, and the United States B) Hong Kong, Japan, France, and the United Kingdom C) Italy, the United States, China, and Russia D) Singapore, Russia, France, and Chad E) Mexico, Canada, Germany, and Egypt Answer: B Topic: Advanced economies Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

25) The emerging market economies are A) the largest grouping including the nations of China and India. B) in transition from state-owned production to free markets. C) most of the nations of Western Europe. D) the nations that are currently agricultural in nature. E) the nations with the highest standards of living. Answer: B Topic: Emerging market economies Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

26) As a percentage of total world production, production in the 29 advanced economies is about ________ percent of total world production and in the 118 developing economies is about ________ percent of total world production. A) 53; 39 B) 23; 62 C) 53; 12 D) 30; 46 E) 19; 73 Answer: A Topic: Advanced economies Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

27) Compared to the developing economies, the advanced economies have ________ human capital and ________ physical capital. A) more; more B) more; less C) the same; the same D) less; more E) less; less Answer: A Topic: Advanced economies Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

28) In the advanced economies, ________ of the factories use advanced capital equipment and in the developing economies ________ of the factories use advanced capital equipment. A) virtually all; virtually all B) some; some C) virtually all; none D) some; none of E) virtually all; some Answer: E Topic: Advanced economies Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

29) Among the United States, Canada, Russia, India, and the United Kingdom, the country with the highest average income per person is A) the United States. B) Russia. C) India. D) Canada. E) the United Kingdom. Answer: A Topic: Advanced economies Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

2.3 The Circular Flows 1) ________ the owners of the factors of production, while ________ what amounts of those factors to hire. A) Households are; firms determine B) Households are; the government determines C) The government is; firms determine D) Firms are; households determine E) Firms are; the government determines Answer: A Topic: Households vs. firms Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

2) What two groups of decision makers are represented in the basic circular flow model? A) governments and financial institutions B) lenders and borrowers C) wholesalers and retailers D) bankers and regulators E) households and firms Answer: E Topic: Circular flow Skill: Level 1: Definition Section: Checkpoint 2.3 Status: New AACSB: Reflective thinking

3) Dan missed class the day the professor covered the circular flow model. Dan asked his friend Joan to explain markets to him. Joan correctly stated that a market A) requires a physical location for buyers and sellers to get together. B) is any arrangement that brings buyers and sellers together. C) must include a written contract between buyers and sellers. D) is only a place to purchase groceries. E) must have many buyers and only one seller, who is willing to sell to all the buyers. Answer: B Topic: Markets Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

4) The decisions of firms and households are A) coordinated by markets. B) made independently of one another. C) controlled by but not totally coordinated by the government. D) unexplainable by the circular flow model. E) coordinated by but not totally controlled by the government. Answer: A Topic: Markets Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

5) The circular flow model is used to show the A) flow of renewable natural resources. B) recycling process of production materials. C) expansions and contractions of economic activity. D) flow of expenditures and incomes in the economy. E) flow of supply and the flow of demand. Answer: D Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

6) The circular flow model shows the A) distribution of income and consumption goods across income levels. B) combinations of the factors of production needed to produce goods and services. C) flow of expenditure and incomes that arise from the households', firms', and governments' decisions. D) flow of natural resources from firms to the private market to government and back to firms. E) distribution of income to the different factors of production. Answer: C Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

7) The circular flow model shows the flow of A) expenditure and income throughout the economy. B) only money throughout the economy. C) only funds in stock and bond markets. D) only tax payments and government expenditures. E) goods markets and factor markets as they move through the economy. Answer: A Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

8) In the circular flow model, there are two types of markets: the ________ market and the ________ market. A) producers; consumers B) households; firms C) service; goods D) goods; factor E) supply; demand Answer: D Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

9) In the circular flow model, consumption goods are bought and sold in the A) goods markets. B) financial market. C) factor markets. D) government market. E) monetary flows. Answer: A Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

10) In the circular flow model, which of the following is on the buying side in the goods market? i. firms ii. households iii. federal, state, and local governments A) i only B) ii only C) iii only D) i and ii E) ii and iii Answer: E Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

11) In the circular flow model, which of the following is on the selling side in the goods market? A) federal, state, and local governments B) only households C) exporters D) only firms E) both firms and households Answer: D Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

12) The circular flow model shows that goods and services flow from A) businesses to households. B) households to business. C) the factor market to businesses. D) the goods market to businesses. E) the factor markets to the goods markets. Answer: A Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

13) As the circular flow model points out, a choice that households make is how A) many resources a firm will hire. B) many goods and services are produced. C) many goods and services are purchased. D) much labor is hired. E) much the government will collect in taxes and how much the government will spend on transfer payments. Answer: C Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

14) In the circular flow model, which of the following owns the factors of production? A) only federal, state, and local governments B) only households C) only firms D) both firms and households E) firms, households, and all levels of government Answer: B Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

15) In the circular flow model, the factor markets are the markets in which A) consumption goods and services are bought and sold. B) government goods and services are provided. C) land, labor, capital, and entrepreneurship are bought and sold. D) investment goods and services are bought and sold. E) governments impose all their taxes. Answer: C Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

16) A money flow in the circular flow diagram is i. the government's collection of taxes. ii. Chevrolet's production of SUVs. iii. Nike's payment of wages to its workers. A) i and iii B) i, ii and iii C) i only D) ii only E) ii and iii Answer: A Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

17) A real flow in the circular flow diagram is i. a firm's payments of wages to its workers. ii. a household's purchase of a new car. iii. a farmer's use of land to grow corn. A) ii and iii B) i only C) i and iii D) ii only E) i, ii and iii Answer: A Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

18) An example of a real flow in the circular flow diagram is A) a household's supply of work effort at its new business. B) the government's payment of wages to a soldier. C) Nike's payment of wages to workers in China. D) your county's collection of property taxes. E) a teacher's salary at the local high school. Answer: A Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

19) An example of a money flow in the circular flow diagram is A) a student's payment of tuition to her university. B) the government's operation of the court system. C) the government's financing of the national debt. D) a firm's production of goods to sell to a foreign country. E) a farmer's use of land to grow wheat. Answer: A Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

20) As the circular flow model shows, the factors of production flow from A) firms to households through the factor market. B) households to firms through the factor market. C) firms to households through the goods market. D) households to firms through the goods market. E) the goods market through firms to the factor markets. Answer: B Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

21) In the circular flow model, the factors of production flow in the A) same direction as do the rents, wages, interest, and profits. B) opposite direction as do the rents, wages, interest, and profits. C) opposite direction as does the government. D) same direction as does the goods market. E) opposite direction as does the goods market. Answer: B Topic: Circular flow model Skill: Level 4: Applying models Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

22) In the goods market, firms ________ and households ________. A) purchase goods and services; supply goods and services B) supply land, labor, capital, and entrepreneurship services; hire land, labor, capital, and entrepreneurship services C) pay rent, wages, interest, and profit; earn rent, wages, interest, and profit D) supply goods and services; purchase goods and services E) hire land, labor, capital, and entrepreneurship services; supply goods and services Answer: D Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

23) In the factor market, firms ________ and households ________. A) hire land, labor, capital, and entrepreneurship services; purchase goods and services B) supply land, labor, capital, and entrepreneurship services; hire land, labor, capital, and entrepreneurship services C) pay rent, wages, interest, and profit; earn rent, wages, interest, and profit D) purchase goods and services; supply goods and services E) supply goods and services; purchase goods and services Answer: C Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

24) Which of the following transactions takes place in factor markets? A) Henry receives a commission from his employer for selling a new automobile. B) Jake purchases 1,000 shares of stock in the Wal-Mart Corporation through his online trading account. C) Sam enters the winning bid on a grand piano at a local auction. D) Justin receives $30 in exchange for mowing his neighbor's lawn. E) Lucille receives a $500 check from the U.S. Social Security Administration. Answer: A Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: New AACSB: Application of knowledge

25) Which markets are depicted in the basic circular flow model? A) the goods market and the stock market B) the factor market and the bond market C) the goods market and the factor market D) the money market and the foreign exchange market E) the stock market and the bond market Answer: C Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: New AACSB: Reflective thinking

26) In the circular flow model, which of the following flows in the opposite direction from the flow of factors of production? A) finished goods and services B) wages, rent, interest, and profit C) interests payments of Federal, state, and local governments D) firm's profit incentives E) the goods market Answer: B Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

27) Terri is enrolled in her first economics course. She is required to give a presentation about the circular flow. Which of the following statements should she include in her presentation? A) Households choose the amount of the factors of production to provide the firms. B) Firms choose the amount of the factors of production to provide households. C) Households receive wages for the amount of entrepreneurship they provide firms. D) Firms pay wages for the amount of entrepreneurship they provide households. E) The flows of goods and services and payments for the goods and services flow in the same direction. Answer: A Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

28) Aaron locked himself out of his house and had to pay $40 to Brianna, who works for Lucky Locksmith, to open his door. Based on this transaction in the economy and using concepts from the circular flow model, which of the following is true? A) Brianna earned income from supplying her labor services. B) Aaron earned income from supplying his labor services. C) Brianna purchased goods and services. D) Aaron acted as a firm in this transaction. E) Aaron supplied goods and services. Answer: A Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

29) In the circular flow model, A) the government is represented as a separate market. B) the government buys goods and services from firms. C) goods and services are sold by households and purchased by firms. D) factor markets are where goods rather than services are bought and sold. E) the government has no direct interaction with either households or firms. Answer: B Topic: Circular flow and the government Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

30) In the circular flow model with the government sector, transfers A) flow in the same direction as do taxes. B) flow in the opposite direction as do taxes. C) to households flow in the same direction as do expenditures on goods and services. D) to firms flow in the same direction as do rent, wages, interest, and profits. E) flow only through the goods market. Answer: B Topic: Circular flow and the government Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

31) In the circular flow model with the government sector, taxes A) flow in the opposite direction as do transfers. B) flow in the same direction as do transfers. C) on households flow in the same direction as do the goods and services. D) on firms flow in the same direction as do factors of production. E) flow from the goods market to the factor markets. Answer: A Topic: Circular flow and the government Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

32) Which of the following is NOT shown explicitly in the circular flow model? A) the governments' purchases in the goods market B) the taxes the governments collect from households C) the governments' interaction with firms D) the legal system E) the transfers the governments make to households Answer: D Topic: Circular flow and the government Skill: Level 3: Using models Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

33) Which of the following is a function of the U.S. federal government? A) providing the legal and social framework for economic activity B) distributing private goods and services C) deciding for whom firms should produce goods and services D) deciding how much to produce of private goods and services E) determining what wages firms will pay their workers. Answer: A Topic: Federal government Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

34) Which of the following is NOT a function of the federal government? A) collecting property taxes B) making Social Security and welfare payments C) making transfers to state and local governments D) providing public goods and services E) imposing a personal income tax Answer: A Topic: Functions of the federal government Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

35) Of the following, the largest single component of U.S. federal government expenditures is spent on A) interest paid on the national debt. B) Medicare and Medicaid. C) national defense. D) purchases of goods and services for purposes other than national defense. E) transfers to state and local governments. Answer: B Topic: Federal government Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

36) The largest component of federal government spending is for A) national defense. B) Medicare and Medicaid. C) education. D) prisons. E) interest on the national debt. Answer: B Topic: Federal government Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

37) Of the following, the federal government obtains most revenue from A) excise taxes. B) sales taxes. C) corporate income taxes. D) Social Security taxes. E) property taxes. Answer: D Topic: Federal government Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

38) The two biggest items of the U.S. federal government revenue that together account for over approximately 80 percent of total federal government revenue are A) personal income taxes and Social Security taxes. B) personal income taxes and corporate income taxes. C) corporate income taxes and Social Security taxes. D) corporate income taxes and property taxes. E) personal income taxes and sales taxes. Answer: A Topic: Federal government Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

39) Of the following, the federal government's largest source of revenue is the A) sales tax. B) property tax. C) corporate income tax. D) Social Security tax. E) transfers from state and local governments. Answer: D Topic: Federal government Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

40) Tax revenues are transferred from A) state governments to the federal government. B) local governments to state and federal governments. C) one state government to other state governments. D) the federal government to state and local governments. E) the state and local governments to the federal government. Answer: D Topic: Federal government Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

41) Of the following, the largest source of revenue for the federal government is the A) personal income tax. B) transfers from state and local governments. C) corporation income tax. D) lottery. E) revenue from the sale of public lands. Answer: A Topic: Federal government Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

42) Income taxes paid by corporations are A) the major source of revenue for the federal government. B) the major source of revenue for state governments. C) the major source of revenue for local governments. D) about 9 percent of the federal government's revenue. E) the major source of expenditure by the federal government. Answer: D Topic: Federal government Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

43) The national debt is the total amount the ________ government has borrowed to make expenditures that ________ tax revenue. A) state and local; are less than B) federal; are less than C) federal; exceed D) state and local; exceed E) federal; are equal to Answer: C Topic: National debt Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

44) The national debt is the total amount the ________ government has ________ to make expenditures that exceed tax revenue. A) state and local; borrowed B) federal; taxed U.S. citizens C) state and local; taxed U.S. citizens D) federal; borrowed E) federal; loaned Answer: D Topic: National debt Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

45) The total amount the federal government has borrowed to make expenditures that exceed tax revenue is called A) personal income taxes. B) federal expenditures. C) total government spending. D) the net government revenue. E) the national debt. Answer: E Topic: National debt Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

46) If there is a national debt, we can conclude that the federal government has A) borrowed in the past. B) purchased more goods and services than were needed. C) spent money foolishly. D) loaned funds to U.S. taxpayers in the past. E) loaned funds to other nations in the past. Answer: A Topic: National debt Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

47) State and local governments finance expenditures mainly from A) tax revenue. B) funds provided by the federal government. C) government bonds issued at the state level. D) private bank loans. E) lottery funds. Answer: A Topic: State and local governments Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

48) Of the following, the largest source of tax revenue collected by state and local governments comes from A) individual income taxes. B) corporate income taxes. C) death taxes. D) sales taxes. E) lottery revenues. Answer: D Topic: State and local governments Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

49) Which of the following are sources of revenue for state and local governments? i. property taxes ii. sales taxes iii. transfers from the federal government A) i and ii B) ii and iii C) i and iii D) i, ii and iii E) i only Answer: D Topic: State and local governments Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

50) Property taxes are a major source of revenue for A) state and local governments. B) the federal governments. C) the federal, state, and local governments. D) firms wanting to relocate their operations. E) consumers. Answer: A Topic: State and local governments Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

51) The largest category of state and local government expenditures is A) public welfare. B) highways. C) education. D) interest on their debt. E) Social Security. Answer: C Topic: State and local governments Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

52) State and local governments spend about ________ of their expenditures on education. A) 14 percent B) 19 percent C) 34 percent D) 59 percent E) 74 percent Answer: C Topic: State and local governments Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

53) Households and firms in the U.S. economy interact with those in the rest of the world in the ________ market and in the ________ market. A) goods; factor B) goods; financial C) government; goods D) financial; factor E) firm; government Answer: B Topic: Circular flow model, international flows Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

54) An example of a U.S. export is A) a TV made in China sold to a buyer in Azerbaijan. B) matchbooks made in Mexico sold to a buyer in New Jersey. C) pasta made in Italy sold to buyers in Spain. D) diamonds mined in Africa sold to buyers in South America. E) a washing machine made in Indiana sold to a buyer in France. Answer: E Topic: Circular flow model, international flows Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

55) Within the circular flow model, economists define households as A) families with at least 2 children. B) families living in their own houses. C) individuals or groups living together. D) married or engaged couples. E) individuals or groups within the same legally defined family. Answer: C Topic: Households Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

56) A market is defined as A) the physical place where goods (but not services) are sold. B) the physical place where goods and services are sold. C) any arrangement that brings buyers and sellers together. D) a place where money is exchanged for goods. E) another name for a store. Answer: C Topic: Markets Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

57) In the circular flow model, A) only firms sell in markets. B) only households buy from markets. C) some firms only sell and some firms only buy. D) the money used to buy goods and the goods themselves travel in the same direction. E) both firms and households buy or sell in different markets. Answer: E Topic: Markets Skill: Level 3: Using models Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

58) ________ choose the quantities of goods and services to produce, while ________ choose the quantities of goods and services to buy A) Households; firms B) Firms; households and the government C) The government; firms D) Firms; only households E) Households; the government Answer: B Topic: Households vs. firms Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

59) ________ choose the quantities of factors of production to hire and ________ choose the quantities of goods and services to produce. A) Entrepreneurs; firms B) Firms; firms C) Markets; markets D) Factor markets; goods markets E) Firms; households Answer: B Topic: Households vs. firms Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

60) In the circular flow model, rent, wages, interest, and profit paid flow from ________ through ________ to ________. A) households; goods markets; firms as payment for goods B) firms; factor markets; households C) firms; goods markets; households D) households; factor markets; firms E) firms; goods markets; firms Answer: B Topic: Households vs. firms Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

61) A circular flow model shows the interrelationship between the ________ market and the ________ markets. A) household; goods B) household; factor C) business; household D) expenditure; income E) goods; factor Answer: E Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

62) In the circular flow model, the expenditures on goods and services flow in the A) same direction as goods and services in all cases. B) same direction as goods and services only if they both flow through the goods market. C) same direction as goods and services only if they both flow through the factor market. D) opposite direction as goods and services. E) same direction as factor markets. Answer: D Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

63) Households receive transfers from ________ and firms receive transfers from ________. A) government; government B) firms; households C) government; government and households D) firms and government; government E) government; no one Answer: A Topic: Circular flow and the government Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

64) Of the following, the largest source of revenue for the federal government is A) personal income taxes. B) sales taxes. C) corporate income taxes. D) property taxes. E) lottery revenue. Answer: A Topic: Federal government Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

65) ________ are the largest components of state and local government revenue. A) Transfers from federal government and corporate income taxes B) Transfers from federal government and sales taxes C) Individual income taxes and corporate income taxes D) Individual income taxes and sales taxes E) Corporate income taxes and lottery income Answer: B Topic: State and local governments Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

66) U.S. exports of goods and services flow to households and firms in ________ and U.S. financial inflows of capital flow to households and firms in ________. A) the United States; the United States B) the United States; the rest of the world C) the rest of the world; the United States D) the rest of the world; the rest of the world E) the United States; the rest of the world and the United States Answer: C Topic: Circular flow model, international flows Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

2.4 Integrative Questions 1) If a product becomes more popular and consumers want more produced, which of the following best describes what happens to move more factors of production into that industry? A) An agency of the Federal government directs the movement of factors. B) The chief executive officers or presidents of corporations require that factors leave one industry and move to the other industry. C) Factor owners voluntarily move their factors because they want to satisfy the interests of consumers. D) Wages, rent, interest, and profit increase in that industry, thereby giving factors the incentive to move to that industry. E) Consumers increase their demand for the products and, as a result, the taxes the producers must pay decrease enabling the producers to hire more factors of production. Answer: D Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

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

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

2.5 Chapter Figures

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

2) In the figure above, which of the following represents a money flow? A) Goods purchased B) Interest C) Capital D) Services sold E) Goods supplied Answer: B Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

3) In the figure above, which of the following represents a real flow? A) Expenditures on real estate services B) Profit C) Capital D) Wages E) Both B and D Answer: C Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

4) In the figure above, which of the following transactions take place in the factor markets? i. Michael, a student, orders a computer from Dell online. ii. Peter gets a job at a Wal-Mart store. iii. Apple Computer opens a new store in Georgia A) ii and iii B) only i C) only ii D) only iii E) i and ii Answer: A Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

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

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

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

8) In the figure above, governments A) collect taxes. B) coordinate economic activities of households and firms. C) hire factors of production. D) own factors of production. E) sell goods and services to household. Answer: A Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

9) In the figure above, which of the following is true? i. Governments coordinate economic activities of households and firms. ii. Governments buy goods and services in goods markets. iii. Households pay taxes directly to firms. A) only ii B) only i C) only iii D) i and ii E) ii and iii Answer: A Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

10) Social Security tax is deducted from your paycheck. In the figure above this will be shown as A) taxes flowing from households to governments. B) taxes flowing from firms to governments. C) taxes flowing from households to firms. D) wages flowing from firms to households. E) wages flowing from firms to governments. Answer: A Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

2.6 Essay: What, How, and For Whom? 1) It is conventional to divide the nation's total production into four categories. Name and explain the four categories. In the United States, which category accounts for the largest share and the smallest share of the nation's total production? Answer: The four categories of production are consumption goods and services, capital goods, government goods and services, and export goods and services. The division is based upon who purchases the goods and services. For instance, consumption goods and services are purchased by individuals for their own enjoyment whereas export goods and services are purchased by foreigners. In the United States, the largest of these four components is consumption goods and services. In 2011, consumption goods and services accounted for 61 percent of the total production. The smallest components were capital goods and export goods and services, which each accounted for 11 percent of the total production. Topic: What we produce Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Written and oral communication

2) Explain the difference between consumption and capital goods. Answer: A difference lies in the identity of the purchaser. Consumption goods (and services) are purchased by households and investment goods are purchased by firms. Households buy consumption goods to use for personal enjoyment. They contribute to the person's standard of living. Firms buy capital goods to use as a factor of production. Capital goods are used along with the other factors of production, to help produce additional goods and services. Topic: Consumption and capital goods Skill: Level 3: Using models Section: Checkpoint 2.1 Status: Old AACSB: Written and oral communication

3) Identify the four factors of production, and tell what type of income is earned by each factor. Answer: The factors of production are land, which represents all the gifts of nature; labor, the work effort people put into producing goods and service; capital, goods that have been produced and are used as a productive resource to help produce other goods and services; and entrepreneurship, the human resource that organizes all the other factors of production. Land earns rent, labor earns wages, capital earns interest, and entrepreneurship earns profit or losses. Topic: Factors of production Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

4) What are the payments each factor of production receives? Answer: Rent is paid for the use of land. Wages are paid for the services of labor. Interest is paid for the use of productive capital. Entrepreneurs earn a profit. Topic: Factors of production Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

5) What is meant by the term "human capital"? Answer: Human capital refers to the skills people possess. These skills help increase the quality of labor. Human capital can be increased through education, on the job training, and experience. The knowledge and skill gained from these improvements are called human capital. Topic: Human capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

6) What effect, if any, will a good college education have on your human capital? Explain your answer. Answer: Human capital refers to the skills people possess. These skills can be gained through education, on the job training, and experience. Thus your college education is increasing your human capital. Topic: Human capital Skill: Level 3: Using models Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

7) Explain the differences between "human capital," "financial capital," and "capital." Answer: Human capital is the knowledge and skills people obtain from education, on-the-job training, and work experience. Financial capital is money, stocks, and bonds. Capital is tools, instruments, machines, buildings, and anything that had to be produced prior to production of the desired goods and services. Topic: Capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

8) What is the difference between "capital" and "financial capital"? Which is a factor of production? Answer: "Capital" is the actual physical good, such as a factory, an assembly line, or a computer server. "Financial capital" is stocks, bonds, or money. Financial capital is used to fund the purchase of the (physical) capital. Financial capital is NOT a factor of production because it is not used to help produce goods and services. Capital, however, is a factor of production because capital is used to help produce goods and services. Topic: Capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

9) What is the difference between the functional and the personal distribution of income? Answer: The functional distribution of income shows how total income is divided among the factors of production. The personal distribution of income shows how total income is divided among households. Topic: Distributions of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

10) In the United States, which factor of production earns the largest share of the nation's total income? Answer: The largest fraction of the nation's total income is earned by labor. In the United States, wages paid to labor account for about 69 percent of the nation's total income. Topic: Functional distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

11) In the United States, how does the income received by the richest 20 percent of individuals compare with the income received by the other 80 percent? Answer: In the United States, the richest 20 percent of individuals receive about 51 percent of the nation's total income. Thus the other 80 percent of individuals receive the remainder, about 49 percent of the nation's income. So the richest 20 percent of the individuals receive almost the same amount as the other 80 percent of people. Topic: Personal distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

2.7 Essay: The Global Economy 1) Compare and contrast the world population with that of the United States. Is the United States becoming a larger or a smaller part of the world's population? Answer: The U.S. population was approximately 311 million in 2011. It is growing at a rate of about one person in every 12 seconds. The world population in 2011 was about 7 billion and is growing at a rate of 30 people in the same 12 seconds. Hence the United States is becoming a smaller fraction of the world's population. Topic: Population Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

2) How many and what fraction of the world's people live in advanced economies? In emerging market and developing economies? Answer: There are approximately 7 billion people in the world. Of the 7 billion people, almost 1 billion or 15 percent, live in advanced economies. About 85 percent, or nearly 5.8 billion people live in emerging market and developing economies. Topic: Population Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

3) The International Monetary Fund divides nations into three groups. What are the three groups and what are the characteristics of each group? Answer: The International Monetary Fund divides nations into "advanced economies," "developing economies," and "emerging market economies." Advanced economies are the countries or regions that have the highest living standards. Industrialized nations such as the United States, Canada, and Japan are included, as are the newly industrialized Asian economies. Developing economies are the countries that have yet to achieve a high standard of living. Nations in Africa, Central America, and South America fall into this category. The emerging market economies are nations that are changing how they organize their economies. In the past, their economic system relied upon state-ownership of capital and direct government management of the economy. They now are moving to more reliance upon a system of free enterprise, that is, a system similar to what exists in the United States. Emerging market economies are Russia and the other nations in Eastern and Central Europe that used to be Russian satellites. Topic: Classification of countries Skill: Level 3: Using models Section: Checkpoint 2.3 Status: Old AACSB: Written and oral communication

4) Discuss the distribution of income around the world. Which countries have the highest average incomes? Which countries have the lowest average incomes? How has the distribution of income changed in recent years? Answer: Income is distributed unequally, with residents in the advanced economies having the highest average incomes. The highest living standard is in the United States, where the average income is $129 per day. Canada, Japan, the United Kingdom, and the Euro zone are close behind. In the poorest regions of the world, India and Africa, incomes are much lower. The average income is only $3 per day in India. The distribution of world income has become more equal in recent years because income in some very poor nations, especially China, has grown rapidly. Topic: Distributions of income Skill: Level 3: Using models Section: Checkpoint 2.3 Status: Old AACSB: Written and oral communication

5) Discuss the differences between developing and emerging market economies. Answer: Although the average income in emerging market economies is less than that in advanced economies, developing countries generally have lower levels of income than emerging market economies. Emerging market economies are in some ways as developed as the advanced economies because they often have a well-trained labor force and a reasonable capital stock, both of which are typically missing in developing economies. But emerging market economies are struggling to raise their living standards. The main difference between emerging market economies and other economies is their economic system. Emerging market economies operated under state-owned production for many years and are now moving towards a free market system. Developing economies generally do not have the same history of a very long period of time operating under a system of state-owned production. Topic: Developing and emerging market economies Skill: Level 5: Critical thinking Section: Checkpoint 2.3 Status: Old AACSB: Written and oral communication

2.8 Essay: The Circular Flows 1) What is a market? Must a market have a single physical location? Answer: A market is any arrangement that allows buyers and sellers to get together and transact their business. Although some markets have a physical location, such as a farmers' market where buyers and sellers of fresh corn can meet face-to-face, markets do not require an actual location. Indeed, many markets, such as the local market for apartments, do not have a single physical location. Nonetheless, buyers and sellers (tenants and landlords) arrange purchases and sales (the rental of apartments and houses) through means other than meeting in one central location. Topic: Markets Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Written and oral communication

2) Explain the structure of the circular flow model. Answer: Households own the factors of production and sell the services from them to firms in the factor market. Income earned by households in the factor market is used to purchase goods and services from firms in the goods market. And the revenue the firms gain by selling the goods and services in the goods market is used to pay for the services of the factors of production they hire in the factor markets. Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Written and oral communication

3) How are the roles of the household different in the goods market and in the factor markets? Answer: In the goods market, households are buyers. They purchase the goods and services produced by the firms. In exchange for the goods and services, households pay firms. In the factor market, households are sellers. They provide the services from land, labor, capital, and entrepreneurship to the firms. In the factor markets, households receive payments from firms. Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Written and oral communication

4) Describe the circular flow of the economy by discussing the two markets where households and firms meet. Answer: Firms and households meet in two markets: the goods market and the factors market. In the goods markets, households buy the goods and services that firms sell. In this market, households give firms money in exchange for the goods and services. In the factors market, households sell the services of the factors of production to firms, which buy the services of these factors. In the factors market, firms pay households money in exchange for the productive resources. Hence households earn their incomes in the factors market and spend their incomes in the goods market. And firms earn their revenue in the goods market and pay their costs in the factors market. Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Written and oral communication

5) Explain how public goods provided by the federal government differ from public goods provided by the state and local governments. Answer: The federal government provides goods and services such as national defense and the legal system. These are goods and services that benefit the entire nation or else substantial parts of it. The state and local governments provide mainly education and highways, which benefit primarily residents within the state or locality. Topic: Functions of state and local governments Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Written and oral communication

6) Describe the government's flows in the circular flow model of the economy. Answer: The government has several flows in the circular flow model. First, the government taxes households and firms. Hence, funds flow from households and firms to the government. Second, the government transfers income back to households, via payments such as Social Security. In this case, funds flow from the government to households. The government also purchases goods and services from firms in the goods market. In this case, goods and services flow to the government and payments flow to firms. Topic: Circular flow and the government Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Written and oral communication

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

Answer:

The figure above shows the labeled flows. Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

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

A circular flow diagram with the markets and flows labeled is in the figure above. Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

9) Explain how the largest sources of state tax revenues differs from the largest sources of federal tax revenues. Answer: The two largest sources of federal tax revenues are from the personal income tax and Social Security taxes. Most state tax revenues are from sales and property taxes. There are no federal property or sales taxes. There is no state Social Security tax. And, although there are state income taxes, they do not take in as much revenue as do other state taxes. Topic: Tax receipts Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

10) What are the two largest sources of tax revenues for the U.S. federal government? Answer: The largest source of tax revenue for the U.S. federal government is personal income taxes, that is, the income taxes that individuals pay. The second largest source of revenue is Social Security taxes. Personal income taxes account for about 41 percent of the federal government's revenue and Social Security taxes account for about 40 percent, so together these two sources of revenue are 81 percent of the federal government's total tax revenues. Topic: Federal government Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

11) What is the largest source of tax revenue for the U.S. federal government and what is the largest expenditure item of the U.S. federal government? Answer: The largest source of tax revenue for the U.S. federal government is personal income taxes, that is, the income taxes that individuals pay. The largest expenditure of the U.S. federal government is spending on Medicare and Medicaid. Topic: Federal government Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

Essential Foundations of Economics, 8e (Bade) Chapter 3 The Economic Problem 3.1 Production Possibilities 1) The United States produced approximately ________ worth of goods and services in 2011. A) $15 trillion B) $15 billion C) $150 trillion D) $150 billion E) $1,500 trillion Answer: A Topic: Production possibilities Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

2) Which of the following is an assumption used when drawing a production possibilities frontier? i. Human wants and desires are limited to what is available. ii. Only two goods are considered. iii. The level of technology is fixed and unchanging. A) i only B) ii only C) i and iii D) ii and iii E) i, ii, and iii Answer: D Topic: Production possibilities frontier Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

3) In the production possibilities model, the vertical axis measures ________ and the horizontal axis measures ________. A) the quantity of a good or service; the quantity of another good or service B) the price of a good or service; the quantity of the good or service C) the price of a good or service; the price of another good or service D) the quantity of a good or service; time E) people's wants; the quantity of a good or service Answer: A Topic: Production possibilities frontier Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

4) The production possibilities frontier illustrates the A) maximum combinations of goods and services that can be produced. B) resources the economy possess, but not its level of technology. C) goods and services that people want. D) limits to people's wants. E) amount of each good that people want to buy. Answer: A Topic: Production possibilities frontier Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

5) When drawing a production possibilities frontier, which of the following is held constant? A) the amount of money in the economy B) the available factors of production and the state of technology C) the prices of goods and services D) the quantity of the goods and services that are produced E) None of the above because nothing is held constant when drawing the production possibilities frontier. Answer: B Topic: Production possibilities frontier Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

6) A production possibilities frontier shows A) the various combinations of output a nation can produce a certain time, given its available resources and technology. B) the limits to future growth of a nation. C) how money can be allocated among two kinds of goods. D) that if price of one good decreases, the price of the other has to increase. E) that it is impossible to produce inefficiently. Answer: A Topic: Production possibilities frontier Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

7) The production possibilities frontier is the A) maximum output that can be produced at an opportunity cost of zero. B) minimum output that can be produced when resources are used inefficiently. C) boundary between the combinations of goods and services that can be produced and the combinations that cannot be produced, given the available factors of production and the state of technology. D) boundary between the combinations of goods and services that can be produced and the combinations that cannot be produced when technology is changing. E) maximum opportunity cost combinations of goods and services. Answer: C Topic: Production possibilities frontier Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

8) The production possibilities frontier is the boundary between the A) goods and services that the economy can produce. B) attainable and unattainable combinations of goods and services. C) wanted and unwanted combinations of goods and services. D) rational and irrational choices facing a society. E) affordable and unaffordable combinations of production. Answer: B Topic: Production possibilities frontier Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

9) Consider a production possibility frontier with jeans on the vertical axis and shoes on the horizontal axis. As the country moves along the frontier closer to the horizontal axis, A) more jeans are produced. B) the country eventually chooses an unattainable point. C) free lunches occur. D) more tradeoffs occur. E) more shoes are produced. Answer: E Topic: Production possibilities frontier Skill: Level 4: Applying models Section: Checkpoint 3.1 Status: Old AACSB: Analytical thinking

10) While moving along a production possibilities frontier, the amount of labor ________, the amount of capital ________, and the level of technology ________. A) is fixed; is fixed; varies B) varies; is fixed; varies C) varies; is fixed; is fixed D) is fixed; is fixed; is fixed E) varies; varies; varies Answer: D Topic: Production possibilities frontier Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

11) The table above gives four production possibilities for airplanes and cruise ships. In possibility A, how many resources are devoted to the production of airplanes? A) 0 B) few C) most D) all E) It is impossible to tell without more information about the prices of airplanes and cruise ships. Answer: D Topic: Production possibilities frontier Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytical thinking

12) The table above gives four production possibilities for airplanes and cruise ships. In possibility A, how many resources are devoted to the production of cruise ships? A) 0 B) few C) most D) all E) It is impossible to tell without more information about the prices of airplanes and cruise ships. Answer: A Topic: Production possibilities frontier Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytical thinking

13) Moving from one point to another on a production possibilities frontier implies A) increasing the production of both goods. B) decreasing the production of both goods. C) increasing the production of one good and decreasing the production of another. D) holding the production levels of both goods constant. E) changing the amount of factors of production that are employed. Answer: C Topic: Production possibilities frontier Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

14) Assume that an association of young workers has lobbied Congress to require that all workers retire once they reach the age of fifty. What impact would this law have on the nation's production possibilities frontier? A) no impact at all B) The level of unemployment would decrease so the production possibilities frontier would shift outward. C) The nation would move to a new position on its production possibilities frontier but the frontier itself would not shift. D) The production possibilities frontier would shift inward. E) The number of young workers would increase so the production possibilities frontier would shift outward. Answer: D Topic: Production possibilities frontier Skill: Level 4: Applying models Section: Checkpoint 3.1 Status: Old AACSB: Analytical thinking

15) A major earthquake occurs in the central part of the United States. What impact would this have on the nation's production possibilities frontier and why? A) It would shift outward because unemployment would be reduced. B) Nothing would happen because the nation would still have the same capabilities. C) A tradeoff would occur to replace the resources and goods destroyed. D) It would shift inward because some of the nation's resources, such as capital and labor, would be destroyed. E) It would not shift because people would get to work to replace any capital that was destroyed. Answer: D Topic: Production possibilities frontier Skill: Level 4: Applying models Section: Checkpoint 3.1 Status: Old AACSB: Analytical thinking

16) When all of the available factors of production are being efficiently employed, the A) economy is producing at a point within its PPF. B) economy is producing at a point on its PPF. C) economy is producing at a point beyond its PPF. D) PPF disappears. E) opportunity cost of changing production is infinite. Answer: B Topic: Attainable points Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

17) In a production possibilities frontier diagram, the attainable production points are shown as A) only the points on the production possibilities frontier. B) only the points beyond the production possibilities frontier. C) only the points inside the production possibilities frontier. D) the points inside and the points on the production possibilities frontier. E) any of the production points. Answer: D Topic: Attainable points Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

18) In the production possibilities frontier model, an unattainable point lies A) only on the production possibilities frontier itself. B) only inside the production possibilities frontier. C) only outside the production possibilities frontier. D) both on and outside the production possibilities frontier. E) There are no unattainable points in the production possibilities model. Answer: C Topic: Unattainable points Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

19) Production efficiency is represented by ________ a production possibilities frontier. A) all points on B) all points inside C) all points outside D) a movement along E) only one point on Answer: A Topic: Production efficiency Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

20) If an economy cannot produce more of one good without producing less of another good, this implies that which of the following has been achieved? A) allocative efficiency B) minimum marginal cost C) PPF efficiency D) production efficiency E) maximum marginal benefit Answer: D Topic: Production efficiency Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

21) Production efficiency occurs A) anywhere inside or on the production possibilities frontier. B) when the total cost of production is minimized. C) at all points on the production possibilities frontier. D) at only one point on the production possibilities frontier. E) at all points inside the production possibilities frontier. Answer: C Topic: Production efficiency Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

22) When production efficiency does NOT occur, i. an economy is producing at a point within its PPF. ii. there are unemployed resources. iii. allocative efficiency cannot occur. A) i only B) i and ii C) iii only D) i and iii E) i, ii, and iii Answer: E Topic: Production efficiency Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

23) If there is unemployment in an economy, then the A) production possibilities frontier will shift inwards. B) economy is operating at an unattainable point. C) production possibilities frontier will shift outwards. D) economy is producing at a point inside the production possibilities frontier. E) production possibilities frontier must be bowed inward. Answer: D Topic: Attainable points, unemployment Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

24) If a society moves from a period of time with significant unemployment to a time with full employment, its production possibilities frontier will A) shift leftward. B) shift rightward. C) not shift because the society moves from one point on the frontier to a point inside the frontier. D) not shift because the society moves from a point inside the frontier to a point on the frontier. E) not shift because the society moves from one point on the frontier to a point outside the frontier. Answer: D Topic: Attainable points, unemployment Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytical thinking

25) Suppose that an economy is currently producing at a point that lies inside of its production possibilities set. Which of the following would best explain this circumstance? A) The economy does not have enough resources to produce at a point closer to the frontier of the production possibilities set. B) The prevailing level of technology prevents the economy from producing at a point closer to the frontier of the production possibilities set. C) The economy is experiencing a high level of unemployment. D) Any of the above statements could explain this situation. E) None of the above statements could explain this situation. Answer: C Topic: Attainable points, unemployment Skill: Level 3: Using models Section: Checkpoint 3.1 Status: New AACSB: Analytical thinking

26) Which of the following correctly describes the relationship between productivity growth, unemployment, and the economy's production possibilities frontier? A) An increase in productivity moves the economy from inside the production possibilities set to its frontier. B) An increase in productivity shifts the economy from the production possibilities frontier to a point outside the production possibilities set. C) An increase in unemployment shifts the economy further inside its production possibilities set. D) An increase in unemployment shifts the economy from a point outside the production set back to the production possibilities frontier. E) A reduction in unemployment shifts the entire production possibilities frontier outward. Answer: C Topic: Attainable points, unemployment Skill: Level 3: Using models Section: Checkpoint 3.1 Status: New AACSB: Analytical thinking

27) A point on the production possibilities frontier reflects an A) attainable point with full employment of all resources. B) attainable point without full employment of all resources. C) unattainable point with full employment of all resources. D) unattainable point without full employment of all resources. E) None of the above answers is correct. Answer: A Topic: Attainable points, full employment Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

28) Suppose a country operates on its production possibility frontier when it produces 1,000 books and 1,000 tables. The combination of ________ reflects ________. A) 500 books and 1,000 tables; an inefficient but attainable point. B) 1,000 books and 500 tables; an efficient point. C) 1,000 books and 1,000 tables; a free lunch. D) 500 books and 500 tables; an attainable and efficient point. E) 1,000 books and 1,500 tables; a free lunch. Answer: A Topic: Attainable points, inefficiency Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytical thinking

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

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

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

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

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

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

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

36) Which point in the figure above is an attainable combination that would have unemployed resources? A) point A B) point B C) point C D) point D E) point A and point B Answer: C Topic: Attainable points, unemployment Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytical thinking

37) The figure above shows a nation's production possibilities frontier. In the figure, point A shows A) the maximum quantity of pizza that can be produced. B) the minimum quantity of pizza that the society must produce. C) an unattainable point. D) an attainable point with unemployed resources. E) More information is needed to determine which of the above answers is correct. Answer: A Topic: Attainable points Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytical thinking

38) The figure above shows a nation's production possibilities frontier. In the figure, point B shows A) an unattainable point. B) an attainable point. C) a point with a free lunch. D) a point with no trade off. E) a point at which there are unemployed resources. Answer: A Topic: Unattainable points Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytical thinking

39) The figure above shows the production possibilities frontier for a country. In order for it to produce at point E, the A) country would need to acquire more resources and/or more advanced technology. B) production of compact cars would need to decrease. C) production of SUVs would need to decrease. D) country would need to use its resources more efficiently. E) country would need to determine that compact cars and SUVs are equally important to it. Answer: A Topic: Unattainable points Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytical thinking

40) The figure above shows the production possibilities frontier for a country. If the country is producing at point D, then the A) resources are being used efficiently. B) technology associated with producing SUVs and compact cars is advancing. C) resources are not being used efficiently and/or are unemployed. D) production of SUVs and compact cars is maximized. E) None of the above answers are correct because it is not possible to produce at point D. Answer: C Topic: Attainable points, unemployment Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytical thinking

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

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

43) The above figure shows the production possibility frontier for an economy. The point or points that are not attainable are A) points B and C. B) points A, B, and C. C) point E. D) points A, B, C, and D. E) points A and D. Answer: C Topic: Production possibilities frontier Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Analytical thinking

44) In order for Ireland to grow more potatoes, wool production must decrease. This situation is an example of A) producing at a point that lies beyond the PPF. B) zero opportunity cost. C) opportunity benefit. D) a free lunch. E) a tradeoff. Answer: E Topic: Tradeoffs Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

45) As we move along the production possibilities frontier, A) the production of one good increases as the production of the other good decreases. B) the possibilities of tradeoffs diminish. C) a tradeoff is not possible because nations need all goods. D) more of both goods can be produced. E) less of both goods can be produced. Answer: A Topic: Tradeoffs Skill: Level 4: Applying models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

46) Which of the following statements is correct? A) If capital is idle, the economy is producing at its full potential. B) The production possibilities frontier shows that there are no limits to production. C) A tradeoff is a limit that forces an exchange or a substitution of one thing for something else. D) Any point on or within the PPF is production efficient. E) None of the above answers is correct. Answer: C Topic: Tradeoffs Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

47) When a nation is producing on its production possibilities frontier, if more resources are used to produce one good, then the production of other goods A) must increase. B) must decrease. C) must remain the same. D) must change but they might increase or decrease. E) might increase if the nation can produce more efficiently. Answer: B Topic: Tradeoffs Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

48) The negative slope of the production possibilities frontier represents the idea A) that free lunches are possible. B) of tradeoffs, that in order to produce more of one good, the nation must produce less of another. C) of unemployment. D) of inefficient production. E) that prices rise as less is produced. Answer: B Topic: Tradeoffs Skill: Level 4: Applying models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

49) A movement from one point on a production possibilities frontier to another represents A) a tradeoff. B) a free lunch. C) full employment of labor but not capital. D) unemployment. E) an advance in technology. Answer: A Topic: Tradeoffs Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

50) The saying "There's no such thing as a free lunch," applies A) when there is some unemployment. B) on the production possibilities frontier. C) to unattainable combinations of goods and services. D) when more of one good can be produced without decreasing production of another. E) at all points inside the PPF. Answer: B Topic: Tradeoffs Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

51) A free lunch (the absence of a tradeoff) when the production of a good is increased is possible for the entire economy only if A) less of some product is produced. B) prices are decreased. C) prices are increased. D) resources are used inefficiently. E) there is a movement along the PPF. Answer: D Topic: Free lunches Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

52) A movement from a point inside the production possibilities frontier to a point on the production possibilities frontier represents A) a tradeoff. B) a free lunch. C) full employment of labor but not capital. D) unemployment of labor but not capital. E) an infinite opportunity cost. Answer: B Topic: Free lunches Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

53) A reason the production possibilities frontier exists is A) unlimited resources and technology. B) scarcity of resources. C) scarcity of resources and unlimited technology. D) unemployment. E) that people's wants are unlimited. Answer: B Topic: Production possibilities frontier Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

54) The production possibilities frontier is a graph showing the A) exact point of greatest efficiency for producing goods and services. B) tradeoff between free lunches. C) maximum combinations of goods and services that can be produced. D) minimum combinations of goods and services that can be produced. E) resources available for the economy's production use. Answer: C Topic: Production possibilities frontier Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

55) The production possibilities frontier is a boundary that separates A) the combinations of goods that can be produced from the combinations of services. B) attainable combinations of goods and services that can be produced from unattainable ones. C) equitable combinations of goods and services that can be produced from inequitable ones. D) fair combinations of goods and services that can be consumed from unfair ones. E) affordable production points from unaffordable points. Answer: B Topic: Production possibilities frontier Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

56) Points inside the PPF are all A) unattainable and have fully employed resources. B) attainable and have fully employed resources. C) unattainable and have some unemployed resources. D) attainable and have some unemployed resources. E) unaffordable. Answer: D Topic: Attainable points, inefficiency Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

57) During a time of high unemployment, a country can increase the production of one good or service A) without decreasing the production of something else. B) but must decrease the production of something else. C) and must increase the production of something else. D) by using resources in the production process twice. E) but the opportunity cost is infinite. Answer: A Topic: Free lunches Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

58) Moving along the production possibilities frontier itself illustrates A) the existence of tradeoffs. B) the existence of unemployment of some factors of production. C) the benefits of free lunches. D) how free lunches can be exploited through trade. E) how tradeoffs need not occur if the economy is efficient. Answer: A Topic: Tradeoffs Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

59) The production possibilities frontier illustrates which of the following economic ideas? A) efficiency B) tradeoffs C) opportunity cost D) all of the above E) none of the above Answer: D Topic: Production possibilities frontier Skill: Level 3: Using models Section: Checkpoint 3.1 Status: New AACSB: Reflective thinking

60) Points on the PPF are all A) unattainable and have fully employed resources. B) free lunches. C) inefficient. D) attainable and have some unemployed resources. E) production efficient. Answer: E Topic: Production efficiency Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

3.2 Opportunity Cost 1) In a production possibilities frontier graph, the cost of producing more units of a good is measured by the A) dollar value of the resources used to produce the good. B) amount of the other good or service that must be forgone. C) dollar value of the additional output. D) area in the arc between the PPF and a straight line drawn between the starting point and the ending point. E) None of the above answers is correct. Answer: B Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

2) The opportunity cost of producing one more unit of a good is calculated by dividing the A) increase in the quantity of that good by the decrease in the quantity of other good. B) total quantity of that good by the total quantity of other good. C) decrease in the quantity of the other good by the increase in the quantity of the good whose opportunity cost we're calculating. D) total quantity of the other good by the total quantity of the good whose opportunity cost we're calculating. E) price of the good whose opportunity cost we are calculating by the number of units of the other good that are forgone. Answer: C Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytical thinking

3) To find the opportunity cost of producing one more unit of any product while on the production possibilities frontier requires A) setting the amounts of the two products equal to each other. B) setting the change in one product equal to the change in the other product. C) dividing the amount of the product forgone by the amount of the product gained. D) subtracting the change in the product whose production increased from the change in the product whose production decreased. E) None of these describe how to find opportunity cost. Answer: C Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytical thinking

4) To calculate the opportunity cost per unit, you divide the decrease in the quantity of the forgone item by the A) decrease in the quantity of the other item. B) increase in the quantity of the other item obtained. C) price of the item obtained. D) price of the item forgone. E) price of the item obtained and then multiply by the price of the item forgone. Answer: B Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Analytical thinking

5) On a production possibilities frontier, 500 pounds of apples and 1,200 pounds of bananas can be produced while at another point on the same frontier, 300 pounds of apples and 1,300 pounds of bananas can be produced. Between these points, what is the opportunity cost of producing a pound of bananas? A) 2 pounds of bananas B) 200 pounds of apples C) 2 pounds of apples D) 0.5 a pound of apples E) 12/5 = 2.4 pounds of apples Answer: C Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytical thinking

6) On a production possibilities frontier, 500 pounds of apples and 1,200 pounds of bananas can be produced while at another point on the same frontier, 300 pounds of apples and 1,300 pounds of bananas can be produced. Between these points, what is the opportunity cost of producing a pound of apples? A) 2 pounds of bananas B) 100 pounds of bananas C) 2 pounds of apples D) 0.5 of a pound of bananas E) 5/12 of a pound of bananas Answer: D Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytical thinking

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

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

9) Robinson Crusoe divides his time between catching fish and gathering fruit. Part of his production possibilities frontier is given in the above table. If Mr. Crusoe is on his PPF and he increases the amount of fruit he gathers from 56 to 90 pounds, the opportunity cost is A) 37 pounds of fish. B) 31 pounds of fish. C) 17 pounds of fish. D) 34 pounds of fruit. E) 90 pounds of fruit. Answer: C Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Analytical thinking

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

11) The table above shows a nation's production possibilities frontier. If the nation wants to produce 4 robots and 34 pizzas, A) it will shift the production possibilities frontier. B) the opportunity cost is 9 pizzas. C) the nation will be producing inefficiently. D) it will be unable to do so because the production point is unattainable. E) the nation will then be producing at a production efficient point. Answer: D Topic: Unattainable points Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytical thinking

12) The table above shows a nation's production possibilities frontier. If the nation chooses to increase the production of robots from 2 to 3 and it is on its PPF, it will have to forgo ________ pizzas. A) 37 B) 34 C) 3 D) 35.5 E) None of the above answers is correct. Answer: C Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytical thinking

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

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

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

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

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

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

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

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

21) The above figure shows the production possibility frontier for a country. What is the opportunity cost per ton of rice to move from point B to point D? A) 1,000 bottles of wine B) 500 bottles of wine C) 2 bottles of wine D) 1/2 of a bottle of wine E) None of the above answers is correct. Answer: B Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytical thinking

22) The above figure shows the production possibility frontier for a country. What is the opportunity cost per ton of rice to move from point D to E? A) 3,000 bottles of wine B) 333 bottles of wine C) 3 bottles of wine D) 1/3 of a bottle of wine E) None of the above answers is correct. Answer: A Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytical thinking

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

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

25) Moving from a point inside the production possibilities frontier to a point on the production possibilities frontier, the opportunity cost of producing more of the good on the horizontal axis A) increases. B) decreases. C) is constant. D) is 0. E) is infinite. Answer: D Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytical thinking

26) Consider a production possibility frontier with jeans on the vertical axis and shoes on the horizontal axis. As a country moves along the frontier closer to the vertical axis, A) the opportunity cost of producing jeans increases. B) the opportunity cost of producing shoes increases. C) there are fewer tradeoffs. D) inefficient production occurs. E) the opportunity cost of producing jeans decreases. Answer: A Topic: Opportunity cost Skill: Level 4: Applying models Section: Checkpoint 3.2 Status: Old AACSB: Analytical thinking

27) Suppose that in a PPF graph, wheat is on the vertical axis and jets are on the horizontal axis. Moving down along the PPF, the A) number of jets increases and the opportunity cost of jets increases. B) amount of wheat increases and the opportunity cost of wheat increases. C) number of jets increases and the opportunity cost of jets decreases. D) amount of wheat increases and opportunity cost of wheat decreases. E) opportunity cost of jets and wheat both increase. Answer: A Topic: Opportunity cost Skill: Level 4: Applying models Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

28) Why is a production possibilities frontier bowed out (concave)? A) The bowed shape reflects constant opportunity cost. B) The bowed shape reflects decreasing opportunity cost. C) The bowed shape indicates that opportunity cost at first decreases at a decreasing rate, and then begins to decrease at an increasing rate. D) The bowed shape indicates that opportunity cost at first increases at a decreasing rate, and then begins to increase at an increasing rate. E) The bowed shape reflects increasing opportunity cost. Answer: E Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

29) The bowed out (concave) shape of the production possibilities curve implies that as production of one good A) increases, society must forgo increasing amounts of another good. B) increases, society must forgo decreasing amounts of another good. C) decreases, production of other goods decreases as well. D) increases, production of other goods increases as well. E) increases, society can obtain a free lunch. Answer: A Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

30) The idea of increasing opportunity cost is reflected in the A) bowed out shape of the production possibilities frontier. B) bowed in shape of the production possibilities frontier. C) linear shape of the production possibilities frontier. D) positive slope of the production possibilities frontier. E) fact that the PPF shows there are unattainable production points. Answer: A Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

31) A bowed out production possibilities frontier shows A) that resources are equally productive in all uses. B) increasing opportunity cost. C) that resources are not equally productive in all uses. D) Both answers B and C are correct. E) Both answers A and B are correct. Answer: D Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

32) The opportunity cost of a good increases as more of it is produced because A) there is no such thing as a free lunch. B) resources are not equally productive in all activities. C) producing more of a good requires additional resources. D) the number of forgone alternatives also increases. E) people want the good less as more is produced. Answer: B Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

33) As an economy increasingly specializes in producing one good, the opportunity cost of that good increases. The opportunity cost increases because A) resources are not equally productive in all activities. B) what must be paid to resources increases. C) human wants are virtually unlimited. D) not all goods are equally valuable. E) as more of a good is produced, the profit from its production must rise. Answer: A Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

34) As an economy produces more of one of the goods on a bowed out production possibilities frontier, what happens to the opportunity cost of producing the good? A) It remains constant. B) It decreases. C) It increases. D) It might increase, decrease, or remain constant depending on how much people value the additional units of the good. E) None of these depicts what happens to opportunity cost. Answer: C Topic: Increasing opportunity costs Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

35) When a production possibilities frontier is bowed outward, as more of one good is produced, its opportunity cost A) increases. B) decreases. C) remains constant. D) might increase, decrease, or remain constant depending on how much people value the additional units of the good. E) cannot be predicted. Answer: A Topic: Increasing opportunity costs Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

36) A bowed out PPF reflects which of the following ideas? i. Increasing opportunity cost ii. Resources are not equally productive in all activities. iii. Prices of goods increase over time. A) i only B) i and ii C) i and iii D) ii and iii E) i, ii, and iii Answer: B Topic: Increasing opportunity costs Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

37) If there is increasing opportunity cost, then when moving downward on a production possibilities frontier, the opportunity cost of the good on the horizontal axis ________ as more of the good is produced. A) increases and the PPF gets steeper B) increases and the PPF gets flatter C) decreases and the PPF gets steeper D) decreases and the PPF gets flatter E) does not change and the PPF gets steeper Answer: A Topic: Increasing opportunity costs Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytical thinking

38) A bowed out production possibility frontier shows that the A) opportunity cost of a good is constant as more of the good is produced. B) opportunity cost of a good decreases as more of the good is produced. C) opportunity cost of a good increases as more of the good is produced. D) opportunity cost relationship is linear. E) opportunity cost of producing another good is negative. Answer: C Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

39) Why does a nation experience increasing opportunity cost? A) As the nation moves from a production point within the PPF to one on the PPF, opportunity costs increase. B) As the nation moves from a production point within the PPF to another point also within the PPF, opportunity costs increase. C) When the amount of resources increases, the opportunity cost of all goods and services increases. D) Resources are not equally productive in producing different kinds of goods and services. E) Because the nation cannot produce at the unattainable production points that lie beyond the PPF. Answer: D Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

40) The fact of increasing opportunity cost when moving on the PPF means that A) to increase the production of one product requires larger and larger sacrifices of the other good. B) to decrease the production of one product requires smaller and smaller sacrifices of the other good. C) to increase the production of one product requires smaller and smaller sacrifices of the other good. D) when the government forces a movement from one point on the PPF to another point, no production is lost. E) the PPF will be a negatively sloped straight line. Answer: A Topic: Increasing opportunity costs Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

41) Production possibilities frontiers usually curve out and away from the origin. The implication is A) that as resources are used to produce one good, fewer resources are available to produce another good. B) that the opportunity cost of producing a good goes down as more of that good is produced. C) technological change is present. D) that the opportunity cost of producing a good stays the same regardless of how much of that good is produced. E) some resources are better at producing one good while other resources are better at producing alternative goods. Answer: E Topic: Increasing opportunity costs Skill: Level 3: Using models Section: Checkpoint 3.2 Status: New AACSB: Reflective thinking

42) If the production possibilities frontier between two goods were a straight line, then the opportunity cost of one good in terms of another would be A) constant. B) increasing. C) decreasing. D) zero. E) either constant, increasing, or decreasing but more information is needed to determine which. Answer: A Topic: Increasing opportunity costs Skill: Level 4: Applying models Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

43) If the production possibilities frontier between two goods is a straight line, then the A) opportunity cost is not a ratio. B) resources are equally productive in both goods. C) line does not qualify as a production possibilities frontier because the unattainable production points are too close to the inefficient production points. D) Both answers A and C are correct. E) Both answers A and B are correct. Answer: B Topic: Increasing opportunity costs Skill: Level 4: Applying models Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

44) As an economy moves down along a straight line production possibilities frontier, what happens to the opportunity cost of producing the good on the horizontal axis? A) It remains constant. B) It decreases. C) It increases. D) Above the midpoint it decreases until it equals 1 at the midpoint and then it increases. E) None of these depicts what happens to opportunity cost. Answer: A Topic: Opportunity cost Skill: Level 4: Applying models Section: Checkpoint 3.2 Status: Old AACSB: Analytical thinking

45) If the production possibilities frontier between bottled water and water in a jug is a straight line, which of the following statements would be correct? A) A large amount of unemployment must exist. B) Resources are equally productive at producing either product. C) There is no tradeoff between the two goods. D) There is no decrease in the production of one good when the production of the other is increased. E) Producing more of one good gives the economy a free lunch. Answer: B Topic: Opportunity cost Skill: Level 4: Applying models Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

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

47) The table above shows the production possibilities for an economy. The opportunity cost of a loaf of bread is ________ when moving from possibility B to possibility C. A) 1/2 of a book B) 2 books C) 200 books D) 100 loaves of bread E) 1 loaf of bread Answer: B Topic: Increasing opportunity costs Skill: Level 4: Applying models Section: Checkpoint 3.2 Status: Old AACSB: Analytical thinking

48) The table above presents the production possibilities frontier for a nation. Using the information in the table, moving from possibility C to B means that A) 4 units of capital goods are given up to get 55 units of consumption goods. B) 2 units of capital goods are given up to get 55 additional units of consumption goods. C) 4 units of capital goods are given up to get 10 additional units of consumption goods. D) 4 units of capital goods are given up to get 45 units of consumption goods. E) 2 units of capital goods are given up to get 10 additional units of consumption goods. Answer: E Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytical thinking

49) The table above presents the production possibilities frontier for a nation. Using the information in the table, when moving from possibility C to D, the cost of 1 unit of a capital good in terms of the consumption goods forgone is ________ consumption goods per capital good. A) 25 B) 15 C) 20 D) 10 E) an undefined amount of Answer: D Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytical thinking

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

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

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

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

54) The figure above shows the production possibilities frontier for a country. In order for it to move from producing at point A to producing at point B, the country would need to A) decrease SUV production by 1 million. B) decrease SUV production by 3 million. C) decrease SUV production by 4 million. D) decrease compact car production by 3 million. E) acquire more resources and/or more advanced technology. Answer: A Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Analytical thinking

55) The figure above shows the production possibilities frontier for a country. In order for it to move from producing at point A to producing at point B, the country would need to incur an opportunity cost of A) 1 million SUVs. B) 3 million SUVs. C) 4 million SUVs. D) 3 million compact cars. E) 0 because the gain in compact cars exceeds the loss in SUVs. Answer: A Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Analytical thinking

56) The figure above shows the production possibilities frontier for a country. How does the opportunity cost of compact cars forgone per SUV gained moving from point C to point B compare with the movement from point B to point A? A) The opportunity cost of moving from point C to point B is greater than the movement from point B to point A. B) The opportunity cost of moving from point C to point B is the same as the movement from point B to point A. C) The opportunity cost of moving from point C to point B is less than the movement from point B to point A. D) The opportunity costs cannot be compared because the units of moving from point C to point B differ from the units of moving from point B to point A. E) More information is needed to determine how the two opportunity costs compare. Answer: C Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Analytical thinking

57) Once you find the opportunity cost of producing one unit of a good, to find the opportunity cost of producing the other good, you must A) take the inverse. B) multiply by the total amount produced of the second good. C) divide by the total amount produced of the second good. D) do nothing because the opportunity cost for the first good is the same as the opportunity cost for the second good. E) None of the answers is correct. Answer: A Topic: Opportunity cost is a ratio Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytical thinking

58) While moving on the production possibilities frontier, if the opportunity cost of producing one good is 1/2, the opportunity cost of producing the other good (in the same range) is A) 1/2. B) 1/4. C) 2. D) 4. E) An amount that cannot be calculated without more information. Answer: C Topic: Opportunity cost is a ratio Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytical thinking

59) The opportunity cost of producing more of one good on a production possibilities frontier is A) a dollar amount. B) a ratio of quantities. C) a ratio of prices. D) equal to the area inside the production possibilities frontier. E) a theoretical concept which cannot be measured. Answer: B Topic: Opportunity cost is a ratio Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Analytical thinking

60) The opportunity cost of one more slice of pizza in terms of sodas is the A) number of pizza slices we have to give up in order to get one extra soda. B) number of sodas we have to give up in order to get one extra pizza slice. C) total number of sodas that we have divided by the total number of pizza slices that we have. D) total number of pizza slices that we have divided by the total number of sodas that we have. E) price of a pizza slice minus the price of a soda. Answer: B Topic: Opportunity cost Skill: Level 1: Definition Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

61) Moving between two points on a PPF, a country gains 6 automobiles and forgoes 3 trucks. The opportunity cost of 1 automobile is A) 3 trucks. B) 6 automobiles - 3 trucks. C) 2 trucks. D) 1/2 of a truck. E) 1 automobile. Answer: D Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytical thinking

62) Moving between two points on a PPF, a country gains 8 desktop computers and forgoes 4 laptop computers. The opportunity cost of 1 desktop computer is A) 4 laptops. B) 8 desktops. C) 1 desktop. D) 2 laptops. E) 1/2 of a laptop. Answer: E Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytical thinking

63) A country produces only cans of soup and ink pens. If the country produces on its bowed outward PPF and increases the production of cans of soup, the opportunity cost of additional A) cans of soup is increasing. B) cans of soup is decreasing. C) cans of soup remains unchanged. D) ink pens is increasing. E) More information is needed to determine what happens to the opportunity cost. Answer: A Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

64) Moving along a country's PPF, a reason opportunity costs increase is that A) unemployment decreases as a country produces more and more of one good. B) unemployment increases as a country produces more and more of one good. C) technology declines as a country produces more and more of one good. D) some resources are better suited for producing one good rather than the other. E) technology must advance in order to produce more and more of one good. Answer: D Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

65) Increasing opportunity cost exists A) in the real world. B) as long as there is high unemployment. C) only in theory but not in real life. D) for a country but not for an individual. E) inside the PPF but not on the PPF. Answer: A Topic: Increasing opportunity costs Skill: Level 1: Definition Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

3.3 Economic Growth 1) Which of the following is the best definition of economic growth? A) The investment in capital and consumption goods by an economy B) The opportunity cost of capital C) The opportunity cost of consumption D) Increased development of land and entrepreneurship E) The sustained expansion of production possibilities Answer: E Topic: Economic growth Skill: Level 1: Definition Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking

2) The sustained expansion of production possibilities is called A) economic investment. B) production expansion. C) opportunity cost of growth. D) economic growth. E) production possibilities. Answer: D Topic: Economic growth Skill: Level 1: Definition Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking

3) Which of the following would most likely cause a country's production possibilities set to shift outward at every point along the frontier? A) a decrease in idle capital B) a decrease in unemployment C) a technological advance in only one sector of the economy D) a general technological advance that affects all sectors of the economy E) none of the above Answer: D Topic: Economic growth and the PPF Skill: Level 3: Using models Section: Checkpoint 3.3 Status: New AACSB: Analytical thinking

4) Consider a PPF with consumption goods on the horizontal axis and capital goods on the vertical axis. If the country operates on its PPF near its ________ axis, this country ________. A) vertical; will experience greater economic growth B) vertical; will not face opportunity costs C) horizontal; will have a larger chance at economic growth D) horizontal; faces larger trade offs E) vertical; is operating at an inefficient point Answer: A Topic: Economic growth and the PPF Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytical thinking

5) Economic growth depends upon which of the following? i. Increasing the quantity of labor ii. Lowering the prices of goods and services iii. Advancing technology A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: D Topic: Economic growth Skill: Level 1: Definition Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking

6) Economic growth depends upon which of the following? i. Improving the quality of labor ii. Technological advancement iii. Increasing the amount of capital A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: E Topic: Economic growth Skill: Level 1: Definition Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking

7) As an economy grows, A) its PPF shifts outward. B) it can eliminate scarcity. C) the opportunity cost of production will approach 0. D) the opportunity cost of production will increase. E) its PPF does not shift; instead, the production point moves from inside the PPF to be closer to the PPF. Answer: A Topic: Economic growth and the PPF Skill: Level 1: Definition Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking

8) The opportunity cost of economic growth is A) 0, because it means an expansion of production possibilities. B) the decrease in the current production of productive factors. C) a slower accumulation of human capital. D) the decrease in the current production of consumption goods. E) the increase in the nation's capital stock and/or its technology. Answer: D Topic: Economic growth, opportunity cost Skill: Level 1: Definition Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking

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

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

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

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

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

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

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

16) Suppose India and France have the same PPF, shown in the figure above. Based on their current production points, India's most likely future PPF is ________ and France's most likely future PPF is ________. A) PPF1; PPF1 B) PPF2; PPF2 C) PPF0; PPF0 D) PPF2; PPF1 E) PPF1; PPF2 Answer: D Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytical thinking

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

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

19) Suppose that Germany, France, Estonia, and India all have the same production possibilities, illustrated in the figure above. Based on the production points in the figure, India is most likely to expand its PPF to A) PPF3 or PPF2. B) PPF3. C) PPF1. D) PPF1. or PPF2. E) PPF2. Answer: C Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytical thinking

20) Suppose that Germany, France, Estonia, and India all have the same production possibilities, illustrated in the figure above. Based on the production points in the figure, Germany is most likely to expand its PPF to A) PPF3 or PPF2. B) PPF3. C) PPF1. D) PPF1. or PPF2. E) PPF2. Answer: B Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytical thinking

21) To increase its economic growth, a nation should A) limit the number of people in college because they produce nothing. B) encourage spending on goods and services. C) encourage education because that increases the quality of labor. D) increase current consumption. E) eliminate expenditure on capital goods. Answer: C Topic: Economic growth Skill: Level 2: Using definitions Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking

22) Other things equal, if Mexico devotes more resources to train its population than Spain, A) Mexico will be able to eliminate opportunity cost faster than Spain. B) Mexico will be able to eliminate scarcity faster than Spain. C) Spain will grow faster than Mexico. D) Mexico will have more current consumption than Spain. E) Mexico will grow faster than Spain. Answer: E Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking

23) If a nation devotes a larger share of its current production to consumption goods, then A) its economic growth will slow down. B) its PPF will shift outward. C) its PPF will shift inward. D) some productive factors will become unemployed. E) it must produce at a point within its PPF. Answer: A Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking

24) Which of the following statements is correct? i. As the economy grows, the opportunity costs of economic growth decrease. ii. Economic growth has no opportunity cost. iii. The opportunity cost of economic growth is current consumption forgone. A) i only B) ii only C) iii only D) i and iii E) i and ii Answer: C Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking

25) When a country's production possibilities frontier shifts outward over time, the country is experiencing A) no opportunity cost. B) economic growth. C) higher unemployment of resources. D) a decrease in unemployment of resources. E) an end to opportunity cost. Answer: B Topic: Economic growth Skill: Level 1: Definition Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking

26) The opportunity cost of economic growth is ________ and the benefit of economic growth is ________. A) increased current consumption; increased future consumption B) increased current consumption; decreased future consumption C) decreased current consumption; increased future consumption D) decreased current consumption; decreased future consumption E) nothing; increased future consumption Answer: C Topic: Economic growth Skill: Level 1: Definition Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking

3.4 Specialization and Trade 1) If Wendy can produce more of all goods than Tommy in an hour, then A) Wendy has an absolute advantage in all goods. B) Wendy does not need to trade with Tommy in order to achieve the gains from trade. C) Wendy has a comparative advantage in all goods. D) Tommy has an absolute advantage in all goods. E) Only Tommy but not Wendy can benefit from trade between the two of them. Answer: A Topic: Absolute advantage Skill: Level 1: Definition Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

2) Mac can bake more cookies than Monica per hour. It must be true that A) Monica has an absolute advantage in cookie baking. B) Mac has an absolute advantage in baking cookies. C) Mac has a comparative advantage in baking cookies. D) Monica has a comparative advantage in baking cookies. E) Mac cannot benefit by trade between the two of them. Answer: B Topic: Absolute advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

3) When Mik has an absolute advantage in the production of two goods over Tommy, Mik A) is less productive than Tommy. B) is better off if he does not engage in specialization and trade with Tommy. C) is more productive in producing both goods than Tommy. D) always has a comparative advantage over Tommy in the production of both goods. E) cannot gain from trade with Tommy. Answer: C Topic: Absolute advantage Skill: Level 1: Definition Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

4) If John can produce 10 chairs or 20 lamps during a week while Mary can produce 12 chairs or 22 lamps in the same time, who has the absolute advantage in producing each good? A) Mary in producing both goods B) John in producing both goods C) Mary in producing chairs, John in producing lamps D) John in producing chairs, Mary in producing lamps E) Both Mary and John in both goods Answer: A Topic: Absolute advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

5) If Toni has an absolute advantage in both sewing and ironing when compared to Tom, then A) they might benefit from trading, but we need more information to determine in which task they should specialize. B) neither Toni nor Tom can benefit from trading with each other. C) Toni should specialize in sewing, and Tom should specialize in ironing. D) Toni cannot benefit from trading with Tom, but Tom can benefit from trading with Toni. E) Tom cannot benefit from trading with Toni, but Toni can benefit from trading with Tom. Answer: A Topic: Absolute advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

6) If a country has A) an absolute advantage in producing a good, it definitely also has a comparative advantage in producing that good. B) an absolute advantage in producing a good, it might or might not have a comparative advantage in producing that good. C) a comparative advantage in production of a good, it must also have an absolute advantage in producing that good. D) an absolute advantage in producing a good, it definitely will not have a comparative advantage in producing that good. E) None of the above answers is correct. Answer: B Topic: Absolute advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

7) Hank requires 1 hour to cut the grass and 3 hours to clean the house. His sister Holly requires 1 hour to cut the grass and 4 hours to clean the house. Which of the following statements is true? A) Hank has a comparative advantage in both cutting the grass and cleaning the house. B) Hank and Holly both have a comparative advantage in cutting the grass. C) Hank has a lower opportunity cost of cutting the grass. D) Hank has an absolute advantage in both cutting the grass and cleaning the house. E) Holly has a comparative advantage in cutting the grass. Answer: E Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

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

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

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

11) In the above table, for Mary the opportunity cost of producing a dress is ________, and the opportunity cost for Mark of producing a dress is ________. A) 1 1/2 jackets; 2/3 of a jacket B) 1 1/2 jackets; 2 1/2 jackets C) 1 1/4 jackets; 1/2 of a jacket D) 1 jacket; 1 jacket E) 1 dress; 1 dress Answer: A Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

12) A country has a comparative advantage in the production of a good if it can A) produce more of the good than another country. B) produce more of the good most efficiently. C) produce the good on and remain on its production possibilities frontier. D) tradeoff producing the good for another good. E) produce the good at the lowest opportunity cost. Answer: E Topic: Comparative advantage Skill: Level 1: Definition Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

13) Having a comparative advantage means a nation can A) benefit from trade. B) produce at a higher opportunity cost. C) produce more of the good. D) produce without incurring an opportunity cost. E) produce the good at a point beyond its PPF. Answer: A Topic: Comparative advantage Skill: Level 1: Definition Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

14) When a person has a comparative advantage in producing a good or service, the person has A) a higher opportunity cost in producing that product than someone else. B) a constant opportunity cost in producing that product. C) a decreasing opportunity cost in producing that product. D) a lower opportunity cost in producing that product than someone else. E) an increasing marginal benefit in producing the good. Answer: D Topic: Comparative advantage Skill: Level 1: Definition Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

15) Which of the following best describes comparative advantage? A) being able to produce more output than any other country B) using the fewest number of resources to produce a given amount of output C) having the largest number of resources compared to other countries D) forgoing the fewest units of one product to produce a unit of another product E) It is the same as absolute advantage. Answer: D Topic: Comparative advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

16) Which of the following is correct about comparative advantage? A) Some countries will have a comparative advantage in everything. B) Having a comparative advantage without an absolute advantage is impossible. C) A comparative advantage in a good means that the country can produce more of the good than any other country. D) A country has a comparative advantage in the production of a good if it can produce the good at lower opportunity cost than any other country. E) None of the above answers is correct. Answer: D Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

17) John can make pizza at a lower opportunity cost than Allen, but Allen can make more pizzas per day than John. Therefore, A) John cannot benefit from trade with Allen. B) Allen cannot benefit from trade with John. C) John has a comparative advantage in pizza. D) John has an absolute advantage in pizza. E) Allen has a comparative advantage in pizza. Answer: C Topic: Comparative advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

18) Alice and Gene work in the mailroom, sorting and delivering mail. In order for them to benefit from specialization and trade, Alice must A) be able to both sort and deliver faster than Gene. B) be equally productive in both sorting and delivering. C) have a comparative advantage in both sorting and delivering. D) have a comparative advantage in one task and Gene must have a comparative advantage in the other task. E) be equally productive as Gene in both sorting and delivering. Answer: D Topic: Comparative advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

19) When one person's opportunity cost of producing a good is lower than another person's opportunity cost of producing the same good, it is called A) an absolute advantage. B) a comparative advantage. C) specialization. D) production possibilities. E) a trade off. Answer: B Topic: Comparative advantage Skill: Level 1: Definition Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

20) For country Gamma, the opportunity cost for producing 1 computer is 10 tons of steel. For country Beta, the opportunity cost for producing 1 computer is 6 tons of steel. Which country has the comparative advantage in the production of steel? A) Gamma B) Beta C) Both have the comparative advantage in the production of steel. D) Neither country has the comparative advantage in the production of steel. E) More information is needed to determine which of the two nations has the comparative advantage. Answer: A Topic: Comparative advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

21) For country North, the opportunity cost incurred when 3 tractors are produced is 21 watches. For country South, the opportunity cost incurred when 5 tractors are produced is 100 watches. Which country has the comparative advantage in the production of tractors? A) North B) South C) Both have the comparative advantage in the production of tractors. D) Neither country has the comparative advantage in the production of tractors. E) More information is needed about which country has the comparative advantage in the production of watches. Answer: A Topic: Comparative advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

22) If Country A can produce an extra plane by giving up two boats, and Country B can produce an extra plane by giving up three boats, then A) Country A has a comparative advantage over Country B in the production of planes. B) Country B has a comparative advantage over Country A in the production of planes. C) the two countries have no incentive to trade with one another. D) Country A would like to trade with B, but B cannot gain by trading with A. E) Country A has an absolute advantage in producing planes and a comparative advantage in producing boats. Answer: A Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

23) David takes 10 minutes to process a customer, and 20 minutes to stock the shelves. Danny takes 15 minutes to process a customer, and 15 minutes to stock the shelves. Which of the following statements is true? A) David has an absolute advantage in performing both tasks. B) Danny has an absolute advantage in performing both tasks. C) David has a comparative advantage in processing customers but not in stocking shelves. D) Danny has a comparative advantage in processing customers but not in stocking shelves. E) Danny has a comparative advantage in processing customers and in stocking shelves. Answer: C Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

24) Rika's opportunity cost of producing 100 t-shirts is 50 jackets. Jeff's opportunity cost of producing 75 tshirts is 25 jackets. Who should specialize in jackets? A) Rika B) Jeff C) neither D) both E) More information is needed about their production possibilities frontiers to determine who should specialize in jackets. Answer: A Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

25) Huey and Steve can grow potatoes or tomatoes. The table above shows the pounds of potatoes and tomatoes Huey and Steve can grow in a week. Based on the table, Huey's opportunity cost of producing one pound of tomatoes is A) 1.5 pounds of potatoes. B) 0.66 pound of potatoes. C) 0, because he has an absolute advantage in it. D) 0, because he has a comparative advantage in it. E) 1.0 pound of potatoes. Answer: A Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

26) Huey and Steve can grow potatoes or tomatoes. The table above shows the pounds of potatoes and tomatoes Huey and Steve can grow in a week. Based on the table, Steve has a comparative advantage in A) both potatoes and tomatoes. B) neither potatoes nor tomatoes. C) potatoes. D) tomatoes. E) More information is needed about Huey's comparative advantage in order to determine Steve's comparative advantage. Answer: C Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

27) Huey and Steve can grow potatoes or tomatoes. The table above shows the pounds of potatoes and tomatoes Huey and Steve can grow in a week. Based on the table, which of the following statements is correct? A) Steve has an absolute advantage in both potatoes and tomatoes. B) Steve has a comparative advantage in both potatoes and tomatoes. C) Steve has an absolute advantage in potatoes only. D) Huey has an absolute advantage in potatoes only. E) Huey has an absolute advantage in both potatoes and tomatoes. Answer: E Topic: Absolute advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

28) If Tom can wax a car in fewer hours than Jerry, then Tom definitely has A) a comparative advantage in car waxing. B) an absolute advantage in car waxing. C) both a comparative and an absolute advantage in car waxing. D) neither a comparative nor an absolute advantage in car waxing. E) an undetermined advantage because we do not know how long it takes Tom and Jerry to wash a car. Answer: B Topic: Comparative advantage versus absolute advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: New AACSB: Analytical thinking

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

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

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

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

33) Deb and Pete have volunteered to help their favorite charity mail out fundraiser information. The figure above shows their production possibilities frontiers for assembling packets and stuffing envelopes. What is Deb's opportunity cost of assembling 1 packet? A) 160 envelopes B) 40 envelopes C) 4 envelopes D) 1/4 of an envelope E) 4 packets Answer: C Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

34) Deb and Pete have volunteered to help their favorite charity mail out fundraiser information. The figure above shows their production possibilities frontiers for assembling packets and stuffing envelopes. Which of the following statements is correct? A) Deb has a comparative advantage in assembling packets. B) Pete has an absolute advantage in both assembling packets and stuffing envelopes. C) Deb has a comparative advantage in stuffing envelopes. D) Deb has an absolute advantage in both assembling packets and stuffing envelopes. E) Deb has a comparative advantage in both assembling packets and stuffing envelopes. Answer: C Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

35) Deb and Pete have volunteered to help their favorite charity mail out fundraiser information. The figure above shows their production possibilities frontiers for assembling packets and stuffing envelopes. If Deb and Pete specialize and trade, how many packets will be assembled? A) 40 B) more than 40 and less than 80 C) 80 D) 160 E) more than 80 and less than 160 Answer: D Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

36) Gabriel operates a ranch in Idaho where he raises cattle and grows potatoes. The figure above illustrates his production possibilities frontier. What is Gabriel's opportunity cost of growing another ton of potatoes? A) 400 cows B) 80 cows C) 100 cows D) 0 cows E) 1 ton of potatoes Answer: B Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

37) Gabriel operates a ranch in Idaho where he raises cattle and grows potatoes. The figure above illustrates his production possibilities frontier. What is Gabriel's opportunity cost of raising another 100 cows? A) 1.25 tons of potatoes B) 5.0 tons of potatoes C) 3.0 tons of potatoes D) 1.0 ton of potatoes E) 100 cows Answer: A Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

38) In the above figure, Jack's opportunity cost of producing 1 gallon of soda is ________ of bottled water. A) 1 gallon B) 1/2 of a gallon C) 6 gallons D) 1/4 of a gallon E) 2 gallons Answer: E Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

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

40) In the above figure, Jill's opportunity cost of producing 1 gallon of soda is ________ of bottled water. A) 2 gallons B) 1/2 of a gallon C) 4 gallons D) 1 gallon E) 1/4 of a gallon Answer: D Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

41) In the above figure, Jill's opportunity cost of producing 1 gallon of bottled water is ________ of soda. A) 2 gallons B) 1/2 of a gallon C) 4 gallons D) 1 gallon E) 1/4 of a gallon Answer: D Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

42) Using the figure above, if Jack and Jill specialize and gain from trade, then A) Jack produces equal amounts of gallons of water and bottled water. B) Jack specializes in the production of bottled water. C) Jack and Jill produce beyond their PPF. D) Jack specializes in the production of soda. E) Jack specializes on the production of soda and water. Answer: B Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

43) On a typical acre of land, Iowa can produce either 300 pounds of beef or 100 pounds of soybeans in a year. On a typical acre of land, Nebraska can produce 150 pounds of beef or 200 pounds of soybeans. Which of the following is correct? A) Nebraska should produce soybeans because its opportunity cost of soybeans is lower. B) Nebraska should produce soybeans because its opportunity cost of soybeans is higher. C) Iowa should produce soybeans because its opportunity cost of soybeans is lower. D) Iowa should produce soybeans because its opportunity cost of soybeans is higher. E) Nebraska and Iowa should divide each acre evenly between soybean and beef production. Answer: A Topic: Achieving the gains from trade Skill: Level 5: Critical thinking Section: Checkpoint 3.4 Status: New AACSB: Analytical thinking

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

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

46) The figure above shows the production possibilities frontiers for the United Kingdom and France. If the United Kingdom and France specialize and engage in trade, the United Kingdom will produce ________ and France will produce ________. A) wheat; wheat B) wheat; fish C) fish; wheat D) fish; fish E) both wheat and fish; both wheat and fish Answer: C Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

47) The figure above shows the production possibilities frontiers for the United Kingdom and France. If the United Kingdom and France specialize and engage in trade, the United Kingdom will export ________ and France will export ________. A) wheat; wheat B) wheat; fish C) fish; wheat D) fish; fish E) nothing; nothing Answer: C Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

48) What is gained when people engage in specialization and trade? A) Specialization and trade allow people to consume outside their individual production possibilities frontiers. B) Specialization and trade allow people to consume inside their production possibilities frontiers. C) Specialization and trade allow people to consume at a point on their production possibilities frontiers. D) Specialization and trade allow people to produce outside their individual production possibilities frontiers. E) There are no gains from specialization and trade. Answer: A Topic: Achieving the gains from trade Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

49) Gains from trade A) occur when one party to the trade has an absolute advantage in both goods. B) result in being able to consume beyond the trading individuals' production possibilities frontiers. C) occur when people do not specialize. D) occur when opportunity costs are equal. E) always benefit one party but not the other party of any trade. Answer: B Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

50) Consider the United States' production of soy beans and running shoes. If the United States has an absolute advantage in the production of both goods compared to China, A) both countries can gain from trade. B) only the United States can gain from trade. C) only China can gain from trade. D) each country will be able to produce at a point beyond its PPF. E) only the United States will be able to operate beyond its PPF. Answer: A Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

51) To achieve gains from trade, a country A) needs to have an absolute advantage in the production of all goods. B) specializes in the producing a good in which it has a lower opportunity cost. C) must produce at a point beyond its PPF. D) should produce at the midpoint of its PPF. E) needs to have an absolute advantage in the production of at least one good. Answer: B Topic: Achieving the gains from trade Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

52) Specialization and trade A) does not benefit anyone. B) allows nations to produce inside their individual production possibilities frontier. C) allows nations to consume combinations of products that are outside their individual production possibilities frontier. D) shifts the production possibilities frontier inward. E) shifts the production possibilities frontier outward. Answer: C Topic: Achieving the gains from trade Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

53) The United States is one of the richest nations in the world, A) so it does not need to trade with poor nations in order to achieve any gains from trade. B) so it might not have a comparative advantage in producing any goods. C) but it can still benefit from specialization and trade. D) so it must have a comparative advantage in the production of all goods. E) so it must have an absolute advantage in the production of all goods. Answer: C Topic: Achieving the gains from trade Skill: Level 4: Applying models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

54) Specialization and trade make a country better off because with trade, the country can consume at a point A) outside its production possibilities frontier. B) inside its production possibilities frontier. C) on its production possibilities frontier. D) on its trading partner's production possibilities frontier. E) inside its trading partner's production possibilities frontier. Answer: A Topic: Achieving the gains from trade Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

55) By specializing and trading, a country is able to A) obtain the absolute advantage in the goods it produces. B) consume but not to produce combinations of goods that lie beyond its production possibilities frontier. C) produce but not to consume combinations of goods that lie beyond its production possibilities frontier. D) both produce and consume combinations of goods that lie beyond its production possibilities frontier. E) neither produce nor consume combinations of goods that lie beyond its production possibilities frontier. Answer: B Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

56) With no international trade, a country ________ consume at a point outside of its PPF; with international trade, a country ________ consume at a point outside of its PPF. A) cannot; can B) can; cannot C) can; can D) cannot; cannot E) None of the above answers is correct because the presence or absence of international trade has nothing to do with where a country consumes in comparison to its PPF. Answer: A Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

57) In terms of a nation's production possibilities frontier, what impact does international trade have? A) International trade shifts the nation's production possibilities frontier outward. B) International trade shifts the nation's production possibilities frontier inward. C) International trade allows the nation to consume at a point outside its production possibilities frontier. D) International trade shifts the production possibilities frontier outward for the goods that are exported and inward for the goods that are imported. E) International trade shifts the production possibilities frontier outward for the goods that are imported and inward for the goods that are exported. Answer: C Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

58) The gains from trade include: i. lower prices from competition ii. greater output from specialization iii. greater variety of goods and services available A) i and iii B) ii and iii C) i and ii D) i, ii, and iii E) ii only Answer: D Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: New AACSB: Reflective thinking

59) If a nation has an absolute advantage in producing a good, then it A) will have a comparative advantage in producing that good. B) will have no need to trade with other nations. C) will always specialize in that good. D) might or might not have a comparative advantage in producing that good. E) will not have a comparative advantage in producing that good. Answer: D Topic: Comparative advantage versus absolute advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

60) In one hour John can produce 20 loaves of bread or 8 cakes. In one hour Phyllis can produce 30 loaves of bread or 15 cakes. Which of the following statements is true? A) Phyllis has a comparative advantage in producing bread. B) John has a comparative advantage in producing cakes. C) Phyllis has an absolute advantage in both goods. D) John has an absolute advantage in both goods. E) Phyllis has a comparative advantage in producing both cakes and bread. Answer: C Topic: Absolute advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

61) "Comparative advantage" is defined as a situation in which one person can produce A) more of all goods than another person. B) more of a good than another person. C) a good for a lower dollar cost than another person. D) a good for a lower opportunity cost than another person. E) all goods for lower opportunity costs than another person. Answer: D Topic: Comparative advantage Skill: Level 1: Definition Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

62) Scott and Cindy both produce only pizza and tacos. In one hour, Scott can produce 20 pizzas or 40 tacos. In one hour, Cindy can produce 30 pizzas or 40 tacos. Scott's opportunity cost of producing 1 taco is A) 1/2 of a pizza. B) 1 pizza. C) 2 pizzas. D) 20 pizzas. E) 2 tacos. Answer: A Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

63) Scott and Cindy both produce only pizza and tacos. In one hour, Scott can produce 20 pizzas or 40 tacos. In one hour, Cindy can produce 30 pizzas or 40 tacos. Cindy's opportunity cost of producing 1 taco is A) 3/4 of a pizza. B) 1 pizza. C) 30 pizzas. D) 40 pizzas. E) 1 1/3 tacos. Answer: A Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

64) Scott and Cindy both produce only pizza and tacos. In one hour, Scott can produce 20 pizzas or 40 tacos. In one hour, Cindy can produce 30 pizzas or 40 tacos. Based on these data, A) Cindy has a comparative advantage at producing tacos. B) Scott has a comparative advantage at producing tacos. C) Cindy and Scott have the same comparative advantage in producing tacos. D) neither Cindy nor Scott has a comparative advantage in producing tacos. E) Cindy and Scott have the same comparative advantage in producing pizzas. Answer: B Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

65) In one hour John can produce 20 loaves of bread or 16 cakes. In one hour Phyllis can produce 30 loaves of bread or 15 cakes. Which of the following statements is true? A) Phyllis has a comparative advantage in producing bread. B) John has a comparative advantage in producing cakes. C) Phyllis has an absolute advantage in both goods. D) John has an absolute advantage in both goods. E) Phyllis has a comparative advantage in producing both cakes and bread. Answer: B Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

66) Comparative advantage is directly related to which of the following concepts? A) productivity B) efficiency C) opportunity cost D) competition E) fairness Answer: C Topic: Comparative advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: New AACSB: Reflective thinking

67) If workers in Mexico produce fewer goods and services per hour than workers in the United States in all areas of production, then A) the United States will benefit from trade with Mexico but Mexico will not. B) Mexico will benefit from trade with the United States but the United States will not. C) neither Mexico nor the United States will benefit from trade with the other. D) both the United States and Mexico will benefit from trade with the other. E) it is unknown whether either country can benefit from trade with the other. Answer: D Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: New AACSB: Reflective thinking

3.5 Chapter Figures

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

2) The figure above shows a production possibilities frontier. In the figure, which of the following combinations of the two goods are efficient? A) 2 million cell phones and 13 million DVDs B) 5 million cell phones and 15 million DVDs C) No cell phones and 15 million DVDs D) 4 million cell phones and 4 million DVDs E) None of these combinations is efficient. Answer: C Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytical thinking

3) The figure above shows a production possibilities frontier. In the figure, the economy faces a tradeoff when ________ cell phones and ________ DVDs. are produced. A) 3 million; 9 million B) 2 million; 9 million C) 3 million; 8 million D) 4.5 million; no E) 5 million; 15 million Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytical thinking

4) The figure above shows a production possibilities frontier. In the figure, when the economy moves from point E to point D, what is the opportunity cost of a DVD? A) 0.25 cell phones B) 0.5 cell phones C) 1 cell phone D) 4 cell phones E) zero Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytical thinking

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

6) The figure above shows a production possibilities frontier. In the figure, when the economy moves from point C to point B, what is the opportunity cost of a DVD? A) 0.5 cell phones B) 2 cell phones C) 0.5 million cell phones D) 2 million cell phones E) zero Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytical thinking

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

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

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

The figure above shows Liz's and Joe's production possibilities for Salads and Smoothies. 10) Liz has a comparative advantage in ________ and an absolute advantage in ________. A) smoothies only; both goods B) smoothies only; smoothies only C) both goods; both goods D) salads only; both goods E) salads only; salads only Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

11) Liz has a comparative advantage in ________ because ________. A) smoothies; her opportunity cost of producing smoothies is lower than Joe's B) salads; her opportunity cost of producing salads is lower than Joe's C) smoothies; she can produce more smoothies per hour than Joe can D) salads; she can produce more salads per hour than Joe can E) both goods; she can produce more of both goods per hour than Joe can Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

12) Given the information in the figure above, Liz ________ benefit from trade with Joe because ________. A) can; each of them has a comparative advantage in one of the goods B) can; each of them has an absolute advantage in one of the goods C) cannot; she has an absolute advantage in both goods D) cannot; she has a comparative advantage in both goods E) can; Joe is more productive in producing one of the goods Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

13) Given the information in the figure above, Joe can benefit from trade as far as the price at which he buys Liz's smoothies is A) below 5 salads per smoothie. B) not higher than 2 salads per smoothie. C) not lower than 2 salads per smoothie. D) not lower than 1 salad per smoothie. E) not higher than 4 salads per smoothie. Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

14) Using the figure above, suppose with no trade Liz and Joe each produce at point A on their respective PPFs. Then, Liz suggests that they specialize and trade. She would produces only smoothies and Joe would produce only salads. Then she would sell 10 smoothies to Joe at a price of 2.5 salads per smoothie. In this scenario, A) Liz gains 10 smoothies and 5 salads, and Joe gains 5 smoothies. B) Liz gains 5 smoothies, and Joe gains 10 smoothies. C) Liz gains 10 smoothies, and Joe loses 5 smoothies. D) Liz gains 5 smoothies and 5 salads, and Joe loses 5 salads. E) None of the individuals gains from trade. Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

15) Using the figure above, suppose with no trade Liz and Joe each produce at point A on their respective PPFs. Then, Joe suggests that they specialize and trade. He would produces only salads and Liz would produce only smoothies. Then, Joe says, he would buy 16 smoothies from Liz at a price of 1.5 salads per smoothie. Liz should A) accept Joe's offer since she will gain 4 smoothies and 4 salads. B) accept Joe's offer as she will be as well off as with no trade. C) not accept Joe's offer as the price he offers is too low for her to gain from trade. D) not accept Joe's offer since she would lose 2 smoothies and 2 salads. E) accept Joe's offer since she will gain 4 salads. Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

3.6 Integrative Questions 1) As technology advances, A) all opportunity costs decrease. B) the PPF shifts outward. C) a country moves toward the midpoint along its PPF and can produce more of both goods. D) all opportunity costs increase. E) the PPF shifts inward because unemployment occurs. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

2) If a country is operating at a point of production efficiency, A) it enjoys a free lunch when increasing production. B) it produces on its production possibilities frontier. C) it must specialize in the production of a good. D) it operates on its trade line. E) it cannot be producing at its point of comparative advantage. Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

3) Relative to Al, Joe has ________ if Joe can produce a good at a lower opportunity cost than Al. A) a comparative advantage B) more production efficiency C) a comparative benefit D) a marginal benefit E) a free lunch Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

4) Suppose that after specializing according to comparative advantage, a country is trading with another nation that also specializes according to its comparative advantage. Which of the following statements are true for the first country? i. It enjoys gains from trade. ii. It must have an absolute advantage in the production of the good it produces. iii. It is producing at a point beyond its PPF. A) i only B) i and ii C) i and iii D) ii and iii E) i, ii, and iii Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

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

6) The table above gives the production possibilities frontier for two countries, Anaconda and Bear. The table shows that A) Bear achieves production efficiency only at its production point A. B) Anaconda achieves production efficiency only at its production point A. C) Anaconda has a comparative advantage in the production of corn. D) Bear has an absolute advantage in the production of both goods. E) Both answers A and B are correct. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

7) The table above gives the production possibilities frontier for two countries, Anaconda and Bear. The opportunity cost of moving from production point B to production point C for Anaconda equals ________ and for Bear equals ________. A) 1 ton of corn; 1 ton of corn B) 650 pairs of shoes; 900 pairs of shoes C) 550 pairs of shoes; 700 pairs of shoes D) 100 pairs of shoes; 200 pairs of shoes E) 50 pairs of shoes; 100 pairs of shoes Answer: D Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

8) The table above gives the production possibilities frontier for two countries, Anaconda and Bear. The opportunity cost of moving from ________ is greater for ________. A) point A to point B; Anaconda B) point B to point A; Bear C) point D to point E; Bear D) point E to point D; Bear E) any point to any other point; Bear Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

3.7 Essay: Production Possibilities 1) What does the vertical intercept of a production possibilities frontier represent? Answer: The vertical intercept is the maximum amount that can be produced if all available resources are dedicated to the production of the good or service measured on the vertical axis. Topic: Production possibilities frontier Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

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

3) How can a combination of goods be unattainable? Answer: A combination of goods can be unattainable if producing that combination requires more resources and technology than are available. Topic: Unattainable points Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

4) A production point beyond the production possibilities frontier represents what? Answer: A production point beyond the production possibilities frontier is an unattainable combination of products. Topic: Unattainable points Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

5) "If Mexico is currently operating at a point beyond its production possibilities frontier, then there are unemployed or misallocated resources in Mexico." Is this statement true or false? Briefly explain your answer. Answer: The statement is false. It is false on two counts. First, production points beyond the production possibilities frontier are unattainable, so it is not possible for Mexico to be producing at such a point. Second, it is points within the production possibilities frontier that have unemployed or misallocated resources. Topic: Unattainable points Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Written and oral communication

6) "If Mexico is currently operating at a point inside its production possibilities frontier, then there are unemployed or misallocated resources in Mexico." Is this statement true or false? Briefly explain your answer. Answer: The statement is true. Points within the production possibilities frontier are attainable, so it is possible for Mexico to be producing at a point within its frontier. At points within the production possibilities frontier, there are unemployed or misallocated resources. Topic: Attainable points, unemployment Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

7) Are all points inside the production possibilities frontier unattainable? Answer: No, all points within the production possibilities frontier are attainable, though there are unemployed resources at these points. Topic: Attainable points, unemployment Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

8) In the movie Cast Away, Tom Hanks plays a FedEx efficiency expert stranded on a deserted island. While on the island, he divides his time between catching fish, gathering coconuts, painting, and building a raft. Suppose that these were Mr. Hanks' only activities. Did he face an opportunity cost from pursuing any of these activities? Why or why not? Answer: Yes, Mr. Hanks faces an opportunity cost from all of these endeavors. If he decides to use his time catching fish, he couldn't gather coconuts, paint, or build a raft. Whatever he would have been doing, not opting to catch fish is his opportunity cost of catching fish. Similarly, time spent on building his raft means less time painting, or fewer coconuts for breakfast, or fewer fish for dinner. Tradeoffs such as these are a feature of any economy that is operating on its production possibilities frontier and cannot be avoided. Topic: Tradeoffs Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Written and oral communication

9) What does it mean when a "free lunch" is available? Relate your answer to the production possibilities frontier. Answer: A free lunch means that there is no tradeoff, that is, the production of one good or service can be increased without decreasing the production of another good or service and thereby giving up some of the other good. A free lunch occurs when the economy is producing at a point within the production possibilities frontier because at these points some resource is unemployed. By utilizing the unemployed resource, more goods or services can be produced without giving up any other goods or services. Topic: Free lunches Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Written and oral communication

10) Describe the differences between tradeoffs and free lunches in terms of a PPF. Answer: A tradeoff is a constraint or limit that forces giving up one thing in exchange for something else. When resources are fully employed, a country operates on its PPF. Any movement from one point to another point along the PPF requires the country to make a tradeoff between the two goods because one good is given up to get some other good. A free lunch occurs when some resources are not being used or not being used in their most productive way. When a country operates inside its PPF and moves toward its PPF choosing a different combination of goods, the country enjoys a free lunch. It does not face a tradeoff. Topic: Tradeoffs and free lunches Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Written and oral communication

11) On a production possibilities frontier diagram, where are production points that have tradeoffs? Where are production points with a free lunch? Answer: A tradeoff is a situation in which a limit forces one thing to be given up in exchange for something else. Any point on the production possibilities frontier itself is a production point with a tradeoff. Why? Moving along the production possibilities frontier means that more of one good can be obtained only at the (opportunity) cost of giving up some other good, which means that there is a tradeoff. A free lunch is the absence of a tradeoff, that is, when the production of a good or service can be increased without decreasing the production of another good or service. A free lunch occurs at any point within the production possibilities frontier. At these points, resources are being used inefficiently. By utilizing the resource efficiently, more goods or services can be produced without giving up any other goods or services. Topic: Tradeoffs and free lunches Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Written and oral communication

12) Explain why a movement from a point inside a production possibilities frontier to the production possibilities frontier is described as a free lunch and a movement along a production possibilities frontier is described as a tradeoff. Answer: The key point to answer this question is the fact that producing more of a good requires more resources. Hence, if all resources are employed efficiently, as is the case when producing on the production possibilities frontier, producing more of one good means reallocating resources away from the production of another good; there is a tradeoff between the two goods. In other words, to produce more of one good, the production of another must be given up. If, however, resources are used inefficiently, as is the case when producing inside the production possibilities frontier, then the production of a good can be increased by using the resources efficiently; hence no tradeoff is required and the additional goods are a free lunch. Topic: Tradeoffs and free lunches Skill: Level 4: Applying models Section: Checkpoint 3.1 Status: Old AACSB: Written and oral communication

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

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

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

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

When a PPF is drawn, we draw it for a fixed amount of natural resources, along with fixed amounts of the other factors of production such as labor, capital, etc. Fire reduced Kuwait's natural resources temporarily, so the PPF after the war shifted inwards. However, because setting the oil wells on fire did not affect Kuwait's ability to produce food, the maximum amount of food production, the point where the PPF intersects the vertical axis, did not change. Topic: Production possibilities frontier Skill: Level 4: Applying models Section: Checkpoint 3.1 Status: Old AACSB: Analytical thinking

3.8 Essay: Opportunity Cost 1) Moving on a bowed out PPF, what happens to the opportunity cost of its production as a nation specializes more in one product? Answer: The bowed out PPF indicates that as the amount of the good produced increases, the good's opportunity cost increases. Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

2) Why is the production possibilities frontier bowed out? Answer: The production possibilities frontier is bowed out because resources are not equally productive in all uses. The resources used to produce robots are different from the resources used to produce pizzas. Thus, as more of one good is produced, say robots, less productive resources must be used to increase the number of robots produced. Hence the opportunity cost of the additional robots increases, which gives the production possibilities frontier a bowed out shape. Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Written and oral communication

3) Why does the production possibilities frontier have a bowed out shape rather than being a straight line? Answer: The fact that as the production of one good or service increases, its opportunity cost increases means that the production possibilities frontier will be bowed out. Only if the opportunity cost remained constant as the production of a good increases would the production possibilities frontier be a straight line. Topic: Increasing opportunity costs Skill: Level 4: Applying models Section: Checkpoint 3.2 Status: Old AACSB: Written and oral communication

4) When economists state that the opportunity cost of a product increases as more of it is produced, what do they mean? For instance, what is the opportunity cost? And, where in a PPF diagram does this statement apply and where does it not apply? Answer: In general, the opportunity cost of increasing the production of one good or service is the forgone production of another good or service. The statement that the opportunity cost of a product increases as more of it is produced applies to production points on the production possibilities frontier. On the production possibilities frontier, resources are fully employed. Hence to increase the production of one good or service, resources must be switched away from the production of another good or service and hence the production of that good or service decreases. And, as more of the first good or service is produced, the opportunity cost of an additional unit becomes larger, so that the opportunity cost increases. However, the assertion that the opportunity cost of a product increases as more of it is produced does not apply to production points within the production possibilities frontier. Production points within the production possibilities frontier are points at which there are resources being used inefficiently. From a production point with inefficiently used resources, to increase the production of a good, some of the resources can be used efficiently and so there is no opportunity cost in terms of forgone other products. Therefore from a point within the production possibilities frontier, the opportunity cost of increasing the production of a good is zero. Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Written and oral communication

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

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

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

Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytical thinking

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

Answer:

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

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

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

3.9 Essay: Economic Growth 1) How is economic growth shown in a production possibilities frontier graph? Answer: Economic growth is illustrated as an outward shift of the PPF. Topic: Economic growth Skill: Level 2: Using definitions Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking

3.10 Essay: Specialization and Trade 1) What is comparative advantage? Give an example. Answer: Comparative advantage is the ability of a person to produce a good at a lower opportunity cost compared to another person. A lower opportunity cost means that the person gives up less to produce the good compared to another person. For example, one person may need to give up one hour of typing to get dinner made while another person must give up two hours of typing to produce the same dinner. Topic: Comparative advantage Skill: Level 1: Definition Section: Checkpoint 3.4 Status: Old AACSB: Written and oral communication

2) "When a person has an absolute advantage in producing a good, the person necessarily has a lower opportunity cost of producing it." Is this assertion correct or incorrect? Answer: The assertion is incorrect. An absolute advantage is when a person can produce more of the good than someone else. A comparative advantage relies on a comparison of opportunity costs, so a person has a comparative advantage in producing a good if the person can produce the good at a lower opportunity cost. Topic: Comparative advantage versus absolute advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Written and oral communication

3) "When a person is more productive in producing a good or service than another person, the first person has the comparative advantage in producing the good." Is this assertion correct or incorrect? Explain your answer. Answer: The assertion is incorrect. The statement describes an absolute advantage, that is, a person has an absolute advantage in the production of a good if the person can produce more of it in a given time period than someone else. Comparative advantage, however, relies on a comparison of opportunity costs. A person has a comparative advantage in producing a good if the person can produce the good at a lower opportunity cost than another person. Topic: Comparative advantage versus absolute advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Written and oral communication

4) Why is it likely that the United States has an absolute advantage in goods and yet it still ends up importing them from other countries? Answer: The United States might have an absolute advantage in producing a good but not a comparative advantage. In this case, the opportunity cost of producing the good in the United States is higher than in another country. Thus the United States will import the product from the other country. Topic: Comparative advantage versus absolute advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Written and oral communication

5) The United States has an absolute advantage in producing sugar over all of the other sugar producing countries. Does this fact mean that we should not import any sugar from the other countries? Answer: Having an absolute advantage doesn't mean that the United States should engage in the production of sugar. If the opportunity cost of sugar in the United States is higher than in the other countries, then the other countries will have the comparative advantage. The countries with the comparative advantage are the ones that should do the producing. Quite likely these other nations have the comparative advantage and so it would be good policy for the United States to import sugar from these nations. Topic: Comparative advantage versus absolute advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Written and oral communication

6) Japan can use all of its resources to produce 100 videos or 400 shoes. China can use all of its resources to produce 25 videos or 200 shoes. Which nation has the comparative advantage in shoes and which nation has the comparative advantage in videos? Answer: In Japan, the opportunity cost of producing a video is 4 shoes and in China it is 8 shoes. Therefore Japan has the comparative advantage in producing videos because its opportunity cost is lower. In Japan, the opportunity cost of producing a shoe is 1/4 of a video and in China the opportunity cost of producing a shoe is 1/8 of a video. China has the comparative advantage in producing shoes because its opportunity cost is lower. Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

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

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

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

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

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

12) "When countries specialize in producing the good in which they have a comparative advantage and then trade with each other, only the country with the absolute advantage gains." Is the previous statement correct or incorrect? Briefly explain your answer. Answer: The statement is incorrect. Absolute advantage, which is essentially the ability to produce more of a good than another country, has nothing to do with the gains from trade. All nations gain from free international trade regardless of whether they possess an absolute advantage or not. Topic: Gains from trade Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Written and oral communication

13) "Because the United States is the largest economy in the world and can produce anything it needs domestically, there are no gains from trade for the United States." Is the previous statement correct or incorrect? Answer: The statement is incorrect. The United States, like any other nation, gains from trade when it specializes according to comparative advantage. Topic: Gains from trade Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

14) How can a nation that is at an absolute disadvantage gain from trade? Answer: Being at an absolute disadvantage means that the nation can produce less than its trading partner, but it says nothing about the relative costs of producing the goods. International trade is based on comparative advantage, which means that the low-cost producer specializes in the production of a good and exports it to the other nation that has the higher cost of production. A nation that has an absolute disadvantage still has a lower opportunity cost of production for one of the goods and hence has the comparative advantage in the production of that good. Therefore this country will gain from trade, as will all its trading partners. Topic: Gains from trade Skill: Level 4: Applying models Section: Checkpoint 3.4 Status: Old AACSB: Written and oral communication

15) Why do nations engage in international trade? Answer: Nations engage in international trade because they gain from trade. International trade results in a more efficient use of resources and thereby increases world output. As a result, it increases the amount of goods and services available for consumption in all nations and thereby makes all countries better off. Topic: Gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Written and oral communication

16) Explain why specialization and trade increases a country's overall level of consumption. Answer: A country specializes in the activities in which it has the lowest opportunity cost. By trading, it can obtain goods and services at a lower opportunity cost than it would cost to produce the goods and services domestically. Hence the nation acquires goods and services at a lower cost than before and so the nation's consumption increases. In fact, trade allows the nation to consume at a point beyond its production possibilities frontier. Topic: Gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytical thinking

Essential Foundations of Economics, 8e (Bade) Chapter 4 Demand and Supply 4.1 Demand 1) A market is defined as A) a physical place where people buy only goods. B) a physical place where people buy both goods and services. C) a store where people buy physical goods. D) any arrangement that brings buyers and sellers together. E) a place where one good is bartered for another. Answer: D Topic: Markets Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

2) EBay A) will be considered a market when the Internet firms are profitable. B) is a market because buyers and sellers are brought together to buy and sell. C) would be a market if there was only one physical location. D) cannot function as a market. E) is not a market because buyers can buy from only one seller at any point in time. Answer: B Topic: Markets Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

3) Which of the following are examples of a market? i. the New York Stock Exchange ii. a used car lot iii. a website selling vacations to Disney World A) i, ii and iii. B) i only. C) iii only. D) i and iii only. E) ii and iii only. Answer: A Topic: Markets Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: New AACSB: Application of knowledge

4) Which of the following statements is true about a competitive market? A competitive market A) must have a physical location. B) includes markets for goods and services but not for inputs. C) has so many buyers and sellers that no one can influence the price. D) has one seller competing to sell his or her product. E) has a handful of sellers but always has many buyers. Answer: C Topic: Markets Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

5) What is the "quantity demanded"? A) the amount of a good people desire B) the amount of a good people are able and willing to buy during a specific time period and at a given price C) the amount of a good people are able and willing to buy at all possible prices D) the maximum amount of a good that can be consumed during a specific time period E) the minimum amount of a good that people are willing to buy during a specific time period and at a given price Answer: B Topic: Quantity demanded Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

6) The "quantity demanded" of any good or service is ________ during a specified time period and at a specified price. A) the amount people are willing to buy B) the amount people are able to buy C) the amount people are willing and able to offer D) the amount people are willing and able to buy E) the amount people are willing to buy because it is the amount sellers are willing to sell Answer: D Topic: Quantity demanded Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

7) The "law of demand" refers to the fact that, other things remaining the same, when the price of a good rises, A) the demand curve shifts rightward. B) the demand curve shifts leftward. C) there is a movement down along the demand curve to a larger quantity demanded. D) there is a movement up along the demand curve to a smaller quantity demanded. E) the demand curve shifts rightward and there is a movement up along the demand curve to a smaller quantity demanded. Answer: D Topic: Law of demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

8) The law of demand refers to how A) demand changes when people's incomes change. B) demand changes when the prices of substitutes and complements change. C) the quantity demanded changes when the price of the good changes. D) the price of the good changes when people's demand for the good changes. E) the quantity demanded changes when the demand for the good changes. Answer: C Topic: Law of demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

9) Which of the following describes the law of demand? When other things remain the same, as A) the price of gas falls, the quantity demanded of gas increases. B) the quantity demanded of bread increases, the price of bread falls. C) the price of peanut butter increases, the quantity demanded of jelly decreases. D) your income increases, you'll buy more hamburgers. E) more people decide to eat pizza, the demand for pizza increases. Answer: A Topic: Law of demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

10) Gasoline prices increase by 50 percent and other things remain the same. As a result, there is A) an increase in the demand for gasoline. B) a decrease in the demand for gasoline. C) no change in the quantity of gasoline demanded. D) a decrease in the quantity of gasoline demanded. E) More information is needed to determine if the demand for gasoline increases or decreases. Answer: D Topic: Law of demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

11) In stores, it is common to find seasonal products marked down when the season ends. What explains this behavior? A) The law of demand is being used to increase the quantity demanded. B) The store is trying to increase its customers' demand for the product. C) The store manager must be trying to drive away customers by selling low quality products. D) The store is trying to increase its customers' incomes by increasing their purchasing power. E) The store is trying to sell the goods and realizes that they are substitutes for other goods whose prices have risen. Answer: A Topic: Law of demand Skill: Level 4: Applying models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

12) The law of demand implies that, other things remaining the same, A) as the price of a cheeseburger rises, the quantity of cheeseburgers demanded increases. B) as the price of a cheeseburger rises, the quantity of cheeseburgers demanded decreases. C) as income increases, the quantity of cheeseburgers demanded increases. D) as the demand for cheeseburgers increases, the price of a cheeseburger falls. E) as more people demand cheeseburgers, the quantity demanded increases. Answer: B Topic: Law of demand Skill: Level 4: Applying models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

13) An increase in the quantity demanded is shown as A) a movement along the demand curve. B) a movement toward the demand curve. C) a rightward shift of the demand curve. D) a leftward shift of the demand curve. E) both a movement along the demand curve and a shift of the demand curve. Answer: A Topic: Quantity demanded Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

14) Which of the following results in a movement upward along the demand curve for movies? A) an increase in the price of movie tickets B) a decrease in the price of movie tickets C) an increase in income, assuming that movies are a normal good D) a decrease in income, assuming that movies are a normal good E) a decrease in the price of NetFlix, a substitute for movies Answer: A Topic: Quantity demanded Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

15) Which of the following is true regarding demand? i. Demand is the relationship between quantity demanded and the price of a good when all other influences on buying plans remain the same. ii. Demand refers to one quantity at one time. iii. "Demand" and "quantity demanded" are the same thing. A) i only B) ii only C) i and ii D) iii only E) ii and iii Answer: A Topic: Quantity demanded versus demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

16) The price of cotton clothing falls. As a result, A) the quantity demanded of cotton clothing increases. B) the demand for cotton clothing increases. C) the quantity demanded of cotton clothing decreases. D) the demand for cotton clothing decreases. E) both the demand for cotton clothing increases and the quantity demand of cotton clothing increases. Answer: A Topic: Quantity demanded versus demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

17) The American Dairy Association starts a highly successful advertising campaign that makes most people want to drink more milk. As a result, A) the demand for milk increases. B) the quantity demanded of milk increases. C) the price of milk falls to encourage people to drink more milk. D) the demand for milk is not affected. E) the demand for milk decreases because the price of milk rises. Answer: A Topic: Quantity demanded versus demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

18) A demand schedule shows A) the quantities that people plan to buy in all possible circumstances. B) the quantities that people plan to buy at each different price when all other influences on buying plans remain the same. C) the quantities that people would plan to buy if they could afford them at each different price when all other influences on buying plans remain the same. D) the quantities that people plan to buy at each different income when all other influences on buying plans remain the same. E) the quantities that people plan to buy at each different price as long as producers are willing to supply that quantity. Answer: B Topic: Demand schedule Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

19) A demand schedule A) shows the quantity demanded at one price. B) is a graph showing a relationship between the quantity demanded and the price of a good. C) is a list of the quantities demanded at each different price when all other influences on buying plans remain the same. D) shows that demand is on schedule. E) shows how the demand changes when the supply changes. Answer: C Topic: Demand schedule Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

20) The downward slope of a demand curve A) represents the law of demand. B) shows that as the price of a good rises, consumers increase the quantity they demand. C) indicates how the quantity demanded changes when incomes rise and the good is a normal good. D) indicates how demand changes when incomes rise and the good is a normal good. E) indicates how demand changes when the price changes and the good is a normal good. Answer: A Topic: Demand curve Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

21) A demand curve A) has an upward slope. B) has a downward slope. C) is a graph of the relationship between quantity demanded of a good and its price. D) Both answers B and C are correct. E) Both answers A and C are correct. Answer: D Topic: Demand curve Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

22) Demand curves slope ________ because as the price increases and other things remain the same, the quantity demanded ________. A) downward; decreases B) downward; increases C) upward; decreases D) upward; increases E) downward; does not change Answer: A Topic: Demand curve Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

23) The market demand curve A) cannot show how quantity demanded changes in response to a change in price. B) cannot show a change in demand for a good. C) is the horizontal sum of individual demand curves. D) is the vertical sum of individual demand curves. E) is upward sloping. Answer: C Topic: Individual and market demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

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

25) The figure above shows the market for sports drinks. Which of the statements are true? i. A change in demand is shown as a movement from C to A. ii. A change from point C to point B represents a change in the quantity demanded. iii. If the price increases from $1 to $3, quantity demanded will decrease from 25 to 10 bottles. A) i, ii and iii B) ii only C) i and iii D) iii only E) i and ii Answer: C Topic: Changes in quantity demanded versus change in demand Skill: Level 4: Applying models Section: Checkpoint 4.1 Status: New AACSB: Analytical thinking

26) Consider a demand curve for apples. "A change in the price of apples leads to a ________ the demand curve for apples because ________. A) movement along; all other factors influencing buying plans are held constant B) shift in; all other factors influencing demand are held constant C) movement along; all other factors influencing demand are allowed to change D) shift in; changes in the prices of other fruit affect demand E) movement along; changes in the prices of other fruit affect demand Answer: A Topic: Changes in quantity demanded Skill: Level 3: Using models Section: Checkpoint 4.1 Status: New AACSB: Analytical thinking

27) Consider the market for burritos. The law of demand can be illustrated by A) a shift in the demand curve for burritos due to a change in the price of a burrito. B) a shift in the demand curve for burritos due to a change in the price of a taco. C) a movement along the demand curve for burritos when the price of a taco changes. D) a movement along the demand curve for burritos due to a change in the price of a burrito. E) a shift in the demand curve for burritos due to a shift in the supply curve of burritos. Answer: D Topic: Law of demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: New AACSB: Application of knowledge

28) The market demand curve for mangos is A) the same as the demand curve of one buyer in a market with many buyers. B) upward sloping because rich people can afford more mangos than poor people can buy. C) the horizontal sum of the individual demand curves of all the buyers. D) the vertical sum of the individual demand curves of all the buyers. E) the horizontal average of the individual demand curves of all the buyers. Answer: C Topic: Individual and market demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

29) There are five hundred buyers in the market for cheese. If we know each individual's demand curves, to find the market demand, we must A) add the prices that each buyer will pay at every quantity. B) add the quantities that each buyer will purchase at every price. C) multiply the price times quantity for each buyer and then add the resulting products together. D) average the price each buyer is willing to pay for each given quantity. E) give up because there is no way to find the market demand. Answer: B Topic: Individual and market demand Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

30) Market demand curves are obtained by A) determining the price each consumer is willing to pay for the good and summing those prices across all consumers. B) observing the prices and quantities sold in a market over time and plotting those price-quantity combinations in a graph. C) summing the quantities every consumer is willing to buy at each different price. D) observing the behavior of an individual consumer in a market. E) averaging the quantities every consumer is willing to buy at each different price. Answer: C Topic: Individual and market demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

31) The market demand curve for mousetraps is A) found by summing the quantities of mousetraps demanded at each income level by each buyer. B) found by summing the prices of mousetraps at each quantity of mousetraps demanded by each buyer. C) the horizontal sum of the individual demand curves for mousetraps of all the buyers. D) Both answers B and C are correct. E) Both answers A and C are correct. Answer: C Topic: Individual and market demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

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

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

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

If the price is $6 per serving, ________ each week. A) the market demand is 3 servings B) the market supply is 3 servings C) the market demand is 7 servings D) there will be a shortage of frozen yogurt E) there will be a surplus of frozen yogurt Answer: A Topic: Market demand Skill: Level 3: Using models Section: Checkpoint 4.1 Status: New AACSB: Application of knowledge

34) The phrase "a change in demand" refers to a A) movement along a demand curve. B) movement along the price curve. C) change in the quantity demanded of a good. D) shift of the demand curve. E) movement along the quantity curve. Answer: D Topic: Changes in demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Revised AACSB: Reflective thinking

35) When demand increases, A) consumers are willing to buy more at any price. B) consumers buy more of the good only if its price falls. C) the price is lower at any level of quantity demanded. D) consumers buy more of the good only if its price rises. E) the demand curve shifts leftward. Answer: A Topic: Changes in demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

36) A change in the demand for apples could result from any of the following EXCEPT A) a change in the number of buyers. B) increased preferences for fresh fruit consumption for health reasons. C) a change in the price of an apple. D) a change in the price of a banana. E) a change in income. Answer: C Topic: Changes in demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

37) Changes in which of the following factors do NOT shift the demand curve? A) the price of the good B) buyers' incomes C) the price of a substitute good D) the number of buyers E) the price expected in the future Answer: A Topic: Shifts of the demand curve Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

38) If the demand for used cars decreases after the price of a new car falls, used cars and new cars are A) inferior goods. B) substitute goods. C) complementary goods. D) normal goods. E) The questions errs because it is the quantity of used cars, NOT the demand for used cars, that will change when the price of a new car falls. Answer: B Topic: Changes in demand, price of a substitute Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

39) Consumers regard Dell computers and Apple computers as substitutes. If the price of a Dell computer decreases, the A) demand for Dell computers increases. B) demand for Apple computers increases. C) demand for Apple computers decreases. D) supply of Dell computers increases. E) demand for Dell computers decreases. Answer: C Topic: Changes in demand, price of a substitute Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

40) Which of the following increases the demand for a good or service? A) a fall in the price of the good or service B) a smaller number of consumers wanting to buy the good or service C) a rise in the price of the good or service D) a rise in the price of a substitute good or service E) a rise in the price of a complement Answer: D Topic: Changes in demand, price of a substitute Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

41) Consider the market for smart phones. Which of the following shifts the demand curve rightward? A) an increase in the price of smart phones B) a decrease in the price of smart phones C) an increase in the price of land-line phone service, a substitute for smart phones D) a decrease in the number of smart phone buyers E) an increase in the supply of smart phones Answer: C Topic: Changes in demand, price of a substitute Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

42) Which of the following shifts the demand curve for movies rightward? A) an increase in the price of NetFlix, a substitute for movies B) an increase in the price of movie tickets C) a decrease in the price of move tickets D) an increase in movie star salaries E) an increase in the price of HDTV sets Answer: A Topic: Changes in demand, price of a substitute Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

43) Which of the following shifts the demand curve for movies leftward? A) a decrease in the price of NetFlix, a substitute for movies B) a decrease in the price of movie tickets C) an increase in the price of movie tickets D) an increase in movie star salaries E) an increase in incomes, assuming movies are a normal good Answer: A Topic: Changes in demand, price of a substitute Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

44) Two brands of water, Natural Water and Mountain Water, are close substitutes. If the price of Mountain Water decreases, the fall in price A) shifts the demand curve for Natural Water rightward. B) shifts the demand curve for Natural Water leftward. C) increases the price of Natural Water. D) increases the demand for Mountain Water. E) More information is needed to determine if the demand curve for Natural Water shifts rightward or leftward. Answer: B Topic: Changes in demand, price of a substitute Skill: Level 4: Applying models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

45) Car insurance and cars are complements. If the price of car insurance increases, the A) demand for cars decreases. B) demand for cars increases. C) quantity of cars demanded decreases. D) quantity of cars demanded increases. E) More information is needed to determine if the demand increases or decreases. Answer: A Topic: Changes in demand, price of a complement Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

46) Consumers eat salsa with taco chips. The price of salsa rises. How does the increase in the price of salsa affect the demand for taco chips? A) It decreases the demand for taco chips. B) It increases the demand for taco chips. C) It has no effect on the demand for taco chips. D) It will decrease the demand for taco chips only if taco chips are a normal good. E) It could increase, decrease, or have no effect on the demand for taco chips, but more information is needed to determine the impact. Answer: A Topic: Changes in demand, price of a complement Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

47) What happens to the demand for a good if a complement's price increases? A) The demand decreases and the demand curve shifts rightward. B) The demand increases and the demand curve shifts rightward. C) The demand decreases and the demand curve shifts leftward. D) The demand increases and the demand curve shifts leftward. E) There is no impact on demand for the good and the demand curve does not shift. Answer: C Topic: Changes in demand, price of a complement Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

48) Hot dogs and hot dog buns are complements. If the price of a hot dog falls, then A) the demand for hot dogs will increase. B) the demand for hot dog buns will decrease. C) the quantity demanded of hotdogs will decrease. D) the demand for hot dog buns will increase. E) the quantity demanded of hot dog buns will increase. Answer: D Topic: Changes in demand, price of a complement Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

49) A popular dinner among college students today is sushi, green tea, and wasabi dip so these foods are complements. If the price of green tea increases and the price of wasabi dip increases, what would be the effect on demand for sushi at lunch? A) The demand for sushi would decrease. B) The demand for sushi would be unaffected, but the price would increase. C) The demand for sushi could increase or decrease. D) The demand for sushi would increase. E) The demand for sushi would be unaffected, but the price would decrease. Answer: A Topic: Changes in demand, price of a complement Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

50) Soda and hot dogs are complements for one another. If a shortage of carbonated water leads to an increase in the price of soda, then the A) demand for hot dogs increases. B) demand for hot dogs decreases. C) quantity of hot dogs demanded increases. D) quantity of hot dogs demanded decreases. E) More information is needed to determine if the demand increases or decreases. Answer: B Topic: Changes in demand, price of a complement Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

51) A student at New York University used to take the Redhound bus when she visited her grandmother in Boston. After graduating, although the bus fare and the plane fare were the same as they were when she was a student, with a well-paid job on Wall Street she now takes the plane to Boston to visit her grandmother. For this student, travel by Redhound bus is A) a normal good. B) an inferior good. C) a substitute good. D) a complement good. E) a good with negative preferences. Answer: B Topic: Inferior goods Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

52) If the demand for digital cameras increases when consumers' incomes rise, then digital cameras are A) a normal good. B) an inferior good. C) a substitute for camcorders. D) a complement to camcorders. E) made using advanced technology. Answer: A Topic: Normal goods Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

53) If the demand for a good increases when people's incomes increase, A) the good is an inferior good. B) the law of demand is violated. C) the good's demand curve must be slope upward. D) the good is a normal good. E) the good is a substitute good for an inferior good. Answer: D Topic: Changes in demand, normal good Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

54) In a recession, consumers have less income to spend. As a result, if dining out is a normal good, then which of the following would happen to the demand curve for dining out? A) The demand curve would shift leftward. B) The demand curve would not shift but the price of dining out would rise. C) The effect on the demand curve is unknown. D) The demand curve would shift rightward. E) The demand curve would not shift but the price of dining out would fall. Answer: A Topic: Changes in demand, normal good Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

55) If macaroni and cheese is an inferior good, then a decrease in income results in A) an increase in the demand for macaroni and cheese. B) a decrease in the demand for macaroni and cheese. C) an increase in the supply of macaroni and cheese. D) a decrease in the supply of macaroni and cheese. E) Both answers A and D are correct. Answer: A Topic: Changes in demand, inferior good Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

56) If income increases and the demand for bus rides decreases, A) bus rides are a normal good. B) consumers are behaving irrationally. C) bus rides are an inferior good. D) bus rides are a substitute good. E) bus rides must be a complement good with some other good. Answer: C Topic: Changes in demand, inferior good Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

57) Which of the following is true? A) For an inferior good, when income increases, the demand curve shifts leftward. B) If the price of a substitute rises, the demand curve shifts leftward. C) If people expect the price of a good will rise in the future, the demand curve shifts leftward. D) An increase in population shifts the demand curve leftward. E) An increase in the cost of producing a good shifts the demand curve leftward. Answer: A Topic: Changes in demand, inferior good Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

58) Ramen noodles are a staple food item for many college students. Ramen noodles are very inexpensive, easy to prepare, and can be combined easily with other foods. After students graduate, find employment, and earn a higher income, they decrease their Ramen noodle purchases significantly. In this case, Ramen noodles are A) a normal good. B) an inferior good. C) a complement for higher income people. D) a substitute good. E) None of the above answers is correct. Answer: B Topic: Changes in demand, inferior good Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

59) Water bottlers announce that next month the price of bottled water will rise by 25 percent. Which of the following occurs immediately? A) The quantity of bottled water demanded increases. B) The quantity of bottled water demanded decreases. C) The demand for bottled water decreases. D) The demand for bottled water increases. E) None of the above answers is correct because it is the supply that immediately changes, not the demand. Answer: D Topic: Changes in demand, expectations Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

60) A huge 50 percent off sale on golf clubs is advertised for next week. What happens this week in the market for golf clubs? A) The supply of golf clubs increases. B) The supply of golf clubs decreases. C) The demand for golf clubs increases. D) The demand for golf clubs decreases. E) The demand for and the supply of golf clubs decreases. Answer: D Topic: Changes in demand, expectations Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

61) You are just about to finish college and are about to start a high paying job. Because of this new job, what is the most likely outcome in the market for cars? A) Your demand for cars will decrease. B) The market supply of cars will increase. C) Your demand for cars will increase. D) The market supply of cars will decrease. E) The demand and the supply for cars will decrease. Answer: C Topic: Changes in demand, expectations Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

62) Which of the following increases the demand for a good? A) a rise in the price of a complement B) the expectation that future income will be higher C) an increase in income, assuming the good is an inferior good D) a decrease in the number of buyers E) a fall in the price of a substitute Answer: B Topic: Changes in demand, expectations Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

63) Suppose that tattoos gained immense popularity with retired people as well as college students. This gain in popularity best reflects which of the following influences on buying plans? A) the price of a substitute good B) income C) expectations D) preferences E) the price of a complement good Answer: D Topic: Changes in demand, preferences Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

64) Consider the market for cellular phones. Which of the following shifts the demand curve leftward? A) studies showing using cellular phones can cause brain cancer B) a decrease in the price of cellular phones C) a decrease in the quantity demanded of cellular phones D) an increase in the services provided by cellular phones, such as text messaging E) an increase in the price of cellular phones Answer: A Topic: Changes in demand, preferences Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

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

66) Scooters are a normal good and buyers' incomes decrease. Which of the figures above best illustrates how this change affects the demand curve for scooters? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the above answers is correct because the decrease in income will affect the supply curve not the demand curve. Answer: B Topic: Changes in demand, normal good Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

67) Over the next few years more and more people prefer to ride on scooters. Which of the figures above best illustrates how this change affects the demand curve for scooters? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the above answers is correct because the change in tastes will affect the supply curve not the demand curve. Answer: A Topic: Changes in demand, number of buyers Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

68) A scooter uses much less gasoline than does a car. Suppose the price of gasoline rises substantially. Which of the figures above best illustrates how this change affects the demand curve for scooters? A) Figure A only B) Figure B only C) Figure C only D) Figure D only E) Both Figure A and Figure D Answer: A Topic: Changes in demand, preferences Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

69) In the above figure, the movement from point a to point b reflects A) a decrease in the price of pizza. B) an increase in the demand for pizza. C) an increase in the number of people who eat pizza. D) an increase in the price of the tomato sauce used to produce pizza. E) a decrease in the number of firms producing pizza. Answer: A Topic: Changes in quantity demanded Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

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

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

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

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

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

75) Pizza is a normal good. In the above figure, the shift in the demand curve from D to D2 can be the result of A) a decrease in the price of soda, a complement to pizza. B) an increase in the price of hamburgers, a substitute for pizza. C) a decrease in income. D) a study that shows that pizza is a very healthy food. E) an increase in the cost of producing pizza. Answer: C Topic: Changes in demand, normal good Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

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

77) In the above figure, ________ will shift in the demand curve from D to D1. A) an increase in income if pizza is an inferior good B) a decrease in the price of a sub sandwich, a substitute for pizza C) buyers' expectation that pizza will be less expensive next week D) a scientific article published that demonstrates eating pizza is good for one's health E) a fall in the cost of producing pizza Answer: D Topic: Changes in demand, preferences Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

78) Which of the following brings only an increase in the quantity demanded of a good? A) a decrease in income, assuming the good is an inferior good B) a rise in the price of a substitute good C) a fall in the price of the good itself D) an expectation that the good's price will rise in the future E) a decrease in income, assuming the good is a normal good Answer: C Topic: Quantity demanded versus demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

79) People consume more soup as temperatures falls. So, as cold weather approaches, A) the quantity of soup demanded increases. B) the demand for soup increases. C) people move closer to their demand curve for soup. D) people move farther beyond their demand curves. E) both the demand and the quantity demanded of soup increase. Answer: B Topic: Quantity demanded versus demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

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

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

82) The table above gives the demand schedule for lattes at the Bottomless Cup. If the price of a latte is $3, then the quantity of lattes demanded is ________ an hour. A) 90 B) 30 C) 80 D) 60 E) 230 Answer: D Topic: Quantity demanded Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

83) Other things remaining the same, the quantity of a good or service demanded will increase if the price of the good or service A) rises. B) falls. C) does not change. D) rises or does not change. E) rises or falls. Answer: B Topic: Law of demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

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

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

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

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

88) People come to expect that the price of a gallon of gasoline will rise next week. As a result, A) today's supply of gasoline increases. B) today's demand for gasoline increases. C) the price of a gallon of gasoline falls today. D) next week's supply of gasoline decreases. E) today's demand for gasoline and today's supply of gasoline do not change. Answer: B Topic: Changes in demand, expectations Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

89) One reason the demand for laptop computers might increase is a A) fall in the price of a laptop computers. B) fall in price of desktop computers. C) change in preferences as laptops have become more portable, with faster processors and larger hard drives. D) poor quality performance record for laptop computers. E) decrease in income if laptops are a normal good. Answer: C Topic: Changes in demand, preferences Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

90) Teenagers drink more soda than other age groups. If the number of teenagers increases, everything else remaining the same, A) market demand for soda increases. B) market demand for soda decreases. C) market demand for soda does not change. D) there is a movement along the market demand curve for soda. E) None of the above answers is correct because the effect on the demand depends whether the supply curve shifts rightward, leftward, or not at all. Answer: A Topic: Changes in demand, number of buyers Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

91) The number of buyers of sport utility vehicles, SUV, decreases sharply. So the A) demand curve for SUVs shifts leftward. B) demand curve for SUVs shifts rightward. C) demand curve for SUVs does not shift, nor is there a movement along then demand curve. D) demand curve for SUVs does not shift, but there is a movement downward along it. E) supply curve for SUVs shifts rightward. Answer: A Topic: Changes in demand, number of buyers Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

92) When moving along a demand curve, which of the following changes? A) the consumers' incomes B) the prices of other goods C) the number of buyers D) the price of the good E) the consumers' preferences Answer: D Topic: Movement along the demand curve Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

93) The graph illustrates the demand curve for soda. After a rise in the price of a soda from $1.00 a can to $2.00 a can, the quantity of soda demanded A) decreases from 2 cans to 0 cans a day. B) increases from 0 cans to 2 cans a day. C) remains unchanged. D) decreases from 1 can to 0 cans a day. E) cannot be determined from the figure because the demand curve will shift to a new curve. Answer: A Topic: Movement along the demand curve Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

94) Pizza and tacos are substitutes, and the price of a pizza increases. Which of the following correctly indicates what happens? A) The demand for pizzas decreases and the demand for tacos increases. B) The demand for both goods decreases. C) The quantity of tacos demanded increases and the quantity of pizza demanded decreases. D) The quantity of pizza demanded decreases and the demand for tacos increases. E) The demand for each decreases because both are normal goods. Answer: D Topic: Changes in quantity demanded versus change in demand Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

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

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

97) The figure shows the market for sports drinks. If the price of sports drinks decreases (with all other factors influencing buying plans unchanged), which of the following is true? i. There will be a movement from point A to point B. ii. The law of demand must be applied. iii. There will be a shift from D0 to D1. iv. There will be a shift from D0 to D2. A) ii and iii B) i and ii C) ii and iv D) iii only E) iv only Answer: B Topic: Changes in quantity demanded versus change in demand Skill: Level 4: Applying models Section: Checkpoint 4.1 Status: New AACSB: Application of knowledge

4.2 Supply 1) To be part of the supply for a good, a producer must be A) only able to supply the good. B) only willing to supply the good. C) both able and willing to supply the good. D) both able and willing to supply the good, and have already identified a buyer. E) both able and willing to supply the good, and have already sold the good. Answer: C Topic: Producers Skill: Level 1: Definition Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

2) The quantity supplied of a good or service is the A) list of all quantities at different prices, as illustrated by a supply schedule and a supply curve. B) list of all quantities at different prices, as illustrated by a demand schedule and a demand curve. C) one quantity produced at a variety of prices. D) quantity produced at one price. Answer: D Topic: Quantity supplied Skill: Level 1: Definition Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

3) The law of supply states that, other things remaining the same, A) demand increases when supply increases. B) if the price of a good increases, firms buy less of it. C) if the price of a good increases, the quantity supplied increases. D) as people's income increase, the supply of goods increases. E) if the price of a good increases, the supply increases. Answer: C Topic: Law of supply Skill: Level 1: Definition Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

4) The law of supply states that other things remaining the same, a decrease in the price of a kayak leads to A) a decrease in the supply of kayaks. B) a decrease in the quantity of kayaks supplied. C) an increase in the supply of kayaks. D) an increase in the quantity of kayaks supplied. E) an increase in the supply of kayaks and a decrease in the quantity of kayaks supplied. Answer: B Topic: Law of supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

5) Which of the following helps explain why the law of supply exists? A) Larger outputs result in lower costs of production. B) The law of increasing opportunity cost C) The costs of production remain constant throughout all levels of output. D) Sellers realize that if the price increases, they make larger profits and do not need to change their production. E) The law of demand Answer: B Topic: Law of supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

6) The law of supply reflects the fact that A) people buy more of a good when its price falls. B) suppliers have an incentive to use their resources in the way that brings the biggest return. C) higher prices are more attractive to consumers because they signal a higher quality product. D) businesses can sell more goods at lower prices. E) the demand curve is downward sloping. Answer: B Topic: Law of supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

7) The supply schedule A) shows the relationship between the quantity supplied and the price of a good when all other influences on selling plans remain the same. B) is a curve showing the relationship between the amount the sellers are willing and able to sell and the price of that good when all relevant factors change. C) shows one quantity at one price. D) is the schedule that suppliers have to keep or else they will be late. E) shows the relationship between the quantity supplied and the price of a good when all other influences on selling plans change. Answer: A Topic: Supply schedule Skill: Level 1: Definition Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

8) A supply curve A) slopes downward. B) slopes upward. C) is a graph of the relationship between quantity supplied of a good and its price. D) Both answers B and C are correct. E) Both answers A and C are correct. Answer: D Topic: Supply curve Skill: Level 1: Definition Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

9) Which of the following results in a movement upward along the supply curve for movies in theaters? A) an increase in the price of movie tickets B) a decrease in the price of movie tickets C) a decrease in the price of downloaded movies D) a decrease in movie star salaries E) an increase in the number of theaters Answer: A Topic: Changes in quantity supplied Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

10) If the price of iPods decreases, A) there will be a movement down along the supply curve for iPods. B) there will be a rightward shift in the iPod supply curve. C) there will be a movement up along the supply curve for iPods. D) the supply curve for iPods shifts leftward. E) there has been a decrease in the price of iTunes songs. Answer: A Topic: Changes in quantity supplied Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

11) Which of the following increases the quantity supplied of yoga pants but does NOT increase the supply of yoga pants? A) a decrease in the price of a yoga pants B) an increase in the price of a yoga pants C) a decrease in the number of suppliers of yoga pants D) an increase in the price of the resources used to produce yoga pants E) new technology that lowers the cost of producing yoga pants Answer: B Topic: Changes in quantity supplied versus change in supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Revised AACSB: Reflective thinking

12) When the price of oranges increases, A) the supply of oranges increases. B) the quantity of oranges demanded increases. C) the quantity of oranges supplied increases. D) the supply of oranges decreases. E) none of the above Answer: C Topic: Changes in supply Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: New AACSB: Reflective thinking

13) Which of the following increases the supply of a product? A) lower prices for the resources used to produce the product B) some producers going bankrupt and leaving the industry C) a higher price for the product D) an increase in the expected future price of the product E) a decrease in productivity Answer: A Topic: Changes in supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

14) Which of the following does NOT increase the supply of personal computers, that is, does NOT shift the supply curve of personal computers? A) an advance in the technology used to produce personal computers B) an increase in the number of firms producing personal computer C) a fall in the cost of the components used to assemble personal computers D) a rise the price of a personal computer E) a change in the expected future price of a personal computer Answer: D Topic: Changes in supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

15) Which of the following shifts the supply curve of rutabagas rightward? (A rutabaga is a potato-like vegetable.) A) an increase in the price of a rutabaga B) an exceptionally cold summer that killed much of the rutabaga crop C) a fall in the price of fertilizer used to grow rutabagas D) Both answers A and C shift the supply curve of rutabagas rightward. E) Both answers A and B shift the supply curve of rutabagas rightward. Answer: C Topic: Shifts of the supply curve Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

16) Mulch is shredded wood and is a by-product in the production of lumber. Because these two goods are produced together, they are A) complements in production. B) substitutes in production. C) inputs into the same production process. D) not related. E) normal goods in production. Answer: A Topic: Complements in production Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

17) A decrease in the price of a complement in production leads to A) a decrease in the supply of the good in question. B) an increase in the supply of the good in question. C) no change in the supply of the good in question. D) a decrease in the quantity supplied of the good in question. E) an increase in the supply of the good in question and a decrease in the quantity supplied of the good in question. Answer: A Topic: Changes in supply, price of a complement in production Skill: Level 1: Definition Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

18) Milk can be used to produce cheese or butter. If the price of a pound of butter rises, what happens to the supply of cheese? A) The supply of cheese increases. B) The supply of cheese decreases. C) The supply of cheese stays the same, and there is no change in the quantity supplied of cheese. D) The supply of cheese stays the same, and there is a decrease in the quantity supplied of cheese. E) The supply of cheese could increase, decrease, or stay the same depending on what happens to the supply of butter. Answer: B Topic: Changes in supply, price of a substitute in production Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

19) Oil refiners can refine a barrel of petroleum so that it yields either more home heating oil or more diesel fuel. If the price of diesel fuel falls, there is A) an increase in the supply of home heating oil. B) a decrease in the supply of home heating oil. C) an increase in the quantity of home heating oil supplied. D) a decrease in the quantity of home heating oil supplied. E) an increase in the demand for home heating oil. Answer: A Topic: Changes in supply, price of a substitute in production Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

20) Which of the following increases the supply of gasoline? A) a situation where the quantity of gasoline demanded exceeds the quantity supplied B) an increase in the price of gasoline C) a decrease in the price of a resource used to produce gasoline, such as crude oil D) a decrease in the demand for gas-guzzling, sport utility vehicles E) an increase in income if gas-guzzling, sport utility vehicles are a normal good Answer: C Topic: Changes in supply, price of a resource Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

21) The United Auto Workers bargained for higher wages and more benefits for autoworkers. As a result of the higher wages and increased benefits, i. the quantity of new automobiles supplied decreases. ii. the supply of new automobiles decreases. iii. the supply of new automobiles increases. A) only i B) only ii C) only iii D) both i and ii E) Neither i, ii, nor iii is correct. Answer: B Topic: Changes in supply, price of a resource Skill: Level 4: Applying models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

22) If the automobile workers' union successfully negotiates a wage increase for its members, how does the wage hike affect the supply of automobiles? A) The supply increases. B) The supply decreases. C) The quantity supplied increases. D) The quantity supplied decreases. E) Both answers B and D are correct. Answer: B Topic: Changes in supply, price of a resource Skill: Level 4: Applying models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

23) Plywood is used in the construction of houses. If the price of plywood rises, what happens to the supply of houses? A) The supply increases so that the supply curve shifts rightward. B) The supply decreases so that the supply curve shifts leftward. C) The quantity supplied increases, but there is no shift in the supply curve. D) The quantity supplied decreases, but there is no shift in the supply curve. E) The quantity supplied decreases, and the supply curve shifts leftward. Answer: B Topic: Changes in supply, price of a resource Skill: Level 4: Applying models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

24) It is expected that the price of a bushel of wheat will increase in one month. This belief will result in A) an increase in the current supply of wheat. B) a decrease in the current supply of wheat. C) a decrease in the future supply of wheat. D) no change in the current or future supply of wheat. E) an increase in the current quantity supplied of wheat. Answer: B Topic: Changes in supply, expectations Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

25) If the number of companies producing memory chips increases, then the A) supply of memory chips does not change. B) supply of memory chips increases. C) supply of memory chips decreases. D) quantity of memory chips supplied increases. E) demand for memory chips increases. Answer: B Topic: Changes in supply, number of sellers Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

26) An increase in the number of fast-food restaurants A) raises the price of fast-food meals. B) increases the demand for fast-food meals. C) increases the supply of fast-food meals. D) increases the demand for substitutes for fast-food meals. E) increases both the demand and supply of fast-food meals. Answer: C Topic: Changes in supply, number of sellers Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

27) An increase in the number of pineapple growers results in A) an increase in the quantity of pineapples supplied and no shift in the supply curve of pineapples. B) an increase in the supply of pineapples and a rightward shift in the supply curve of pineapples. C) an increase in the supply of pineapples and a leftward shift in the supply curve of pineapples. D) no change in the supply of pineapples and a movement along the supply curve of pineapples. E) None of the above answers is correct. Answer: B Topic: Changes in supply, number of sellers Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

28) If the number of sellers decreases, then the supply curve ________ and the supply ________. A) shifts rightward; increases B) shifts rightward; decreases C) shifts leftward; increases D) shifts leftward; decreases E) does not shift; does not change, but there is a decrease in the quantity supplied Answer: D Topic: Changes in supply, number of sellers Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

29) Which of the following results in an increase in the supply of a good or service? A) a fall in the price of the good or service B) a smaller number of sellers producing the good or service C) an increase in foreign imports of the good or service D) higher taxes imposed upon producers of the good or service E) a rise in the price of the good or service Answer: C Topic: Changes in supply, number of sellers Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

30) Researchers have found a hybrid of corn that is cheaper to grow. This technological breakthrough A) increases the demand for hybrid corn. B) increases the supply of hybrid corn. C) decreases the supply of hybrid corn. D) Both answers A and C are correct. E) Both answers A and B are correct. Answer: B Topic: Changes in supply, productivity Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Revised AACSB: Reflective thinking

31) Suppose over the next several years the productivity of firms producing electric cars improves dramatically. The advance in productivity leads to A) a decrease in the supply of electric cars so that the supply curve shifts leftward. B) a decrease in the supply of electric cars so that the supply curve shifts rightward. C) an increase in the supply of electric cars so that the supply curve shifts leftward. D) an increase in the supply electric cars so that the supply curve shifts rightward. E) no change in the supply of electric cars, only a change in the quantity supplied of electric cars. Answer: D Topic: Changes in supply, shifts of the supply curve Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

32) Which of the following increases the supply of a good and shifts its supply curve rightward? A) a smaller number of producers B) a higher wage paid to workers in the industry C) a technological advance in how the good is produced D) an increase in the cost of the resources used to produce the good E) an increase in the price of the good Answer: C Topic: Changes in supply, productivity Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

33) Which of the following increases the supply of a good? A) The price of a complement in production decreases. B) Producers expect higher prices for the good in the future. C) Productivity improves. D) Prices of inputs used to produce the good rise. E) The number of producers decreases. Answer: C Topic: Changes in supply, productivity Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

34) Advances in productivity increase supply because they might A) increase the price expected in the future. B) decrease the number of goods available. C) decrease the cost of production. D) raise the prices of resources used to produce the good. E) increase the number of firms producing the good. Answer: C Topic: Changes in supply, productivity Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

35) The number of corn producers increases, so the supply of corn ________ and the supply curve of corn ________. A) increases; shifts rightward B) increases; shifts leftward C) decrease; shifts rightward D) decreases; shifts leftward E) increases; does not shift Answer: A Topic: Changes in supply, shifts of the supply curve Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

36) Which of the following shifts the supply curve for oranges? A) disastrous weather that destroys about half of this year's orange crop B) a newly discovered increase in the nutritional value of oranges C) an increase in the price of bananas, a substitute in consumption for oranges D) an increase in income for all orange consumers if oranges are a normal good E) an increase in the number of orange consumers Answer: A Topic: Shifts of the supply curve Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

37) Because of the high cost of fuel, railroads such as Union Pacific Corp and CSX Corp have increased the price they charge to haul freight. This change means that A) the demand curve for hauling freight has shifted leftward. B) the supply curve for hauling freight has shifted leftward. C) the demand curve for hauling freight has shifted rightward. D) the supply curve for hauling freight has shifted rightward. E) neither the supply curve nor the demand curve for hauling freight has shifted; the only change is that the price is higher. Answer: B Topic: Shifts of the supply curve Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

38) Which of the following shifts the supply curve of popcorn leftward? A) a decrease in the price of popcorn B) an increase in the price of popcorn C) a technological development in the production of popcorn D) a decrease in the number of popcorn suppliers E) a decrease in the cost of producing popcorn Answer: D Topic: Shifts of the supply curve Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

39) In the above figure, the movement from point a to point b reflects A) an increase in the price of pizza. B) an increase in the supply of pizza. C) an increase in the number of producers of pizza. D) a decrease in the cost of the tomato sauce used to produce pizza. E) a decrease in income if pizza is a normal good. Answer: A Topic: Changes in quantity supplied Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

40) In the above figure, the shift in the supply curve from S to S1 reflects A) an increase in the quantity of pizza supplied. B) a decrease in the quantity of pizza supplied. C) an increase in the supply of pizza. D) a decrease in the supply of pizza. E) None of the above answers is correct. Answer: D Topic: Changes in supply Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

41) In the above figure, the shift in the supply curve from S to S2 reflects A) an increase in the quantity of pizza supplied. B) a decrease in the quantity of pizza supplied. C) an increase in the supply of pizza. D) a decrease in the supply of pizza. E) a decrease in the supply of pizza and a simultaneous decrease in the quantity of pizza supplied. Answer: C Topic: Changes in supply Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

42) In the above figure, the shift in the supply curve from S to S2 might reflect A) a decrease in the cost of the tomato sauce used to produce pizza. B) a decrease in the number of pizza producers. C) an increase in the price of a pizza. D) an increase in income if pizza is a normal good. E) an increase in the price of a good that is a substitute for consumers. Answer: A Topic: Shifts of the supply curve, number of sellers Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

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

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

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

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

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

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

49) The above figure illustrates the market for corn. If point "a" represents the original equilibrium and point "b" the new equilibrium, which of the following could have caused the change? A) an increase in consumers' preferences for corn B) an increase in consumers' income if corn is a normal good C) an increase in labor costs of producing corn D) an improvement in the technology of producing corn E) an increase in consumers' income if corn is an inferior good Answer: D Topic: Shifts of the supply curve, productivity Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

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

51) The above figure illustrates the market for corn. If point "a" represents the original equilibrium and point "b" the new equilibrium, which of the following could have caused the change? A) a decrease in the number of corn growers B) a decrease the price of wheat, a substitute in production for corn C) an increase in the cost of the seed used to grow the corn D) an decrease in buyers' incomes if corn is an inferior good E) an increased belief among buyers that corn is healthy Answer: B Topic: Shifts of the supply curve, price of a substitute in production Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

52) In the figure above, if point "a" represents the original equilibrium and point "b" the new equilibrium, then A) there has been an increase in supply. B) there has been an increase in demand. C) there has been a change in the quantity supplied and no change in supply. D) Both answers B and C are correct. E) Both answers A and B are correct. Answer: A Topic: Shifts of the supply curve Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

53) Autoworkers negotiate a wage increase. How does this change affect the supply curve of cars? A) It shifts the supply curve leftward. B) It shifts the supply curve rightward. C) It does not shift the supply curve or create a movement along it. D) The supply curve will shift but there is not enough information to tell if the change shifts the supply curve rightward, leftward, or not at all. E) It creates a movement downward along the supply curve. Answer: A Topic: Shifts of the supply curve Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

54) The figure shows the market for tires. If the price of tires falls from $90 to $60 per tire, this can be shown as a ________ because all other factors affecting selling plans are ________. A) movement down along S0; held constant B) movement down along S0; allowed to vary C) shift from S0 to S1; allowed to vary D) shift from S1 to S0; held constant E) movement down along S0; unpredictable Answer: A Topic: Law of supply Skill: Level 3: Using models Section: Checkpoint 4.2 Status: New AACSB: Analytical thinking

55) The figure shows the market for tires. A change in the price of tires from $60 to $120 A) is shown as a movement from point B to point A. B) causes a shift from S1 to S0. C) is shown as a movement from point A to point C. D) causes shift from S0 to S1. E) could be caused a a decrease in the price of rubber. Answer: A Topic: Changes in quantity supplied Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: New AACSB: Analytical thinking

56) The figure shows the market for tires. The effect of an increase in the price of rubber can be shown as a A) shift from S1 to S0 due to a change in supply. B) change from point A to point B. C) shift from S0 to S1 due to a change in supply. D) change from point B to point A. E) change from point B to point C due to a change in the quantity supplied. Answer: C Topic: Changes in supply, price of a resource Skill: Level 3: Using models Section: Checkpoint 4.2 Status: New AACSB: Analytical thinking

57) If the supply of iPods increases, then i. the supply curve for iPods has shifted rightward. ii. the price of iPods has decreased. iii. there will be a movement upward along the iPod supply curve. A) i only B) i, ii and iii C) i and ii D) ii and iii E) i and iii Answer: A Topic: Quantity supplied versus supply Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

58) Which of the following leads to an increase in the quantity supplied but not an increase in supply? A) a decrease in the costs of production B) an increase in the product's price C) an advance in the technology used to produce the good D) an increase in the price of another product that the suppliers can produce E) an increase in the number of firms producing the good or service Answer: B Topic: Quantity supplied versus supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

59) The price of salsa rises. How does the increase in the price of salsa affect the supply of salsa? A) The supply of salsa increases. B) The supply of salsa decreases. C) There is no change to either the supply of salsa or the quantity of salsa supplied. D) There is no change to the supply of salsa, but the quantity of salsa supplied increases. E) There is no change to the supply of salsa, but the quantity of salsa supplied decreases. Answer: D Topic: Quantity supplied versus supply Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

60) If a higher price for wheat decreases the quantity of corn being produced, which of the following describes what has occurred? A) The supply of wheat increased and the supply of corn decreased. B) The quantity of wheat supplied increased and quantity of corn supplied decreased. C) The supply of wheat increased and the quantity of corn supplied decreased D) The quantity of wheat supplied increased and the supply of corn decreased. E) The supply of wheat decreased and the supply of corn decreased. Answer: D Topic: Quantity supplied versus supply Skill: Level 4: Applying models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

61) "Other things remaining the same, if the price of a good rises, the quantity supplied of that good increases." This sentence describes a A) shift of a supply curve. B) shift of the price curve. C) movement along a supply curve. D) movement along the price curve. E) movement along the quantity curve. Answer: C Topic: Movement along the supply curve Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

62) The quantity supplied of a good, service, or resource is ________ during a specified period and at a specified price. A) the amount that people are able to sell B) the amount that people are willing to sell C) the amount that people are able and willing to sell D) the amount that people are willing and able to buy E) the amount sold Answer: C Topic: Quantity supplied Skill: Level 1: Definition Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

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

64) The graph illustrates the supply of sweaters. Which of the following events will increase the quantity supplied of sweaters? A) a rise in the price of a sweater B) a rise in the wage rate paid to the workers who make sweaters C) a rise in the expected future price of a sweater D) an increase in the number of sellers of sweaters E) a decrease in the number of sweater buyers Answer: A Topic: Quantity supplied Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

65) Which of the following indicates that the law of supply applies to makers of soda? A) An increase in the price of a soda leads to an increase in the demand for soda. B) An increase in the price of a soda leads to an increase in the supply of soda. C) An increase in the price of a soda leads to an increase in the quantity of soda supplied. D) A decrease in the price of a soda leads to an increase in the quantity of soda demanded. E) A decrease in the price of a soda leads to an increase in the supply of soda. Answer: C Topic: Law of supply Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

66) One reason supply curves have an upward slope is because A) increased supply will require increased technology. B) people will pay a higher price when less is supplied. C) a higher price brings a greater profit, so firms want to sell more of that good. D) to have more of the good supplied requires more firms to open. E) None of the above answers is correct because supply curves have a downward slope. Answer: C Topic: Supply curve Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

67) The market supply curve is the ________ of the ________. A) horizontal sum; individual supply curves B) vertical sum; individual supply curves C) horizontal sum; individual supply curves minus the market demand D) vertical sum; individual supply curves minus the market demand E) vertical average; of the individual supply curves Answer: A Topic: Market supply curve Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

68) If the costs of producing pizza increase, which will occur? A) The supply of pizza will decrease. B) The quantity of pizzas supplied will increase as sellers try to cover their costs. C) Pizza will cease to be produced and sold. D) The demand curve for pizza will shift leftward when the price of a pizza increases. E) The demand curve for pizza will shift rightward when the price of a pizza increases. Answer: A Topic: Changes in supply, costs Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

69) Wheat is used to produce cereal. When the price of wheat falls, the A) demand for wheat increases. B) supply of wheat decreases. C) supply of cereal increases. D) demand for cereal increases. E) demand for cereal decreases. Answer: C Topic: Changes in supply, costs Skill: Level 3: Using models Section: Checkpoint 4.2 Status: New AACSB: Reflective thinking

70) A rise in the price of a substitute in production for a good leads to A) an increase in the supply of that good. B) a decrease in the supply of that good. C) no change in the supply of that good; instead there is a change in the quantity supplied. D) a decrease in the quantity of that good supplied. E) no change in either the supply or the quantity supplied of the good. Answer: B Topic: Changes in supply, price of a substitute in production Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

71) Suppose the price of leather used to produce shoes increases. The higher price of leather ________ the supply of shoes and the supply curve of shoes ________. A) increases; shifts rightward B) increases; shifts leftward C) decreases; shifts rightward D) decreases; shifts leftward E) does not change; does not shift Answer: D Topic: Changes in supply, price of a resource Skill: Level 4: Applying models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

72) An increase in the number of producers of bird seed ________ the supply of bird seed and shifts the supply curve of bird seed ________. A) increases; rightward B) increases; leftward C) decreases; rightward D) decreases; leftward E) does not change; rightward Answer: A Topic: Changes in supply, number of sellers Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

73) Which of the following will increase the supply of a product? A) an increase in the price of the product B) an increase in the demand for the product C) an increase in the number of sellers D) a decrease in the demand for the product E) an increase in the price of inputs Answer: C Topic: Changes in supply, number of sellers Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: New AACSB: Analytical thinking

74) The graph illustrates the supply of sweaters. Which of the following events will increase the supply of sweaters? A) a rise in the price of a sweater B) a rise in the wage rate paid to the workers who make sweaters C) a rise in the expected future price of a sweater D) an increase in the number of sellers of sweaters E) an increase in income if sweaters are a normal good Answer: D Topic: Changes in supply, number of sellers Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

75) The graph illustrates the supply of sweaters. As the technology used to produce sweaters improves, the A) supply of sweaters decreases and the demand for sweaters does not change. B) supply of sweaters increases and the demand for sweaters does not change. C) quantity of sweaters supplied increases. D) quantity of sweaters supplied decreases. E) supply of sweaters increases and the demand for sweaters increases. Answer: B Topic: Changes in supply, productivity Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

76) An increase in the productivity of producing jeans results in A) the quantity of jeans supplied increasing. B) the supply of jeans increasing. C) buyers demanding more jeans because they are now more efficiently produced. D) buyers demanding fewer jeans because their price will fall, which signals lower quality. E) some change, but the impact on the supply of jeans is impossible to predict. Answer: B Topic: Changes in supply, productivity Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

77) A change in the price of a good ________ its supply curve and ________ a movement along its supply curve. A) shifts; causes B) shifts; does not cause C) does not shift; causes D) does not shift; does not cause E) None of the above because the change in the price might cause either a shift in the supply curve or a movement along the supply curve depending on the size of the change. Answer: C Topic: Shifts of the supply curve versus movement along the supply curve Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

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

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

80) When the price of rice rises, A) the market quantity supplied of rice increases. B) the market supply of rice increases. C) the market quantity of rice demanded decreases. D) Both A and C are true. E) Both A and B are true. Answer: D Topic: Changes in supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: New AACSB: Reflective thinking

81) Wheat is used to produce cereal. When the price of wheat falls, the A) demand for wheat increases. B) supply of wheat decreases. C) supply of cereal increases. D) demand for cereal increases. E) demand for cereal decreases. Answer: C Topic: Changes in supply, expectations Skill: Level 3: Using models Section: Checkpoint 4.2 Status: New AACSB: Reflective thinking

82) The table below shows the three firms that are suppliers in the frozen yogurt market. Price Quantity Supplied ($ per serving) (1,000s of servings supplied) YoYo FunFro Yummy 8.00 300 300 400 7.00 150 200 300 6.00 0 100 200

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

4.3 Market Equilibrium 1) Market equilibrium occurs when A) all markets become equal. B) the quantity demanded equals the quantity supplied. C) opposing forces pull demand and supply apart. D) demand and supply move in opposite direction. E) demand and supply change so that they are equal at all possible prices. Answer: B Topic: Market equilibrium Skill: Level 1: Definition Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

2) Market equilibrium occurs when A) the quantity demanded equals the quantity supplied. B) the market is changing rapidly. C) other things remain the same. D) buyers get the lowest possible price. E) everyone who wants the good gets the quantity he or she wants. Answer: A Topic: Market equilibrium Skill: Level 1: Definition Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

3) Market equilibrium i. can never occur because there are always people who want a good but cannot afford it. ii. occurs at the intersection of the supply and demand curves. iii. is the point where the price equals the quantity. A) ii only B) iii only C) ii and iii D) i only E) i and ii Answer: A Topic: Market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

4) A surplus of cardboard boxes means that A) at the current price of a cardboard box, the quantity demanded exceeds the quantity supplied. B) at the current price of a cardboard box, the quantity demanded is less than the quantity supplied. C) the current price of a cardboard box is less than the equilibrium price. D) at the current price of a cardboard box, the quantity demanded equals the quantity supplied and the price will fall to restore the equilibrium. E) More information is needed to determine if the price of cardboard boxes is higher than, lower than, or equal to the equilibrium price. Answer: B Topic: Surplus Skill: Level 1: Definition Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

5) When there is a surplus of snowboards, the A) demand for snowboards is greater than the supply of snowboards. B) supply of snowboards is greater than the demand for snowboards. C) quantity of snowboards demanded is greater than the quantity of snowboards supplied. D) quantity of snowboards supplied is greater than the quantity of snowboards demanded. E) price rises to restore the equilibrium. Answer: D Topic: Surplus Skill: Level 1: Definition Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

6) If there is a surplus of tacos, then the A) quantity of tacos demanded equals the quantity of tacos supplied. B) quantity of tacos demanded is greater than the quantity of tacos supplied. C) quantity of tacos demanded is less than the quantity of tacos supplied. D) market is at equilibrium. E) supply curve of tacos will shift leftward to eliminate the surplus. Answer: C Topic: Surplus Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

7) When a surplus of rice occurs, A) the price of rice rises. B) the price of rice falls. C) there is a balance between the forces of supply and demand. D) the quantity demanded is greater than quantity supplied at the current price. E) the demand curve shifts rightward and the supply curve shifts leftward to eliminate the surplus. Answer: B Topic: Surplus Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

8) Suppose the equilibrium price of oranges is $2.00 per pound. If the actual price is above the equilibrium price, a A) shortage exists and the price falls to restore equilibrium. B) shortage exists and the price rises to restore equilibrium. C) surplus exists and the price falls to restore equilibrium. D) surplus exists and the price rises to restore equilibrium. E) surplus exists but nothing happens until either the demand or the supply changes. Answer: C Topic: Surplus Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

9) Suppose the current price of a pound of steak is $12 per pound and the equilibrium price is $9 per pound. In this case, there is a A) shortage, so the price falls and quantity demanded increases. B) surplus, so the price falls and quantity demanded increases. C) shortage, so the price rises and quantity demanded decreases. D) surplus, so the price rises and quantity demanded increases. E) surplus, so the price falls and quantity supplied increases. Answer: B Topic: Surplus Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

10) As a falling price eliminates a surplus in the jersey market, A) the demand curve for jerseys shifts leftward, and the supply curve of jerseys shifts rightward. B) consumers increase the quantity of jerseys they demand. C) producers increase the quantity of jerseys they supply. D) producers decrease the quantity of jerseys they supply, and buyers decrease the quantity of jerseys they demand. E) the demand curve for jerseys shifts rightward, and the supply curve of jerseys shifts leftward. Answer: B Topic: Surplus Skill: Level 5: Critical thinking Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

11) If the price is below the equilibrium price, A) there is a surplus. B) there is a shortage. C) the supply curve will shift rightward. D) the supply curve will shift leftward. E) the demand curve will shift leftward. Answer: B Topic: Shortage Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

12) When there is a shortage of parking spaces at your college, the A) demand for parking spaces is greater than the supply. B) supply of parking spaces is greater than the demand. C) quantity of parking spaces supplied is greater than the quantity of parking spaces demanded. D) quantity of parking spaces demanded is greater than the quantity of parking spaces supplied. E) Both answers A and D are correct. Answer: D Topic: Shortage Skill: Level 1: Definition Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

13) If the price of carrots is below the equilibrium price, the A) quantity demanded of carrots exceeds the quantity supplied and a surplus exists. B) quantity supplied of carrots exceeds the quantity demanded and a surplus exists. C) quantity demanded of carrots exceeds the quantity supplied and a shortage exists. D) quantity supplied of carrots exceeds the quantity demanded and a shortage exists. E) quantity supplied of carrots equals the quantity demanded. Answer: C Topic: Shortage Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

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

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

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

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

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

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

20) Using the data in the table above, the equilibrium quantity and equilibrium price for a stapler is A) 10,000 and $8. B) 90,000 and $8. C) 100,000 and $5. D) 70,000 and $6. E) 60,000 and $5. Answer: D Topic: Market equilibrium Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

21) Using the data in the table above, if the price of a stapler is $8, then there is ________ of staplers, and the quantity of staplers demanded ________ the quantity of staplers supplied. A) a surplus; is greater than B) a surplus; is less than C) a shortage; is greater than D) a shortage; is less than E) neither a surplus nor a shortage; equals Answer: B Topic: Surplus Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

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

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

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

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

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

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

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

29) Assume a competitive market is in equilibrium. There is an increase in demand, but no change in supply. As a result the equilibrium price ________, and the equilibrium quantity ________. A) rises; increases B) rises; does not change C) falls; does not change D) falls; decreases E) falls; increases Answer: A Topic: Effects of an increase in demand Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

30) If a market begins in equilibrium and then the demand curve shifts leftward, a A) shortage is created, which is eliminated by a fall in price. B) shortage is created, which is eliminated by a rise in price. C) surplus is created, which is eliminated by a fall in price. D) surplus is created, which is eliminated by a rise in price. E) surplus is created, which is eliminated by the supply curve shifting leftward. Answer: C Topic: Effects of a decrease in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

31) When the demand curve shifts rightward and the market moves to a new equilibrium, then the A) supply increases. B) supply decreases. C) quantity supplied increases. D) quantity supplied decreases. E) price falls to restore the equilibrium. Answer: C Topic: Effects of an increase in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

32) An increase in both the equilibrium price and quantity can be the result of A) a decrease in demand. B) an increase in supply. C) a decrease in supply. D) an increase in demand. E) None of the above answers is correct. Answer: D Topic: Effects of an increase in demand Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: New AACSB: Reflective thinking

33) Suppose the equilibrium quantity of movie tickets is 1,000. If the demand curve shifts ________, the equilibrium quantity of movie tickets will ________. A) rightward; increase B) rightward; decrease C) leftward; increase D) rightward; not change E) leftward; not change Answer: A Topic: Effects of an increase in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

34) If consumers buy a large number of plug-in electric cars, the equilibrium price of electricity will ________ and the equilibrium quantity of electricity will ________. A) rise; increase B) rise; decrease C) fall; increase D) fall; decrease E) not change; increase Answer: A Topic: Effects of an increase in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

35) Because of a sharp increase in the price of gasoline, the demand for Sports Utility vehicles (SUVs) has decreased. So, the high price of gasoline leads to a A) leftward shift of the demand curve for SUVs and the supply curve of SUVs. B) leftward shift of the demand curve for SUVs and no shift in the supply curve of SUVs. C) leftward shift of the demand curve for SUVs and a rightward shift of the supply curve of SUVs. D) leftward shift of the supply curve of SUVs and no shift in the demand curve for SUVs. E) rightward shift of the supply curve of SUVs and no shift in the demand curve for SUVs. Answer: B Topic: Effects of an increase in demand Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

36) If the price of tangerines increases, the price of oranges also rises because A) consumers consider the two goods complements and so sellers decreased the supply of oranges. B) consumers consider the two goods substitutes and demand for oranges increases. C) if the supply of tangerines decreased, then the supply of oranges also must decrease. D) buyers must have expected a higher price for oranges and thus increased their demand for oranges. E) buyers' incomes must have decreased and oranges are an inferior good. Answer: B Topic: Effects of an increase in demand Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

37) Suppose that the equilibrium price and quantity of new houses both increase. Which of the following could be a cause of this change? A) Both the supply and the demand for new houses increased, and the supply increased by more than the demand. B) The demand for new houses increased, and the supply did not change. C) Both the supply and demand for new houses decreased. D) The supply of new houses decreased, and the demand for new houses did not change. E) The supply of new houses increased, and the demand for new houses did not change. Answer: B Topic: Effects of an increase in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

38) Suppose that the equilibrium price and quantity of new houses both increase. Which of the following could be a cause of this change? A) The wage paid carpenters who build new houses might have risen. B) A technological advance in framing a new house might have occurred. C) The rent for nearby apartments might have fallen. D) More home buyers might have moved into the area. E) The cost of wood framing used to build houses might have fallen. Answer: D Topic: Effects of an increase in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

39) Suppose that over the next few years the demand for dancing to country and western music decreases. Hence, at country and western dance clubs the equilibrium price of admission ________ and the equilibrium quantity of dancing ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) does not change; decreases Answer: D Topic: Effects of a decrease in demand Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

40) For consumers, taco chips and salsa are complements. If the price of salsa rises, what is the effect on the equilibrium price and quantity of taco chips? A) The equilibrium price of taco chips falls, and the equilibrium quantity decreases. B) The equilibrium price of taco chips rises, and the equilibrium quantity decreases. C) There is no change in the equilibrium price of taco chips, and the equilibrium quantity increases. D) The equilibrium price of taco chips could rise, fall, or stay the same, and the equilibrium quantity increases. E) The equilibrium price of taco chips rises, and the equilibrium quantity increases. Answer: A Topic: Effects of a decrease in demand Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

41) Computer chips are a normal good. Suppose the economy slips into a recession so that income falls. As a result, the demand for computer chips ________ so that the price of a computer chip ________. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls E) decreases; does not change Answer: D Topic: Effects of a decrease in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

42) Bagels and cream cheese are complementary goods. Suppose that the price for flour, which is used to produce bagels, increases. The equilibrium price of cream cheese ________, and the equilibrium quantity of cream cheese ________. A) rises; decreases B) rises; increases C) falls; decreases D) does not change; does not change E) falls; increases Answer: C Topic: Effects of a decrease in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

43) Suppose that people decide riding scooters is no longer fun. The equilibrium price of a scooter ________, and the equilibrium quantity of scooters ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) does not change; decreases Answer: D Topic: Effects of a decrease in demand Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

44) Assume a market is in equilibrium. There is an increase in supply, but no change in demand As a result the equilibrium price ________, and the equilibrium quantity ________. A) rises; increases B) rises; decreases C) rises; does not change D) falls; decreases E) falls; increases Answer: E Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

45) If the supply of solar panels increases, A) the price and quantity of solar panels increases. B) the demand for solar panels increases. C) the quantity demanded of solar panels decreases. D) the price of solar panels decreases and the quantity increases. E) None of the above. Answer: D Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.2 Status: New AACSB: Reflective thinking

46) If good weather conditions result in a larger than normal crop of peaches, then the A) equilibrium price of peaches rises, and the equilibrium quantity of peaches increases. B) equilibrium price of peaches falls, and the equilibrium quantity of peaches increases. C) demand curve for peaches shifts leftward. D) increase in the supply of peaches induces a greater demand for peaches, so that the equilibrium price rises and the equilibrium quantity increases. E) equilibrium price of peaches falls, and the equilibrium quantity of peaches decreases. Answer: B Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

47) The initial equilibrium price in the market for Web pages is $200 per page and 1,000 Web pages are created in a month. Many new Web design firms now enter the market. As a result, A) the supply of Web pages increases and the price falls. B) the supply curve of Web pages shifts leftward and the price falls. C) the demand for Web pages increases and the price rises. D) the supply of web pages increase and the price falls, which then increases the demand for Web pages and the demand curve shifts rightward. E) the demand for Web pages increases and the price falls. Answer: A Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

48) Suppose the equilibrium price of movie tickets is $10. If the supply curve for movies shifts ________, the equilibrium price will ________. A) rightward; decrease B) leftward; decrease C) rightward; increase D) leftward; not change E) rightward; not change Answer: A Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

49) Which of the following lowers the equilibrium price of a canoe? A) an increase in the supply of canoes B) an increase in the demand for canoes C) an increase in the quantity of canoes supplied D) a decrease in the supply of canoes E) Both answers A and B are correct. Answer: A Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

50) When personal computers were first produced, the price was very high. As time passed, the price of personal computers fell because A) the demand for personal computers decreased. B) the initial price was too high and nobody bought personal computers. C) there were technological advances in the production of personal computers. D) people's incomes increased and personal computers are an inferior good. E) None of the above answers is correct. Answer: C Topic: Effects of an increase in supply Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

51) An increase in the equilibrium price and a decrease in the equilibrium quantity can be the result of A) a decrease in demand. B) an increase in supply. C) a decrease in supply. D) an increase in demand. E) None of the above. Answer: C Topic: Effects of a decrease in supply Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: New AACSB: Reflective thinking

52) If a freeze destroys oranges before they are harvested, the equilibrium price of an orange ________ and the equilibrium quantity ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) does not change; decreases Answer: B Topic: Effects of a decrease in supply Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

53) Suppose that the price of bread rises. This rise could be the result of A) a decrease in the supply of bread. B) an increase in the supply of bread. C) a decrease in the demand for bread. D) Both answers A and C are correct. E) Both answers B and C are correct. Answer: A Topic: Effects of a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

54) If an early frost destroys most of the apple crop, the equilibrium price of an apple ________ and the equilibrium quantity ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) does not change; decreases Answer: B Topic: Effects of a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

55) In Great Britain, raising taxes on gasoline has increased the costs of supplying gasoline. As a result, the equilibrium quantity of gasoline ________, and the equilibrium price of gasoline ________. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls E) does not change; rises Answer: C Topic: Effects of a decrease in supply Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

56) Suppose that the price of flour used to produce bagels increases. Hence the equilibrium price of a bagel ________, and the equilibrium quantity ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) does not change; does not change Answer: B Topic: Effects of a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

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

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

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

60) The number of logging firms increases. Which of the figures above best illustrates this change? A) Figure A B) Figure B C) Figure C D) Figure D E) Figure A and Figure D Answer: D Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

61) New technology for producing plywood is developed. Which of the figures above best illustrates this change? A) Figure A B) Figure B C) Figure C D) Figure D E) Figure A and Figure D Answer: D Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

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

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

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

65) Which figure above shows the effect of a technological advance in the production of pizza? A) Figure A B) Figure B C) Figure C D) Figure D E) Both Figure A and Figure D Answer: D Topic: Effects of an increase in supply Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

66) Which figure above shows the effect of a decrease in the number of pizza sellers? A) Figure A B) Figure B C) Figure C D) Figure D E) Both Figure B and Figure C Answer: C Topic: Effects of a decrease in supply Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

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

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

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

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

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

72) The above figure shows the market for pizza. The market is in equilibrium when some of the pizza firms go out of business. What point represents the most likely new price and quantity? A) A B) B C) C D) D E) E Answer: B Topic: Effects of a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

73) The above figure shows the market for pizza. The market is in equilibrium when people learn that eating pizza helps prevent heart disease. What point represents the most likely new price and quantity? A) A B) B C) C D) D E) E Answer: C Topic: Effects of an increase in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

74) The above figure shows the market for pizza. The market is in equilibrium. Pizza and tacos are substitutes for consumers. The price of tacos falls. What point represents the most likely new price and quantity? A) A B) B C) C D) D E) E Answer: E Topic: Effects of a decrease in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

75) If both the supply and demand curves shift simultaneously, we can always predict what will happen to A) both the price and the quantity. B) either the price or the quantity, but not both. C) only the price. D) only the quantity. E) neither the price nor the quantity. Answer: B Topic: Effects of changes in both demand and supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

76) A competitive market is in equilibrium. Then there is an increase in demand and an increase in supply. The equilibrium price ________, and the equilibrium quantity ________. A) rises; increases B) perhaps changes but we can't say if it rises, falls, or stays the same; does not change C) falls; increases D) perhaps changes but we can't say if it rises, falls, or stays the same; increases E) falls; perhaps changes but we can't say if it increases, decreases, or stays the same Answer: D Topic: Effects of an increase in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

77) If the demand and supply both increase equally, then the equilibrium price ________ and the equilibrium quantity ________. A) increases; increases B) increases; does not change C) does not change; increases D) increases; decreases E) decreases; does not change Answer: C Topic: Effects of an increase in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

78) Kiwis and strawberries are substitutes for consumers. An increase in the price of a kiwi coupled with an increase in the number of strawberry growers ________ the equilibrium price of a pound of strawberries and ________ the equilibrium quantity of strawberries. A) raises; increases B) probably changes, but more information is needed to determine if it rises or falls; increases C) raises; probably changes, but more information is needed to determine if it increases or decreases D) lowers; probably changes, but more information is needed to determine if it increases or decreases E) lowers; increases Answer: B Topic: Effects of an increase in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

79) A competitive market is in equilibrium. Then there is a decrease in demand and a decrease in supply. The equilibrium price ________, and the equilibrium quantity ________. A) rises; decreases B) perhaps changes but we can't say if it rises, falls, or stays the same; decreases C) falls; increases D) perhaps changes but we can't say if it rises, falls, or stays the same; increases E) rises; increases Answer: B Topic: Effects of a decrease in demand and a decrease in supply. Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

80) If both supply and demand decrease by the same amount, the equilibrium price A) does not change. B) rises. C) falls. D) cannot be predicted. E) None of the answers is correct because the price depends on what happens to the equilibrium quantity. Answer: A Topic: Effects of a decrease in demand and a decrease in supply. Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

81) Both the demand for and supply of cars changes in France. You observe that the quantity of cars does not change but the price rises. Thus, which of the following occurred? A) Demand and supply increased by an equal amount. B) Demand and supply decreased by an equal amount. C) Demand increased and supply decreased by an equal amount. D) Demand decreased and supply increased by an equal amount. E) Demand increased by a larger magnitude than supply decreased. Answer: C Topic: Effects of an increase in demand and a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

82) Suppose that the demand curve for desktop computers shifts rightward and at the same time the supply curve shifts leftward. Which of the following could have caused these shifts? A) Desktop computers are a normal good and incomes increased, while more firms entered the market. B) The price of a laptop computer, a substitute for desktop computers, fell, and the cost of producing desktop computers decreased. C) Consumers purchased more computers because of the Christmas season, and the labor costs of producing desktop computers decreased. D) Desktop computers are a normal good and incomes increased, while the labor costs of producing personal computers increased. E) Desktop computers are a normal good and incomes decreased, while the labor costs of producing personal computers increased. Answer: D Topic: Effects of an increase in demand and a decrease in supply Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

83) If the demand curve for desktop computers shifts rightward and at the same time the supply curve shifts leftward, then A) the equilibrium price definitely rises. B) the equilibrium price definitely falls. C) the equilibrium price definitely remains the same. D) More information is needed to determine the effect on the equilibrium price. E) the equilibrium quantity definitely increases. Answer: A Topic: Effects of an increase in demand and a decrease in supply Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

84) If the demand curve for desktop computers shifts rightward and at the same time the supply curve shifts leftward, then A) the equilibrium quantity definitely increases. B) the equilibrium quantity definitely decreases. C) the equilibrium quantity definitely remains the same. D) More information is needed to determine the effect on the equilibrium quantity. E) the equilibrium price definitely falls. Answer: D Topic: Effects of an increase in demand and a decrease in supply Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

85) The demand for oranges increases while the supply decreases. The equilibrium price of oranges ________, and the equilibrium quantity ________. A) rises; decreases B) falls; perhaps changes but we can't say if it increases, decreases, or stays the same C) falls; increases D) does not change; perhaps changes but we can't say if it increases, decreases, or stays the same E) rises; perhaps changes but we can't say if it increases, decreases, or stays the same Answer: E Topic: Effects of an increase in demand and a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

86) The demand for cat food decreases while the supply increases. The equilibrium price of cat food ________, and the equilibrium quantity ________. A) does not change; increases B) rises; decreases C) falls; perhaps changes but we can't say if it increases, decreases, or stays the same D) rises; perhaps changes but we can't say if it increases, decreases, or stays the same E) falls; increases Answer: C Topic: Effects of a decrease in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

87) Suppose the government imposes a small carbon tax on automakers. But the price of gasoline has doubled due to a Middle East crisis which has reduced oil production. In the market for autos, these changes mean that supply and demand have both changed with the effect on the demand larger than the effect on the supply. The result is that the price of autos will ________ and the number of autos sold will ________. A) rise; perhaps change but we can't say if it increases, decreases, or stays the same B) rise; increase C) rise; decrease D) fall; perhaps change but we can't say if it increases, decreases, or stays the same E) fall; decrease Answer: E Topic: Effects of a decrease in demand and a decrease in supply. Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

88) If both producers and consumers believe that a product's price will rise in the future, then at the present, demand ________ and supply ________. A) increases; increases B) decreases; decreases C) increases; decreases D) decreases; increases E) does not change; does not change Answer: C Topic: Changes in both demand and supply, expected future price Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

89) If both producers and consumers believe that a product's price will rise in the future, then at the present, the equilibrium price A) does not change. B) rises. C) falls. D) might rise, fall, or not change, but the change can never be predicted. E) might rise, fall, or not change depending on whether the effect from the producers is greater than or less than the effect from the consumers. Answer: B Topic: Changes in both demand and supply, expected future price Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

90) The equilibrium price of a good occurs if the A) quantity of the good demanded equals the quantity of the good supplied. B) quantity of the good demanded is greater than the quantity of the good supplied. C) quantity of the good demanded is less than the quantity of the good supplied. D) demand for the good is equal to the supply of the good. E) price of the good seems reasonable to most buyers. Answer: A Topic: Market equilibrium Skill: Level 1: Definition Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

91) If there is a surplus of a good, the quantity demanded is ________ the quantity supplied, and the price will ________. A) less than; rise B) less than; fall C) greater than; rise D) greater than; fall E) equal to; fall Answer: B Topic: Surplus Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

92) The graph illustrates the market for bottled water. When the price exceeds the equilibrium price, the quantity demanded is ________ the quantity supplied and the price of the good will ________. A) less then; fall B) greater than; rise C) greater than; fall D) less than; rise E) equal to; fall Answer: A Topic: Surplus Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

93) Which of the following is correct? i. A surplus puts downward pressure on the price of a good. ii. A shortage puts upward pressure on the price of a good. iii. There is no surplus or shortage at equilibrium. A) i and ii B) i and iii C) ii and iii D) i, ii, and iii E) only iii Answer: D Topic: Surplus, shortage, market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

94) Which of the following is the best explanation for why the price of gasoline increases during the summer months? A) Oil producers have higher costs of production in the summer. B) Sellers have to earn profits during the summer to cover losses in the winter. C) There is increased driving by families going on vacation. D) There is less competition among oil refineries in the summer. E) The number of gas stations open 24 hours a day rises in the summer months and so the price must rise to cover the higher costs. Answer: C Topic: Effects of an increase in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

95) The number of people looking to buy ceiling fan buyers increases, so there is an increase in the A) quantity of ceiling fans demanded and a surplus of ceiling fans. B) demand for ceiling fans and a rise in the price of a ceiling fan. C) demand for ceiling fans and a surplus of ceiling fans. D) supply of ceiling fans and no change in the price of a ceiling fan. E) demand for ceiling fans and in the supply of ceiling fans. Answer: B Topic: Effects of an increase in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

96) When the demand for a good decreases, its equilibrium price ________ and equilibrium quantity ________. A) falls; decreases B) falls; increases C) rises; decreases D) rises; increases E) falls; does not change Answer: A Topic: Effects of a decrease in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

97) A technological improvement lowers the cost of producing corn. As a result, the price of a pound of corn ________ and the quantity of corn ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) falls; does not change Answer: C Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

98) The technology associated with manufacturing computers has advanced enormously. This change has led to the price of a computer ________ and the quantity ________. A) rising; increasing B) rising; decreasing C) falling; increasing D) falling; decreasing E) falling; not changing Answer: C Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

99) The graph illustrates the market for bottled water. If the producers of bottled water switch to using improved technology, then the A) supply of bottled water decreases. B) quantity demanded of bottled water increases. C) quantity demanded of bottled water does not change. D) price of bottled water rises. E) supply curve shifts leftward. Answer: B Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

100) Suppose that the price of lettuce used to produce tacos increases. This change means that the equilibrium price of a taco ________ and the equilibrium quantity ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) does not change; decreases Answer: B Topic: Effects of a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

101) Suppose a medical study reveals new benefits to consuming beef and at the same time a bumper corn crop reduces the cost of feeding steers. The equilibrium quantity of beef will A) decrease. B) perhaps increase, decrease, or stay the same, but more information is needed to determine which it does. C) stay the same. D) increase. E) definitely either stay the same or decrease. Answer: D Topic: Effects of an increase in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

102) Candy makers accurately anticipate the increase in demand for candy for Halloween so that the supply of candy and demand for candy increase the same amount. As a result, the price of candy ________ and the quantity of candy ________. A) rises; does not change B) falls; increases C) does not change; increases D) does not change; does not change E) rises; increases Answer: C Topic: Effects of an increase in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

103) Suppose improvements in technology cause the supply of natural gas to increase and at the same time the demand for natural gas increases. What are we sure of? A) Both equilibrium price and quantity increase. B) Equilibrium price increases. C) Equilibrium price decreases. D) Equilibrium quantity increases. E) Equilibrium quantity decreases. Answer: D Topic: Effects of an increase in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: New AACSB: Analytical thinking

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

105) The graph illustrates the market for computers. If the number of buyers of computers increases and technology advances, you predict that the A) equilibrium quantity of computers will increase. B) equilibrium quantity of computers will decrease. C) equilibrium price of a computer will rise. D) equilibrium price of a computer will fall. E) equilibrium quantity of computers might increase, decrease, or not change. Answer: A Topic: Effects of an increase in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

106) Which of the following definitely results in a product's equilibrium price rising? A) an increase in both demand and supply B) a decrease in both demand and supply C) an increase in demand combined with a decrease in supply D) a decrease in demand combined with an increase in supply E) an increase in the supply combined with no change in the demand Answer: C Topic: Effects of an increase in demand and a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

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

108) When demand increases and supply decreases by the same amount, the equilibrium quantity ________ and the equilibrium price ________. A) decreases; rises B) decreases; falls C) decreases; does not change D) decreases; might rise, fall, or not change E) does not change; might rise, fall, or not change Answer: C Topic: Effects of an increase in demand and a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: New AACSB: Reflective thinking

109) The graph illustrates the market for British pounds, the currency of the United Kingdom. As the number of buyers of pounds decreases and the number of sellers of pounds increases, the equilibrium price of a pound A) will rise. B) will fall. C) will remain the same. D) might rise, fall, or remain the same but more information is needed. E) will rise if the magnitude of the effect on the buyers is larger than the magnitude of the effect on the sellers. Answer: B Topic: Effects of a decrease in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

110) An increase in the equilibrium price and a decrease in the equilibrium quantity can be the result of A) a decrease in demand. B) an increase in supply. C) a decrease in supply. D) an increase in demand. E) None of the above is correct. Answer: C Topic: Market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: New AACSB: Reflective thinking

111) Consider the market for frozen yogurt. Assume the market starts at point A. An increase in income causes a movement to point A) D if frozen yogurt is a normal good. B) B if frozen yogurt is a normal good. C) C because the price of resources used to make frozen yogurt will increase. D) D because the price of resources used to make frozen yogurt will increase. E) B because the price of resources used to make frozen yogurt will decrease. Answer: A Topic: Market equilibrium Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: New AACSB: Application of knowledge

112) Consider the market for frozen yogurt. Assume the market starts at point A. Which of the following is true? A) If frozen yogurt is a normal good, an increase in income leads to a shift from D1 to D2 and a movement along the supply curve. B) A change in the price of frozen yogurt leads to a shift from D1 to D2. C) If frozen yogurt is a normal good, an increase in income leads to a movement up along D1 from point A to point C. D) An increase in the number of firms supplying frozen yogurt leads to a movement from point A to point D. E) A decrease in the number of firms supplying frozen yogurt leads to a movement from point A to point B. Answer: A Topic: Market equilibrium Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: New AACSB: Application of knowledge

4.4 Integrative Questions 1) Consider the market for bread. If the price of wheat rises, then the A) demand curve for bread shifts leftward. B) supply curve of bread shifts leftward. C) price of bread falls. D) equilibrium quantity of bread increases. E) demand curve for bread shifts rightward. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

2) Consider the market for turkeys. In the United States, because of Thanksgiving in the month of November, A) there is a downward movement along the demand curve for turkeys. B) there is an upward movement along the supply curve for turkeys. C) the supply curve of turkeys shifts leftward. D) the demand curve for turkeys shifts leftward. E) neither the demand curve nor the supply curve shift; instead there is a movement along both curves. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

3) Consider the market for feather pillows. If there is an increase in the price of feather dusters, a substitute in production for feather pillows, then A) the price of feather pillows decreases. B) the demand curve for feather pillows shifts leftward. C) the supply curve for feather pillows shifts leftward. D) there is a downward movement along the demand curve for feather pillows. E) the demand curve for feather pillows shifts rightward. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

4) Consider the market for peanut butter. If there is an increase in the price of peanuts, A) there is an upward movement along the supply curve for peanut butter. B) the supply curve for peanuts shifts rightward. C) there is a decrease in the supply of peanuts. D) there is a decrease in the supply of peanut butter. E) there is a decrease in the demand for peanut butter. Answer: D Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

5) Peanut butter and jelly are complements for many consumers. Consider the market for peanut butter. If there is an increase in the price of jelly, A) there is a movement along the supply curve of peanut butter. B) the price of peanut butter rises. C) the quantity of peanut butter increases. D) there is a shift in the supply curve for jelly. E) the demand curve for peanut butter does not shift; instead there is a movement along it. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

6) Consider the market for wheat. If there is an improvement in harvesting technology, A) the supply curve for wheat shifts rightward. B) the demand curve for wheat shifts rightward. C) there is a movement up along the demand curve. D) the equilibrium price rises. E) the demand curve for wheat shifts leftward. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

7) When the price of rice rises, A) the market quantity supplied of rice increases. B) the market supply of rice increases. C) the market quantity of rice demanded decreases. D) Both A and C are true. E) Both A and B are true. Answer: D Topic: Integrative Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: New AACSB: Reflective thinking

8) Consider the market for camera film. If more people start using digital cameras, which do not require film, A) the supply curve of film shifts rightward. B) the demand curve for film shifts leftward. C) there is a movement up along the demand curve for film. D) there is a movement down along the demand curve for film. E) neither the demand curve nor the supply curve for film shifts; instead there is a movement along both. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

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

10) The above figures show the market for HD televisions. Blu-ray players can be used to play HD movies. If the price of blu-ray players falls, then which figure shows the effect of this change in the market for HD televisions? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the figures represent this change. Answer: A Topic: Changes in demand, price of a complement Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

11) The above figures show the market for HD televisions. If research is published showing that watching HD television shows causes eye damage, then which figure shows the effect of this change? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the figures represent this change. Answer: B Topic: Changes in demand, preferences Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

12) The above figures show the market for HD televisions. If cable television providers lower the price of providing HD cable service, which figure shows the effect of this change? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the figures represent this change. Answer: A Topic: Changes in demand, price of a complement Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

13) The above figures show the market for HD televisions. If the price of the LCD screens used to produce these televisions falls, which figure shows the effect of this change in price? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the figures represent this change. Answer: C Topic: Changes in supply, price of a resource Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

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

15) The above figures show the market for HD televisions. If more firms start to produce HD televisions , which figure shows the effect of this change? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the figures represent this change. Answer: C Topic: Changes in supply, number of sellers Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

16) The above figures show the market for HD televisions. If the technology used to produce these televisions advances so that productivity increases, which figure shows the effect of this change? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the figures represent this change. Answer: C Topic: Changes in supply, productivity Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

17) Consider the market for leather shoes. If producers believe the price of leather shoes will increase next month, today A) the supply curve for leather shoes shifts rightward. B) the supply curve for leather shoes shifts leftward. C) there is a movement along the supply curve for leather shoes. D) the equilibrium price of leather shoes falls. E) the equilibrium quantity of leather shoes increases. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

18) Consider the market for peanut butter. If there is an increase in the price of bread (a complement for peanut butter) along with a drought in peanut growing areas, the A) equilibrium quantity of bread increases. B) equilibrium quantity of peanut butter definitely decreases. C) equilibrium quantity of peanut butter might increase or might decrease. D) equilibrium price of peanut butter definitely rises. E) equilibrium price of peanut butter definitely falls. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

19) Consider the market for peanut butter. If there is a decrease in the price of deli turkey slices (a substitute in consumption for peanut butter) along with a decrease in the price of peanut brittle (a substitute in production for peanut butter), the A) equilibrium price of peanut butter definitely falls. B) equilibrium quantity of peanut definitely decreases. C) equilibrium price of peanut butter might rise or fall. D) equilibrium quantity of peanut butter definitely increases. E) equilibrium price of peanut butter definitely rises. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

20) Millions of people from Mexico have migrated to the United States. This has reduced the supply of labor in Mexico and increased the supply of labor in the United States. Assume that the demand for labor in Mexico and the United States is unchanged. Then wages in the United States ________ and wages in Mexico ________. A) fall; rise B) rise; rise C) rise; do not change D) fall; fall E) do not change; fall Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

4.5 Essay: Demand 1) What is the law of demand? Answer: The law of demand states that other things remaining the same, if the price of a good rises, the quantity demanded of that good decreases, and if the price of a good falls, the quantity demanded of that good increases. Topic: Law of demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

2) What leads to a decrease in the quantity demanded of a good or service? Answer: The quantity demanded of a good or service decreases when the price of the product increases. Topic: Law of demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

3) Explain the difference between a change in demand and a change in quantity demanded. What leads to each of these changes? Answer: A change in demand occurs when consumers will buy more or less of a product at every price; a change in the quantity demanded occurs when the price changes and consumers buy more or less. A change in demand is reflected by a shift of the entire demand curve, while a change in the quantity demanded is reflected by a movement along one demand curve. Only a change in the price of the good brings about a change in the quantity demanded. A change in demand is brought about by a change in any of the other influences on demand, namely, the prices of related goods, income, expectations, the number of buyers, and preferences. Topic: Changes in quantity demanded versus change in demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Written and oral communication

4) List the factors that change demand and shift the demand curve. Tell what happens to demand and the demand curve when there is an increase in the factor. Answer: One factor that changes demand is a change in income. An increase in income increases demand and shifts the demand curve rightward for a normal good. An increase in income decreases demand and shifts the demand curve leftward for an inferior good. A change in the price of a substitute or complement also changes demand. An increase in the price of a substitute increase demand and shifts the demand curve rightward while an increase in the price of a complement decreases demand and shifts the demand curve leftward. Expectations, the number of buyers, and preferences also change demand. If people expect their income to increase, or if they expect its price to be higher in the future, or if the number of buyers increases, or if people's preferences for the good increase, demand increases and the demand curve shifts rightward. Topic: Changes in demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Written and oral communication

5) Computers are a complement to computer software. Suppose the price of a computer falls. How does this fall in price affect the demand for computer software and the demand curve for computer software? Answer: The fall in the price of a complement increases the demand for a product. Hence the fall in the price of a computer increases the demand for computer software and shifts the demand curve for computer software rightward. Topic: Changes in demand, price of a complement Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Written and oral communication

6) What is the difference between a normal good and an inferior good. Give an example of each. Answer: A good is a normal good if an increase in incomes leads to an increase in demand for a good. Most goods are normal goods. An example of a normal good is new clothes. A good is an inferior good if an increase in income leads to a decrease in demand for the good. Second-hand clothing that can be purchased at thrift stores is an inferior good. Topic: Normal and inferior goods Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Written and oral communication

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

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

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

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

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

Topic: Changes in demand, income Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

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

2) What is the difference between quantity supplied and supply? Answer: Quantity supplied is the amount that people are willing to sell during a specific period for a specific price. It deals with one quantity at one price. Supply is the relationship between the quantity supplied and the price of the good. Supply applies to various prices and various quantities. Topic: Changes in quantity supplied versus change in supply Skill: Level 1: Definition Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

3) List the factors that change supply and shift the supply curve. Tell what happens to supply and the supply curve when there is an increase in the factor. Answer: The factors that change supply are productivity, the number of sellers, expectations, prices of resources, and prices of related goods. An increase in productivity, an increase in the price of a complement in production, a decrease in expected future prices, and an increase in the number of sellers all lead to an increase in supply and a rightward shift in the supply curve. An increase in the price of a substitute in production or an increase in the prices of inputs leads to a decrease in supply and a leftward shift in the supply curve. Topic: Changes in supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Written and oral communication

4) What are substitutes in production? Answer: Goods are substitutes in production when one can be produced in place of the other, that is, when the goods are produced using the same resources. Topic: Substitutes in production Skill: Level 1: Definition Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

5) Suppose that the number of companies selling computer software decreases. How does this change affect the supply of computer software and the supply curve of computer software? Answer: A decrease in the number of sellers decreases the supply. Hence the decrease in the number of companies selling computer software decreases the supply of computer software and shifts the supply curve of computer software leftward. Topic: Changes in supply, number of sellers Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

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

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

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

Topic: Market supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

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

2) When does a surplus occur? Answer: A surplus occurs when the price is above the equilibrium price. When the price exceeds the equilibrium price, the quantity supplied is greater than the quantity demanded. Topic: Surplus Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

3) At prices above the equilibrium price, what occurs? Answer: If the price exceeds the equilibrium price, there is a surplus because the quantity supplied exceeds the quantity demanded. With a surplus, the law of market forces points out that the price will fall. As the price falls, the quantity supplied decreases and the quantity demanded increases, thus decreasing the size of the surplus. The price will continue to fall as long as there is a surplus, that is, as long as the price exceeds the equilibrium price. Ultimately the price will fall to equal the equilibrium price, at which time the surplus will be eliminated and the price will no longer change. Topic: Surplus Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Written and oral communication

4) When the demand for blue jeans increases, what happens next? Answer: If the demand for blue jeans increases, then at all prices buyers are more willing and more able to buy blue jeans. The demand curve for blue jeans shifts rightward. With the curve shifts, at the initial price a shortage of jeans will emerge. The law of market forces drives the price higher. Hence an increase in demand for blue jeans leads to a rise in the price of a pair of blue jeans and an increase in the quantity of blue jeans. Topic: Effects of a change in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Written and oral communication

5) Suppose Ramen noodles, an inexpensive but a quite tasty dish, are an inferior good. Why do grocery stores in college towns, that is, towns with a large fraction of college students, stock a lot of Ramen noodles? Answer: Generally, college students' incomes are relatively low because they cannot hold high paying, full-time jobs. Hence the demand for inferior goods is strong in college towns. Hence the demand curve for Ramen noodles in a college town lies to the right of the demand curve for Ramen noodles in a similar size town not dominated by a college. Thus the equilibrium quantity of Ramen noodles is quite large in a college town and so stores stock a lot of Ramen noodles. Topic: Effects of a change in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Written and oral communication

6) Why does an increase in supply lead to lower prices? Answer: When the supply of a good, such as computers, increases, the supply curve shifts rightward. This shift means sellers are more willing and more able to sell computers at all prices than they were before. When this change occurs, a surplus of computers breaks out. With the surplus, the law of market forces drives the price lower and thereby eliminates the surplus. Topic: Effects of a change in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Written and oral communication

7) Smart phones are becoming less expensive as new technology reduces the cost of production. In a supply and demand model, explain the effects of the technological innovations and their effect on the quantity of smart phones. Answer: Advances in technology increase the supply of smart phones and the supply curve of smart phones shifts rightward. The demand curve does not shift. Rather, on the demand side there is an increase in quantity demanded, or movement along the curve, in response to the falling price. The equilibrium price of a smart phone falls and the equilibrium quantity of smart phones increases. Topic: Effects of a change in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Written and oral communication

8) What is the effect on the price and quantity of a product if both the demand and supply simultaneously increase? Answer: The equilibrium quantity unambiguously increases. The effect on the equilibrium price is ambiguous. The equilibrium price rises if the increase in demand exceeds the increase in supply. The equilibrium price falls if the increase in supply exceeds the increase in demand. The equilibrium price is unchanged if the increase in demand equals the increase in supply. Topic: Effects of an increase in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

9) What is the effect on the price and quantity of a product if the demand decreases and the supply simultaneously increases? Answer: The equilibrium price unambiguously falls. The effect on the equilibrium quantity is ambiguous. The equilibrium quantity decreases if the decrease in demand exceeds the increase in supply. The equilibrium quantity increases if the increase in supply exceeds the decrease in demand. The equilibrium quantity is unchanged if the decrease in demand equals the increase in supply. Topic: Effects of a decrease in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

10) For consumers, computers are a complement to computer software. Suppose the price of a computer falls. Simultaneously, suppose that the number of companies selling computer software decreases. How do these changes affect the price and quantity of computer software? Answer: The fall in the price of a computer increases the demand for computer software and the demand curve for computer software shifts rightward. A decrease in the number of sellers decreases the supply of computer software and the shifts the supply curve of computer software leftward. The increase in demand and decrease in supply both raise the price, so the price definitely rises. The increase in demand increases the quantity and the decrease in supply decreases the quantity. Hence the net effect on the quantity is ambiguous. Topic: Effects of an increase in demand and a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

11) In early 2012 the price of computer hard disc drives rose. In a demand and supply model, shifts in what curve or curves could have brought about the higher price? Answer: The higher price could have been brought about by an increase in demand, a decrease in supply, or the combination of an increase in demand combined with a decrease in supply. Hence the higher price could have been the result of a rightward shift in the demand curve, a leftward shift in the supply curve, or a combined rightward shift of the demand curve and leftward shift of the supply curve. Topic: Effects of an increase in demand and a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

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

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

14) The above table gives the demand and supply schedules for cat food. What is the equilibrium price and quantity? Answer: The equilibrium price is $2.50 per pound of cat food because that is the price at which the quantity demanded equals the quantity supplied. The equilibrium quantity of cat food is 40 tons per year. Topic: Equilibrium price and quantity Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

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

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

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

18) In the figure above, what is the equilibrium price and quantity? Answer: The equilibrium price is $4 a unit and the equilibrium quantity is 3 units per month. Topic: Equilibrium price and quantity Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

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

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

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

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

Essential Foundations of Economics, 8e (Bade) Chapter 5 Elasticities of Demand and Supply 5.1 The Price Elasticity of Demand 1) The price elasticity of demand is a measure of A) the equilibrium price of a product. B) buyers' responsiveness to changes in the price of a product. C) the amount of a product purchased when income increases. D) whether a product is a substitute or a complement. E) how much a change in demand affects the equilibrium price. Answer: B Topic: Price elasticity of demand Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

2) The price elasticity of demand measures which of the following? A) the slope of the demand curve B) the rate at which demand changes when price changes C) how responsive the quantity demanded is to changes in price D) the percentage-slope of the demand curve E) None of these correctly defines what price elasticity of demand measures. Answer: C Topic: Price elasticity of demand Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

3) The price elasticity of demand measures the extent to which the quantity demanded changes when A) the price of the good changes. B) the price of a related good changes. C) the expected future price of a good changes. D) consumer preferences change. E) both the demand and supply of the good change. Answer: A Topic: Price elasticity of demand Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

4) The price elasticity of demand measures the ________ that results from a ________. A) change in quantity demanded; change in price B) change in price; change in the quantity demanded C) percentage change in price; percentage change in the quantity demanded D) percentage change in the quantity demanded; percentage change in price E) percentage change in the quantity demanded; change in price Answer: D Topic: Price elasticity of demand Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

5) The elasticity of demand is used to A) determine if consumers will or will not buy a product. B) measure how responsive consumers are to a change in price. C) determine in what direction the demand curve shifts if income changes. D) find the market equilibrium. E) determine if a change in price results in a shortage or a surplus. Answer: B Topic: Price elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

6) To determine the price elasticity of demand, we A) need information on consumers' incomes. B) need to know how much is available. C) compare the percentage change in the quantity demanded to the percentage change in the price. D) compare the change in the quantity to the change in price. E) divide the quantity by the price. Answer: C Topic: Price elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

7) If the price of a good rises, then moving along a demand curve the percentage change in the quantity demanded will be A) positive. B) negative. C) zero. D) either positive, negative, or zero depending on how the demand curve shifted. E) undefined. Answer: B Topic: Percentage change Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

8) If we ignore the negative or positive sign, the midpoint method of calculating a percentage change in price between two points on a demand curve results in A) a smaller percentage change if the price rises than if it falls. B) the same percentage, regardless of whether the price increases or decreases. C) the price elasticity of demand. D) the price elasticity of supply. E) a higher percentage change if the price rises than if it falls. Answer: B Topic: Midpoint formula Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

9) Suppose the price of a box of cereal rises from $4 to $6. Using the midpoint method, what is the percentage change in price? A) 50 percent B) 40 percent C) 33 percent D) 67 percent E) None of the above answers is correct. Answer: B Topic: Midpoint formula Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

10) Suppose the price of a DVD rose from $15 to $17 and the quantity demanded decreased from 1,000 per month to 900 per month. Using the midpoint formula, the ________ percent change in price lead to a ________ percent change in the quantity demanded. A) 12.5; 10.5 B) 13.3; 10.0 C) 11.8; 11.1 D) 8.0; 9.5 E) None of the above answers is correct. Answer: A Topic: Midpoint formula Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

11) Suppose the local university charges $85 per credit hour. If tuition increases from $85 to $93 per credit hour, using the midpoint method, what is the percentage change in price? A) 8.99 percent B) 8.00 percent C) 9.41 percent D) 8.62 percent E) 9.12 percent Answer: A Topic: Midpoint formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

12) Using the midpoint method, if the price of an airline ticket from Orlando to Pittsburgh falls from $275 to $238, the percentage change in price is A) 1442 percent. B) 14.42 percent. C) 15.54 percent. D) 13.45 percent. E) 68.00 percent. Answer: B Topic: Midpoint formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

13) If the demand for a good is elastic, then A) people do not change the quantity they demand when the price of the good changes. B) a change in price leads to a smaller percentage change in the quantity demanded. C) people substantially decrease the quantity of the good they buy if its price increases by a small percentage. D) a change in the quantity demanded is smaller than the change in price. E) the quantity demanded divided by the price exceeds 1.00. Answer: C Topic: Elastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

14) When the percentage change in the quantity demanded exceeds the percentage change in price, then demand is A) inelastic. B) unit elastic. C) elastic. D) irrelevant. E) undefined. Answer: C Topic: Elastic demand Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

15) If the percentage change in price is 10 percent and the demand is elastic, then the percentage change in the quantity demanded A) is greater than 0 percent but less than 10 percent. B) is larger than 10 percent. C) equals 0 percent. D) equals 10 percent. E) More information is needed to determine the magnitude of the change in the quantity demanded. Answer: B Topic: Elastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

16) If the price of a six-pack of Pepsi falls from $4 to $3 and the quantity purchased increases 80 percent, then demand is A) inelastic. B) elastic. C) unit elastic. D) perfectly inelastic. E) perfectly elastic. Answer: B Topic: Elastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

17) Suppose the Chicago Bears football team raises ticket prices by 13 percent and as a result the quantity of tickets demanded decreases by 21 percent. This response means that the demand for Bears tickets is A) inelastic. B) elastic. C) unit elastic. D) perfectly inelastic. E) perfectly elastic. Answer: B Topic: Elastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

18) If the price elasticity of demand for moose hunting lessons is 4.23, then the demand for moose hunting lessons is A) elastic. B) unit elastic. C) inelastic. D) perfectly unit elastic. E) perfectly elastic. Answer: A Topic: Elastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

19) Suppose the demand for peaches sold from one roadside stand in Georgia is perfectly elastic. As a result, a 7 percent increase in the price charged by the owner of this stand leads to A) zero peaches sold by this stand. B) no change in the quantity demanded at this stand. C) a 7 percent decrease in the quantity demanded at this stand. D) a 7 percent decrease in demand at this stand. E) a virtually infinite increase in the quantity demanded at this stand. Answer: A Topic: Perfectly elastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

20) When the percentage change in the quantity demanded is less than the percentage change in price, then demand is A) inelastic. B) unit elastic. C) elastic. D) irrelevant. E) undefined. Answer: A Topic: Inelastic demand Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

21) Suppose the San Francisco 49ers lower ticket prices by 15 percent and as a result the quantity of tickets demanded increases by 10 percent. This set of results shows that San Francisco 49ers tickets have A) an inelastic demand. B) an elastic demand. C) a unit elastic demand. D) an inelastic supply. E) an elastic supply. Answer: A Topic: Price elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

22) If the percentage change in the quantity demanded is not zero but is less than the percentage change in the price, demand is A) elastic. B) inelastic. C) unit elastic. D) perfectly elastic. E) perfectly inelastic. Answer: B Topic: Inelastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

23) If the price elasticity of demand for razors is 0.32, the demand for razors is A) elastic. B) unit elastic. C) inelastic. D) perfectly inelastic. E) perfectly elastic. Answer: C Topic: Inelastic demand Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

24) Perfectly inelastic demand means that consumers A) are willing to buy any quantity of the good at a given price, but none at higher prices. B) decrease their consumption as price rises. C) increase their consumption as price rises. D) will buy a certain quantity, regardless of price. E) will buy a huge, almost infinite amount more, if the price falls just a little. Answer: D Topic: Perfectly inelastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

25) Suppose the demand for rescue services in our national parks is perfectly inelastic. This fact would mean that a 31 percent increase in rescue fees leads to A) a 31 percent decrease in the quantity demanded. B) a 31 percent increase in demand. C) a 31 percent decrease in demand. D) no change in the quantity demanded. E) a decrease in the quantity demanded to 0 rescues. Answer: D Topic: Perfectly inelastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

26) When the percentage change in the quantity demanded equals the percentage change in price, then demand is A) inelastic. B) unit elastic. C) elastic. D) irrelevant. E) undefined. Answer: B Topic: Unit elastic demand Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

27) If the price elasticity of demand for opera tickets in Orlando is 1.00, then the demand for opera tickets in Orlando is A) unit elastic. B) elastic. C) perfectly inelastic. D) inelastic. E) perfectly elastic. Answer: A Topic: Unit elastic demand Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

28) Suppose a local photographer increases his prices by 8 percent and quantity demanded decreases by the same percentage. This set of facts indicates that the demand for his services is A) inelastic. B) elastic. C) unit elastic. D) perfectly elastic. E) perfectly inelastic. Answer: C Topic: Unit elastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

29) Which of the following does NOT influence the price elasticity of demand? A) the amount by which the demand curve shifts when the price of another good changes B) the number of substitutes available to consumers C) the price of the good relative to total income D) the time period buyers have to respond to a price change E) whether the good is a necessity or a luxury Answer: A Topic: Factors that influence the price elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

30) If a substitute good is easy to find, then demand for a good is A) elastic. B) inelastic. C) unit elastic. D) perfectly inelastic. E) Substitutes don't have any effect on elasticity. Answer: A Topic: Elasticity, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

31) The demand for a good is more elastic if the A) good is a necessity. B) good has few substitutes. C) good is narrowly defined. D) supply of the good is plentiful. E) Both answers B and C are correct. Answer: C Topic: Elasticity, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

32) If a good has many close substitutes, then its demand is most likely A) elastic. B) inelastic. C) unit elastic. D) perfectly inelastic. E) elastic or inelastic depending on whether the price of the good is increasing or decreasing. Answer: A Topic: Elasticity, substitutes Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

33) If a product is narrowly defined, it is likely to A) have many substitutes and therefore its demand is elastic. B) have few substitutes, and therefore its demand is less elastic. C) be unique, and therefore its demand is inelastic. D) be unique and have many substitutes. E) have a larger proportion of income spent on it. Answer: A Topic: Elasticity, substitutes Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

34) Of the following, which good has the most elastic demand? A) food B) breakfast food C) cereal D) Post Raisin Bran E) Post Raisin Brand purchased at a Safeway grocery store Answer: E Topic: Elasticity, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

35) The demand for Dasani bottled water in New York City would be ________. The demand for bottled water in the Sahara Desert would be ________. A) elastic; inelastic B) unit elastic; inelastic C) elastic; unit elastic D) inelastic; elastic E) inelastic; inelastic Answer: A Topic: Elasticity, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: New AACSB: Application of knowledge

36) All of the following statements are true EXCEPT A) the demand for food is less elastic than the demand for a Hawaiian vacation. B) the demand for clothing is less elastic than the demand for blue jeans. C) the demand for gasoline is more elastic the longer the time elapsed. D) the smaller the proportion of income spent on a good, the more inelastic demand will be. E) the demand for Nike running shoes is less elastic than the demand for shoes. Answer: E Topic: Price elasticity of demand Skill: Level 5: Critical thinking Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

37) The price elasticity of demand for Red Delicious apples, a certain type of apple, is likely A) elastic. B) inelastic. C) perfectly elastic. D) perfectly inelastic. E) unit elastic. Answer: A Topic: Elasticity, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

38) Which of the following statements is correct? A) The demand for New Balance shoes is more elastic than the demand for shoes in general. B) The demand for salt is very elastic. C) The demand for luxuries is less elastic than the demand for necessities. D) The demand for a narrowly defined good is less elastic than the demand for a more broadly defined good. E) The larger the proportion of income spent on a good, the smaller the elasticity of demand. Answer: A Topic: Elasticity, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

39) One reason why the demand for gasoline is inelastic is because A) substitutes for gas abound. B) substitutes for gas are hard to find. C) gasoline is a luxury item. D) people have a long time to shop around for automobiles that use less gas. E) buses run on diesel fuel rather than gasoline. Answer: B Topic: Elasticity, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

40) The longer the time that has elapsed since the price of a good changed, the A) more elastic the demand for that good. B) steeper the demand curve. C) less elastic the demand for that good. D) smaller the amount of that good bought. E) fewer substitutes available for the good. Answer: A Topic: Elasticity, time since the price changed Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

41) As more time passes, the price elasticity of gasoline A) increases. B) decreases. C) stays the same. D) becomes perfectly inelastic. E) becomes perfectly elastic. Answer: A Topic: Elasticity, time since the price changed Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

42) Demand for a product tends to be more elastic the longer the time period considered because A) sellers have more time to expand production. B) buyers have more time to search for substitutes. C) price increases over time make the price larger relative to buyers' incomes. D) the inverse relationship between the price and the quantity demanded weakens over time. E) buyers get used to the new price. Answer: B Topic: Elasticity, time since the price changed Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

43) The long-run price elasticity of demand for electricity is ________ the short-run price elasticity of demand for electricity. A) greater than B) less than C) equal to D) not comparable to E) unrelated to Answer: A Topic: Elasticity, time since the price changed Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

44) A product's price elasticity of demand is likely to be greater A) if it only has a few substitutes. B) if consumers spend a small proportion of income on the product. C) the less time consumers have to adjust to price changes. D) if the product is a luxury good rather than a necessity. E) Both answers C and D are correct. Answer: D Topic: Elasticity, luxury good Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

45) The demand for luxury suites at basketball games is more elastic if A) these suites are a necessity. B) these suites are a luxury item. C) few close substitutes exist for these suites. D) basketball fans have little time to look for alternative suites. E) poorer fans cannot afford luxury suites. Answer: B Topic: Elasticity, luxury good Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

46) The demand for a necessity generally is A) very elastic. B) infinitely elastic. C) unaffected by income. D) inelastic. E) unit elastic. Answer: D Topic: Elasticity, necessities Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

47) The demand for necessities generally is ________ the demand for luxury goods. A) as elastic as B) more elastic than C) less elastic than D) flatter than E) not comparable to Answer: C Topic: Elasticity, necessities Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

48) If a good is a necessity, it has ________ substitutes and its demand is ________. A) poor; elastic B) poor; inelastic C) many; elastic D) many; inelastic E) many; precisely unit elastic Answer: B Topic: Elasticity, necessities Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

49) You are more sensitive to a change in price if you A) spend a lot of your income on the good. B) spend a small percentage of your income on the good. C) buy very little of the good. D) do not buy the good regularly. E) have a very inelastic demand for the good. Answer: A Topic: Elasticity, fraction of income Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

50) We calculate the price elasticity of demand as the A) ratio of the percentage change in the quantity demanded to the percentage change in price. B) change in quantity divided by the change in price. C) ratio of the percentage change in the price to the percentage change in quantity. D) percentage change in the quantity demanded divided by the percentage change in income. E) equilibrium quantity divided by the equilibrium price. Answer: A Topic: Price elasticity of demand, formula Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

51) What is the formula for the price elasticity of demand? The percentage change in the A) quantity demanded divided by the percentage change in the price of a substitute or complement. B) quantity supplied divided by the percentage change in price. C) quantity demanded divided by the percentage change in price. D) quantity demanded divided by the percentage change in income. E) equilibrium quantity demanded divided by the equilibrium price. Answer: C Topic: Price elasticity of demand, formula Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

52) Demand is price inelastic if ________ percentage change in the price leads to a ________ percentage change in the quantity demanded. A) a small; large B) a large; small C) any; large D) Both answers A and B are correct. E) None of the above answers is correct. Answer: B Topic: Price elasticity of demand, formula Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

53) If a 10 percent price increase generates a 10 percent decrease in quantity demanded, then demand is A) unit elastic. B) elastic. C) perfectly inelastic. D) perfectly elastic. E) inelastic. Answer: A Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

54) If a 10 percent price increase generates a 20 percent decrease in quantity demanded, then demand is A) elastic. B) perfectly inelastic. C) perfectly elastic. D) inelastic. E) unit elastic. Answer: A Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

55) If a 30 percent price increase generates a 20 percent decrease in quantity demanded, then demand is A) inelastic. B) elastic. C) unit elastic. D) perfectly elastic. E) perfectly inelastic. Answer: A Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

56) The price of furnace filters increased by 5 percent and the quantity demanded did not change. The price elasticity of demand for furnace filters is A) perfectly inelastic. B) inelastic. C) elastic. D) unit elastic. E) perfectly elastic. Answer: A Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

57) If a 2 percent change in price leads to a ________ percent change in the quantity demanded, then demand is ________. A) 2; elastic B) 1; unit elastic C) 3; inelastic D) 1; inelastic E) 0; perfectly elastic Answer: D Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

58) If a 2 percent change in price leads to a ________ percent change in the quantity demanded, then demand is ________. A) 2; elastic B) 1; unit elastic C) 3; inelastic D) 4; elastic E) 0; perfectly elastic Answer: D Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

59) If the price elasticity of demand for a good is 2, then a 10 percent increase in the price of that good ________ the quantity demanded by ________ percent. A) increases; 20 B) decreases; 2 C) decreases; 10 D) decreases; 20 E) increases; 8 Answer: D Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

60) When the price of tacos rise 4 percent, the quantity demanded decreases 10 percent. What is the price elasticity of demand for tacos? A) 40.0 B) 25.0 C) 0.4 D) 2.5 E) 10.0 Answer: D Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

61) When we use the midpoint method to compute the price elasticity of demand we use A) the original quantity and the average price. B) the original price and the average quantity. C) the average price and the average quantity. D) either the original or new price, and the average quantity. E) the average price and the original quantity. Answer: C Topic: Price elasticity of demand Skill: Level 1: Definition Section: Checkpoint 5.1 Status: New AACSB: Reflective thinking

62) Suppose the price of a ticket to a Lenny Kravitz concert is $41 and at that price, the quantity of tickets demanded is 17,000 per concert. Using the midpoint method of calculating percentage changes, if Mr. Kravitz raises the price to $48 and the quantity demanded decreases to 16,000, the price elasticity of demand for his concert tickets is A) 15.73. B) 6.06. C) 1.00. D) 0.39. E) 0.93. Answer: D Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

63) When the price of a burrito increases from $2 to $4, the quantity demanded decreases from 50 to 40. Using the midpoint method, the price elasticity of demand equals A) 1/3. B) 3. C) 2. D) 1. E) 1/2. Answer: A Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

64) When the price of Cosmopolitan magazine decreases from $5 to $3, the quantity demanded increases from 600,000 to 1,000,000 copies each month. Using the midpoint method, the price elasticity of demand equals A) 1. B) 3. C) 2. D) 1/3. E) 1/2. Answer: A Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

65) If a 4 percent change in the price of a good leads to a 3 percent change in quantity demanded, the price elasticity of demand equals A) 1.33. B) 0.75. C) 4.00. D) 3.44. E) None of the above answers is correct. Answer: B Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

66) A 10 percent increase in price leads to a 20 percent decrease in the quantity demanded. The price elasticity of demand is equal to A) 0.5. B) 1.0. C) 2.0. D) 20.0. E) 10.0. Answer: C Topic: Price elasticity of demand, formula Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

67) A firm can sell 10 units if the price is $100 and can sell 8 units if the price is $125. Using the midpoint method, what is the price elasticity of demand? A) 0.75 B) 1.00 C) 1.25 D) 0.50 E) 0.0 Answer: B Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

68) When the price of a cup of coffee falls from $3.00 to $2.50, the quantity demanded increases from 1,000 per month to 1,150 per month. Using the midpoint method, the price elasticity of demand is A) 0.77. B) 1.30. C) 0.07. D) 3.00. E) 2.50. Answer: A Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

69) During last year the price of regular unleaded gasoline in Oakland, California increased 11.0 percent. If the price elasticity of demand for gasoline was 0.13, the price hike means that the quantity demanded decreased by A) 1.43 percent. B) 8.46 percent. C) 0.16 percent. D) 4.31 percent. E) 6.46 percent. Answer: A Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

70) If the price elasticity of demand for a product is 2.5, then a price increase of 1.5 percent decreases the quantity demanded by A) 1.55 percent. B) 3.50 percent. C) 5.00 percent. D) 3.75 percent. E) 1.00 percent. Answer: D Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

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

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

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

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

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

76) The data in the table above give two points on the demand curve for pizza. Using the midpoint method, when the price of a pizza falls from $10 to $9, what is the price elasticity of demand? A) 0.5 B) 0.6 C) 0.9 D) 2.1 E) 8.6 Answer: D Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

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

Quantity 0 1 2 3 4 5 6 7 8 9

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

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

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

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

81) The figure shows a demand curve. Using the midpoint formula, the elasticity of demand moving from point A to point B equals A) 0.033. B) 1.00. C) 2.00. D) 0.045. E) 0.022. Answer: A Topic: Elasticity formula Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: New AACSB: Analytical thinking

82) The figure above shows a demand curve. Using the midpoint formula, the percentage change in the quantity demanded is ________ the percentage change in the price, which means that the elasticity of demand is ________. A) equal to; unit elastic B) more than; inelastic C) more than; elastic D) less than; elastic E) less than; inelastic Answer: E Topic: Elasticity formula Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: New AACSB: Application of knowledge

83) Tickets to a Beyonce concert increase from $90 to $110. As a result, tickets sales fall from 100,000 to 80,000. Using the midpoint formula, the percentage change in ________ which means that the elasticity of demand is ________. A) quantity demanded is greater than the percent change in price; elastic B) quantity supplied is greater than the percent change in price; elastic C) price is greater than the change in demand; inelastic D) price is greater than the change in supply; inelastic E) quantity demanded equals the percent change in price; unit elastic Answer: A Topic: Elastic, inelastic, and unit elastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: New AACSB: Application of knowledge

84) Ticket prices to a Kanye West concert increase from $40 to $60. As a result, ticket sales decrease from 50,000 to 40,000. The elasticity of demand for Kanye West tickets equals ________ and demand is ________. A) 1.8; elastic B) 0.55; inelastic C) 0,22; inelastic D) 0.40; inelastic E) 5.0; elastic Answer: B Topic: Elastic, inelastic, and unit elastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: New AACSB: Application of knowledge

85) Ticket prices to a Kanye West concert increase from $40 to $60. As a result, ticket sales decrease from 50,000 to 40,000. Total revenue changes from ________ and demand is ________. A) $2 million to $2.4 million; elastic B) $40 to $60; elastic C) $2 million to $2.4 million; inelastic D) $2.4 million to $2 million; elastic E) $1.6 million to $3 million; elastic Answer: C Topic: Total revenue test Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: New AACSB: Application of knowledge

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

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

88) In the figure above, using the midpoint method, the price elasticity of demand when the price falls from $6 to $5 is equal to A) 2.50. B) 1.63. C) 1.10. D) 0.91. E) 1.00. Answer: C Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

89) In the mid-1970s, Newsweek magazine reported that the city of Atlanta lowered its city bus fares from 40 cents to 15 cents a passenger. The number of bus riders increased by 15 percent after the fare cut. This set of results indicates that the demand for bus rides in Atlanta at that time was A) unit elastic. B) perfectly inelastic. C) elastic. D) inelastic. E) perfectly elastic. Answer: D Topic: Price elasticity of demand, formula Skill: Level 4: Applying models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

90) When hamburger is $3 per pound, Ms. Rush buys 6 pounds. When hamburger is $2 per pound, Ms. Rush buys 10 pounds. Describe Ms. Rush's demand between these two prices. A) elastic B) unit elastic C) inelastic D) perfectly inelastic E) perfectly elastic Answer: A Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

91) Economists use elasticity to measure the responsiveness of quantity to a change in price rather than the slope of the demand curve because elasticity is A) independent of the units of measurement. B) dependent on the units of measurement. C) easier to calculate. D) harder to calculate. E) always negative whereas the slope is always positive. Answer: A Topic: Slope and elasticity Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

92) Which of the following is correct? i. All linear demand curves have a constant slope and a constant price elasticity of demand. ii. The price elasticity of demand changes while moving along a downward-sloping linear demand curve. iii. The magnitude of the slope of all linear demand curves is equal to the price elasticity of demand. A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: B Topic: Price elasticity of demand, linear demand curve Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

93) Moving downward along a linear (straight-line) downward sloping demand curve, the A) slope is constant. B) price is constant. C) quantity is constant. D) elasticity is constant. E) None of the above answers is correct. Answer: A Topic: Price elasticity of demand, linear demand curve Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

94) The figure shows a demand curve. The price elasticity of demand at point C = 1.00. If the price increases from $20 to $25, total revenue will A) decrease because demand is elastic. B) decrease because demand is unit elastic. C) increase because the price has doubled. D) increase because demand is inelastic. E) more information is needed to determine what will happen to total revenue. Answer: A Topic: Total revenue test Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: New AACSB: Application of knowledge

95) The figure shows a demand curve. The price elasticity at point C equals 1.00. Suppose the price falls from $10 to $5. As a result, total revenue will A) increase because demand is inelastic. B) decrease because demand is unit elastic. C) decrease because demand is inelastic. D) not change because the price change is too small. E) increase because demand is elastic. Answer: C Topic: Total revenue test Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: New AACSB: Application of knowledge

96) Moving downward along a linear (straight-line) downward-sloping demand curve, the A) price elasticity of demand does not change. B) quantity demanded decreases. C) demand becomes more elastic. D) demand becomes less elastic. E) total revenue never changes. Answer: D Topic: Price elasticity of demand, linear demand curve Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

97) As you move up along a straight-line demand curve, A) the price elasticity of demand decreases in size. B) the price elasticity of demand increases in size. C) total revenue always decreases. D) total revenue always increases. E) total revenue never changes. Answer: B Topic: Price elasticity of demand, linear demand curve Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

98) Which of the following statements is correct for the price elasticity of demand along a linear, downward-sloping demand curve? A) The price elasticity of demand is constant because the slope is constant. B) At low prices, demand is elastic but at high prices demand is inelastic. C) At high prices, demand is elastic but at low prices demand is inelastic. D) The price elasticity of demand is not defined for a linear demand curve because the slope is constant. E) None of the above answers is correct. Answer: C Topic: Price elasticity of demand, linear demand curve Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

99) At the midpoint of a linear, downward-sloping demand curve, the price elasticity of demand is A) greater than one. B) equal to one. C) less than one but greater than zero. D) zero. E) infinite. Answer: B Topic: Price elasticity of demand, linear demand curve Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

100) Along a linear (straight-line) downward-sloping demand curve, demand is unit elastic at A) the highest price. B) the lowest price. C) the midpoint. D) all points on the linear demand curve. E) None of the above because linear demand curves are never unit elastic. Answer: C Topic: Price elasticity of demand, linear demand curve Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

101) The price of the good multiplied by the quantity sold is its A) total revenue. B) total cost. C) total spending. D) total income. E) total quantity. Answer: A Topic: Total revenue Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

102) Total revenue equals A) price × quantity sold. B) profit - cost. C) price. D) quantity sold - cost. E) cost × price. Answer: A Topic: Total revenue Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

103) The total revenue test says i. Demand is elastic if a decrease in price results in an increase in total revenue. ii. Total revenue is maximized when demand is elastic. iii. Total revenue is minimized when demand is unit elastic. A) i only B) i and ii C) ii and iii D) i, ii and iii E) ii only Answer: A Topic: Elasticity and total revenue Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

104) If demand is price inelastic and the price is lowered, which of the following occurs? A) The quantity sold decreases. B) The total expenditure increases and the total revenue decreases. C) The total revenue of the firms selling the product is unchanged. D) The total revenue of the firms selling the product decreases. E) The total expenditure decreases and the total revenue increases. Answer: D Topic: Elasticity and total revenue Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

105) If demand is inelastic and the price falls, the total revenue A) rises. B) falls. C) remains constant. D) might rise, fall, or remain constant. E) becomes negative. Answer: B Topic: Elasticity and total revenue Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

106) Total revenue increases if the price of the good A) rises and demand is elastic. B) rises and demand is inelastic. C) rises and demand is unit elastic. D) falls and supply is inelastic. E) falls and demand is unit elastic. Answer: B Topic: Elasticity and total revenue Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

107) If the supply of a good decreases and it causes total revenue to increase, this shows that the good has an A) inelastic demand. B) elastic demand. C) unit elastic demand. D) inelastic supply. E) elastic supply. Answer: A Topic: Elasticity and total revenue Skill: Level 5: Critical thinking Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

108) You own a small store. Your cashier thinks you should raise prices to increase your total revenue and your customer thinks you should lower prices to increase your total revenue. The cashier thinks the price elasticity of demand is ________ and the customer believes the price elasticity of demand is ________. A) inelastic; elastic B) elastic; inelastic C) elastic; elastic D) inelastic; inelastic E) unit elastic; elastic Answer: A Topic: Elasticity and total revenue Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

109) Products X, Y, and Z have price elasticities of 3.0, 0.80, and 1.0 respectively. Total revenue decreases if the price of A) product X falls. B) product Y falls. C) product Z falls. D) product X or product Z falls. E) product Y or product Z falls. Answer: B Topic: Elasticity and total revenue Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

110) If a 2 percent rise in price leads to a 4 percent decrease in quantity demanded, then demand is A) elastic and total revenue decreases. B) elastic and total revenue increases. C) inelastic and total revenue decreases. D) elastic, but we cannot tell what happens to total revenue without more information. E) Total revenue decreases but we cannot tell if the demand is elastic or inelastic without more information. Answer: A Topic: Elasticity and total revenue Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

111) If the demand for insulin is inelastic, an increase in insulin prices leads to A) less total revenue for insulin makers. B) more total revenue for insulin makers. C) no change in total revenue for insulin makers. D) first a decrease, then an increase in total revenue for insulin makers. E) Total revenue probably changes, but we need more information about the change in total expenditures on insulin to determine if the total revenue rises, falls, or stays the same. Answer: B Topic: Elasticity and total revenue Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

112) If the price elasticity of demand for gasoline equals 0.3, then an increase in the price of a gallon of gasoline from $3.70 to $3.90 A) decreases total revenue. B) increases total revenue. C) leads to no change in total revenue. D) makes the demand for gasoline elastic. E) Both answers B and D are correct. Answer: B Topic: Elasticity and total revenue Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

113) If a Pizza Hut raises the price of a slice of pizza from $3.00 to $3.25, the quantity demanded decreases from 1,500 slices per week to 1,300 slices per week. The demand for slices of pizza is ________ and the total revenue received by this Pizza Hut ________. A) elastic; decreases B) inelastic; decreases C) elastic; increases D) inelastic; increases E) unit elastic; does not change Answer: A Topic: Elasticity and total revenue Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

114) If an Atlanta bakery raises the price of their rye bread by 11 percent and the quantity demanded decreases by 11 percent, then the demand for the rye bread is ________ and the bakery's total revenue ________. A) unit elastic; does not change B) unit elastic; increases C) unit elastic; decreases D) elastic; does not change E) inelastic; does not change Answer: A Topic: Elasticity and total revenue Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

115) Suppose the Oakland Raiders football team increases their season ticket prices and total revenue from ticket sales falls, but not to zero. This fact means that the demand for Raiders tickets is A) inelastic. B) elastic. C) unit elastic. D) perfectly elastic. E) perfectly inelastic. Answer: B Topic: Elasticity and total revenue Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

116) After long hair for men became popular, barbers found that their incomes fell. In an attempt to boost their incomes, many barbers raised the price of a haircut and yet their total revenue fell even more. What can explain this result? A) The demand for haircuts by barbers is elastic because of many substitutes. B) The demand for haircuts by barbers became inelastic after the increase in price. C) Haircuts are inferior products. D) The demand for haircuts by barbers is inelastic because most people need haircuts. E) None of the above can explain the phenomenon. Answer: A Topic: Elasticity and total revenue Skill: Level 4: Applying models Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

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

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

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

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

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

122) In the figure above, using the midpoint method, what is the price elasticity of demand between points A and B? A) 0.05 B) 0.13 C) 0.43 D) 1.00 E) 2.33 Answer: C Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

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

124) In the figure above, using the midpoint method, what is the price elasticity of demand when the price falls from $8 to $7? A) 4.0 B) 5.0 C) 0.5 D) 0.4 E) 0.25 Answer: B Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

125) In the figure above, if the price falls from $8 to $7, demand is A) elastic. B) inelastic. C) unit elastic. D) income elastic. E) perfectly elastic. Answer: A Topic: Total revenue test Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

126) In the figure above, when the price falls from $8 to $7, total revenue A) increases from $120 to $210 so demand is elastic. B) decreases from $210 to $120 so demand is inelastic. C) increases from $120 to $210 so demand is inelastic. D) decreases from $210 to $120 so demand is elastic. E) increases from $120 to $210, but more information is needed to determine whether demand is elastic, inelastic, or unit elastic. Answer: A Topic: Total revenue test Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

127) A firm raises the price it charges. The firm's total revenue decreases. What can we conclude about the price elasticity of demand? A) Demand is elastic. B) Demand is unit elastic. C) Demand is inelastic. D) Demand is perfectly inelastic. E) Not enough information is given to conclude anything about price elasticity of demand. Answer: A Topic: Total revenue test Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

128) A firm raises the price it charges. The firm's total revenue does not change. What can we conclude about the price elasticity of demand? A) Demand is elastic. B) Demand is unit elastic. C) Demand is inelastic. D) Demand is perfectly elastic. E) Not enough information is given to conclude anything about price elasticity of demand. Answer: B Topic: Total revenue test Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

129) A firm lowers the price it charges. The firm's total revenue decreases. What can we conclude about the price elasticity of demand? A) Demand is elastic. B) Demand is unit elastic. C) Demand is inelastic. D) Demand is perfectly elastic. E) Not enough information is given to conclude anything about price elasticity of demand. Answer: C Topic: Total revenue test Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

130) If, when the price falls, total revenue increases, demand is A) elastic. B) inelastic. C) unit elastic. D) perfectly inelastic. E) None of the above answers is correct because total revenue always decreases when the price of the good falls. Answer: A Topic: Total revenue test Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

131) The price elasticity of demand for an agricultural product is 0.4. This value means that, when the quantity decreases 1 percent, the price A) falls 4 percent. B) rises 4 percent. C) falls 2.5 percent. D) rises 2.5 percent. E) rises 0.25 percent. Answer: D Topic: Farm revenue and elasticity Skill: Level 4: Applying models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

132) The price elasticity of demand is a measure of the extent to which the quantity demanded of a good changes when ________ and all other influences on buyers' plans remain the same. A) income changes B) the price of a related good changes C) the price of the good changes D) the demand alone changes E) both the demand and the supply simultaneously change Answer: C Topic: Price elasticity of demand Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

133) Suppose the price of a movie falls from $9 to $7. Using the midpoint method, what is the percentage change in price? A) 33 percent B) -33 percent C) 25 percent D) -25 percent E) -97 percent Answer: D Topic: Midpoint formula Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

134) Suppose the price of a tie rises from $45 to $55. Using the midpoint method, what is the percentage change in price? A) 10 percent B) -10 percent C) 20 percent D) -20 percent E) 100 percent Answer: C Topic: Midpoint formula Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

135) Demand is elastic if A) consumers respond strongly to changes in the product's price. B) a large percentage change in price brings about a small percentage change in quantity demanded. C) a small percentage change in price brings about a small percentage change in quantity demanded. D) the quantity demanded is not responsive to price changes. E) the demand curve is vertical. Answer: A Topic: Elastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

136) During the winter of 2014-2015, the price of fuel oil increased enormously but the quantity demanded decreased only a little. This response indicates that the demand for fuel oil was A) inelastic. B) elastic. C) unit elastic. D) perfectly elastic. E) perfectly inelastic. Answer: A Topic: Inelastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Revised AACSB: Reflective thinking

137) If substitutes for a good are readily available, the demand for that good A) does not change substantially if the price rises. B) does not change substantially if the price falls. C) is inelastic. D) is elastic. E) Both answers A and B are correct. Answer: D Topic: Elasticity, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

138) If the price of a product increases by 5 percent and the quantity demanded decreases by 5 percent, then the elasticity of demand is A) 0. B) 1. C) indeterminate. D) 5. E) 25. Answer: B Topic: Price elasticity of demand, formula Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

139) The price of a bag of pretzels rises from $2 to $3 and the quantity demanded decreases from 100 to 60. What is the price elasticity of demand? A) 1.0 B) 1.25 C) 40.0 D) 20.0 E) 0.80 Answer: B Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

140) When a firm raises the price of its product, what happens to its total revenue? A) If demand is elastic, total revenue decreases. B) If demand is unit elastic, total revenue increases. C) If demand is inelastic, total revenue decreases. D) If demand is elastic, total revenue increases. E) If demand is unit elastic, total revenue decreases. Answer: A Topic: Elasticity and total revenue Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

141) In Tanzania a larger proportion of income is spent on food compared to Canada. As a result, we'd expect the price elasticity of demand for food to be A) greater in Canada. B) greater in Tanzania. C) equal in both countries because food is a necessity. D) unrelated because the prices are different. E) negative in Tanzania and positive in Canada. Answer: B Topic: Elasticity, fraction of income Skill: Level 5: Critical thinking Section: Checkpoint 5.1 Status: New AACSB: Reflective thinking

142) The price elasticity of demand for product A is 2.32. The price elasticity of demand for product Z is 0.12. This difference could be due to the fact that A) there are many good substitutes for product A and few substitutes for product Z. B) there are many good substitutes for product Z and few substitutes for product A. C) Product A is a necessity and product Z is a luxury. D) Product Z is a necessity and product A is a luxury. E) Both A and D are correct. Answer: E Topic: Elasticity, substitutes Skill: Level 5: Critical thinking Section: Checkpoint 5.1 Status: New AACSB: Reflective thinking

143) Product Z has a price elasticity of demand of 2.5. This means that i. There are few substitutes for product Z. ii. Consumers spend only a small portion of their income on product Z. iii. If the price of product Z increases, the total amount spent on the good will decrease. A) iii only B) i, ii and iii C) i and iii D) ii only E) ii and iii Answer: A Topic: Elastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: New AACSB: Analytical thinking

5.2 The Price Elasticity of Supply 1) What is measured by the price elasticity of supply? A) The price elasticity of supply measures how responsive producers are to changes in the price of other goods. B) The price elasticity of supply measures how responsive producers are to changes in income. C) The price elasticity of supply measures how responsive producers are to changes in the price of a product. D) The price elasticity of supply is a measure of the slope of the supply curve. E) The price elasticity of supply measures how responsive producers are to changes in the cost of producing a product. Answer: C Topic: Price elasticity of supply Skill: Level 1: Definition Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

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

3) The price elasticity of supply is always a positive value because i. there is a direct relationship between the price and the quantity supplied. ii. as the equilibrium price increases, the equilibrium quantity also always increases. iii. buyers are willing to pay a higher price for larger quantities. A) i only B) ii only C) iii only D) i and ii E) ii and iii Answer: A Topic: Price elasticity of supply Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

4) If the percentage change in the price of a good exceeds the percentage change in the quantity supplied, then the supply is A) elastic. B) inelastic. C) unit elastic. D) perfectly elastic. E) perfectly inelastic. Answer: B Topic: Price elasticity of supply, formula Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

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

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

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

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

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

10) If the supply curve is ________, the elasticity of supply is ________. A) vertical; infinite B) vertical; 0 C) horizontal; 1 D) horizontal; 0 E) a straight, upward sloping line through the origin; 0 Answer: B Topic: Price elasticity of supply, perfectly inelastic Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

11) The fact that there is a very limited amount of land in Hong Kong means the supply of new apartments in Hong Kong is A) inelastic. B) elastic. C) unit elastic. D) perfectly elastic. E) limited by the demand. Answer: A Topic: Price elasticity of supply, production possibilities Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

12) The opportunity cost of producing a good rises only slightly as the quantity produced increases. This good has A) an inelastic demand. B) an elastic demand. C) an elastic supply. D) an inelastic supply. E) a perfectly elastic supply. Answer: C Topic: Price elasticity of supply, production possibilities Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

13) For a product with a constant or gently increasing opportunity cost of producing additional units, as more is produced, we expect that A) demand is price elastic. B) supply is price elastic. C) demand is price inelastic. D) supply is price inelastic. E) demand is unit elastic. Answer: B Topic: Price elasticity of supply, production possibilities Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

14) For which of the following would the supply likely be most inelastic? A) aircraft carrier B) canned soup C) toy airplane D) t-shirt E) bottled water Answer: A Topic: Price elasticity of supply, production possibilities Skill: Level 5: Critical thinking Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

15) Suppose a good can be produced using commonly available resources. The elasticity of supply is A) negative. B) greater than zero but less than 1. C) greater than 1. D) zero. E) More information is needed to make a determination about the size of the elasticity of supply. Answer: C Topic: Price elasticity of supply, production possibilities Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

16) If wheat can be produced at a constant opportunity cost, then the supply of wheat is A) elastic. B) inelastic. C) unit elastic. D) perfectly inelastic. E) perfectly elastic. Answer: E Topic: Price elasticity of supply, production possibilities Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

17) Which of the following explains why supply is more elastic as more time passes? A) It is difficult or impossible to increase the quantity produced in a short period of time. B) Consumers have more time to search for substitutes. C) Sellers try to take advantage of a high price in the short term. D) The supply curve becomes generally steeper as more time passes. E) There is no explanation for this phenomenon. Answer: A Topic: Factors that influence the price elasticity of supply Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

18) One reason why the price elasticity of supply for DVD players is greater than one is that A) the cost of producing DVD players is small. B) the storage of DVD players is not possible. C) DVD players can be easily stored. D) the demand for DVD players is fairly large. E) DVD players require relatively advanced technology for their production. Answer: C Topic: Factors that influence the price elasticity of supply Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

19) Running shoes are likely to have a ________ elasticity of supply compared to bananas because ________. A) higher; shoes are easier to store compared to bananas B) lower; shoes are easier to store compared to bananas C) lower; as incomes increase people are more likely to buy running shoes D) higher; as incomes increase people are more likely to buy running shoes E) similar; both goods are easily produced Answer: A Topic: Factors that influence the price elasticity of supply Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: New AACSB: Application of knowledge

20) If the price elasticity of supply for a good is 0.75, then A) the percentage change in the quantity supplied is less than the percentage change in price. B) the supply is elastic. C) an increase in the price boosts the quantity supplied by a larger percentage. D) the supply is inelastic so the demand must also be inelastic. E) None of the above answers is correct. Answer: A Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

21) It is very difficult for Gourmet Chocolatier to find inexpensive and available inputs for the business. Because of this, we predict that Gourmet Chocolatier's supply to be A) inelastic. B) perfectly elastic. C) elastic. D) unit elastic. E) nonexistent. Answer: A Topic: Price elasticity of supply, inelastic Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

22) The price of lumber increased by 10 percent and the quantity supplied increased by 20 percent. The supply of lumber is A) inelastic. B) perfectly elastic. C) perfectly inelastic. D) unit elastic. E) elastic. Answer: E Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

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

24) The price of beef increased by 20 percent and the quantity supplied increased by 10 percent. The supply of beef is A) elastic. B) perfectly elastic. C) perfectly inelastic. D) inelastic. E) unit elastic. Answer: D Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

25) If the price of corn increases by 20 percent and the quantity supplied of corn increases by 30 percent, then supply is A) elastic and the elasticity of supply equals 1.5. B) inelastic and the elasticity of supply equals 1.5. C) elastic and the elasticity of supply equals 0.66. D) inelastic and the elasticity of supply equals 0.66. E) either elastic or inelastic, but more information about the elasticity of demand is needed to determine which. Answer: A Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

26) Suppose the current price of barley is $7 per bushel and at that price 100,000 bushels are grown by a Colorado farmer. If the price of barley rises to $8 and quantity supplied increases to 130,000 bushels, then using the midpoint method, the price elasticity of supply for barley equals A) 13.33. B) 26.78. C) 1.96. D) 0.51. E) zero. Answer: C Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

27) Jess owns a sandwich shop. The price of a sandwich recently increased from $5 to $7. Jess responded by increasing the quantity of sandwiches she supplied from 70 to 90 per day. Using the midpoint method, Jess's price elasticity of supply is equal to A) 1.33. B) 0.75. C) 3.00. D) 4.00. E) 1.50. Answer: B Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

28) The price of one bedroom apartments in Cheyenne increased from $55,000 to $65,000 and the quantity of apartment for sale increased from 25 to 30. Using the midpoint method, the price elasticity of supply for apartments in Cheyenne is equal to A) 0.916. B) 0.75. C) 1.09. D) 2.18. E) 0.08. Answer: A Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

29) Suppose an increase in demand causes the price to increase from $2 to $4 and the quantity to increase from 1,000 to 1,800. Using the midpoint method, the elasticity of supply equals A) 0.86. B) 1.17. C) 2.74. D) 0.68. E) None of the above answers is correct. Answer: A Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

30) Suppose a decrease in demand causes the price to decrease from $4 to $3 and the quantity to decrease from 1,000 to 700. Using the midpoint method, the elasticity of supply equals A) 0.81. B) 1.24. C) 2.83. D) 0.18. E) None of the above answers is correct. Answer: B Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

31) When the price of a product increases from $35 to $45, the quantity supplied increases from 30 units to 40 units per week. Using the midpoint method, the price elasticity of supply is A) 0.00. B) -1.1. C) 1.14. D) 1.35. E) 0.88. Answer: C Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

32) If the price of a DVD falls from $20 to $12 and the quantity of DVDs supplied decreases from 118,000 per hour to 100,000 per hour, using the midpoint formula the elasticity of supply equals A) 0.33. B) 2.94. C) 3.08. D) 0.23. E) -3.08. Answer: A Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

33) If the price of a good decreases from $9 to $6 and the quantity supplied decreases from 1,500 to 1,300, using the midpoint formula the elasticity of supply equals A) 0.20. B) 2.80. C) 0.36. D) 0.40. E) 3.20. Answer: C Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

34) If the price doubles and the quantity supplied also doubles, the price elasticity of supply for the good is A) -1. B) 1. C) -2. D) 2. E) 100 percent. Answer: B Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

35) If the price elasticity of supply for a good is 10, then supply is A) elastic. B) inelastic. C) unit elastic. D) perfectly elastic. E) perfectly inelastic. Answer: A Topic: Price elasticity of supply, elastic Skill: Level 1: Definition Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

36) If the quantity supplied and the price change by the same percentage, then supply is A) elastic. B) inelastic. C) unit elastic. D) perfectly elastic. E) perfectly inelastic. Answer: C Topic: Price elasticity of supply, unit elastic Skill: Level 1: Definition Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

37) Because the price elasticity of supply for jumbo jets is 0.35, the supply of jumbo jets is A) elastic. B) unit elastic. C) inelastic. D) perfectly elastic. E) perfectly inelastic. Answer: C Topic: Price elasticity of supply, inelastic Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

38) If a 20 percent increase in the price of a good does not change the quantity supplied, the A) supply is perfectly inelastic. B) supply is unit elastic. C) supply is perfectly elastic. D) supply is elastic. E) None of the above answers is correct. Answer: A Topic: Price elasticity of supply, perfectly inelastic Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

39) The price elasticity of supply is a measure of the extent to which the quantity supplied of a good changes when the A) cost of producing the product increases. B) quantity of the good demanded increases. C) supply increases. D) price changes. E) number of firms supplying the good changes. Answer: D Topic: Price elasticity of supply Skill: Level 1: Definition Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

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

41) The supply of beach front property on St. Simon's Island is A) elastic. B) unit elastic. C) negative. D) inelastic. E) perfectly elastic. Answer: D Topic: Price elasticity of supply, production possibilities Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

42) Goods that can be produced at a constant or very gently rising opportunity cost have A) an elastic demand. B) an inelastic demand. C) an inelastic supply. D) an elastic supply. E) a unit elastic demand. Answer: D Topic: Price elasticity of supply, production possibilities Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

43) For a product with a rapidly increasing opportunity cost of producing additional units, A) demand is price elastic. B) supply is price elastic. C) demand is price inelastic. D) supply is price inelastic. E) the demand curve is vertical. Answer: D Topic: Price elasticity of supply, production possibilities Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

44) The greater the amount of time that passes after a price change, the A) less elastic supply becomes. B) more elastic supply becomes. C) more negative supply becomes. D) steeper the supply curve becomes. E) None of the above answers is correct. Answer: B Topic: Price elasticity of supply, time elapsed after a price change Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

45) Many manufactured goods have an ________ supply if production plans have only a short period to change and as time passes and all production adjustments are made, the supply of the good ________ from the initial response. A) inelastic; increases B) elastic; decreases C) elastic; increases D) inelastic; decreases E) inelastic; does not change Answer: A Topic: Price elasticity of supply, time elapsed after a price change Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

46) When the price of a textbook is $95, the quantity of textbooks supplied is 90 million a year and when the price rises to $105, the quantity of textbooks supplied is 110 million a year. The supply of textbooks is A) elastic. B) perfectly elastic. C) inelastic. D) perfectly inelastic. E) unit elastic. Answer: A Topic: Price elasticity of supply, elastic Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

47) Supply is unit elastic when the A) supply curve is upward sloping. B) price elasticity of supply is positive. C) percentage change in the quantity supplied equals the percentage change in price. D) supply curve is horizontal. E) supply curve is vertical. Answer: C Topic: Price elasticity of supply, unit elastic Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

48) When supply is perfectly inelastic, the supply curve is A) upward sloping but not a straight line. B) vertical. C) downward sloping. D) horizontal. E) a straight line with a 45 degree slope that goes through the origin. Answer: B Topic: Price elasticity of supply, perfectly inelastic Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

49) The price elasticity of supply equals the percentage change in the A) quantity demanded divided by the percentage change in the price of a substitute or complement. B) quantity supplied divided by the percentage change in price. C) quantity demanded divided by the percentage change in price. D) supply divided by the percentage change in the demand. E) quantity supplied divided by the percentage change in the quantity demanded. Answer: B Topic: Price elasticity of supply, formula Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

50) If a firm supplies 200 units at a price of $50 and 100 units at a price of $40, using the midpoint method, what is the price elasticity of supply? A) 0.33 B) 1.00 C) 3.00 D) 5.00 E) 8.50 Answer: C Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

51) If the quantity supplied increases by 8 percent when the price rises by 2 percent, the price elasticity of supply is A) 10.0. B) 6.0. C) 0.25. D) 16.0. E) 4.0. Answer: E Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

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

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

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

5.3 Cross Elasticity and Income Elasticity 1) The extent to which the demand for a good changes when the price of a substitute or complement changes, other things remaining the same, is measured as the A) income elasticity of demand. B) cross elasticity of demand. C) price elasticity of demand. D) price elasticity of supply. E) cross income elasticity of demand. Answer: B Topic: Cross elasticity of demand Skill: Level 1: Definition Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

2) The cross elasticity of demand is a measure of how A) responsive consumers are to changes in the price of a product. B) responsive suppliers are to changes in the price of a product. C) demand for a product changes when the price of a substitute or complement changes. D) total revenue changes when the price of a product changes. E) demand for a product changes when income changes. Answer: C Topic: Cross elasticity of demand Skill: Level 1: Definition Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

3) If we are trying to determine if two different products are substitutes, complements, or not related at all, we should find the value of the A) price elasticity of demand for both goods. B) price elasticity of supply for both goods. C) income elasticity of demand for both goods. D) cross elasticity of demand. E) price elasticity of demand and the price elasticity of supply for both goods. Answer: D Topic: Cross elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

4) If Microsoft wanted to prove to the Justice Department that its Windows software has many substitutes that personal computer owners can use, Microsoft hopes to find A) that the demand for Windows' is inelastic. B) that the demand for Windows is elastic. C) a large positive value for the cross elasticity of Windows and other software. D) a negative income elasticity for Windows. E) a positive income elasticity for Windows. Answer: C Topic: Cross elasticity of demand, substitutes Skill: Level 4: Applying models Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

5) What is the formula for the cross elasticity of demand? The percentage change in the A) quantity demanded divided by the percentage change in the price of a substitute or complement. B) quantity supplied divided by the percentage change in price. C) quantity demanded divided by the percentage change in price. D) quantity demanded divided by the percentage change in income. E) equilibrium quantity demanded divided by the equilibrium quantity supplied. Answer: A Topic: Cross elasticity of demand, formula Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

6) If a 1 percent increase in the price of X increases the quantity demanded of Y by 2 percent, then X and Y are A) complements and the cross elasticity of demand equals 2. B) substitutes and the cross elasticity of demand equals 1/2. C) substitutes and the cross elasticity of demand equals 2. D) complements and the income elasticity of demand equals 2. E) normal goods and the income elasticity of demand of each equals 2. Answer: C Topic: Cross elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

7) The price of coffee rose 40 percent and the quantity of coffee demanded fell by 20 percent. The quantity of doughnuts demanded also fell by 20 percent. From this information, we can conclude that A) the demand for coffee is elastic. B) the demand for coffee is unit elastic. C) coffee is an inferior good. D) the cross elasticity demand between coffee and doughnuts is -0.5. E) the income elasticity of demand for coffee is 2. Answer: D Topic: Cross elasticity of demand, formula Skill: Level 4: Applying models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

8) The cross elasticity of demand for Good A and Good B is -0.7. This means that A) if the price of Good A increases by 10 percent, the quantity demanded of Good B decreases by 7 percent. B) if the price of Good A increases by 10 percent, the quantity demand of Good B increases by 7 percent. C) the goods are substitutes. D) the goods are complements. E) both A and D are correct. Answer: E Topic: Cross elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: New AACSB: Analytical thinking

9) The income elasticity of demand for electricity is 1.90. Suppose the economy improves and incomes are expected to increase by 10 percent. This means that A) power companies can expect to sell 19 percent more electricity. B) electricity demand is income inelastic. C) consumers will try to find substitutes for electric power. D) consumers will spend 19 percent of their income on electric power. E) electricity is an inferior good. Answer: A Topic: Income elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: New AACSB: Reflective thinking

10) If the price of a movie rises 3 percent and, as a result, the quantity demanded of video rentals increases 6 percent, then the cross elasticity of demand is A) 2. B) 1/2. C) -1/2. D) -2. E) 9. Answer: A Topic: Cross elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

11) Based on data in the table above, use the midpoint method to determine the cross elasticity of demand for ice cream and cake. A) The cross elasticity is -0.75. B) The cross elasticity is -1.75. C) The cross elasticity is -0.83. D) The cross elasticity is -4.0. E) The cross elasticity is -1.33. Answer: A Topic: Cross elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

12) Based on the data in the table above, ice cream and cake are ________ goods. A) inferior B) normal C) substitute D) complementary E) Both answers B and D are correct. Answer: D Topic: Cross elasticity of demand, complements Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

13) Goods are ________ when the income elasticity of demand is positive. A) complements B) elastic C) inferior D) substitutes E) normal Answer: D Topic: Cross elasticity of demand, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

14) If the price of a Brita water filtration system increases and the quantity demanded of bottled water increases, then these two goods are A) substitutes. B) complements. C) normal goods. D) inferior goods. E) inelastic goods. Answer: A Topic: Cross elasticity of demand, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

15) The cross elasticity of demand for butter and margarine is likely to be A) positive because they are substitutes. B) positive because they are complements. C) negative because they are substitutes. D) negative because they are complements. E) positive because they are normal goods. Answer: A Topic: Cross elasticity of demand, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

16) Which of the following is correct? A) The cross elasticity of demand for substitute goods is positive. B) The cross elasticity of demand for substitute goods is negative. C) The cross elasticity of demand equals the percentage change in demand divided by the percentage change in income. D) The income elasticity of demand for a normal good is negative. E) The cross elasticity of demand for normal goods is positive. Answer: A Topic: Cross elasticity of demand, substitutes Skill: Level 1: Definition Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

17) If the cross elasticity of demand between good A and good B is negative, then a decrease in the price of good A results in A) an increase in the demand for good B. B) a decrease in the demand for good B. C) a movement downward along the demand curve for good B. D) an increase in the supply of good B. E) a decrease in the supply of good B. Answer: A Topic: Cross elasticity of demand, substitutes Skill: Level 3: Using models Section: Checkpoint 5.3 Status: New AACSB: Analytical thinking

18) Patrick lives near two gas stations, Exxon and Shell. If Exxon decreases the price of gas, we predict that the quantity of gasoline demanded at Shell will A) decrease because Exxon and Shell gas are complements. B) decrease because Exxon and Shell gas are substitutes. C) increase because Exxon and Shell gas are substitutes. D) increase because Exxon and Shell gas are complements. E) not change Exxon and Shell are different brands of gasoline. Answer: B Topic: Cross elasticity of demand, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

19) The cross elasticity of demand for strawberry jelly and grape jelly is likely to be A) positive because they are substitutes. B) positive because they are complements. C) negative because they are substitutes. D) negative because they are complements. E) negative because they are inferior goods. Answer: A Topic: Cross elasticity of demand, substitutes Skill: Level 5: Critical thinking Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

20) If a lower price for a Pepsi decreases the demand for a Coke, the cross elasticity value for Pepsi and Coke is A) definitely negative. B) definitely equal to zero. C) definitely positive. D) definitely greater than one. E) possibly negative, positive, or zero, but there is not enough information to decide. Answer: C Topic: Cross elasticity of demand, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

21) If the cross elasticity of demand between Coke and Pepsi is 2.02, then Coke and Pepsi are A) complements. B) substitutes. C) normal goods. D) inferior goods. E) Both answers B and C are correct. Answer: B Topic: Cross elasticity of demand, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

22) If Pepsi goes on sale and decreases its price by 10 percent, and as a result, the quantity demanded of Coca Cola decreases by 5 percent, then Pepsi and Coke are ________ goods. A) inferior B) normal C) substitute D) complementary E) unrelated Answer: C Topic: Cross elasticity of demand, substitutes Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

23) Tacos and pizza are substitutes. If a 2 percent change in the price of a taco leads to a 4 percent change in the demand for pizza, the cross elasticity of demand equals A) -1/2. B) 1/2. C) 2. D) -2. E) 4. Answer: C Topic: Cross elasticity of demand, substitutes Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

24) Pete feeds his dog 100 percent more Pup-Peronis when Zuke's treats increase in price by 50 percent. For Pete, Pup-Peronis and Zuke's are ________ and the cross-price elasticity of demand is ________. A) complements; -1/2 B) substitutes; 2 C) substitutes; -2 D) complements; 2 E) substitutes; 1/2 Answer: B Topic: Cross elasticity of demand, substitutes Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

25) The cross elasticity between computers and software is A) negative because they are substitutes. B) positive because they are substitutes. C) negative because they are complements. D) positive because they are complements. E) positive because they are normal goods. Answer: C Topic: Cross elasticity of demand, complements Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

26) If you know the cross elasticity between two goods is negative, then you know the goods are A) substitutes. B) normal goods. C) complements. D) inferior goods. E) inelastic goods. Answer: C Topic: Cross elasticity of demand, complements Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

27) If the price of a one good increases and the quantity demanded of a different good decreases, then these two goods are A) substitutes. B) normal goods. C) inferior goods. D) inelastic goods. E) complements. Answer: E Topic: Cross elasticity of demand, complements Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

28) If the cross elasticity of demand is negative, that means the goods A) have elastic demands. B) have inelastic demands. C) are complements. D) are substitutes. E) are inferior. Answer: C Topic: Cross elasticity of demand, complements Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

29) When two goods are related such that an increase in the price of one good decreases the quantity demanded of the other good, these goods are definitely A) normal goods. B) luxury goods. C) complements. D) substitutes. E) inferior goods. Answer: C Topic: Cross elasticity of demand, complements Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

30) If a lower price for good X increases the demand for good Y, the cross elasticity value for the two goods is A) negative. B) equal to zero. C) positive and less than one. D) positive and greater than one. E) possibly negative, positive, or zero, but there is not enough information to decide. Answer: A Topic: Cross elasticity of demand, complements Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

31) If two goods are ________, then an increase in the price of one leads to ________ in the quantity demanded of the other. A) complements; a decrease B) complements; no change C) substitutes; a decrease D) substitutes; no change E) normal; an increase Answer: A Topic: Cross elasticity of demand, complements Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

32) The cross elasticity of demand for blank DVDs and DVD burners is likely to be A) positive because they are substitutes. B) positive because they are complements. C) negative because they are substitutes. D) negative because they are complements. E) negative because with the advent of digital cameras, film and film cameras are inferior goods. Answer: D Topic: Cross elasticity of demand, complements Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

33) If the cross elasticity of demand between car insurance and new cars is -0.41, then car insurance and new cars are A) complements. B) substitutes. C) normal goods. D) inferior goods. E) unrelated goods. Answer: A Topic: Cross elasticity of demand, complements Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

34) If the cross elasticity of demand for DVD players and DVDs equals -2, then the products are A) unrelated. B) complements. C) inferior goods. D) substitutes. E) normal goods. Answer: B Topic: Cross elasticity of demand, complements Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

35) Tennis balls and tennis rackets are complements. If a 3 percent change in the price of a tennis racket leads to a 9 change in the quantity of tennis balls demanded, the cross elasticity of demand equals A) 3. B) -3. C) 1/3. D) -1/3. E) 9. Answer: B Topic: Cross elasticity of demand, complements Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

36) The income elasticity of demand is a measure of A) how demand for a product changes when the price of a substitute or complement product changes. B) how responsive consumers are to changes in the price of a product. C) how responsive suppliers are to changes in the price of a product. D) the extent to which the demand for a good changes when income changes. E) the extent to which the supply of a good changes when the demand changes as a result of a change in income. Answer: D Topic: Income elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

37) If the income elasticity of demand for a good is 2, then when income rises 10 percent, the quantity demanded A) increases 2 percent. B) increases 20 percent. C) decreases 2 percent. D) decreases 20 percent. E) increases 12 percent. Answer: B Topic: Income elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

38) The income elasticity of demand is A) positive for a normal good. B) zero for an inferior good. C) less than one for an income elastic normal good. D) Only answers A and B are correct. E) Answers A, B, and C are correct. Answer: A Topic: Income elasticity of demand, normal good Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

39) The income elasticity of demand is ________ if the good is ________ good. A) positive; a normal B) positive; an inferior C) negative; a normal D) less than one; an inferior E) positive; a substitute Answer: A Topic: Income elasticity of demand, normal good Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

40) Assume that it is predicted that for the years after you graduate from college, the entire economy will experience a long period of prosperity when incomes grow rapidly. What type of industry would be the best for you to find employment if this prediction is correct? An industry that produces a product that is A) income elastic. B) income inelastic. C) inferior. D) a substitute good. E) none of these industries Answer: A Topic: Income elasticity, normal good Skill: Level 4: Applying models Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

41) Which of the following statements is correct? A) The income elasticity of demand for inferior goods is positive. B) The cross elasticity of demand for substitutes is negative. C) The income elasticity of demand for normal goods is positive. D) The cross elasticity of demand for complements is positive. E) The income elasticity of demand for inferior goods is zero. Answer: C Topic: Income elasticity of demand, normal good Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

42) The income elasticity of demand for skiing trips to Vermont is greater than one. Thus a trip to Vermont for skiing is ________ good. A) a normal B) an inferior C) a unit elastic D) a price elastic E) a price inelastic Answer: A Topic: Income elasticity of demand, normal good Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

43) People eat at restaurants less often when their incomes fall because of a recession. Eating at restaurants must be A) an inferior good. B) a normal good. C) a complement to other goods. D) a substitute for other goods. E) an inelastic good. Answer: B Topic: Income elasticity of demand, normal good Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

44) People take fewer trips by airplane when their incomes fall because of a recession. Trips by airplane must be A) a normal good. B) an inferior good. C) a substitute for other goods. D) a complement to other goods. E) an inelastic good. Answer: A Topic: Income elasticity of demand, normal good Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

45) Sergio's rentals of Blu-ray movies increase by 10 percent when her income increases by 30 percent. Based on this information, we know that for Sergio Blu-ray movies A) are complements. B) are substitutes. C) are inferior goods. D) have an inelastic demand. E) are normal goods. Answer: E Topic: Income elasticity of demand, normal good Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

46) Alan purchases 10 percent fewer bags of chips when his income decreases by 5 percent. Based on only this information, we know that for Alan A) chips are a normal good. B) chips are a complement to salsa. C) chips are a substitute for pretzels. D) chips are an inferior good. E) the price of chips fell. Answer: A Topic: Income elasticity of demand, normal good Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

47) For a good such as food, the income elasticity is likely A) negative. B) equal to zero. C) positive and less than one. D) positive and greater than one. E) undefined because people always buy the same amount of food. Answer: C Topic: Income elasticity of demand Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

48) For a good such as a large screen HD television set, the income elasticity would likely be A) negative. B) equal to zero. C) positive and less than one. D) positive and greater than one. E) undefined because large screen, HD TVs are bought by many consumers. Answer: D Topic: Income elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

49) Assume that it is predicted that for the years after you graduate from college, the entire economy will experience a long period of recession during which people's incomes decrease. What type of industry would be the best for you to find employment if this prediction is correct? An industry that produces a product that A) is income elastic. B) is income inelastic. C) is inferior. D) is a complement. E) none of these industries Answer: C Topic: Income elasticity of demand, inferior good Skill: Level 4: Applying models Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

50) What is an inferior good? A) a product of low quality that we do not want to purchase B) a product for which demand increases when income increases, and demand decreases when income decreases C) a product for which demand increases when income decreases, and demand decreases when income increases D) a product that is complementary E) a product that is a substitute for another, better good Answer: C Topic: Income elasticity of demand, inferior good Skill: Level 1: Definition Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

51) A product that has a negative income elasticity of demand is ________ good. A) a complementary B) a substitute C) a normal D) an inferior E) a negative Answer: D Topic: Income elasticity, inferior good Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

52) Goods are ________ when the income elasticity of demand is less than zero. A) substitutes B) complements C) inferior D) elastic E) normal Answer: C Topic: Income elasticity of demand, inferior good Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

53) If a product is an inferior good, then its income elasticity of demand is A) zero. B) positive. C) negative. D) indeterminate. E) undefined. Answer: C Topic: Income elasticity of demand, inferior good Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

54) If a good is inferior, then it has an income elasticity of demand that is A) equal to zero. B) greater than zero. C) less than zero. D) greater than one. E) undefined. Answer: C Topic: Income elasticity of demand, inferior good Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

55) If a 5 percent increase in income brings about a 10 percent decrease in the demand for a good, then the A) good is a normal good. B) good is an inferior good. C) income elasticity of demand is 0.5. D) income elasticity of demand is 2.0. E) income elasticity of demand is 5.0. Answer: B Topic: Income elasticity of demand, inferior good Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

56) If a 10 percent increase in income leads to a 5 percent decrease in the demand for a good, the income elasticity of demand equals ________ and the good is ________ good. A) 1/2; a normal B) -1/2; an inferior C) 2; a normal D) -2; a normal E) -5; an inferior Answer: B Topic: Income elasticity of demand, inferior good Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

57) Joe receives a 20 percent increase in his income from his part time job and as a consequence decreases his consumption of Ramen noodles by 10 percent. Hence to Joe, Ramen noodles are A) a normal good with a price elasticity of demand of 0.5. B) a substitute good with a cross elasticity of 0.5. C) a good with a price elasticity of supply of -0.5. D) an inferior good with an income elasticity of -0.5. E) an inferior good with an income elasticity of -2.0. Answer: D Topic: Income elasticity, inferior good Skill: Level 4: Applying models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

58) If a 5 percent decrease in income leads to a 15 percent decrease in the demand for a good, the income elasticity of demand equals A) -1/3 and the good is an inferior good. B) 1/3 and demand for the good is income elastic. C) 3 and the good is a normal good. D) -3 and the demand for the good is income inelastic. E) 3 and the good is an inferior good. Answer: C Topic: Income elasticity of demand, inferior good Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

59) When income increases from $20,000 to $30,000 the quantity of inter-city bus trips taken per year decreases from 10 to 8. Hence A) inter-city bus trips are a normal good. B) the income elasticity of demand for inter-city bus trips is -1.8. C) the income elasticity of demand for inter-city bus trips is -0.56. D) Both answers A and B are correct. E) Both answers A and C are correct. Answer: C Topic: Income elasticity of demand, inferior good Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

60) The income elasticity of demand for foreign travel A) is likely to be smaller than the income elasticity of demand for food. B) is likely to be larger than the income elasticity of demand for food. C) cannot be compared to the income elasticity of demand for food. D) is likely to be inelastic. E) is likely to be negative. Answer: B Topic: Income elasticity of demand Skill: Level 4: Applying models Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

61) The lower the level of income in a country, the A) less income elastic is the demand for food. B) more income elastic is the demand for food. C) more negative the income elasticity of the demand for food. D) Both answers A and C are correct. E) None of the above is correct. Answer: B Topic: Eye on the global economy, income elasticities of demand Skill: Level 4: Applying models Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

62) The measure used to determine whether two products are complements or substitutes is called the A) price elasticity of supply. B) cross elasticity of demand. C) price elasticity of demand. D) income elasticity. E) substitute elasticity of demand. Answer: B Topic: Cross elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

63) If beef and pork are substitutes for consumers, the cross elasticity of demand between the two products must be A) negative. B) positive. C) indeterminate. D) elastic. E) greater than 1. Answer: B Topic: Cross elasticity of demand, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

64) When the price of a pizza is $10, the quantity of soda demanded is 300 drinks. When the price of a pizza is $15, the quantity soda demanded is 100 drinks. The cross elasticity of demand is equal to A) -0.25. B) -0.40. C) -2.50. D) -25.00. E) 4.00. Answer: C Topic: Cross elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

65) When the price of going to a movie rises 5 percent, the quantity of DVDs demanded increases 10 percent. The cross elasticity of demand equals A) 10.0. B) 0.50. C) -0.50. D) -2.0. E) 2.0. Answer: E Topic: Cross elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

66) If two goods have a cross elasticity of demand of -2, then when the price of one good increases, the demand curve of the other good A) shifts rightward. B) shifts leftward. C) remains unchanged and the supply curve also remains unchanged. D) might shift rightward, leftward, or remain unchanged. E) remains unchanged but the supply curve shifts leftward. Answer: B Topic: Cross elasticity of demand, complements Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

67) The income elasticity of demand is the percentage change in the ________ divided by the percentage change in ________. A) quantity demanded; the price of a substitute or complement B) quantity supplied; price C) quantity demanded; price D) quantity demanded; income E) quantity demanded when income changes; the quantity supplied Answer: D Topic: Income elasticity of demand, formula Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

68) When income increases from $20,000 to $30,000 the number of home delivered pizzas per year increases from 22 to 40. The income elasticity of demand for home delivered pizza equals A) 1.45. B) 0.69. C) 0.58. D) 0.40. E) 2.86. Answer: A Topic: Income elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

69) When income increases by 6 percent, the demand for potatoes decreases by 2 percent. The income elasticity of demand for potatoes equals A) -2.00. B) 3.00. C) -3.00. D) 0.33. E) -0.33. Answer: E Topic: Income elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

70) When income increases from $30,000 a year to $40,000 a year, the quantity demanded of weekend vacations by Sara increases from 2 a year to 5 a year. For Sara, the income elasticity of demand of weekend vacations is ________ and weekend vacations are ________ good. A) 3; a normal B) 4.5 a normal C) 1/3; an inferior D) -4.5; an inferior E) 1/3; a normal Answer: A Topic: Income elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

71) If a product is a normal good, then its income elasticity of demand is A) zero. B) positive. C) negative. D) indeterminate. E) greater than 1. Answer: B Topic: Income elasticity of demand, normal good Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

72) The income elasticity of demand for used cars is less than zero. So, used cars are A) an inferior good. B) a normal good. C) an inelastic good. D) a perfectly inelastic good. E) a substitute good. Answer: A Topic: Income elasticity of demand, inferior good Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

73) An inferior good has a ________ elasticity of demand. A) positive income B) negative income C) negative cross D) positive cross E) negative price Answer: B Topic: Income elasticity of demand, inferior good Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

74) Which of the following is most likely to have an income elasticity of demand that exceeds 1? A) tobacco B) alcoholic beverages C) airline travel D) food E) telephone Answer: C Topic: Income elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: New AACSB: Reflective thinking

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

5.4 Chapter Figures

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

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

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

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

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

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

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

8) In the figure above, when the price falls from $5 to $4, the price elasticity of demand is A) 2. B) 3. C) 0.75. D) 1.5. E) 0.33. Answer: B Topic: Midpoint formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

9) In the figure above, when the price rises from $3 to $4, the price elasticity of demand is A) 1.4. B) 2. C) 0.71. D) 0.4. E) 1. Answer: A Topic: Midpoint formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

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

The figure above shows the demand curve for Starbucks latte. 11) In the figure above, the demand is elastic in the range of prices between A) $3.50 and $4.50 per cup. B) $2.50 and $3.50 per cup. C) $1.00 and $2.00 per cup. D) $2.00 and $4.00 per cup. E) $1.75 and $2.75 per cup. Answer: A Topic: Midpoint formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

12) In the figure above, the demand is unit elastic A) at the point where the price is $3.00 per cup. B) at the point where the price is $2.00 per cup. C) at the point where the price is $4.00 per cup. D) at the point where the price is $2.50 per cup. E) at all points along the demand curve. Answer: A Topic: Midpoint formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

13) In the figure above, the demand is inelastic in the range of prices between A) $3.50 and $4.50 per cup. B) $2.50 and $3.50 per cup. C) $1.00 and $2.00 per cup. D) $2.25 and $4.50 per cup. E) $2.75 and $3.75 per cup. Answer: C Topic: Midpoint formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

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

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

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

17) In the figure above, at the point where the price is $50 per bunch, the price elasticity of supply is A) 2.14. B) 0.47. C) 1. D) 3. E) 0.33. Answer: A Topic: Price elasticity of supply Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

5.5 Integrative Questions 1) Suppose an increase in supply lowers the price from $10 to $8 and increases the quantity demanded from 100 units to 130 units. Using the midpoint method, the elasticity of demand equals A) 1.17. B) 0.85. C) 0.26. D) 1.56. E) None of the above answers is correct. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

2) Suppose a decrease in supply raises the price from $4.00 to $5.50 and decreases the quantity demanded from 2,000 to 1,500. Using the midpoint method, the elasticity of demand equals A) 2.10. B) 1.11. C) 0.90. D) 0.72. E) None of the above answers is correct. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

3) The total revenue test says that if a price decrease leads to A) an increase in total revenue, demand is income elastic. B) a decrease in total revenue, demand is income inelastic. C) a decrease in total revenue, demand is price inelastic. D) a decrease in total revenue, supply is price inelastic. E) a decrease in total revenue, supply is price elastic. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

4) The total revenue test says that if a price decrease leads to A) an increase in total revenue, supply is elastic. B) a decrease in total revenue, supply is unit elastic. C) a decrease in total revenue, supply is inelastic. D) an increase in total revenue, supply is inelastic. E) None of the above answers is correct. Answer: E Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

5) If demand is ________, a price cut ________ the total revenue. A) elastic; increases B) unit elastic; decreases C) inelastic; increases D) inelastic; does not change E) normal; decreases Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

6) If you spend a large portion of your income on a good, A) supply of that good would be price elastic. B) demand for that good is more elastic than if you spent a smaller portion of your income on the good. C) supply of that good is price inelastic. D) demand for that good is less elastic than if you spent a smaller portion of your income on the good. E) the good must be able to be produced at a constant (or gently rising) opportunity cost. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

7) A ________ curve means that ________. A) horizontal demand; a change in price does not change total revenue B) horizontal demand; the elasticity of demand is less than 1 C) horizontal supply; the elasticity of supply is infinite D) horizontal supply; the elasticity of demand is infinite E) vertical demand; a change in price does not change total revenue Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

8) The cross elasticity of demand A) means that an increase in the demand for one good leads to a decrease in demand for another good. B) measures how a change in the price of one good impacts the demand for another good. C) measures how a change in supply impacts the demand for the good. D) means that an increase in the price of one good leads to an increase in the price of another good. E) measures how a change in income impacts the demand for the good. Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

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

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

11) Which of the following is true? i. The easier it is to find substitutes for a good, the more price elastic the demand for the good is. ii. The demand for a good is more price elastic the smaller the proportion of income spent on it. iii. If demand is price elastic, lowering the price leads to a decrease in total revenue. A) i only B) ii only C) iii only D) i and ii E) i and iii Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

5.6 Essay: The Price Elasticity of Demand 1) "The price elasticity of demand is a measure of how sensitive demanders are to changes in the price of a product." Is this statement true or false? Answer: The assertion is true. All elasticities measure the sensitivity, or responsiveness, of some variable to a change in an influence. The price elasticity of demand measures how strongly demanders respond to a change in the price of the good or service. Topic: Price elasticity of demand Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

2) What is the price elasticity of demand? In terms of percentage changes, what is its formula? Answer: The price elasticity of demand is a measure of the responsiveness of quantity demanded to a change in price. The formula for the price elasticity of demand is the absolute value of the percentage change in quantity demanded divided by the percentage change in price. Topic: Price elasticity of demand Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

3) When does a decrease in supply raise the price more: When demand is elastic or when demand is inelastic? When OPEC decreases the supply of oil, the price of gasoline skyrockets. Hence is the demand for gasoline elastic or inelastic? Answer: A decrease in supply raises the price more when demand is inelastic. The skyrocketing price of gasoline indicates that the demand for gasoline is inelastic. Topic: Price elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

4) What does a horizontal demand curve indicate about the price elasticity of demand? Answer: If the demand curve for a good is horizontal, the demand for the good is perfectly elastic. Hence the price elasticity of demand is infinite. Topic: Perfectly elastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

5) What are the three cases for the price elasticity of demand? Briefly define each. Answer: Demand can be elastic, inelastic, or unit elastic. Elastic demand occurs when the percentage change in quantity demanded exceeds the percentage change in price. Inelastic demand occurs when the percentage change in quantity demanded is less than the percentage change in price. Unit elasticity occurs when the percentage change in price equals the percentage change in demand. Topic: Elastic, inelastic, and unit elastic demand Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Written and oral communication

6) In a study session, your friend says, "Demand is elastic if the percentage change in the price exceeds the percentage change in quantity demanded." Is your friend correct? Answer: No, your friend is incorrect. Demand is elastic if the percentage change in the price is less than the percentage change in the quantity demanded. Topic: Elastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

7) If the percentage change in quantity demanded is greater than the percentage change in price, can you determine if the demand is elastic, unit elastic, or inelastic? Explain your answer. Answer: The demand is elastic. The formula for the price elasticity of demand is the percentage change in the quantity demanded divided by the percentage change in the price. And, if the elasticity of demand exceeds one, then the demand is elastic. In this case, the percentage change in the quantity demanded is larger than the percentage change in the price, so the elasticity of demand will be greater than one. Hence the demand is elastic. Topic: Elastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Written and oral communication

8) Does the fact that the price elasticity of demand for a good is inelastic violate the law of demand? Answer: No, if the demand is inelastic, when the price falls, the quantity demanded increases, but by a smaller percentage than the percentage fall in price. Thus the negative relationship between the price and the quantity demanded remains, and the demand curve still slopes downward, which is the law of demand. Topic: Inelastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Written and oral communication

9) What factors determine the size of the price elasticity of demand? Answer: The factors that determine the size of the elasticity of demand can be classified into the availability of substitutes for the good and the proportion of income spent on the good. The more substitutes for a good, the more elastic its demand. Luxuries have more substitutes than necessities, and so the elasticity of demand for luxuries exceeds that for necessities; narrowly defined goods have more substitutes than broadly defined goods, and so the elasticity of demand for narrowly defined goods exceeds that for broadly defined goods; and, the more time that has elapsed since a price change, the more substitutes consumers can find, and so the elasticity of demand is larger the more time passes. Income also plays a role because the larger the proportion of consumers' incomes spent on a good, the larger is its elasticity of demand. Topic: Factors that influence the price elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Written and oral communication

10) Explain why the number of substitutes influences the price elasticity of demand. Answer: The price elasticity of demand is a measure of how responsive the quantity demanded is to a change in price. If a good has many substitutes, it is easy to switch away from it when its price rises. Hence a rise in price will substantially decrease the quantity demanded. Similarly, when its price falls, consumers can switch into it and away from many other (substitute) products. Hence a fall in price will substantially increase the quantity demanded. Because changes in price have major effects on the quantity demanded, the demand is elastic. Topic: Elasticity, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Written and oral communication

11) "The fewer the number of substitutes for a product, the more elastic the demand for that product." Is the previous statement true or false? Answer: The statement is false. The greater the number of substitutes, the more elastic the demand for that product. Conversely, the fewer the number of substitutes, the less elastic (the more inelastic) the demand for that product. Topic: Elasticity, substitutes Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

12) If a good has only a few, poor substitutes, is its demand elastic or inelastic? Answer: The demand is inelastic. The fewer substitutes for a good, the more inelastic (less elastic) its demand. Topic: Elasticity, substitutes Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

13) Which is larger: The price elasticity of demand for food or the price elasticity of demand for oranges? Why? Answer: The price elasticity of demand for oranges is larger than the price elasticity of demand for food. The elasticity of demand for oranges is larger because there are many more substitutes for oranges (apples, grapefruit, lemons, and so forth) than there are substitutes for food. Topic: Elasticity, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

14) Water is considered a necessity. So, is the demand for water elastic or inelastic? Answer: The demand for necessities is inelastic, so the demand for water is inelastic. Topic: Elasticity, necessities Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

15) Studies have shown that the price elasticity of demand for necessities, such as food, are higher in developing countries and lower in developed countries. What is the reason for this difference in elasticity? Answer: One of the determinants of elasticity is the proportion of income spent on a good or service. The higher the proportion of income spent on a good, the larger the price elasticity of demand for that good. People in developing countries have low incomes and therefore spend a large part of it on food. For example, in Tanzania 62 percent of income is spent on food. On the other hand, in United States only 12 percent of income is spent on food. The price elasticity of demand for food therefore will be larger in developing countries as compared to developed countries. Topic: Elasticity, fraction of income Skill: Level 4: Applying models Section: Checkpoint 5.1 Status: Old AACSB: Written and oral communication

16) What happens to the price elasticity of demand moving down along a downward-sloping, linear demand curve? Answer: Moving down along a downward-sloping, linear demand curve, the elasticity of demand falls in value. Demand changes from elastic to inelastic at the midpoint of the demand curve and then changes to inelastic as the quantity demanded increases moving along demand curve. Topic: Price elasticity of demand, linear demand curve Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Written and oral communication

17) What effect does a price hike have on the total revenue of the producers? Answer: The effect of a price hike on total revenue depends on the elasticity of demand. If the demand is elastic, then total revenue will decrease because the decrease in the quantity demanded will outweigh the effect of the higher price. If the demand is inelastic, then total revenue will increase. In this case, the decrease in the quantity demanded is proportionally less than the increase in price and so the higher price leads to increased total revenue. Finally, if the demand is unit elastic, then the higher price does not change the total revenue. The percentage decrease in the quantity demanded just equals the percentage increase in the price and so the two effects just offset each other. The total revenue does not change. Topic: Elasticity and total revenue Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Written and oral communication

18) The demand for oil is inelastic. So, does an increase in the price of oil mean an increase in total revenue or a decrease in total revenue for oil producers? Answer: Because the demand is inelastic, an increase in price increases the total revenue of the oil producers. Topic: Elasticity and total revenue Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

19) Anna owns the Sweet Alps Chocolate store. She charges $10 per pound for her hand made chocolate. You, the economist, have calculated the elasticity of demand for chocolate in her town to be 2.5. If she wants to increase her total revenue, what advice will you give her? Answer: You should tell her to lower her price. Because demand is elastic, lowering the price will increase the total revenue. Topic: Elasticity and total revenue Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

20) You are the brand manager of Crest toothpaste and you observe that when you increase the price of Crest, your total revenue increases. How is that possible? Answer: The demand for Crest toothpaste must be inelastic, so that the percentage increase in price is greater than the percentage decrease in quantity demanded, thereby increasing the total revenue. Topic: Elasticity and total revenue Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

21) Explain the total revenue test. Answer: The total revenue test estimates whether demand for the good is elastic, unit elastic or inelastic based on what happens to total revenue when the price of a good changes. If price and total revenue move in opposite directions, demand is elastic. If price and total revenue move in the same direction, demand is inelastic. If a price change does not change total revenue, demand is unit elastic. Topic: Total revenue test Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

22) If a decrease in price increases total revenue, what can you determine about the elasticity of demand for the good? Answer: If a decrease in price increases total revenue, the demand for the good is elastic, that is, the elasticity of demand exceeds 1.00. Topic: Total revenue test Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

23) "If the price falls and, as a result, the total revenue decreases, demand is elastic." Is the previous assertion correct? Answer: No, the assertion is incorrect. If the demand is elastic, a fall in price increases the quantity demanded enough so that total revenue increases. Topic: Total revenue test Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

24) Recently the governor of Vermont proposed that cigarette taxes in Vermont should be increased substantially, from 44 cents a pack to 66 cents a pack. He estimates that Vermont can raise $20 million in revenue from this tax hike. He also pointed out that the neighboring state of New Hampshire was considering an increase in cigarette taxes. a. How can it be that an increase in cigarette taxes will increase tax revenue, because, after all, a higher tax will increase cigarette prices and thereby decrease the quantity demanded? b. If New Hampshire chooses not to increase cigarette taxes, is it likely that Vermont can still raise $20 million in tax revenue? Why or why not? Explain Answer: a. The governor knows that cigarettes have an inelastic demand. If the price of cigarettes increases because of a tax, smokers will not decrease their consumption of cigarettes substantially. The percentage change in the quantity will be less than the percentage change in the price and the total tax revenue will increase. b. If New Hampshire does not increase its taxes, it is less likely that Vermont will be able to raise the $20 million in tax revenue. The reason is because for many people cigarettes from New Hampshire are a good substitute for cigarettes from Vermont. Thus many people from Vermont will buy their cigarettes in New Hampshire, thereby decreasing the total increase in tax revenue in Vermont. Topic: Addiction and elasticity Skill: Level 4: Applying models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

25) Suppose the price of flour increases from $0.80 to $1.00 a pound and the quantity demanded decreases from 100 pounds to 95 pounds. 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: Elasticity formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

26) If the price of suntan lotion increases from $6 to $8 per bottle and quantity demanded decreases from 900,000 bottles to 845,000 bottles, 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 . Topic: Elasticity formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

27) If the price of a magazine increases from $5 to $7 and the quantity demanded of the magazines decreases from 10 million per month to 8 million per month, 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: Elasticity formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

28) Suppose the price elasticity of demand for bouquets of flowers is 4.0. You are charging $8 per bouquet. If you want to increase the quantity of bouquets you sell by 20 percent, what price should you charge? Answer: The price elasticity of demand = (percentage change in the quantity demanded) ÷ (percentage change in price). Using the numbers in the problem gives 4.0 = (20 percent) ÷ (percentage change in price), where 20 percent is the desired increase in the quantity of bouquets demanded. Therefore, rearranging the formula shows that (percentage change in price) = (20 percent) ÷ 4.0 = 5 percent. In order to increase the quantity demanded, the price needs to be decreased, so the price needs to be decreased by 5 percent. Next, 5 percent of $8 is ($8) × (5 percent) = $0.40. Thus the price needs to be decreased to $7.60 per bouquet. Topic: Elasticity formula Skill: Level 4: Applying models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

29) The table above gives the demand schedule for a good. 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: Elasticity formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

30) The figure above shows the demand curve for pizza. Using the midpoint method 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: Elasticity formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

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

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

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

34) Steve sells hotdogs from a vending cart downtown. The table above shows his daily total revenues at four different prices. 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 test Skill: Level 4: Applying models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

35) Suppose bad weather decreases the quantity of wheat by 12 percent. If the price elasticity of demand for wheat is 0.6, how would the crop failure affect the price of wheat? Would the crop decrease benefit or harm wheat farmers? Answer: When the price elasticity of demand is 0.6, a 12 percent decrease in quantity brings about a 20 percent increase in the price. Wheat farmers' total revenue increases since the demand is inelastic because, with inelastic demand and taken as a group, wheat farmers' total revenue increases. However, the benefit is distributed unequally. Those farmers whose crop was destroyed because of the bad weather are harmed whereas those farmers whose crop was spared the bad weather, benefited. Topic: Farm revenue and elasticity Skill: Level 5: Critical thinking Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

5.7 Essay: The Price Elasticity of Supply 1) What is the price elasticity of supply? List and briefly define three cases of the price elasticity of supply. Answer: The price elasticity of supply measures how responsive quantity supplied is to a change in the price of the good. Supply can be price elastic, if the percentage change in the quantity supplied exceeds the percentage change in the price, price inelastic, if the percentage change in the quantity supplied is less than the percentage change in the price, or unit elastic, if the percentage change in the quantity supplied equals the percentage change in the price. Topic: Elasticity of supply Skill: Level 1: Definition Section: Checkpoint 5.2 Status: Old AACSB: Written and oral communication

2) If the price elasticity of supply of corn is 3.12, then is the supply of corn elastic or inelastic? Answer: Because the price elasticity of supply exceeds one, the supply of corn is elastic. Topic: Elasticity of supply Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

3) List factors that increase the price elasticity of supply. Answer: Factors that increase the price elasticity of supply are: ∙ The good has a constant or very gently rising opportunity cost of production. ∙ More time has passed since the price of the good changed. ∙ The good can be stored. Topic: Factors that influence the price elasticity of supply Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Written and oral communication

4) How does elasticity of supply differ for a product that can be stored, compared to a product that cannot be stored? Answer: A product that can be stored can be withheld from the market for a time when the price falls and can be quickly supplied to the market from the inventory when the price rises. Hence the quantity supplied of the product can be quickly and markedly changed and so the supply is elastic. A product that cannot be stored, especially if it is perishable, cannot be withheld from the market when the price falls because it will spoil. In addition, when the price rises it cannot be supplied from the inventory because there is no inventory. Hence the quantity supplied of the product that cannot be stored cannot change much and is therefore less elastic. Topic: Elasticity, storage Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Written and oral communication

5) Natural gas is difficult to store. What implication does this fact have for the elasticity of supply of natural gas? Answer: Because natural gas is difficult to store, the supply of natural gas is inelastic. With few storage facilities, it is very difficult (at least in the short run) to increase the quantity supplied by much even when prices rise substantially. Topic: Elasticity, storage Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

6) Is supply more elastic or less elastic as more time passes after a price change? Explain your answer. Answer: Supply becomes elastic as more time passes after a price change. Consider the case of an increase in price. As more time passes, producers have time to gather more resources, such as building additional factories, and to implement new production techniques. Hence as time passes, the quantity supplied increases. Topic: Elasticity, time since the price changed Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

7) If the price increases by 20 percent and the quantity supplied increases by 40 percent, what does the elasticity of supply equal? Answer: The price elasticity of supply = (percentage change in the quantity supplied) ÷ (percentage change in price) = (40 percent) ÷ (20 percent) = 2.00. Topic: Price elasticity of supply, formula Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

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

9) The table above gives the supply schedule for a product. 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: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

10) June makes holiday wreaths and sells them during the holiday season. The figure above shows her supply curve of wreaths per week. Use the midpoint method in this problem. a. Calculate the percentage change in quantity between points A and B. b. Calculate the percentage change in price between points A and B. c. Calculate the price elasticity of supply between points A and B. Answer: a. The percentage change in quantity is 20 percent. b. The percentage change in price is 20 percent. c. The price elasticity of supply is 1.0. Topic: Price elasticity of supply, formula Skill: Level 4: Applying models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

5.8 Essay: Cross Elasticity and Income Elasticity 1) The price elasticity of demand is always positive, as is the price elasticity of supply. Is the cross elasticity of demand always positive? Explain your answer. Answer: No, the cross elasticity of demand is not always positive. The cross elasticity of demand is positive for goods that are substitutes and negative for goods that are complements. Hence the sign of the cross elasticity of demand indicates whether the goods are substitutes or complements. Topic: Cross elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Written and oral communication

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

3) If the cross elasticity of demand between two goods is negative, are the goods substitutes or complements? Answer: If the cross elasticity of demand is negative, then the goods are complements. Topic: Cross elasticity of demand, complements Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

4) If the cross elasticity of demand between peanut butter and milk is -1.11, then are peanut butter and milk substitutes or complements? Answer: Because the cross elasticity of demand is negative, peanut butter and milk are complements. Topic: Cross elasticity of demand, complements Skill: Level 1: Definition Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

5) How are the cross elasticity of demand and income elasticity of demand similar and how are they different from the price elasticity of demand? Answer: The cross and income elasticities are similar to the price elasticity of demand because all examine how strongly demanders respond to a change in a relevant factor. The price elasticity of demand examines how strongly demanders respond to a change in the price of the product. The cross elasticity of demand studies how strongly demanders respond to a change in the price of a related product. And the income elasticity of demand examines how strongly demanders respond to a change in income. The formulas for all three elasticities also are similar. All three use percentage changes and all three divide the percentage change in the quantity demanded of the good by the percentage change in the relevant factor. The elasticities also differ. For instance, as outlined above, all three concentrate on a different factor: the good's price (for the price elasticity of demand); the price of a related good (for the cross elasticity of demand); and income (for the income elasticity of demand.) The price elasticity of demand is always positive (because we use the magnitudes of the percentage changes or, equivalently, we take the absolute value of the percentage changes) whereas the cross and income elasticities of demand can be either positive or negative. Topic: Cross elasticity of demand and income elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Written and oral communication

6) If the income elasticity of demand for a Miami Dolphin season ticket is 2.34, then are Dolphin season tickets a normal or an inferior good? Answer: Because the income elasticity of demand is positive, Dolphin season tickets are a normal good. Topic: Income elasticity of demand, normal good Skill: Level 1: Definition Section: Checkpoint 5.3 Status: Old AACSB: Written and oral communication

7) The income elasticity of demand for store brands of soda (that is, non-name brands) is negative. What does this fact indicate about consumers' perceptions about the store brands? Answer: The negative income elasticity indicates that the store brands of soda are considered by many consumers to be an inferior good. Hence as income increases, consumption of these sodas decreases as consumers opt for name brand sodas, such as Pepsi and Coke. Topic: Income elasticity of demand, inferior good Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Written and oral communication

8) When the price of Ford pickup trucks rises from $18,000 to $19,000, the quantity of Chevy trucks demanded increases from 112,000 to 144,000. What does the cross elasticity of demand between Ford and Chevy trucks equal? Answer: In this case, the cross elasticity of demand = (percentage change in the quantity of Chevy trucks demanded) ÷ (percentage change in the price of a Ford truck). Use the midpoint method to calculate the percentages. Thus the percentage change in the quantity of Chevy trucks demanded = (144,000 - 112,000) ÷ (128,000) = 25 percent and the percentage change in the price of a Ford truck is ($19,000 - $18,000) ÷ ($18,500) = 5.4 percent. Thus the cross elasticity of demand equals (25 percent) ÷ (5.4 percent) = 4.625. Topic: Cross elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

9) When the price of bananas rises 2 percent, the quantity demanded of peanut butter falls 4 percent. a. What is the cross elasticity of demand between these two goods? b. How are these goods related? c. If the price of bananas rises, how will that affect the demand curve for peanut butter? Answer: a. The cross elasticity of demand equals -2. b. Because the cross elasticity of demand is negative, the cross elasticity indicates that the two goods are complements. c. If the price of bananas rises, the demand for peanut butter decreases and the demand curve for peanut butter shifts leftward. Topic: Cross elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

10) Consider two goods: peanut butter and jelly. If the price of jelly increases from $2 a jar to $3 per jar and the quantity demanded of peanut butter decreases from 50 jars to 45 jars, what is the cross elasticity of demand? Are the goods substitutes or complements? Answer: The cross elasticity of demand equals -0.275. The value is negative so the goods are complements. Topic: Cross elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

11) A 10 percent increase in income brings about a 15 percent decrease in the demand for a good. What is the income elasticity of demand and is the good a normal good or an inferior good? Answer: The income elasticity of demand is -1.5. The good is an inferior good. Topic: Income elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

12) If income increases from $50,000 to $60,000 while the demand for a good increases from 100 units to 125 units, what is the income elasticity of demand? Is the good a normal good or an inferior good? Answer: The income elasticity equals 1.22. Because the income elasticity of demand is positive, the good is a normal good. Topic: Income elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

13) The income elasticity of demand for movies in the United States is 3.41. If people's incomes decrease by 1 percent, what is the decrease in the quantity of movies demanded? Answer: The income elasticity of demand = (percentage change in quantity demanded) ÷ (percentage change in income). Using the numbers in the problem gives 3.41 = (percentage change in quantity demanded) ÷ (1 percent). Rearranging the formula shows (percentage change in quantity demanded) = (1 percent) × 3.41 = 3.41 percent. Therefore the quantity of movies demanded decreases by 3.41 percent. Topic: Income elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

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

Essential Foundations of Economics, 8e (Bade) Chapter 6 Efficiency and Fairness of Markets 6.1 Allocation Methods and Efficiency 1) Wal-Mart has a limited number of "Black Friday" (the day-after Thanksgiving Day) special items on sale at prices well below their typical price. Wal-Mart opens at 10 PM on Thanksgiving. Wal-Mart is using a ________ allocation method for these items. A) first-come, first-served B) market price C) contest D) majority rule E) command Answer: A Topic: Allocation methods Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

2) A city must decide to pay for its workers pension plan. If the city puts the decision up for a vote by citizens, resource use will be determined by a ________ method. A) majority rule B) first-come, first-served C) sharing equally D) command E) force Answer: A Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: New AACSB: Application of knowledge

3) Drivers in Atlanta can choose to use toll lanes on I-75. The toll changes during the day depending on congestion and traffic flow. Toll lane resources are determined using the ________ method. A) first-come, first-served B) sharing equally C) contest D) command E) market price Answer: E Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: New AACSB: Application of knowledge

4) A university has a speakers series each semester. Students line up early in order to get a limited number of free tickets to hear the speaker's program. The seats are allocated using the ________ method. A) command B) market price C) first-come, first-served D) contest E) sharing equally Answer: C Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: New AACSB: Analytical thinking

5) Often people trying to withdraw money from their bank must wait in line, which reflects a ________ allocation method. A) first-come, first-served B) market price C) contest D) majority rule E) command Answer: A Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

6) University of Colorado reserves 5,000 free tickets to each home football game for students. Students must stand in line to receive their ticket. Football tickets are allocated through which method? A) market price B) sharing equally C) personal characteristics D) first-come, first-served E) force Answer: D Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

7) Auditors working for a large accounting firm are often away from the office. When they are in the office, they are allowed to use any desk that is available. Which method is used to allocate desks? A) lottery B) first-come, first-served C) command D) contest E) sharing equally Answer: B Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

8) When you arrive at Olive Garden with your date, you have to wait 25 minutes for a table. Olive Garden is allocating tables using which method? A) market price B) first-come, first-served C) command D) personal characteristics E) sharing equally Answer: B Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: New AACSB: Reflective thinking

9) Mandy saved her allowance to buy a 12 pack of cream soda. When Mandy's brother saw the soda, he took four. Sodas were allocated between Mandy and her brother through A) force. B) majority rule. C) first-come, first-served. D) sharing equally. E) personal characteristics. Answer: A Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

10) Which of the following situations describing a resource allocation method most resembles the force method? A) Seventy percent of Austin's chess club wanted to purchase new chess sets and thirty percent did not. The club purchased the sets. B) Lattes are sold at Starbucks. C) Food from the Weld County Food Bank is distributed to families in need. D) Mandy saved her allowance to buy a 12 pack of cream soda. When Mandy's brother saw the soda, he took four. E) Jose works at Intel. His manager tells him what work needs to be completed each month. Answer: D Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

11) Honda will sell its vehicles to anyone who wants to and can buy one. Honda is using a ________ allocation method. A) first-come, first-served B) market price C) contest D) majority rule E) command Answer: B Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

12) The resource allocation method used for the online auctions on eBay is A) market price. B) lottery. C) contest. D) first-come, first-served. E) sharing equally. Answer: A Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

13) Lattes at Starbucks are allocated to individuals in society through what type of method? A) lottery B) contest C) sharing equally D) market price E) personal characteristics Answer: D Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

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

15) If a landlord will rent an apartment only to married couples, the landlord is using a ________ allocation method. A) majority rule B) market price C) contest D) personal characteristics E) command Answer: D Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

16) Canned milk was only rationed to babies and small children during World War II. This rationing was an example of allocation by A) market price. B) first-come, first-served. C) sharing equally. D) force. E) personal characteristics. Answer: E Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

17) Although Jack and Vanessa were equally qualified, Jack was promoted to manager instead of Vanessa because the president of the company thought that the other employees would not respect a female manager. The resource, the management position, was allocated in what manner? A) sharing equally B) contest C) personal characteristics D) command E) lottery Answer: C Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

18) Allocating resources by the order of someone in authority is a ________ allocation method. A) first-come, first-served B) market price C) contest D) majority rule E) command Answer: E Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

19) Jose works at Intel. His manager tells him what work needs to be completed each month. Jose's resource, labor, is allocated with which of the following methods? A) command B) majority rule C) force D) personal characteristics E) lottery Answer: A Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

20) The chair of the Department of Economics at Colorado State University decided that office space is for tenured faculty and that graduate students are required to share cubicles. What method is used to allocate office space? A) lottery B) majority rule C) command D) first-come, first-served E) sharing equally Answer: C Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

21) If you split your dessert with your date, you are using a ________ allocation method. A) first-come, first-served B) sharing equally C) contest D) personal characteristics E) command Answer: B Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

22) When the city of Fresno holds a referendum to determine if taxes will be raised to pay for road repairs, the city is using a ________ allocation method. A) majority rule B) market price C) contest D) personal characteristics E) command Answer: A Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

23) Seventy percent of Austin's chess club wanted to purchase new chess sets and thirty percent did not. The club purchased the sets. Which method of allocation best describes the choice to purchase the sets? A) force B) sharing equally C) command D) majority rule E) lottery Answer: D Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

24) Which of the following situations describing a resource allocation method most resembles the majority rule method? A) Seventy percent of Austin's chess club wanted to purchase new chess sets and thirty percent did not. The club purchased the sets. B) Lattes are sold at Starbucks. C) Food from the Weld County Food Bank is distributed to families in need. D) Jose works at Intel. His manager tells him what work needs to be completed each month. E) Matt's mother had the rule that whoever cuts the cake chooses their slice last. Answer: A Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

25) In 2009, tickets to a Presidential Town Hall meeting were distributed to individuals through a random selection of those who registered on a website. The tickets were allocated by which method? A) lottery B) majority rule C) contest D) first-come, first-served E) personal characteristics Answer: A Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

26) The Ironman Hawaii randomly draws a few hundred slots from thousands of applicants for the race. The method of allocation for the opportunity to participate in the race is ________, and the method of allocation for determining the winner of the race is ________. A) lottery; contest B) contest; lottery C) first-come, first-served; lottery D) lottery; first-come, first-served E) contest; command Answer: A Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

27) The table above shows the production possibilities for an economy. When the economy produces a combination of 900 books and 50 loaves of bread, A) production efficiency occurs because resources are not overused. B) allocative efficiency is achieved because both goods are produced. C) production efficiency is not achieved. D) allocative and production efficiency are both achieved. E) production efficiency is not achieved but allocative efficiency might be achieved. Answer: C Topic: Production efficiency Skill: Level 4: Applying models Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking

28) Resource use is allocative efficient A) when it is not possible to produce more of one good. B) when we produce goods and services that we value most highly. C) when most resources are fully employed. D) at any point on the PPF. E) at all points either on or within the PPF because all these production points are attainable. Answer: B Topic: Allocative efficiency Skill: Level 1: Definition Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

29) Allocative efficiency refers to A) producing the goods and services most highly valued. B) using the least amount of labor to produce output. C) producing the maximum possible amount of output. D) obtaining the least output with the most inputs. E) producing at any point on the PPF. Answer: A Topic: Allocative efficiency Skill: Level 1: Definition Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

30) When allocative efficiency occurs, A) an economy produces the goods and services most highly valued. B) marginal benefit exceeds marginal cost by some amount. C) technology must be increasing. D) we can simultaneously produce more of all goods. E) marginal benefit exceeds marginal cost by as much as possible. Answer: A Topic: Allocative efficiency Skill: Level 1: Definition Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

31) To achieve allocative efficiency, an economy A) must produce on its PPF. B) does not necessarily need to be production efficient. C) must have increases in technology. D) might leave some resources unemployed. E) can produce either on or within its PPF. Answer: A Topic: Allocative efficiency Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

32) If an economy is allocatively efficient, it must be producing A) beyond its production possibilities frontier. B) inside its production possibilities frontier. C) on its production possibilities frontier. D) the goods and services that are the most expensive. E) the goods and services that are the least expensive to produce. Answer: C Topic: Allocative efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

33) When a society achieves allocative efficiency, it A) is not achieving production efficiency. B) is producing that combination of goods and services that society values most highly. C) might or it might not be producing at a point on society's PPF. D) is producing a combination of goods and services whose marginal cost exceeds their marginal benefit. E) is producing the combination of goods and services for which marginal benefit exceeds marginal cost by as much as possible. Answer: B Topic: Allocative efficiency Skill: Level 1: Definition Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

34) To determine allocative efficiency, the ________ used to determine what is possible to produce and the ________ used to determine the allocatively efficient point. A) PPF is; marginal benefit and marginal cost curves are B) marginal benefit and marginal cost curves are; marginal benefit and marginal cost curves are C) PPF; supply curve D) marginal benefit and marginal cost curves are; PPF E) marginal benefit curve; demand curve Answer: A Topic: Allocative efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: New AACSB: Application of knowledge

35) The tollway authority must decide the efficient allocation of resources to build toll roads. To determine the efficient allocation of resources, the tollway authority must compare A) the PPF to the marginal benefit curve. B) marginal cost to marginal benefit. C) the demand curve to the PPF. D) command method to the market price method. E) the force method to the command method. Answer: B Topic: Allocation of resources Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: New AACSB: Application of knowledge

36) Marginal benefit is the benefit that a person receives from consuming A) a good or service until the person has grown tired of it. B) only goods and services that are free. C) one more unit of a good or service. D) all of the possible units of a good or service that can be consumed. E) one more unit of a good and is equal to the cost of producing the unit of the good. Answer: C Topic: Marginal benefit Skill: Level 1: Definition Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

37) Marginal benefit is the A) total benefit we receive from consuming a good or service. B) additional benefit we receive from consuming one more unit of a good or service. C) minimum amount of other goods or services we are willing to give up. D) opportunities given up to get one more unit of a good or service. E) the benefit we receive from consuming one more unit of a good or service minus the cost of the producing one more unit of the good or service. Answer: B Topic: Marginal benefit Skill: Level 1: Definition Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

38) The marginal benefit of a taco is measured by A) the price of the taco. B) the amount of another good a person is willing to give up to get one more taco. C) the amount of another good a person must give up to get one more taco. D) a point on the PPF. E) the opportunity cost of producing another taco. Answer: B Topic: Marginal benefit Skill: Level 1: Definition Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

39) Marginal benefit A) increases as more of a good is consumed. B) decreases as more of a good is consumed. C) is the total benefit from all units consumed. D) is constant as more of a good is consumed. E) is the gain to the producer of producing and selling one more unit of a good. Answer: B Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

40) As more of a good is consumed, the marginal benefit of the good A) increases. B) decreases. C) remains constant. D) is unpredictable. E) first decreases and then increases. Answer: B Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

41) The principle of decreasing marginal benefit explains why the marginal benefit curve A) is upward sloping. B) has an infinite slope. C) is vertical. D) is downward sloping. E) is horizontal. Answer: D Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

42) In general, the marginal benefit curve A) has a positive slope. B) has a negative slope. C) is horizontal. D) is vertical. E) is concave. Answer: B Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

43) The point that each glass of lemonade consumed on a hot day brings lower and lower levels of satisfaction is known as the principle of A) total benefits. B) increasing marginal cost. C) decreasing marginal benefit. D) increasing opportunity cost. E) decreasing marginal price. Answer: C Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

44) The marginal benefit of the first hotdog consumed is ________ the marginal benefit of the fifth hotdog consumed. A) equal to B) less than C) greater than D) the inverse of E) equal to 5 times Answer: C Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking

45) Suppose Jennifer derives $100 in marginal benefits from her first skiing trip and $80 from her third trip. Her marginal benefit from her second trip is likely to be A) more than $100. B) between $100 and $80. C) between $79 and $51. D) less than $51. E) some amount that cannot be calculated without additional information. Answer: B Topic: Marginal benefit Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking

46) Marginal benefit curves A) have positive slopes. B) have negative slopes. C) are horizontal lines. D) are vertical lines. E) are upside-down U-shaped curves. Answer: B Topic: Marginal benefit Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

47) Marginal cost equals A) the profitability derived from producing another unit of output. B) all the opportunity cost of producing the amount of output. C) or exceeds the marginal benefit. D) productive efficiency. E) the opportunity cost of producing one more unit of output. Answer: E Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

48) Marginal cost is the opportunity cost of producing A) every unit possible. B) zero units. C) the first unit and only the first unit. D) one more unit of a good or service. E) None of the above answers is correct. Answer: D Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

49) Moving ________ along the marginal cost curve, the ________. A) upward; opportunity cost of one more unit increases B) upward; marginal cost decreases C) downward; marginal cost increases D) upward; opportunity cost of one more unit does not change E) downward; opportunity cost of one more unit does not change Answer: A Topic: Marginal cost Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

50) The marginal cost of a good or service A) can be calculated from the marginal benefit of that good or service. B) decreases as more of the good or service is produced. C) can be derived from the production possibilities frontier. D) graphs as a positively sloped curve, so it cannot be derived from the production possibilities frontier, which is downward sloping. E) None of the above answers is correct. Answer: C Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

51) The marginal cost curves slope upward because of the principle of A) decreasing marginal benefits. B) increasing marginal cost. C) increasing marginal benefits. D) decreasing marginal cost. E) decreasing total benefit. Answer: B Topic: Marginal cost Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

52) The marginal cost curve is A) downward sloping to reflect the bowed out PPF. B) downward sloping as marginal benefits increase. C) upward sloping because marginal cost falls as more of a good or service is produced. D) upward sloping to reflect the increasing opportunity cost of producing one more unit. E) U-shaped to reflect the bowed out PPF. Answer: D Topic: Marginal cost Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

53) As more of a good is consumed, marginal benefit ________ and as more of a good is produced, marginal cost ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; does not change Answer: C Topic: Marginal benefit, marginal cost Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

54) Which of the following is necessary for allocative efficiency to be achieved? A) Marginal benefit must be maximized. B) Marginal cost must be minimized. C) Marginal benefit must equal marginal cost. D) The difference between marginal benefit and marginal cost must be maximized. E) Production must be at a point inside the production possibilities frontier. Answer: C Topic: Allocative efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

55) In order to efficiently allocate goods and services, we have to compare A) total cost to total benefit. B) total cost to price. C) marginal benefit to price. D) marginal cost to marginal benefit. E) price to marginal cost. Answer: D Topic: Efficient use of resources Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

56) To achieve allocative efficiency, one must compare the A) marginal cost of a good to its opportunity cost. B) opportunity cost to the attainable point on the production possibilities frontier. C) marginal benefit of a good to its marginal cost. D) marginal cost to the production efficiency cost. E) point of production efficiency to the point of allocative efficiency. Answer: C Topic: Allocative efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

57) We allocate resources efficiently when A) marginal benefit is equal to marginal cost. B) marginal benefit is greater than marginal cost by any amount. C) marginal cost is greater than marginal benefit. D) total benefit is greater than total cost. E) marginal benefit is greater than marginal cost by as much as possible. Answer: A Topic: Efficient use of resources Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

58) Allocative efficiency is achieved when the marginal benefit of a good A) exceeds the marginal cost regardless of how much the difference is. B) is less than its marginal cost. C) is equal to its marginal cost. D) equals zero. E) exceeds the marginal cost by as much as possible. Answer: C Topic: Efficient use of resources Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

59) Allocative efficiency is achieved when the production is such that A) the marginal benefit exceeds the marginal cost by as much as possible. B) marginal cost equals zero. C) marginal benefit is equal to marginal cost. D) the production point is on the PPF. E) None of the above is true. Answer: C Topic: Efficient use of resources Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: New AACSB: Reflective thinking

60) All points on the production possibilities frontier A) are production inefficient. B) achieve allocative efficiency. C) are production efficient but only one point achieves allocative efficiency. D) are allocatively efficient but only one point achieves production efficiency. E) are allocatively inefficient. Answer: C Topic: Efficient use of resources Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

61) When the marginal benefit and marginal cost of sodas are equal, then A) the production of sodas might be allocatively efficient but it is definitely production inefficient. B) the allocatively inefficient amount of sodas is being produced. C) more sodas should be produced to reach the allocatively efficient quantity. D) fewer sodas should be produced to reach the allocatively efficient quantity. E) the allocatively efficient amount of sodas is being produced. Answer: E Topic: Efficient use of resources Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking

62) When the marginal cost of producing a bike is greater than the marginal benefit of the bike, for resource use to be allocatively efficient, A) more bikes should be produced. B) fewer bikes should be produced. C) no more and no fewer bikes should be produced. D) it must be determined if the production of bikes can be increased. E) people must be educated to demand more bikes. Answer: B Topic: Efficient use of resources Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking

63) For resource use to be allocatively efficient, when the marginal benefit of a slice of pizza exceeds the marginal cost, A) more slices of pizza should be produced. B) fewer slices of pizza should be produced. C) no more slices of pizza should be produced. D) allocative efficiency is reached only if the marginal benefit exceeds the marginal cost by as much as possible. E) None of the above answers is correct. Answer: A Topic: Allocative efficiency Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking

64) If the difference between the marginal benefit and the marginal cost of a good is as large as possible, A) resources are being used with maximum efficiency. B) resources would create more value producing other goods and hence the production of this good should be decreased. C) more of the good should be produced. D) allocative efficiency has been attained. E) Both answers A and D are correct. Answer: C Topic: Efficient use of resources Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking

65) Any point on the production possibility frontier is A) attainable and might be allocatively inefficient. B) attainable and must be allocatively efficient. C) less production efficient than a point in the interior of the PPF. D) always allocatively efficient but might or might not be production efficient. E) always production efficient and always allocatively efficient. Answer: A Topic: Efficient use of resources Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

66) Which of the following are the rules for finding the point of allocative efficiency? A) Produce on the PPF and then produce where the marginal benefit and marginal cost are as large as possible. B) Produce on the PPF and then produce where marginal benefit equals marginal cost. C) Produce on the PPF and then produce where marginal benefit and marginal cost are constant. D) Produce on the PPF and then produce where the marginal benefit exceeds marginal cost by as much as possible. E) Produce anywhere on the PPF. Answer: B Topic: Allocative efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

67) Allocative efficiency occurs A) anywhere inside or on the production possibilities frontier. B) when the total cost of production is minimized. C) at all points on the production possibilities frontier. D) at only one point on the production possibilities frontier. E) at the points where the production possibilities frontier crosses the horizontal or vertical axis. Answer: D Topic: Allocative efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

68) When society produces the combination of goods and services on the PPF that it values the most highly, society has A) achieved only production efficiency and definitely not allocative efficiency. B) achieved only allocative efficiency definitely not production efficiency. C) achieved both production efficiency and allocative efficiency. D) achieved a free lunch. E) perhaps achieved production efficiency and has perhaps achieved allocative efficiency. Answer: C Topic: Efficient use of resources Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

69) To determine how much of a good to produce to achieve allocative efficiency, we A) construct a production possibilities frontier and choose the midpoint. B) construct a production possibilities frontier and choose any point on it. C) must produce on the PPF and at the point where the marginal benefit and marginal cost of the good are equal. D) must produce on the PPF and at the point where the marginal benefit exceeds by any amount the marginal cost of the good. E) must produce on the PPF and at the point where the marginal benefit exceeds by as much as possible the marginal cost of the good. Answer: C Topic: Allocative efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

70) Suppose the nation is producing at a point on its PPF. If the marginal cost of producing one more computer is greater than the marginal benefit, the nation is producing A) too few computers to be allocatively efficient. B) too many computers to be allocatively efficient. C) the correct number of computers to be allocatively efficient. D) at the point of allocative efficiency. E) More information is needed to determine if the nation is or is not producing at the allocatively efficient point. Answer: B Topic: Allocative efficiency Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking

71) The figure above shows Kaley's marginal benefit from swimming with manatees and Scott's marginal cost of providing manatee swimming tours. At 1 manatee swim per week, Kaley's marginal benefit is ________ and Scott's marginal cost is ________. A) $40; $10 B) $40; $40 C) $90; $50 D) None of the above answers is correct. Answer: A Topic: Efficient use of resources Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking

72) The figure above shows Kaley's marginal benefit from swimming with manatees and Scott's marginal cost of providing manatee swimming tours. If Scott offers two swim tours per week, he incurs a marginal cost of A) more than $30. B) $30. C) $20. D) $10. E) $2. Answer: C Topic: Efficient use of resources Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking

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

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

75) If a landlord will rent an apartment only to married couples over 30 years old, the landlord is allocating resources using a ________ allocation method. A) majority rule B) market price C) contest D) personal characteristics E) command Answer: D Topic: Allocation of resources Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

76) Allocative efficiency occurs when A) the most highly valued goods and services are produced. B) all citizens have equal access to goods and services. C) the environment is protected at all cost. D) goods and services are free. E) production takes place at any point on the PPF. Answer: A Topic: Efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

77) Marginal benefit equals the A) benefit that a person receives from consuming another unit of a good. B) additional efficiency from producing another unit of a good. C) increase in profit from producing another unit of a good. D) cost of producing another unit of a good. E) total benefit from consuming all the units of the good or service. Answer: A Topic: Marginal benefit Skill: Level 1: Definition Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

78) In general, the marginal cost curve A) has a positive slope. B) has a negative slope. C) is horizontal. D) is vertical. E) is U-shaped. Answer: A Topic: Marginal cost Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

79) Allocative efficiency is achieved when the marginal benefit of a good A) exceeds the marginal cost by as much as possible. B) exceeds the marginal cost, but not by as much as possible. C) is less than the marginal cost. D) equals the marginal cost. E) equals zero. Answer: D Topic: Allocative efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

6.2 Value, Price, and Consumer Surplus 1) Which describes the economic meanings of value and price? A) Value is exchange worth minus marginal benefit and price is the dollars that must be paid. B) Value is the marginal benefit obtained and price is the dollars that must be paid. C) Value refers to the gain the producer gets from the good or service and price refers to the gain the consumer gets from the good or service. D) Value refers to the dollars that must be paid and price refers to the cost of producing the good. E) They are the same and both mean the dollars that must be paid. Answer: B Topic: Value Skill: Level 1: Definition Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

2) The value of a slice of pizza to a consumer is equal to A) its marginal benefit. B) the maximum price the consumer is willing to pay. C) the consumer surplus. D) Both answers A and B are correct. E) Both answers B and C are correct. Answer: D Topic: Value Skill: Level 1: Definition Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

3) To an economist, "value" is the same as A) marginal cost. B) consumer surplus. C) the minimum price that people are willing to pay for another unit of the good. D) marginal benefit. E) total surplus. Answer: D Topic: Value Skill: Level 1: Definition Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

4) Which of the following statements is correct? i. The demand curve shows the maximum price people are willing to pay for a given quantity of the good. ii. The maximum price a consumer is willing to pay for an additional unit is the marginal benefit of that unit. iii. Value is what a consumer receives and price is what a consumer pays. A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: E Topic: Value Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

5) Value and price can be compared by noting that A) they are the same thing. B) value is always greater than price. C) value is what we must pay while price is what we are willing to pay. D) price is what we must pay and value is what we are willing to pay. E) value is what the seller receives when we buy a good, and price is what we must pay when we buy a good. Answer: D Topic: Value Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

6) The maximum amount of other goods and services that people are willing to give up in order to get one more unit of a good is defined as the good's A) marginal benefit. B) total benefit. C) marginal cost. D) total cost. E) price. Answer: A Topic: Marginal benefit Skill: Level 1: Definition Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

7) The marginal benefit of each additional unit of a good consumed A) increases as more is consumed. B) is always equal to its marginal cost. C) decreases as more is consumed. D) will maximize consumer surplus. E) is equal to the deadweight loss if the unit of the good is not produced. Answer: C Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

8) The phrase "decreasing marginal benefit" means that A) the more you consume of the product, the less total benefit you derive. B) the marginal cost will be increasing as you consume more of a good. C) each additional unit of a good you consume gives you less additional benefit than the previous unit. D) Both answers A and B are correct. E) Both answers A and C are correct. Answer: C Topic: Marginal benefit Skill: Level 1: Definition Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

9) What must be true for a consumer to buy a good or service? A) The price must be equal to or less than the marginal benefit. B) The total benefit received must equal the total spent to buy the good or service. C) The consumer must be able to obtain some consumer surplus. D) The consumer must not be able to produce the product. E) The price must be equal to or greater than the marginal benefit. Answer: A Topic: Demand curve and marginal benefit curve Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

10) Mark loves ice cream. At any point in time, he will buy an additional ice cream cone if A) the marginal benefit from it exceeds the price. B) the marginal benefit from it is zero. C) his willingness to pay is less than the price. D) there is no deadweight loss produced by his purchase of a cone. E) None of the above answers is correct. Answer: A Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

11) A point on the demand curve shows the A) price and the corresponding quantity demanded. B) marginal benefit from that unit. C) marginal cost to the seller of producing the unit. D) Both answers A and B are correct. E) Both answers A and C are correct. Answer: D Topic: Demand curve and marginal benefit curve Skill: Level 1: Definition Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

12) A point on the demand curve shows the A) minimum price that people are willing to pay for another unit of a good. B) dollars' worth of other goods that people must sacrifice to consume another unit of the good. C) maximum price that people are willing to pay for another unit of a good. D) consumer surplus a person gains from consuming a unit of a good. E) marginal benefit minus the consumer surplus from consuming another unit of a good. Answer: C Topic: Demand curve and marginal benefit curve Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

13) The demand curve is also the A) total cost curve. B) total benefit curve. C) marginal cost curve. D) marginal benefit curve. E) marginal deadweight cost curve. Answer: D Topic: Demand curve and marginal benefit curve Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

14) A demand curve can be interpreted as A) a marginal benefit curve. B) a total benefit curve. C) an average benefit curve. D) a marginal cost curve. E) None of the above answers is correct. Answer: A Topic: Demand curve and marginal benefit curve Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

15) Which of the following is true regarding a demand curve? i. The demand curve is also the marginal benefit curve. ii. The demand curve shows the dollars' worth of other goods that people are willing to forgo to consume another unit of the good. iii. The demand curve shows the maximum price that people are willing to pay for another unit of a good. A) i and ii B) i and iii C) ii and iii D) i, ii, and iii E) i only Answer: D Topic: Demand curve and marginal benefit curve Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

16) The marginal benefit from buying a particular unit of a good A) is the amount paid for the unit plus the consumer surplus of the unit. B) increases as market price increases. C) is the difference between the amount paid for the unit and the market price of the unit. D) is the difference between the total benefit of the unit and the marginal cost of producing that unit. E) None of the above answers is correct. Answer: A Topic: Total benefit Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

17) Consumers' total benefit from consuming a good is equal to the A) total amount spent on the good. B) consumer surplus on the quantity purchased. C) consumer surplus plus the total amount spent on the good. D) consumer surplus minus the total amount spent on the good. E) total amount spent on the good divided by the number of units purchased. Answer: C Topic: Total benefit Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

18) Samantha was willing to pay $10 for a hamburger because she was hungry but she only paid $2.50. What is the marginal benefit Samantha gained from the hamburger? A) $2.50 B) $7.50 C) $10.00 D) $12.50 E) None of the above answers is correct. Answer: C Topic: Total surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

19) Consumer surplus exists when a A) person buys something with a marginal benefit less than what they paid. B) person buys something with a marginal benefit exactly what they paid. C) person buys something with a marginal benefit more than what they paid. D) producer sells something for more than it is worth. E) person buys something with a marginal cost less than what they paid. Answer: C Topic: Consumer surplus Skill: Level 1: Definition Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

20) Shelby said to her friend, "I just bought a new pair of climbing shoes and I love them so much that I totally would have paid more for them." Shelby was describing the concept of A) consumer surplus. B) producer surplus. C) equilibrium. D) marginal cost. E) total surplus. Answer: A Topic: Consumer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

21) Jake just bought a new hockey stick. When he was leaving the shop, he thought that he such a great deal and would have paid $50 more dollars for the stick. Jake received A) producer surplus. B) equilibrium. C) marginal cost. D) total surplus. E) consumer surplus. Answer: E Topic: Consumer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

22) Consumer surplus exists when A) it costs less to produce goods than buyers must pay for them. B) consumers value the good more highly than what they must pay to buy it. C) taxes on goods are less than the appropriate amount. D) the marginal benefit of the good is always equal to or less than the price of the good. E) the price of the good is greater than the marginal cost of producing a unit of the good. Answer: B Topic: Consumer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

23) The consumer acquires a consumer surplus on a good if the marginal benefit is A) equal to the price. B) greater than the price. C) less than the price. D) zero. E) less than the marginal cost. Answer: B Topic: Consumer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

24) Consumer surplus is equal to A) marginal benefit minus price summed over the quantity consumed. B) price minus marginal benefit summed over the quantity consumed. C) marginal benefit summed over the quantity consumed. D) price multiplied by the quantity consumed. E) marginal benefit plus price summed over the quantity consumed. Answer: A Topic: Consumer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

25) Which of the following statements is correct? A) Consumer surplus equals the price paid for a good. B) The consumer surplus from a good is always larger than the total benefit from the good. C) An increase in price decreases consumer surplus. D) An increase in price has no effect on consumer surplus. E) The consumer surplus from a good or service must always equal producer surplus. Answer: C Topic: Consumer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

26) In a figure, the consumer surplus is equal to the area ________ the ________ curve and ________ the price. A) above; demand; above B) below; supply; below C) below; demand; below D) below; demand; above E) above; supply; below Answer: D Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

27) Consumer surplus is the area A) below the demand curve and above the market price. B) below the supply curve and above the market price. C) above the demand curve and below the market price. D) above the supply curve and below the market price. E) below the demand curve and above the supply curve. Answer: A Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

28) When the market price rises, the consumers' consumer surplus ________. When the market price falls, the consumers' consumer surplus ________. A) decreases; increases B) decreases; decreases C) increases; increases D) increases; decreases E) does not change; increases Answer: A Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

29) In the summer of 2008, the price of gasoline increased greatly. If the demand curve for gasoline did not shift, which of the following occurred? A) Drivers received no consumer surplus after the price increase. B) Consumer surplus increased if drivers drove less. C) Consumer surplus decreased. D) If consumers drove the same amount, they received less total benefit. E) Both the marginal benefit from each gallon of gasoline and the consumer surplus from each gallon of gasoline decreased. Answer: C Topic: Consumer surplus Skill: Level 4: Applying models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

30) Lauren and Katy each bought a new bike lock for $20. Both Lauren and Katy would have paid $25 for the lock. Katy's consumer surplus equaled A) $10. B) $40. C) $5. D) $20. E) $50. Answer: C Topic: Consumer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

31) Lauren and Katy each bought a new bike lock for $20. Both Lauren and Katy would have paid $25 for the lock. The total consumer surplus for Lauren and Katy taken together equaled A) $15. B) $10. C) $40. D) $20. E) $50. Answer: B Topic: Consumer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

32) The price of a cowboy hat is $100. Willie is willing to pay $130, Waylon is willing to pay $100, and Merle is willing to pay $85. All of the following statements are true EXCEPT: A) Merle's consumer surplus is $15. B) The sum of consumer surplus will be $30. C) Waylon's consumer surplus is $0. D) Only Willie and Waylon will purchase the cowboy hat. E) Willie's consumer surplus is $30. Answer: A Topic: Consumer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

33) Mary is willing to pay $50 for a Christmas tree, John is willing to pay $45 and Jeff is willing to pay $40. The price of a tree is $40. The total consumer surplus for Mary, John and Jeff taken together is A) $15. B) $135. C) $40. D) $95. E) $120. Answer: A Topic: Consumer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

34) Suppose Dan is willing to pay a maximum of $3,000 for a piano, but finds one he can buy for $2,500. Dan's consumer surplus from this piano is A) $5,500. B) $3,000. C) $2,500. D) $500. E) zero because he buys the piano. Answer: D Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

35) John has a marginal benefit of $7 for 1 slice of pizza, $5 for a second slice, $3 for a third slice, $1 for a fourth slice, and $0.50 for a fifth slice. The price of pizza is $1.50 per slice. Which of the following statements is correct? A) John will purchase 3 slices of pizza and have consumer surplus of $10.50. B) John will purchase 4 slices of pizza and have consumer surplus of $12.00. C) John will purchase 2 slices of pizza and have consumer surplus of $1.50. D) John will purchase 3 slices of pizza and have consumer surplus of $4.50. E) John will purchase 2 slices of pizza and have consumer surplus of $3.00. Answer: A Topic: Consumer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

36) Which of the following is an example of consumer surplus? A) Jose buys a hamburger for $2 and tells you he would not have paid a penny more. B) John believes the price he paid for his computer was too high. C) Mary buys a paper tablet for $2 and finds the same good at another store for $1.50. D) Sue would have paid $15 for a new compact disc but paid only $10. E) Anne finds a mountain bike for which she is willing to pay a maximum of $550 and the price of the bike is $600. Answer: D Topic: Consumer surplus Skill: Level 1: Definition Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

37) If you are willing to pay no more than $4 for a slice of pizza and the price of a slice of pizza is $4, then A) if you buy it, you would be cheated because you would realize no total benefit from the purchase. B) you buy it but you get no marginal benefit from the purchase. C) you will not buy it. D) you buy it but you get no consumer surplus from the purchase. E) you might buy it depending on how the slice's marginal benefit compares to its price. Answer: D Topic: Consumer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

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

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

40) The figure above shows that for the 10,000th ticket, marginal benefit equals ________ and consumer surplus equals ________. A) $40; $40 B) $40; zero C) $150,000; $150,000 D) zero; $40 E) $70; $40 Answer: B Topic: Marginal benefit Skill: Level 3: Using models Section: Checkpoint 6.2 Status: New AACSB: Application of knowledge

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

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

43) In the figure above, at the market price of $15, the consumer surplus equals A) $10,000. B) $30,000. C) $40,000. D) 2,000 units. E) $20,000. Answer: A Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

44) The figure above shows Lauren's demand curve for Barbie dolls and the market price for Barbie dolls. Using the area of the consumer surplus triangle, Lauren's total consumer surplus from purchasing 3 dolls is A) $5.50. B) $10.00. C) $22.50. D) $45.00. E) 3 dolls. Answer: C Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

45) The figure above shows Lauren's demand curve for Barbie dolls and the market price for Barbie dolls. In order for Lauren to avoid paying more for dolls than they are worth to her, she must not purchase any more than A) 0 dolls. B) 1 doll. C) 3 dolls. D) 5 dolls. E) 4 dolls. Answer: C Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

46) In the figure above, suppose that $20 is the market equilibrium price. Which area is the consumer surplus? A) A B) B C) A + B D) B - A E) B ÷ A Answer: A Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

47) In the figure above, suppose that $20 is the market equilibrium price. What is the amount of the consumer surplus? A) $3,375 B) $3,000 C) $375 D) 150 units E) $1,500 Answer: C Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

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

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

50) The figure above shows Diane's demand curve for soda. The price of a soda is $1.00. Diane's consumer surplus from all 15 sodas is A) $15.00. B) $22.50. C) $11.25. D) $8.00. E) $1.50. Answer: C Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

51) The figure above shows Diane's demand curve for soda. The price of a soda is $1.00. Diane's total benefit from consuming 15 sodas is A) $15.00. B) $26.25. C) $11.25. D) $0. E) None of the above answers is correct. Answer: B Topic: Total benefit Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

52) Value is A) the price we pay for a good. B) the cost of resources used to produce a good. C) objective so that it is determined by market forces, not preferences. D) the marginal benefit we get from consuming another unit of a good or service. E) the difference between the price paid for a good and the marginal cost of producing that unit of the good. Answer: D Topic: Value and price Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

53) A marginal benefit curve A) is the same as a demand curve. B) is the same as a supply curve. C) slopes upwards. D) is a vertical line at the efficient quantity. E) is U-shaped. Answer: A Topic: Demand curve and marginal benefit curve Skill: Level 1: Definition Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

54) In general, as the consumption of a good or service increases, the marginal benefit from consuming that good or service A) increases. B) decreases. C) stays the same. D) at first increases and then decreases. E) at first decreases and then increases. Answer: B Topic: Marginal benefit Skill: Level 1: Definition Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

55) The difference between the marginal benefit from a new pair of shoes and the price of the new pair of shoes is A) the consumer surplus from that pair of shoes. B) what we get. C) what we have to pay. D) the price when the marginal benefit is maximized. E) the consumer's expenditure on the shoes. Answer: A Topic: Consumer surplus Skill: Level 1: Definition Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

56) Suppose the price of a scooter is $200 and Cora Lee is willing to pay $250. Cora Lee's A) consumer surplus from that scooter is $200. B) consumer surplus from that scooter is $50. C) marginal benefit from that scooter is $100. D) consumer surplus from that scooter is $150. E) consumer surplus from that scooter is $250. Answer: B Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

57) If the price of a pizza is $10 per pizza, the consumer surplus from the first pizza consumed ________ the consumer surplus from the second pizza consumed. A) is greater than B) equals C) is less than D) cannot be compared to E) None of the above answers is correct because more information is needed about the marginal cost of producing the pizzas to answer the question. Answer: A Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

6.3 Cost, Price, and Producer Surplus 1) To a seller, the cost of a good or service is ________, and the price is ________. A) what must be given up to produce the good or service; what is received for the good or service B) what is received for the good or service; what must be given up to produce the good or service C) the producer surplus the seller receives; the consumer surplus the buyer receives D) the producer surplus the buyer receives; the consumer surplus the seller receives E) None of the above answers is correct. Answer: A Topic: Cost and price Skill: Level 1: Definition Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

2) Which of the following describes the economic meanings of cost and price? A) Cost is exchange worth, and price is dollar worth. B) Cost is what must be given up to produce a good, and price is what a seller receives when the good is sold. C) They are the same, and they both mean what is received when a good is sold. D) Cost refers to what the buyers pay for the good, and price refers to what sellers receive when the good is sold. E) Cost refers to the price that buyers must pay to buy the good. Answer: B Topic: Cost and price Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

3) The opportunity cost of producing one more unit of a good or service is the A) marginal cost. B) marginal benefit. C) efficient level of production. D) market outcome. E) price of the good or service. Answer: A Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

4) The cost of producing one more unit of a good or service is equal to its A) marginal benefit. B) producer surplus. C) marginal expenditure. D) consumer surplus. E) marginal cost. Answer: E Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

5) Ben's cost of making an additional rocking chair is $75. A) If he sells it for a $100, his producer surplus is $25. B) His marginal cost is equal to $75. C) The marginal benefit to the consumer from the chair will be $75. D) Both answers A and B are correct. E) Both answers B and C are correct. Answer: D Topic: Marginal cost Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking

6) A supply curve is the same as a A) total cost curve. B) marginal cost curve. C) total benefit curve. D) marginal benefit curve. E) deadweight loss curve. Answer: B Topic: Supply curve and marginal cost curve Skill: Level 1: Definition Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

7) The supply curve of a good or service is the same as A) the demand curve. B) the marginal benefit curve. C) the marginal cost curve. D) the total surplus curve. E) None of the above answers is correct. Answer: C Topic: Supply curve and marginal cost curve Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

8) A point on the supply curve can illustrate the A) price and the corresponding quantity supplied. B) marginal cost of that unit of the good. C) price the consumer is willing to pay. D) Both answers A and B are correct. E) Both answers A and C are correct. Answer: D Topic: Supply curve and marginal cost curve Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

9) The supply curve shows the A) marginal benefit of a firm producing another unit of a good. B) dollars' worth of other goods and services we are willing to give up to get another unit of the good. C) minimum price that firms must receive to supply a certain quantity of a good. D) producer surplus of producing the good. E) maximum price that firms will accept in order to supply a certain quantity of a good. Answer: C Topic: Supply curve and marginal cost curve Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

10) A supply curve shows quantities supplied at various prices. It also shows the A) total profit the firm earns at a given level of output. B) marginal benefit of the good. C) total cost of production. D) marginal cost of production. E) producer surplus, which is equal to the slope of the supply curve. Answer: D Topic: Supply curve and marginal cost curve Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

11) A supply curve shows the marginal A) benefit consumers receive from consuming a good. B) profit businesses earn from selling a good. C) cost of producing the good. D) price paid for a good. E) benefit sellers receive from selling a good. Answer: C Topic: Supply curve and marginal cost curve Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

12) The supply curve is upward sloping because of A) increasing marginal cost. B) decreasing marginal benefit. C) decreasing marginal cost. D) increasing marginal benefit. E) increasing total cost. Answer: A Topic: Supply curve and marginal cost curve Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

13) Which of the following is a correct description of the supply curve? i. The supply curve is also the marginal cost curve. ii. The supply curve shows the dollars' worth of other goods that we must sacrifice to produce another unit of a good. iii. The supply curve shows the additional cost of producing another unit of a good. A) i only B) i and ii C) ii and iii D) i, ii, and iii E) ii only Answer: D Topic: Supply curve and marginal cost curve Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

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

15) The figure shows the t-shirt market. For which shirt does the marginal cost of producing the shirt equal the producer surplus from the shirt? A) the 4,000th shirt B) the 24,000th shirt C) the 12,000th shirt D) the 8,000th shirt E) All of the answers above are correct because the marginal cost of producing a shirt always equals the producer surplus from the shirt. Answer: A Topic: Marginal cost Skill: Level 3: Using models Section: Checkpoint 6.3 Status: New AACSB: Application of knowledge

16) The total cost of producing 24,000 t-shirts is ________ which equals the ________. A) $84,000; amount received minus the producer surplus B) $156,000; sum of the amount received plus the producer surplus C) $36,000; producer surplus D) $120,000; amount received E) $5; amount received for the 24,000th t-shirt. Answer: A Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.3 Status: New AACSB: Application of knowledge

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

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

19) Producer surplus is the ________ summed over the quantity produced. A) price of the good minus the marginal cost of producing it B) marginal benefit of the good minus its marginal cost C) marginal benefit of the good minus its price D) marginal cost of the good minus the opportunity cost of producing it E) None of the above answers is correct. Answer: A Topic: Producer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

20) Producer surplus definitely exists when the A) price exceeds marginal benefit. B) price exceeds marginal cost. C) marginal cost exceeds the price. D) marginal benefit exceeds the price. E) marginal benefit exceeds the marginal cost. Answer: B Topic: Producer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

21) When the price of a product exceeds the marginal cost of producing it, producers have a A) consumer surplus. B) producer surplus. C) consumer shortage. D) producer shortage. E) deadweight surplus. Answer: B Topic: Producer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

22) If the price is greater than the marginal cost of producing a good, the seller has A) no benefit from the sale. B) a loss. C) some producer surplus from the sale. D) some negative consumer surplus from the sale. E) None of the above answers is correct. Answer: C Topic: Producer surplus Skill: Level 1: Definition Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

23) The producer surplus is found by subtracting the ________ and then adding the difference for all units sold. A) marginal cost from price B) price from marginal cost C) marginal benefit from total benefit D) marginal cost from marginal benefit E) deadweight loss from the price Answer: B Topic: Producer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

24) When the price rises and the supply curve does not shift, the firms' producer surplus ________. When the price falls and the supply curve does not shift, the firms' producer surplus ________. A) increases; decreases B) decreases; increases C) decreases; decreases D) increases; increases E) does not change; does not change Answer: A Topic: Producer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

25) The producer surplus of making and selling 10 chairs is found by A) multiplying the selling price by 10. B) subtracting the marginal cost from the selling price for each chair and summing the differences for all 10 chairs. C) subtracting from the total revenue the cost of producing one chair multiplied by 10. D) adding the marginal cost and the price of all 10 chairs. E) None of the above answers is correct. Answer: B Topic: Producer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking

26) Producer surplus A) increases if market price rises and the supply curve does not shift. B) decreases if market price rises and the supply curve does not shift. C) is equal to the maximum price consumers are willing to pay. D) is the same as the marginal cost. E) always must equal consumer surplus. Answer: A Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking

27) Hester owns an ice cream shop. It costs her $2 per cone to make 10 ice cream cones. If she sells 10 cones for $4 each, her producer surplus on the 10 cones is equal to A) $2. B) $20. C) $10. D) $40. E) $4. Answer: B Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking

28) If a firm produces five chairs with marginal costs of $25, $30, $40, $55, and $75, respectively, and sells them for $80 each, what is the firm's total producer surplus? A) $400 B) $225 C) $175 D) $150 E) $80 Answer: C Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking

29) The price of a cowboy hat is $100. Willie can produce a hat at a marginal cost of $130, Waylon can produce at a marginal cost of $100, and Merle can produce at a marginal cost of $85. Which of the following statements is correct? A) The sum of producer surplus is $15. B) All three of these sellers will gain producer surplus from selling a hat. C) The sum of producer surplus is $30. D) Willie's producer surplus is $30. E) The sum of producer surplus is $45. Answer: A Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

30) Graphically, producer surplus is the area under the A) demand curve and above the supply curve, up to the relevant quantity. B) price and above the demand curve, up to the relevant quantity. C) price and above the supply curve, up to the relevant quantity. D) price and above the quantity axis, up to the relevant quantity. E) demand curve and above the price, up to the relevant quantity. Answer: C Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking

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

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

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

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

35) The figure above shows the supply curve for soda. The market price is $1.00 per soda. The ________ price that must be offered so that the 10,000th soda is produced is ________. A) minimum; $0.50 B) minimum; $1.00 C) maximum; $0.50 D) maximum; $1.00 E) minimum; more than $0.50 but less than $1.00 Answer: A Topic: Marginal cost Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking

36) The figure above shows the supply curve for soda. The market price is $1.00 per soda. The producer surplus from the 10,000th soda is A) $0.00. B) $0.50. C) $1.00. D) more than $1.00. E) None of the above answers is correct. Answer: B Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking

37) The figure above shows the supply curve for soda. The market price is $1.00 per soda. The producer surplus from the 20,000th soda is A) $0.00. B) $0.50. C) $1.00. D) more than $1.00. E) None of the above answers is correct. Answer: A Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking

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

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

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

41) In the figure above, the equilibrium market price is $20. The producer surplus is shown by the area A) A. B) B. C) A + B. D) A ÷ B. E) A - B. Answer: A Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking

42) In the figure above, the equilibrium market price is $20. The producer surplus equals A) $20. B) $1,500. C) $3,000. D) 150. E) $4,500. Answer: B Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking

43) Cost A) is what the buyer pays to get the good. B) is always equal to the marginal benefit for every unit of a good produced. C) is what the seller must give up to produce the good. D) is greater than market price, which results in a profit for firms. E) means the same thing as price. Answer: C Topic: Costs Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

44) If a firm is willing to supply the 1,000th unit of a good at a price of $23 or more, we know that $23 is the A) highest price the seller hopes to realize for this output. B) minimum price the seller must receive to produce this unit. C) average price of all the prices the seller could charge. D) price that sets the marginal benefit equal to the price. E) only price for which the seller is willing to sell this unit of the good. Answer: B Topic: Supply and marginal cost Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

45) A supply curve shows the ________ of producing one more unit of a good or service. A) producer surplus B) consumer surplus C) total benefit D) marginal cost E) marginal benefit to the producer Answer: D Topic: Supply curve and marginal cost curve Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

46) The producer surplus on a unit of a good is A) equal to the marginal benefit from the good minus its price. B) equal to the price of the good minus the marginal cost of producing it. C) always equal to consumer surplus. D) Both answers A and C are correct. E) Both answers B and C are correct. Answer: B Topic: Producer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

47) Suppose you're willing to tutor a student for $10 an hour. The student pays you $15 an hour. What is your producer surplus? A) $5 an hour B) $10 an hour C) $15 an hour D) $25 an hour E) More than $25 an hour Answer: A Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking

48) In a figure that shows a supply curve and a demand curve, producer surplus is the area A) below the demand curve and above the market price. B) below the supply curve and above the market price. C) above the demand curve and below the market price. D) above the supply curve and below the market price. E) between the demand curve and the supply curve. Answer: D Topic: Producer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking

6.4 Are Markets Efficient? 1) In a competitive market with no externalities, A) the consumer surplus is equal to zero because of competition. B) buyers cannot control the price, so the consumer surplus is zero. C) at the equilibrium price, marginal benefit exceeds marginal cost. D) at the equilibrium price, marginal benefit equals marginal cost. E) at the equilibrium price, the total amount of consumer surplus equals the total amount of producer surplus. Answer: D Topic: Market efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

2) A competitive market with no externalities is efficient when it is in equilibrium because A) total benefit equals total cost. B) marginal benefit equals marginal cost. C) consumer surplus equals producer surplus. D) the sum of consumer surplus plus producer surplus is minimized. E) the deadweight gain equals its maximum. Answer: B Topic: Market efficiency Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

3) If marginal benefit is equal to marginal cost, then the A) producer surplus is equal to the consumer surplus. B) sum of producer surplus and consumer surplus is as large as possible. C) sum of producer surplus and consumer surplus equals zero. D) market has squeezed out total surplus so that it equals zero. E) deadweight loss is more than zero but less than its maximum. Answer: B Topic: Total surplus Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

4) Which of the following occurs when a market is efficient? A) Consumer surplus equals producer surplus. B) Consumer surplus is as large as possible. C) Producer surplus is as large as possible. D) The sum of consumer surplus and producer surplus is maximized. E) The marginal benefit exceeds the marginal cost by as much as possible. Answer: D Topic: Total surplus Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

5) Efficiency occurs in a market when A) the sum of consumer surplus and producer surplus is maximized. B) consumer surplus is equal to producer surplus. C) consumer surplus is less than producer surplus. D) consumer surplus is greater than producer surplus. E) total revenue is maximized. Answer: A Topic: Market efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

6) Efficiency in a market occurs when the production of the good is such that A) marginal benefit exceeds marginal cost. B) marginal benefit equals marginal cost. C) marginal benefit is lower than marginal cost. D) the marginal cost stops increasing. E) marginal benefit exceeds marginal cost by the maximum amount possible. Answer: B Topic: Market efficiency Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

7) At the market equilibrium, when efficiency is attained, the marginal benefit ________ the marginal cost. A) is equal to B) is greater than C) is less than D) has no necessary relationship with E) is equal to the marginal deadweight loss which is equal to Answer: A Topic: Market efficiency Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

8) If the market for bicycles is efficient, then A) no more bicycles can be produced. B) marginal benefit exceeds marginal cost. C) consumer surplus must be greater than producer surplus. D) it is not possible to produce more bicycles without sacrificing another, more highly valued good. E) consumer surplus must equal producer surplus. Answer: D Topic: Market efficiency Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

9) When efficiency is attained, the sum of the total amount of consumer surplus and producer surplus is A) minimized. B) maximized. C) equal to the deadweight loss. D) undefined. E) equal to zero. Answer: B Topic: Market efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

10) When efficiency is attained, the consumer surplus A) must be larger than the producer surplus. B) must be smaller than the producer surplus. C) must equal the producer surplus. D) can be either smaller than or larger than but cannot equal the producer surplus. E) can be smaller than, equal to, or larger than the producer surplus. Answer: E Topic: Market efficiency Skill: Level 3: Using models Section: Checkpoint 6.4 Status: New AACSB: Analytical thinking

11) If the marginal benefit of a hot dog is greater than its marginal cost, then to increase efficiency, A) more hot dogs should be produced. B) fewer hot dogs should be produced. C) nothing should be done if the marginal benefit is greater than the marginal cost by the maximum amount because in this case the efficient quantity of hot dogs is being produced. D) production should be halted. E) More information is needed about the price of a hot dog in order to determine if production should be increased, decreased, or not changed. Answer: A Topic: Market efficiency Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

12) If the demand curve is the same as the marginal benefit curve and the supply curve is the same as the marginal cost curve, then the quantity at which they cross is i. the equilibrium quantity. ii. the allocatively efficient quantity. iii. the quantity with no deadweight loss. A) i, ii, and iii. B) i only. C) ii only. D) i and ii. E) i and iii. Answer: A Topic: Market efficiency Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

13) The figure above shows the t-shirt market. The t-shirt market is efficient at a quantity of ________ tshirt(s) because this is the quantity where the ________. A) 30,000; marginal cost equals the marginal benefit B) 30,000; total surplus is maximized C) 1; difference between the supply and demand curves is greatest D) 1; the price is the highest E) both A and B are correct. Answer: E Topic: Efficient equilibrium Skill: Level 3: Using models Section: Checkpoint 6.4 Status: New AACSB: Application of knowledge

14) The figure above shows the t-shirt market. The t-shirt market produces an efficient outcome at a quantity equal to A) 30,000 because total surplus is maximized. B) 20,000 because consumer surplus is greater than producer surplus. C) 20,000 because producer surplus is greater than consumer surplus. D) 10,000 because marginal benefit exceeds marginal cost. E) 10,000 because marginal cost exceeds marginal benefit. Answer: A Topic: Efficient equilibrium Skill: Level 3: Using models Section: Checkpoint 6.4 Status: New AACSB: Application of knowledge

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

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

17) The figure above represents the competitive market for slices of key lime pie. If the production is 80 slices per day, the cost of the 80th slice is A) less than anyone is willing to pay for it. B) more than anyone is willing to pay for it. C) equal to what someone is willing to pay for it. D) indeterminant. E) equal to the deadweight loss from the 80th slice. Answer: B Topic: Market efficiency Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

18) The figure above represents the competitive market for slices of key lime pie. When 60 slices are produced, the marginal cost A) exceeds the marginal benefit. B) is less than the marginal benefit. C) equals the marginal benefit. D) is not defined. E) equals the deadweight loss on the 60th slice. Answer: C Topic: Market efficiency Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

19) The figure above represents the competitive market for slices of key lime pie. When the price equals $3 A) there is a shortage of slices of pie. B) there is a surplus of slices of pie. C) the efficient quantity of slices is being produced. D) the quantity produced is inefficient. E) the deadweight loss is maximized. Answer: C Topic: Market efficiency Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

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

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

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

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

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

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

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

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

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

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

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

31) The concept of "the invisible hand" suggests that A) products are produced out of a seller's sense of charity. B) when the seller is better off, the buyer is worse off. C) sellers exploit consumers with high prices. D) buyers and sellers are self-interested. E) the command system is the only way of efficiently allocating resources. Answer: D Topic: Invisible hand Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

32) Adam Smith's Wealth of Nations, written in 1776, describes the market's invisible hand representing the A) King of England's control over the colonies. B) control all governments have in organizing the market. C) efficiency the market achieves without the interference of governments. D) inefficiency of markets when governments do not organize them. E) invisible command system that efficiently allocates resources. Answer: C Topic: Invisible hand Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

33) What did Adam Smith identify as the source of the invisible hand in 1776? A) a benevolent central government that decided was best for everyone B) an individual's concern for fellow humans C) an individual's own self-interest D) the stock market E) buyers' and suppliers' concerns to obtain and retain good reputations Answer: C Topic: Invisible hand Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

34) The "invisible hand" refers to the notion that A) competitive markets send resources to their highest valued uses. B) government intervention is necessary to ensure efficiency. C) marginal benefit decreases as more is consumed. D) marginal cost increases as more is produced. E) no matter what allocation method is used, the resulting production is efficient. Answer: A Topic: Invisible hand Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

35) The efficiency of competitive markets happens because A) of the benevolence of the butcher, the brewer, and the baker. B) people make environmentally aware purchasing decisions. C) prices adjust to make buying plans and selling plans compatible. D) government organizes and monitors production. E) the U.S. economy uses a command system to allocate resources within the competitive markets. Answer: C Topic: Invisible hand Skill: Level 4: Applying models Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

36) The concept of "the invisible hand" suggests that to attain efficiency, the government should A) guide economic activity. B) set prices. C) leave prices and output decisions to the competitive market. D) regulate all production decisions, but not price decisions. E) make sure that a command system is used to allocate resources. Answer: C Topic: Invisible hand Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

37) In a competitive market for a private good with no price or quantity regulations, no external cost nor external benefit, low transactions costs, and no taxes or subsidies, A) the allocation of resources is planned by the government. B) production is organized by government organizations. C) efficiency can be attained in the market with no government intervention. D) efficiency is usually be achieved by majority rule. E) efficiency is generally obtained by using a command system. Answer: C Topic: Invisible hand Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

38) At a competitive equilibrium, if there are no taxes, subsidies, price regulations, quantity regulations, or externalities, A) the marginal benefit is greater than the marginal cost. B) resource use is efficient. C) the marginal benefit is less than the marginal cost. D) both the marginal benefit and the marginal cost of the last unit produced equal zero. E) the marginal benefit is greater than the marginal cost by as much as possible. Answer: B Topic: Invisible hand Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

39) At a competitive market equilibrium, if there are no taxes, subsidies, price regulations, quantity regulations, or externalities, i. consumer surplus is minimized. ii. marginal cost equals marginal benefit. iii. resources are efficiently used. iv. producer surplus is minimized. A) ii and iii B) i and ii C) i and iv D) i, ii, iii, and iv E) ii only Answer: A Topic: Invisible hand Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

40) When technology increases the supply of a good and lower prices increase the quantity demanded, A) the economy is reallocating resources to achieve an efficient allocation. B) consumer surplus falls. C) the invisible hand is unnecessary. D) the marginal benefit of the good increases with the quantity produced. E) the economy is no longer efficient because the quantity changes. Answer: A Topic: Invisible hand Skill: Level 4: Applying models Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

41) When output is less than the efficient level, A) consumers are willing to pay more for another unit than it costs to produce the unit. B) the amount consumers are willing to pay equals the cost of production. C) the cost of production is greater than the price consumers are willing to pay. D) the production costs can't be measured. E) the marginal cost of producing the good must be greater than the marginal benefit from the good. Answer: A Topic: Underproduction Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

42) When there is market failure so that a market produces less than the efficient amount, A) consumer surplus definitely is larger than when the efficient quantity is produced. B) the sum of producer surplus and consumer surplus is larger than when the efficient quantity is produced. C) there is a deadweight loss. D) consumers definitely lose and producers definitely gain. E) consumers definitely gain and producers definitely lose. Answer: C Topic: Underproduction Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

43) A quantity less than the equilibrium quantity in a competitive market is inefficient because A) the marginal benefit of another unit is greater than its marginal cost. B) too much of the good is being produced. C) the marginal cost of another unit is greater than its marginal benefit. D) the marginal benefit of another unit is not equal to zero. E) the marginal benefit is not maximized. Answer: A Topic: Underproduction Skill: Level 5: Critical thinking Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

44) Overproduction results in A) external costs. B) external benefits. C) deadweight loss. D) super-efficiency. E) the marginal benefit of the last unit produced being larger than the marginal cost. Answer: C Topic: Overproduction Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

45) What do economists call the loss society experiences when there is market failure and the production of a good is less than the efficient amount? A) tax B) subsidy C) price floor D) deadweight loss E) quantity restriction Answer: D Topic: Deadweight loss Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

46) In the above figure, if the market is in equilibrium, area A + area B + area C equals A) total surplus. B) consumer surplus. C) deadweight loss. D) producer surplus. E) total revenue. Answer: B Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

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

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

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

50) In the above figure, if the quantity is equal to 2,500,000 units, the deadweight loss is equal to A) area B + area F. B) area D + area I. C) area C. D) area G + area H. E) None of the above answers is correct because the deadweight loss is equal to zero. Answer: B Topic: Deadweight loss Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

51) In the above figure, if the quantity is equal to 1,500,000 units, the deadweight is equal to A) area A + area B. B) area C. C) area B + area F. D) area G + area H. E) None of the above answers is correct because the deadweight loss is equal to zero. Answer: E Topic: Deadweight loss Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

52) Which of the following leads to a deadweight loss? i. overproduction ii. underproduction iii. taxes iv. monopoly A) ii only B) iii and iv C) i and ii D) i, ii, iii, and iv E) i, ii, and iii Answer: D Topic: Obstacles to efficiency Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

53) Which of the following leads to a deadweight loss? i. competition ii. taxes iii. consumer surplus iv. monopoly A) ii only B) iii and iv C) i and ii D) ii and iv E) i, ii, and iii Answer: D Topic: Obstacles to efficiency Skill: Level 1: Definition Section: Checkpoint 6.4 Status: New AACSB: Reflective thinking

54) Which of the following government policies ensures market efficiency? A) subsidy B) tax C) price regulations D) quantity regulations E) None of the above answers is correct. Answer: E Topic: Obstacles to efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

55) Obstacles in achieving efficiency in a market include A) public goods. B) the presence of an external cost or benefit. C) competition. D) Both answers A and C are correct. E) Both answers A and B are correct. Answer: E Topic: Obstacles to efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

56) If the government imposes a tax on a competitive market with no externalities, then i. resource use is not efficient. ii. there is a deadweight loss. iii. consumer surplus is at its maximum. A) ii only B) i and ii C) iii only D) i and iii E) i, ii, and iii Answer: B Topic: Taxes Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

57) What is the impact of a government subsidy to producers? A) Less is produced relative to the efficient level, creating a deadweight loss. B) More is produced relative to the efficient level, creating a deadweight loss. C) Producer surplus is increased, which creates a larger consumer surplus. D) Producers are able to sell the product at a higher price. E) Consumers must pay a higher price for the good. Answer: B Topic: Subsidies Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

58) Subsidies ________ the price paid by the buyer and ________ the price received by the seller. A) increase, increase B) increase, decrease C) decrease, increase D) decrease, decrease E) do not change; increase Answer: C Topic: Subsidies Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

59) When there is a cost or benefit that affects someone other than the seller and buyer, then there is A) a tax. B) a subsidy. C) a quantity regulation. D) a price regulation. E) an externality. Answer: E Topic: Externalities Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

60) When the cost of producing a product is paid, at least in part, by someone other than the producer, the cost is referred to as A) an external cost. B) an external profit. C) an external benefit. D) an external/internal cost. E) a public cost. Answer: A Topic: External cost Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

61) A cost not borne by the producer but borne by other people is known as ________ cost. A) a marginal B) an internal C) an external D) a nonessential E) a subsidized Answer: C Topic: External cost Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

62) Air pollution is an external cost because it A) is a pollution of the external environment. B) is a cost not borne by the producer of the good. C) benefits no one. D) is not associated with resource use. E) is created only when production occurs. Answer: B Topic: External cost Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

63) When a product benefits people other than the buyer of the product, the product is said to have A) an external cost. B) an excludable cost. C) an external benefit. D) an excludable benefit. E) a subsidized benefit. Answer: C Topic: External benefit Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

64) A benefit that accrues to people other than the buyer of a good is known as ________ benefit. A) an internal B) an external C) a marginal D) a total E) a subsidized Answer: B Topic: External benefit Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

65) A public good A) is a good that is usually consumed in public, such as a restaurant meal. B) is a good people can consume even if they do not pay for it. C) is a good produced by government. D) results in an efficient allocation of resources. E) is a good for which people are willing to pay a very high price. Answer: B Topic: Public good Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

66) A good or service can be consumed by a person even if he or she didn't pay for it is called ________ good. A) a private B) a public C) a normal D) an inferior E) an external Answer: B Topic: Public good Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

67) When people cannot be excluded from consuming a good, even if they have not paid for the good, competitive markets would A) produce more of the good than society needs. B) allocate more resources than the efficient amount to the production of the good. C) produce the good so that people could enjoy a "free ride." D) produce less than the efficient quantity. E) eliminate the deadweight loss. Answer: D Topic: Public good Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

68) A monopoly is A) the single buyer of some good or service. B) a firm that has control of a market because it is the only seller. C) a firm that creates enormous external costs. D) a firm that faces intense competition. E) a cost of producing a good or service. Answer: B Topic: Monopoly Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

69) If one producer has control over an entire market and underproduces, the producer will A) increase producer surplus by lowering pollution costs. B) increase consumer surplus by lowering producer surplus. C) increase both consumer and producer surplus. D) create a deadweight loss. E) decrease the deadweight loss that would exist if the market were efficient. Answer: D Topic: Monopoly Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

70) Deadweight loss and market failure are created when a market produces A) either more or less than the efficient quantity. B) more than the efficient quantity but not when less than the efficient quantity is produced. C) less than the efficient quantity but not when more than the efficient quantity is produced. D) the efficient quantity. E) None of the above answers is correct because deadweight loss has nothing to do with the efficient quantity. Answer: A Topic: Deadweight loss Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

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

72) The figure above shows the market for pants. If 6 million pairs of pants are produced, the deadweight loss is A) zero. B) the triangle ABE. C) the triangle BCE. D) the triangle ACE. E) the triangle BCE minus the triangle ABE. Answer: A Topic: Deadweight loss Skill: Level 4: Applying models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

73) The figure above shows the market for pants. If the production of the pants results in an external cost from pollution that is the result of the dye used, then A) 6 million pairs is the efficient quantity. B) fewer than 6 million pairs is the efficient quantity. C) more than 6 million pairs is the efficient quantity. D) None of the above answers is necessarily correct because more information is needed about the size of the external cost. E) None of the above answers is correct because it is impossible to tell whether the external cost results in underproduction or overproduction. Answer: B Topic: External cost Skill: Level 4: Applying models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

74) The figure above shows the market for pants. If the government subsidizes the production of pants so that production expands from 6 million pairs to 7 million pairs, A) there would be no deadweight loss. B) the government's policy would have no effect on the sum of consumer surplus and producer surplus. C) a deadweight loss would result. D) the government's policy would increase the sum of consumer surplus and producer surplus. E) production would be even more efficient than if 6 million pairs of pants are produced because more is always better than less. Answer: C Topic: Subsidies Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

75) When a market is efficient, the A) sum of consumer surplus and producer surplus is maximized. B) deadweight gain is maximized. C) quantity produced is maximized. D) marginal benefit of the last unit produced exceeds the marginal cost by as much as possible. E) total benefit equals the total cost. Answer: A Topic: Market efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

76) Which of the following occurs when a market is efficient? A) Producers earn the highest income possible. B) Production costs equal total benefit. C) Consumer surplus equals producer surplus. D) Scarce resources are used to produce the goods and services that people value most highly. E) Every consumer has all of the good or service he or she wants. Answer: D Topic: Market efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

77) The concept of "the invisible hand" suggests that markets A) do not produce the efficient quantity. B) are always fair. C) produce the efficient quantity. D) are unfair. E) allocate resources unfairly and inefficiently. Answer: C Topic: Invisible hand Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

78) When underproduction occurs, A) producers gain more surplus at the expense of consumers. B) marginal cost is greater than marginal benefit. C) consumer surplus increases to a harmful amount. D) there is a deadweight loss that is borne by the entire society. E) the deadweight loss harms only consumers. Answer: D Topic: Underproduction Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

79) When production moves from the efficient quantity to a point of overproduction, A) consumer surplus definitely increases. B) the sum of producer surplus and consumer surplus increases. C) there is a deadweight loss. D) consumers definitely lose and producers definitely gain. E) consumers definitely gain and producers definitely lose. Answer: C Topic: Deadweight loss Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

80) Which of the following can result in a market producing an inefficient quantity of a good? i. competition ii. an external cost or an external benefit iii. a tax A) i only B) iii only C) ii only D) ii and iii E) i and iii Answer: D Topic: Obstacles to efficiency Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

81) A country decides to impose a tax to reduce the external cost created by carbon emissions. Prior to the tax, ________ and as a result of the tax ________. A) market failure occurred; the deadweight loss is reduced B) there was no deadweight loss; a market failure occurs because taxes reduce production C) market failure occurred; producer surplus will equal consumer surplus D) producer surplus equals consumer surplus; marginal cost equals marginal benefit E) marginal cost equals marginal benefit; marginal cost will be less than marginal benefit Answer: A Topic: Market failure Skill: Level 5: Critical thinking Section: Checkpoint 6.4 Status: New AACSB: Reflective thinking

6.5 Are Markets Fair? 1) Economists conclude that the only way to measure fairness is A) to insure that the rules are fair. B) to insure that the result is fair. C) to insure that both the rules and the result are fair. D) to compare the allocatively efficient quantity to the equilibrium quantity. E) None of the above answers is correct. Answer: E Topic: Fair rules Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Old AACSB: Ethical understanding and reasoning

2) Equal opportunity but unequal results A) occurs only when the economy is not producing at the allocative efficient point on the PPF. B) means that the outcome is definitely not fair. C) can occur under the fair-rules view of fairness. D) cannot occur if all exchange is voluntary. E) occurs only if the state fails to establish and protect private property rights. Answer: C Topic: Fair rules Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Revised AACSB: Ethical understanding and reasoning

3) Assume the Nozick rules are being followed in the economy so that the distribution of income is fair. What must be true for this to create an efficient allocation of resources? A) All people are earning equal incomes. B) There are no public goods, monopolies, high transactions costs, or external costs and benefits. C) The costs of administering redistribution equals the benefits the poor receive. D) The government must redistribute income in a fashion that minimizes the "big tradeoff." E) The government must allocate resources using a command mechanism. Answer: B Topic: Fair rules Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Old AACSB: Ethical understanding and reasoning

4) An unequal distribution of income is considered fair according to Robert Nozick if A) marginal cost equals marginal benefit. B) the cost of administering a welfare system is minimized. C) property rights are enforced and voluntary exchange occurs. D) the economy is producing its maximum total output. E) resources are allocated using the command method. Answer: C Topic: Fair rules Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Old AACSB: Ethical understanding and reasoning

5) Which of the following is most closely related to the "fair results" approach to fairness? A) efficient resource use B) having an equal income distribution C) voluntary exchange D) the command system of allocating resources E) price hikes in a natural disaster Answer: B Topic: Fair results Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Old AACSB: Ethical understanding and reasoning

6) Outcomes are fair according to the A) rules view if private property rights are established and trade is voluntary. B) results view if private property rights are established and trade is voluntary. C) rules view if there is not too much inequality. D) results view if there is not a big tradeoff. E) results view if there is equality of opportunity. Answer: A Topic: Fairness Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Old AACSB: Reflective thinking

7) The "big tradeoff" refers to A) producing capital goods instead of consumable goods. B) marginal benefit versus marginal cost. C) efficiency and fairness. D) taking an economics course instead of some other course. E) using market prices rather than a command system to allocate resources. Answer: C Topic: Big tradeoff Skill: Level 1: Definition Section: Checkpoint 6.5 Status: Old AACSB: Reflective thinking

8) The idea of the "big tradeoff" points out the costs of A) using a results approach to fairness when the rules approach is correct. B) transferring income using taxes that decrease efficiency. C) price hikes during natural disasters. D) using a rules approach to fairness when the results approach is correct. E) None of the above answers is correct. Answer: B Topic: Big tradeoff Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Old AACSB: Reflective thinking

9) When economists use the term "big tradeoff" when discussing efficiency they are referring to the tradeoff between A) external costs and external benefits. B) marginal cost and marginal benefits. C) producer surplus and consumer surplus. D) efficiency and fairness. E) deadweight loss and producer/consumer surplus. Answer: D Topic: Big tradeoff Skill: Level 1: Definition Section: Checkpoint 6.5 Status: Old AACSB: Reflective thinking

10) Which of the following is true for taxes? They A) are always administered fairly. B) are a necessary part of living in an economy with a fair distribution of income. C) are always administered without creating unfairness or inefficiency. D) are an involuntary transfer of private property. E) do not create a big tradeoff problem. Answer: D Topic: Big tradeoff Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Old AACSB: Reflective thinking

11) Which of the following is part of the cost of income transfers? A) Tax-collecting agencies cost money to administer. B) Taxing incomes encourages people to work harder. C) Income transfers make the results more unfair. D) Income transfers increase the size of the economic pie. E) Income transfers are a similar to allocating resources using a lottery. Answer: A Topic: Big tradeoff Skill: Level 3: Using models Section: Checkpoint 6.5 Status: Old AACSB: Reflective thinking

12) As pointed out by the "big tradeoff," government action that redistributes incomes so that everyone has the same income leads to A) fairness according to the "fair rules" approach. B) efficient markets. C) resources being allocated according to a command system. D) a smaller total output. E) lower taxes on the rich than on the poor so that the rich do not lose their incentive to work. Answer: D Topic: Big tradeoff Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Old AACSB: Reflective thinking

13) Redistributing income from the rich to the poor creates inefficiency because A) of wasteful expenditures by people receiving welfare grants. B) of the administrative costs to operate the government redistribution agencies. C) the redistribution creates an incentive to produce less output. D) Both answers B and C are correct. E) Both answers A and C are correct. Answer: D Topic: Big tradeoff Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Old AACSB: Reflective thinking

14) Why does redistribution, so that the distribution of income is equal, bring about less total output? A) Incentives to work are reduced. B) No one can determine marginal benefit or marginal cost as a result. C) Those in political power will likely receive a larger income. D) Because the marginal benefit and marginal cost of work have been equally increased. E) The premise of the question is incorrect because an equal distribution of income would increase rather than decrease the total amount produced. Answer: A Topic: Big tradeoff Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Old AACSB: Reflective thinking

15) Suppose Kansas had a severe ice storm that caused electrical blackouts. The Fictitious Portable Generator firm of Lawrence had several portable generators that could be used by homeowners to provide electricity. Which of the following would be the fair-rules way to provide them? A) The government confiscates the generators owned by Fictitious and distributes them. B) Fictitious is forced by the state to rent the generators at half the normal rate. C) The state sets up a lottery to determine who rents the available generators at the normal rate. D) Fictitious rents generators at the equilibrium market price. E) Fictitious follows government commands about who gets to use the generators. Answer: D Topic: Fairness in natural disasters Skill: Level 4: Applying models Section: Checkpoint 6.5 Status: Revised AACSB: Ethical understanding and reasoning

16) If the government takes over the distribution of some scarce good in a time of a natural disaster and provides the good at no charge to users, what must also be done? A) The government must produce the good itself. B) Some rationing mechanism must be set up to determine who gets the good. C) Everyone hurt in the natural disaster must get one of the goods. D) nothing E) Because we live in a democracy, the government must use majority rule as the rationing mechanism. Answer: B Topic: Fairness in natural disasters Skill: Level 3: Using models Section: Checkpoint 6.5 Status: Old AACSB: Reflective thinking

17) The "fair rules" view of fairness is based on A) income transfers from the rich to the poor. B) property rights and voluntary exchange. C) utilitarianism. D) the big tradeoff. E) allocating resources using majority rule. Answer: B Topic: Fair rules Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Old AACSB: Ethical understanding and reasoning

18) The idea that unequal incomes are unfair generally uses the ________ principle of fairness. A) big tradeoff B) involuntary exchange C) voluntary exchange D) it's not fair if the result isn't fair E) it's not fair if the rules aren't fair Answer: D Topic: Fair results Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Old AACSB: Ethical understanding and reasoning

19) Which of the following is an example in which "the big tradeoff" can occur? A) The government redistributes income from the rich to the poor. B) Ford increases the price of a pickup truck. C) A basketball player signs a $5 million contract. D) A college lowers tuition. E) The price of personal computers falls year after year. Answer: A Topic: The big tradeoff Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Old AACSB: Reflective thinking

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

6.6 Chapter Figures

The figure above shows the PPF, marginal cost curve, and marginal benefit curve for pizza. 1) In the figure above, production efficiency occurs at ________, and allocative efficiency occurs at ________.

A) all points on the PPF; only one point on the PPF B) only one point on the PPF; all points on the PPF C) only one point on the PPF; only one point on the PPF D) all points on the PPF; all points on the PPF E) all points on the PPF; all points above the PPF Answer: A Topic: Allocative efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking

2) In the figure above, when 2,000 pizzas are produced, the marginal benefit of a pizza ________ its marginal cost, which means ________ pizza is being produced. A) exceeds; too little B) exceeds; too much C) is below; too much D) is below; too little E) equals; the efficient quantity of Answer: A Topic: Allocative efficiency Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking

3) In the figure above, when 6,000 pizzas are produced, the marginal benefit of a pizza ________ its marginal cost, which means ________ pizza is being produced. A) exceeds; too little B) exceeds; too much C) is below; too much D) is below; too little E) equals ; the efficient quantity of Answer: C Topic: Allocative efficiency Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking

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

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

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

7) In the figure above, what is the consumer surplus per day? A) $100,000 B) $50,000 C) $125,000 D) $150,000 E) zero Answer: B Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

8) In the figure above, the total benefit from pizza is ________ per day. A) $100,000 B) $50,000 C) $125,000 D) $150,000 E) None of the above answers is correct. Answer: D Topic: Total benefit Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

The figure above shows the supply curve for pizza and the market price of pizza. 9) In the figure above, the minimum price that must be offered for the 5,000th pizza a day to be produced is A) $6. B) $10. C) $8. D) $2. E) $4. Answer: A Topic: Minimum supply price Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking

10) In the figure above, the cost of producing 10,000 pizzas a day is A) $60,000. B) $100,000. C) $40,000. D) $80,000. E) $50,000. Answer: A Topic: Total cost Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking

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

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

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

14) In the figure above, if pizza production is restricted to 5,000 pizzas a day, then marginal benefit ________ marginal cost, and ________ occurs. A) exceeds; overproduction B) exceeds; underproduction C) is below; overproduction D) is below; underproduction E) exceeds; efficient production Answer: B Topic: Underproduction Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

15) In the figure above, if pizza production increases to 15,000 pizzas a day, then marginal benefit ________ marginal cost, and ________ occurs. A) exceeds; overproduction B) exceeds; underproduction C) is below; overproduction D) is below; underproduction E) exceeds; efficient production Answer: C Topic: Overproduction Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

16) In the figure above, if pizza production is restricted to 5,000 pizzas a day, the deadweight loss is A) $45,000 per day. B) $12,500 per day. C) $22,500 per day. D) $90,000 per day. E) zero. Answer: C Topic: Deadweight loss Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

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

6.7 Integrative Questions

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

2) The figure above shows the market for brooms. If 800 brooms are produced, A) consumer surplus is maximized. B) producer surplus is maximized. C) market failure and a deadweight loss occur. D) marginal cost is less than marginal benefit. E) there is no deadweight loss. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

3) The figure above shows the market for brooms. If 800 brooms are produced, A) marginal cost exceeds marginal benefit. B) a deadweight loss does not occur because everyone who wants to buy a broom can. C) the "big tradeoff" occurs. D) value exceeds price. E) the "fair results" approach to fairness is definitely not violated. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

4) The figure above shows the market for brooms. If 400 brooms are produced, A) consumer surplus is maximized. B) producer surplus is maximized. C) market failure and a deadweight loss occur. D) marginal cost is greater than marginal benefit. E) consumer surplus equals zero. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

5) The figure above shows the market for brooms. Which of the following could lead to the production of fewer than 600 brooms? A) a monopoly B) a deadweight loss C) subsidies D) an external cost E) a big tradeoff Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

6) When society must decrease the production of something in order to produce more of another good or service, society has necessarily achieved A) only production efficiency. B) only allocative efficiency. C) both production efficiency and allocative efficiency. D) a free lunch. E) the maximum opportunity cost. Answer: A Topic: Production efficiency Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking

7) When a society achieves production efficiency, it is A) definitely producing at a point on its PPF. B) perhaps producing at a point on its PPF and perhaps producing at a point inside its PPF. C) definitely producing that combination of goods and services that society values most highly. D) not fully employing all of its available resources to produce goods and services. E) enjoying a free lunch. Answer: A Topic: Production efficiency Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking

8) Production efficiency requires that A) the economy be producing on the PPF but the marginal cost of a good does not need to equal its marginal benefit. B) the economy be producing on the PPF and that the marginal cost of a good equals its marginal benefit. C) the marginal cost of a good equals its marginal benefit but the economy does not need to be producing on its PPF. D) the society be producing at the point of allocative efficiency. E) opportunity costs be minimized. Answer: A Topic: Production efficiency Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

9) If an economy is producing on its PPF, then it is definitely achieving A) both production and allocative efficiency. B) only production efficiency, but it definitely is not achieving allocative efficiency. C) only allocative efficiency, but it is definitely not achieving production efficiency. D) neither production nor allocative efficiency. E) only production efficiency. Answer: E Topic: Production efficiency Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking

10) If society can produce more of one good but must forgo some of another good to do so, it is definitely achieving A) both production and allocative efficiency. B) only production efficiency. C) only allocative efficiency. D) neither production nor allocative efficiency. E) None of the above answers is correct because when society must forgo another good to produce more of one good, then society might be production efficient or it might be allocatively efficient. Answer: B Topic: Production efficiency Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

11) Which of the following is true? i. Production efficiency occurs only when resources are used to produce the combination of goods that has the greatest value. ii. Allocative efficiency occurs when marginal benefit equals marginal cost. iii. A demand curve is a marginal cost curve. A) ii only B) i only C) iii only D) i and ii E) ii and iii Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

12) Which of the following is true? i. Marginal cost is measured by the maximum price that consumers are willing to pay for another unit of a good or service. ii. Producer surplus equals marginal benefit minus price, summed over the quantity produced. iii. A supply curve is a marginal cost curve. A) iii only B) i only C) ii only D) i and ii E) i and iii Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

13) Which of the following is true? When there are no externalities, public goods, common resources, taxes or subsidies, then i. allocative efficiency occurs when marginal benefit exceeds marginal cost by as much as possible. ii. an a competitive equilibrium, resource allocation is efficient. iii. fair rules require income transfers from the rich to the poor. A) ii only B) i only C) iii only D) i and ii E) i and iii Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

14) To achieve ________, marginal cost ________ marginal benefit. A) production efficiency; must equal B) production efficiency; must be greater than C) allocative efficiency; must be greater than D) allocation efficiency; must be less than E) allocative efficiency; must equal Answer: E Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

15) When marginal benefit exceeds marginal cost in a market, A) only consumer surplus is reduced. B) only producer surplus is reduced. C) consumer surplus and producer surplus are not affected compared to when production is such that marginal cost equals marginal benefit. D) the deadweight loss is negative. E) None of the above answers is correct. Answer: E Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

16) At a competitive equilibrium with no externalities, taxes, subsidies, public goods, common resources, or high transactions costs, which of the following occurs? i. an efficient outcome ii. definitely a fair outcome when judged by the fair-results approach iii. marginal cost equals marginal benefit iv. producer surplus equals consumer surplus A) i and iii B) i, ii and iii C) ii and iii D) i, ii, iii and iv E) i only Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

17) The price of a shirt is $20. Charlie can produce a shirt at a marginal cost of $10, Mac can produce a shirt for $18, and Dennis can produce a shirt for $22. For a shirt, Deandra has a marginal benefit of $25, Frank has marginal benefit of $20, and Artemis has a marginal benefit of $18. Which of the following statements is correct? A) The sum of consumer surplus is $5 and the sum of producer surplus is $12. B) The sum of consumer surplus is $12. C) Only Frank and Artemis will purchase a shirt. D) Only Dennis will produce a shirt. E) The sum of producer surplus is $10. Answer: A Topic: Consumer surplus and producer surplus Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

18) The fair results approach to fairness A) requires property rights and voluntary exchange. B) supports transferring income from the rich and giving it to the poor. C) requires efficient market outcomes. D) ensures that marginal cost equals marginal benefit. E) never creates a big tradeoff. Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Ethical understanding and reasoning

19) The fair rules approach to fairness requires A) consumer surplus equals producer surplus. B) income transfers from rich to poor. C) property rights and voluntary exchange. D) that marginal cost equal marginal benefit. E) consumer surplus exceed producer surplus because there are more consumers than producers. Answer: C Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Ethical understanding and reasoning

20) Consumer surplus equals A) producer surplus at a market equilibrium. B) marginal benefit minus price, summed over the quantity consumed. C) price minus marginal cost. D) the deadweight loss if there is underproduction. E) the deadweight loss plus the producer surplus. Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

21) Suppose a market produces 5,000 tons of wheat. At this quantity, the marginal cost exceeds the marginal benefit. This outcome could be the result of A) a quantity regulation limiting the amount that can be produced. B) a monopoly. C) a subsidy. D) an external benefit. E) producing a public good. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

6.8 Essay: Allocation Methods and Efficiency 1) What allocation method is the primary method used in the United States? Answer: While all the different allocation methods—first-come, first-serve, majority rule, contest, force, and so forth—are used in various instances, the primary method used in the United States is allocation using market prices. In the United States, for most goods and services, if someone is willing and able to pay the market price for a good or service, the person can acquire the good or service. Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Written and oral communication

2) "Allocative efficiency in the production of cherries means that consumers can eat all of the cherries they desire." Is this statement true or false? Answer: Allocative efficiency means that we are producing the goods and services society values most highly. It does not mean that consumers can afford all of the cherries that they desire. The allocatively efficient quantity of cherries is the level of production such that the marginal benefit of a pound of cherries equals the marginal cost of a pound of cherries. The marginal cost of any product will be positive, so the marginal cost of a pound of cherries at the allocatively efficient quantity will be positive. Hence for the allocatively efficient quantity of cherries, the marginal benefit of cherries also must be positive. In order for consumers to have all the cherries they desire, the marginal benefit of a pound of cherries must be zero. (If the marginal benefit is positive, consumers desire more cherries.) Therefore the allocatively efficient quantity of cherries is not the quantity at which consumers are able to eat all they desire. Topic: Allocative efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Written and oral communication

3) "Allocative efficiency requires that the maximum number of people have access to all of the goods and services that our economy produces." Is this statement true or false? Explain your answer. Answer: The statement is false. Allocative efficiency requires that production be such that the marginal benefit equals the marginal cost. Allocative efficiency has nothing to do with requiring that the maximum number of people have access to all the goods and services produced. Topic: Allocative efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Written and oral communication

4) When less than the efficient amount of a good is produced, how does the marginal benefit of the last unit produced compare to its marginal cost? Answer: When less than the efficient amount of a good is produced, the marginal benefit of the last unit produced exceeds its marginal cost. The fact that the marginal benefit exceeds the marginal cost indicates that producing additional units of the good will move the amount of production closer to the efficient quantity. Topic: Allocative efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Written and oral communication

5) Why does the marginal benefit curve have a negative slope? Answer: Each successive increase in the consumption of any good or service provides a lower level of satisfaction, or benefit, than the preceding unit of consumption. For a specific example, think of drinking water on a hot day. What is the first glass worth? How about the second and third? The marginal benefit is the benefit from each additional glass of water and, as the example indicates, the marginal benefit decreases as the amount of the good increases. Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Written and oral communication

6) The table above shows the production possibilities frontier for the nation of Isolanda. a. Find the marginal cost of a pound of fish using the above PPF. b. How does the marginal cost of a pound of fish change as more fish are caught? Answer:

a. The table above shows the marginal cost of a pound of fish. Remember that marginal cost is calculated at the mid-point, that is, midway between the two production possibilities. For instance, moving from production point A to production point B has an opportunity cost of 5 pounds of berries. Because this movement gains 1 pound of fish, the marginal cost is 5 pounds of berries. We then attribute this marginal cost to the point midway between points A and B, which is 0.5 pounds of fish. b. As more fish are caught, the marginal cost of a fish increases. Topic: Marginal cost Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking

7) Draw and describe a marginal benefit curve for slices of pizza where the opportunity cost of consuming a slice of pizza is a taco. Answer:

A marginal benefit curve is drawn as a downward sloping line with the marginal benefit of the slice of pizza on the vertical axis and the quantity of slices of pizza on the horizontal axis. A point on the curve shows the maximum number of tacos that people are willing to give up to get another slice of pizza. Topic: Marginal benefit curve Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking

8) Draw and describe a marginal cost curve for slices of pizza where the opportunity cost of producing a slice of pizza is a taco. Answer:

A marginal cost curve is drawn as an upward sloping line with the marginal cost of pizza on the vertical axis and the quantity of pizza on the horizontal axis. A point on the curve shows the number of tacos that must be given up to get another slice of pizza. Topic: Marginal cost curve Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking

9) At the current production point on a nation's production possibilities frontier, the marginal benefit of a slice of pizza is 500 tacos while the marginal cost of producing a slice of pizza is 750 tacos. For the nation to produce at the point of allocative efficiency, what should be done? Answer: The marginal benefit of a slice of pizza is less than its marginal cost. Therefore to produce at the point of allocative efficiency, less pizza and hence more tacos should be produced. Topic: Allocative efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking

10) Using the values for the marginal benefit and the marginal cost of a bushel of apples given in the table above, what is the allocatively efficient quantity of apples? Suppose 10 million bushels of apples are produced. Should the quantity be increased or decreased? What if 20 million bushels are produced; should the quantity be increased or decreased? Answer: The allocatively efficient quantity of apples is 15 million bushels because this is the quantity at which the marginal benefit equals the marginal cost. If 10 million bushels of apples are produced, the marginal benefit exceeds the marginal cost, so more apples should be produced. If 20 million bushels of apples are produced, the marginal cost exceeds the marginal benefit and so fewer apples should be produced. Topic: Allocative efficiency Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking

11) Suppose a factory can be designed to produce either trucks or cars. The figure above shows the marginal cost and marginal benefit of producing trucks in terms of the forgone cars. a. What is the marginal benefit of the 25th truck? b. What is the marginal cost of the 25th truck? c. Should the 25th truck be produced? Why or why not. d. What is the marginal benefit of the 75th truck? e. What is the marginal cost of the 75th truck? f. Should the 75th truck be produced? Why or why not? g. What is the allocatively efficient quantity of trucks? Answer: a. 3 cars b. 1 car c. This truck should be produced because people value the 25th truck at 3 cars, but it only costs 1 car to make the truck. d. 1 car e. 3 cars f. This truck should not be produced because people value the 75th truck at 1 car, but it costs 3 cars to make the truck. g. 50 trucks is the allocatively efficient quantity of trucks. Topic: Allocative efficiency Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking

12) Compare and contrast production efficiency and allocative efficiency. Answer: Production efficiency means that we are operating at a point on the production possibilities frontier and so we cannot produce more of a good or service without producing less of some other good or service. Production efficiency occurs at all points on the PPF. At any point inside the frontier, production is inefficient because we have unemployed resources. Allocative efficiency means that we are producing the goods and services that society values most highly and so allocative efficiency implies that we are operating on the frontier. But not every point on the production possibilities frontier is the combination of goods and services valued most highly by society. Allocative efficiency only occurs at a single point on the PPF. To insure that allocative efficiency exists, we must compare the marginal benefit of a good with its marginal cost. When production is such that the marginal benefit equals the marginal cost, then we are producing the allocatively efficient level of output. Topic: Production and allocative efficiency Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Written and oral communication

6.9 Essay: Value, Price, and Consumer Surplus 1) Is the marginal benefit someone enjoys from a good or service the same as the price he or she pays? Explain your answer. Answer: Generally the marginal benefit of a good or service is different than the price that is paid. The marginal benefit is the maximum amount a consumer is willing to pay for a good or service. Typically the consumer can buy the good or service for a price less than the maximum. Indeed, the difference between the marginal benefit (the maximum price the consumer is willing to pay) and the price actually paid is the consumer surplus.) However, it might be the case that the price precisely equals the marginal benefit, that is, equals the maximum the consumer is willing to pay. In this case alone, the marginal benefit equals the price. And in this case, the amount of the consumer surplus equals zero. Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Written and oral communication

2) Why is the demand curve the same as the marginal benefit curve? Answer: The demand curve for a good tells us for any quantity of the good, the dollar's worth of other goods and services that we are willing to forgo in order to get one more unit of the good in question. The marginal benefit of a good is the additional benefit from each unit of a good consumed. The additional benefit is measured by the amount of other goods and services we are willing to forgo to get one more unit of the good in question. Hence the demand curve is the same as the marginal benefit curve because the demand curve shows precisely what the marginal benefit curve measures. Topic: Demand curve and marginal benefit curve Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Written and oral communication

3) The demand curve is the same as another curve. Which curve is the same as the demand curve? Why are the curves the same? Answer: The demand curve is the same as the marginal benefit curve. For any quantity, the demand curve shows the dollar value of other goods and services the consumer is willing to forgo to get another unit of the good. (This amount is the maximum price the consumer is willing to pay and equals the price from the demand curve vertically above each quantity.) But the amount of other goods and services the consumer is willing to forgo is the marginal benefit of the good. Hence along the demand curve the price associated with each quantity of the good is the same as the marginal benefit of that quantity. (So that, for instance, the price associated with the 3rd quantity is the same as the marginal benefit of the 3rd unit.) Therefore the demand curve is the same as the marginal benefit curve. Topic: Demand curve and marginal benefit curve Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Written and oral communication

4) What are the two ways demand curves can be interpreted? Answer: Demand curves can be used to find either: 1. the quantity demanded at a given price. In this view, the curve is a demand curve; 2. the maximum price people are willing to pay for a given quantity. In this view the curve is a marginal benefit curve. Topic: Demand curve and marginal benefit curve Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

5) "A demand curve is the same as a marginal cost curve." Is this statement correct or incorrect? Explain your answer. Answer: The statement is incorrect. A demand curve is a marginal benefit curve not a marginal cost curve. A demand curve is a marginal benefit curve because it can be used to find the maximum price people are willing to pay for a given quantity, that is, the marginal benefit of the given quantity. Topic: Demand curve and marginal benefit curve Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

6) What is consumer surplus? Answer: Consumer surplus equals the difference between the marginal benefit of the good and the price paid for it summed over the quantity consumed. The total consumer surplus in a market equals the area under the demand curve and above the price. Topic: Consumer surplus Skill: Level 1: Definition Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

7) What must be true for a consumer to enjoy a consumer surplus from a unit of a good? Answer: The marginal benefit to the consumer of the unit of the good must be greater than the price of the good. Topic: Consumer surplus Skill: Level 1: Definition Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

8) If the demand for a good does not change, how will an increase in the price of that good affect the consumer surplus from it? Answer: The consumer surplus equals the difference between the marginal benefit of the good and its price summed over the quantity consumed. If the demand for a good does not change, then the marginal benefit of that good does not change. Hence an increase in the price decreases the consumer surplus from that good because 1) it decreases the quantity purchased, and 2) it decreases the consumer surplus on each particular unit that is purchased. Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Written and oral communication

9) The figure shows the demand curve for hotel rooms at a local resort. a. If the hotel charges $120 per night, how many rooms will they rent? b. If there are only 40 rooms available, how much are customers willing to pay for a room? c. If 60 rooms are available, how much are customers willing to pay? d. What do the dollars in your answer to part (c) represent? Answer: a. At $120 a night, the hotel will rent 20 rooms. b. If 40 rooms are available, customers are willing to pay $90 per room. c. If 60 rooms are available, customers are willing to pay $60 per room. d. The $60 represents the dollars' worth of other goods and services that customers are willing to forgo to get one more night in a hotel room. Topic: Demand curve and marginal benefit curve Skill: Level 4: Applying models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

10) Jenn is willing to pay $75 for a purse and the purse's price is $60. What is Jenn's consumer surplus on this purse? Answer: The consumer surplus equals the difference between the marginal benefit of the good and the price actually paid. Jenn is willing to pay $75 for the purse, so its marginal benefit to her is $75. However, she only must pay $60, so Jenn has a consumer surplus of $75 - $60 = $15. Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

11) Jason needs help getting ready for the next test in his economics course and would like to hire Maria, an economics tutor to help him. Jason is willing to pay $30 for the first hour of tutoring, $25 for the second, $20 for the third, $15 for the fourth, and $10 for the fifth. The equilibrium price for tutoring is $15 per hour. For how many hours of tutoring will Jason hire Maria? Why this amount of hours? What is Jason's consumer surplus, if any, from the tutoring? What is Maria's consumer surplus from the tutoring? Answer: Jason will hire Maria for 4 hours of tutoring. At $15 per hour, the marginal benefit to Jason of the first 4 hours exceeds the price. But the marginal benefit from the fifth hour is less than the price and so Jason will not hire Maria for 5 hours. Jason's total consumer surplus is $30, the sum of $15 from the first hour plus $10 from the second plus $5 from the third plus $0 from the fourth. Maria has no consumer surplus in this market because she is the producer not the consumer. Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

12) The figure above shows the demand curve for pizza. a. What is the marginal benefit of the 20th pizza? b. What is the maximum price the consumer is willing to pay for the 20th pizza? c. If the price of a pizza is $6, what is the consumer surplus of the 20th pizza? d. If the price of a pizza is $10, what is the consumer surplus on all the pizzas consumed? e. If the price of a pizza is $6, what is the consumer surplus on all the pizzas consumed? Answer: a. The marginal benefit of the 20th pizza is $10. b. The maximum price the consumer is willing to pay for the 20th pizza is $10. c. If the price of a pizza is $6, the consumer surplus of the 20th pizza is $4. d. If the price of a pizza is $10, the consumer surplus is $40. e. If the price of a pizza is $6, the consumer surplus is $160. Topic: Consumer surplus Skill: Level 4: Applying models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

13) The figure above shows Cindy's demand for CDs per year. a. What is Cindy's consumer surplus on all the CDs consumed if the price of a CD is $12? b. What is Cindy's consumer surplus on all the CDs consumed if the price of a CD is $9? c. What happens to Cindy's consumer surplus when the price of a CD falls? Answer: a. Her consumer surplus when the price of a CD is $12 equals $15, the area of the triangle under the demand curve and above the price. b. Her consumer surplus when the price of a CD is $9 equals $60, the area of the triangle under the demand curve and above the price c. As the price of a CD falls, Cindy's consumer surplus increases. This result reflects the observation that consumers are better off when prices are lower. Topic: Consumer surplus Skill: Level 4: Applying models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

14) The diagram above depicts the demand for, and market price of, buckets of raw oysters in Orlando. a. What is the consumer surplus of the person who buys the 100th bucket of oysters? b. What is the consumer surplus of the person who buys the 200th bucket of oysters? c. What is the consumer surplus of the person who buys the 300th bucket of oysters? d. What is the total consumer surplus from all the oysters consumed in the market? Answer: a. The consumer surplus of the person who buys the 100th bucket of oysters is $6. b. The consumer surplus of the person who buys the 200th bucket of oysters is $3. c. The consumer surplus of the person who buys the 300th bucket of oysters is $0. d. The total consumer surplus in the market is $1,350. Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

6.10 Essay: Cost, Price, and Producer Surplus 1) Explain the difference between the words "value," "price," and "cost." Answer: Value refers to the marginal benefit of consuming one more unit of a good and is illustrated by the demand curve. Price is determined in the market by the forces of supply and demand. Price is what the supplier receives for selling a good and is what the buyer pays when purchasing a good. Cost refers to what must be given up to produce a good. The marginal cost of producing one more unit of a good is illustrated by the supply curve. Topic: Value, price, and cost Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Written and oral communication

2) The supply curve is the same as another curve. What other curve is the same as the supply curve? Why are the curves the same? Answer: The supply curve is the same as the marginal cost curve. The marginal cost is the cost of producing one more unit of a good. For any quantity, the supply curve shows the minimum price for which a producer is willing to produce another unit of the good. (This price is equal to the price on the supply curve vertically above each quantity.) A producer is willing to produce a unit of the good if the price covers all costs of the producing that unit, that is, if the price equals the cost of producing the unit. The cost of producing the unit is the marginal cost. Hence along the supply curve, the price associated with each quantity is equal to the marginal cost of each quantity. Therefore the supply curve is the same as the marginal cost curve. Topic: Supply curve and marginal cost curve Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Written and oral communication

3) What is producer surplus? Answer: Producer surplus equals the difference between the price of the good and the marginal cost of producing it, summed over the quantity produced. Topic: Producer surplus Skill: Level 1: Definition Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

4) What must be true for a producer to obtain a producer surplus from the sale of a unit of a good? Answer: The price must be greater than the marginal cost of producing the good. Topic: Producer surplus Skill: Level 1: Definition Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

5) If the price of a visit to Sea World exceeds the marginal cost of the visit by $13, a producer surplus exists for Sea World." Is this statement true or false? Answer: The statement is true. Anytime the price exceeds the marginal cost, there is a producer surplus. In this case, the producer surplus is $13 dollars. Topic: Producer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking

6) Maria helps tutor students taking economics. The equilibrium price for tutoring is $15 per hour. Maria has determined her opportunity cost per hour to be $6 for the first, $9 for the second, $12 for the third, $15 for the fourth, and $18 for the fifth. How many hours will Maria tutor? Why this amount of hours? What, if any, is Maria's producer surplus? Answer: Maria will tutor for 4 hours. For all of the first 4 hours of tutoring, Maria's marginal cost of tutoring is less than or equal to the price she receives from tutoring. Maria will not tutor the fifth hour because for this hour her marginal cost exceeds the price. Maria makes a producer of surplus of $18, the sum of $9 on the first hour plus $6 on the second hour plus $3 on the third hour plus $0 on the fourth hour. Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking

7) The figure above shows the supply curve for pizzas. a. What is the marginal cost of the 20th pizza? b. What is the minimum supply price of the 20th pizza? c. If the price is $6 per pizza, what is the producer surplus on the 20th pizza? d. If the price is $6 per pizza, what is the producer surplus for the total quantity of pizzas produced? e. If the price is $8 per pizza, what is the producer surplus for the total quantity of pizzas produced? f. If the price is $10 per pizza, what is the producer surplus for the total quantity of pizzas produced? Answer: a. The marginal cost of the 20th pizza is $6. b. The minimum supply price of the 20th pizza is $6. c. If the price is $6 per pizza, the producer surplus on the 20th pizza is zero. d. If the price is $6 per pizza, the producer surplus is $20. e. If the price is $8 per pizza, the producer surplus is $80. f. If the price is $10 per pizza, the producer surplus is $180. Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking

6.11 Essay: Are Markets Efficient? 1) Why is a competitive market efficient? Answer: Efficiency is attained when production is such that the marginal benefit equals the marginal cost. When a competitive market is at equilibrium, the quantity demanded equals the quantity supplied, that is, the demand and supply curves cross. But the marginal benefit curve is the same as the demand curve and the marginal cost curve is the same as the supply curve. Thus equilibrium occurs at the point where the marginal benefit curve crosses the marginal cost curve. As a result, so the marginal benefit equals the marginal cost and hence the market is efficient. Topic: Efficiency of a competitive market Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

2) Briefly describe the concept of the "invisible hand." Answer: The invisible hand suggests that a competitive market attains allocative efficiency simply by the forces of supply and demand, with no government involvement needed to organize the resources, or set the efficient price and quantity. Topic: Invisible hand Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

3) Explain how the invisible hand delivers an efficient market outcome. Answer: The invisible hand concepts claims that people, acting in their own self-interest, send resources to be used at their highest value. As a result, resources are efficiently used to produce the output of goods and services that people most highly value. With this outcome, producer and consumer surplus are maximized. Topic: Invisible hand Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Written and oral communication

4) What is the "invisible hand"? Answer: The invisible hand is a concept articulated by Adam Smith that suggests that competitive markets are efficient. Smith discussed how self-interested buyers and sellers, without government involvement, interact with one another to bring about market efficiency. In Smith's words, market participants are "led by an invisible hand to promote an end (efficiency) which was no part of his intention." Topic: Invisible hand Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Written and oral communication

5) When economists refer to "the invisible hand," what do they mean? Answer: In his book, Wealth of Nations, Adam Smith wrote that a participant in a competitive market is "led by an invisible hand to promote an end which was no part of his intention." Market participants act in their own self-interest, attempting to maximize their own well-being, yet, in the process, the result is an efficient use of resources. This result occurs because the market forces of supply and demand invisibly guide resources to their highest valued uses. Topic: Invisible hand Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Written and oral communication

6) "If there is an inefficient level of nursing care in South America, a deadweight loss exists." Is this statement true or false? Answer: The statement is true. Anytime there is an inefficient level of production, a deadweight loss exists. Topic: Deadweight loss Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

7) What are some of the potential obstacles that can lead to market failure by preventing a market from reaching the efficient outcome? Briefly define each obstacle. Answer: The obstacles basically fall into two camps: Obstacles that occur because the government does not intervene in the market and obstacles that occur because the government does intervene in the market. In the first group are the issues of externalities, public goods and common resources, and monopoly. An externality occurs when a cost or benefit from production falls upon someone other than the producer or when a cost or benefit from consumption falls upon someone other than the demander. A public good is a good or service that can be consumed simultaneously by everyone even if they didn't pay for the good or service. Public goods create the free rider problem, in which people consume the good without paying for it. A common resource is a resource that no one owns but everyone can use. A common resource is over-used. Finally, a monopoly occurs when a single producer controls the market by being the only producer. In the case of an externality, public good, or monopoly, government intervention has the possibility of increasing the market's efficiency. The second set of obstacles occurs when a market is otherwise efficient but nonetheless the government intervenes in the market. The second group is comprised of price and quantity regulations, as well as taxes and subsidies. Some price regulations make prices higher than a certain price illegal; others make prices lower than a certain price illegal. Both prevent the market from reaching its (efficient) equilibrium. Taxes increase the price paid by the buyer and decrease the price received by the seller. Subsidies have the opposite effect, decreasing the price paid by the buyer and increasing the price received by the seller. One last reason for a market to be inefficient that does not involve the government is high transactions costs. In this case it might be too expensive to operate a market. Topic: Obstacles to efficiency Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Written and oral communication

8) Jason hires Maria to tutor him in economics. Jason is willing to pay $30 for the first hour of tutoring, $25 for the second, $20 for the third, $15 for the fourth, and $10 for the fifth. Maria has an opportunity cost per hour of $6 for the first, $9 for the second, $12 for the third, $15 for the fourth, and $18 for the fifth. What will be the equilibrium quantity of hours tutored and the equilibrium price? Explain why this quantity and price is the equilibrium. What is Jason's consumer surplus and what is Maria's producer surplus? Answer: The equilibrium quantity will be 4 hours of tutoring and the equilibrium price will be $15 per hour. The equilibrium quantity will be 4 hours of tutoring because for any of these first 4 hours, the marginal benefit (to Jason) exceeds or is equal to the marginal cost (to Maria). The price will be $15 per hour because that is the maximum price Jason is willing to pay for the fourth hour of tutoring and $15 is the minimum price Maria will accept for the fourth hour of tutoring. Jason's total consumer surplus is $30, the sum of $15 from the first hour plus $10 from the second plus $5 from the third plus $0 from the fourth. Maria makes a producer surplus of $18, the sum of $9 on the first hour plus $6 on the second hour plus $3 on the third hour plus $0 on the fourth hour. Topic: Efficiency of a competitive market Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

9) The figure above shows the market for pizza. a. If the price of a slice of pizza is $3, what is the consumer surplus of the 50th slice? b. If the price of a slice of pizza is $3, what is the producer surplus of the 50th slice c. What is the efficient quantity? What is the equilibrium quantity? What is the deadweight loss when the equilibrium quantity is produced? Answer: a. Consumer surplus is the distance between the demand curve and the price of $3 when 50 slices are consumed. That difference is $4, the marginal benefit, minus $3 or $1. b. Producer surplus is the distance between the supply curve and the market price when 50 slices are produced. That difference is $3 minus $2, the marginal cost, or $1. c. The efficient quantity is 100 slices because that is the quantity for which the marginal benefit equals the marginal cost. The equilibrium quantity is 100 slices, because that is the quantity for which the quantity demanded equals the quantity supplied. There is no deadweight loss at the equilibrium quantity because it is the same as the efficient quantity. Topic: Efficiency of a competitive market Skill: Level 4: Applying models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

10) Jason wants to hire Maria to tutor him in economics. Jason is willing to pay $30 for the first hour of tutoring, $25 for the second, $20 for the third, $15 for the fourth, and $10 for the fifth. Maria has an opportunity cost per hour of $6 for the first, $9 for the second, $12 for the third, $15 for the fourth, and $18 for the fifth. The initial equilibrium price for tutoring is $15 an hour and hence Maria tutors Jason for 4 hours. Now, Maria realizes that she is the only economics tutor because all the other tutors have graduated. Because she is the only tutor, she has a monopoly and, as a monopolist, Maria decides to charge a price of $25 instead of $15 an hour. a. At the price of $25 an hour, how many hours will Maria tutor Jason? b. At the initial equilibrium price of $15 an hour, what was Jason's total consumer surplus and Maria's total producer surplus? c. At the price of $25 an hour, how many hours will Jason hire Maria to tutor him? What is Jason's total consumer surplus and Maria's total producer surplus? d. How does the sum of Jason's consumer surplus plus Maria's producer surplus compare at the initial equilibrium price of $15 an hour (part b) and at the new price of $25 an hour (part c)? Comment on any difference. Answer: a. Maria will tutor Jason for 2 hours. b. At the initial price of $15, Jason's total consumer surplus was $30, the sum of $15 from the first hour plus $10 from the second plus $5 from the third plus $0 from the fourth. Maria made a producer surplus of $18, the sum of $9 on the first hour plus $6 on the second hour plus $3 on the third hour plus $0 on the fourth hour. c. At the new price of $25 an hour, Jason will hire Maria for 1 hour. Jason's total consumer surplus is $5, the consumer surplus from the first hour. Maria makes a producer surplus of $35, the sum of $19 on the first hour plus $16 on the second hour. d. When the price was $15 an hour, the sum of the consumer and producer surpluses was $48. When the price is $25, the sum of the consumer and producer surpluses is $40. The $8 difference between the initial situation and the situation in which Maria is a monopolist is the deadweight loss. Topic: Deadweight loss Skill: Level 4: Applying models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

11) The figure above shows the market for hot dogs. a. What is the maximum price consumers are willing to pay for the 25th hot dog? b. What is the efficient quantity? c. Suppose that the production was limited to 25 hot dogs. In the figure, indicate the amount of the deadweight loss.

Answer: a. Consumers are willing to pay a maximum of $4 for the 25th hot dog. b. The efficient quantity of hot dogs is 75 hot dogs because that is the quantity for which the marginal benefit equals the marginal cost.

The deadweight loss is indicated in the figure above.

Topic: Deadweight loss Skill: Level 4: Applying models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

12) The figure above shows the supply and demand curves for pizza. If the market is at its competitive equilibrium, what area in the graph above represents: a. consumer surplus? b. producer surplus? Answer: a. AFB b. BFC Topic: Efficiency of a competitive market Skill: Level 4: Applying models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

13) The figure above shows the supply and demand for pizza. a. What is the efficient level of output? b. If 70,000 pizzas are produced, what area represents the deadweight loss? c. Why does the deadweight loss in part (b) occur? d. If 20,000 pizzas are produced, what area represents the deadweight loss? e. Why does the deadweight loss in part (d) occur? Answer: a. 40,000 pizzas is the efficient quantity. b. If 70,000 pizzas are produced, the deadweight loss is area C. c. The deadweight loss occurs because we are producing some pizzas, specifically pizzas 40,001 through 70,000, for which the marginal cost is greater than the marginal benefit. d. If 20,000 pizzas are produced, the deadweight loss is area B. e. The deadweight loss occurs because we are not producing some pizzas, namely pizzas 20,001 through 40,000, for which the marginal benefit is greater than the marginal cost. Topic: Deadweight loss Skill: Level 4: Applying models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

6.12 Essay: Are Markets Fair? 1) What are the two views of fairness? How does each view redistribution of income from the rich to the poor? Answer: One view is that "it's not fair if the result isn't fair." This view requires that income should be redistributed from the rich to the poor in order to create a fair result. Another view is that "it's not fair if the rules aren't fair." This view requires that private property may be transferred only under voluntary exchange, so redistribution of income is not fair unless it is voluntary. Topic: Fairness Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Old AACSB: Ethical understanding and reasoning

2) How can a person argue that health care services in America are provided efficiently, but not fairly? Answer: The assertion that the health market is efficient implies that competitive market forces determine the level and quality of health care. Where the demand for and supply of health care intersects, the marginal benefit and marginal cost of health care are equal. This equality means that the people who are demanding health care are willing and able to pay the price, which is equal to the marginal cost of providing health care. However, at that market price there are many people who cannot afford health care. These people, probably the poor and uninsured, are left to go to clinics, crowd emergency rooms, or else do without basic health care needs because of their lack of ability to pay the market price. This outcome could easily violate the "it's not fair if the result isn't fair" view of fairness. Thus observers who assert that the U.S. health care system might be efficient but isn't fair are using the "results" view of fairness. Topic: Fair results Skill: Level 4: Applying models Section: Checkpoint 6.5 Status: Old AACSB: Written and oral communication

3) Often politicians assert that a price, such as the price of gasoline or the rent for an apartment, is too high and that it is unfair for these prices to be so high. If these products are traded in competitive markets, what fairness rule are politicians using? Why? Answer: The fairness rule is one of "It's not fair if the results aren't fair." The claim that the prices are too high to be fair is a claim that buyers are being unfairly harmed by having to pay such high prices. The assertion that people are harmed because the price is too high is looking at the results of the process because if the price had been lower, the assertion of unfairness would not have been made. Topic: Fair results Skill: Level 4: Applying models Section: Checkpoint 6.5 Status: Old AACSB: Ethical understanding and reasoning

4) What approach to fairness argues in favor of government policies that redistribute income so that there is more equality of income? Answer: The general approach to fairness that argues in favor of government redistribution is a "fair results approach," that is, an approach that argues "it isn't fair unless the results are fair." In this view, more (perhaps even complete) equality of income is the fairest income distribution. So this view asserts that government policies to redistribute income are necessary for fairness. Topic: Fair results Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Old AACSB: Ethical understanding and reasoning

5) What is the "big tradeoff"? Answer: The "big tradeoff" is the tradeoff between efficiency and fairness. The idea is that if the government redistributes income so that it is more equally shared, output decreases so that it is less than the efficient amount. Output shrinks because such redistribution blunts people's incentives to work. Hence redistributing income so that everyone has the same amount of income might end up insuring that everyone's incomes are smaller than if less redistribution is pursued. Topic: The big tradeoff Skill: Level 1: Definition Section: Checkpoint 6.5 Status: Old AACSB: Written and oral communication

6) Why do societies face a tradeoff between the size of the economic pie and the degree of equality with which it is shared? Answer: A person's share of the economic pie is determined by his or her income. To increase the degree of equality, income must be redistributed away from richer people and towards poorer people. Income is transferred from the rich to the poor by means of taxes. Taxes discourage work and saving. Because people work less, the nation's output decreases. When saving decreases, so does investment in capital, which also decreases the nation's output. Thus taxes that redistribute income in order to make for a more equal income distribution decrease the nation's output, that is, shrink the economic pie. Topic: The big tradeoff Skill: Level 4: Applying models Section: Checkpoint 6.5 Status: Old AACSB: Written and oral communication

7) Why does the problem of the big tradeoff arise when the government engages in the process of redistributing income using taxes and transfers? Answer: There are two reasons why the big tradeoff problem arises. First, in the process of transferring income from the people who have to those who do not have, an administrative cost is incurred by society. The result is that $1 taxed is not $1 transferred. Hence the effort to make incomes more equal decreases the average income. Second, taxing people's income is a disincentive to work, while taxing people's savings is a disincentive to accumulate capital. As a result, people work less and save less, both of which decrease the amount of goods and services produced and decrease people's income. Hence once again the effort to make incomes more equal decreases the average income. Topic: The big tradeoff Skill: Level 3: Using models Section: Checkpoint 6.5 Status: Old AACSB: Written and oral communication

8) Bill Gates is a founder of Microsoft and 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 rules Skill: Level 4: Applying models Section: Checkpoint 6.5 Status: Old AACSB: Written and oral communication

9) According to the "fair rules" view of fairness, are taxes fair? Explain. Answer: Taxes are unfair according to the fair rules view because they are an involuntary transfer of private property. While most economists and most people support fair taxation, there is little agreement on what constitutes a fair tax. Topic: Fair rules Skill: Level 3: Using models Section: Checkpoint 6.5 Status: Old AACSB: Ethical understanding and reasoning

Essential Foundations of Economics, 8e (Bade) Chapter 7 Government Actions in Markets 7.1 Taxes on Buyers and Sellers 1) Tax incidence is the A) burden buyers have to absorb from a tax on goods and services. B) burden sellers have to absorb from a tax on goods and services. C) lost revenue the government endures from goods and services that are not taxed. D) division of the burden of a tax between the buyer and the seller. E) deadweight loss created by a tax. Answer: D Topic: Tax incidence Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

2) Tax incidence is the A) dollar amount of a tax, expressed as a percentage of the purchase price. B) dollar amount of a tax per unit sold. C) division of a tax burden between the buyer and seller. D) amount of revenue collected by government on a specific good. E) deadweight loss from the tax. Answer: C Topic: Tax incidence Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

3) Which of the following is true regarding tax incidence? i. The elasticities of supply and demand determine tax incidence. ii. When the government taxes the seller, the firm always pays most of the tax. iii. When the government taxes the buyer, the consumer always pays most of the tax. A) i only. B) i and ii. C) i and iii. D) ii and iii. E) i, ii and iii. Answer: A Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: New AACSB: Analytical thinking

4) The incidence of a tax refers to A) the division of the burden of a tax between buyers and sellers. B) the deadweight loss that a tax generates. C) the inefficiency of a tax. D) the revenue collected by government because of a tax. E) the division of the burden of a tax between the public and the government. Answer: A Topic: Tax incidence Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

5) If a $10 sales tax is imposed on a good and the equilibrium price increases by $10, the tax is A) split between buyers and sellers but not evenly. B) paid fully by sellers. C) paid fully by buyers. D) split evenly between buyers and sellers. E) perhaps split between buyers and sellers but it is impossible to determine the incidence without further information. Answer: C Topic: Tax incidence Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

6) Sales taxes are usually collected from sellers, who view the tax as A) resulting from a leftward of the demand curve. B) an additional cost of selling the good. C) an addition to the demand for the product. D) an addition to profit. E) the same as a rightward shift of the demand curve. Answer: B Topic: Tax incidence Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

7) Imposing a sales tax on sellers of a product has an effect that is similar to which of the following? A) a decrease in consumers' preferences for the good B) an increase in the costs of production C) an increase in demand for the good D) a decrease in people's willingness to work E) anything that decreases the demand and shifts the demand curve leftward Answer: B Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

8) A sales tax imposed on sellers of a good A) decreases the demand and shifts the demand curve rightward. B) decreases the supply and shifts the supply curve leftward. C) decreases both the demand and the supply and shifts both the demand and supply curves leftward. D) decreases the supply and shifts the supply curve rightward. E) has no effect on either the demand or the supply. Answer: B Topic: Tax incidence Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

9) Suppose the government imposes a $1 per gallon per gallon tax on sellers of gasoline. As a result, the A) supply curve shifts leftward. B) supply curve shifts rightward. C) demand curve shifts leftward. D) demand curve shifts rightward. E) demand and supply curves both shift leftward. Answer: A Topic: Tax incidence Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

10) If a good has a tax levied on it, sellers respond to the price that excludes the tax and not the price with the tax because A) the tax is handed over to the state directly by buyers. B) sellers do not get to keep the tax revenue. C) the demand for the good has decreased. D) the quantity supplied of the good increases. E) demanders pay none of the tax. Answer: B Topic: Tax incidence, price wedge Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

11) Neither the demand nor the supply of gasoline is perfectly elastic or inelastic. When the government increases the federal tax on gasoline, the effect on buyers is that the price they pay A) rises. B) falls. C) does not change. D) rises if the demand is inelastic and falls if the demand is elastic. E) rises if the supply is inelastic and falls if the supply is elastic. Answer: A Topic: Tax incidence Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

12) The demand curve for pizza is downward sloping and the supply curve is upward sloping. If the government imposes a $2 tax on a pizza, ________ the tax. A) only consumers pay B) only producers pay C) both producers and consumers pay part of D) neither producers nor consumers pay part of E) the government pays Answer: C Topic: Tax incidence Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

13) Neither the demand nor the supply of automobiles is perfectly elastic or inelastic. If the government imposes a $1,000 tax on automobiles, then the price of an automobile buyers pay A) increases by $1,000. B) increases by less than $1,000. C) increases by more than $1,000. D) decreases by $1,000. E) does not change. Answer: B Topic: Tax incidence Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

14) Neither the demand nor the supply of sugar is perfectly elastic or inelastic. If the government imposes a 5 percent tax on sugar, the A) price of sugar buyers pay falls by 5 percent. B) price of sugar buyers pay increases by less then 5 percent. C) price of sugar buyers pay does not change. D) quantity of sugar increases. E) price of sugar buyers pay rises by 5 percent. Answer: B Topic: Tax incidence Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

15) Giving in to the demand of protestors, suppose the French government reduces the tax on gasoline by 15 percent. Neither the demand for gasoline nor the supply of gasoline is perfectly elastic or inelastic. As a result of the tax cut, the price for a gallon of gasoline paid by buyers A) falls by 15 percent. B) rises by 15 percent. C) falls by less than 15 percent. D) rises by less than 15 percent. E) falls by more than 15 percent. Answer: C Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

16) Neither the demand for gasoline nor the supply of gasoline is perfectly elastic or inelastic. If the federal government eliminated the 18.4 cents per gallon gasoline tax, the price paid by buyers would A) decrease by less than 18.4 cents. B) decrease by 18.4 cents. C) decrease by more than 18.4 cents. D) stay the same. E) increase by 18.4 cents. Answer: A Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

17) To calculate the revenue government receives when a tax is imposed on a good, multiply the A) pre-tax equilibrium price by the pre-tax quantity. B) after-tax equilibrium price by the after-tax quantity. C) tax by the pre-tax quantity. D) tax by the after-tax quantity. E) after-tax equilibrium price by the after-tax quantity and then subtract the pre-tax equilibrium price multiplied by the pre-tax quantity. Answer: D Topic: Tax incidence, government revenue Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

18) The imposition of a tax on a good enables the government to A) raise the price received by sellers of the goods that have been taxed. B) lower the price paid by buyers for the goods that have been taxed. C) create a more efficient economic system. D) take part of consumer and producer surplus as tax revenue when the good is purchased. E) decrease the deadweight loss in this market. Answer: D Topic: Tax incidence, government revenue Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

19) In the figure above, suppose that the government imposes a tax of $4 per pizza. Then, the A) buyers and sellers equally share the incidence of the tax. B) shaded area is the deadweight loss from the tax. C) shaded area is the tax revenue from the tax. D) Both answers A and B are correct. E) Both answers A and C are correct. Answer: D Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

20) In the figure above, suppose that the government imposes a tax of $4 per pizza. Then, the tax revenue collected by the government equals A) $240. B) $320. C) $160. D) $120. E) $4. Answer: A Topic: Tax incidence, government revenue Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

21) The above figure shows the market for gourmet ice cream. In effort to reduce obesity, government places a $2 tax per gallon on suppliers in this market, shifting the supply curve from S0 to S1. The quantity of ice cream consumed before the tax is ________ gallons and the quantity consumed after the tax is ________ gallons. A) 300,000; 200,000 B) 200,000; 250,000 C) 250,000; 200,000 D) 200,000; 300,000 E) 200,000; 200,000 Answer: C Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

22) The above figure shows the market for gourmet ice cream. In effort to reduce obesity, government places a $2 tax per gallon on suppliers in this market, shifting the supply curve from S0 to S1. The total tax revenue is equal to A) $400,000. B) $800,000. C) $500,000. D) $200,000. E) More information is needed to determine the total tax revenue. Answer: A Topic: Tax incidence, government revenue Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

23) The above figure shows the market for gourmet ice cream. In effort to reduce obesity, government places a $2 tax per gallon on suppliers in this market, shifting the supply curve from S0 to S1. The tax incidence is A) split equally between consumers and producers, each paying $1 per gallon. B) split equally between consumers and producers, each paying $2 per gallon. C) such that consumers pay $2 per gallon and producers pay $1 per gallon. D) such that consumers pay $1 per gallon and producers pay $2 per gallon. E) such that producers pay all of the tax. Answer: A Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

24) The above figure shows the market for buckets of golf balls at the driving range. A new leisure time tax is placed on suppliers in this market, shifting the supply curve from S0 to S1. The amount of this tax is ________ per bucket of golf balls. A) $4 B) $2 C) $2.50 D) $1 E) $3 Answer: E Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

25) The above figure shows the market for buckets of golf balls at the driving range. A new leisure time tax is placed on suppliers in this market, shifting the supply curve from S0 to S1. The tax incidence is A) split equally between buyers and sellers, each paying $1 per bucket. B) split equally between buyers and sellers, each paying $2 per bucket. C) such that buyers pay $2 per bucket and sellers pay $1 per bucket. D) such that buyers pay $1 per bucket and sellers pay $2 per bucket. E) such that sellers pay all of the tax. Answer: D Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

26) The above figure shows the market for buckets of golf balls at the driving range. A new leisure time tax is placed on suppliers in this market, shifting the supply curve from S0 to S1. The total tax revenue is equal to A) $1,800. B) $600. C) $1,200. D) $900. E) $5,600. Answer: C Topic: Tax incidence, government revenue Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

27) The above figure shows the market for buckets of golf balls at the driving range. A new leisure time tax is placed on suppliers in this market, shifting the supply curve from S0 to S1. The quantity of buckets without the tax is ________ and the quantity with the tax is ________. A) 400; 600 B) 600; 400 C) 400; 400 D) 800; 500 E) 600; 500 Answer: B Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

28) The figure above shows the market for tires. The figure shows that the government has imposed a tax of ________ per tire. A) $10 B) $30 C) $40 D) $60 E) None of the above answers is correct. Answer: B Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

29) The figure above shows the market for tires. The figure shows that the government has imposed a tax of ________ per tire and that ________ pay most of the tax. A) $30; buyers B) $40; buyers C) $30; sellers D) $60; sellers E) $60; buyers Answer: C Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

30) The figure above shows the market for tires. The government has imposed a tax on tires, and the buyers pay ________ of the tax. A) $10 B) $20 C) $50 D) $60 E) $30 Answer: A Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

31) The figure above shows the market for tires. The government has imposed a tax on tires, and the sellers pay ________ of the tax. A) $10 B) $20 C) $50 D) $60 E) $30 Answer: B Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

32) The figure above shows the market for tires. According to the figure, the government collects ________ per month in total tax revenue. A) $600 million B) $1,200 million C) $2,000 million D) $900 million E) None of the above answers is correct. Answer: A Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

33) The figure above shows the market for tires. According to the figure, the price elasticity of demand is ________ the price elasticity of supply. A) greater than B) equal to C) less than D) not comparable to E) More information is needed to determine if the price elasticity of demand is greater than, equal to, less than, or comparable to the price elasticity of supply. Answer: A Topic: Tax incidence and the elasticity of supply Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

34) For a given supply elasticity, the more inelastic the demand for a good, the larger the share of the tax paid by the A) buyers. B) sellers. C) participants other than the buyers and sellers. D) government. E) None of the above answers is correct. Answer: A Topic: Tax incidence and the elasticity of demand Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

35) If a tax is placed on suppliers of a good, then the incidence of the tax A) falls more on the sellers if demand is elastic. B) falls more on the sellers if demand is inelastic. C) is usually split equally between the buyers and the sellers. D) usually falls more on the sellers than the buyers. E) usually falls more on the buyers than the sellers. Answer: A Topic: Tax incidence and the elasticity of demand Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

36) Suppose that the elasticity of demand for insulin is 0.1, the elasticity of demand for oranges is 1.2, and the elasticity of supply for insulin and oranges is 0.4. If the government imposes a 10 percent tax on both insulin and oranges, the decrease in the quantity of oranges is ________ the decrease in the quantity of insulin. A) larger than B) smaller than C) equals to D) not comparable to E) More information is needed to determine how the decrease in the quantity of oranges compares to the decrease in the quantity of insulin. Answer: A Topic: Tax incidence and the elasticity of demand Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

37) The demand for insulin is quite inelastic. The demand for Pepsi is quite elastic. Suppose the elasticity of supply for insulin is the same as the elasticity of supply for Pepsi. If a $0.20 tax was imposed on each of these goods (holding everything else constant), which consumers would pay more of the tax? A) the Pepsi consumers B) the insulin consumers C) There would be no difference in the amount of tax paid by the consumers. D) More information is needed to determine which consumers pay more of the tax. E) The premise of the question is wrong because the elasticity of demand and the incidence of a tax are not related. Answer: B Topic: Tax incidence and the elasticity of demand Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

38) The demand for gasoline is inelastic and the supply of gasoline is elastic. Therefore, A) sellers bear most of the incidence of a tax on gasoline. B) buyers bear most of the incidence of a tax on gasoline. C) the government bears most of the incidence of a tax on gasoline. D) the incidence of a tax on gasoline depends if the tax is imposed on sellers or on buyers. E) None of the above answers is correct. Answer: B Topic: Tax incidence and the elasticity of demand Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

39) The buyers pay all of a tax when the demand is A) perfectly elastic. B) more elastic than the supply. C) more inelastic than the supply. D) unit elastic. E) perfectly inelastic. Answer: E Topic: Tax incidence and the elasticity of demand Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

40) If the demand curve for a good is horizontal, a tax is levied on this product is A) split between the buyers and the sellers but not evenly so that either the buyer or the seller pays more. B) split evenly between the buyers and the sellers. C) paid entirely by buyers. D) paid entirely by sellers. E) not paid by either the buyers or the sellers. Answer: D Topic: Tax incidence and the elasticity of demand Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

41) Suppose the demand for specialty car license plates is perfectly inelastic and the supply curve for specialty license plates is upward sloping. A tax is imposed on specialty license plates. Which of the following is true? A) Drivers pay the smallest share of the tax. B) Drivers pay none of the tax. C) Drivers pay all of the tax. D) The government pays all of the tax. E) The government collects nothing in tax revenues. Answer: C Topic: Tax incidence and the elasticity of demand Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

42) Suppose the elasticity of demand for a product is 0 and elasticity of supply is 1. If the government imposes a tax on the product, then A) buyers and sellers pay exactly the same share of the tax. B) buyers pay all of the tax. C) sellers pay all of the tax. D) buyers pay a smaller share of the tax than do sellers, but both buyers and sellers pay some of the tax. E) because the elasticity of demand is zero, the government collects no revenue from this tax. Answer: B Topic: Tax incidence and the elasticity of demand Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

43) Suppose the demand for peaches from South Carolina is perfectly elastic. If the supply curve is upward sloping and a tax is imposed on peaches from South Carolina, then A) peach sellers pay all of the tax. B) peach buyers pay all of the tax. C) peach buyers and sellers evenly split the tax. D) the government does not collect any revenue from the tax. E) the tax does not change the equilibrium quantity of peaches. Answer: A Topic: Tax incidence and the elasticity of demand Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Revised AACSB: Reflective thinking

44) If buyers pay more of a tax than do the sellers, A) demand is more elastic than supply. B) the amount of tax revenue collected by the government is almost zero. C) supply is more elastic than demand. D) the equilibrium price paid by buyers rises by less than half the amount of the tax. E) None of the above answers is correct. Answer: C Topic: Tax incidence and the elasticity of demand Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

45) Cigarettes are highly addictive and therefore have a very low elasticity of demand. A $2.00 increase in the national sales tax on cigarettes would likely cause the price paid by buyers of cigarettes to A) increase by more than $1.00 but less than $2.00. B) increase by $2.00. C) increase by more than $2.00. D) increase by less than $1.00. E) remain unchanged. Answer: A Topic: Tax incidence and the elasticity of demand Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

46) A $2.00 increase in the size of a tax on a good will only cause the price for buyers to increase by $2.00 if A) demand is perfectly inelastic. B) demand is perfectly elastic. C) demand is unit elastic. D) demand is inelastic, but not perfectly inelastic. E) demand is elastic, but not perfectly elastic. Answer: A Topic: Tax incidence and the elasticity of demand Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

47) If the supply of automobiles becomes more inelastic, then a tax on automobiles is A) paid more by the buyers after the change than before. B) paid more by the sellers after the change than before. C) always split evenly between the buyers and the sellers. D) paid more by the government after the change than before. E) always paid entirely by the buyers. Answer: B Topic: Tax incidence and the elasticity of supply Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

48) For a given elasticity of demand, the less elastic the supply, the A) larger the deadweight loss from a tax. B) larger the share of a tax paid by the sellers. C) greater the burden on the government from a tax. D) greater is the excess burden from a tax. E) larger the share of a tax paid by the buyers. Answer: B Topic: Tax incidence and the elasticity of supply Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

49) Sellers bear the entire incidence of a tax on a good. This outcome can occur if A) supply is perfectly inelastic. B) the good is an inferior good. C) demand is perfectly inelastic. D) the demand curve is downward sloping and the supply curve is upward sloping. E) supply is perfectly elastic. Answer: A Topic: Tax incidence and the elasticity of supply Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

50) Why do sellers pay all of a tax when supply is perfectly inelastic? A) because a perfectly inelastic supply means that the demand is elastic B) because the government requires firms to collect the tax C) because a perfectly inelastic supply means that the quantity supplied is quite sensitive to a change in price D) because a perfectly inelastic supply means that suppliers will produce the same amount regardless of the price E) because in this case the price of the good that suppliers receive and keep does not change Answer: D Topic: Tax incidence and the elasticity of supply Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

51) Suppose the elasticity of supply of land is 0 and elasticity of demand is 2. If the government imposes a 10 percent tax on land, then A) buyers and sellers each pay 5 percent of the tax. B) buyers pay all of the tax. C) sellers pay all of the tax. D) sellers pay a smaller share of the tax than do buyers but both buyers and sellers pay some of the tax. E) buyers pay 1/2 of the tax. Answer: C Topic: Tax incidence and the elasticity of supply Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

52) The supply of sand is perfectly inelastic and the demand curve for sand is downward sloping. Hence, if a tax on sand is imposed, A) sand buyers pay the entire tax. B) sand sellers pay the entire tax. C) the tax is split evenly between the buyers and sellers. D) the government pays the entire tax. E) the government collects no tax revenue because the supply is perfectly inelastic. Answer: B Topic: Tax incidence and the elasticity of supply Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

53) Suppose the supply of apartments in Minneapolis is perfectly elastic. The effect of a $100 per month tax on all apartments is that A) landlords pay none of the tax and there is a surplus of apartments. B) landlords pay all of the tax and suffer all of the deadweight loss. C) landlords pay all of the tax and no changes take place in the quantity of apartments supplied. D) renters pay all of the tax. E) the government collects no tax revenue because the supply is perfectly elastic. Answer: D Topic: Tax incidence and the elasticity of supply Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

54) If the government eliminates a tax on a good with a perfectly elastic supply, who benefits most? A) buyers B) sellers C) buyers if the demand is also perfectly elastic, otherwise sellers D) buyers if the demand is unit elastic, otherwise sellers E) Buyers and sellers benefit equally. Answer: A Topic: Tax incidence and the elasticity of supply Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

55) If the elasticity of demand for a product equals 3 and the supply is perfectly elastic, then if a tax is imposed on this product, A) the buyer pays all the tax. B) the seller pays all the tax. C) the buyer pays 3/4 of the tax. D) the seller pays 3/4 of the tax. E) the buyer pays 4/3 of the tax. Answer: A Topic: Tax incidence and the elasticity of supply Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

56) The loss to society resulting from a tax includes the A) deadweight loss. B) consumer surplus paid to the government in the form of tax revenue. C) producer surplus paid to the government in the form of tax revenue. D) deadweight loss plus the consumer surplus and producer surplus paid to the government as tax revenue. E) deadweight loss minus the tax revenue collected by the government. Answer: A Topic: Taxes, deadweight loss Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

57) The inefficiency of a sales tax on a good is ultimately the result of the A) low tax revenue earned by the government relative to the cost of collection. B) wedge between what buyers pay for the good and what sellers receive for the good. C) buyers being unable to avoid paying the tax. D) sellers being unable to avoid paying the tax. E) increase in the consumer surplus that is more than offset by the decrease in the producer surplus. Answer: B Topic: Taxes, deadweight loss Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

58) A tax A) places a wedge between the price paid by the buyers and the price received by the sellers. B) reduces consumer surplus and producer surplus. C) decreases government spending. D) Both answers A and B are correct. E) None of the above answers is correct. Answer: D Topic: Taxes, deadweight loss Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

59) When a tax is imposed on a good, at the after-tax equilibrium the marginal benefit of the last unit produced ________ the marginal cost. A) equals B) is greater than C) is less than D) can be calculated but is not comparable to E) The premise of the question is incorrect because after a tax is imposed, it becomes impossible to determine the marginal benefit and the marginal cost. Answer: B Topic: Taxes, deadweight loss Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

60) When a tax is imposed on a good or a service, the marginal benefit of the last unit bought ________ the marginal cost of the last unit. A) is equal to B) is greater than C) is less than D) None of the above answers is correct because there is no consistent relationship between the marginal benefit of the last unit and its marginal cost. E) is not able to be compared to Answer: B Topic: Taxes, deadweight loss Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

61) If neither the demand nor supply of a good is perfectly elastic or inelastic, a tax on the good ________ consumer surplus and ________ producer surplus. A) decreases; decreases B) increases; increases C) decreases; increases D) increases; decreases E) decreases; does not change Answer: A Topic: Taxes, deadweight loss Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

62) When a product is taxed, A) part of the initial consumer surplus goes to the government as revenue. B) part of the initial consumer surplus becomes a deadweight loss. C) the producer surplus never changes because consumers pay taxes, not producers. D) Both answers A and B are correct. E) Both answers B and C are correct. Answer: D Topic: Taxes, deadweight loss Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

63) The size of the deadweight loss, or excess burden, of a tax depends on the A) amount of producer surplus but not the amount of consumer surplus because it is the producers who send the tax revenues to the government. B) strength of demand. C) strength of supply. D) elasticities of demand and supply. E) number of demanders and the number of suppliers. Answer: D Topic: Taxes, deadweight loss Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

64) When a tax is imposed on a good or service, the A) revenue gained by the government is the excess burden. B) deadweight loss that arises from a tax is the excess burden. C) share of the tax paid by the buyer is the excess burden. D) share of the tax paid by the seller is the excess burden. E) amount the government collects as tax revenue is the deadweight loss from the tax. Answer: B Topic: Deadweight loss, excess burden Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

65) The excess burden of a tax refers to the fact that A) the benefits from a tax exceed the tax revenue. B) the deadweight loss from a tax exceeds the remaining consumer surplus. C) marginal cost is greater than marginal benefit after the tax. D) a tax creates a deadweight loss. E) taxes are split between buyers and sellers. Answer: D Topic: Deadweight loss, excess burden Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

66) The deadweight loss from a tax A) is the tax revenue the government collects when people die. B) is the split of a tax between the amount paid and the amount collected. C) equals the amount collected as revenue from the tax. D) is called the excess burden of the tax. E) equals the amount collected as revenue from the tax plus the excess burden of the tax. Answer: D Topic: Deadweight loss, excess burden Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

67) The deadweight loss of a tax A) is the transfer of income from households to the government. B) determines the incidence of a tax. C) is part of the total burden of a tax. D) is greater than the total burden of a tax. E) equals the tax revenue collected by the government. Answer: C Topic: Deadweight loss, excess burden Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

68) Suppose the elasticity of demand for Mexican food is 3.00 and the elasticity of supply is 1.20. If the government imposes a sales tax on Mexican food, which of the following occurs? i. Less Mexican food is purchased by buyers. ii. Less Mexican food is produced by sellers. iii. The government receives the excess burden as revenue. iv. Both the consumer surplus and the producer surplus decrease. A) i and ii B) iii only C) i, ii, and iv D) iv only E) i, ii, iii, and iv Answer: C Topic: Deadweight loss, excess burden Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

69) The above figure shows the demand curves in four different markets. If each of the markets has an identical upward sloping supply curve and the same tax is levied on suppliers, which market would produce the smallest amount of deadweight loss? A) A B) B C) C D) D E) C and D Answer: C Topic: Taxes, deadweight loss Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

70) The above figure shows the demand curves in four different markets. If each of the markets has an identical upward sloping supply curve and the same tax is levied on suppliers, which market would produce the largest amount of deadweight loss? A) A B) B C) C D) D E) C and D Answer: D Topic: Taxes, deadweight loss Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

71) The above figure shows the supply curves in four different markets. If each of the markets has an identical downward sloping demand curve and the same tax is levied on suppliers, which market would produce the smallest amount of deadweight loss? A) A B) B C) C D) D E) A and D Answer: A Topic: Taxes, deadweight loss Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

72) The above figure shows the supply curves in four different markets. If each of the markets has an identical downward sloping demand curve and the same tax is levied on suppliers, which market would produce the largest amount of deadweight loss? A) A B) B C) C D) D E) A and D Answer: D Topic: Taxes, deadweight loss Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

73) Tax incidence refers to A) how government taxes are spent by the government. B) the incidences of tax revolts by the taxpayers. C) the amount of a tax minus its burden. D) the division of the burden of a tax between the buyer and the seller. E) tax revenue minus excess burden. Answer: D Topic: Tax incidence Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

74) If a $1 sales tax is imposed on the sale of a CD, and neither the demand nor the supply is perfectly elastic or perfectly inelastic, then the price of a CD paid by consumers will A) increase by $1 and fewer CDs will be bought. B) increase by less than $1 and fewer CDs will be bought. C) not change and the same number of CDs will be bought. D) increase by $1 and the same number of CDs will be bought. E) increase by more than $1 and fewer CDs will be bought. Answer: B Topic: Tax incidence Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

75) Neither the supply of nor demand for a good is perfectly elastic or perfectly inelastic. So, imposing a tax on the good results in a ________ in the price paid by buyers and ________ in the equilibrium quantity. A) rise; an increase B) rise; a decrease C) fall; an increase D) fall; a decrease E) rise; no change Answer: B Topic: Tax incidence Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

76) The graph shows the market for textbooks. If the government introduces a tax of $20 a textbook, then the price paid by buyers A) increases by $20. B) increases to $80 a textbook. C) decreases to $60 a textbook. D) is $70 a textbook. E) does not change because the demand for textbooks is perfectly elastic. Answer: B Topic: Tax incidence Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

77) Neither the supply of nor demand for a good is perfectly elastic or perfectly inelastic. So, imposing a tax on the good results in ________ in the price received and kept by sellers and a ________ in the price paid by buyers. A) a rise; rise B) a rise; fall C) a fall; rise D) a fall; fall E) no change; rise Answer: C Topic: Tax incidence, price wedge Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

78) Suppose the demand for barley is perfectly elastic. The supply curve of barley is upward sloping. If a tax is imposed on barley, A) barley sellers pay the entire tax. B) barley buyers pay the entire tax. C) the government pays the entire tax. D) the tax is split evenly between barley buyers and sellers. E) who pays the tax depends on whether the government imposes the tax on barley sellers or on barley buyers. Answer: A Topic: Tax incidence and the elasticity of demand Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

79) The demand for apple pies is perfectly elastic. If the government taxes apple pies at $1 a pie, then A) the seller pays the entire tax. B) the buyer pays the entire tax. C) the seller and the buyer split the tax evenly. D) the seller and the buyer split the tax but the seller pays more. E) who pays the tax depends on whether the government imposes the tax on pie buyers or on pie sellers. Answer: A Topic: Tax incidence and the elasticity of demand Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

80) At harvest time the supply of wheat is perfectly inelastic. If the government taxes wheat at $1 a bushel, then A) the seller pays the entire tax. B) the buyer pays the entire tax. C) the seller and the buyer split the tax evenly. D) the seller and the buyer split the tax but the seller pays more. E) no one pays the tax because the wheat must be harvested or it will go to waste. Answer: A Topic: Tax incidence and the elasticity of supply Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

81) To determine who bears the greater share of a tax, we compare the A) number of buyers to the number of sellers. B) elasticity of supply to the elasticity of demand. C) size of the tax to the price of the good. D) government tax revenue to the revenue collected by the suppliers. E) pre-tax quantity to the post-tax quantity. Answer: B Topic: Tax incidence and the elasticity of demand and supply Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

82) The supply of oil is more elastic than the demand for oil. If oil is taxed $10 per barrel, how will the tax be divided between the buyer and seller? A) The seller will pay more of the tax than the buyer pays. B) The buyer will pay more of the tax than the seller pays. C) The seller and buyer will split the tax evenly. D) The seller will pay the entire tax. E) The buyer will pay the entire tax. Answer: B Topic: Tax incidence and the elasticity of demand and supply Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

83) The buyer will pay the entire tax levied on a good when the demand for the good is ________ or when the supply of the good is ________. A) perfectly elastic; perfectly inelastic B) perfectly elastic; perfectly elastic C) perfectly inelastic; perfectly inelastic D) perfectly inelastic; perfectly elastic E) unit elastic; unit elastic Answer: D Topic: Tax incidence and the elasticity of demand and supply Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

84) A sales tax imposed on tires ________ consumer surplus and ________ producer surplus. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; does not change Answer: D Topic: Taxes, deadweight loss Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

85) If a tax is placed on tires, then i. the equilibrium quantity of tires will decrease. ii. a deadweight loss will be created. iii. the producer surplus will decrease. A) i only B) ii only C) i and iii D) i and ii E) i, ii, and iii Answer: E Topic: Taxes, deadweight loss Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

86) The deadweight loss from a tax is called the A) marginal benefit of the tax. B) marginal cost of the tax. C) excess burden of the tax. D) net gain from taxation. E) net loss from taxation. Answer: C Topic: Deadweight loss, excess burden Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

87) The graph shows the market for cell phones. The government imposes a sales tax on cell phones at $10 a cell phone. The excess burden of the sales tax on cell phones is A) $20,000. B) $15,000. C) $35,000. D) $7,500. E) $30,000. Answer: B Topic: Deadweight loss, excess burden Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

88) A sales tax creates a deadweight loss because A) there is some paper work opportunity cost of sellers paying the sales tax. B) demand and supply both decrease. C) less is produced and consumed. D) citizens value government goods less than private goods. E) the government spends the tax revenue it collects. Answer: C Topic: Taxes, deadweight loss Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

89) The graph shows the market for mattresses. As a result of a tax imposed by the government, the price buyers pay changes from ________ and the equilibrium quantity changes from ________ mattresses. A) $300 to $325; 5,000 to 4,000 B) $295 to $325; 5,000 to 4,000 C) $325 to $300; 4,000 to 5,000 D) $325 to $295; 4,000 to 5,000 E) $295 to $300; 4,000 to 5,000 Answer: A Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: New AACSB: Application of knowledge

90) The graph shows the market for mattresses. The government imposes a tax on mattresses. The amount of the tax is ________ which causes the price buyers pay to ________ with ________ bearing more of the tax. A) $30; rise to $325;buyers B) $25; fall to $295; buyers C) $30; rise to $300; buyers D) $5; fall to $295; firms E) $25; rise to $325; firms Answer: A Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: New AACSB: Application of knowledge

91) The figure shows the market for mattresses. As a result of the government's tax on mattresses, consumer surplus ________, producer surplus ________ and the government collects tax revenue of ________. A) shrinks; shrinks; $150,000 B) shrinks; shrinks; $120,000 C) grows; shrinks; $120,000 D) shrinks; grows; $150,000 E) grows; grows; $30 per mattress sold Answer: B Topic: Tax incidence, government revenue Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: New AACSB: Application of knowledge

92) The figure shows the market for mattresses. If the government imposes a tax on mattresses, the figure shows that A) firms will pay more of the tax because they have less elastic supply. B) firms and buyers will bear equal tax burdens. C) buyers will pay most of the tax because they have less elastic demand. D) the excess burden of the tax falls mainly on firms. E) inefficiency does not occur because buyers and sellers split the tax. Answer: C Topic: Tax incidence and the elasticity of demand and supply Skill: Level 5: Critical thinking Section: Checkpoint 7.1 Status: New AACSB: Reflective thinking

93) The figure shows the market for mattresses. If the government had imposed the tax on the buyers instead of on the sellers, the A) outcome would have been the same. B) deadweight loss would have been smaller. C) deadweight loss would have been larger. D) equilibrium price would have risen a smaller amount. E) equilibrium quantity would have fallen by a smaller amount. Answer: A Topic: Tax incidence Skill: Level 3: Using models Section: Checkpoint 7.1 Status: New AACSB: Application of knowledge

94) The figure shows a market with perfectly inelastic demand. As a result of a tax imposed by the government A) the price buyers pay increases by $1 and the equilibrium falls to 900 units. B) sellers bear all of the tax and there is a deadweight loss of area ACD. C) sellers bear all of the tax and there is no deadweight loss. D) buyers bear all of the tax and there is a deadweight loss of area ABC. E) buyers bear all of the tax and there is no deadweight loss. Answer: E Topic: Tax incidence Skill: Level 5: Critical thinking Section: Checkpoint 7.1 Status: New AACSB: Reflective thinking

95) The figure shows a market with perfectly inelastic demand. Which of the following is true regarding the figure? i. The tax decreases the equilibrium quantity from 1,000 to 900 units. ii. The tax increases the price buyers pay from $10 to $11. iii. The tax creates a deadweight loss of area ABC. A) ii only. B) i and ii only. C) i only. D) i and iii only. E) ii and iii only. Answer: A Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: New AACSB: Application of knowledge

96) Suppose that in a market, supply is perfectly elastic while demand is perfectly inelastic. If the government imposes a tax of $10 per unit, A) the price buyers pay increases by less than $10 per unit with firms and buyers splitting the tax. B) the price buyers pay is unaffected by the tax. C) the market quantity is unaffected by the tax. D) at the new equilibrium, marginal cost equals marginal benefit and there is no deadweight loss. E) both C and D are correct. Answer: E Topic: Tax incidence and the elasticity of demand and supply Skill: Level 5: Critical thinking Section: Checkpoint 7.1 Status: New AACSB: Reflective thinking

7.2 Price Ceilings 1) A price ceiling A) is an illegal price. B) is the price that exists in a black market. C) is the maximum price that can legally be charged. D) Both answers A and B are correct. E) Both answers B and C are correct. Answer: C Topic: Price ceiling Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

2) A price ceiling is A) a maximum legal price. B) a minimum legal price. C) an equilibrium price. D) a market-determined price. E) the highest price at which the quantity demanded equals the quantity supplied. Answer: A Topic: Price ceiling Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

3) If a price ceiling is set above the equilibrium price, then A) there will be a surplus of the good. B) there will be a shortage of the good. C) there will be neither a shortage nor a surplus of the good. D) the price ceiling will generate revenue for the government. E) the price ceiling affects suppliers but not demanders. Answer: C Topic: Price ceiling, shortages Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

4) A price ceiling in the market for gasoline that is below the equilibrium price will lead to A) the quantity demanded of gasoline exceeding the quantity supplied. B) an increase in the demand for gasoline. C) a decrease in the supply of gasoline. D) the quantity supplied of gasoline exceeding the quantity demanded. E) no change in the market since the price ceiling is below the equilibrium price. Answer: A Topic: Price ceiling Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

5) When a price ceiling below the equilibrium price is imposed on a good, production of the good A) increases. B) decreases. C) does not change. D) is frozen at the pre-ceiling level. E) either increases or decreases depending on whether the supply of the good increases or decreases when the price ceiling is imposed. Answer: B Topic: Price ceiling, shortages Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

6) A price ceiling in the market for fuel oil that is below the equilibrium price will A) lead to the quantity supplied of fuel oil exceeding the quantity demanded. B) lead to the quantity demanded of fuel oil exceeding the quantity supplied. C) decrease the demand for fuel oil. D) increase the supply of fuel oil. E) have no effect in the market for fuel oil. Answer: B Topic: Price ceiling, shortages Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

7) The demand and supply schedules for pizza are in the table above. A price ceiling of $2 per slice results in A) a surplus of 20 slices of pizza. B) a shortage of 20 slices of pizza. C) a shortage of 40 slices of pizza. D) a shortage of 60 slices of pizza. E) neither a shortage nor a surplus. Answer: B Topic: Price ceiling, shortages Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

8) The demand and supply schedules for pizza are in the table above. A price ceiling of $4 per slice results in A) a surplus of 20 slices of pizza. B) a shortage of 20 slices of pizza. C) a shortage of 40 slices of pizza. D) a shortage of 60 slices of pizza. E) neither a shortage nor a surplus. Answer: E Topic: Price ceiling, shortages Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

9) The demand and supply schedules for pizza are in the table above. If the government sets a maximum legal price of $2 per slice of pizza, then A) there is a shortage of 20 slices of pizza. B) this maximum price is an example of a price floor. C) this maximum price is an example of a price ceiling. D) Both answers A and C are correct. E) Both answers B and C are correct. Answer: D Topic: Price ceiling, shortages Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

10) The figure shows the market for apartments in Rivercity. If the government imposes a rent ceiling of $400 which of the following will occur? i. There will be increased search activity. ii. A shortage of apartments will occur. iii. A deadweight loss will occur. A) i, ii and iii. B) i only. C) ii and iii only. D) i and ii only. E) ii only. Answer: A Topic: Price ceiling Skill: Level 3: Using models Section: Checkpoint 7.1 Status: New AACSB: Analytical thinking

11) The graph shows the market for apartments in Rivercity. Prior to the rent ceiling, ________ apartments are rented at ________. After a rent ceiling of $400 is imposed, ________ are rented. A) 1,000; $500; 1,000. B) 3,000; $400; 2,000. C) 3,000; $400; 6,000. D) 2,000; $500; 6,000. E) 3,000; $500; 3,000, Answer: B Topic: Price ceiling Skill: Level 3: Using models Section: Checkpoint 7.1 Status: New AACSB: Analytical thinking

12) The graph shows the market for apartments in Rivercity. As a result of the rent ceiling of $400, ________ are rented and people are willing to incur search costs of ________. A) 2,000; more than $100 B) 2,000; less than $100 C) 5,000; zero D) 5,000; more than $100 E) None of the above answers are correct. Answer: A Topic: Rent ceiling Skill: Level 3: Using models Section: Checkpoint 7.1 Status: New AACSB: Analytical thinking

13) The figure above illustrates the bagel market. Which of the following statements is correct? A) With a price ceiling of $1.00 per bagel, the quantity demanded is equal to the quantity supplied. B) With a price ceiling of $3.00 per bagel, the quantity demanded is greater than the quantity supplied. C) With a price ceiling of $1.00 per bagel, there is a shortage of bagels. D) Answers A and B are correct. E) Answers B and C are correct. Answer: C Topic: Price ceiling, shortages Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

14) The figure above illustrates the bagel market. Which of the following statements is correct? A) With a price ceiling of $1.00 per bagel, the price of a bagel is $1. B) With a price ceiling of $3.00 per bagel, the price of a bagel is $2. C) With no government intervention, the equilibrium price of a bagel is $2. D) Only answers A and B are correct. E) Answers A, B, and C are correct. Answer: E Topic: Price ceiling Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

15) In a housing market with no rent ceilings, the equilibrium rent is that for which the quantity of apartments demanded A) equals the quantity supplied. B) is greater than the quantity supplied. C) is less than the quantity supplied. D) might be greater than, equal to, or less than the quantity supplied depending on whether the supply curve is upward sloping, horizontal, or vertical. E) None of the above answers is correct because without rent ceilings there is no equilibrium rent. Answer: A Topic: Rent ceiling Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

16) A rent ceiling set below the equilibrium rent A) ensures the availability of enough low-rent apartments in a city. B) results in all renters and potential renters being better off. C) creates a situation in which the quantity demanded of housing is greater than quantity supplied. D) ensures that landlords earn a reasonable rate of profit on apartments. E) eliminates discrimination by landlords. Answer: C Topic: Rent ceiling, shortages Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

17) A rent ceiling set below the equilibrium rent decreases the quantity of housing supplied because A) landlords of previously barely profitable apartments refuse to rent them. B) the supply of housing increases. C) fewer tenants will search for housing. D) demand for housing will increase. E) the supply curve of housing immediately shifts leftward. Answer: A Topic: Rent ceiling, shortages Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

18) A housing shortage results when A) a tax is imposed on housing. B) a rent ceiling below the equilibrium rent is imposed. C) a rent ceiling above the equilibrium rent is imposed. D) rents rise. E) a rent floor below the equilibrium rent is imposed. Answer: B Topic: Rent ceiling, shortages Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

19) Suppose the equilibrium rent in Denver is $1,050. A rent ceiling of $755 per month leads to A) a surplus of apartments in Denver. B) a shortage of apartments in Denver. C) no change in the Denver apartment market. D) fair prices in the Denver market. E) compared to the situation at the equilibrium rent, a decrease in the quantity of apartments demanded and an increase in the quantity of apartments supplied. Answer: B Topic: Rent ceiling, shortages Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

20) Suppose the equilibrium rent in Boston is $1,500. A rent ceiling of $1,600 per month leads to A) a surplus of apartments in Boston. B) a shortage of apartments in Boston. C) no change in the Boston apartment market. D) fair prices in the Boston apartment market. E) compared to the situation at the equilibrium rent, a decrease in the quantity of apartments demanded and an increase in the quantity of apartments supplied. Answer: C Topic: Rent ceiling, shortages Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

21) With a rent ceiling set below the equilibrium rent, i. all renters are able to rent apartments at a lower rent. ii. there is a shortage of apartments. iii. the quantity of apartments supplied does not change because buildings cannot be moved. A) i only B) ii only C) iii only D) ii and iii E) i, ii, and iii Answer: B Topic: Rent ceiling, shortages Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

22) Which of the following is an impact of a rent ceiling set below the equilibrium rent? A) Renters find apartments to rent more rapidly because the rent ceiling is lower. B) Landlords' incentives to provide apartments decrease. C) The supply of apartments increases as soon as the rent ceiling is imposed. D) A surplus of housing occurs. E) Search for apartments decreases because renters need no longer search for the apartment with the lowest rent. Answer: B Topic: Rent ceiling, shortages Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

23) If a rent ceiling is below the equilibrium rent, some allocation scheme must be used. The allocation methods include all of the following EXCEPT A) charging the equilibrium rent. B) refusing to rent to individuals on the basis of sex, race, or some other attribute. C) requiring a payment, such as key money, in addition to the rent. D) the creation of a black market. E) increased search activity. Answer: A Topic: Rent ceiling, allocation Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

24) Which of the following results from a price ceiling? i. increased search activity ii. surplus iii. black market A) i only B) i and iii C) ii and iii D) i, ii, and iii E) ii only Answer: B Topic: Price ceiling, search and black market Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

25) An illegal market in which the price exceeds a legally imposed price ceiling is called a A) shortage market. B) surplus market. C) black market. D) fair market. E) subsidized market. Answer: C Topic: Price ceiling, black market Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

26) A black market A) is legal only when it is associated with government price ceilings. B) is defined as the deadweight loss associated with taxes. C) benefits no one. D) is a potential outcome of a price ceiling. E) is always legal. Answer: D Topic: Price ceiling, black market Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

27) A price ceiling A) creates market efficiency by making a good cheaper. B) helps all producers by increasing the price of the good. C) can create a black market for the good. D) reduces search activity. E) benefits all people who want to buy the good. Answer: C Topic: Price ceiling, black market Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

28) A rent ceiling below the equilibrium rent A) increases the quantity of housing supplied. B) is an example of a price floor. C) has no effect on the housing market because the ceiling is below the equilibrium. D) can create a black market. E) limits search because people need no longer search for cheap apartments. Answer: D Topic: Rent ceiling, black market Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

29) A black market for housing exists because of a rent ceiling. The rent for housing in the black market is A) the same as the equilibrium rent. B) lower than the ceiling rent. C) somewhere between the ceiling rent and the maximum rent a tenant is willing to pay. D) somewhere between zero and the equilibrium rent. E) not defined because the market is not legal. Answer: C Topic: Rent ceiling, black market Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

30) Black markets can occur when price ceilings are imposed in a market. Which of the following explains why sellers participate in a black market? A) Sellers are able to sell the product for a higher than legal price. B) There are more buyers in the black market than in the legal market. C) The demand is perfectly elastic in a black market. D) The demand is perfectly inelastic in a black market. E) The surplus in the legal market means that many sellers can sell their product in the black market. Answer: A Topic: Rent ceiling, black market Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

31) When a rent ceiling law is passed in a city, which of the following occurs? A) The total price of renting an apartment decreases to all renters. B) The quantity of apartments supplied does not change. C) Some landlords and renters use methods such as "key money" to get around the rent ceiling law. D) Renters have no trouble finding a nice, reasonably priced apartment to rent. E) Generally the number of renters in the city increases because people move to the city to take advantage of the low-rent apartments. Answer: C Topic: Rent ceiling, black market Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

32) One of the consequences of a rent ceiling set below the equilibrium rent is A) decreased search activity. B) increased search activity. C) the establishment of landlord unions. D) surpluses of apartments. E) the elimination of the deadweight loss that would otherwise exist in the housing market. Answer: B Topic: Rent ceiling, search Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

33) The opportunity cost of an apartment in a rent controlled market is equal to A) the rent charged for the apartment. B) the opportunity cost of searching for the apartment. C) the rent charged for the apartment plus the opportunity cost of searching for the apartment. D) nothing because of the surplus of apartments when there are rent controls. E) the rent charged for the apartment minus the opportunity cost of searching for the apartment. Answer: C Topic: Rent ceiling, search Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

34) A rent ceiling in a housing market A) makes all rents lower than the ceiling illegal to charge. B) is set above the equilibrium rent in order to have an effect. C) increases the time people spend searching for housing. D) Both answers B and C are correct. E) Both answers A and C are correct. Answer: C Topic: Rent ceiling, search Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

35) In a housing market with a rent ceiling below the equilibrium rent, apartment seekers spend more time searching for an apartment than they would in a housing market without a rent ceiling. Why does this difference exist? A) In the market with the rent ceiling, renters are searching for the best buy in apartments. B) In the market with the rent ceiling, there is a wide variety in the quality of apartments for rent. C) In the market with the rent ceiling, the quantity of housing demanded is greater than quantity supplied at the ceiling price. D) The premise of the question is incorrect because people spend less time searching with a rent ceiling since they no longer need to look for a low-priced apartment. E) The premise of the question is incorrect because there is no difference in the search time between a market with a rent ceiling and one without a ceiling. Answer: C Topic: Rent ceiling, search Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

36) In a market with a rent ceiling set below the equilibrium rent, the producer and consumer surplus A) both increase. B) both decrease, but generally not to zero. C) do not change. D) are eliminated. E) are both totally converted into deadweight loss. Answer: B Topic: Rent ceiling, efficiency Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

37) Which of the following decrease the deadweight loss from a rent ceiling set below the equilibrium rent? i. lowering the ceiling ii. dedicating more resources to enforcement of the ceiling iii. raising the ceiling A) i only B) ii only C) iii only D) i and ii E) ii and iii Answer: C Topic: Rent ceiling, efficiency Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

38) People who benefit from a rent ceiling include A) all landlords. B) taxpayers. C) tenants who have a rent-controlled apartment. D) potential tenants, that is, people looking for apartments. E) all landlords and some tenants. Answer: C Topic: Rent ceiling, efficiency Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

39) When a rent ceiling below the equilibrium rent is put in place, the outcome is A) efficient because marginal benefit equals marginal cost. B) inefficient because marginal benefit equals marginal cost. C) inefficient because marginal benefit is greater than marginal cost. D) inefficient because marginal benefit is less than marginal cost. E) efficient because marginal benefit is greater than marginal cost. Answer: C Topic: Rent ceiling, efficiency Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

40) Assuming that the rent ceiling is strictly enforced so that there is no black market, which of the following statements about a housing market with a rent ceiling set below the equilibrium rent is correct? A) The rent for housing equals the ceiling rent or higher. B) There is excess supply of housing. C) The rent ceiling increases the amount of producers' surplus. D) The rent ceiling creates a deadweight loss. E) The rent ceiling enforces efficiency upon the housing market. Answer: D Topic: Rent ceiling, deadweight loss Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

41) The deadweight loss in a housing market with a rent ceiling set below the equilibrium rent is the A) loss to those who cannot find apartments and the gain to landlords who charge black market rents. B) loss to those who cannot find apartments and the loss to landlords who cannot offer housing at the lower rent ceiling. C) loss to landlords and the gain to tenants who pay a fairer rent. D) loss to tenants and the gain to landlords who have the incentive to offer more apartments for rent. E) gain to landlords and to tenants because now a fairer rent is charged. Answer: B Topic: Rent ceiling, deadweight loss Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

42) Rent ceilings set below the equilibrium rent i. create a deadweight loss. ii. increase search activity. iii. result in a surplus of apartments. A) i only B) ii only C) i and iii D) i and ii E) i, ii, and iii Answer: D Topic: Rent ceiling, deadweight loss Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

43) The deadweight loss from a rent ceiling below the equilibrium rent is smallest when the supply of housing is A) perfectly elastic. B) elastic but not perfectly elastic. C) unit elastic. D) inelastic but not perfectly inelastic. E) perfectly inelastic. Answer: E Topic: Rent ceiling, deadweight loss Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

44) The above figure shows the market for 2 bedroom town homes in San Diego. If a rent ceiling is set at $1,000 per month, then there is a A) surplus equal to 150,000 town homes. B) shortage equal to 100,000 town homes. C) surplus equal to 100,000 town homes. D) shortage equal to 150,000 town homes. E) shortage equal to 250,000 town homes. Answer: D Topic: Rent ceiling, shortages Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

45) The above figure shows the market for 2 bedroom town homes in San Diego. If a rent ceiling is set at $1,000 per month, what is true? A) The quantity of town homes demanded decreases to 100,000. B) Black market rents might be as high as $1,300 per month. C) The quantity of town homes supplied increases to 250,000. D) More town homes are rented after the rent ceiling that before. E) The quantity demanded of town homes is less than the quantity supplied. Answer: B Topic: Rent ceiling, black market Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

46) The above figure shows the market for 2 bedroom town homes in San Diego. If a rent ceiling is set at $1,000 per month, what is the maximum rent someone is willing to pay in the black market? A) $1,300 per month B) $1,000 per month C) $900 per month D) $1,100 per month E) $1,400 per month Answer: A Topic: Rent ceiling, black market Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

47) The above figure shows the market for winter jackets. In an effort to keep the nation warm, the president places a price ceiling of $100 in the market for winter jackets. As a result, there is a A) shortage equal to 150,000 jackets. B) surplus equal to 150,000 jackets. C) surplus equal to 300,000 jackets. D) shortage equal to 250,000 jackets. E) shortage equal to 100,000 jackets. Answer: A Topic: Price ceiling, shortages Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

48) The above figure shows the market for winter jackets. In an effort to keep the nation warm, the president places a price ceiling of $100 in the market for winter jackets. Which of the following statements is true? A) After taking account of the resources lost in search, consumer surplus increases when the price ceiling is in place. B) There will be a surplus of jackets. C) Because the price of a jacket is lowered, consumers end up buying more jackets with the price ceiling than without it. D) Producer surplus decreases if there is a price ceiling. E) The quantity supplied of jackets is greater that quantity demanded when there is a price ceiling. Answer: D Topic: Price ceiling, efficiency Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

49) The above figure shows the market for winter jackets. In an effort to keep the nation warm, the president places a price ceiling of $100 in the market for winter jackets. What would be the maximum price someone would pay in the black market? A) $100 per jacket B) $120 per jacket C) $130 per jacket D) $90 per jacket E) $140 per jacket Answer: C Topic: Price ceiling, black market Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

50) The above figure shows the market for winter jackets. In an effort to keep the nation warm, the president places a price ceiling of $100 in the market for winter jackets. When the price ceiling is in place and taking account of the resources lost in search, consumer surplus ________ and producer surplus ________ compared to the equilibrium before the price ceiling was imposed. A) decreases; increases B) decreases; decreases C) increases; increases D) increases; decreases E) does not change; increases Answer: B Topic: Price ceiling, efficiency Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

51) The above figure shows a housing market with a rent ceiling equal to $1,000. In this figure, after taking account of the resources lost in search, what area is equal to the consumer surplus? A) area A B) area B C) area C D) area D E) area E Answer: A Topic: Rent ceiling, efficiency Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

52) The above figure shows a housing market with a rent ceiling equal to $1,000. In this figure, what area is equal to the producer surplus? A) area A B) area B C) area C D) area D E) area E Answer: D Topic: Rent ceiling, efficiency Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

53) The above figure shows a housing market with a rent ceiling equal to $1,000. In this figure, what area is equal to the deadweight loss? A) area A B) area B C) area C D) area D E) area E Answer: C Topic: Rent ceiling, deadweight loss Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

54) The above figure shows a housing market with a rent ceiling equal to $1,000. In this figure, what area is equal to the resources lost due to search? A) area A B) area B C) area C D) area D E) area E Answer: B Topic: Rent ceiling, search Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

55) The above figure shows the market for DVDs. The government decides that all citizens deserve to watch affordable DVDs so a price ceiling of $12 per DVD is placed on DVDs. After this price ceiling is in effect and taking account of the resources lost in search, consumer surplus equals A) $900,000. B) $400,000. C) $200,000. D) $180,000. E) $100,000. Answer: E Topic: Price ceiling, efficiency Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

56) The above figure shows the market for DVDs. The government decides that all citizens deserve to watch affordable DVDs so a price ceiling of $12 per DVD is placed on DVDs. After this price ceiling is in effect, producer surplus equals A) $900,000. B) $400,000. C) $200,000. D) $100,000. E) $1,800,000. Answer: D Topic: Price ceiling, efficiency Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

57) The above figure shows the market for DVDs. The government decides that all citizens deserve to watch affordable DVDs so a price ceiling of $12 per DVD is placed on DVDs. After this price ceiling is in effect, deadweight loss equals A) $1,600,000. B) $200,000. C) $800,000. D) $1,800,000. E) $400,000. Answer: C Topic: Price ceiling, efficiency Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

58) In a housing market with a rent ceiling set below the equilibrium rent, as time passes the supply of apartments A) decreases. B) increases. C) does not change. D) becomes fixed by the government. E) increases while the demand for apartments decreases. Answer: A Topic: Rent ceiling, change in supply over time Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

59) New York City, which has had a rent ceiling law for more than sixty years, has many abandoned apartment buildings throughout the city. Which of the following explains this? A) Few workers with jobs in the city want to live in there because of pollution. B) No building permits for new apartment buildings have been issued for over fifty years. C) Once any building gets so old, it is abandoned. D) Landlords have no incentive to finance maintenance and remodeling of apartment buildings. E) Rent ceilings make the construction of new buildings so profitable that old buildings are simply abandoned. Answer: D Topic: Rent ceiling, change in supply over time Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

60) Which of the following is an example of the unfairness of a rent ceiling? A) Voluntary exchange is encouraged by rent control. B) Racial discrimination in renting is discouraged by rent ceilings. C) Newcomers have a more difficult time finding apartments. D) Rich people do not get apartments in these markets. E) Too many people rent apartments. Answer: C Topic: Rent ceiling, unfairness Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Ethical understanding and reasoning

61) Suppose the city of Chicago imposes a rent ceiling program that fixes rents at $400 below the equilibrium rent. With this plan A) the quantity of apartments demanded will increase. B) the quantity of apartments supplied will increase. C) young people and poor people will have an easier time finding apartments. D) the deadweight loss in Chicago's apartment market will be eliminated. E) there will be a surplus of apartments offered for rent. Answer: A Topic: Rent ceiling, unfairness Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

62) Rent ceilings A) create a deadweight loss. B) increase maintenance by landlords. C) benefit people who live in rent controlled apartments. D) Both answers A and C are correct. E) Both answers B and C are correct. Answer: D Topic: Rent ceiling, unfairness Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

63) Rent ceilings are difficult to abolish because A) they create such large profits for landlords. B) current renters offer political support for ceilings. C) the government doesn't like to give up the tax revenues associated with ceilings. D) they result in an efficient use of resources. E) landlords lobby to keep them in place. Answer: B Topic: Rent ceiling, unfairness Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

64) A price ceiling is a government regulation that makes it illegal to charge a price A) below the equilibrium price. B) above the equilibrium price. C) for a good or service. D) above some specified level. E) below some specified level. Answer: D Topic: Price ceiling Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

65) When a price ceiling is set below the equilibrium price, the quantity supplied ________ the quantity demanded and ________ exists. A) is less than; a surplus B) is less than; a shortage C) is greater than; a surplus D) is greater than; a shortage E) equals; an equilibrium Answer: B Topic: Price ceiling, shortages Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

66) The graph shows the market for holiday condos in West Palm Beach. The equilibrium rent is ________ a week. A) any amount less than $1,550 B) any amount greater than $1,550 C) $1,550 D) $4,000 E) None of the above answers is correct. Answer: C Topic: Rent ceiling Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

67) In a housing market with a rent ceiling set below the equilibrium rent, A) some people seeking an apartment to rent will not be able to find one. B) the total cost of renting an apartment will decrease for all those seeking housing. C) some landlords will not be able to find renters to fill available apartments. D) search will decrease because renters no longer need to search for less expensive apartments. E) None of the above answers are correct because to have an impact, the rent ceiling must be set above the equilibrium rent. Answer: A Topic: Rent ceiling, shortages Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

68) The graph shows the market for ski chalets in Aspen. The Aspen Tourist Board asks the local government to impose a rent ceiling on ski chalets. If the rent ceiling is set at $1,900 a week, then there is A) a shortage of 3,000 chalets a week. B) a surplus of 3,000 chalets a week. C) neither a shortage nor surplus of chalets. D) a shortage of 6,000 chalets a week. E) a surplus of 6,000 chalets a week. Answer: A Topic: Rent ceiling, shortages Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

69) A rent ceiling on housing creates a problem of allocating the available housing units because A) the demand for housing decreases and the demand curve shifts leftward. B) the supply of housing increases and the supply curve shifts rightward. C) a shortage of apartments occurs. D) a surplus of apartments occurs. E) it eliminates search, which is one of the major ways housing units are allocated. Answer: C Topic: Rent ceiling, allocation Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

70) Suppose that the government imposes a price ceiling on gasoline that is below the equilibrium price. The black market for gasoline is ________ market in which the price ________ ceiling price. A) a legal; exceeds the B) an illegal; exceeds the C) a legal; is less than the D) an illegal; is less than the E) an illegal; equals Answer: B Topic: Price ceiling, black market Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

71) If a rent ceiling is imposed that is less than the equilibrium rent, which of the following outcomes is most likely to occur? A) reduced search activity B) black market activity C) a building boom D) a housing surplus E) None of the above answers is correct because to have an impact, the rent ceiling must be above the equilibrium rent. Answer: B Topic: Rent ceiling, black market Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

72) The graph shows the market for ski chalets in Aspen. If a rent ceiling is set at $1,900 a week, then the maximum amount charged in the black market is ________ a week. A) $1,900 B) $2,050 C) $2,125 D) $225 E) $150 Answer: C Topic: Rent ceiling, black market Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

73) The graph shows the market for holiday condos in West Palm Beach. If a rent ceiling is set at $1,700 a week, the quantity of holiday condos rented A) is 2,000 a week. B) is 4,000 a week. C) is 5,000 a week. D) is some amount, but more information is needed to determine the amount. E) depends on the black market. Answer: B Topic: Rent ceiling, shortages Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

74) Rent ceilings A) increase search activity. B) result in surpluses. C) create efficiency. D) benefit producers. E) have no effect if they are set below the equilibrium rent. Answer: A Topic: Rent ceiling, search Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

75) A rent ceiling creates a deadweight loss A) if it is set below the equilibrium rent. B) if it is set equal to the equilibrium rent. C) if it set above the equilibrium rent. D) if it decreases the taxes the government collects in the housing market. E) never, because if it did create a deadweight loss, the government would not impose it. Answer: A Topic: Price ceiling, efficiency Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

76) If a price ceiling is introduced in the market for milk below the market equilibrium price, then the producer surplus made by dairy farmers A) will increase. B) will decrease. C) will not change. D) might increase or decrease depending on whether the demand for milk increases or decreases. E) might increase or decrease depending on whether the supply of milk decreases or increases. Answer: B Topic: Price ceiling, efficiency Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

77) The graph shows the market for rental housing in Little Rock. The market for apartments is efficient when A) the quantity of apartments demanded is 12,000 a month. B) the rent ceiling is set at $300 a month. C) there is no rent ceiling. D) the quantity of apartments supplied is 6,000 a month. E) the rent charged is less than $450. Answer: C Topic: Rent ceiling, efficiency Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

78) Rent ceilings A) eliminate the problem of scarcity. B) allocate resources efficiently. C) ensure that housing goes to the poorer people. D) benefit renters living in rent-controlled apartments. E) benefit all landlords because the landlords know what rent to charge their renters. Answer: D Topic: Rent ceiling, unfairness Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Revised AACSB: Reflective thinking

79) A rent ceiling is A) fair, because it helps all renters. B) fair, because it insures that low-income families can rent apartments. C) fair, because it helps all landlords. D) unfair. E) fair, because it helps more renters than it harms. Answer: D Topic: Rent ceiling, unfairness Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Ethical understanding and reasoning

7.3 Price Floors 1) A price floor is A) the highest possible legal price that can be charged for a good or service. B) usually equal to the equilibrium price established before the government imposed the price floor. C) the lowest legal price at which a good or service can be traded. D) a legal price of zero that can be charged for a good or service. E) almost always equal to the price ceiling. Answer: C Topic: Price floor Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking

2) A price floor makes prices A) below the price floor illegal. B) above the price floor illegal. C) below the equilibrium price illegal. D) above the equilibrium price illegal. E) None of the above answers is correct. Answer: A Topic: Price floor Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking

3) Which of the following is an example of a price floor? A) a law passed in a city to lower apartment rents by setting the maximum price that can be charged for rent B) an equilibrium price C) a minimum wage law D) a law setting the highest price that can legally be charged for a gallon of gasoline. E) None of the above answers give examples of a price floor. Answer: C Topic: Price floor Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking

4) A price floor set above the equilibrium price A) creates a surplus. B) creates a shortage. C) creates excess demand. D) balances supply and demand. E) has no effect. Answer: A Topic: Price floor, surplus Skill: Level 4: Applying models Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking

5) A price floor A) changes the equilibrium price if it is imposed in black markets. B) changes the price and quantity if it is set below the equilibrium price. C) changes the price and quantity if it is set above the equilibrium price. D) does not create a black market if it is set above the equilibrium price. E) changes the price and quantity only if it equals the equilibrium price. Answer: C Topic: Price floor, surplus Skill: Level 4: Applying models Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking

6) Suppose the equilibrium price of a gallon of milk is $4. If the government imposes a price floor of $5 per gallon of milk, the A) quantity supplied of milk falls short of the quantity demanded. B) quantity supplied of milk exceeds the quantity demanded. C) supply increases. D) demand decreases. E) price of milk remains $4 per gallon. Answer: B Topic: Price floor, surplus Skill: Level 4: Applying models Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking

7) Suppose the equilibrium price of a gallon of milk is $4. If the government imposes a price floor of $5 per gallon of milk, A) the quantity supplied of milk exceeds the quantity demanded. B) the quantity supplied of milk falls short of the quantity demanded. C) the supply increases. D) the market will not be affected. E) there will be a shortage of milk. Answer: A Topic: Price floor Skill: Level 4: Applying models Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

8) In the labor market, as wages rise, households A) decrease the quantity of labor supplied. B) increase the quantity of labor supplied. C) decrease the quantity of labor demanded. D) increase the quantity of labor demanded. E) increase the supply of labor. Answer: B Topic: Labor market Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking

9) A stated goal of a minimum wage is to A) increase government tax revenue. B) stabilize production costs. C) boost the incomes of low-wage earners. D) decrease business profits. E) increase business profits by making the labor market more efficient. Answer: C Topic: Minimum wage Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking

10) In a competitive labor market, a minimum wage law set above the equilibrium wage rate A) creates a shortage of labor. B) causes equality between the quantity of labor supplied and the quantity demanded. C) creates a surplus of labor. D) lowers the wage rate paid to workers. E) has no impact. Answer: C Topic: Minimum wage, employment Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking

11) Why do some workers lose their job when the minimum wage is increased? A) The increase in labor costs decreases the supply of the product, thereby raising the price of the good so that the equilibrium quantity decreases to zero. B) The increase in the minimum wage decreases the quantity of labor demanded. C) The demand for labor is perfectly inelastic. D) The supply of labor decreases. E) The demand for labor is perfectly elastic. Answer: B Topic: Minimum wage, employment Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking

12) A minimum wage increases unemployment by A) increasing the quantity of labor demanded. B) decreasing the quantity of labor demanded. C) shifting only the labor supply curve rightward. D) shifting only the labor demand curve leftward. E) shifting the labor supply curve rightward and shifting the labor demand curve leftward. Answer: B Topic: Minimum wage, employment Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking

13) Suppose the current equilibrium wage rate for housekeepers is $8.60 per hour. An increase in the minimum wage to $7.50 per hour leads to A) a surplus of housekeepers. B) a shortage of housekeepers. C) no change in the market for housekeepers. D) an increase in the quantity of housekeepers supplied. E) unemployment of housekeepers. Answer: C Topic: Minimum wage, employment Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

14) Suppose the equilibrium wage rate for apricot pickers is $7.00 per hour and at that wage rate the equilibrium quantity of apricot pickers employed is 14,000. If the minimum wage is set at $7.50 per hour, then the A) quantity of apricot pickers employed increases. B) quantity of apricot pickers employed decreases. C) quantity of apricot pickers employed does not change. D) wage rate for apricot pickers decreases. E) quantity of apricot pickers demanded does not change, and the quantity of apricot pickers supplied does not change. Answer: B Topic: Minimum wage, employment Skill: Level 4: Applying models Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

15) Suppose the current equilibrium wage rate for landscapers is $6.65 in Little Rock; $7.50 in St. Louis and $9.05 in Raleigh. An increase in the minimum wage to $7.50 per hour results in unemployment of landscapers in A) Little Rock and St. Louis. B) only Raleigh. C) Little Rock, St. Louis, and Raleigh. D) only Little Rock. E) St. Louis and Raleigh. Answer: D Topic: Minimum wage, employment Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

16) Suppose the equilibrium wage rate for apricot pickers is $9.00 per hour in California and at that wage rate the equilibrium quantity of apricot pickers is 14,000. If the minimum wage is set at $7.50 per hour, then the A) quantity of apricot pickers employed increases. B) quantity of apricot pickers employed decreases. C) quantity of apricot pickers employed does not change. D) wage rate for apricot pickers increases. E) some apricot pickers are unemployed. Answer: C Topic: Minimum wage, employment Skill: Level 4: Applying models Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

17) The labor demand and labor supply schedules are given in the table above. If a minimum wage of $11 per hour is imposed, A) a surplus of 300 workers occurs. B) there is no shortage or surplus of workers. C) 900 workers are employed. D) Both answers B and C are correct. E) Both answers A and C are correct. Answer: A Topic: Minimum wage, employment Skill: Level 4: Applying models Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

18) The labor demand and labor supply schedules are given in the table above. If a minimum wage of $9 per hour is imposed, A) a surplus of 300 workers occurs. B) a shortage of 300 workers occurs. C) there is no surplus or shortage of workers. D) the quantity demanded is 1,000 workers. E) there is unemployment of 700 workers. Answer: C Topic: Minimum wage, employment Skill: Level 4: Applying models Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

19) The graph shows the market for labor. If the government imposes a minimum wage of $15 per hour, which of the following will occur? i. 50,000 workers will be hired. ii. 100,000 people will be unemployed. iii. A deadweight loss will occur. A) i and iii B) i only C) i and ii D) i, ii and iii E) ii only Answer: A Topic: Minimum wage Skill: Level 3: Using models Section: Checkpoint 7.3 Status: New AACSB: Analytical thinking

20) The graph shows the market for labor. Prior to the minimum wage law of $15 per hour, ________ workers are hired at ________ per hour. After the law, ________ workers are hired. A) 150,000; $15; 150,000 B) 150,000; $9; 50,000 C) 150,000; $9; 150,000 D) 150,000; $15; 250,000 E) 150,000; $9; 250,000 Answer: B Topic: Minimum wage Skill: Level 3: Using models Section: Checkpoint 7.3 Status: New AACSB: Analytical thinking

21) The figure shows the labor market. As a result of the minimum wage law of $15 per hour, ________ workers are hired and exactly ________ people are unemployed. A) 50,000; 100,000 B) 150,000; 50,000 C) 50,000; 200,000 D) 50,000; 0 E) 250,000; 0 Answer: C Topic: Minimum wage Skill: Level 3: Using models Section: Checkpoint 7.3 Status: New AACSB: Analytical thinking

22) The figure shows the labor market for fast food workers. A minimum wage of ________ per hour will create unemployment of ________ workers. A) $9; 150,000 B) $15; 150,000 C) $6; 75,000 D) $15; 100,000 E) $15; 250,000 Answer: B Topic: Minimum wage Skill: Level 3: Using models Section: Checkpoint 7.3 Status: New AACSB: Analytical thinking

23) The figure shows the market for fast food workers. If the government imposes a minimum wage of $15 per hour, ________ workers will be fired and the remaining jobs will be allocated by ________. A) 100,000; increased job search activity and illegal hiring B) 150,000; increased job search activity and illegal hiring C) 50,000; increased job search activity and illegal hiring D) 50,000; decreased job search activity and a black market E) 150,000; a black market. Answer: C Topic: Minimum wage, efficiency Skill: Level 3: Using models Section: Checkpoint 7.3 Status: New AACSB: Analytical thinking

24) The figure shows the market for fast food workers. As a result of a minimum wage of $15 per hour, a deadweight loss equal to the area ________ occurs. Resources lost to job search are shown by area ________. A) A; B B) E; B C) C; A D) D; B E) C; D Answer: D Topic: Minimum wage, efficiency Skill: Level 3: Using models Section: Checkpoint 7.3 Status: New AACSB: Application of knowledge

25) When the government imposes a minimum wage law, A) an inefficient outcome occurs and total surplus shrinks. B) an efficient outcome occurs because more people get jobs. C) an efficient outcome occurs because people earn higher wages. D) an efficient outcome occurs because only the most efficient workers find jobs. E) an inefficient outcome occurs and producer surplus increases. Answer: A Topic: Minimum wage, efficiency Skill: Level 5: Critical thinking Section: Checkpoint 7.3 Status: New AACSB: Reflective thinking

26) The figure above shows the labor market in a region. For a minimum wage to change the wage rate and amount of employment, it must be A) left to the forces of supply and demand. B) set above $6 an hour. C) set equal to $6 an hour. D) set below $6 an hour. E) set at $12 per hour. Answer: B Topic: Minimum wage, employment Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

27) The figure above shows the labor market in a region. If a minimum wage of $8 an hour is imposed, then there are ________ unemployed workers. A) 20,000 B) 40,000 C) 60,000 D) 80,000 E) zero Answer: B Topic: Minimum wage, employment Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

28) The figure above shows the labor market in a region. If a minimum wage of $8 an hour is imposed, then the quantity of labor supplied is ________ and the quantity of labor demanded is ________. A) 60,000; 60,000 B) 80,000; 40,000 C) 40,000; 60,000 D) 60,000; 40,000 E) 40,000; 40,000 Answer: B Topic: Minimum wage, employment Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

29) The figure above shows the labor market in a region. In which of the following cases would the amount of unemployment be the largest? A) when the market is at its equilibrium, with no minimum wage B) when a minimum wage of $4 an hour is imposed C) when a minimum wage of $6 an hour is imposed D) when a minimum wage of $8 an hour is imposed E) None of the above because the market will adjust so that there is no unemployment. Answer: D Topic: Minimum wage, unemployment Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

30) One result of the minimum wage is A) a black market for labor that pays more than the minimum wage. B) a black market for labor that pays less than the minimum wage. C) decreased job search activity. D) a decrease in unemployment among poor and unskilled workers. E) an increase in employment among poor and unskilled workers. Answer: B Topic: Minimum wage, black market Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking

31) One result of a minimum wage is A) illegal hiring of people at wages below the minimum wage. B) more people with jobs. C) a change in the equilibrium wage. D) lower costs paid by firms. E) fewer people searching for work because they realize that firms have decreased the number of people hired. Answer: A Topic: Minimum wage, black market Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking

32) A minimum wage law A) lowers the wage rate of workers who are able to get a job. B) increases employment. C) increases the time spent searching by workers who cannot find a job. D) creates efficiency in the labor market. E) must be set below the equilibrium wage rate in order to have an impact. Answer: C Topic: Minimum wage, search Skill: Level 4: Applying models Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking

33) An increase in the minimum wage to $15 per hour would lead to A) an increase in search activity for many workers. B) a decrease in search activity for many workers. C) a decrease in unemployment. D) no change in unemployment. E) no change in employment. Answer: A Topic: Minimum wage, search Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking

34) Suppose the marginal benefit the owner of a cherry orchard derives from hiring Lauren to pick cherries is $8 per hour. If the wage rate that Lauren earns is $7 per hour, then the orchard owner's surplus from Lauren's labor is ________ per hour. A) $7 B) $15 C) $1 D) $8 E) $0 Answer: C Topic: Demand for labor, surplus Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

35) An efficient allocation of labor occurs when the A) marginal benefit to workers exceeds the marginal benefit to firms. B) marginal benefit to firms exceeds the marginal benefit to workers. C) marginal cost to workers is equal to the marginal benefit to firms. D) marginal cost and marginal benefit of both workers and the firms are equal to zero. E) marginal benefit of workers exceeds the marginal cost to firms by as much as possible. Answer: C Topic: Minimum wage, efficiency Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

36) If the minimum wage is set above the equilibrium wage, after taking into account the resources lost in job search, the firms' surplus ________ and the workers' surplus ________. A) increases; increases B) increases; decreases. C) decreases; increases D) decreases; decreases E) does not change; decreases Answer: D Topic: Minimum wage, efficiency Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

37) A minimum wage set above the equilibrium wage A) decreases the deadweight loss in the market. B) decreases the workers' surplus because workers must spend resources looking for jobs. C) increases the firm's surplus. D) increases the market's efficiency. E) has no effect on the market. Answer: B Topic: Minimum wage, efficiency Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking

38) A minimum wage that is above the equilibrium wage rate A) increases efficiency within the labor market. B) increases the quantity of labor demanded. C) creates a deadweight loss. D) has no effect on the labor market because it is set above the equilibrium wage rate. E) None of the above answers is correct. Answer: C Topic: Minimum wage, deadweight loss Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking

39) A minimum wage A) increases all workers' surplus because the wage rate increases. B) increases consumer surplus because the price of the good decreases. C) decreases the firms' surplus because fewer workers are hired at the higher wage. D) increases the firms' surplus and the workers' surplus because it increases the efficiency of the labor market. E) None of the above answers is correct. Answer: C Topic: Minimum wage, deadweight loss Skill: Level 4: Applying models Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

40) Who loses and who gains from the minimum wage? A) Losers are all workers and gainers are all firms. B) Losers are all firms and gainers are all workers. C) Losers are all firms and some workers, while gainers are other workers. D) Gainers are some firms and all workers, while losers are some firms. E) Gainers are some firms and some workers, while losers are other firms and other workers. Answer: C Topic: Minimum wage, deadweight loss Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking

41) The people who immediately benefit from a minimum wage are A) employers who now pay the minimum wage. B) those people who enter the labor force to search for minimum wage jobs. C) the workers who retain their jobs after enactment of the minimum wage. D) everyone, both demanders and suppliers, because the minimum wage benefits everyone. E) all workers. Answer: C Topic: Minimum wage, deadweight loss Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking

42) In the figure above, if the wage rate is $6 per hour, then the A) firms' surplus is the area d + e + f. B) workers' surplus is the area a + b + c. C) deadweight loss equals zero. D) Only answers A and C are correct. E) Answers A, B, and C are correct. Answer: E Topic: Minimum wage, efficiency Skill: Level 4: Applying models Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

43) In the figure above, if the minimum wage rate is $8 per hour, then after taking account of resources lost in job search, the workers' surplus is the area ________ and the firms' surplus is the area ________. A) e; c B) d; b C) a; f D) f; a E) a + b + c + d + e; f Answer: C Topic: Minimum wage, efficiency Skill: Level 4: Applying models Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

44) In the figure above, if the minimum wage is $8 per hour, then A) resources used in job-search activity increase compared to the situation before the minimum wage. B) it is legal to hire workers for a wage below the minimum wage because otherwise unemployment would result. C) the deadweight loss is minimized. D) Both answers A and B are correct. E) Both answers B and C are correct. Answer: A Topic: Minimum wage, efficiency Skill: Level 4: Applying models Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

45) The above figure shows a labor market with a minimum wage of $8 an hour. How many people are employed when the minimum wage is in place? A) 40,000 B) 60,000 C) 80,000 D) fewer than 40,000 E) more than 80,000 Answer: A Topic: Minimum wage, employment Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

46) The above figure shows a labor market. Before the minimum wage of $8 an hour is imposed, employment equals ________ workers; after the minimum wage of $8 an hour is imposed, employment equals ________ workers. A) 80,000; 40,000 B) 40,000; 80,000 C) 60,000; 40,000 D) 60,000; 80,000 E) 80,000; 60,000 Answer: C Topic: Minimum wage, employment Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

47) The above figure shows a labor market with a minimum wage of $8 an hour. The value of the resources workers are willing to use in their job search equals the distance between point ________ and point ________. A) a; d B) a; b C) b; c D) a; c E) c; d Answer: B Topic: Minimum wage, search Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

48) The above figure shows a labor market with a minimum wage of $8 an hour. The deadweight loss equals the A) area abc. B) distance ab. C) distance ad. D) area bad. E) area acd. Answer: A Topic: Minimum wage, deadweight loss Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

49) The above figure shows the market for finish carpenters in Bozeman. If there is a minimum wage set at $18, then there will be A) unemployment of 200 workers. B) a surplus of 200 workers. C) unemployment of 400 workers. D) a surplus of 400 workers. E) no unemployment of workers and no surplus of workers. Answer: A Topic: Minimum wage, unemployment Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

50) The above figure shows the market for finish carpenters in Bozeman. If there is a minimum wage set at $18, what is true? A) The lowest wage for which someone is willing to work is $18 an hour. B) The quantity of jobs increases to 400. C) The lowest wage for which someone is willing to work is $20 an hour. D) 200 workers are employed. E) The quantity of jobs demanded is more than the quantity supplied. Answer: D Topic: Minimum wage, unemployment Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

51) The above figure shows the market for finish carpenters in Bozeman. If there is a minimum wage set at $18, which of the following statements is true? A) Firms' surplus increases with the minimum wage. B) Workers who retain their jobs have their wages rise. C) The market is efficient. D) The quantity supplied of workers is less that quantity demanded. E) Unemployment decreases because firms employ their workers more carefully. Answer: B Topic: Minimum wage Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

52) The above figure shows the market for finish carpenters in Bozeman. There is a minimum wage set at $18. Compared to the initial equilibrium without the minimum wage, once the minimum wage is in place, and after taking account of job search, the total workers' surplus ________ and the total firms' surplus ________. A) decreases; increases B) increases; increases C) increases; decreases D) does not change; increases E) decreases; decreases Answer: E Topic: Minimum wage, efficiency Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

53) The above figure shows a labor market with minimum wage equal to $16. In this figure, what area equals the firms' surplus? A) area A B) area B C) area C D) area D E) area E Answer: A Topic: Minimum wage, deadweight loss Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

54) The above figure shows a labor market with minimum wage equal to $16. In this figure, after taking account of search costs, what area equals the workers' surplus? A) area A B) area B C) area C D) area D E) area E Answer: D Topic: Minimum wage, deadweight loss Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

55) The above figure shows a labor market with minimum wage equal to $16. In this figure, what area equals the deadweight loss? A) area A B) area B C) area C D) area D E) area E Answer: C Topic: Minimum wage, deadweight loss Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

56) The above figure shows a labor market with minimum wage equal to $16. In this figure, what area equals the resources lost because of job search? A) area A B) area B C) area C D) area D E) area E Answer: B Topic: Minimum wage, search Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

57) The above figure shows the market for biologists. The government decides to set a minimum wage for biologists of $18 per hour. After this minimum wage is in effect, the firms' surplus equals A) $800. B) $900. C) $1,800. D) $400. E) $200. Answer: D Topic: Minimum wage, deadweight loss Skill: Level 4: Applying models Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

58) The above figure shows the market for biologists. The government decides to set a minimum wage for biologists of $18 per hour. After this minimum wage is in effect, and taking account of the resources lost in job search, workers' surplus equals A) $800. B) $900. C) $400. D) $1,800. E) $200. Answer: C Topic: Minimum wage, deadweight loss Skill: Level 4: Applying models Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

59) The above figure shows the market for biologists. The government decides to set a minimum wage for biologists of $18 per hour. After this minimum wage is in effect, the deadweight loss equals A) $400. B) $200. C) $800. D) $1,600. E) $100. Answer: B Topic: Minimum wage, deadweight loss Skill: Level 4: Applying models Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

60) The above figure shows the market for biologists. The government decides to set a minimum wage for biologists of $18 per hour. After this minimum wage is in effect, unemployment equals ________ workers. A) 100 B) 300 C) 400 D) 500 E) 200 Answer: E Topic: Minimum wage, unemployment Skill: Level 4: Applying models Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

61) A price floor is considered A) "fair" based only on the fair results view. B) "fair" based only on the fair rules view. C) "unfair" based on both the fair results and fair rules views. D) "unfair" based only on the fair results view. E) "fair" based on the fair results view and on the fair rules view. Answer: C Topic: Price floor, fairness Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Ethical understanding and reasoning

62) Is the minimum wage fair? A) Yes, because all workers benefit because they are paid more. B) No, because it enhances the prospects of voluntary exchange. C) No, because workers who lose their jobs are made worse off. D) Yes, because firms must pay a wage closer to a living wage. E) Yes, because workers need the extra income. Answer: C Topic: Minimum wage, unfairness Skill: Level 4: Applying models Section: Checkpoint 7.3 Status: Old AACSB: Ethical understanding and reasoning

63) The "fair results" view of fairness says that a minimum wage law set above the equilibrium wage rate is unfair because the minimum wage A) does not apply to all workers. B) boosts the income of highly skilled workers. C) benefits only those workers who are able to find and keep a job. D) benefits nobody. E) cannot be enforced. Answer: C Topic: Minimum wage, unfairness Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Ethical understanding and reasoning

64) Labor unions ________ increases in the minimum wage because an increase in the minimum wage ________ the demand for union labor. A) support; increases B) support; decreases C) oppose; increases D) oppose; decreases E) support; has no effect on Answer: A Topic: Minimum wage, support Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking

65) Labor unions support the minimum wage because A) the increased unemployment is good for labor. B) the value associated with the deadweight loss goes to labor unions. C) labor unions prefer to operate in black markets. D) it puts upward pressure on all wages. E) union members are usually paid the minimum wage. Answer: D Topic: Minimum wage, support Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking

66) A price floor A) is the highest price at which it is legal to trade a particular good, service, or factor of production. B) is the lowest price at which it is legal to trade a particular good, service, or factor of production. C) is an illegal price to charge. D) is the equilibrium price when the stock market crashes. E) is the lowest price for which the quantity demanded equals the quantity supplied. Answer: B Topic: Price floor Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking

67) A price floor is a price A) below which a seller cannot legally sell. B) above which a seller cannot legally sell. C) that creates a shortage of the good if it is set above the equilibrium price. D) Both answers A and C are correct. E) Both answers B and C are correct. Answer: A Topic: Price floor Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking

68) The graph shows the labor market for painters. The lower the wage rate, the ________ is the quantity of painters that firms demand and the ________ is the quantity of painters that households are willing to supply. A) greater; smaller B) greater; greater C) smaller; greater D) smaller; smaller E) None of the above answers is correct because both the demand and supply curves will shift in response to the change in the wage rate. Answer: A Topic: Labor market Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

69) To be effective in raising people's wages, a minimum wage must be set A) above the equilibrium wage rate. B) below the equilibrium wage rate. C) equal to the equilibrium wage rate. D) below $7. E) either above or below the equilibrium wage depending on whether the supply curve of labor shifts rightward or leftward in response to the minimum wage. Answer: A Topic: Minimum wage Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

70) A minimum wage set above the equilibrium wage rate A) increases the quantity of labor services supplied. B) decreases the quantity of labor services supplied. C) has no effect on the quantity of labor services supplied. D) shifts the labor supply curve rightward. E) shifts the labor supply curve leftward. Answer: A Topic: Minimum wage, employment Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking

71) A minimum wage set above the equilibrium wage will ________ the quantity of labor demanded and ________ the quantity of labor supplied. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) not change; not change Answer: C Topic: Minimum wage, employment Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking

72) Suppose the current equilibrium wage rate for lifeguards in Houston is $7.85 an hour. A minimum wage law that creates a price floor of $8.50 an hour leads to A) a surplus of lifeguards in Houston. B) a shortage of lifeguards in Houston. C) no changes in the lifeguard market. D) a change in the quantity of lifeguards supplied but no change in the quantity of lifeguards demanded. E) an increase in the number of lifeguards employed. Answer: A Topic: Minimum wage, employment Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

73) The graph shows the labor market for teenagers in Atlanta. If the government sets a minimum wage of $6 an hour, the number of teenagers employed is A) 7,000. B) 5,000. C) 4,000. D) 3,000. E) less than 3,000. Answer: D Topic: Minimum wage, employment Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

74) If the minimum wage is above the equilibrium wage rate, then an increase in the minimum wage ________ employment and ________ unemployment. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; increases Answer: C Topic: Minimum wage, employment Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

75) The graph shows the labor market for apple pickers in Ohio. If the government sets a minimum wage of $5 an hour, ________ apple pickers are unemployed. A) 6,000 B) 8,000 C) 10,000 D) 14,000 E) more than 14,000 Answer: B Topic: Minimum wage, unemployment Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

76) If a minimum wage is introduced that is above the equilibrium wage rate, A) the quantity of labor demanded increases. B) job search activity increases. C) the supply of labor increases and the supply of labor curve shifts rightward. D) unemployment decreases because more workers accept jobs at the higher minimum wage rate. E) the quantity of labor supplied decreases because of the increase in unemployment. Answer: B Topic: Minimum wage, search Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking

77) The graph shows the labor market for teenagers in Atlanta. If the government sets a minimum wage of $6 an hour, then the maximum amount that a teenager would be willing to spend on job search is ________ an hour. A) $2 B) $4 C) $5 D) $6 E) $3 Answer: B Topic: Minimum wage, search Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

78) The minimum wage is set above the equilibrium wage rate. Does the minimum wage create inefficiency? A) Yes B) No C) Only if the supply of labor is perfectly inelastic D) Only if the supply of labor is perfectly elastic E) Only if employment exceeds the efficient amount Answer: A Topic: Minimum wage, efficiency Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking

79) A minimum wage set above the equilibrium wage rate creates A) efficiency because it increases most workers' wages. B) efficiency because few workers lose their jobs. C) efficiency because workers can earn a living wage. D) inefficiency and a deadweight loss. E) inefficiency because it creates excessive employment. Answer: D Topic: Minimum wage, efficiency Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking

80) The graph shows the labor market for fast-food workers in Sioux City. If the government sets a minimum wage of $7 an hour, then the labor market is ________, and marginal benefit ________ marginal cost. A) inefficient; is less than B) inefficient; equals C) efficient; equals D) inefficient; is greater than E) inefficient; cannot be compared to Answer: D Topic: Minimum wage, efficiency Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

81) When the minimum wage is raised, the ________ union labor ________. A) demand for; increases B) demand for; decreases C) supply of; increases D) supply of; decreases E) demand for; does not change Answer: A Topic: Minimum wage, support Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking

7.4 Production Quotas 1) A production quota A) is a government regulation limiting the maximum amount that can be supplied. B) increases market efficiency. C) reduces the deadweight loss in a market. D) results in lower prices in the market. E) helps consumers but not producers. Answer: A Topic: Production quota Skill: Level 1: Definition Section: Checkpoint 7.4 Status: New AACSB: Application of knowledge

2) To have an effective production quota, the government must set the quota so it is ________ the equilibrium quantity. i. less than ii. equal to iii. more than A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: A Topic: Production quota Skill: Level 2: Using definitions Section: Checkpoint 7.4 Status: New AACSB: Reflective thinking

3) Which of the following is true regarding production quotas in the dairy market? i. Compared to an unregulated market, output will decrease. ii. The dairy market will suffer a deadweight loss. iii. Market efficiency is improved in the dairy market because farmers' profit increases. A) ii only B) i, ii and iii C) i and iii D) iii only E) i and ii Answer: E Topic: Production quota Skill: Level 2: Using definitions Section: Checkpoint 7.4 Status: New AACSB: Analytical thinking

4) An effective production quota ________ producers and ________ a deadweight loss. A) has no effect on; does not create B) benefits; creates C) harms; creates D) benefits; does not create E) harms; does not create Answer: B Topic: Production quota Skill: Level 3: Using models Section: Checkpoint 7.4 Status: New AACSB: Reflective thinking

5) An effective production quota ________ inefficiency and ________ unfair. A) has no effect on; is not B) creates; is C) creates; is not D) does not create; is E) does not create; is not Answer: B Topic: Production quota Skill: Level 3: Using models Section: Checkpoint 7.4 Status: New AACSB: Reflective thinking

6) The figure shows the market for milk. As a result of the production quota, the market price A) increases from $3 to $5 per gallon. B) increases from $2 to $5 per gallon. C) decreases from $5 to $2 per gallon. D) decreases from $5 to $3 per gallon. E) will be unchanged because the quota will be ineffective. Answer: A Topic: Production quota Skill: Level 3: Using models Section: Checkpoint 7.4 Status: New AACSB: Analytical thinking

7) The figure shows the market for milk. As a result of the production quota, A) consumer surplus shrinks by area ABE. B) a deadweight loss of area ABE occurs. C) a deadweight loss of area ABC occurs. D) the price increases from $1 to $5. E) the quantity produced increases from 20 thousand to 40 thousand gallons. Answer: B Topic: Production quota Skill: Level 4: Applying models Section: Checkpoint 7.4 Status: New AACSB: Analytical thinking

8) The figure shows the market for milk. As a result of the production quota, the consumer surplus shrinks by area ________ and a deadweight loss of area ________ occurs. A) ABE; ABE B) ABC; ABE C) ABC; ACE D) ACE; ABE E) ACE; ABC Answer: B Topic: Production quota Skill: Level 4: Applying models Section: Checkpoint 7.4 Status: New AACSB: Analytical thinking

9) The figure shows the market for milk. As a result of the production quota, which of the following are true? i. Quantity produced decreases from 40 thousand to 20 thousand gallons. ii. Price increases from $3 to $5 per gallon. iii. A deadweight loss of ABE occurs. A) i, ii and iii B) i only C) i and ii D) ii and iii E) ii only Answer: A Topic: Production quota Skill: Level 4: Applying models Section: Checkpoint 7.4 Status: New AACSB: Analytical thinking

10) The figure shows the market for milk. As a result of the production quota, the price of a gallon of milk ________ and the quantity of milk produced ________. A) does not change; does not change B) changes from $3 to $5 per gallon; does not change C) does not change; changes from 40 thousand to 20 thousand gallons D) changes from $5 to $3 per gallon; changes from 20 thousand to 40 thousand gallons E) changes from $3 to $5 per gallon; changes from 40 thousand to 20 thousand gallons Answer: E Topic: Production quota Skill: Level 4: Applying models Section: Checkpoint 7.4 Status: New AACSB: Analytical thinking

7.5 Chapter Figures

The figure above shows the supply and demand curves in the market for rental housing. A rent ceiling is set at $400 per month. 1) In the figure above, with the rent ceiling the quantity of housing supplied is ________ units, the quantity demanded is ________ units, and the quantity rented is ________ units. A) 3,000; 6,000; 3,000 B) 3,000; 6,000; 6,000 C) 3,000; 6,000; 4,000 D) 3,000; 3,000; 3,000 E) 4,000; 4,000; 4,000 Answer: A Topic: Rent ceiling Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

2) In the figure above, with the rent ceiling A) there is a shortage of 3,000 units. B) there is a surplus of 3,000 units. C) there is a surplus of 2,000 units. D) there is a shortage of 1,000 units. E) the market is in equilibrium. Answer: A Topic: Rent ceiling, shortages Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

3) In the figure above, with the rent ceiling ________ units of housing are available, and black market rents might be as high as ________ a month. A) 3,000; $625 B) 6,000; $400 C) 3,000; $550 D) 4,000; $550 E) 4,000; $625 Answer: A Topic: Rent ceiling, black market Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

The figure above shows the supply and demand curves in the market for rental housing. A rent ceiling is set at $400 per month. 4) As shown in the figure above, the rent ceiling A) decreases consumer surplus. B) increases producer surplus. C) decreases deadweight loss. D) increases the quantity of housing rented. E) is efficient. Answer: A Topic: Rent ceiling, deadweight loss Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

5) As shown in the figure above, the rent ceiling ________ consumer surplus and ________ producer surplus. A) decreases; decreases B) decreases; increases C) increases; increases D) increases; decreases E) decreases; does not change Answer: A Topic: Rent ceiling, deadweight loss Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

The figure above shows supply and demand in the market for labor. The government introduces a minimum wage of $7 per hour. 6) In the figure above, the number of workers employed is ________, and the wage paid is ________. A) 3,000; $7 per hour B) 7,000; $7 per hour C) 5,000; $5 per hour D) 5,000; $7 per hour E) 3,000; $5 per hour Answer: A Topic: Minimum wage, employment Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

7) In the figure above, the number of unemployed workers is A) 4,000. B) 3,000. C) 2,000. D) 5,000. E) zero. Answer: A Topic: Minimum wage, unemployment Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

8) The figure above shows that the lowest wage rate for which someone is willing to work is A) $3 an hour. B) $5 an hour. C) $6 an hour. D) $7 an hour. E) $4 an hour. Answer: A Topic: Minimum wage Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

9) In the figure above, the deadweight loss is A) $4,000 an hour. B) $2,000 an hour. C) $1,000 an hour. D) $5,000 an hour. E) zero. Answer: A Topic: Minimum wage, deadweight loss Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

10) The figure above shows that the value of the resources used in job-search activity can be as large as ________ per hour. A) $12,000 B) $8,000 C) $6,000 D) $4,000 E) $2,000 Answer: A Topic: Minimum wage, search Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

7.6 Integrative Questions 1) The shortage created by a rent ceiling below the equilibrium rent is smallest when the demand for housing is ________ and the supply of housing is ________. A) elastic; elastic B) elastic; inelastic C) inelastic; elastic D) inelastic; inelastic E) unit elastic; unit elastic Answer: D Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Analytical thinking

2) The shortage created by a price ceiling will likely be A) smaller if the good is a necessity. B) larger if the good is addictive. C) smaller if the good is a luxury. D) unaffected by the time that has elapsed since the price ceiling is implemented. E) None of the above answers is correct. Answer: A Topic: Price ceiling, shortages Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Analytical thinking

3) The unemployment caused by minimum wage would be larger if A) both labor demand and labor supply are more elastic. B) both labor demand and labor supply are more inelastic. C) minimum wage is set equal to the equilibrium wage rate. D) minimum wage is set below the equilibrium wage rate. E) both labor demand and labor supply are perfectly inelastic. Answer: A Topic: Minimum wage, unemployment Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Analytical thinking

4) The surplus created by a price floor will likely be A) smaller if the good is a necessity. B) larger if the good is addictive. C) smaller if the good is a luxury. D) unaffected by the time that has elapsed since the price ceiling is implemented. E) None of the above answers is correct. Answer: A Topic: Price floor, surplus Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Analytical thinking

5) A regulation that sets the highest price at which it is legal to trade a good is a A) production quota. B) price floor. C) price support. D) price ceiling. E) subsidy. Answer: D Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Revised AACSB: Reflective thinking

6) A regulation that sets the lowest price at which it is legal to trade a good is a A) search ceiling. B) price floor. C) production ceiling. D) price ceiling. E) subsidy. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

7) If the government imposes an effective ________, a deadweight loss ________. A) price floor; does not occur B) price ceiling; does not occur C) price ceiling; occurs D) production quota; does not occur E) Both answers C and D are correct. Answer: C Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Revised AACSB: Reflective thinking

8) In order to have an impact, a ________ must be set below the equilibrium price, and when this occurs, ________. A) price ceiling; consumer surplus increases B) price floor; consumer surplus decreases C) price ceiling; producer surplus decreases D) price support; total revenue increases E) price support; consumer surplus increases Answer: C Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Analytical thinking

9) Both production quotas and a price floor can A) create a deadweight loss. B) decrease output below the equilibrium quantity. C) decrease the price below the equilibrium price. D) increase consumer surplus. E) have no effect on producer surplus. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Revised AACSB: Reflective thinking

10) Which of the following is true? i. A price ceiling set above the equilibrium price has no effects. ii. A price ceiling set below the equilibrium price creates a surplus. iii. A price floor set above the equilibrium price has no effects. A) only i B) only ii C) only iii D) i and ii E) ii and iii Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

11) Assume a market is producing efficiently. Which type of government intervention in this market might create a deadweight loss? i. a price ceiling ii. a price floor iii. a production quota A) i only B) i and ii C) iii only D) ii and iii E) i, ii, and iii Answer: E Topic: Efficiency Skill: Level 3: Using models Section: Integrative Status: Revised AACSB: Analytical thinking

12) Which of the following is true? i. A price ceiling is inefficient but fair. ii. A price floor is inefficient and unfair. iii. A production quota increases the quantity produced. A) i only B) ii only C) iii only D) i and ii E) ii and iii Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Revised AACSB: Reflective thinking

13) Which of the following is true? i. A price ceiling set below the equilibrium price decreases search activity. ii. A minimum wage is an example of a price ceiling. iii. A production quota decreases the quantity consumed. A) i only B) ii only C) iii only D) i and iii E) ii and iii Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Revised AACSB: Reflective thinking

14) Which of the following is true? i. A production quota is inefficient. ii. A price floor set above the equilibrium price creates a surplus. iii. A price ceiling set above the equilibrium price creates a black market. A) i only B) ii only C) iii only D) i and ii E) ii and iii Answer: D Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Revised AACSB: Reflective thinking

15) Which of the following can create a deadweight loss? i. production quotas ii. price floor iii. price ceiling A) i only B) i and iii C) ii and iii D) i, ii and iii E) i and ii Answer: D Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Revised AACSB: Reflective thinking

16) Following a major natural disaster that destroys housing, a rent ceiling ________ be an effective policy to increase the quantity of more affordable housing for displaced residents because it would ________. A) would not; discourage rebuilding and result in a shortage B) would not; cause the quantity supplied to exceed the quantity demanded C) would; cause increased search activity D) would; create a black market that would result in a lower rent E) would; encourage a greater quantity supplied Answer: A Topic: Price ceiling Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Analytical thinking

17) If an apartment owner charged ________ than a specified rent for housing, the government ________ impose a rent ceiling. A) more; can B) more; cannot C) less; can D) less; cannot E) less; might Answer: A Topic: Price ceiling Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

18) If a rent ceiling is set ________ the equilibrium price, the effect can result in a housing ________. A) below; surplus B) below; shortage C) above; shortage D) above; surplus E) equal to; surplus Answer: B Topic: Price ceiling, shortages Skill: Level 4: Applying models Section: Integrative Status: New AACSB: Analytical thinking

19) If a rent ceiling is set below the equilibrium price, thus creating a ________, housing may be allocated by increasing search activity or creating a ________. A) shortage; black market B) shortage; free market C) surplus; black market D) surplus; open market E) surplus; free market Answer: A Topic: Price ceiling, shortages Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

20) A rent ceiling controls the rent portion of the cost of housing but not the search cost. So when the search cost is ________ the rent, some people end up paying a ________ opportunity cost for housing than they would if there were no rent ceiling. A) added to; lower B) subtracted from; higher C) subtracted from; lower D) added to; higher E) equal to; lower Answer: D Topic: Price ceiling Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

21) If the quantity of housing demanded ________ the quantity of housing supplied, scarce housing resources are allocated efficiently because the marginal cost of the housing ________ the marginal benefit. A) is more than; equals B) is less than; equals C) equals; is more than D) equals; is less than E) equals; equals Answer: E Topic: Price ceiling, efficiency Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

22) When a rent ceiling is ________, consumer surplus and producer surplus shrink, a deadweight loss ________, and resources are lost in search activity and evading the rent ceiling law. A) inefficient; arises B) inefficient; disappears C) efficient; arises D) efficient; disappears E) nonexistent; arises Answer: A Topic: Price ceiling, efficiency Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

23) When a minimum wage is introduced ________ the equilibrium wage rate, the quantity of labor demanded ________ and the quantity of labor supplied ________, thus creating unemployment. A) above; increases; decreases B) below; increases; decreases C) above; decreases; increases D) above; decreases; decreases E) below; decreases; decreases Answer: C Topic: Price floor Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

24) When a minimum wage is ________, the firms' surplus and workers' surplus shrink, a deadweight loss ________, and resources are lost in job search. A) inefficient; arises B) inefficient; disappears C) efficient; arises D) efficient; disappears E) nonexistent; arises Answer: A Topic: Price floor, inefficiency Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

25) Nonunion labor is a substitute for union labor, so when the minimum wage ________, the demand for union labor ________. A) rises; decreases B) decreases; increases C) decreases; decreases D) rises; increases E) rises; remains the same Answer: D Topic: Price floor Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

7.7 Essay: Price Ceilings 1) In the housing market, if a rent ceiling of $600.00 is imposed when the equilibrium rent is $500.00, why will nothing change? Answer: A rent ceiling is the maximum legal rent. Generally, the government imposes the ceiling when the equilibrium rent is considered too high. If, however, the rent ceiling ($600.00) is above the equilibrium rent ($500.00), people are already paying a rent lower than legal maximum. As a result, nothing changes and so this price ceiling is ineffective. Topic: Rent ceiling Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

2) What are the effects of a rent ceiling set below the equilibrium rent? Answer: A rent ceiling is the maximum legal rent. If the rent ceiling is set below the equilibrium rent, the rent ceiling creates a shortage of apartments. Consumer and producer surplus are both reduced. Hopeful renters face must engage in increased search activity. In order to rent an apartment, renters and landlords might engage in black market activity that effectively raises the rent. Topic: Rent ceiling Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Written and oral communication

3) In the 1980s, one of the most common sights in the socialist countries, such as the former Soviet Union and North Korea, were long lines for bread, sugar, and other necessities. These countries had price ceilings on these necessities. Some of the socialist nations, such as the former Soviet Union, have moved to a market economy by lifting the price ceilings, while others, such as North Korea, have retained their price ceilings. What prediction do you make about the presence (or absence) of long lines today in the former Soviet Union and North Korea? Explain your answer. Answer: The long lines have disappeared in the former Soviet Union but are still present in North Korea. The socialist countries had price ceilings on necessities that were below the equilibrium price. These ceilings created shortages, thus the long lines. In the countries that have lifted the price ceilings, the price has risen toward the equilibrium price, thereby eliminating the shortages and long lines. In the nations that have retained the price ceilings, the shortages and hence the long lines have persisted. Topic: Price ceiling, shortages Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Written and oral communication

4) Explain why in cities such as New York City that have rent ceiling laws, so many people who work in the city commute from outside the city. Answer: Rent ceilings decrease the quantity supplied of housing. So many people who work in the city and would like to live in the city cannot find housing. As a result, they must live outside the city and commute to work. Topic: Rent ceiling, shortages Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Written and oral communication

5) Suppose that apartments rent for $1,300 a month in San Francisco, California and $850 a month in Los Angeles, California. If the state of California passes a state-wide rent ceiling for apartments of $1,100 a month, what occurs in the two cities? Answer: The rent ceiling is below the equilibrium rent in San Francisco. A shortage of apartments occurs as the quantity of apartments demanded increases and the quantity supplied decreases. The shortage becomes even larger as time passes because, with the rent ceiling, landlords have no incentive to maintain existing apartments or to build new ones. A black market for apartments will emerge, with bribery and "key money" becoming common. In Los Angeles, the outcome differs. The rent ceiling is above the equilibrium rent and has no impact on the quantity demanded or the quantity supplied. If, however, Los Angeles grows so that the demand for housing increases enough, the time may come when the rent ceiling is below the equilibrium rent in Los Angeles, in which case the Los Angeles apartment market also would be marked by a shortage and black market. Topic: Rent ceiling, shortages Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Written and oral communication

6) Why do rent ceilings lead to shortages and black markets? Answer: Rent ceilings that are set below the market equilibrium price for apartments lead to shortages for two reasons. First, the lower price increase the quantity of apartments demanded. Second, the quantity of apartments supplied decreases and, over time, the supply decreases even more because of the lower rent. When the quantity demanded exceeds the quantity supplied, a shortage is created. Faced with the inability to obtain the product they want, in this case, housing, people use bribes and other inducements in the black market to increase their chances of moving up the waiting list that emerges in the rent-controlled apartment market. Not everyone participates in the black market, but rent ceilings will favor those people willing to engage in illegal transactions. Topic: Rent ceiling, black market Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Written and oral communication

7) The table above gives the demand and supply schedules for the housing market in a small town. If a rent ceiling of $600 a month is imposed, what is the quantity demanded, the quantity supplied, and the shortage of housing? Answer: The quantity demanded is 350 units, the quantity supplied is 150 units, and the shortage is 200 units. Topic: Rent ceiling, shortages Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

8) The figure above illustrates the current market for apartments in Washington, D.C. a. If the local government imposes a price ceiling of $1,500 per month, is there a shortage? If so, how much? If not, why not? b. If the local government imposes a price ceiling of $900 per month, is there a shortage? If so, how much? If not, why not? Answer: a. There is not a shortage. The equilibrium rent is $1,200 a month. Because the rent ceiling is above the equilibrium rent, it has no effect. b. There is a shortage. At a rent of $900 per month, the quantity of units demanded is 100,000 and the quantity of units supplied is 60,000. Hence there is a shortage of 40,000 units. Topic: Rent ceiling, shortages Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

9) The above figure shows the market for a prescription drug. What is the equilibrium price of the drug? How many doses are purchased? Suppose the government imposes a price ceiling of $1.50 a dose. How many doses are purchased after the price ceiling is imposed? Answer: The equilibrium price is $2.50 per dose. The number of doses purchased is the equilibrium quantity, 8,000 doses per day. After the price ceiling is imposed, the number of doses purchased is 4,000 per day, which is equal to the quantity of doses supplied at the price of $1.50 per dose. Topic: Price ceiling, shortages Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

7.8 Essay: Price Floors 1) Explain why a price floor set below the equilibrium price is ineffective. Answer: Price floors are legal minimums; it is legal to charge the floor price, or higher. If the equilibrium price falls in the legal range, that is, the equilibrium price is above the price floor so that the price floor is below the equilibrium price, then the price floor has no effect on the market because the market price does not change. Topic: Price floor Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Written and oral communication

2) Compare and contrast a price ceiling and a price floor. Answer: A price ceiling is the maximum legal price that may be charged. A price floor is the minimum legal price that may be charged. For a price ceiling or a price floor to have an effect, they must make the equilibrium price illegal. So, an effective price ceiling is set below the equilibrium price while an effective price floor is set above the equilibrium price. A price ceiling creates a shortage of the good while a price floor creates a surplus. Both create inefficiency because the marginal benefit of the last unit consumed no longer equals the marginal cost of the last unit produced. Topic: Price ceiling and price floor Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Written and oral communication

3) Will an increase in the minimum wage create more unemployment if the supply and demand for labor are highly elastic or highly inelastic? Answer: An increase in the minimum wage creates less unemployment when the supply and demand for labor are highly inelastic. If the supply and demand for labor are highly elastic, an increase in the minimum wage leads to more unemployment because the quantity of labor supplied increases significantly and the quantity of labor demanded decreases significantly. If they are inelastic, an increase in the minimum wage leads to only a small decrease in the quantity of labor demanded and only a small increase in the quantity of labor supplied, so that the resulting unemployment is not very large. Topic: Minimum wage, unemployment Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Written and oral communication

4) Why would an increase in the minimum wage to $15 per hour lead to more unemployment for teenage and low-skilled workers? Answer: Many teenage and low-skilled workers earn far less than $15 per hour. Hence a price floor in the labor market that "guaranteed" a wage of $15 per hour, that is, a minimum wage of $15 per hour, would have a double-edged effect. First, the quantity of labor supplied would increase because more people would be willing and able to work for the higher wage. Indeed, some high school students would drop out of school in order to obtain work if they thought they would be paid $15 an hour. Second, many businesses would be unwilling and unable to pay $15 per hour and would therefore lay off many teenage and low-skilled workers. In other words, the quantity of labor supplied increases and the quantity of labor demanded decreases. The resulting surplus of labor means a higher unemployment rate for the very people the minimum wage is designed to help. Topic: Minimum wage, unemployment Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Written and oral communication

5) Explain why low-skilled workers find that their employment opportunities are less with a minimum wage. Answer: A minimum wage set above the equilibrium wage rate decreases the quantity of labor demanded, so employment decreases with a minimum wage. This effect is particularly strong in the market for low-skilled labor, because it is low-skilled labor that is paid low wage rates. Thus it is lowskilled workers for whom the decrease in employment is severe. Topic: Minimum wage, unemployment Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Written and oral communication

6) How does the elasticity of demand for labor affect the deadweight loss from an increase in the minimum wage? Why? Answer: The more elastic the demand for labor, the greater the deadweight loss from increasing the minimum wage. Essentially, the more elastic the demand for labor, the larger the decrease in the quantity of labor demanded when the minimum wage rate rises. As a result, the larger the decrease in employment and hence the greater is the deadweight loss. Topic: Minimum wage, unemployment Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Written and oral communication

7) Discuss the inefficiencies created by a price floor. Answer: A price floor prevents the efficient allocation of resources. If a price floor is set above the equilibrium price, the quantity of the good or service supplied increases and the quantity demanded decreases, so that a surplus results. The minimum wage is a price floor. If the minimum wage is set above the equilibrium wage rate, the surplus of labor means increased unemployment. Similar to all price floors, the minimum wage creates inefficiency. The minimum wage leads to inefficiency because at the minimum wage, marginal benefit to a firm from hiring another worker exceeds the marginal cost to a worker from working. Topic: Price floor, inefficiency Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Written and oral communication

8) Who are minimum wages designed to help? Do they succeed? What is their effect on society? Answer: Minimum wages are designed to improve the incomes of low-wage earners. They do successfully raise the wages of those fortunate enough to find jobs at the minimum wage; however they reduce the chance of finding a job by decreasing the quantity of labor demanded. The low-wage earners who cannot find a job with a minimum wage in place are harmed. Minimum wages harm society because they create a deadweight loss. In addition to the deadweight loss, minimum wages also: ∙ increase the amount of time it takes to find a job (search activity). ∙ encourage illegal hiring at wages below the minimum wage rate. ∙ block voluntary exchange at the equilibrium wage. Topic: Minimum wage, support Skill: Level 4: Applying models Section: Checkpoint 7.3 Status: Old AACSB: Written and oral communication

9) We know that the minimum wage causes unemployment. So, why does the government impose one? Answer: The main reason for the minimum wage is because its supporters outnumber its opponents. Some supporters, such as labor unions, have a self-interested motivation for seeing a high minimum wage. A high minimum wage increases the cost of low-skilled labor, which is a substitute for high-skilled union labor. Hence firms decrease the quantity of low-skilled labor they demand and increase their demand for union labor, thereby increasing the employment and wages of union labor. Other supporters point to the fact that the minimum wage helps raise the incomes of low-skilled workers who retain jobs. Also, if the demand and supply of low-skilled workers is inelastic, the resulting unemployment will be low and so supporters might believe that helping some low-skilled workers is worth harming others. Topic: Minimum wage, support Skill: Level 4: Applying models Section: Checkpoint 7.3 Status: Old AACSB: Written and oral communication

10) The table above gives the supply and demand schedules for scooters. Because of increased injuries sustained by children riding scooters, Citizens Against Scooter Accidents successfully lobbies the government to impose a price floor of $80.00 on scooters. a. What is the quantity demanded and supplied after the price floor has been imposed? b. Is there any shortage or surplus at this price floor? If so, how much? c. If the price floor is raised to $110.00, what is the quantity demanded and supplied? d. At a price floor of $110.00, is there any shortage or surplus? If so, how much? Answer: a. The quantity demanded and supplied is 100 scooters at $90, the equilibrium price. Because the price floor, which is the legal minimum price, is below the equilibrium price, it has no effect. The price stays at the equilibrium price of $90 per scooter and the quantity remains at the equilibrium quantity of 100 scooters. b. There is no surplus or shortage at a price floor of $90 per scooter. c. The quantity demanded at $110 is 80 scooters and quantity supplied is 140. d. There is a surplus. The surplus equals the quantity supplied, 140 scooters, minus the quantity demanded, 80 scooters, or a 60 scooters per week surplus. Topic: Price floor, surplus Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

11) The figure above illustrates the current market for fast-food workers in Baltimore. a. Without any government intervention, what is the equilibrium wage rate and amount of employment? b. If the city government imposes a minimum wage of $3 an hour, what is the amount of employment? Does the minimum wage create any unemployment? Why or why not? c. If the city government imposes a minimum wage of $6 an hour, what is the amount of employment? Does the minimum wage create any unemployment? Why or why not? Answer: a. The equilibrium wage rate is $4 an hour and the equilibrium amount of employment is 8,000 workers. b. Employment remains 8,000 workers. The minimum wage does not create any unemployment. The $3 per hour minimum wage does not bring about any unemployment because it is below the equilibrium wage rate. c. Employment decreases to 4,000 workers, the quantity of labor demanded at a wage rate of $6 per hour. At the wage rate of $6 per hour, the quantity of labor supplied is 12,000 workers and the quantity of labor demanded is 4,000 workers. Hence there are 8,000 workers unemployed. The minimum wage of $6 an hour creates unemployment because it is higher than the equilibrium wage rate. As a result, the quantity of labor supplied increases and the quantity of labor demanded decreases, leading to a situation of excess supply, or unemployment. Topic: Minimum wage, employment and unemployment Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

7.9 Essay: Production Quotas 1) What is a production quota in an agricultural market? Explain its impact on a market. Answer: A production quota is a regulation that limits the amount that be supplied. For a production quota to have an effect, the quota amount must be less than the equilibrium quantity. A production quota increases the price of the product, thereby leading to a decrease in the quantity consumed by private consumers. The producers benefit because their producer surplus increases. However, a deadweight loss is created. Topic: Production quota Skill: Level 1: Definition Section: Checkpoint 7.4 Status: Revised AACSB: Written and oral communication

2) Who gains from a production quota? Who loses? Explain how the size of the gain compares to the size of the loss. Answer: Producers gain from a production quota because the price of the good or service increases. As a result, the producer surplus increases. Consumers lose from a production quota because the price the good or service increases. As a result, the consumer surplus decreases. Because a production quota creates a deadweight loss, it is the case that the decrease in consumer surplus exceeds the increase in producer surplus. Topic: Production quota Skill: Level 3: Using models Section: Checkpoint 7.4 Status: Revised AACSB: Written and oral communication

3) Suppose that producers are richer than consumers. Is a production quota fair? Explain your answer. Answer: A production quota is unfair. It is unfair under the fair rules approach to fairness because a production quota prevents voluntary exchange. And, if producers are richer than consumers, it is unfair under a fair results approach because the price support further enriches the (already rich) producers while decreasing the income of the (already poor) consumers. So in this case a production quota redistributes income from the poor to the rich. Topic: Production quota Skill: Level 5: Critical thinking Section: Checkpoint 7.4 Status: Revised AACSB: Ethical understanding and reasoning

Essential Foundations of Economics, 8e (Bade) Chapter 8 Global Markets in Action 8.1 How Global Markets Work 1) Goods and services that the United States buys from other nations are called A) exports. B) imports. C) bartered goods. D) exchanges. E) world goods. Answer: B Topic: International trade Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

2) Imports are defined as the goods and services that we A) produce and consume in the United States. B) sell to other countries. C) buy from other countries. D) partially produce in both the United States and another country. E) produce abroad using U.S. owned factories and then consume in the United States. Answer: C Topic: International trade Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

3) Goods and services that the United States sells to other nations are called A) exports. B) imports. C) bartered goods. D) exchanges. E) world goods. Answer: A Topic: International trade Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

4) If you buy a DVD player produced in Japan, a A) good was exported by Japan and imported by the United States. B) good was imported by Japan and by the United States. C) service was imported by Japan and exported by the United States. D) service was exported by Japan and imported by the United States. E) good was exported by Japan and by the United States. Answer: A Topic: International trade Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

5) The United States exports A) goods only. B) services only. C) manufactured goods only. D) goods and services. E) only agricultural products and high-tech goods. Answer: D Topic: Patterns of trade Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

6) All of the following statements about the United States are true EXCEPT: A) The largest imports are services like royalties, license fees, and financial services, and the largest exports are goods like crude oil, automobiles, and clothing. B) The United States is the world's largest international trader. C) The United States imports more than it exports. D) Services account for a larger portion of U.S. exports than U.S. imports. E) Imports are a larger percentage of total expenditure than exports are a percentage of total production. Answer: A Topic: Patterns of trade Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

7) Of the following, ________ account(s) for the largest share of imports into the United States. A) food and drinks B) clothing and footwear C) crude oil D) computers E) chemicals Answer: D Topic: Eye on the global economy, the major items of U.S. trade Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Revised AACSB: Reflective thinking

8) The fundamental force that generates international trade is A) the need for more goods and services. B) absolute advantage. C) the sea rule. D) comparative advantage. E) the existence of tariffs. Answer: D Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

9) The fundamental force that drives trade between nations is A) the government. B) NAFTA. C) absolute advantage. D) comparative advantage. E) legal treaties. Answer: D Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

10) One of the major reasons why the United States exports jet airplanes is because Boeing faces ________ opportunity cost compared with firms in other nations in the production of such aircraft. A) a higher B) an unrelated C) a lower D) a nonexistent E) an identical Answer: C Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

11) A nation has a comparative advantage in a good when it has a A) lower absolute cost of producing the good. B) higher opportunity cost of producing the good. C) lower opportunity cost of producing the good. D) higher absolute cost of producing the good. E) tariff in place protecting the producers of the good. Answer: C Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

12) The United States buys shoes from China and China buys wheat from the United States. This trade can be explained by A) comparative advantage. B) absolute advantage. C) the law of supply. D) the law of demand. E) the price elasticity of demand. Answer: A Topic: International trade Skill: Level 2: Using definitions Section: Checkpoint 8.1 Status: New AACSB: Application of knowledge

13) Consider the market for Good X in the country Xenon. Which of the following statements regarding international trade in Good X is correct? A) If Xenon imports Good X, the world price of X must be lower than Xenon's pre-trade price of Good X. B) If Xenon exports Good X, the world price of X must be lower than Xenon's pre-trade price of Good X. C) If Xenon has a comparative advantage in Good X, it will import more of Good X after trade. D) If Xenon has a comparative advantage in Good X, Xenon will produce less of Good X after trade. E) If Xenon imports Good X, the world price of Good X must fall. Answer: A Topic: International trade Skill: Level 2: Using definitions Section: Checkpoint 8.1 Status: New AACSB: Application of knowledge

14) How can a domestic producer determine whether or not it has a comparative advantage in the production of a good or service? A) It cannot. B) by comparing the price it receives to the prices of other domestic producers C) by comparing the price it receives to the world price D) by comparing the quantity it produces to the quantity produced in the world E) by comparing the total domestic quantity to the total world quantity Answer: C Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

15) A country exports the goods A) for which its domestic prices are very high compared to the world prices. B) that the economy can produce the most of. C) that the economy can produce at relatively lowest opportunity cost. D) that it cannot sell domestically. E) in which it has a comparative disadvantage. Answer: C Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

16) If a nation can produce a good or service at the lowest opportunity cost, then it A) can sell the product at a lower price than other nations. B) does not want to export the good because the low cost means it makes only a low profit. C) is best for the nation to not trade the good internationally. D) will definitely import the good because it can beat other countries' prices. E) might export or import the good, depending on whether or not it has a comparative advantage in the production of the good. Answer: A Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

17) The country with a comparative advantage in the production of a good has a A) lower opportunity cost of production. B) higher opportunity cost of production. C) horizontal production possibilities frontier. D) vertical production possibilities frontier. E) linear production possibilities frontier. Answer: A Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

18) The United States imports t-shirts because A) it is a dangerous job to produce them. B) foreign nations have a lower opportunity cost of production. C) the United States has a lower opportunity cost of production. D) foreign economies have an absolute advantage in their production. E) the United States must import goods and services from other countries so that they can develop economically. Answer: B Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

19) If the United States starts to import a good that had previously been produced in the United States, the market price of the good in the United States A) rises. B) falls. C) remains constant. D) either remains constant or rises, depending on how whether the supply of the good stays the same or increases. E) There is not enough information to answer the question because we need to know if the market price in the United States had been above or below the world market price before trade began. Answer: B Topic: Imports Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

20) If the United States imports purses, then the quantity of purses produced in the United States will ________ and the quantity of purses purchased by consumers in the United States will ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) not change; increase Answer: C Topic: Imports Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

21) Most t-shirts bought by Americans are made in Asia. As a result of free trade, the production of tshirts in America A) has increased. B) has stayed the same. C) has decreased. D) has been taken over by the government. E) might change, but more information about what else the United States imports is needed to determine if U.S. production increased, decreased, or did not change. Answer: C Topic: Imports Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

22) The United States imports t-shirts from Asia. As a result, U.S. consumers pay ________ otherwise and Asian producers receive ________ otherwise. A) a higher price than; a higher price than B) a higher price than; a lower price than C) a lower price than; a higher price than D) a lower price than; a lower price than E) the same price as; the same price as Answer: C Topic: Imports Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

23) If the world price of a good is below the no-trade domestic price, a country A) will benefit from exporting the good. B) will benefit from importing the good. C) cannot benefit from trade. D) has a comparative advantage in the production of that good. E) will not engage in trade for that good. Answer: B Topic: Imports Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

24) Suevania opens its doors to trade with Barvania. Barvania has a comparative advantage in the production of machinery. Hence, once trade occurs, Suevania's consumers will buy ________ machinery and pay ________ before. A) more; a higher price than B) more; a lower price than C) less; a higher price than D) less; a lower price than E) the same amount of; the same price as Answer: B Topic: Imports Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

25) If a nation imports a good that can be domestically produced, what happens to the quantity consumed of the good and why? A) The quantity consumed increases because the market price decreases. B) The quantity consumed decreases because the market price increases. C) The quantity consumed remains constant because the price is unchanged. D) The quantity consumed increases because the nation produces more of the good. E) The quantity consumed decreases because the market price decreases. Answer: A Topic: Imports Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

26) A country will export a good if it A) can sell the good to a foreigner at a higher price than the no-trade domestic price. B) can sell the good to a foreigner at a lower price than the no-trade domestic price. C) can dump the good on the world market. D) has a high opportunity cost of production. E) is impossible to import the good. Answer: A Topic: Exports Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

27) A country exports a good if A) it has a high opportunity cost of production. B) the world price of the good is below the country's no-trade equilibrium price. C) the world price of the good is above the country's no-trade equilibrium price. D) the quantity demanded of the good in the country is greater than the quantity supplied at the world price. E) it cannot import the good. Answer: C Topic: Exports Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

28) A nation will export a good if its A) no-trade, domestic price is equal to the world price. B) no-trade, domestic price is less than the world price C) no-trade, domestic price is greater than the world price. D) no-trade, domestic quantity is less than the world quantity. E) no-trade, domestic quantity is greater than the world quantity. Answer: B Topic: Exports Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

29) As a result of importing a good, domestic consumers ________ the quantity consumed and the price of the good ________. A) increase; rises B) increase; falls C) decrease; rises D) decrease; falls E) increase; does not change Answer: B Topic: Imports Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

30) As a result of importing a good, domestic producers ________ the quantity produced and the price of the good ________. A) increase; rises B) increase; falls C) decrease; rises D) decrease; falls E) decrease; does not change Answer: D Topic: Imports Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

31) The above figure shows the U.S. market for flip-flops. When there is no international trade, the U.S. price is ________ per flip-flop and the U.S. quantity is ________ flip-flops. A) $12; 300,000 B) $14; 500,000 C) $12; 700,000 D) $14; 300,000 E) $14; 700,000 Answer: B Topic: Imports Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

32) The above figure shows the U.S. market for flip-flops. With international trade, the equilibrium price in the United States is ________ and the United States ________ flip-flops. A) $12; imports B) $12; does not trade C) $12; exports D) $14; imports E) $14; does not trade Answer: A Topic: Imports Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

33) The above figure shows the U.S. market for flip-flops. With international trade, the United States imports ________ flip-flops. A) 300,000 B) 500,000 C) 700,000 D) 0 flip-flops because the United States exports E) 400,000 Answer: E Topic: Imports Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

34) The above figure shows the U.S. market for flip-flops. With international trade, U.S. consumers buy ________ flip-flops and U.S. producers produce ________ flip-flops. A) 500,000; 500,000 B) 300,000; 700,000 C) 500,000; 300,000 D) 700,000; 300,000 E) 700,000; 500,000 Answer: D Topic: Imports Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

35) The above figure shows the U.S. market for flip-flops. With no international trade, the price in the United States for flip-flops is ________. With international trade, the price in the United States for flipflops is ________. A) $12; $14 B) $500; $300 C) $14; $12 D) $700; $300 E) $500; $700 Answer: C Topic: Imports Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

36) With no international trade, the U.S. price of wheat is lower than the world price of wheat. This indicates that the United States ________ a comparative advantage in the production of wheat and with international trade, the United States will ________ wheat. A) has; export B) has; not trade C) has; import D) does not have; export E) might have; export Answer: A Topic: Exports Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

37) Once international trade occurs, a country with a comparative advantage in the production of a good will ________ production of the good and ________. A) decrease; import the good B) increase; export the good C) not change; import the good D) increase; import the good E) decrease; export the good Answer: B Topic: Exports Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

38) Airlines in other countries buy airplanes from Boeing because A) it is illegal to produce airplanes in many other countries. B) Boeing's prices are less than what the airlines would pay for planes built in their own country. C) trade treaties require such purchases. D) these nations must buy something from the United States. E) None of the above answers is correct. Answer: B Topic: Exports Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

39) When a country exports a good because the world price is higher than the no-trade domestic price, domestic purchases of the good ________ and domestic production of the good ________. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases E) do not change; increases Answer: C Topic: Exports Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

40) The table above has the domestic demand and domestic supply schedules for a good. According to the table, the no-trade price of the good is A) $4. B) $6. C) $8. D) $10. E) $2. Answer: B Topic: Trade Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

41) The table above has the domestic demand and domestic supply schedules for a good. If the world price of the good is $10 and international trade occurs, then according to the table A) domestic production is higher before trade than after trade. B) the country imports 16 units a day. C) the country imports 6 units a day. D) the country exports 6 units a day. E) the country exports 22 units a day. Answer: D Topic: Trade Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

42) According to the above table, the country will import the good if the world price is less than ________ and will export the good if the world price is more than ________. A) $4; $4 B) $6; $6 C) $8; $4 D) $10; $10 E) $4; $8 Answer: B Topic: Trade Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

43) The figure above shows the U.S. demand and U.S. supply curves for cherries. In the absence of international trade, cherry farmers would receive ________ per pound of cherries. A) $0.50 B) $1.50 C) $2.50 D) $2.00 E) $1.00 Answer: B Topic: Exports Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

44) The figure above shows the U.S. demand and U.S. supply curves for cherries. In the absence of international trade, how many pounds of cherries would U.S. farmers produce? A) 200,000 pounds B) 400,000 pounds C) 600,000 pounds D) 800,000 pounds E) 0 pounds Answer: B Topic: Exports Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

45) The figure above shows the U.S. demand and U.S. supply curves for cherries. Suppose the world price of cherries is $2 per pound. At this price, U.S. consumption of cherries will equal A) 200,000 pounds. B) 400,000 pounds. C) 600,000 pounds. D) 800,000 pounds. E) 0 pounds. Answer: A Topic: Exports Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

46) The figure above shows the U.S. demand and U.S. supply curves for cherries. At a world price of $2 per pound once international trade occurs, the production of cherries in the United States will equal A) 200,000 pounds. B) 400,000 pounds. C) 600,000 pounds. D) 800,000 pounds. E) 0 pounds. Answer: C Topic: Exports Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

47) The figure above shows the U.S. demand and U.S. supply curves for cherries. At a world price of $2 per pound once international trade occurs, the total exports of cherries from the United States to other nations equals A) 200,000 pounds. B) 400,000 pounds. C) 600,000 pounds. D) 800,000 pounds. E) 0 pounds. Answer: B Topic: Exports Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

48) The figure above shows the U.S. demand and U.S. supply curves for cherries. At a world price of $2 per pound once international trade occurs, the total imports of cherries to the United States from other nations equals A) 200,000 pounds. B) 400,000 pounds. C) 600,000 pounds. D) 800,000 pounds. E) 0 pounds. Answer: E Topic: Exports Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

49) The above figure shows the U.S. market for wheat. When there no international trade, the U.S. price of wheat is ________ per ton and the U.S. equilibrium quantity is ________ tons. A) $14; 300,000 B) $14; 500,000 C) $16; 500,000 D) $16; 300,000 E) $16; 700,000 Answer: B Topic: Exports Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

50) The above figure shows the U.S. market for wheat. With international trade, the price of wheat in the United States is ________ per ton and the United States ________ wheat. A) $16; exports B) $14; exports C) $14; imports D) $16; imports E) $14; does not trade Answer: A Topic: Exports Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

51) The above figure shows the U.S. market for wheat. With international trade, the United States exports ________ of wheat. A) 300,000 tons B) 500,000 tons C) 700,000 tons D) 400,000 tons E) None of the above answers is correct because the United States imports wheat. Answer: D Topic: Exports Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

52) The above figure shows the U.S. market for wheat. With international trade, U.S. consumers buy ________ tons of wheat and U.S. producers produce ________ tons of wheat. A) 700,000; 300,000 B) 500,000; 500,000 C) 300,000; 500,000 D) 300,000; 700,000 E) 500,000; 700,000 Answer: D Topic: Exports Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

53) The above figure shows the U.S. market for wheat. With no international trade, the price of wheat in the United States is ________ per ton. With international trade, the price of wheat in the United States is ________ per ton. A) $16; $14 B) $500; $300 C) $14; $16 D) $700; $300 E) $500; $700 Answer: C Topic: Exports Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

54) Goods and services that we buy from firms in other countries are called our A) imports. B) exports. C) inputs. D) raw materials. E) obligations. Answer: A Topic: International trade Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

55) If the United States exports planes to Brazil and imports ethanol from Brazil, the price received by U.S. producers of planes ________, and the price received by Brazilian producers of ethanol ________. A) does not change; does not change B) rises; rises C) rises; falls D) falls; rises E) falls; falls Answer: B Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

56) When Italy buys Boeing jets, the price Italy pays is ________ if it produced its own jets and the price Boeing receives is ________ than it could receive from an additional U.S. buyer. A) lower than; lower B) higher than; higher C) lower than; higher D) higher than; lower E) the same as; higher Answer: C Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

57) A nation will import a good if its no-trade, domestic A) price is equal to the world price. B) price is less than the world price. C) price is greater than the world price. D) quantity is less than the world quantity. E) quantity is greater than the world quantity. Answer: C Topic: Trade Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

58) When a good is imported, the domestic production of it ________ and the domestic consumption of it ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) increases; does not change Answer: C Topic: Trade Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

59) The United States exports a good if its no-trade U.S. price is ________ its world price. With international trade, U.S. production of the good ________ compared to the level of no-trade production. A) higher than; does not change B) higher than; increases C) lower than; increases D) the same as; increases E) the same as; does not change Answer: C Topic: Trade Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

60) The graph shows the market for running shoes in the United States. With no international trade, the price of running shoes in the United States is ________ and ________ pairs are produced and bought. A) $100; 2 million B) $100; 1 million C) $40; 1 million D) $40; 2 million E) $40; 4 million Answer: A Topic: International trade Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: New AACSB: Application of knowledge

61) The graph shows the market for running shoes in the United States. With international trade, the price of running shoes in the United States is ________ and ________ pairs are imported. A) $40; 3 million B) $40; 2 million C) $100; 1 million D) $100; 2 million E) $60; 3 million Answer: A Topic: International trade Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: New AACSB: Application of knowledge

62) The graph shoes the market for running shoes in the United States. As a result of international trade, which of the following occur? i. The price of running shoes in the United States falls by $60 per pair. ii. The United States imports 3 million pairs of running shoes. iii. The United States produces 1 million pairs of running shoes. A) i, ii and iii B) i only C) i and ii D) i and iii E) ii and iii Answer: A Topic: International trade Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: New AACSB: Application of knowledge

63) The graph shows the market for car batteries in the United States. Prior to international trade, the quantity of car batteries produced in the United States equals ________ and with trade, production in the United States equals ________. A) 1.0 million; 1.0 million B) 1.0 million; 1.5 million C) 0.5 million; 1.0 million D) 1.5 million; 1.0 million E) 1.0 million; 0.5 million Answer: E Topic: International trade Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: New AACSB: Application of knowledge

64) The figure shows the market for car batteries in the United States. Prior to international trade, the price of batteries in the United States is ________. After trade, the price of car batteries in the United States equals ________. A) $100; $40 and the quantity consumed increases B) $100; $100 and the quantity produced increases C) $100; $50 and the United States exports 0.5 million batteries. D) $50; $100 and the United States exports 1.0 million batteries. E) $100; $100 and the United States imports 1.0 million batteries. Answer: A Topic: International trade Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: New AACSB: Application of knowledge

8.2 Winners, Losers, and Net Gains from Trades 1) International trade benefits A) only the exporter. B) only the importer. C) both the exporter and the importer. D) neither the exporter nor the importer. E) the exporter at all times and sometimes also the importer. Answer: C Topic: Gains from trade Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking

2) Who gains from international trade? A) only the exporting nation B) only the importing nation C) both the importing and the exporting nations D) neither the importing nor the exporting nations E) The gain depends on which nation gets to keep the total revenue from the sale. Answer: C Topic: Gains from trade Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking

3) Most t-shirts bought by Americans are made in Asia. U.S. consumers of t-shirts buy these t-shirts because A) they pay a higher price for t-shirts made in Asia than they would for similar shirts made in the United States. B) they pay a lower price for t-shirts made in Asia than they would for similar shirts made in the United States. C) they must buy some goods or services produced in Asia. D) by so doing they are helping preserve U.S. jobs producing t-shirts. E) they know that the United States has a comparative advantage in wearing t-shirts. Answer: B Topic: Gains from imports Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking

4) After a nation starts importing a good from overseas, the domestic price of the good A) falls. B) stays the same. C) rises. D) might change, but more information about what the country exports is needed to determine if the price rises, falls, or does not change. E) might change, but more information about what else the country imports is needed to determine if the price rises, falls, or does not change. Answer: A Topic: Gains from imports Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking

5) When a nation starts importing a good or service, domestic employment in that industry A) decreases. B) stays the same. C) increases. D) might change, but more information about what else the country imports is needed to determine if employment increases, decreases, or does not change. E) might change, but more information about what the country exports is needed to determine if employment increases, decreases, or does not change. Answer: A Topic: Gains from imports Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking

6) When a nation imports a good or service, the nation's consumer surplus ________, its producer surplus ________, and its total surplus ________. A) increases; decreases; increases B) increases; decreases; decreases C) increases; increases; increases D) decreases; decreases; decreases E) decreases; decreases; increases Answer: A Topic: Gains from imports Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

7) When a nation imports a good, its ________ surplus decreases and its ________ surplus increases. A) consumer; producer B) consumer; consumer C) producer; producer D) producer; consumer E) total; consumer Answer: D Topic: Gains from imports Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

8) When a nation imports a good, its ________ surplus decreases and its ________ surplus increases. A) consumer; producer B) consumer; consumer C) producer; producer D) producer; total E) total; consumer Answer: D Topic: Gains from imports Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

9) When a nation imports a good, its ________ surplus increases and its ________ surplus increases. A) consumer; producer B) consumer; consumer C) producer; producer D) producer; total E) total; consumer Answer: E Topic: Gains from imports Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

10) When a nation imports a good, its consumer surplus ________, and its producer surplus ________. A) increases; increases B) decreases; decreases C) increases; decreases D) decreases; increases E) does not change; increases Answer: C Topic: Gains from imports Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

11) When a nation starts importing a good or service, the domestic production of the good or service A) decreases. B) stays the same. C) increases. D) might change, but more information about what the country exports is needed to determine if production increases, decreases, or does not change. E) might change, but more information about what else the country imports is needed to determine if production increases, decreases, or does not change. Answer: A Topic: Gains from imports Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

12) If Country A opens up their corn market to trade with the rest of the world and the global price of corn is lower than the equilibrium price of corn in Country A, then Country A will ________ corn, which will ________ consumer surplus, ________ producer surplus, and ________ total surplus. A) import; increase; decrease; increase B) import; decrease; increase; increase C) export; increase; decrease; increase D) export; decrease; increase; increase E) export; decrease; increase; decrease Answer: A Topic: Gains from imports Skill: Level 4: Applying models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

13) The above figure shows the U.S. market for chocolate. With no international trade, consumer surplus is equal to A) area A + area B + area C + area D. B) area A. C) area B + area C + area D. D) area C + area D. E) area E. Answer: B Topic: Gains from imports Skill: Level 1: Definition Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

14) The above figure shows the U.S. market for chocolate. With international trade, consumer surplus is equal to A) area A + area B + area C + area D. B) area A. C) area B + area C + area D. D) area C + area D. E) area E. Answer: A Topic: Gains from imports Skill: Level 1: Definition Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

15) The above figure shows the U.S. market for chocolate. With no international trade, producer surplus is equal to A) area A + area B + area C + area D. B) area B + area C + area D + area E. C) area B + area C + area D. D) area C + area D. E) area E. Answer: E Topic: Gains from imports Skill: Level 1: Definition Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

16) The above figure shows the U.S. market for chocolate. With international trade, the gain in total surplus is equal to A) area B. B) area A + area B + area C + area D. C) area B + area C + area D + area E. D) area C + area D. E) area B + area C + area D. Answer: D Topic: Gains from imports Skill: Level 1: Definition Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

17) The above figure shows the U.S. market for chocolate. With no international trade, consumer surplus is equal to ________ and producer surplus is equal to ________. A) area A + area B + area C + area D; area E B) area B + area C + area D; area A + area E C) area A; area E D) area C + area D; area B + area E E) area E; area A + area B + area C + area D Answer: C Topic: Gains from imports Skill: Level 1: Definition Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

18) The above figure shows the U.S. market for chocolate. With international trade, ________ is the transfer of surplus from producers to consumers. A) area B +area C + area D B) area B C) area C + area D D) area A E) area E Answer: B Topic: Gains from imports Skill: Level 1: Definition Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

19) When a nation exports a good or service in which it has a comparative advantage, employment in that industry A) decreases. B) stays the same. C) increases. D) might change, but more information about what else the country exports is needed to determine if employment increases, decreases, or does not change. E) might change, but more information about what the country imports is needed to determine if employment increases, decreases, or does not change. Answer: C Topic: Gains from exports Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking

20) When a nation exports a good or service in which it has a comparative advantage, production of the good or service A) decreases. B) stays the same. C) increases. D) might change, but more information about what the country imports is needed to determine if production increases, decreases, or does not change. E) might change, but more information about what else the country exports is needed to determine if production increases, decreases, or does not change. Answer: C Topic: Gains from exports Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking

21) When a nation exports a good or service, employment in that industry A) decreases. B) stays the same. C) increases. D) might change, but more information about what else the country exports is needed to determine if employment increases, decreases, or does not change. E) might change, but more information about what the country imports is needed to determine if employment increases, decreases, or does not change. Answer: C Topic: Gains from exports Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking

22) When a nation exports a good, its consumer surplus ________, and its producer surplus ________. A) increases; increases B) decreases; decreases C) increases; decreases D) decreases; increases E) does not change; increases Answer: D Topic: Gains from exports Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

23) When a nation exports a good, its ________ surplus decreases and its ________ surplus increases. A) consumer; producer B) consumer; consumer C) producer; producer D) producer; consumer E) total; consumer Answer: A Topic: Gains from exports Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

24) When a nation exports a good, its ________ surplus decreases and its ________ surplus increases. A) consumer; total B) consumer; consumer C) producer; producer D) producer; consumer E) total; consumer Answer: A Topic: Gains from exports Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

25) When a nation exports a good, its ________ surplus increases and its ________ surplus increases. A) consumer; total B) consumer; consumer C) producer; producer D) producer; total E) total; consumer Answer: D Topic: Gains from exports Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

26) When a nation exports a good or service, the nation's consumer surplus ________, its producer surplus ________, and its total surplus ________. A) increases; decreases; increases B) increases; decreases; decreases C) increases; increases; increases D) decreases; decreases; decreases E) decreases; increases; increases Answer: E Topic: Gains from exports Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

27) If Country A opens up their corn market to trade with the rest of the world and the global price of corn is higher than the equilibrium price of corn in Country A, then Country A will ________ corn, which will ________ consumer surplus, ________ producer surplus, and ________ total surplus. A) import; increase; decrease; increase B) import; decrease; increase; increase C) export; increase; decrease; increase D) export; decrease; increase; increase E) export; decrease; increase; decrease Answer: D Topic: Gains from exports Skill: Level 4: Applying models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

28) The above figure shows the U.S. market for wheat. When there is no international trade, consumer surplus is equal to A) area A + area B + area C. B) area A. C) area E + area F. D) area B + area C + area D. E) area A + area B + area C + area D. Answer: A Topic: Gains from exports Skill: Level 1: Definition Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

29) The above figure shows the U.S. market for wheat. With international trade, consumer surplus is equal to A) area A + area B + area C. B) area E + area F. C) area B + area C + area D. D) area A + area B + area C + area D. E) area A. Answer: E Topic: Gains from exports Skill: Level 1: Definition Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

30) The above figure shows the U.S. market for wheat. Without international trade, producer surplus is equal to A) area B + area C + area E + area F. B) area A. C) area B + area C +area D + area E + area F. D) area E + area F. E) area A + area B + area C + area D. Answer: D Topic: Gains from exports Skill: Level 1: Definition Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

31) The above figure shows the U.S. market for wheat. With international trade, the gain in total surplus is equal to A) area A. B) area B + area C. C) area D. D) area C + area F. E) area C + area D + area F. Answer: C Topic: Gains from exports Skill: Level 1: Definition Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

32) The above figure shows the U.S. market for wheat. With no international trade, consumer surplus is equal to ________ and producer surplus is equal to ________. A) area A; area B + area C + area E + area F B) area A + area B + area C; area E + area F C) area E + area F; area A D) area B + area C + area D; area E + area F E) area A + area B + area C + area D; area E + area F Answer: B Topic: Gains from exports Skill: Level 1: Definition Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

33) The above figure shows the U.S. market for wheat. With international trade, ________ is the transfer of surplus from consumers to producers. A) area B + area C B) area D C) area C + area F D) area C + area D E) area B + area C + area D Answer: A Topic: Gains from exports Skill: Level 1: Definition Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

34) When a nation exports a good, its total surplus ________, and when it imports a good, its total surplus ________. A) increases; increases B) decreases; decreases C) increases; decreases D) decreases; increases E) does not change; does not change Answer: A Topic: Gains from trade Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

35) When a nation exports a good, its ________ surplus increases, and when it imports a good, its ________ surplus increases. A) total; total B) consumer; consumer C) producer; producer D) producer; consumer E) total; consumer Answer: A Topic: Gains from trade Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

36) When a nation exports a good, its ________ surplus increases, and when it imports a good, its ________ surplus increases. A) consumer; total B) consumer; consumer C) producer; producer D) producer; consumer E) total; consumer Answer: A Topic: Gains from trade Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

37) When a nation exports a good, its ________ surplus increases, and when it imports a good, its ________ surplus increases. A) consumer; producer B) consumer; consumer C) producer; producer D) producer; consumer E) total; consumer Answer: D Topic: Gains from trade Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

38) When a nation exports a good, its ________ surplus decreases, and when it imports a good, its ________ surplus decreases. A) consumer; producer B) consumer; consumer C) producer; producer D) producer; consumer E) total; consumer Answer: A Topic: Gains from trade Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

39) International trade is definitely in the social interest if A) consumer surplus increases. B) producer surplus increases. C) consumer surplus does not decreases. D) producer surplus does not decreases. E) total surplus increases. Answer: E Topic: Gains from trade Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking

40) Imports ________ consumer surplus, ________ producer surplus, and ________ total surplus. A) decrease; decrease; decrease B) increase; increase; increase C) increase; decrease; decrease D) increase; decrease; increase E) decrease; increase; increase Answer: D Topic: Gains from imports Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

41) When a country imports a good, the ________ in consumer surplus is ________ the ________ in producer surplus. A) decrease; larger than; increase B) decrease; smaller than; increase C) increase; smaller than; decrease D) increase; equal to; decrease E) increase; larger than; decrease Answer: E Topic: Gains from imports Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

42) When a country exports a good, the country's producer surplus ________, consumer surplus ________, and the country ________ from the trade. A) increases; increases; gains B) decreases; increases; gains C) increases; decreases; gains D) decreases; decreases; loses E) increases; decreases; loses Answer: C Topic: Gains from imports Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

43) Which of the following is correct? i. U.S. total surplus decreases when the United States exports a good. ii. U.S. total surplus decreases when the United States imports a good. iii. U.S. total surplus increases when the United States imports a good and when it exports a good. A) i only B) iii only C) i and ii D) ii only E) None of the above because the U.S. total surplus does not change as a result of trade Answer: B Topic: Gains from imports Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking

44) Consider the U.S. market for running shoes shown above. With no international trade, area W represents ________ and area X + Y represents ________. A) consumer surplus; producer surplus B) producer surplus; consumer surplus C) the total surplus; producer surplus D) consumer surplus; a deadweight loss E) deadweight loss; producer surplus Answer: A Topic: Gains from trade Skill: Level 4: Applying models Section: Checkpoint 8.2 Status: New AACSB: Application of knowledge

45) Consider the U.S. market for running shoes shown above. As a result of international trade, the price of running shoes in the United States ________ and consumer surplus ________. A) rises from $60 to $80; equals area W B) falls from $80 to $60; increases to area W + X + V + Z C) rises from $60 to $80; shrinks by area V + Z D) falls from $80 to $60; increases by area Y E) falls from $80 to $60; increases by area X + Y Answer: B Topic: Gains from trade Skill: Level 4: Applying models Section: Checkpoint 8.2 Status: New AACSB: Application of knowledge

46) Suppose the United States engage in less international trade, decreasing both imports and exports. As a result of this policy, U.S. consumer surplus would ________, U.S. producer surplus would ________ and U.S. total surplus would ________. A) decrease; decrease; decrease B) decrease; increase; increase C) increase; increase; increase D) increase; decrease; not change E) decrease; increase; not change Answer: A Topic: Gains from trade Skill: Level 4: Applying models Section: Checkpoint 8.2 Status: New AACSB: Application of knowledge

47) Suppose the United States restricts imports. As a result of this policy, which of the following will occur? i. U.S. consumer surplus will decrease. ii. U.S. producer surplus will increase. iii. U.S. total surplus will decease. A) i and ii B) i and iii C) i, ii and iii D) iii only E) i only Answer: C Topic: Gains from trade Skill: Level 4: Applying models Section: Checkpoint 8.2 Status: New AACSB: Application of knowledge

48) Suppose North Korea decides to open its borders to trade. As a result, which of the following will occur? i. North Korean consumer surplus will increase. ii. North Korean producer surplus will decrease. iii. North Korean total surplus will increase. A) i, ii and iii B) i only C) ii only D) i and iii E) ii and iii Answer: A Topic: Gains from trade Skill: Level 4: Applying models Section: Checkpoint 8.2 Status: New AACSB: Application of knowledge

8.3 International Trade Restrictions 1) A tariff is A) a tax imposed on imports. B) any non-tax action used to restrict trade. C) a tax imposed on exports. D) any non-subsidy used to increase trade. E) a subsidy granted to imports. Answer: A Topic: Trade restrictions Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

2) A tariff is a tax A) on an exported good. B) on an imported good. C) imposed on all traded goods. D) imposed on people's income. E) imposed on the difference between the value of the goods a firm imports and the value of the goods it exports. Answer: B Topic: Trade restrictions Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

3) A tax on a good that is imposed by the importing country is called a A) tariff. B) nontariff barrier. C) quantitative restriction. D) licensing regulation. E) trade constraint. Answer: A Topic: Trade restrictions Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

4) Since the mid-1970s, the average U.S. tariff rate is A) less than 5 percent. B) between 6 percent and 15 percent. C) between 16 percent and 25 percent. D) between 26 percent and 35 percent. E) larger than 36 percent. Answer: A Topic: Eye on the past, the history of the U.S. tariff Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

5) Looking at the average tariff rate in the United States since 1930, we see that A) at first tariffs declined, but have recently risen. B) tariffs have trended downward for most of the period. C) tariff levels have remained high, at over 50 percent throughout the period. D) while we talk about free trade, tariff levels have risen over the last 30 years. E) tariffs were made illegal in the United States in 1955. Answer: B Topic: Eye on the past, the history of the U.S. tariff Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

6) During the past 70 years, the peak average tariff rate in the United States stemmed from the A) creation of GATT in the middle of the 1940s. B) Kennedy Administration in the early 1960s. C) Uruguay round of GATT in the 1980s. D) Smoot-Hawley Tariff Act in the early 1930s. E) Clinton-Bush tariff of 2000-2001. Answer: D Topic: Eye on the past, the history of the U.S. tariff Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

7) The agreement between the United States, Mexico, and Canada that sought to lower trade barriers is known as A) the General Agreement on Tariffs and Trade. B) the North American Free Trade Agreement. C) the World Trade Organization. D) the Smoot-Hawley Tariff Act. E) the New World Free Trade Agreement. Answer: B Topic: Eye on the past, the history of the U.S. tariff Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

8) Given job losses in U.S. manufacturing, some Americans have called for an increase in tariffs on Chinese products coming into America. If higher tariffs are imposed on clothing produced in China, the price of clothing in America would A) decrease. B) increase. C) not change. D) first increase then decrease. E) first decrease then increase. Answer: B Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Revised AACSB: Reflective thinking

9) After a tariff is imposed on a good, the price of the good A) does not change. B) falls. C) rises. D) rises only if the domestic demand for the good does not change. E) might rise, fall, or not change depending on whether the government did or did not simultaneously impose a quota. Answer: C Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

10) After a tariff is imposed, consumers must pay a price equal to the A) world market price. B) domestic equilibrium price when there is no trade. C) world market price plus the tariff. D) world market price less the tariff. E) domestic equilibrium price when there is no trade plus the tariff. Answer: C Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

11) Suppose the world price of widgets is $5 each. If a widget-importing country imposed a $2 per widget tariff, what price would that country's consumers pay for widgets? A) $10 B) $7 C) $5 D) $3 E) A price that is greater than $5 and less than $7 Answer: B Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

12) Which of the following chain of events occurs when a tariff is imposed on a good? A) Domestic prices rise, shifting the domestic supply curve rightward. B) Domestic prices fall, shifting the demand curve rightward, and consumers buy more of the good. C) Domestic prices fall, decreasing the domestic quantity supplied and increasing the quantity demanded. D) Domestic prices rise, decreasing the quantity demanded and increasing the domestic quantity supplied. E) Domestic prices rise, shifting the demand curve leftward and the domestic supply curve rightward. Answer: D Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

13) The imposition of tariffs on Korean steel has led to ________ in imports of Korean steel to the United States and ________ the price of steel in the United States. A) no change; raised B) a decrease; raised C) an increase; lowered D) a decrease; no change in E) an increase; raised Answer: B Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

14) As a result of U.S. tariffs imposed on wool from New Zealand, the quantity of this wool that is imported has A) decreased. B) increased a little. C) not changed. D) increased a lot. E) changed but whether it has increased or decreased is ambiguous. Answer: A Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

15) Imposing a tariff on a good leads to a ________ in the price of the product and ________ in imports. A) rise; an increase B) rise; a decrease C) fall; an increase D) fall; a decrease E) rise; no change Answer: B Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

16) As a result of U.S. tariffs on fishnets produced in other nations, the quantity of fishnets purchased in the United States has A) not been affected. B) increased. C) decreased but not to zero. D) fallen to zero. E) probably changed, but whether it has increased or decreased is ambiguous. Answer: C Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

17) If the United States imposes a tariff on foreign chocolate, how are U.S. buyers of chocolate affected? A) The price they pay for chocolate rises. B) Their demand for chocolate increases because the U.S. production chocolate increases. C) The quantity they consume is unchanged. D) The price they pay for chocolate falls but they consume less chocolate because less is imported. E) The price they pay for chocolate falls and they consume more chocolate. Answer: A Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

18) If the United States imposes a tariff on a good, then A) domestic consumption of the good decreases. B) foreign consumption of the good decreases. C) foreign production of the good increases. D) domestic production of the good decreases. E) the government makes less revenue than it would have gained if it imposed a quota. Answer: A Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

19) When the United States imposes a tariff on an imported good, the A) price of the good in the United States falls. B) quantity of the good purchased in the United States decreases. C) quantity of the good produced in the United States decreases. D) outcome becomes more efficient. E) amount imported increases. Answer: B Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

20) U.S. tariffs on Canadian lumber have led to ________ production of lumber within the United States. A) no change in B) an increase in C) the elimination of D) a decrease in E) making illegal the Answer: B Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

21) If the government decides to impose a new tariff on orange juice from Brazil, the tariff would lead to ________ the tariff revenue collected by the U.S. government. A) no change in B) an increase in C) a decrease in D) an elimination of E) making illegal Answer: B Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

22) The imposition of a tariff will typically ________ government revenue and ________ domestic production of the good. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) increase; not change Answer: A Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

23) Country A imports 1,000 cars per month. After imposing a $50 per car tariff, imports fall to 800 cars per month. How much does Country A's government collect in tariff revenue? A) $90,000 B) $50,000 C) $40,000 D) $10,000 E) $60,000 Answer: C Topic: Effects of tariffs Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

24) Of the following, which group is hurt by a tariff? A) domestic producers of the good B) foreign consumers of the good C) domestic consumers of the good D) domestic government E) foreign government Answer: C Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

25) Of the following, who is harmed by a tariff? A) domestic buyers of the good or service B) the overall domestic economy C) the foreign exporter of the good or service D) domestic producers of the good or service E) Both answers A and B are correct. Answer: E Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

26) Relative to free trade, domestic consumers of a good are ________ off with a tariff because of the ________. A) better; higher price and greater quantity sold B) better; higher price and smaller quantity sold C) better; lower price and greater quantity sold D) worse; lower price and smaller quantity sold E) worse; higher price and greater quantity sold Answer: D Topic: Effects of tariffs Skill: Level 4: Applying models Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

27) If a tariff is imposed on imports of shrimp into the United States, U.S. consumer surplus from shrimp will ________ and U.S. producer surplus from shrimp will ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) increase; not change Answer: C Topic: Effects of tariffs Skill: Level 4: Applying models Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

28) If a tariff is imposed on imports of shrimp into the United States, U.S. consumer surplus from shrimp will ________ and U.S. total surplus from shrimp will ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) increase; not change Answer: D Topic: Effects of tariffs Skill: Level 4: Applying models Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

29) If a tariff is imposed on imports of shrimp into the United States, U.S. producer surplus from shrimp will ________ and U.S. total surplus from shrimp will ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) increase; not change Answer: B Topic: Effects of tariffs, inefficiency Skill: Level 4: Applying models Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

30) A tariff makes the total economy A) better off because it increases the domestic production of the good. B) better off because it decreases the deadweight loss from international trade. C) worse off because it creates a deadweight loss. D) worse off because it creates revenue for the government. E) worse off because it decreases both domestic consumer surplus and domestic producer surplus. Answer: C Topic: Effects of tariffs, inefficiency Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

31) Relative to free trade, when a tariff is imposed in a market for an imported good, A) the consumer surplus in that market increases. B) the producer surplus in that market decreases. C) the total surplus in that market decreases. D) tariff revenue decreases. E) deadweight loss decreases. Answer: C Topic: Effects of tariffs, inefficiency Skill: Level 4: Applying models Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

32) Of the following, who gains because of tariffs and why? A) domestic producers of protected goods because they can sell at a higher price B) domestic buyers because they can be sure of buying high-quality products C) foreign producers because they earn more total revenue D) foreign government because they gain more revenue E) domestic buyers because they pay a lower price Answer: A Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

33) Relative to free trade, domestic producers of a good are ________ off with a tariff because of the ________. A) better; higher price and greater quantity sold B) better; higher price and smaller quantity sold C) better; lower price and greater quantity sold D) worse; lower price and smaller quantity sold E) worse; higher price and greater quantity sold Answer: A Topic: Effects of tariffs Skill: Level 4: Applying models Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

34) If the United States imposes a tariff on foreign chocolate, how are U.S. producers of chocolate affected? A) The quantity of chocolate they sell decreases because U.S. consumption of chocolate decreases. B) The quantity of chocolate they produce increases. C) The price at which they sell their chocolate falls. D) They are harmed because foreign exporters of chocolate increase their supply in response to the higher price. E) They are unaffected because the quota applies to foreign producers, not to U.S. producers. Answer: B Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

35) If the United States imposes a tariff on foreign chocolate, how are foreign producers of chocolate affected? A) Their supply increases because they have to pay the tariff. B) They export less to the United States. C) They earn more profit because their chocolate sells for a higher price. D) Their supply is unaffected because the quota must be met by U.S. producers. E) The tariff has no effect on foreign producers because U.S. consumers must pay the higher price. Answer: B Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

36) The above figure shows the U.S. market for replacement cell phone batteries. When there is no international trade, the equilibrium price is ________ per battery and when there is international trade the equilibrium price is ________ per battery. A) $16; $14 B) $14; $12 C) $12; $14 D) $12; $16 E) $16; $12 Answer: E Topic: Tariffs Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

37) The above figure shows the U.S. market for replacement cell phone batteries. With free international trade, the United States A) exports 300,000 batteries. B) imports 400,000 batteries. C) imports 500,000 batteries. D) imports 800,000 batteries. E) exports 700,000 batteries. Answer: D Topic: Imports Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

38) The above figure shows the U.S. market for replacement cell phone batteries. Suppose the U.S. government imposes the tariff illustrated in the figure. The tariff is equal to ________ and the price U.S. consumers pay ________ compared to the price paid when there was free trade. A) $2; decreases B) $14; decreases C) $2; increases D) $12; increases E) $14; increases Answer: C Topic: Effects of tariffs Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

39) The above figure shows the U.S. market for replacement cell phone batteries. With free trade, the United States imports ________ batteries and once the tariff illustrated in the figure is imposed, the United States imports ________ batteries. A) 900,000; 700,000 B) 800,000; 400,000 C) 300,000; 100,000 D) 700,000; 300,000 E) 900,000; 100,000 Answer: B Topic: Effects of tariffs Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

40) The above figure shows the U.S. market for replacement cell phone batteries. With free trade, U.S. production is equal to ________ batteries per year. When a $2 tariff is in place, U.S. production is equal to ________ batteries per year. A) 100,000; 300,000 B) 100,000; 500,000 C) 300,000; 100,000 D) 300,000; 500,000 E) 900,000; 700,000 Answer: A Topic: Effects of tariffs Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

41) The above figure shows the U.S. market for replacement cell phone batteries. The U.S. government collects tariff revenue of ________ on each battery imported. A) $4 B) $14 C) $12 D) $6 E) $2 Answer: E Topic: Effects of tariffs, government revenue Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

42) The above figure shows the U.S. market for replacement cell phone batteries. Area C is the A) deadweight loss from tariff. B) decrease in consumer surplus due to the tariff. C) increase in producer surplus due to the tariff. D) tariff revenue. E) loss in total surplus because of the tariff. Answer: D Topic: Effects of tariffs, government revenue Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

43) The above figure shows the U.S. market for replacement cell phone batteries. Area B + area D is the A) tariff revenue. B) decrease in consumer surplus due to the tariff. C) deadweight loss from tariff. D) increase in producer surplus due to the tariff. E) gain in total surplus due to the tariff. Answer: C Topic: Effects of tariffs, inefficiency Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

44) The above figure shows the U.S. market for replacement cell phone batteries. Area A + area E is the A) consumer surplus when there is a tariff. B) producer surplus when there is a tariff. C) tariff revenue. D) increase in producer surplus due to the tariff. E) gain in total surplus due to the tariff. Answer: B Topic: Tariffs Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

45) The above figure shows the U.S. market for replacement cell phone batteries. Area E is the A) producer surplus when there is free trade. B) deadweight loss from tariff. C) tariff revenue. D) increase in producer surplus due to the tariff. E) gain in total surplus due to the tariff. Answer: A Topic: Tariffs Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

46) Of the following, who gains with a tariff? A) domestic buyers of the good or service B) the importer of the good or service C) the foreign exporter of the good or service D) the government of the importing nation E) the government of the exporting nation Answer: D Topic: Effects of tariffs, government revenue Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

47) If the U.S. government imposes a tariff on imported steel, who else besides U.S. steel producers gains from the tariff? A) U.S. steel consumers B) the U.S. government C) U.S. importers of steel D) foreign exporters of steel E) the foreign government Answer: B Topic: Effects of tariffs, government revenue Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

48) Of the following, who gains from a tariff? A) the government of the importing country B) the government of the exporting country C) consumers in the importing country D) producers in the exporting country E) both the government of the exporting country and the government of the importing country Answer: A Topic: Effects of tariffs, government revenue Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

49) Which type of policy raises the most revenue for the government? A) tariff B) quota C) voluntary export restraints D) If they are set at the same level, all of the above raise the same amount of revenue. E) None of the above answers is correct because none of the policies raises revenue for the government. Answer: A Topic: Effects of tariffs, government revenue Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

50) The difference between a tariff and a quota is that the revenue from the tariff goes to the A) domestic consumer. B) domestic producer. C) domestic government. D) foreign producers. E) foreign government. Answer: C Topic: Effects of tariffs, government revenue Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

51) The table above gives the domestic demand and supply schedules for a good. Suppose the world price of the good is $40 and the government imposes a $20 per unit tariff. How much will the government collect as tariff revenue? A) $160 B) $320 C) $80 D) $240 E) $360 Answer: C Topic: Effects of tariffs Skill: Level 4: Applying models Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

52) A quota is A) a tax on imports. B) a specified minimum amount that must be imported. C) a specified maximum amount that can be imported. D) a tariff on exports. E) the minimum amount that domestic firms can dump. Answer: C Topic: Quotas Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

53) A quota is a A) quantitative restriction on an import imposed by the importing country. B) quantitative restriction on an import imposed by the exporting country. C) restriction on how much a customer can buy of a scarce good imposed by the seller. D) tax that is imposed on a good when it crosses an international boundary. E) trade barrier that does not harm domestic consumers of the good or service. Answer: A Topic: Quotas Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

54) When governments specify the maximum amount of a good that may be imported in a given period of time, they are establishing a A) tariff. B) quota. C) dynamic tariff. D) tax. E) dumping limit. Answer: B Topic: Quotas Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

55) A specified maximum amount of the good that may be imported in a given period of time is a A) forcible limit. B) quota. C) tariff. D) sanction. E) dumping limit. Answer: B Topic: Quotas Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

56) The imposition of a quota ________ domestic production, ________ imports, and ________ domestic purchases. A) increases; decreases; decreases B) increases; decreases; increases C) decreases; increases; decreases D) decreases; decreases; decreases E) increases; increases; increases Answer: A Topic: Effects of quotas Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

57) Of the following, who gains with a quota? A) domestic buyers of the good or service B) the importer of the good or service C) the foreign exporter of the good or service D) the government of the importing nation E) the government of the exporting nation Answer: B Topic: Effects of quotas Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

58) If the United States imposed a quota on the amount of salmon imported from Chile, the result would be ________ salmon prices in the United States and ________ in the quantity of salmon demanded in the United States. A) higher; an increase B) higher; a decrease C) lower; an increase D) lower; a decrease E) higher; no change Answer: B Topic: Effects of quotas Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

59) If a quota is imposed on imports of shrimp into the United States, U.S. consumer surplus from shrimp will ________ and U.S. producer surplus from shrimp will ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) increase; not change Answer: C Topic: Effects of quotas Skill: Level 4: Applying models Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

60) If an import quota is imposed on imports of shrimp into the United States, U.S. consumer surplus from shrimp will ________ and U.S. total surplus from shrimp will ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) increase; not change Answer: D Topic: Effects of quotas Skill: Level 4: Applying models Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

61) If an import quota is imposed on imports of shrimp into the United States, U.S. producer surplus from shrimp will ________ and U.S. total surplus from shrimp will ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) increase; not change Answer: B Topic: Effects of quotas Skill: Level 4: Applying models Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

62) A quota ________ a deadweight loss and a tariff ________ a deadweight loss. A) creates; creates B) creates; does not create C) does not create; creates D) does not create; does not create E) might create; might create Answer: A Topic: Effects of quotas Skill: Level 4: Applying models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

63) The above figure shows the U.S. market for 1 carat diamonds. With free trade, Americans buy ________ diamonds and pay a price of ________ per diamond. A) 500,000; $4,000 B) 300,000; $3,000 C) 700,000; $3,000 D) 300,000; $4,000 E) 900,000; $2,000 Answer: E Topic: International trade Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

64) The above figure shows the U.S. market for 1 carat diamonds. With free trade, the United States produces ________ diamonds and imports ________ diamonds. A) 300,000; 600,000 B) 0; 900,000 C) 100,000; 900,000 D) 100,000; 800,000 E) 500,000; 400,000 Answer: D Topic: International trade Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

65) The above figure shows the U.S. market for 1 carat diamonds. Suppose the United States imposes the import quota shown in the figure. With the import quota, how many diamonds can be imported? A) 500,000 B) 700,000 C) 400,000 D) 900,000 E) 300,000 Answer: C Topic: Effects of quotas Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

66) The above figure shows the U.S. market for 1 carat diamonds. With free trade, the price in the United States for diamonds is equal to ________ and with the quota illustrated in the figure, the price in the United States is equal to ________. A) $4,000; $2,000 B) $2,000; $3,000 C) $4,000; $3,000 D) $2,000; $2,000 E) $2,000; $4,000 Answer: B Topic: Effects of quotas Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

67) The above figure shows the U.S. market for 1 carat diamonds. With free trade, U.S. production of diamonds is equal to ________ diamonds. When the quota illustrated in the figure is in place, U.S. production is equal to ________ diamonds. A) 100,000; 300,000 B) 100,000; 500,000 C) 300,000; 100,000 D) 300,000; 500,000 E) 900,000; 700,000 Answer: A Topic: Effects of quotas Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

68) The above figure shows the U.S. market for 1 carat diamonds. Area B + area D is the A) decrease in consumer surplus due to the import quota. B) importers' profit from the quota. C) gain in total surplus due to the import quota. D) deadweight loss from the import quota. E) increase in producer surplus due to the import quota. Answer: D Topic: Effects of quotas Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

69) The above figure shows the U.S. market for 1 carat diamonds. Area A + area B + area C + area D is the A) deadweight loss from the import quota. B) importers' profit from the quota. C) decrease in consumer surplus due to the import quota. D) gain in total surplus due to the import quota. E) increase in producer surplus due to the import quota. Answer: C Topic: Effects of quotas Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

70) The above figure shows the U.S. market for 1 carat diamonds. Area C is the A) decrease in consumer surplus due to the import quota. B) importers' profit from the quota. C) deadweight loss from the import quota. D) increase in producer surplus due to the import quota. E) gain in total surplus due to the import quota. Answer: B Topic: Effects of quotas Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

71) The above figure shows the U.S. market for 1 carat diamonds. Area A is the A) increase in producer surplus due to the import quota. B) importers' profit from the import quota. C) decrease in consumer surplus due to the import quota. D) deadweight loss from the import quota. E) gain in total surplus due to the import quota. Answer: A Topic: Effects of quotas Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

72) If the United States negotiates a voluntary export restraint with international sugar producing nations, then A) U.S. sugar buyers pay a lower price for sugar. B) U.S. sugar producers produce a smaller quantity. C) imports of sugar increase. D) the U.S. government collects less revenue than if it imposed a tariff on sugar. E) the foreign governments collect more revenue than if a tariff is imposed on sugar. Answer: D Topic: Voluntary export restraint Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

73) Which of the following methods of restricting trade does NOT create a deadweight loss? A) a tariff B) a quota C) a voluntary export restraint D) Both answers A and B are correct. E) None of the above answers is correct because all the methods create a deadweight loss. Answer: E Topic: Gains from trade Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

74) Economists argue for free trade in import markets because A) all consumers and producers benefit from importing goods. B) the gains to the U.S. producers outweigh the losses to the U.S. consumers. C) the gains to the U.S. consumers outweigh the losses to the U.S. producers. D) no one is made worse off by importing goods. E) importing goods decreases total surplus. Answer: C Topic: Gains from trade Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

75) Economists argue for free trade in export markets because A) all consumers and producers benefit from exporting goods. B) the gains to the U.S. producers outweigh the losses to the U.S. consumers. C) the gains to the U.S. consumers outweigh the losses to the U.S. producers. D) no one is made worse off by exporting goods. E) exporting goods decreases total surplus. Answer: B Topic: Gains from trade Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

76) A tax on a good that is imposed when it is imported is called A) an import quota. B) a VER. C) a tariff. D) a sanction. E) a border tax. Answer: C Topic: Trade restrictions Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

77) The average U.S. tariff was highest in the A) 1930s. B) 1940s. C) 1970s. D) 1980s. E) 1990s. Answer: A Topic: Eye on the past, the history of the U.S. tariff Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

78) Suppose the world price of a shirt is $10. If the United States imposes a tariff of $5 a shirt, then the price of a shirt in the A) United States falls to $5. B) United States rises to $15. C) world falls to $5. D) world rises to $5. E) world rises to $15 Answer: B Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

79) When a tariff is imposed on a good, the ________ increases. A) domestic quantity purchased B) domestic quantity produced C) quantity imported D) quantity exported E) world price Answer: B Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

80) When a tariff is imposed on a good, domestic consumers of the good ________ and domestic producers of the good ________. A) win; lose B) lose; win C) win; win D) lose; lose E) lose; neither win nor lose Answer: B Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

81) Which of the following parties benefits from an import quota but not from a tariff? A) the domestic government B) domestic producers C) domestic consumers D) the person with the right to import the good E) the foreign government Answer: D Topic: Effects of quotas Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

82) Consider the market for running shoes shown above. Before a tariff is imposed, if the United States trades with the world, then the United States produces ________ running shoes at a price of ________. A) 1 million; $40 B) 5 million; $40 C) 3 million; $80 D) 5 million; $80 E) 3 million; $40 Answer: A Topic: Effects of tariffs Skill: Level 4: Applying models Section: Checkpoint 8.3 Status: New AACSB: Application of knowledge

83) Consider the market for running shoes shown above. A tariff of ________ is imposed and causes the amount of shoes imported to ________ pairs. A) $40; decrease from 4 million to 2 million B) $20; decrease from 4 million to 3 million C) $40; decrease from 5 million to 2 million D) $20; decrease from 4 million to 2 million E) $60; decrease from 4 million to 2 million Answer: D Topic: Effects of tariffs Skill: Level 4: Applying models Section: Checkpoint 8.3 Status: New AACSB: Application of knowledge

84) Consider the market for running shoes shown above. As a result of the tariff imposed, ________ collect(s) tariff revenue of ________. A) the government; $40 million B) firms; $40 million C) the government; $80 million D) firms; $80 million E) the government; $120 million Answer: A Topic: Effects of tariffs Skill: Level 4: Applying models Section: Checkpoint 8.3 Status: New AACSB: Application of knowledge

85) Suppose the Chinese government helps Chinese textile firms pay the cost of producing textiles. This payment is considered a(n) A) export subsidy and increases producer surplus in the United States. B) tariff and creates a deadweight loss in the United States. C) tariff and increases consumer surplus in the United States. D) export subsidy and creates a deadweight loss in China. E) quota and creates a deadweight loss in China. Answer: D Topic: Export subsidy Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: New AACSB: Analytical thinking

86) The U.S. government provides payments to U.S. cotton producers to help defray the cost of cotton production. This ________ results in ________ of cotton in the United States and ________ in other countries. A) export subsidy; overproduction; underproduction B) export subsidy; underproduction; overproduction C) tariff; overproduction; underproduction D) tariff; underproduction; overproduction E) quota; overproduction; underproduction Answer: A Topic: Export subsidy Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: New AACSB: Application of knowledge

8.4 The Case Against Protection 1) If supporters of restrictions on imports argue that protection is needed to preserve a strategic industry, which of the following is being used? A) save domestic jobs argument B) national security argument C) dumping argument D) infant-industry argument E) protecting national culture argument Answer: B Topic: National security argument Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

2) Which of the following is the national security argument against free trade? A) A country must protect industries that produce defense equipment and armaments. B) A country must protect new industries to give them a chance to mature before facing foreign competition. C) A country must protect firms from dumping by foreign companies. D) A country must protect its consumers from foreign influences. E) A country must preserve its jobs. Answer: A Topic: National security argument Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

3) What is the national security argument to support protection from international trade? A) Domestic firms must be protected until they gain a comparative advantage. B) Any firm necessary in wartime must be protected. C) Foreign producers selling below cost to drive domestic firms bankrupt must be stopped. D) Domestic jobs must be protected from competition from low-paid foreign workers. E) Foreigners selling products in the economy limit the nation's diversity and stability. Answer: B Topic: National security argument Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

4) What is the infant-industry argument for protection from international trade? A) Domestic firms must be protected until they gain a comparative advantage. B) Any firm necessary in wartime must be protected. C) Foreign producers selling below cost to drive domestic firms bankrupt must be stopped. D) Domestic jobs must be protected from competition from low-paid foreign workers. E) Foreigners selling products in the economy limit the nation's diversity and stability. Answer: A Topic: Infant industry Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

5) When protection is encouraged to protect a growing domestic industry; which of the following is being used? A) save domestic jobs argument B) national security argument C) anti-dumping argument D) infant-industry argument E) diversity and stability argument Answer: D Topic: Infant industry Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

6) The infant-industry argument is used by those who assert they want to A) limit imports to protect new industries. B) increase exports to encourage growth of new industries. C) limit exports. D) increase imports to earn money to support new industries. E) encourage foreign firms to dump in the United States. Answer: A Topic: Infant industry Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

7) The infant-industry argument for protection is based on the idea of A) learning-by-doing. B) dumping. C) absolute advantage. D) quotas are the least harmful method of protecting domestic firms. E) saving jobs in the U.S. economy. Answer: A Topic: Infant industry Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

8) What is the dumping argument for protection from international trade? A) Domestic firms must be protected until they gain a comparative advantage. B) Any firm necessary in wartime must be protected. C) Foreign producers selling below cost to drive domestic firms bankrupt must be stopped. D) Domestic jobs must be protected from competition from low-paid foreign workers. E) Foreigners selling products in the economy limit the nation's diversity and stability. Answer: C Topic: Dumping Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

9) When a tariff supporter argues that foreign producers are selling their products for prices below the costs of production, which of the following is being used? A) save domestic jobs argument B) national security argument C) dumping argument D) infant-industry argument E) diversity and stability argument Answer: C Topic: Dumping Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

10) Dumping is defined as the situation in which A) domestic producers sell a product at prices below the cost of production. B) foreign producers sell a product at a price below the cost of production. C) foreign producers sell a product at a price above a fair level. D) domestic producers cut production to drive up domestic prices. E) domestic producers are protected by tariffs. Answer: B Topic: Dumping Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

11) Which of the following is NOT a major argument for restricting international trade? A) the promotion of dumping in America B) the national security argument C) the infant-industry argument D) the prevention of dumping argument E) saves U.S. jobs argument Answer: A Topic: Dumping Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

12) Suppose the United States subsidizes domestic chicken production and then sells surpluses on the world market at a price below the cost of production. In foreign countries, the argument that would made to restrict chicken trade with the United States would be the A) penalizes lax environmental standards argument. B) saves jobs argument. C) infant-industry argument. D) dumping argument. E) national security argument. Answer: D Topic: Dumping Skill: Level 1: Definition Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

13) A flawed argument for protection from foreign trade is that i. tariffs save domestic jobs. ii. tariffs protect the national culture. iii. quotas bring about diversity and stability. A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: E Topic: Protection Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

14) Which of the following is an argument that is used for protection from free trade? i. the national security argument ii. the infant-industry argument iii. the dumping argument A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: E Topic: Protection Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

15) When politicians debated the North American Free Trade Agreement (NAFTA), some told stories of U.S. workers whose jobs would be moved to Mexico. Which of the following arguments in favor of protection was being used? A) save domestic jobs argument B) national security argument C) anti-dumping argument D) infant-industry argument E) diversity and stability argument Answer: A Topic: Saving jobs Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

16) The argument that jobs are lost to free trade is A) totally false because no jobs are lost to free trade. B) correct because jobs are lost but foreign countries are helped and we can afford losses. C) incorrect because no jobs are lost and new jobs are created by trade. D) correct because some jobs are lost but incorrect because new jobs also are created. E) true only when tariffs are imposed on the goods being imported. Answer: D Topic: Saving jobs Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

17) International trade decreases the demand for workers in domestic industries that A) produce goods that are exported from the country. B) produce goods that are imported into the country. C) help businesses import and export. D) service imported goods. E) produce the goods in which the nation has a comparative advantage. Answer: B Topic: Saving jobs Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

18) What is an effective counter against the argument that international trade should be restricted to protect domestic jobs? A) A more effective policy would be to support the industry with subsidies. B) The more diversified the economy, the more stable it is. C) Free trade increases the number of jobs in which workers earn higher incomes. D) Rent seeking behavior should be encouraged. E) Free trade in "green" goods will increase jobs. Answer: C Topic: Saving jobs Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

19) The typical relationship between a worker's productivity and the worker's wage rate is A) high productivity workers receive low wage rates. B) low productivity workers receive low wage rates. C) no link between productivity and wages earned. D) high productivity workers find that their jobs are often outsourced. E) that workers with high productivity need to have their high wages protected by tariffs. Answer: B Topic: Cheap foreign labor Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

20) While high-paid American workers fear competition with low-paid foreign workers, low-paid foreign workers fear competition with high-paid American workers. Why? A) It is completely irrational and unfounded. B) Because America has such a large market it can protect its workers. C) Because high wages reflect high worker productivity and the low-paid foreign workers are not as productive. D) Because high wages are the result of extensive tariff and other trade restrictions. E) Because high wages mean that U.S. workers can buy more goods and services. Answer: C Topic: Cheap foreign labor Skill: Level 1: Definition Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

21) The ________ are hurt by importing a good. A) domestic consumers of the good B) domestic producers of the good C) domestic governments D) foreign producers of the good E) foreign governments Answer: B Topic: Why is trade restricted? Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

22) When the United States imports goods from the rest of the world, which of the following parties is harmed? i. domestic producers of the good ii. domestic consumers of the good iii. foreign producers of the good A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: A Topic: Why is trade restricted? Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

23) The two main reasons why international trade is restricted is because restricting trade means that governments can ________ and because domestic businesses ________. A) create jobs; earn profits B) obtain revenue; rent seek C) rent seek; want to dump D) prevent dumping; want to dump E) rent seek; obtain revenue Answer: B Topic: Why is trade restricted? Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

24) Comparing developed and developing nations in their use of tariffs, we see that A) the developing nations' governments get very little revenue from tariffs. B) both governments get large amounts of revenue from tariffs. C) many developing nations' governments get a large portion of their revenue from tariffs. D) developing nations almost never impose tariffs because they want their people to obtain goods and services at the lowest possible price. E) developed nations rely much more than developing nations on tariff revenue. Answer: C Topic: Why is trade restricted? Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

25) A major reason why it is difficult to lower the barriers to free trade is A) that total benefits are less than total costs from free trade. B) the uneven distribution of gains and losses from free trade. C) the loss of jobs without any gain of jobs from free trade. D) the inability to compensate losers from free trade. E) that the barriers allow us to compete with cheap foreign labor. Answer: B Topic: Why is trade restricted? Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

26) What is rent seeking with respect to restricting international trade? A) The rent on factory buildings increases if trade is restricted. B) The government avoids paying rent on buildings when importers pay the tariff. C) An attempt to capture the gains from trade by imposing a tariff D) The government's efforts to capture tariff rents E) The attempt by importers to avoid paying a tariff Answer: C Topic: Rent seeking Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

27) Which of the following groups gain from international trade? i. producers of exported goods ii. domestic consumers of imported goods iii. workers in exporting firms A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: E Topic: Why is trade restricted? Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

28) Why are the losers from free international trade not fully compensated for their losses? A) The amount of compensation needed would bankrupt the government. B) The people who claim to lose are also the same ones who benefit. C) Identifying all losers and the size of their losses is extremely difficult. D) No one actually loses from international trade. E) The losers are foreigners. Answer: C Topic: Why is trade restricted? Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

29) Trade is often restricted because the A) total gain to all producers is larger than the total loss to all consumers. B) total gain to all producers is smaller than the total loss to all consumers. C) gain per producer is larger than the loss per consumer. D) gain per producer is less than the loss per consumer. E) gain per consumer is larger than the loss per producer. Answer: C Topic: Why is trade restricted? Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

30) The national security argument is used by those who assert they want to A) increase imports as a way of strengthening their country. B) increase exports as a way of earning money to strengthen their country. C) limit imports that compete with domestic producers important for national defense. D) limit exports to control the flow of technology to third world nations. E) limit all imports. Answer: C Topic: National security argument Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

31) The argument that it is necessary to protect a new industry to enable it to grow into a mature industry that can compete in world markets is known as the A) national security argument. B) diversity argument. C) infant-industry argument. D) environmental protection argument. E) national youth protection argument. Answer: C Topic: Infant industry Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

32) ________ occurs when a foreign firm sells its exports at a lower price than its cost of production. A) Dumping B) The trickle-down effect C) Rent seeking D) Tariff avoidance E) Nontariff barrier protection Answer: A Topic: Dumping Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

33) The United States A) needs tariffs to allow us to compete with cheap foreign labor. B) does not need tariffs to allow us to compete with cheap foreign labor. C) should not trade with countries that have cheap labor. D) will not benefit from trade with countries that have cheap labor. E) avoids trading with countries that have cheap labor. Answer: B Topic: Cheap foreign labor Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

34) Why do governments in less-developed nations impose tariffs? A) The government gains revenue from the tariff. B) The government's low-paid workers are protected from high-paid foreign workers. C) The nation's total income will be increased. D) The national security of the country definitely is improved. E) The government diversifies its economy. Answer: A Topic: Why is trade restricted? Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

35) What is a major reason international trade is restricted? A) rent seeking B) to allow competition with cheap foreign labor C) to save jobs D) to prevent dumping E) to eliminate monopolies Answer: A Topic: Why is trade restricted? Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

8.5 Chapter Figures

The figure above shows the U.S. market for T-shirts, where SUS is the domestic supply curve and DUS is the domestic demand curve. The United States trades freely with the rest of the world. The world price of a T-shirt is $5. 1) In the figure above, with international trade U.S. consumers buy ________ million T-shirts per year at ________ per T-shirt. A) 60; $5 B) 40; $8 C) 20; $5 D) 40; $5 E) 60; $11 Answer: A Topic: Imports Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

2) Based on the figure above, as a result of international trade, U.S. domestic production ________ million T-shirts per year. A) decreases by 20 B) increases by 20 C) decreases by 10 D) increases by 40 E) increases by 10 Answer: A Topic: Imports Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

3) In the figure above, with international trade the United States ________ million T-shirts per year. A) imports 40 B) exports 40 C) exports 20 D) imports 20 E) imports 60 Answer: A Topic: Imports Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

4) Based on the figure above, as a result of international trade, consumer surplus A) increases by $150 million. B) decreases by $150 million. C) increases by $90 million. D) decreases by $90 million. E) remains unchanged. Answer: A Topic: Gains from imports Skill: Level 4: Applying models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

5) Based on the figure above, as a result of international trade, producer surplus A) increases by $150 million. B) decreases by $150 million. C) increases by $90 million. D) decreases by $90 million. E) remains unchanged. Answer: D Topic: Gains from imports Skill: Level 4: Applying models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

6) Based on the figure above, international trade leads to A) a net gain of surplus of $60 million. B) a net loss of surplus of $60 million. C) a net gain of surplus of $90 million. D) a net loss of surplus of $90 million. E) no net gain or loss of surplus. Answer: A Topic: Gains from imports Skill: Level 4: Applying models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

The figure above shows the U.S. market for airplanes, where SUS is the domestic supply curve and DUS is the domestic demand curve. The United States trades freely with the rest of the world. The world price of an airplane is $150 million. 7) Based on the figure above, as a result of international trade, U.S. domestic production ________ airplanes per year. A) decreases by 200 B) increases by 300 C) decreases by 100 D) increases by 500 E) increases by 200 Answer: B Topic: Exports Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

8) In the figure above, U.S. consumers buy ________ airplanes per year at ________ million per airplane. A) 200; $150 B) 400; $100 C) 700; $150 D) 400; $150 E) 200; $100 Answer: A Topic: International trade Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

9) In the figure above, the United States ________ airplanes per year. A) imports 500 B) exports 500 C) exports 400 D) imports 400 E) exports 200 Answer: B Topic: Exports Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

10) Based on the figure above, as a result of international trade, consumer surplus A) increases by $15 billion. B) decreases by $15 billion. C) increases by $27.5 billion. D) decreases by $12.5 billion. E) remains unchanged. Answer: B Topic: Gains from exports Skill: Level 4: Applying models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

11) Based on the figure above, as a result of international trade, producer surplus A) increases by $15 billion. B) decreases by $15 billion. C) increases by $27.5 billion. D) decreases by $12.5 billion. E) remains unchanged. Answer: C Topic: Gains from exports Skill: Level 4: Applying models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

12) Based on the figure above, international trade leads to A) a net gain in surplus of $12.5 billion. B) a net loss of surplus of $12.5 billion. C) a net gain in surplus of $27.5 billion. D) a net loss of surplus of $15 billion. E) no net gain or loss of surplus. Answer: A Topic: Gains from exports Skill: Level 4: Applying models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

The figure above shows the U.S. market for T-shirts, where SUS is the domestic supply curve and DUS is the domestic demand curve. The world price of a T-shirt is $5. The U.S. government imposes a $2 per unit tariff on imported T-shirts. 13) The figure above shows that as a result of the tariff, the price of a T-shirt in the United States ________, and the quantity of T-shirts bought ________. A) rises by $2; decreases by 15 million per year B) rises by $2; increases by 15 million per year C) falls by $2; increases by 5 million per year D) does not change; decreases by 5 million per year E) does not change; does not change Answer: A Topic: Effects of tariffs Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

14) The figure above shows that as a result of the tariff, the quantity of T-shirts produced in the United States ________, and the quantity of T-shirts imported ________. A) increases by 15 million per year; decreases by 30 million per year B) increases by 15 million per year; increases by 15 million per year C) decreases by 15 million per year; decreases by 30 million per year D) decreases by 30 million per year; increases by 30 million per year E) does not change; decreases by 15 million per year Answer: A Topic: Effects of tariffs Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

15) The figure above shows that as a result of the tariff, consumer surplus in the United States A) decreases by $105 million per year. B) increases by $55 million per year. C) decreases by $30 million per year. D) decreases by $20 million per year. E) remains unchanged. Answer: A Topic: Effects of tariffs, inefficiency Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

16) The figure above shows that as a result of the tariff, producer surplus in the United States A) decreases by $105 million per year. B) increases by $55 million per year. C) decreases by $30 million per year. D) decreases by $20 million per year. E) remains unchanged. Answer: B Topic: Effects of tariffs, inefficiency Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

17) The figure above shows that the government revenue from the tariff is A) $20 million per year. B) $30 million per year. C) $15 million per year. D) $55 million per year. E) zero. Answer: A Topic: Effects of tariffs, government revenue Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

18) The figure above shows that the deadweight loss from the tariff is A) $20 million per year. B) $30 million per year. C) $15 million per year. D) $55 million per year. E) zero. Answer: B Topic: Effects of tariffs, inefficiency Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

19) The figure above shows that the U.S. net ________ surplus from the tariff is ________. A) loss of; $30 million per year B) gain in; $20 million per year C) loss of; $10 million per year D) gain in; $55 million per year E) gain in; zero Answer: A Topic: Effects of tariffs, inefficiency Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

8.6 Integrative Questions 1) Assume that the state of Missouri decided to place a tariff on every product produced outside the state in an effort to increase the state's revenue and increase employment in the state. If Missouri did so, A) the state's total output would definitely increase. B) workers with jobs in new firms replacing out-of-state imports would earn high income. C) the standard of living within Missouri would decrease. D) other states would begin to dump in Missouri. E) the prices of goods imported into Missouri would fall. Answer: C Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking

2) During the 1980s, Harley-Davidson, the American motorcycle maker, asked Congress for tariff protection from large motorcycles imported from Japan. Harley-Davidson argued that their company needed protection so the company could reorganize and, after some time had passed, could become more competitive. Harley-Davidson's argument is similar to the ________ argument for protection. A) save domestic jobs B) national security C) anti-dumping D) infant-industry E) bring diversity and stability Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking

3) In the 1950s, crude oil and natural gas imports were restricted to keep the domestic industries viable in case of a war. The rationale for this protection is the ________ argument for protection. A) save domestic jobs B) national security C) anti-dumping D) infant-industry E) penalizing lax environmental standards Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking

4) In the 1980s, the U.S. government forced Japanese automakers to limit their exports to the United States. The union representing the autoworkers (UAW), argued that otherwise the U.S. auto industry would have contracted. The UAW's argument is the ________ argument for protection. A) save domestic jobs B) national security C) anti-dumping D) infant-industry E) bringing diversity and stability Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking

5) In 2002, President Bush imposed a tariff on imported steel. He did so in response to rent seeking by A) domestic steel consumers. B) domestic steel producers. C) foreign steel consumers. D) foreign steel producers. E) foreign politicians. Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking

6) If the opportunity cost of producing a T-shirt is ________ in China than in the United States, China has ________ advantage in producing T-shirts. A) lower; a comparative B) lower; an absolute C) higher; a comparative D) higher; an absolute E) higher; no Answer: A Topic: Comparative advantage Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Analytical thinking

7) Because the United States has ________ advantage compared to China in producing airplanes, China can buy airplanes from the United States at a ________ opportunity cost than that at which China can produce them. A) comparative; lower B) comparative; higher C) absolute; lower D) absolute; higher E) None of the above because China will produce airplanes and sell them to the United States. Answer: A Topic: Comparative advantage Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Analytical thinking

8) Which of the following is true? i. Comparative advantage drives international trade. ii. Compared to a no-trade situation, in a market with imports, producer surplus is larger. iii. Tariffs lower the domestic price of imported goods. A) i only B) ii only C) iii only D) i and ii E) i and iii Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

9) Which of the following is true? i. When the world price of a good is lower than the price that balances domestic supply and demand, a country gains from exporting the good. ii. Compared to a no-trade situation, in a market with imports, consumer surplus is larger. iii. Quotas raise the domestic price of imported goods. A) i only B) ii only C) iii only D) i and ii E) ii and iii Answer: E Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

10) Which of the following is true? i. Compared to a no-trade situation, in a market with exports, consumer surplus is larger. ii. Tariffs decrease consumer surplus. iii. Trade is restricted because protection brings small losses to a large number of people and large gains to a small number of people. A) i only B) ii only C) iii only D) i and iii E) ii and iii Answer: E Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

11) We find that the world price of sugar is 20 cents a pound, the United States does not trade internationally, and the U.S. equilibrium price of sugar is 30 cents a pound. If the United States begins to trade internationally, the price of sugar in the U.S. ________ to the world price and U.S. consumers buy ________ sugar. A) falls; more B) falls; less C) rises; more D) rises; less E) falls; no Answer: A Topic: Imports Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

12) The world price of steel is $100 a ton. Before international trade, the price of steel in India is $60 a ton. If India begins trading internationally, the price of steel in India ________ and steel mills in India ________ the quantity they produce. A) rises; increase B) falls; increase C) does not change; increase D) rises; decrease E) falls; decease Answer: A Topic: International trade Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

13) Imports ________ society's total surplus because of the ________ in price and ________ in consumption. A) increase; rise; increase B) increase; rise; decrease C) decrease; fall; increase D) decrease; fall; decrease E) increase; fall; increase Answer: E Topic: Exports Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Analytical thinking

14) Exports ________ society's total surplus because of the ________ in price and ________ in production. A) increase; rise; increase B) increase; rise; decrease C) decrease; fall; increase D) decrease; fall; decrease E) increase; fall; increase Answer: A Topic: Exports Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Analytical thinking

8.7 Essay: How Global Markets Work 1) How can a nation and its producers determine whether or not it has a comparative advantage in producing a particular good or service? Answer: Whether a nation has a comparative advantage in the production of a particular good or service can be determined by comparing the price the good or service sells for domestically to the world price of the same good or service. If the domestic price is less than the world, the nation has a comparative advantage in the production of that good or service. If the domestic price exceeds the world price, the nation does not have a comparative advantage in the production of that good or service. Topic: Gains from trade Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Written and oral communication

2) After NAFTA was signed, the United States allowed more tomatoes to be imported from Mexico. What happened to the price of tomatoes in the United States when the United States allowed more tomatoes to be imported? Answer: The price of tomatoes fell. Topic: Imports Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

3) A few years ago, as oil and gas prices continued to increase, a growing number of Americans called for the United States to become less reliant on Middle-Eastern oil. Would it make sense for the United States to try to become totally self-reliant in the production of oil? Why or why not? Answer: It would be foolish for the United States to try to become totally self-reliant in oil production. There is a reason that approximately 40 percent of our oil comes from OPEC nations: Middle-Eastern countries can produce oil at a far lower opportunity cost than U.S. producers. In the Middle East the vast reserves of oil, combined with more lax regulations imposed by the government, have combined to drive down the per barrel opportunity cost of oil extraction to very low levels. Hence the United States gains from trade with these nations. Even though the price of oil was higher than in the past, that price was much less than what would be the opportunity cost of producing enough oil domestically so that the United States was totally self-reliant. Topic: Imports Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Written and oral communication

4) The United States imports television sets from Japan. The table above contains the U.S. demand and U.S. supply schedules for television sets. The world price of a television set is $600 per set. a. With no trade, what is the domestic price and quantity of television sets? b. At the world price, what is the quantity of sets demanded in the United States? c. At the world price, how many sets are produced in the United States? d. At the world price, how many sets are imported into the United States? e. What is the opportunity cost of producing the 4-millionth television set in the United States? In Japan? Answer: a. In the absence of trade, the price is $1,000 per television set and the quantity is 4 million sets. b. At the world price, 8 million sets are demanded in the United States. c. At the world price, 2 million sets are produced in the United States. d. At the world price, the quantity of sets imported is 6 million. e. The opportunity cost in the United States to produce the 4-millionth set is $1,000. The opportunity cost in Japan is $600. Topic: Imports Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

5) Merck, an American pharmaceutical company, produces a vaccination that is used against chicken pox. The table shows the domestic demand for, and supply of, this medication, measured in thousands of doses per day. The world price of this medicine is $24 per dose. a. With no trade, what is the U.S. price and quantity of the vaccine? b. At the world price, how many doses are demanded in the United States? c. At the world price, how many doses are produced in the United States? d. At the world price, how many doses are exported? Answer: a. With no trade, the U.S. price is $20 a dose and the quantity is 10,000 doses per day. b. At the world price, 8,000 doses per day are demanded in the United States. c. At the world price, 13,000 doses per day are produced in the United States. d. At the world price, 5,000 doses per day are exported. Topic: Exports Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

6) The table above has the domestic supply and domestic demand schedules for a product. What is the equilibrium price with no trade? Over what range of prices will the country export the good? Over what range will it import the good? Suppose the world price is $20. What is the quantity demanded, the quantity supplied, and the amount of the good exported or imported? Answer: The price with no trade is $12. The country will import the good at world prices below $12 and export it at world prices above $12. If the world price is $20, the quantity demanded is 160, the quantity supplied is 220, and the quantity exported is 60. Topic: Trade Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

7) The figure above shows the U.S. demand and the U.S. supply curves of canned peaches. a. In the absence of trade, what is price of canned peaches in the United States? b. In the absence of trade, what is the level of production in the United States? c. If the world price of canned peaches is $1 a can and the United States engages in trade, does the United States import or export canned peaches? d. If the world price of canned peaches is $1 a can and the United States engages in trade, what is the quantity produced in the United States and what is the quantity consumed? What is the quantity imported or exported? e. If the world price of canned peaches is $2 a can and the United States engages in trade, does the United States import or export canned peaches? f. If the world price of canned peaches is $2 a can and the United States engages in trade, what is the quantity produced in the United States and what is the quantity consumed? What is the quantity imported or exported? Answer: a. In the absence of trade, the price is $1.50 per can of peaches. b. In the absence of trade, 4 million cans are produced. c. The United States imports canned peaches. d. The quantity produced in the United States is 2 million cans and the quantity consumed is 6 million cans. The quantity imported is 4 million cans. e. The United States exports canned peaches. f. The quantity produced in the United States is 6 million cans and the quantity consumed is 2 million cans. The quantity exported is 4 million cans. Topic: Trade Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

8.8 Essay: Winners, Losers, and Net Gains from Trade 1) Who gains from imports? How do they gain? Who loses? How do they lose? Does the overall economy gain or lose from imports? Answer: Consumers of the good being imported gain from imports. They gain because the price they pay falls. As a result, they buy more of the good and their consumer surplus increases. Producers of the good being imported lose from imports. They lose because the price they receive falls. As a result, they produce less of the good and their producer surplus decreases. The overall economy gains because the increase in consumer surplus exceeds the decrease in producer surplus. Topic: Imports Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Written and oral communication

2) How do imports affect buyers' consumer surplus? Answer: Consumer surplus increases. It increases because imports lower the price of the good being imported, so buyers purchase more of the good and hence their consumer surplus increases. Topic: Imports Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

3) How do imports affect sellers' producer surplus? Answer: Producer surplus decreases. It decreases because imports lower the price of the good being imported, so sellers produce less of the good and hence their producer surplus decreases. Topic: Imports Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

4) Who gains from exports? How do they gain? Who loses? How do they lose? Does the overall economy gain or lose from exports? Answer: Producers of the good being exported gain from exports. They gain because the price they receive rises. As a result, they produce more of the good and their producer surplus increases. Consumers of the good being exported lose from exports. They lose because the price they pay rises. As a result, they buy less of the good and their consumer surplus decreases. The overall economy gains because the increase in producer surplus exceeds the decrease in consumer surplus. Topic: Exports Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

5) How do exports affect buyers' consumer surplus? Answer: Consumer surplus decreases. It decreases because exports raise the price of the good being exported, so buyers purchase less of the good and hence their consumer surplus decreases. Topic: Exports Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

6) How do exports affect sellers' producer surplus? Answer: Producer surplus increases. It increases because exports raise the price of the good being exported, so sellers produce more of the good and hence their producer surplus increases. Topic: Exports Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

8.9 Essay: International Trade Restrictions 1) Briefly define a tariff and a quota. Do any of these methods restrict trade without harming domestic consumers? Answer: Governments restrict trade through the use of tariffs and quotas. A tariff is a tax imposed on a good when it is imported into the nation. A quota is a limit on the amount of a good that may be imported. Both of these methods restrict trade and they both harm domestic consumers by raising the price and decreasing the quantity consumed. Topic: Trade restrictions Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Written and oral communication

2) "Tariffs today in the United States are much higher than in the past." Is the previous statement correct or incorrect? Answer: The statement is most decidedly incorrect. U.S. tariffs today are lower compared to what they were in the past. Topic: Eye on the past, the history of the U.S. tariff Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

3) How does a tariff affect the domestic price of the import, the domestic consumption, the domestic production, and the quantity imported? Answer: A tariff raises the price of the good. As a result, domestic consumption decreases as domestic consumers decrease the quantity they demand. And, also as a result, domestic production increases as domestic producers increase the quantity they supply. Because domestic consumption decreases and domestic production increases, the quantity imported decreases. Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Written and oral communication

4) The United States imposes a tariff on foreign limes. How does the tariff affect the U.S. price of a lime and the production of limes in the United States? Answer: The tariff raises the price of limes in the United States. As a result of the higher price, U.S. lime production increases. Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Written and oral communication

5) How does a tariff affect the consumer surplus and the producer surplus from the imported good? Is the overall economy helped or harmed by tariffs? Briefly explain your answers. Answer: A tariff raises the price of the good so that domestic consumption decreases and domestic production increases. As a result, domestic consumer surplus decreases and domestic producer surplus increases. The overall economy is harmed. The decrease in consumer surplus is larger than the increase in producer surplus so a deadweight loss is created. Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

6) Currently, the United States has a quota on the amount of sugar that is allowed to be imported into the United States. What would happen to the price of sugar in the United States if the quota was removed? What would happen to U.S. consumption and U.S. production of sugar? Answer: If the quota is removed, the price of sugar in the United States would fall, U.S. consumption of sugar would increase, and U.S. production of sugar would decrease. Topic: Effects of quotas Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

7) How does a quota affect the domestic price of the import, the domestic consumption, the domestic production, and the quantity imported? Answer: A quota raises the price of the good because it decreases the amount that can be imported. As a result, domestic consumption decreases as domestic consumers decrease the quantity they demand. And, also as a result, domestic production increases as domestic producers increase the quantity they supply. Topic: Effects of quotas Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

8) How does a quota affect the consumer surplus and the producer surplus from the imported good? Is the overall economy helped or harmed by quotas? Briefly explain your answers. Answer: A quota raises the price of the good so that domestic consumption decreases and domestic production increases. As a result, domestic consumer surplus decreases and domestic producer surplus increases. The overall economy is harmed. The decrease in consumer surplus is larger than the increase in producer surplus so a deadweight loss is created. Topic: Effects of quotas Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

9) The United States imports cheese from a variety of countries. The table above gives the domestic supply of, and demand for, cheese in the United States. The world price of cheese is $12 per pound, and trade is unrestricted. a. How many pounds of cheese are consumed in the United States? b. How many pounds of cheese are produced in the United States? c. How many pounds of cheese are imported into the United States? If a $3 per pound tariff is imposed, d. How many pounds of cheese are consumed in the United States? e. How many pounds of cheese are produced in the United States? f. How many pounds of cheese are imported into the United States? g. How much will the U.S. government collect in tariff revenue? h. Who benefits from the tariff? Who loses? Answer: a. 180,000 pounds of cheese are consumed. b. 60,000 pounds of cheese are produced. c. 120,000 pounds of cheese are imported. d. 140,000 pounds of cheese are consumed. e. 80,000 pounds of cheese are produced. f. 60,000 pounds of cheese are imported. g. The government collects $3 per pound × 60,000 pounds = $180,000. h. U.S. producers and the U.S. government gain while U.S. consumers and foreign producers lose. Topic: Effects of tariffs Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

10) The above figure shows the domestic supply of and domestic demand for an imported good. The world price is $15 per unit. a. At the world price of $15 per unit, what is the domestic consumption and domestic production? b. At the world price of $15 per unit, what is the quantity imported? c. If the government imposes a tariff of $5 per unit, what is the domestic consumption and domestic production? d. With the $5 per unit tariff, what is the quantity imported? e. How much revenue does the government collect with a tariff of $5 per unit? Answer: a. Domestic consumption is 8 million units per year and domestic production is 0. b. The quantity imported is 8 million units per year. c. Domestic consumption is 6 million units per year and domestic production is 2 million units per year. d. The quantity imported is 4 million units per year. e. The government collects $5 per unit imported and 4 million units are imported, so the government's revenue from the tariff is $5 × 4 million = $20 million per year. Topic: Effects of tariffs Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

8.10 Essay: The Case Against Protection 1) Three arguments used to promote trade barriers are the national security argument, the infant-industry argument, and the dumping argument. Explain each of these arguments and evaluate whether each one has any flaws. Answer: The national security argument is that countries must protect industries that produce defense equipment and armaments as well as those industries upon which the defense industries rely. The problem with this argument is that all industries contribute to national defense, though some do so more indirectly than others. For instance, the pillow industry can claim that it contributes to national defense because without good pillows, plant workers will be unable to sleep well and hence their efficiency will be lowered. The pillow industry therefore can make a claim for protection-which, incidentally, it did in the 1950s using the argument just described! The infant-industry argument is that it is necessary to protect a new industry to enable it to grow into a mature industry that can compete in world markets. The problem with this argument is that if an industry can eventually compete, then its backers should be willing to fund it until that time. In addition, if the industry has benefits that spill over to other industries, then the more efficient government policy is to subsidize the industry rather than protect it from competition. Finally, the dumping argument asserts that protection is needed to protect domestic industries from foreign dumping practices designed to eliminate competition. (Dumping is selling a good for a price that is less than its cost of production.) The problems with this argument are two-fold. First, it is extremely difficult to determine if a firm is dumping because determining the cost of production is difficult. Second, even if a firm is dumping, its success in establishing a monopoly is in doubt and its success in maintaining its global (!) monopoly is even more doubtful. Hence dumping to obtain a monopoly is likely a very uncommon practice. Topic: Case against protection Skill: Level 1: Definition Section: Checkpoint 8.4 Status: Old AACSB: Written and oral communication

2) What is the national security argument for restricting international trade? What is its flaw? Answer: The national security argument is that the nation must protect and maintain industries that produce defense equipment and armaments as well as those industries upon which the defense industries rely. The problem with this argument is that all industries contribute to national defense, though some do so directly while others do so indirectly. For instance, the sugar industry contributes to national defense because factory workers and armed service men and women drink colas made using sugar, but protecting the sugar industry for reasons of national defense is ludicrous. Topic: National security Skill: Level 1: Definition Section: Checkpoint 8.4 Status: Old AACSB: Written and oral communication

3) What is dumping? Answer: Dumping is the situation in which a firm sells its export goods and services for a lower price than its cost of production. Topic: Dumping Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Reflective thinking

4) Because wage rates are so low in Africa, why don't Microsoft, Cisco and other major corporations close down their American operations and move to Africa? Answer: Wage rates must be weighed against productivity. It is not just wages that influence where production occurs. Wages divided by the productivity of the workers gives the average cost of production. In Africa, workers have low levels of skill, education, and training so their productivity is much less than in the United States. Therefore the cost of production would be far higher in Africa than in America. So even though U.S. wage rates are high, industries stay here because the cost of production is lower because U.S. productivity is so high. Topic: Cheap foreign labor Skill: Level 1: Definition Section: Checkpoint 8.4 Status: Old AACSB: Written and oral communication

5) Explain how governments restrict international trade and who benefits as well as who loses from the restrictions. Answer: Governments use tariffs and nontariff barriers, such as quotas, to restrict trade. Tariffs and quotas both boost the domestic price of the protected good. Consumers in that country lose because of the higher price. The domestic suppliers, however, gain from the higher price. Tariffs are source of revenue for the government that imposes it on imported goods, so the domestic government gains from a tariff. Quotas, on the other hand, do not create revenue for government so the government does not gain from a quota. Topic: Why is trade restricted? Skill: Level 1: Definition Section: Checkpoint 8.4 Status: Old AACSB: Written and oral communication

6) What is "rent seeking"? How does it apply to restricting imports? Answer: Rent seeking is lobbying and other political activity that seeks to capture the gains from trade. When imports are restricted, some people gain from the restrictions. Rent seekers, such as domestic producers of import-competing goods or services, lobby the government to impose import restrictions because restrictions allow the rent seekers to gain revenue and/or profit. Topic: Rent seeking Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Written and oral communication

7) Economics demonstrates that opening up unrestricted free international trade is beneficial to all nations. However, are there any losers from such a policy change? Answer: Yes, there are losers from opening up to free trade. Domestic suppliers of imported goods lose from allowing free trade. Owners of the businesses lose as do workers who had jobs in the 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: Why is trade restricted? Skill: Level 1: Definition Section: Checkpoint 8.4 Status: Old AACSB: Written and oral communication

8) How does the United States attempt to compensate losers from lower trade restrictions? Answer: The U.S. government attempts to compensate workers who lose from lowering U.S. trade restrictions. For instance, the U.S. government set up a fund to support and retrain workers who lost their jobs because of NAFTA. Job losers can also collect unemployment compensation benefits. Topic: Compensating losers Skill: Level 3: Using models Section: Checkpoint 8.4 Status: Old AACSB: Written and oral communication

9) Suppose that elimination of tariffs on agricultural products means that 1,000 farm workers lose jobs that pay an average of $20,000 per year. At the same time, because of the importation of relatively cheaper foreign vegetables, 150 million consumers save $2 per year on their grocery bills. a. What is the total income lost by farm workers because of the free trade? b. What is the total dollar amount saved by all consumers combined? c. Which is greater, the lost income or the consumer savings? Do the benefits of free trade outweigh the costs in this simple example? d. Which group is most likely to become politically involved over the issue of removing the tariffs, the farm workers or the consumers? Why? Answer: a. The total income lost by farm workers is 1,000 × $20,000 = $20,000,000. b. The total saving by all consumers is 150,000,000 × $2 = $300,000,000. c. The consumer savings is much larger than the lost income, so the benefits of free trade outweigh the costs. d. The farm workers are more likely to become involved, because their individual loss is much greater than an individual consumer's gain. Topic: Rent seeking Skill: Level 1: Definition Section: Checkpoint 8.4 Status: Old AACSB: Analytical thinking

Essential Foundations of Economics, 8e (Bade) Chapter 9 Externalities: Pollution, Education, and Healthcare 9.1 Negative Externalities: Pollution 1) Externalities A) can be either benefits or costs. B) always create extra social costs. C) always make society better off. D) cannot be expressed in dollar amounts. E) are always part of private costs or private benefits. Answer: A Topic: Externalities Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

2) A cost that arises from the production or consumption that falls on someone other than the producer or consumer is called A) a negative benefit. B) a public choice impact. C) a positive externality. D) a negative externality. E) a private good. Answer: D Topic: Externalities Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

3) Evidence of external costs in the production of a product is present if A) the price of the product is higher than it should be. B) the production cost increases because of an increase in the minimum wage. C) non-buyers and/or non-producers of the product experience a loss for which they are not compensated. D) buyers refuse to purchase the product. E) producers pay all of the costs of producing the good or service. Answer: C Topic: Externalities Skill: Level 4: Applying models Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

4) An example of someone bearing the burden of a negative production externality would be A) Taylor living downwind from a smelly feedlot where pigs are raised. B) Jess's roommate smokes and she doesn't. C) Lynna's neighbors play loud music late at night. D) All of these are examples of someone bearing the burden of a negative production externality. E) None of these is an example of someone bearing the burden of a negative production externality. Answer: A Topic: Externalities Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

5) An example of someone bearing the burden of a negative consumption externality would be A) Taylor living downwind from a feedlot. B) LaShawn grows beautiful roses in her garden. C) Jess's roommate smokes and she doesn't. D) All of these are examples of someone bearing the burden of a negative consumption externality. E) None of these is an example of someone bearing the burden of a negative consumption externality. Answer: C Topic: Externalities Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

6) To ensure all students are protected from getting the flu this year, your school offers free flu shots. What type of externality exists in this example? A) negative consumption externality B) positive consumption externality C) positive production externality D) negative production externality E) neutral externality. Answer: B Topic: Externalities Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

7) A example of a good with external benefits is A) a pizza. B) a dose of flu vaccine. C) a sewing machine. D) an imported good. E) a pair of running shoes. Answer: B Topic: Externalities Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

8) Which of the following is NOT an example of a good with an external cost? A) electricity generation producing carbon dioxide emissions that contribute toward global warming B) logging that pollutes a nearby river C) Jess smoking near her non-smoking roommate D) Ahmed working at a bank and getting a flu shot each fall E) noise pollution from aircraft Answer: D Topic: Externalities Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

9) Pollution is an example of a ________ externality. A) negative production B) positive production C) negative consumption D) positive consumption E) Coasian Answer: A Topic: Externalities Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

10) When studying pollution and the environment, economists A) have no role to play. B) concentrate on the physical aspects of the environment. C) emphasize costs and benefits. D) attempt to reduce pollution at all costs. E) think pollution is good if it occurs when production takes place. Answer: C Topic: Economics and pollution Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

11) The production of electricity creates pollution. When deciding how much electricity to buy, customers ________ the cost of pollution. When deciding how much electricity to buy, producers ________ the cost of pollution. A) take into account; take into account B) do not take into account; do not take into account C) take into account; do not take into account D) do not take into account; take into account E) None of the above answers is correct. Answer: B Topic: Externalities Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

12) Marginal private cost A) is always zero if there is an external cost. B) equals the marginal social cost only if the marginal external cost is positive. C) is the cost of producing an additional unit of a good or service that is paid by the producer of that good or service. D) the cost of producing an additional unit of a good or service that falls on people other than the producer of that good or service. E) the cost of producing an additional unit of a good or service that is paid by the entire society. Answer: C Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

13) A private cost is a cost of production that is A) borne by the producer of a good. B) measured in marginal terms. C) borne by someone other than the producer of a good. D) measured in total terms. E) the same as an external cost. Answer: A Topic: Private cost Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

14) The cost of producing an additional unit of a good or service that is borne by the producer of that good or service is the marginal A) external cost. B) private cost. C) social cost. D) public cost. E) None of the above answers is correct. Answer: B Topic: Private cost Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

15) The difference between private cost and social cost is that A) social cost only considers the external cost borne by society. B) social cost only considers the cost borne by people other than the producer. C) private cost only considers the cost borne by producers of the good. D) social cost also includes any external benefit whereas private cost excludes all external benefits. E) there is no difference; the terms refer to the same cost. Answer: C Topic: Private cost Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

16) Harry, the owner of a beauty salon, hires a new hair stylist. The wages paid to the new stylist are A) a private cost and not an external cost. B) an external cost and not a private cost. C) both a private cost and an external cost. D) neither a private cost nor an external cost. E) only a private benefit because people want their hair styled. Answer: A Topic: Private cost Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

17) Joanne rents a TV production studio to produce an extra hour of a TV show. The rent is A) a private cost and not an external cost. B) an external cost and not a private cost. C) both a private cost and an external cost. D) neither a private cost nor an external cost. E) a private benefit because viewers will benefit from watching the extra hour of the show. Answer: A Topic: Private cost Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

18) For a product with an external cost, the supply curve A) represents the various quantities people can buy. B) is the same as the marginal private cost curve. C) is the same as the marginal social cost curve. D) is the same as the marginal external cost curve. E) is undefined. Answer: B Topic: Private cost Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

19) For a firm, its labor costs are A) a marginal benefit. B) a private cost. C) an external cost. D) Both answers A and C are correct. E) Both answers A and B are correct. Answer: B Topic: Private cost Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

20) The cost of producing an additional unit of a good or service that falls on people other than the producer is the marginal A) external cost. B) private cost. C) social cost. D) social benefit. E) None of the above answers is correct. Answer: A Topic: External cost Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

21) A marginal external cost of a product is equal to A) what the producer has to pay to hire resources to produce another unit. B) the cost someone other than the producer incurs when another unit is produced. C) the cost the producer incurs to produce another unit. D) what the consumer must pay when he or she buys the good or service. E) None of these answers describes a marginal external cost. Answer: B Topic: External cost Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

22) A loud band plays a concert late at night in a neighborhood park. The noise produced by the band that keeps the neighbors not attending the concert awake is A) only a private cost. B) only an external cost. C) both a private cost and an external cost. D) neither a private cost nor an external cost. E) a private benefit because the neighbors get to hear the band. Answer: B Topic: External cost Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

23) Which of the following is an example of an external cost? A) taxes B) the price of a car wash C) pollution D) an electricity bill E) paying a wage that exceeds the minimum wage Answer: C Topic: External cost Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

24) A firm dumps dioxin in a river, thereby severely polluting the river. The cost of the water pollution is i. zero for the firm. ii. an external cost. iii. part of the marginal social cost A) i only B) ii only C) iii only D) ii and iii E) i, ii, and iii Answer: E Topic: External cost Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

25) When logging in the Pacific Northwest destroys forests that hikers would have used for eco-tourism, the destruction of the trails is an example of A) an external cost. B) a private cost. C) a government cost. D) an external benefit. E) None of the above answers is correct. Answer: A Topic: External cost Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

26) Which of the following is an example of an external cost? A) a grove of trees planted in a park in Seattle B) a library built in Philadelphia C) a new, faster computer chip D) an oil spill off the coast of South America E) a student graduating from college Answer: D Topic: External cost Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

27) Jacob pays $5,000 to paint his house because pollution from a nearby factory damaged the paint. To the factory, the $5,000 cost is A) a private cost and not an external cost. B) an external cost and not a private cost. C) both a private cost and an external cost. D) neither a private cost nor an external cost. E) a private benefit because viewers will benefit from watching the extra hour of the show. Answer: A Topic: External cost Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

28) A landfill site produces an obnoxious odor. Homes downwind of the site rent for $1,000 per month while homes upwind of the site rent for $1,500 per month. If the odor is the only detectable difference between two neighborhoods, the difference in the rent is the ________ of the odor. A) social cost B) external cost C) private cost D) marginal cost-benefit E) private benefit Answer: B Topic: External cost Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

29) Suppose two neighborhoods (A and B) have identical housing, but neighborhood A has a strictly enforced deed restriction that prohibits homeowners from parking junk cars in the front yard. If houses in neighborhood A sell for $105,000 and houses in neighborhood B sell for $100,000, how would an economist value the external cost of visible junk cars, per house? A) $205,000 B) $105,000 C) $100,000 D) $5,000 E) None of the above answers is correct. Answer: D Topic: External cost Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

30) Suppose two neighborhoods with 10 homes each in Buffalo, New York are identical except one of them is near a toxic waste dump. If homes near the dump sell for an average of $40,000 and the other homes sell for $90,000, the external cost of the dump is A) $400,000. B) $1,300,000. C) $900,000. D) $500,000. E) $90,000. Answer: D Topic: External cost Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

31) The marginal cost incurred by the entire society to produce a good or service is the A) marginal external cost. B) marginal private cost. C) marginal social cost. D) marginal social benefit. E) marginal private benefit. Answer: C Topic: Marginal social cost Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

32) Marginal social cost is equal to A) the amount people who buy a product pay for another unit. B) whatever producers have to pay to produce output. C) the sum of marginal private cost and the marginal external cost. D) the average of marginal private cost and the marginal external cost. E) None of the above answers is correct. Answer: C Topic: Marginal social cost Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

33) Marginal social cost is the A) price a consumer pays for one more unit of a good. B) cost a producer incurs producing one more unit of a good. C) cost of producing one more unit of a good that falls on someone other than the producer. D) sum of the cost a producer incurs from producing one more unit of a good plus the cost of producing one more unit of a good that falls on someone other than the producer. E) same as marginal cost only if there is an external cost when the good is produced. Answer: D Topic: Marginal social cost Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

34) Which of the following equations is correct? A) MC = MSC + marginal external cost B) MSC = MC ÷ marginal external cost C) MSC = MC + marginal external cost D) MSC = MC × marginal external cost E) MC = marginal external cost - MSC Answer: C Topic: Marginal social cost Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

35) The marginal social cost of producing a good or service is the A) cost of producing an additional unit borne by the producer. B) cost of producing an additional unit borne by people other than the producer. C) sum of the marginal private cost and the marginal external cost. D) same as marginal external cost. E) sum of the marginal private cost and the marginal external cost minus the marginal social benefit. Answer: C Topic: Marginal social cost Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

36) Which of the following is true? A) MSC = MC + Marginal external cost B) MC = Marginal external cost - MSC C) MC = Marginal external benefit + MSC D) MSC = Marginal external cost + marginal external benefit E) MSC = Marginal external cost - marginal external benefit Answer: A Topic: Marginal social cost Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

37) If there is no external cost, then marginal social cost A) increases as output increases. B) decreases as output increases. C) is constant regardless of the level of output. D) is unrelated to output levels. E) first increases and then decreases as output increases. Answer: A Topic: Marginal social cost Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

38) If a product has zero external costs, then A) marginal social cost equals marginal private cost. B) marginal social cost is greater than marginal private cost. C) marginal social cost is less than marginal private cost. D) marginal social cost equals zero. E) We need more information to determine the relationship between marginal private cost and marginal social cost. Answer: A Topic: Marginal social cost Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

39) If the marginal external cost of building a children's playground equals zero, then the i. marginal private cost equals the marginal social cost. ii. marginal social cost equals zero. iii. marginal private cost equals zero. A) i only B) ii only C) iii only D) ii and iii E) i and ii Answer: A Topic: Marginal social cost Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

40) If the marginal private cost of running a car is $0.30 a mile and the marginal external cost is $0.10, what is the marginal social cost? A) $0.20 B) $3.00 C) $0.03 D) $0.40 E) None of the above answers is correct. Answer: D Topic: Marginal external cost Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

41) If the marginal social cost of generating a kilowatt of electricity is $0.10 and the marginal private cost is $0.08, what is the marginal external cost? A) $0.18 B) $0.10 C) $0.08 D) $0.02 E) $0.80 Answer: D Topic: Marginal external cost Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

42) If the marginal social cost of producing a ton of cement is $4,000 and the marginal private cost is $3,500, then the A) marginal benefit of a ton of cement will equal $4,000. B) total cost of producing a ton of cement is $7,500. C) marginal external cost of producing a ton of cement is $500. D) marginal external cost of producing a ton of cement is $7,500. E) marginal external cost of producing a ton of cement is $4,000. Answer: C Topic: Marginal social cost Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

43) If a good has an external cost, then the marginal private cost curve A) lies below then the marginal social cost curve. B) lies above the marginal social cost curve. C) lies below the horizontal axis. D) is the same as the marginal external cost curve. E) is undefined because the firms' costs are not equal to the social costs. Answer: A Topic: Marginal social cost Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

44) If the production of a good causes an external cost, then the efficient quantity is A) equal to the quantity at which the marginal benefit equals marginal cost. B) less than the quantity at which the marginal benefit equals the marginal cost. C) more than the quantity at which the marginal benefit equals the marginal cost. D) the quantity at which the marginal private benefit is greater than the marginal social benefit. E) None of the above answers is correct. Answer: B Topic: Efficiency Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

45) If a good has an external cost, the A) unregulated competitive market outcome is efficient. B) marginal private cost reflects the external cost. C) unregulated competitive market outcome is inefficient. D) marginal social benefit is equal to the marginal social cost when the market is in equilibrium. E) external benefit must equal the external cost. Answer: C Topic: Inefficient equilibrium Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

46) The basic reason that a competitive unregulated market produces an inefficient amount of a good with an external cost is because A) producers cannot measure marginal social cost. B) producers do not pay the external cost. C) the general public does not care about external costs. D) external costs are not a political issue. E) the external cost is paid by consumers rather than producers. Answer: B Topic: Inefficient equilibrium Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

47) When production of a good results in an external cost, the unregulated competitive market equilibrium quantity is A) the efficient level of output. B) greater than the efficient level of output. C) not zero but is less than the efficient level of output. D) unattainable. E) zero. Answer: B Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

48) If producing a good or a service creates pollution, then A) an unregulated competitive market produces an efficient output. B) the industry's supply curve includes the extra cost of pollution. C) at the unregulated, competitive market equilibrium quantity, marginal social cost is greater than the equilibrium price. D) at the unregulated, competitive market equilibrium quantity, marginal social benefit and marginal social cost are equal. E) at the unregulated, competitive market equilibrium quantity, marginal social benefit is less than the equilibrium price. Answer: C Topic: Inefficient equilibrium Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

49) An external cost in the production of a good creates a difference between the i. costs borne by the producer and the costs borne by society in general. ii. efficient quantity of output and the equilibrium quantity of output. iii. marginal social cost and the marginal private cost. A) i only B) iii only C) ii and iii D) i, ii, and iii E) i and iii Answer: D Topic: Inefficient equilibrium Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

50) The deadweight loss associated with producing a product that has an external cost occurs because A) too much output is produced. B) too little output is produced. C) the price that firms charge for the good is too high. D) not enough resources are allocated to producing the good. E) the marginal social cost does not equal zero. Answer: A Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

51) When production of a good results in an external cost, the unregulated competitive market equilibrium is inefficient because A) MSC = MC. B) MSC = MB. C) MSC > MB. D) MSC < MB. E) MSC is undefined. Answer: C Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

52) For a good whose production creates an external cost, the efficient quantity of output is A) where the market demand curve and the market supply curve intersect. B) where the marginal social cost curve and marginal benefit curve intersect. C) as low as possible. D) zero. E) the amount of production so that the marginal social benefit exceeds the marginal social cost by as much as possible. Answer: B Topic: Efficiency Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

53) The figure above illustrates the marginal private cost and the marginal social cost to the city of Seattle for each rock concert that is offered. If 5 concerts are put on, then the A) marginal external cost will be greater than the marginal social cost. B) marginal external cost will be greater than the marginal private cost. C) marginal external cost will equal the marginal private cost. D) marginal social cost will equal the marginal external cost. E) marginal external cost will equal zero. Answer: B Topic: External cost Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

54) The figure above illustrates the marginal private cost and the marginal social cost to the city of Seattle for each rock concert that is offered. Suppose the marginal private cost of the 5th concert is $10,000. Then, for the 5th concert, the A) marginal external cost equals $30,000. B) marginal social cost equals $30,000. C) marginal external cost equals the marginal private cost. D) marginal external cost equals $40,000. E) marginal external cost equals $10,000. Answer: A Topic: External cost Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

55) The figure above illustrates the marginal private cost and the marginal social cost to the city of Seattle for each rock concert that is offered. At 10 concerts, the A) marginal private cost equals the marginal external cost. B) marginal social cost equals $60,000. C) marginal private cost is more than $40,000. D) marginal external cost equals $60,000. E) marginal external cost equals $80,000. Answer: D Topic: External cost Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

56) The figure above represents the relationship between output and cost in an industry with an external cost. Which line represents the marginal private cost (MC) curve? A) Curve 1 B) Curve 2 C) the dotted line BC D) the y-axis E) the dotted line AB Answer: B Topic: Private cost Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

57) The figure above represents the relationship between output and cost in an industry with an external cost. When output is at D, what distance represents the marginal external cost? A) AB B) BC C) CD D) BD E) None of the above answers is correct. Answer: B Topic: Marginal external cost Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

58) The figure above shows the marginal social cost of generating electricity and the marginal private cost. For 4 billion kilowatts, what is the marginal external cost? A) $0.12 B) $0.08 C) $0.04 D) $0.00 E) $0.20 Answer: C Topic: Marginal external cost Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

59) The figure above shows the marginal social cost curve of generating electricity and the marginal private cost curve. The difference between the marginal cost curve and the marginal social cost curve equals A) marginal private cost. B) private cost. C) external cost. D) marginal external cost. E) Coasian cost. Answer: D Topic: Marginal external cost Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

60) The figure above shows the marginal social cost curve of generating electricity and the marginal private cost curve. The marginal cost borne by producers when 100 billion kilowatt hours are produced is A) 5¢ per kilowatt. B) 10¢ per kilowatt. C) 15¢ per kilowatt. D) 20¢ per kilowatt. E) 0¢ per kilowatt. Answer: A Topic: Private cost Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

61) The figure above shows the marginal social cost curve of generating electricity and the marginal private cost curve. The marginal cost borne by producers when 200 billion kilowatt hours are produced is A) 0¢ per kilowatt. B) 10¢ per kilowatt. C) 20¢ per kilowatt. D) 15¢ per kilowatt. E) 5¢ per kilowatt. Answer: B Topic: Private cost Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

62) The figure above shows the marginal social cost curve of generating electricity and the marginal private cost curve. The marginal external cost when 100 billion kilowatt hours are produced is A) 0¢ per kilowatt. B) 5¢ per kilowatt. C) 10¢ per kilowatt. D) 15¢ per kilowatt. E) 20¢ per kilowatt. Answer: B Topic: Marginal external cost Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

63) The figure above shows the marginal social cost curve of generating electricity and the marginal private cost curve. The marginal external cost when 200 billion kilowatt hours are produced is A) 0¢ per kilowatt. B) 10¢ per kilowatt. C) 20¢ per kilowatt. D) 15¢ per kilowatt. E) 5¢ per kilowatt. Answer: B Topic: Marginal external cost Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

64) The figure above shows the marginal social cost curve of generating electricity and the marginal private cost curve. The marginal cost paid by the producers and everyone else in society when 100 billion kilowatt hours are produced is A) 0¢ per kilowatt. B) 5¢ per kilowatt. C) 10¢ per kilowatt. D) 20¢ per kilowatt. E) 15¢ per kilowatt. Answer: C Topic: Marginal social cost Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

65) The figure above shows the marginal social cost curve of generating electricity and the marginal private cost curve. The marginal cost paid by the producers and everyone else in society when 200 billion kilowatt hours are produced is A) 0¢ per kilowatt. B) 10¢ per kilowatt. C) 20¢ per kilowatt. D) 15¢ per kilowatt. E) 5¢ per kilowatt. Answer: C Topic: Marginal social cost Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

Quantity of steel (millions of tons per week) 5 10 15 20 25

Marginal benefit (dollars per ton) 40 35 30 25 20

Marginal social cost (dollars per ton) 20 25 30 35 40

66) The table above shows information about the costs and benefits of a steel smelter that pollutes the air of a city. The market is efficient when the quantity of steel produced is ________ tons per week. A) 5 B) 10 C) 15 D) 20 E) 25 Answer: C Topic: Efficiency Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

67) The table above shows information about the costs and benefits of a steel smelter that pollutes the air of a city. If the marginal external cost is $10 per ton at every quantity of steel produced, the equilibrium quantity when the steel industry is unregulated is ________ tons per week. A) 5 B) 15 C) 20 D) 25 E) 10 Answer: C Topic: An unregulated market Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

68) Homeowners living under the flight path of a large airport complain their home values suffer due to the roar of airplane traffic overhead. They claim the value of their homes is $2,000 less compared to similar homes not in the flight path. The ________ of the noise pollution equals the ________. A) total external cost; number of affected homes multiplied by $2,000 per home B) marginal external cost; number of affected homes multiplied by $2,000 per home C) total external cost; $2,000 D) marginal external cost; $2,000 divided by the number of homes E) total cost; number of homes multiplied by $2,000 Answer: A Topic: Total external cost Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: New AACSB: Application of knowledge

69) The figure above shows the costs and benefits associated with wood pulp production. As the amount of wood pulp produced increases, the cost paid by the producer for each additional ton ________ and the external cost of pollution of each additional ton ________. A) increases; decreases B) increases; increases C) stays the same; increases D) increases; stays the same E) decreases; increases Answer: B Topic: Externalities Skill: Level 4: Applying models Section: Checkpoint 9.1 Status: New AACSB: Application of knowledge

70) The figure above shows the costs and benefits associated with wood pulp production. The fact that the marginal external cost increases is seen in ________ as production increases. A) the upward sloping MC curve B) the upward sloping MSC curve C) the downward sloping MB curve D) the increasingly large difference between the MSC and MC curves E) the fact that MB = MC Answer: D Topic: Externalities Skill: Level 4: Applying models Section: Checkpoint 9.1 Status: New AACSB: Application of knowledge

71) The graph shows the benefits and costs associated with wood pulp production. When the firm produces 5 tons of wood pulp, marginal private cost equals ________ per ton. A) $700 B) $600 C) $900 D) $1,000 E) $200 Answer: A Topic: Externalities Skill: Level 3: Using models Section: Checkpoint 9.1 Status: New AACSB: Application of knowledge

72) The figure above shows the costs and benefits associated with wood pulp production. Without regulation the market will produce ________ tons of wood pulp at a price of ________ per ton. A) 5; $1,100 B) 3; $900. C) 5 ; $700 D) 3; $600 E) 4; $900 Answer: C Topic: Externalities Skill: Level 3: Using models Section: Checkpoint 9.1 Status: New AACSB: Application of knowledge

73) The figure above shows the costs and benefits associated with the production of wood pulp. With regulation that achieves an efficient outcome, the market produces ________ tons of wood pulp at a price of ________ per ton. A) 3; $800 B) 3; $700 C) 5; $700 D) 5; $1,100 E) 4; $800 Answer: A Topic: Externalities Skill: Level 3: Using models Section: Checkpoint 9.1 Status: New AACSB: Application of knowledge

74) The figure above shows the costs and benefits associated with wood pulp production. Government regulation can produce the efficient outcome by ensuring that production is such that ________. A) MC = MB B) MB > MSC C) MB > marginal external cost D) MSB > MSC E) MSC = MB Answer: E Topic: Externalities Skill: Level 3: Using models Section: Checkpoint 9.1 Status: New AACSB: Application of knowledge

75) The figure shows the costs and benefits associated with wood pulp production. A tax of ________ can be imposed to achieve the efficient level of production of ________ tons. A) $200; 3 B) $200; 2 C) $300; 5 D) $1,000; 5 E) $900; 3 Answer: A Topic: Externalities Skill: Level 3: Using models Section: Checkpoint 9.1 Status: New AACSB: Application of knowledge

76) The figure above shows the costs and benefits associated with producing paper. What is the marginal external cost when output is 6 tons? A) $1,600 B) $1,200 C) $1,000 D) $600 E) $400 Answer: D Topic: Marginal external cost Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

77) The figure above shows the costs and benefits associated with producing paper. What is the unregulated competitive market level of output? A) 0 B) 4 tons C) 6 tons D) more than 6 tons E) None of the above answers is correct. Answer: C Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

78) The figure above shows the costs and benefits associated with producing paper. What is the efficient level of output? A) 0 B) 4 tons C) 6 tons D) more than 6 tons E) None of the above answers is correct. Answer: B Topic: Efficiency Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

79) The figure above illustrates the marginal private cost and the marginal social cost to the city of Seattle for each rock concert that is offered. It also illustrates the marginal benefit. There is no external benefit. If the city of Seattle puts on 5 concerts per year, then the marginal benefit will A) exceed the marginal social cost. B) equal the marginal private cost. C) be less than the marginal social cost. D) will equal the marginal social cost. E) None of the above answers is correct. Answer: A Topic: Marginal benefit, marginal social cost Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

80) The figure above illustrates the marginal private cost and the marginal social cost to the city of Seattle for each rock concert that is offered. It also illustrates the marginal private benefit. There is no external benefit. The efficient number of concerts in Seattle is A) 0. B) 5. C) 10. D) 20. E) 15. Answer: C Topic: Efficiency Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

81) Legally established titles to ownership, use, and disposal of factors of production and goods and services, are called ________ rights. A) government B) pollution C) property D) inefficient E) private Answer: C Topic: Property rights Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

82) Legally established titles to the ownership, use, and disposal of factors of production are referred to as A) property rights. B) Coase rights. C) pollution rights. D) emission rights. E) price-setting rights. Answer: A Topic: Property rights Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

83) One reason why property rights help achieve an efficient level of pollution is because property rights A) force the marginal private cost to equal the marginal social cost. B) force the marginal social cost to zero. C) force the marginal external cost to a lower level than marginal private cost. D) eliminate marginal private costs. E) change the marginal external cost so that they are equal to the marginal social benefit. Answer: A Topic: Property rights Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

84) If a producer must pay the cost of his or her pollution because property rights have been assigned, then A) pollution will be completely eliminated. B) the supply curve will shift rightward as the new costs are added. C) the supply curve will shift leftward as the new costs are added. D) consumers will now consume more of the good because the external costs are reduced. E) there is no longer any marginal benefit from the good or service being produced. Answer: C Topic: Property rights Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

85) The Coase theorem states that A) the level of pollution should be equal to zero to maximize social net benefit. B) profit making producers pollute because they are forced to. C) the efficient level of output is where marginal external cost equals marginal external benefit. D) if property rights exist and transactions costs are low, private transactions are efficient. E) the best way to limit pollution is by taxing producers who pollute. Answer: D Topic: Coase theorem Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

86) The proposition that if property rights exist and are enforced, then private transactions are efficient is referred to as the A) Coase theorem. B) property rights theorem. C) pollution rights theorem. D) emission rights theorem. E) private-market efficiency theorem. Answer: A Topic: Coase theorem Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

87) The Coase theorem deals with the problem of pollution by A) giving the government regulatory power over polluters. B) making all polluters stop polluting. C) establishing and enforcing private property rights. D) having the government take over ownership of all polluting processes. E) allowing the government to set the proper emission charge. Answer: C Topic: Coase theorem Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

88) If transactions costs are low, then assigning property rights in a market with external costs i. increases the deadweight loss. ii. means private transactions are efficient. iii. means that only consumers must pay the external costs. A) i only B) ii only C) ii and iii D) i and iii E) i and ii Answer: B Topic: Coase theorem Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

89) Transactions costs are the A) costs of using the Coase theorem. B) opportunity costs of conducting a transaction. C) external marginal costs of the externality. D) reason why taxes cannot affect the inefficiency resulting from an external cost. E) external costs when a firm pollutes. Answer: B Topic: Coase theorem Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

90) Which of the following is the best example of a transactions cost? A) the value of the time spent negotiating a contract B) the price of a new set of tires C) the cost associated with producing a golf club D) the price of labor and materials used to produce a house E) the price of food Answer: A Topic: Coase theorem Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Revised AACSB: Reflective thinking

91) Methods the government can use to cope with the external cost from pollution are A) pollution taxes, subsidies, and outright bans. B) pollution taxes, regulations, and subsidies. C) marketable permits, pollution subsidies, and pollution taxes. D) pollution taxes and cap-and-trade pollution limits. E) vouchers, pollution subsidies, and pollution taxes. Answer: D Topic: Government actions in the face of external costs Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Revised AACSB: Reflective thinking

92) Which of the following is a common method used by government to cope with the situation in which production of a good creates an external cost? A) removing property rights B) subsidizing production C) cap-and-trade D) lottery E) vouchers Answer: C Topic: Government actions in the face of external costs Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Revised AACSB: Reflective thinking

93) Producing leather creates external costs in the form of water pollution. The figure above illustrates the market for leather. In the absence of any government regulation, how many tons of leather will be produced? A) 0 tons B) 200 tons C) 300 tons D) more than 300 tons E) None of the above answers is correct. Answer: D Topic: Government actions in the face of external costs Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

94) Producing leather creates external costs in the form of water pollution. The figure above illustrates the market for leather. If the government sets a pollution limit that achieves efficiency, how many tons of leather are produced? A) 0 tons B) 200 tons C) 300 tons D) more than 300 tons E) more than 0 tons and less than 200 tons Answer: C Topic: Pollution limits Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

95) Which of the following is true regarding pollution charges? i. They force a polluter to pay a price for its pollution. ii. They are based on the marginal external cost of pollution. iii. The fee that produces the efficient amount of pollution is easily determined. A) i only B) i and ii C) ii and iii D) i, ii, and iii E) i and iii Answer: B Topic: Pollution charges Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

96) When using pollution charges to improve efficiency in a market with an external cost, regulators attempt to set the pollution charge equal to the A) marginal social cost of production. B) marginal external cost of production. C) marginal private cost of production. D) marginal private benefit of consumption. E) marginal external benefit minus the marginal external cost. Answer: B Topic: Pollution charges Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

97) Suppose a firm pollutes a river when it produces a product. To achieve the efficient amount of output, a government could impose a ________ that equals the ________ of the pollution. A) pollution charge; marginal social cost B) pollution charge; marginal external cost C) pollution tax; marginal social cost D) pollution tax; marginal external cost E) pollution subsidy; marginal social cost Answer: D Topic: Taxes Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

98) In order for pollution taxes to be effective in eliminating the deadweight loss resulting from pollution, the pollution tax must be set equal to the A) marginal private cost. B) marginal external cost. C) marginal social cost. D) marginal benefit of polluting. E) price of the good. Answer: B Topic: Taxes Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

99) To eliminate the inefficiency resulting from pollution that creates an external cost, the government can impose a pollution tax on producers that is equal to the A) MSB. B) MC. C) marginal external cost. D) MSC. E) price. Answer: C Topic: Taxes Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

100) If the government taxes producers that create pollution, the government's policy A) allows the producers to pollute more by increasing their costs. B) results in less production because the producers' costs have risen. C) eliminates pollution entirely by shifting the supply curve leftward. D) allows the firms to pass along higher costs but doesn't cut pollution. E) forbids the firms from passing along higher costs. Answer: B Topic: Taxes Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

101) A tax on a polluting industry A) is not desirable because it reduces efficiency. B) leads to less output in this industry. C) causes more resources to be used in the polluting industry. D) shifts the marginal social benefit curve leftward. E) shifts the marginal social benefit curve rightward. Answer: B Topic: Taxes Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

102) If the government taxes an industry that creates pollution, the tax i. decreases the pollution. ii. increases the price of the product produced by the firms. iii. decreases the quantity of the good produced. A) i only. B) ii only. C) ii and iii. D) i and iii. E) i, ii, and iii. Answer: E Topic: Taxes Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

103) If a pollution tax in a market with an external cost changes the market so that it produces the efficient level of output, which of the following occurs? i. The supply curve shifts leftward. ii. The price increases. iii. The quantity produced decreases. A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: E Topic: Taxes Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

104) When government levies pollution taxes on sellers to eliminate the inefficiency from the cost of pollution, the result is A) a lower price. B) a smaller quantity produced. C) a smaller cost of production. D) a rightward shift of the supply curve. E) leftward shifts of the supply and demand curves. Answer: B Topic: Taxes Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

105) The figure above illustrates the gasoline market. There is no external benefit from gasoline. If this market is left unregulated and no pollution tax is imposed, the equilibrium quantity of gasoline is A) 0 gallons. B) 5 million gallons. C) 10 million gallons. D) 20 million gallons. E) 15 million gallons. Answer: D Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

106) The figure above illustrates the gasoline market. There is no external benefit from gasoline. If a pollution tax equal to the marginal external cost is imposed on gasoline, then the quantity of gasoline produced and consumed equals A) 0 gallons. B) 5 million gallons. C) 10 million gallons. D) 20 million gallons. E) None of the above answers is correct. Answer: C Topic: Taxes Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

107) The figure above illustrates the gasoline market. There is no external benefit from gasoline. If a tax on gasoline is imposed as shown in the figure, then the total tax revenue earned by the government equals A) $24 million. B) $16 million. C) $8 million. D) more than $24 million. E) less than $8 million. Answer: C Topic: Taxes Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

108) The figure above shows the market for the chemical hydrogen sulfide, the production of which creates an external cost. If the government assesses the marginal external cost correctly, what is the amount of the pollution tax that eliminates the inefficiency? A) $2 per pound B) $3 per pound C) $4 per pound D) $1 per pound. E) None of the above answers is correct. Answer: B Topic: Taxes Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

109) The figure above shows the market for the chemical hydrogen sulfide, the production of which creates an external cost. The government imposes the pollution tax shown in the above figure. What quantity is produced after the pollution tax is imposed? A) zero pounds B) 80 million pounds C) 160 million pounds D) more than 160 million pounds E) more than 80 million pounds and less than 160 million pounds Answer: B Topic: Efficiency Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

110) The figure above shows the market for the chemical hydrogen sulfide, the production of which creates an external cost. The government imposes the pollution tax shown in the figure. How much tax revenue does the government collect? A) $640 million B) $320 million C) $240 million D) more than $640 million E) zero, because the government has taxed the firms out of business Answer: C Topic: Taxes Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

111) The figure above shows a tax imposed on a good with an external cost. The area of the rectangle abcd equals A) the MSB. B) the total tax revenue collected by the government. C) the amount of pollution tax per ton. D) the MC. E) the deadweight loss. Answer: B Topic: Taxes Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

112) The figure above shows the marginal social cost curve of generating electricity, the marginal private cost curve, and the demand curve. The marginal external cost of producing 200 billion kilowatt hours per day is ________ per kilowatt. A) 0¢ B) 10¢ C) 20¢ D) 15¢ E) 5¢ Answer: B Topic: Marginal external cost Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

113) The figure above shows the marginal social cost curve of generating electricity, the marginal private cost curve, and the demand curve. If the market is competitive and unregulated, the equilibrium price is ________ per kilowatt hour and the equilibrium quantity is ________ billion kilowatt hours per day. A) 10¢; 200 B) 15¢; 150 C) 20¢; 200 D) 20¢; 100 E) 7.5¢; 150 Answer: A Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

114) The figure above shows the marginal social cost curve of generating electricity, the marginal private cost curve, and the demand curve. If the market is competitive and unregulated, the equilibrium quantity is ________ billion kilowatt hours per day and the efficient quantity is ________ billion kilowatt hours per day. A) 150; 200 B) 200; 150 C) 0; 150 D) 250; 0 E) 150; 150 Answer: B Topic: Efficient equilibrium Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

115) The figure above shows the marginal social cost curve of generating electricity, the marginal private cost curve, and the demand curve. If the Coase theorem can be used in this market, output equals ________ kilowatt hours per day. A) 0 B) 150 billion C) 200 billion D) 100 billion E) more than 200 billion Answer: B Topic: Coase theorem Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

116) The figure above shows the marginal social cost curve of generating electricity, the marginal private cost curve, and the demand curve. If the government imposes a pollution tax to achieve the efficient level of production, the tax equals ________ per kilowatt hour. A) 0¢ B) 7.5¢ C) 10¢ D) 15¢ E) 2.5¢ Answer: B Topic: Taxes Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

117) What is the biggest problem of using government actions such as taxes and pollution charges to control external costs? A) insufficient legal power to enforce the controls B) obtaining enough data to determine how much the tax or pollution charge will be C) In some situations, there is no known way to control the external costs. D) political lobbying and voter disagreement E) The Coase theorem points out that taxes and pollution charges work only in the short run and not in the long run. Answer: B Topic: Pollution charges Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

118) A problem with pollution charges or taxes as a solution to pollution is that A) people don't want the government to regulate industry. B) the necessary information about the polluting industry is costly and usually unavailable. C) taxes are already too high. D) pollution would still continue. E) the producers do not want the property right to their pollution. Answer: B Topic: Pollution charges Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

119) Cap-and-trade refers to A) capping emissions and issuing tradeable emissions permits. B) capping revenue from selling emissions permits. C) countries trading fishing rights in international waters. D) capping taxes on firms that engage in international trade. E) capping the benefits gained from pollution controls. Answer: A Topic: Marketable permits Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

120) Using a cap-and-trade policy and issuing marketable permits to firms that produce a product with external costs will give the firms the incentive to A) declare bankruptcy. B) buy and sell the permits amongst themselves. C) escape the problem completely. D) quit producing the output. E) increase the external cost because they no longer need to deal with the externality. Answer: B Topic: Marketable permits Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

121) Firm A and Firm B emit 300 tons of pollution each and each have marketable permits that allow each to emit 100 tons of pollution. If it costs $5,000 for Firm A to eliminate 100 tons of pollution and it costs Firm B $6,000 to eliminate 100 tons of pollution, then A) Firm B sells its permits to Firm A for a price above $6,000. B) Firm A sells its permits to Firm B for a price below $6,000. C) Firm A sells its permits to Firm B for a price above $6,000. D) Firm B sells its permits to Firm A for a price below $6,000. E) neither Firm A nor Firm B sells permits because neither has extra permits. Answer: B Topic: Marketable permits Skill: Level 4: Applying models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

122) Cost effective technologies to reduce pollution are most likely to result from A) marketable pollution permits. B) pollution charges. C) taxes. D) pollution limits. E) quotas. Answer: A Topic: Marketable permits Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

123) Which of the following best describes an externality? A) something that is external to the economy B) a sales tax on a good in addition to the market price C) an effect of a transaction felt by someone other than the buyer or seller D) anything produced in other countries E) a change from what is normal Answer: C Topic: Externalities Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

124) The cost of producing an additional unit of a good or service that is borne by the producer of that good or service A) always equals the benefit the consumer derives from that good or service. B) equals the cost borne by people other than the producer. C) is the marginal private cost. D) is the external cost. E) is the marginal social cost. Answer: C Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

125) The cost of producing an additional unit of a good or service that falls on people other than the producer is A) the marginal cost. B) represented by the demand curve. C) represented by the supply curve. D) the marginal external cost. E) the marginal social cost. Answer: D Topic: External cost Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

126) Which of the following is an example of an activity that creates an external cost? i. a smoker emitting second-hand smoke ii. sulfur emitting from a smoke stack iii. throwing garbage on the roadside A) i only B) i and ii C) iii only D) ii and iii E) i, ii, and iii Answer: E Topic: External cost Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

127) The marginal cost of production that is borne by the entire society is called the marginal A) private cost. B) social cost. C) external cost. D) public cost. E) user cost. Answer: B Topic: Marginal social cost Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

128) If the marginal private cost of producing one kilowatt of power in California is ten cents and the marginal social cost of each kilowatt is fourteen cents, then the marginal external cost equals ________ per kilowatt. A) ten cents B) nineteen cents C) four cents D) zero cents E) fourteen cents Answer: C Topic: External cost Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

129) When the production of a good has a marginal external cost, which of the following occurs in an unregulated market? i. Overproduction relative to the efficient level will occur. ii. The market price is less than the marginal social cost at the equilibrium quantity. iii. A deadweight loss occurs. A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: E Topic: Inefficient equilibrium Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

130) The Coase theorem is the proposition that if property rights exist and are enforced, private transactions are A) inefficient. B) efficient. C) inequitable. D) illegal. E) unnecessary. Answer: B Topic: Coase theorem Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

131) A marketable permit A) allows firms to pollute all they want without any cost. B) allows firms to buy and sell the right to pollute at government controlled prices. C) eliminates pollution by setting the price of pollution permits above the marginal cost of polluting. D) allows firms to buy and sell the right to pollute. E) is the Coase theorem solution to pollution. Answer: D Topic: Marketable permits Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

132) If a polluting producer is forced to pay a pollution charge, what is the effect on the supply and demand curves for the product? A) The quantity supplied along the firm's supply curve increases. B) The firm's demand curve shifts leftward. C) The firm's supply curve shifts rightward. D) The firm's supply curve shifts leftward. E) Both the supply curve and the demand curve shift leftward. Answer: D Topic: Government actions in the face of external costs Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

133) Which of the following best describes an externality? A) something that is external to the economy B) a sales tax on a good in addition to the market price C) an effect of a transaction felt by someone other than the buyer or seller D) anything produced in other countries E) a change from what is normal Answer: C Topic: Externalities Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

134) The cost of producing an additional unit of a good or service that is borne by the producer of that good or service A) always equals the benefit the consumer derives from that good or service. B) equals the cost borne by people other than the producer. C) is the marginal private cost. D) is the external cost. E) is the marginal social cost. Answer: C Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

135) The cost of producing an additional unit of a good or service that falls on people other than the producer is A) the marginal cost. B) represented by the demand curve. C) represented by the supply curve. D) the marginal external cost. E) the marginal social cost. Answer: D Topic: External cost Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

136) Which of the following is an example of an activity that creates an external cost? i. a smoker emitting second-hand smoke ii. sulfur emitting from a smoke stack iii. throwing garbage on the roadside A) i only B) i and ii C) iii only D) ii and iii E) i, ii, and iii Answer: E Topic: External cost Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

137) The marginal cost of production that is borne by the entire society is called the marginal A) private cost. B) social cost. C) external cost. D) public cost. E) user cost. Answer: B Topic: Marginal social cost Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

138) If the marginal private cost of producing one kilowatt of power in California is ten cents and the marginal social cost of each kilowatt is fourteen cents, then the marginal external cost equals ________ per kilowatt. A) ten cents B) nineteen cents C) four cents D) zero cents E) fourteen cents Answer: C Topic: External cost Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

139) When the production of a good has a marginal external cost, which of the following occurs in an unregulated market? i. Overproduction relative to the efficient level will occur. ii. The market price is less than the marginal social cost at the equilibrium quantity. iii. A deadweight loss occurs. A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: E Topic: Inefficient equilibrium Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

140) The Coase theorem is the proposition that if property rights exist and are enforced, private transactions are A) inefficient. B) efficient. C) inequitable. D) illegal. E) unnecessary. Answer: B Topic: Coase theorem Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

141) A marketable permit A) allows firms to pollute all they want without any cost. B) allows firms to buy and sell the right to pollute at government controlled prices. C) eliminates pollution by setting the price of pollution permits above the marginal cost of polluting. D) allows firms to buy and sell the right to pollute. E) is the Coase theorem solution to pollution. Answer: D Topic: Marketable permits Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

142) If a polluting producer is forced to pay a pollution charge, what is the effect on the supply and demand curves for the product? A) The quantity supplied along the firm's supply curve increases. B) The firm's demand curve shifts leftward. C) The firm's supply curve shifts rightward. D) The firm's supply curve shifts leftward. E) Both the supply curve and the demand curve shift leftward. Answer: D Topic: Government actions in the face of external costs Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

143) A mill in Florida emits pollution into a river as it produces wood pulp. Which of the following is true regarding regulation of the industry? A) The Environmental Protection Agency (EPA) can regulate the mill using command-and-control policies. B) The Senate regulates the mill using the Coase theorem. C) The United States Supreme Court regulates the industry using cap-and-trade policies. D) The Department of Homeland Security regulates the industry using Pigouvian taxes. E) The Department of Agriculture ensures clean water by using cap-and-trade policies. Answer: A Topic: Regulation Skill: Level 5: Critical thinking Section: Checkpoint 9.1 Status: New AACSB: Reflective thinking

9.2 Positive Externalities: Education and Health Care 1) When the benefits of producing a good or service spill over to other people, rather than just the buyer, the spillover is referred to as A) an external benefit. B) an external cost. C) a marginal cost. D) an equilibrium social output. E) a Coasian good. Answer: A Topic: External benefit Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

2) The additional benefit that Marvin gets from being vaccinated against the flu is known as the A) external benefit. B) marginal private benefit. C) private cost. D) social cost. E) marginal social benefit. Answer: B Topic: Marginal benefit Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

3) The benefit that Joan gets from eating cherries is an example of A) when the external benefit equals the private benefit. B) a private benefit. C) an external benefit. D) an external cost. E) the marginal social cost of eating cherries. Answer: B Topic: Private benefit Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

4) When a person receives a flu vaccination, the ________ is the additional benefit the person receives from getting the shot. A) marginal private benefit B) marginal external benefit C) marginal social benefit D) marginal social cost E) marginal external cost Answer: A Topic: Private benefit Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

5) External benefits are the extra A) benefits a consumer gets from consuming a good. B) costs a producer creates in producing a good. C) benefits that accrue to people other than the consumers. D) costs a producer bears for producing a polluting good. E) benefits a producer obtains for reducing production of a polluting good. Answer: C Topic: External benefit Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

6) If the marginal private benefit of attending college for Shelly is $40,000 and the marginal external benefit is $15,000, she will attend college if the cost of attendance is no more than A) $55,000. B) $45,000. C) $40,000. D) $25,000. E) $15,000. Answer: C Topic: Private benefit Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

7) Individuals making decisions about how much to purchase of a product with an external benefit base their decisions on which of the following? A) the price and marginal private benefit B) the economically efficient output C) the price and the marginal social benefit D) the size of the deadweight loss E) the size of the external benefit and the price Answer: A Topic: Private benefit Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

8) When Keisha receives a flu vaccination, the additional benefit enjoyed by Keisha's friends is the A) marginal private benefit. B) marginal external benefit. C) marginal social benefit. D) private benefit. E) marginal private cost. Answer: B Topic: External benefit Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

9) Education leads to external benefits because A) the people who become better educated get better jobs. B) better educated people commit fewer crimes. C) better educated people are less lazy. D) little pollution is created when educating people. E) better educated people are more productive. Answer: B Topic: Education Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

10) Which of the following is the best example of a good or service with an external benefit? A) gasoline B) education C) garbage disposal D) fertilizers E) bread Answer: B Topic: External benefit Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

11) Which of the following actions would most likely have an external benefit? A) eating a peanut butter sandwich B) throwing trash out your car window as you drive to class C) sleeping D) attending college E) developing a better marketing strategy for Honda Answer: D Topic: External benefit Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

12) Which of the following is an example of an external benefit? A) a ton of coal burned in a power plant to produce electricity B) a car accident that crowds a major Los Angeles freeway C) the production of a slice of pizza D) the cleanup of a large lake E) the consumption of a can of Mountain Dew Answer: D Topic: External benefit Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

13) Which of the following is true? A) MSB = MB + Marginal external benefit. B) MB = Marginal external benefit - MSB. C) MB = Marginal external benefit + MSC. D) MSB = Marginal external cost - marginal external benefit. E) MSB = MB + Marginal external benefit - Marginal external cost. Answer: A Topic: Marginal social benefit Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

14) MSB equals A) MC + the marginal external cost. B) MC + the marginal external benefit. C) MB + the marginal external cost. D) MB + the marginal external benefit. E) MB + MC. Answer: D Topic: Marginal social benefit Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

15) If an external benefit is present in the consumption of a good or service, then A) there can be no external cost. B) the marginal social benefit is greater than the marginal private benefit. C) the marginal social benefit is equal to the marginal private benefit. D) the marginal private benefit is equal to the marginal social benefit plus the marginal external benefit. E) the marginal external benefit is equal to the marginal private benefit minus the marginal social benefit. Answer: B Topic: Marginal social benefit Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

16) If a product has an external benefit, how does its marginal private benefit compare to its marginal social benefit? A) Marginal private benefit is less than marginal social benefit. B) Marginal private benefit is greater than marginal social benefit. C) At low quantities, marginal private benefit is less than marginal social benefit but at high quantities, marginal private benefit is greater than marginal social benefit. D) At low quantities, marginal private benefit is greater than marginal social benefit but at high quantities, marginal private benefit is less than marginal social benefit. E) Marginal private benefit cannot be compared to marginal social benefit. Answer: A Topic: Marginal social benefit Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

17) The sum of the marginal private benefit and the marginal external benefit derived from eco-tourism in British Columbia is called the A) total private benefit. B) net gain. C) total external benefit. D) marginal social benefit. E) total Coase benefit. Answer: D Topic: Marginal social benefit Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

18) Suppose Julie plants a beautiful garden in her front yard. The benefits of the garden to Julie and to her neighbors equals the A) external benefit. B) marginal private benefit. C) marginal external benefit. D) marginal social benefit. E) marginal social cost. Answer: D Topic: Marginal social benefit Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

19) Suppose scientific research generates external benefits. Without government intervention, the market for scientific research would A) produce the efficient amount. B) produce more than the efficient amount. C) produce some research, but less than the efficient amount. D) produce zero research. E) either produce more than or less than the efficient amount depending on whether the external benefit is on the production or consumption of the research. Answer: C Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

20) The existence of marginal external benefits for a product like higher education creates a deadweight loss for society because, without government intervention, ________ would be consumed and ________ would be produced. A) more than the efficient amount; more than the efficient amount B) more than the efficient amount; less than the efficient amount C) less than the efficient amount; more than the efficient amount D) less than the efficient amount; less than the efficient amount E) the efficient amount; the efficient amount Answer: D Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

21) For a product with external benefits that is produced in a competitive, unregulated market, how can the resulting market output be described? A) underproduction compared to the efficient level B) overproduction compared to the efficient level C) production equals the efficient level D) Underproduction or overproduction are both possible depending on whether the external benefit is to consumption or production. E) None of the above is correct. Answer: A Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

22) If all education in the United States were provided by private, tuition-charging schools, A) too much education would be consumed. B) too little education would be consumed. C) the efficient level of education would be provided. D) the government would provide both students and schools with vouchers. E) education would no longer have an external benefit. Answer: B Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

23) The figure above shows the market for college education. The efficient quantity of education is A) 0 students. B) 4 million students. C) 6 million students. D) more than 6 million students. E) more than 4 million students and less than 6 million students. Answer: C Topic: Inefficient equilibrium Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

24) The figure above shows the market for college education. Left to itself without any government intervention, a competitive market would create a deadweight loss equal to A) zero. B) the area d. C) the area a + c. D) the area b + c. E) the area b + d. Answer: C Topic: Deadweight loss Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

25) The figure above shows the market for private elementary school education in Chicago. There is no external cost of private elementary education. If the government does not intervene in this market, the equilibrium price of private education is A) $12,000. B) $16,000. C) $20,000. D) $4,000. E) $6,000. Answer: A Topic: Inefficient equilibrium Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

26) The figure above shows the market for private elementary school education in Chicago. There is no external cost of private elementary education. If the government does not intervene in this market, the equilibrium number of students being privately educated is A) 0 students. B) 200 students. C) 400 students. D) 600 students. E) None of the above answers is correct. Answer: C Topic: Inefficient equilibrium Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

27) The figure above shows the market for private elementary school education in Chicago. There is no external cost of private elementary education. If the government does not intervene in this market, the equilibrium number of students being privately educated is ________ and the efficient quantity is ________. A) 0 students; 400 students B) 400 students; 400 students C) 400 students; 600 students D) 600 students; 400 students E) 600 students; 600 students Answer: C Topic: Efficiency Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

28) The figure above shows the market for private elementary school education in Chicago. There is no external cost of private elementary education. If the government does not intervene in this market, the deadweight loss equals A) 0. B) $800,000. C) $1,600,000. D) more than $1,600,000. E) more than $800,000 and less than $1,600,000. Answer: B Topic: Deadweight loss Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

29) The figure above shows the market for private elementary school education in Chicago. There is no external cost of private elementary education. If the marginal social benefit of private elementary education equaled the marginal social cost, the deadweight loss in Chicago's private education market would equal A) 0. B) $800,000. C) $1,600,000. D) more than $1,600,000. E) more than $800,000 and less than $1,600,000. Answer: A Topic: Deadweight loss Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

30) If a government action is designed to achieve efficiency, then the action must have the market produce the amount of output so that the A) marginal private cost equals the marginal private benefit. B) marginal social cost equals the marginal social benefit. C) marginal external cost equals the marginal external benefit. D) marginal private cost equals the tax. E) marginal social benefit exceeds the marginal social cost by as much as possible. Answer: B Topic: Government actions in the face of external benefits Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

31) Which of the following are devices that the government uses to achieve a more efficient allocation of resources in the presence of external benefits? A) taxes, private subsidies, and regulation B) public provision, taxes, and private subsidies C) regulations, public provision, and vouchers D) vouchers, public provision, and private subsidies E) public provision, taxes, and vouchers Answer: D Topic: Government actions in the face of external benefits Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

32) The government can overcome the inefficiency created by a good with an external benefit by using A) public provision. B) marketable permits. C) taxes. D) emission charges. E) None of the above answers is correct. Answer: A Topic: Public provision Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

33) Public provision A) is the production of a good by the government by giving funds to private producers. B) lowers the marginal cost of producing the good. C) means the good is produced by a public authority that receives the most of its revenue from the government. D) Both answers A and B are correct. E) Both answers B and C are correct. Answer: C Topic: Public provision Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

34) The production of a good or service by an authority that receives the most of its revenue from the government is referred to as A) public provision. B) private subsidies. C) vouchers. D) copyrights. E) Coasian production. Answer: A Topic: Public provision Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

35) Which of the following is an example of a product that is made available through public provision? i. local police protection ii. public schools iii. local fire department A) i only B) i and ii C) iii only D) i and iii E) i, ii, and iii Answer: E Topic: Public provision Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

36) When government provides a good with an external benefit, to attain efficiency the price paid by consumers is set equal to the A) marginal private benefit at the efficient level of output. B) marginal private cost at the efficient level of output. C) amount paid by taxpayers. D) market-determined price. E) marginal external benefit at the efficient level of output. Answer: A Topic: Public provision Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

37) A subsidy is A) the revenue received from the government to produce a good or service by a public authority. B) a voucher received by the government from producers of goods and services. C) a payment that the government makes to private producers of goods and services. D) a tax imposed on the producers of certain goods or services. E) a tax imposed on the consumers of certain goods or services. Answer: C Topic: Subsidies Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

38) A payment made by the government to private producers of roads and libraries would be an example of A) a subsidy. B) a copyright. C) a voucher. D) public provision. E) a Coase payment. Answer: A Topic: Subsidies Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

39) Which of the following is a method used by government to cope with the situation in which production of a good creates an external benefit? A) removing property rights B) subsidizing production C) marketable permits D) running a lottery E) imposing Coasian taxes Answer: B Topic: Subsidies Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

40) A government subsidy A) is a policy that can be used to help eliminate the deadweight loss from an external cost. B) can help achieve an efficient amount of output when the good has an external benefit. C) increases consumers' marginal benefit from the good. D) Both answers A and C are correct. E) Both answers B and C are correct. Answer: B Topic: Subsidies Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

41) Private subsidies granted to producers affect A) the supply side of the market by shifting the supply curve. B) the demand side of the market by shifting the demand curve. C) property rights. D) transaction costs. E) both the supply side of the market and the demand side because they shift both the supply curve and the demand curve. Answer: A Topic: Subsidies Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

42) When the government uses a private subsidy in a market with an external benefit, to reach the efficient quantity of production, the subsidy must be equal to the marginal A) social benefit. B) cost of production. C) private benefit. D) external benefit. E) external cost. Answer: D Topic: Subsidies Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

43) For a government subsidy on a good with an external benefit to result in the efficient amount of output being produced, what must be done? A) The size of marginal external benefit must be accurately determined. B) The government must produce the product. C) Private production and private consumption must both be directly subsidized. D) The quantity demanded must be decreased to the efficient amount. E) Private production without the subsidy must be prohibited. Answer: A Topic: Subsidies Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

44) If the government provides a subsidy to producers, what is the effect of this policy in a supply and demand diagram? A) The demand curve shifts leftward and the price rises. B) The supply curve shifts rightward and the price falls. C) The supply curve shifts leftward and the price falls. D) The supply curve shifts leftward and the price rises. E) The demand curve shifts rightward and the price rises. Answer: B Topic: Subsidies Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

45) A government subsidy paid to a firm i. increases the demand for the good. ii. has no effect on the supply of the good. iii. leads to an increase in the equilibrium quantity. A) i only B) i and ii C) ii only D) iii only E) i and iii Answer: D Topic: Subsidies Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

46) The figure above shows the market for a good with an external benefit. If the market is competitive and the government takes no action, the equilibrium quantity is ________ units and the equilibrium price is ________ per unit. A) 8; $150 B) 8; $300 C) 10; $250 D) 10; $100 E) 10; $150 Answer: A Topic: Inefficient equilibrium Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

47) The figure above shows the market for a good with an external benefit. If the market is competitive and the government takes no action, the equilibrium quantity of ________ units is inefficient because ________. A) 8; marginal benefit exceeds marginal cost B) 8; marginal cost exceeds marginal benefit C) 10; marginal cost exceeds marginal benefit D) 10; marginal social benefit exceeds marginal benefit E) 10; marginal external benefit exceeds marginal social benefit Answer: A Topic: Inefficient equilibrium Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

48) The figure above shows the market for a good with an external benefit. When 6 units are produced, marginal social benefit equals ________ and marginal external benefit equals ________. A) $200; $150 B) $350; $200 C) $200; $50 D) $350; $150 E) $150; $250 Answer: D Topic: Inefficient equilibrium Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

49) The figure above shows the market for a good with an external benefit. The efficient level of production is ________ units because ________. A) 8; marginal benefit equals marginal cost B) 8; marginal cost is less than marginal social benefit C) 10; marginal cost equals marginal social benefit D) 10; marginal social benefit exceeds marginal benefit E) 8; marginal benefit equals the marginal external benefit Answer: C Topic: Efficient equilibrium Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

50) The figure above shows the market for a good with an external benefit. If the government wants to grant a subsidy so that the efficient quantity is produced, the subsidy must equal ________ per unit. A) $100 B) $150 C) $250 D) $300 E) $50 Answer: B Topic: Subsidies Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

51) The above figure shows the market for college education in the United States. With no government intervention, the market equilibrium is at a tuition of ________ and ________ million students per year. A) 16,000; 14 B) $20,000; 10 C) $13,000; 10 D) $13,000; 17 E) $16,000; 10 Answer: C Topic: Education Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

52) The above figure shows the market for college education in the United States. With no government intervention, the unregulated market equilibrium is ________ because education generates ________. A) efficient; positive external benefits B) inefficient; positive external benefits C) inefficient; positive external costs D) efficient; positive external costs E) inefficient; public goods Answer: B Topic: Education Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

53) The figure above shows the market for college education in the United States. If there is no external benefit from a college education and the government does not intervene in the market, then the equilibrium tuition of college education is A) $13,000. B) $16,000. C) $20,000. D) $7,000. E) None of the above answers is correct. Answer: A Topic: Education Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

54) The figure above shows the market for college education in the United States. The efficient quantity of college education is ________ students per year. A) 10 million B) 12 million C) 17 million D) 18 million E) 14 million Answer: E Topic: Education Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

55) The figure above shows the market for college education in the United States. The marginal external benefit associated with educating 14 million students is ________ per student per year. A) $16,000 B) $13,000 C) $11,000 D) $5,000 E) $7,000 Answer: D Topic: Education Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

56) The figure above shows the market for college education in the United States. If the government does not intervene in this market, the number of students going to college is ________ and the efficient number of students is ________. A) 13 million students per year; 16 million students per year B) 14 million students per year; 16 million students per year C) 10 million students per year; 14 million students per year D) 10 million students per year; 13 million students per year E) 14 million students per year; 10 million students per year Answer: C Topic: Education Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

57) The figure above shows the market for college education in the United States. If the government does not intervene in this market, the deadweight loss equals ________ per year. A) $28 billion B) $14 billion C) $280 billion D) $224 billion E) $7 billion Answer: B Topic: Deadweight loss Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

58) The figure above shows the market for college education in the United States. If the government intervenes in the market and provides a subsidy to colleges to enroll the efficient number of students, the amount of the subsidy equals ________ per student. A) $5,000 B) $16,000 C) $13,000 D) $11,000 E) $7,000 Answer: A Topic: Subsidies Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

59) The figure above shows the market for college education in the United States. If the government provides a subsidy to colleges to enroll the efficient number of students, the amount of the subsidy per student equals ________ and each student pays ________ per year. A) $16,000; $13,000 B) $7,000; $13,000 C) $5,000; $13,000 D) $11,000; $16,000 E) $5,000; $11,000 Answer: E Topic: Subsidies Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

60) The figure above shows the market for college education in the United States. If the government has a goal of enrolling the efficient number of students each year, the government should provide a voucher to students equaling A) $16,000. B) $13,000. C) $11,000. D) $5,000. E) $7,000. Answer: D Topic: Vouchers Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

61) The figure above shows the market for education, a good possessing an external benefit. In order to attain the efficient number of students, a government subsidy must equal ________ per student. A) $2,000 B) $8,000 C) $6,000 D) $10,000 E) $16,000 Answer: C Topic: Subsidies Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

62) A voucher is A) the production of a good by some public institution. B) a payment that government makes to private producers. C) a token that government provides to households to use in purchasing a specific good. D) a permit to pollute. E) a tax that is imposed on consumers rather than producers. Answer: C Topic: Vouchers Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

63) Which of the following government actions is appropriate in a market with an external benefit? A) taxes B) vouchers C) marketable permits D) setting a tax equal to the transactions costs E) price ceiling Answer: B Topic: Vouchers Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Application of knowledge

64) Some policymakers have proposed giving parents of children in poorly performing schools tax dollars to help send their children to private schools. This proposal is an example of A) vouchers. B) public provision. C) external costs. D) taxes. E) correcting an externality using a government good. Answer: A Topic: Vouchers Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

65) Pell grants are money given to students attending college. Pell grants are most closely similar to A) public provision of a good. B) private subsidies given to producers of a good. C) vouchers given to consumers of a good. D) property rights assigned to consumers of a good. E) a subsidy given to the producer of a good. Answer: C Topic: Vouchers Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

66) Food stamps provided by the government to households are an example of A) vouchers. B) marginal benefits from producing a good or service. C) marginal cost from producing a good or service. D) marginal external cost. E) a government good. Answer: A Topic: Vouchers Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

67) Vouchers given to consumers A) increase the demand for a good. B) decrease the demand for a good. C) increase the supply of a good. D) decrease the supply of a good. E) increase both the demand for the good and the supply of the good. Answer: A Topic: Vouchers Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

68) The use of vouchers for education A) decreases the demand for education and increases the equilibrium quantity. B) increases the demand for education and increases the equilibrium quantity. C) increases the deadweight loss for those who can't afford schooling. D) decreases the quantity provided to the efficient level. E) decreases the demand for education and decreases the equilibrium quantity. Answer: B Topic: Vouchers Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

69) Education has an external benefit. So to achieve the efficient level of education, an education voucher must equal the difference between the A) marginal (private) cost and the marginal social benefit. B) marginal (private) benefit and the marginal social benefit. C) marginal social benefit and the marginal (private) cost. D) dollar price and marginal (private) cost. E) marginal (private) cost and the marginal social cost. Answer: B Topic: Vouchers Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

70) If vouchers for a good or service given to consumers, then the supply curve ________ and the demand curve ________. A) shifts leftward; shifts leftward B) shifts leftward; shifts rightward C) shifts rightward; shifts rightward D) does not shift; shifts rightward E) shifts rightward; does not shift Answer: D Topic: Vouchers Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

71) The figure above shows an education market in which the government is providing households with vouchers. What is the efficient quantity of students? A) 2 million B) 4 million C) 6 million D) more than 6 million E) more than 4 million and less than 6 million Answer: C Topic: Efficiency Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

72) The figure above shows an education market in which the government is providing households with vouchers. What is the dollar value of a voucher in this market? A) $4,000 B) $8,000 C) $12,000 D) $16,000 E) None of the above answers is correct. Answer: B Topic: Vouchers Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

73) The figure above shows an education market in which the government is providing households with vouchers. In total, how much do the schools receive for a student? A) $4,000 B) $8,000 C) $12,000 D) $16,000 E) $20,000 Answer: D Topic: Vouchers Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

74) The figure above shows an education market in which the government is providing households with vouchers. Excluding the voucher, what do the students pay the schools? A) $4,000 B) $8,000 C) $12,000 D) $16,000 E) $0 Answer: B Topic: Vouchers Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

75) The figure shows the market for college education. If the market for education is competitive and with no government intervention, the equilibrium quantity of college students is ________ million and the efficient quantity of college students is ________ million. A) 2; 4 B) 8; 2 C) 8; 4 D) 4; 8 E) 0; 10 Answer: D Topic: Inefficient equilibrium Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

76) The figure shows the market for college education. The efficient number of students is A) less than 4 million. B) more than 4 million and less than 8 million. C) 4 million. D) 8 million. E) more than 8 million. Answer: D Topic: Efficiency Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

77) The figure shows the market for college education. In order for the efficient amount of education to occur, the government could provide a subsidy of ________ per student. A) $4,000 B) $8,000 C) $12,000 D) $20,000 E) $16,000 Answer: B Topic: Subsidies Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

78) The figure shows the market for college education. In order for the efficient amount of education to occur, the government could provide a voucher of ________ per student. A) $4,000 B) $8,000 C) $12,000 D) $20,000 E) $16,000 Answer: B Topic: Vouchers Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

79) The figure above shows the market for annual influenza immunizations the United States. With no government intervention, the market equilibrium is at a price of ________ and ________ million immunizations per year. A) $60; 14 B) $40; 14 C) $30; 14 D) $40; 22 E) None of the above answers is correct. Answer: C Topic: Health-care markets Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

80) The figure above shows the market for annual influenza immunizations the United States. The market equilibrium with no government intervention is ________ because health care generates ________. A) efficient; positive external benefits B) inefficient; positive external benefits C) inefficient; positive external costs D) efficient; positive external costs E) inefficient; public goods Answer: B Topic: Inefficient equilibrium Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

81) The figure above shows the market for annual influenza immunizations the United States. If there is NO external benefit from health care and the government does not intervene in the market, then the equilibrium price of immunizations is A) $30. B) $20. C) $40. D) $60. E) $70. Answer: A Topic: Health-care markets Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

82) The figure above shows the market for annual influenza immunizations the United States. The efficient quantity of immunizations is A) 14 million per year. B) 10 million per year. C) Between 14 and 21 million per year. D) Less than 10 million per year. E) 22 million per year. Answer: E Topic: Efficient equilibrium Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

83) The figure above shows the market for annual influenza immunizations the United States. The marginal external benefit associated with immunizing 14 million people is ________ per person per year. A) $40 B) $20 C) $90 D) $30 E) $60 Answer: D Topic: External benefit Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

84) The figure above shows the market for annual influenza immunizations the United States. If the government does not intervene in this market, the number of immunizations per year is ________ and the efficient number of immunizations per year is ________. A) 14 million; 20 million B) 20 million; 22 million C) 14 million; 22 million D) 14 million; 10 million E) 10 million; 14 million Answer: C Topic: Inefficient equilibrium Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

85) The figure above shows the market for annual influenza immunizations the United States. If the government does not intervene in this market, deadweight loss equals A) $350 million. B) $250 million. C) $500 million. D) $600 million. E) $37.5 million. Answer: B Topic: Deadweight loss Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

86) The figure above shows the market for annual influenza immunizations the United States. If the government intervenes in the market and provides a subsidy to providers of immunizations to immunize the efficient number of people, the amount of the subsidy is ________ per person. A) $25 B) $50 C) $35 D) $15 E) $40 Answer: A Topic: Subsidies Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

87) The figure above shows the market for annual influenza immunizations the United States. If the government intervenes in the market and provides a $10 subsidy to providers of immunizations, the number of people immunized is A) 20 million per year. B) exactly 10 million per year. C) between 15 and 20 million per year. D) less than 10 million per year. E) more than 10 million and less than 15 million. Answer: E Topic: Efficient equilibrium Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

88) The figure above shows the market for annual influenza immunizations the United States. Area A is the A) total deadweight loss when there is not the illustrated subsidy. B) remaining deadweight loss when there is the illustrated subsidy. C) gain in efficiency from the illustrated subsidy. D) loss in efficiency from the illustrated subsidy. E) consumer surplus with the illustrated subsidy. Answer: C Topic: Subsidies Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

89) The figure above shows the market for annual influenza immunizations the United States. Area B is the A) gain in efficiency from the illustrated subsidy. B) remaining deadweight loss when there is the illustrated subsidy. C) deadweight loss when there is not the illustrated subsidy. D) equilibrium with the illustrated subsidy. E) loss in efficiency from the illustrated subsidy. Answer: B Topic: Subsidies Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

90) The figure above shows the market for annual influenza immunizations the United States. Area A + Area B is the A) deadweight loss when there is not the illustrated subsidy. B) loss in efficiency from the illustrated subsidy. C) gain in efficiency from the illustrated subsidy. D) remaining deadweight loss when there is the illustrated subsidy. E) equilibrium with the illustrated subsidy. Answer: A Topic: Deadweight loss Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

91) The benefit the consumer of a good or service receives is the A) social benefit. B) external benefit. C) private benefit. D) public benefit. E) consumption benefit. Answer: C Topic: Private benefit Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

92) An external benefit is a benefit from a good or service that someone other than the ________ receives. A) seller of the good or service B) government C) foreign sector D) consumer E) market maker Answer: D Topic: External benefit Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

93) When Ronald takes another economics class, other people in society benefit. The benefit to these other people is called the marginal ________ benefit of the class. A) social B) private C) external D) Coasian E) extra Answer: C Topic: External benefit Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

94) Marginal social benefit equals A) marginal external benefit. B) marginal private benefit. C) marginal private benefit minus marginal external benefit. D) marginal private benefit plus marginal external benefit. E) marginal external benefit minus marginal private benefit. Answer: D Topic: Marginal social benefit Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

95) If an external benefit is present, then the A) marginal private benefit curve lies above the marginal private cost curve. B) marginal social benefit curve lies above the marginal private benefit curve. C) marginal social cost curve lies above the marginal private benefit curve. D) marginal social benefit is equal to the marginal social cost. E) marginal social benefit curve is the same as the marginal private benefit curve. Answer: B Topic: Marginal social benefit Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

96) In an unregulated market with an external benefit, the A) quantity produced is greater than the efficient quantity. B) price charged is too high for efficiency. C) quantity produced is less than the efficient quantity. D) producer is causing pollution but not paying for it. E) government might impose a tax to help move the market toward the efficient amount of production. Answer: C Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

97) If tuition at a college is $30,000 and the external benefit of graduating from this college is $10,000, then i. in the absence of any government intervention, the number of students graduating is less than the efficient number. ii. the government could increase the number of graduates by giving the college a $10,000 subsidy per student. iii. the government could increase the number of graduates by giving the students $10,000 vouchers. A) i only B) i and ii C) i and iii D) ii and iii E) i, ii, and iii Answer: E Topic: Government actions in the face of external benefits Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

98) Which of the following is an example of a voucher? A) the postal service B) police services C) social security D) food stamps E) a patent on a pharmaceutical drug Answer: D Topic: Vouchers Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

99) Only a few countries in the world do not provide free public education. These countries are likely to have ________ than the efficient number of students educated and as a result, the ________ of education are not captured by their societies. A) less; marginal external benefits B) less; marginal private benefits C) more; marginal external costs D) more; marginal external benefits E) less; private social costs Answer: A Topic: Marginal external benefit Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: New AACSB: Analytical thinking

100) Several politicians support providing free college tuition in the United States These politicians recognize that the ________ of a college education and that providing free college tuition will ________ in the market. A) MB = MC; decrease the deadweight loss B) MB < MC; decrease the deadweight loss C) MSB > MB; decrease the deadweight loss D) MSB > MB; eliminate the marginal external benefit E) MC > MEC; decrease the deadweight loss Answer: C Topic: Marginal social benefit Skill: Level 3: Using models Section: Checkpoint 9.2 Status: New AACSB: Analytical thinking

101) Several countries provide free college educations. These countries recognize that college educations produce a ________ and that subsidizing college educations produce an efficient outcome where ________. A) marginal external benefit; MSB = MC B) marginal private benefit; MC = MB C) marginal external cost; MC = MB D) marginal external benefit; MSB > MC E) marginal benefit; MSB > MC Answer: A Topic: Marginal external benefit Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: New AACSB: Application of knowledge

102) Florida offers free pre-kindergarten for 4-year-olds by collecting taxes to subsidize this education. The state chooses to subsidize pre-kindergarten because ________ of education. A) marginal benefit > marginal social cost B) marginal benefit < marginal social benefit C) marginal private benefit = marginal social benefit D) marginal private benefit < marginal social benefit E) marginal external cost = marginal external benefit Answer: B Topic: Marginal social benefit Skill: Level 3: Using models Section: Checkpoint 9.2 Status: New AACSB: Application of knowledge

103) Florida offers free pre-kindergarten for 4-year-olds by collecting taxes to subsidize this education. By providing free education, the state ________ that would otherwise occur because the ________ of education without any subsidies. A) reduces the deadweight loss; MB < MSB B) reduces the deadweight loss; MC< MSC C) increases the deadweight loss; MB > MSB D) increases the marginal external benefit; MB < MSB E) increases the marginal external benefit; MC < MSC Answer: A Topic: Marginal social benefit Skill: Level 5: Critical thinking Section: Checkpoint 9.2 Status: New AACSB: Reflective thinking

9.3 Chapter Figures

A chemical factory dumps waste into a river. The figure above shows the demand curve for the chemical (D) and the marginal private cost (MC) and marginal social cost (MSC) of producing it. 1) In the figure, the unregulated market equilibrium occurs at a price of ________ a ton and quantity of ________ tons. A) $100; 4,000 B) $150; 2,000 C) $150; 4,000 D) $225; 4,000 E) $100; 2,000 Answer: A Topic: Inefficient equilibrium Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

2) In the figure above, when the market is unregulated and in equilibrium, marginal social cost ________ marginal benefit, and the quantity of chemical produced is ________. A) exceeds; above the efficient quantity B) exceeds; below the efficient quantity C) is below; above the efficient quantity D) is below; below the efficient quantity E) equals; efficient Answer: A Topic: Inefficient equilibrium Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

3) In the figure above, when the market is unregulated and in equilibrium, the deadweight loss is ________ thousand per month. A) $250 B) $125 C) $150 D) $50 E) zero Answer: A Topic: Inefficient equilibrium Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

4) Based on the figure above, if the factory owned the river then at the equilibrium, marginal social cost would ________ marginal benefit, and the quantity of chemical produced would be ________. A) exceed; above the efficient quantity B) exceed; below the efficient quantity C) be below; above the efficient quantity D) be below; below the efficient quantity E) equal; efficient Answer: E Topic: Coase theorem Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

5) In the figure above, if a pollution tax is imposed that is equal to the marginal external cost of pollution, then at the equilibrium, marginal social cost would ________ marginal benefit, and the quantity of chemical produced would be ________. A) exceed; above the efficient quantity B) exceed; below the efficient quantity C) be below; above the efficient quantity D) be below; below the efficient quantity E) equal; efficient Answer: E Topic: Taxes Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

6) In the figure above, if a pollution tax is imposed that is equal to the marginal external cost of pollution, then when the market is in equilibrium, the deadweight loss is ________ thousand per month. A) $250 B) $125 C) $150 D) $50 E) zero Answer: E Topic: Taxes Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

The figure above shows the demand for college education (D), the marginal social benefit of college education (MSB), and the marginal cost of the private schools (MC). 7) The figure above shows that the unregulated market equilibrium occurs at a tuition of ________ a year and ________ million students. A) $15,000; 7.5 B) $25,000; 15 C) $15,000; 15 D) $25,000; 7.5 E) $38,000; 7.5 Answer: A Topic: Inefficient equilibrium Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

8) The figure above shows that at the unregulated market equilibrium, marginal social benefit ________ marginal cost, and the number of students enrolled is ________. A) exceeds; above the efficient quantity B) exceeds; below the efficient quantity C) is below; above the efficient quantity D) is below; below the efficient quantity E) equals; efficient Answer: B Topic: Inefficient equilibrium Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

9) Based on the figure above, when the market is unregulated and is in equilibrium, the deadweight loss is A) $86.25 million per year. B) $56.25 million per year. C) $48.75 million per year. D) $37.50 million per year. E) zero. Answer: A Topic: Inefficient equilibrium Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

10) Using the figure above, suppose education is provided by public colleges, where tuition is set at $10,000 a year. Then, ________ million students are enrolled, and the taxpayers cover ________ of marginal cost per student. A) 15; $15,000 B) 7.5; $5,000 C) 3.5; none D) 15; $25,000 E) 7.5; $15,000 Answer: A Topic: Public provision Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

11) Using the figure above, suppose education is provided by public colleges, where tuition is set at $10,000 a year. When the market is in equilibrium, the marginal social benefit is ________, the marginal cost is ________, and the number of students enrolled is ________. A) $25,000; $25,000; efficient B) $25,000; $10,000; inefficient C) $15,000; $25,000; inefficient D) $15,000; $15,000; efficient E) $25,000; $15,000; inefficient Answer: A Topic: Public provision Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

12) Using the figure above, suppose education is provided by public colleges. At what level should tuition be set to ensure the efficient number of students? A) $10,000 B) $5,000 C) $20,000 D) $25,000 E) $15,000 Answer: A Topic: Subsidies Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

13) Using the figure above, suppose a subsidy of $15,000 per student is provided to private colleges. Then, the market equilibrium occurs at a tuition of ________ a year and ________ million students. A) $10,000; 15 B) $25,000; 15 C) $15,000; 15 D) $15,000; 7.5 E) $20,000; 20 Answer: A Topic: Subsidies Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

14) Using the figure above, suppose a subsidy of $15,000 per student is provided to private colleges. When the market is in equilibrium, marginal social benefit ________ marginal cost, and the number of students enrolled is ________. A) exceeds; above the efficient quantity B) exceeds; below the efficient quantity C) is below; above the efficient quantity D) is below; below the efficient quantity E) equals; efficient Answer: E Topic: Subsidies Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

15) In the figure above, suppose a subsidy is provided to private colleges. What amount of subsidy will ensure the efficient number of students? A) $10,000 B) $25,000 C) $15,000 D) $5,000 E) $20,000 Answer: C Topic: Subsidies Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

16) In the figure above, suppose the government provides vouchers worth $15,000 per student per year. Then the market equilibrium occurs at a tuition of ________ a year and ________ million students. A) $10,000; 15 B) $25,000; 15 C) $15,000; 15 D) $15,000; 7.5 E) $20,000; 20 Answer: A Topic: Vouchers Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

17) In the figure above, suppose the government provides vouchers worth $15,000 per student per year. When the market is in equilibrium, marginal social benefit ________ marginal cost, and the number of students enrolled is ________. A) exceeds; above the efficient quantity B) exceeds; below the efficient quantity C) is below; above the efficient quantity D) is below; below the efficient quantity E) equals; efficient Answer: E Topic: Vouchers Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

9.4 Integrative Questions 1) A noisy party that keeps neighbors awake is an example of a A) negative production externality. B) positive production externality. C) negative consumption externality. D) positive consumption externality. E) Both answers B and C are correct. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

2) An externality can be a cost or benefit arising from the production of a good that falls upon A) consumers but not producers. B) producers but not consumers. C) both the consumer and the producer. D) someone other than the consumer or producer. E) no one so it goes unpaid. Answer: D Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

3) Externalities A) are important in the areas of environment and education. B) only have a negative impact on people. C) deal with issues that are not our internal issues. D) affect the people who are responsible for production. E) are nonexistent in unregulated, competitive markets. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

4) In a market with an external cost, government action A) cannot decrease the amount of the deadweight loss from the external cost. B) can sometimes help to achieve an efficient outcome. C) cannot alter firms' cost curves. D) Both answers A and C are correct. E) Both answers B and C are correct. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

5) A competitive, unregulated market would A) produce too much pollution because pollution is an external cost. B) produce too little education because education has an external benefit. C) fail to achieve equilibrium if there are externalities present. D) Both answers A and B are correct. E) Both answers B and C are correct. Answer: D Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking

6) When property rights are assigned and transactions costs are low, A) all costs and benefits are taken into account by the transacting parties so the transaction is efficient. B) externalities will result in market failure. C) the marginal social benefit curve shifts leftward and the marginal social cost curve does not shift. D) the marginal social cost curve shifts rightward and the marginal social benefit curve does not shift. E) the marginal social cost curve shifts rightward and the marginal social benefit curve also shifts rightward. Answer: A Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking

7) Which of the following is true? i. In an unregulated market with an external benefit, consumers don't take it into account and consume less than the efficient quantity. ii. Marginal social cost equals marginal private cost minus marginal external cost. iii. An unregulated market produces more than the efficient quantity of a good with an external cost. A) i only B) ii only C) iii only D) i and ii E) i and iii Answer: E Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking

8) When people decide whether or not to get a flu vaccination, they ignore the ________ and as a result ________. A) marginal private benefit; too few vaccinations are given B) external benefit; too few vaccinations are given C) private cost; too many vaccinations are given D) marginal external cost; vouchers must be provided E) social cost; too many vaccinations are given Answer: B Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Analytical thinking

9) A carbon tax would ________ the cost of producing goods and services that create large carbon emissions, and would lead Americans to use ________ carbon-intensive goods and services, which could ________ climate change. A) raise; more; slow B) raise; fewer; speed up C) lower; fewer; slow D) raise; fewer; slow E) raise; more; speed up Answer: D Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: New AACSB: Application of knowledge

10) When there is a marginal external ________ producers take account only of marginal private cost and produce ________ than the efficient quantity. A) cost; more B) cost; less C) benefit; more D) benefit; less E) increase; more Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: New AACSB: Application of knowledge

11) The Coase theorem says that if property rights exist and the costs of enforcing them are ________, then the market outcome is ________ and it doesn't matter who has the property rights. A) low; inefficient B) high; inefficient C) low; efficient D) high; efficient E) stable; efficient Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: New AACSB: Application of knowledge

9.5 Essay: Negative Externalities: Pollution 1) What is marginal external cost? Give an example. Answer: Marginal external cost is the additional cost that is imposed on someone other than the producer of the good or service. An example is the sulfur dioxide and other chemicals emitted by utility companies in the Midwest. These pollutants travel north with the winds, causing acid rain that harms vegetation and kills fish in the Northeast of the United States. Topic: External cost Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Written and oral communication

2) Explain the difference between a negative production externality and a negative consumption externality. Answer: A negative production externality occurs when a firm produces a good and the cost of the good falls on parties other than the firm. A negative consumption externality occurs a person consumes a good and that consumption imposes a cost on others. Topic: Negative production and negative consumption externalities Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

3) Discuss the difference between a private cost and a social cost. Answer: A private cost is the cost of producing a good or service that is borne by the producers. In certain instances, however, some of the costs of production are borne by someone other than the producer. This cost is called an external cost. The social cost is the total cost borne by all of society. Thus the social cost equals the private cost, the costs borne by the producers, plus the external cost, the costs borne by everyone else. Topic: External cost Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Written and oral communication

4) When a forest is logged, it is possible for the logging to create "soil runoff," a situation in which the soil, no longer protected by trees, erodes and silts a river miles downstream from the logging area. Is soil runoff created by logging in Montana that ruins a river an example of a private cost to the lumbering company or an external cost? Answer: The soil runoff is an external cost. The lumber company does not pay the cost of the ruined river, so the cost is not a private cost to the company. Instead, the cost is borne by fishermen or other users of the river who can no longer use the river, or by society, which pays to clean up the river so that the fishermen and other users can utilize it once again. Topic: External cost Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Written and oral communication

5) Explain why a producer who is causing external costs does not have the incentive to reduce these costs. Answer: The answer lies in the fact that the costs are external. These are not costs borne by the producer. The producer responds to the costs he or she must pay and external costs are paid by someone else. Hence the producer has no incentive to decrease the activity that is creating the external cost because the activity costs the producer nothing. Topic: External cost Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Written and oral communication

6) If the production of a good creates an external cost, is the supply curve the same as the marginal social cost or the same as the marginal private cost curve or both? Answer: The supply curve is always the same as the marginal private cost curve. In the case of an external cost, however, the marginal private cost curve is not the same as the marginal social cost curve. In this case, the supply curve is the same as only the marginal private cost curve and is not the same as the marginal social cost curve. Topic: Social cost Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Written and oral communication

7) "The marginal social cost of burning garbage in Houston is the sum of the marginal private cost and the marginal external cost." Is this assertion correct or incorrect? Answer: The statement is correct. The marginal social cost of any activity is the sum of the marginal private cost plus the marginal external cost. Topic: Social cost Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

8) Why does an external cost lead to inefficient overproduction? Answer: If there is an external cost, then the market supply curve represents only the private costs rather than all the costs of production. Private producers respond only to the costs that they pay. In the case of an external cost, because producers are not paying all of the costs, they produce too much of the good from the social perspective, that is, there is overproduction. Thus government policies, such as pollution limits, taxes, pollution charges, or marketable permits, can move the market toward efficiency. Topic: Inefficient equilibrium Skill: Level 4: Applying models Section: Checkpoint 9.1 Status: Old AACSB: Written and oral communication

9) Why is it not efficient to eliminate all pollution? Answer: Eliminating pollution is a task that uses resources, so there is an opportunity cost. If the cost of eliminating another unit of pollution is greater than the benefit, it would not be an efficient use of resources to eliminate the pollution because there are other activities with a higher value to society. In other words, pollution elimination is similar to any other good: pollution should be eliminated until the marginal benefit of pollution reduction equals the marginal cost of pollution reduction. Topic: Production and pollution: how much? Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Written and oral communication

10) What is the Coase theorem? What conditions need to be present for this theorem to work? Answer: The Coase theorem states that if property rights exist, only a small number of people are involved, and transactions costs are low, then private transactions are efficient and the outcome is not affected by who is assigned the property right. The conditions that need to be present for the Coase theorem to work are: ∙ property rights exist; ∙ only a small number of people are involved; ∙ the transactions costs are low. If these conditions are met, then the Coase theorem applies and there are no externalities. Topic: Coase theorem Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Written and oral communication

11) "According to the Coase theorem, if Gabriel wants the local television station to cease having helicopters fly over his house at night, he will be more likely to be able to reach an agreement with the station if the property right to the airspace is clearly defined and the transaction costs of negotiating are high." Is this statement true or false? Explain your answer. Answer: The statement is false. The first part of the statement is correct, insofar as the property right to the airspace needs to be clearly defined. However, the second part is incorrect. In particular, if the costs of negotiating are high, Gabriel and the television station are less likely to be able to come to an agreement. Topic: Coase theorem Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Written and oral communication

12) What do we mean by "property rights" and why are they important? Answer: Property rights are legally established titles to ownership, use, and disposal of factors of production and goods and services that are enforceable in the courts. Property rights are important because ownership of a resource provides a strong incentive to its owner to see that the resource they own is not damaged, overused, or degraded. Topic: Property rights Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Written and oral communication

13) If the production of a good causes pollution (an external cost), is the unregulated competitive market equilibrium of that product efficient? Answer: The presence of pollution means that the supply curve of the firm, which is also the firm's marginal cost curve, only represents the firm's private costs and ignores all external costs. The equilibrium between supply and demand curves leads to overproduction of this good. The amount produced, therefore, is not efficient because the level of production occurs where the marginal private cost equals the marginal (social) benefit rather than where the marginal social cost equals the marginal (social) benefit. Topic: Inefficiency Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Written and oral communication

14) Burning coal to generate electricity can create pollution. If the market for generating electricity is competitive and is allowed to operate without any government intervention, is the equilibrium quantity of coal burned equal to, more than, or less than the efficient quantity? Answer: The equilibrium quantity of coal burned is more than the efficient quantity. In a market for a good with an external cost, an unregulated competitive market will have an equilibrium quantity that exceeds the efficient quantity. Topic: Inefficiency Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Written and oral communication

15) "If production of a good creates an external cost, then, when production is such that the marginal private costs are equal to the marginal private benefits, the market outcome will be inefficient." Explain whether this assertion is correct or incorrect. Answer: The assertion is correct. Efficiency requires that the marginal social benefit equal the marginal social cost. If the production of a good creates an external cost, then the marginal private cost does not equal the marginal social cost. So, even if the marginal private benefit equals the marginal social benefit, setting the marginal private cost equal to the marginal private benefit creates inefficiency because the marginal social benefit does not equal the marginal social cost. Topic: Inefficiency Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Written and oral communication

16) Use the idea of external costs to explain why some cities have laws against late-night rock concerts. Answer: While many people might like to see a midnight show featuring AC/DC or Creed, many others argue that a rock concert blaring away early in the morning imposes external costs on many nearby residents who do not want to be disturbed late at night. Therefore regulations on the time that music can be "emitted" are common. To the extent that the regulations are motivated by the externality, such regulations increase efficiency. Topic: Government actions in the face of external costs Skill: Level 4: Applying models Section: Checkpoint 9.1 Status: Old AACSB: Written and oral communication

17) The production of paper creates pollution, an external cost. What happens to the production of paper if the government imposes a tax on paper producers equal to the marginal external cost of the pollution? Answer: When the government imposes a tax equal to the marginal external cost of the pollution, the production of paper decreases. Prior to the tax being imposed, the external cost was ignored by the producers because they did not pay this cost. However, once the tax is in place, the external cost now becomes a cost that the producer must pay. As a result, the producers' costs increase and so the supply of paper decreases. Topic: Taxes Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

18) How has air quality changed in the United States since 1980? Answer: Generally air quality in the United States has improved. Most sources of pollution have decreased substantially and even ozone, which has changed the least, has decreased. Topic: Eye on the U.S. economy, pollution trends Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

19) If the marginal social cost of a good is $70 and the marginal external cost is $20, what does the marginal private cost equal? Answer: The marginal social cost equals the marginal private cost plus the marginal external cost. Hence, substituting in the numbers from the problem gives $70 = marginal private cost + $20, so that the marginal private cost = $50. Topic: Social cost Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

20) The table above gives the private costs and external costs of producing paper. a. Complete the table by finding the marginal social cost at each level of production. b. If the market is competitive and is left unregulated and 400 tons of paper are produced, what is the price of a ton of paper? c. If the government imposes a tax equal to the external cost at each level of production, what price would be charged if 400 tons are produced? Answer:

a. The table above completes the marginal social cost column. At any level of output, the marginal social cost equals the sum of the marginal private cost plus the marginal external cost. b. The price will equal the marginal private cost of $40 a ton. c. If a tax is imposed equal to the marginal external cost, when 400 tons of paper are produced this tax will be $20 a ton. Hence the price will rise by $20, to $60 a ton, which is the same as the marginal social cost. Topic: Social cost Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

21) Suppose unregulated production of pesticides results in an equilibrium price and quantity of $400 and 1,000 tons per day, respectively, and a marginal external cost of $10 a ton. a. If the government were to eliminate the external cost by using pollution charges, what should the pollution charge be set at? b. If the government were to eliminate the external cost by using taxes, what should the tax equal? c. Would the government actions described above affect the quantity of pesticides produced? If yes, how? If no, why not? Answer: a. $10 a ton b. $10 a ton c. Yes, for both the pollution charge and the tax, the output of pesticides would be decreased to the efficient level. Topic: Government actions in the face of external costs Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

22) Use the figure above to answer this question. Explain what the marginal social cost curve and the marginal external cost mean. In the figure, if the market is competitive and unregulated, what is the equilibrium price and quantity? What is the efficient amount of output? Illustrate the deadweight loss.

Answer:

The marginal social cost curve shows the sum of marginal private cost and marginal external cost. Marginal external cost is the cost of producing an extra unit of a good that falls on people other than the firm. The (inefficient) market equilibrium is 8 units with a price of $150 per unit. The efficient quantity is 6 units. The deadweight loss is illustrated in the figure. Topic: Marketable permits Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

23) The above figure shows the market for fertilizer. When fertilizer is applied to lawns, it runs off into neighboring streams and ponds, killing fish and creating an external cost. a. What is the equilibrium price and quantity of fertilizer in an unregulated, competitive market? b. What is the efficient quantity of fertilizer? c. Suppose government imposes a tax equal to the marginal external cost. What is the equilibrium price paid by consumers and the equilibrium quantity after implementation of the tax? d. At the output level in part (c), how much is the tax? e. How much tax revenue does government collect? f. What is the deadweight loss borne by society if the externality is left uncorrected? Answer: a. The equilibrium price is $1,000 a ton and the equilibrium quantity is 6 tons per day. b. The efficient quantity is 4 tons per day. c. The price paid by consumers after the tax is $1,200 a ton and the equilibrium quantity is the efficient quantity, 4 tons per day. d. The tax is $400 a ton. e. The government collects $1,600 a day in taxes. f. The deadweight loss with no government action is $600 a day. Topic: Government actions in the face of external costs Skill: Level 4: Applying models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

24) The figure above shows the market for steel, the production of which creates pollution. a. What point represents the equilibrium price and what point represents the equilibrium quantity in an unregulated, competitive market? b. What area represents the deadweight loss of the unregulated, competitive market outcome? c. What point represents the efficient quantity? d. If the output level in part (c) was achieved through the use of a government imposed tax, what price would consumers pay? What price would the producers receive? What distance represents the amount of the tax? Answer: a. The price is given by point c and the quantity is given by point f. b. The deadweight loss is area gij. c. The efficient quantity is given by point e. d. Consumers pay a price equal to point b. Producers receive a price equal to point d. The amount of the tax is the distance bd (which is the same as gh). Topic: Taxes, inefficiency Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Revised AACSB: Analytical thinking

9.6 Essay: Positive Externalities: Education and Health Care 1) Explain the difference between a positive production externality and a positive consumption externality. Answer: A positive production externality occurs when a firm produces a good and that production provides benefits to parties other than the firm. A positive consumption externality occurs when a person consumes a good and that consumption provides benefits to others who did not consume the good. Topic: Positive production and positive consumption externalities Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

2) Does the existence of the University of Oklahoma affect citizens who do not attend the University? Answer: Education creates an external benefit. Hence people who do not attend the University of Oklahoma benefit from the education received by its students because this education has external benefits. For instance, the presence of hundreds of thousands of educated graduates from the University of Oklahoma raises public discourse on certain topics and makes the provision of high quality social activities, such as live theater, more common. Topic: External benefit Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

3) Explain the difference between marginal social benefit and marginal external benefit. Answer: Marginal social benefit equals the marginal benefit enjoyed by society (by consumers of the good plus others). It equals marginal benefit plus marginal external benefit. Marginal external benefit is the benefit from an additional unit of a good that is enjoyed by someone other than the consumer. Topic: External benefit Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

4) "Education in elementary and high schools has external benefits because families who have a lot of children do not pay any more than families without children." Is this statement correct or incorrect? Explain your answer. Answer: The statement is incorrect. Education has external benefits because educated people create benefits for everyone else. Who pays for the education is not an external benefit. Topic: External benefit Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Written and oral communication

5) Describe some of the external benefits associated with education. What can government do to encourage production of the efficient amount of education? Answer: External benefits to education include the facts that college graduates: ∙ communicate more effectively with others, ∙ tend to be better citizens, ∙ have lower crime rates, ∙ are more tolerant of others' views. To insure that the efficient amount of education is produced, the government could: ∙ provide education, as it does with public schools, ∙ subsidize education, as it does with state universities, or ∙ give consumers vouchers to reduce the cost of private schooling, as is happening in some states or with various college grant programs. Topic: External benefit Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Written and oral communication

6) Does inoculation against chicken pox have both private and external benefits? Answer: Yes, inoculation against chicken pox has both private and external benefits. The individual who is vaccinated benefits because he or she will not catch chicken pox. In addition, everyone who interacts with that person will benefit because they will not catch chicken pox from him or her. Topic: External benefit Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Written and oral communication

7) "External benefits lead to overproduction so that more than the efficient quantity is produced." Is the previous statement true or false? Answer: The statement is false. External benefits lead to underproduction so that less than the efficient quantity is produced. Topic: Inefficiency Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

8) Why does the existence of an external benefit lead to the production of less than the efficient quantity? Answer: Buyers ignore the presence of an external benefit because the benefit they receive is the private benefit. As a result, buyers do not take account of all the benefits from a good or service. Because buyers do not take account of all the benefits, their demand for the good or service, which reflects their private benefit, is less than the marginal social benefit, is less than the marginal social benefit. So, with the demand being less than the marginal social benefit, the equilibrium quantity is less than the efficient quantity. Topic: Inefficiency Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Written and oral communication

9) Why does government provide educational opportunities in the form of vouchers, private subsidies, and public provision? Answer: Education generates external benefits. With a better educated population, everyone is better off. The more educated the population, the more productive it is. Educated individuals need less social services than uneducated individuals. Crime rates are lower the more educated the population. And a more educated population makes it more likely to provide other goods with external benefits, such as high quality newspapers. But because part of the social benefit from education is an external benefit, an unregulated market will create less than the efficient amount of education. Hence government policies such as vouchers, subsidies, and public provision are attempts to overcome inefficiency and move the market to the efficient amount of education. Topic: Government actions in the face of externalities Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Written and oral communication

10) A private subsidy has what effect on the amount of a good or service produced? Is a subsidy an appropriate policy to offset the inefficiency from an external cost or an external benefit? Answer: A private subsidy increases the production of the good or service that is subsidized. Because it increases the production, a private subsidy is the appropriate policy to overcome the inefficiency that is the result of an external benefit. (A good or service with an external benefit is underproduced by a competitive, unregulated market.) Topic: Private subsidy Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Written and oral communication

11) Explain the process by which a private subsidy corrects an external benefit. Answer: If a good or service has an external benefit, an unregulated competitive market will produce less than the efficient quantity. A private subsidy, which is money given to firms, reduces the cost of production. With the subsidy, firms are willing to produce more at any given price. If the subsidy equals the marginal external benefit, production with the subsidy will be at the efficient level. Topic: Private subsidy Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

12) The table above gives the marginal social cost (which equals the price), marginal private benefit, and marginal social benefit of students attending Diablo Valley College (DVC) in Concord, California. a. When 4,500 students attend DVC, what does the marginal external benefit equal? b. If the market is competitive and left without government intervention, what is the quantity of students that will attend DVC and what will be the price of a course? c. What is the efficient quantity of students attending DVC? d. If the government can set the price per course, in order to have the efficient quantity of students attending DVC, what should the government set as the price? Answer: a. The marginal external benefit equals $40, the difference between the marginal social benefit ($60) and the marginal private benefit ($20). b. 3,500 students will attend and the price of a course will be $60. c. The efficient quantity is 4,000 students because at this quantity the marginal social benefit equals the marginal social cost. d. In order to have 4,000 students attend DVC, the government must set the price at $40 per course. Topic: Inefficient equilibrium Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

13) The figure above shows the market for polio vaccination in Pakistan. Polio vaccination confers an external benefit because one person's vaccination makes it less likely that other people will catch polio. a. If the market is competitive and left unregulated, how many doses of vaccine will be administered? b. If the Melinda and Bill Gates Foundation underwrites the cost of the vaccine by paying for a large fraction of the preparation and delivery cost, what will happen to the number of doses administered? Why? Answer: a. If the market is competitive and left unregulated, 4 million doses will be administered. b. If the Foundation underwrites the cost of the vaccine, the marginal cost of the vaccine will drop. The result will be similar to a government subsidy: the marginal cost curve will shift rightward, thereby increasing the number of doses administered. The market's efficiency will be increased. Topic: Inefficient equilibrium Skill: Level 1: Definition Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

14) The figure above shows the market for education. Education has an external benefit. a. If the market is competitive and left unregulated, how many students will be enrolled per year? b. What is the efficient number of students? c. In the figure, show the effect of a government subsidy that moves the market to the efficient number of students. What is the amount of the subsidy and what tuition must the students pay?

Answer: a. If the market is competitive and left unregulated, 4 million students will be enrolled. b. The efficient number of students enrolled is 6 million students.

c. The above figure shows the effect of the government subsidy and how the supply curve shifts. The subsidy is $6,000 and students pay tuition of $10,000. Topic: Subsidies Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

15) When young students are hungry, they can be disruptive and inattentive in class. Thus, providing lunch to students has external benefits. The figure above represents the market for school lunches before and after government vouchers are issued. a. What is the unregulated private market equilibrium? b. What is the efficient quantity of lunches? c. What is the amount of the voucher necessary to move the economy to the efficient number of lunches? d. When vouchers are used, what is the dollar price of the lunch that suppliers receive and what is the dollar price that consumers pay when the voucher is used? Answer: a. If the market is left unregulated, 4 million school lunches per day will be served and the price will be $1.50 per school lunch. b. The efficient quantity of lunches is 6 million school lunches per day. c. The amount of the voucher is $1.00. d. The dollar price of the lunch received by sellers is $2.00. The consumers have a voucher for $1, so the total dollar price paid by the consumers is $1.00. Topic: Vouchers Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

Essential Foundations of Economics, 8e (Bade) Chapter 10 Production and Cost 10.1 Economic Cost and Profit 1) The primary goal of a business firm is to A) promote fairness. B) make a quality product. C) promote workforce job satisfaction. D) maximize profit. E) increase its production. Answer: D Topic: Firm's goal Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

2) As a firm, Apple's goal is to A) maximize profit. B) develop new products. C) maximize sales. D) maximize revenue. E) maximize production. Answer: A Topic: Firm's goal Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: New AACSB: Application of knowledge

3) A firm's fundamental goal is A) different for each firm. B) to make a quality product. C) to maximize profit. D) to gain market share. E) to decrease its employment of workers in order to cut its costs. Answer: C Topic: Firm's goal Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

4) Accountants calculate A) economic depreciation as part of the firm's cost. B) depreciation using Internal Revenue Service rules. C) the opportunity cost of all the resources the firm uses. D) all the firm's implicit costs but only a few of its explicit costs. E) All of the above answers are correct. Answer: B Topic: Accounting cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

5) John fishes for a living. Last year, he sold $100,000 of fish. Bait, nets and other fishing supplies cost John $10,000 and he paid $40,000 in salaries to his helpers. Depreciation on his boat and other equipment, as calculated using IRS rules, was $15,000. What was John's profit as would be calculated by an accountant? A) $165,000 B) $100,000 C) $65,000 D) $35,000 E) None of the above answers is correct. Answer: D Topic: Accounting profit Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

6) Lauren runs a chili restaurant in San Francisco. Her total revenue last year equaled $111,000. The rent on her restaurant totaled $48,000. Her labor costs totaled $43,000. Her materials, food and other variable costs totaled $19,000. To Lauren's accountant, Lauren A) incurred a loss of $1,000. B) earned a profit of $1,000. C) incurred a loss of $111,000. D) earned a profit of $111,000. E) had a total cost equal to $91,000. Answer: B Topic: Accounting cost Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

7) Lauren runs a chili restaurant in San Francisco. Her total revenue last year was $110,000. The rent on her restaurant was $48,000, her labor costs were $42,000, and her materials, food and other variable costs were $20,000. Lauren could have worked as a biologist and earned $50,000 per year. An economist calculates her implicit costs as A) $150,000. B) $63,000. C) $50,000. D) $110,000. E) $0 because Lauren did not work as a biologist. Answer: C Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

8) When an economist uses the term "cost" referring to a firm, the economist refers to the A) price of the good to the consumer. B) explicit cost of producing a good or service but not the implicit cost of producing a good or service. C) implicit cost of producing a good or service but not the explicit cost of producing a good or service. D) opportunity cost of producing a good or service, which includes both implicit and explicit cost. E) cost that can be actually verified and measured. Answer: D Topic: Opportunity cost Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

9) From a firm's viewpoint, opportunity cost is the A) best alternative use customers can find for the firm's output. B) cost the firm must pay for the factors of production it employs to attract them from their best alternative use. C) accounting cost of resources. D) price a firm can charge for its output. E) cost of acquiring the opportunity to sell to its customers. Answer: B Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

10) A firm has explicit costs of $110,000 and total revenue of $120,000. Which of the following is true about the firm? A) The firm might be making an economic profit but we need more information about implicit costs to know for sure. B) The firm is definitely making an economic profit because it must be minimizing its opportunity cost. C) The firm is incurring an economic loss if implicit costs are $10,000. D) The firm is making a normal profit if implicit costs are $0. E) The firm may be making an economic profit but only if implicit costs are negative. Answer: A Topic: Economic profit Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: New AACSB: Analytical thinking

11) The cost that a firm pays in money to hire a resource is referred to as ________ cost. A) a minimized B) a maximized C) an explicit D) an implicit E) a total Answer: C Topic: Explicit cost Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

12) A cost paid in money is A) not an opportunity cost. B) an implicit cost and an opportunity cost. C) an explicit cost and an opportunity cost. D) not an accounting cost. E) an explicit cost but not an opportunity cost. Answer: C Topic: Explicit cost Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

13) Which of the following is an explicit cost in Jim's business venture? A) the salary Jim could have earned at another job B) the interest Jim does not earn because he invested his savings in his business C) the wages Jim pays his workers D) Jim's normal profit E) Answers A, B, and D are correct. Answer: C Topic: Explicit cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

14) Darryl runs a ranch in Jackson, Wyoming. The interest on the debt he incurred to buy his ranch totals $3,000 per year. For Darryl, the interest is A) an implicit cost. B) an explicit cost. C) his normal cost. D) his normal profit. E) part of his economic profit. Answer: B Topic: Explicit cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

15) Which of the following is an explicit cost of production? A) wages paid to workers B) the electric bill C) purchases of raw material D) Only answers A and B are explicit costs because the purchases of raw material is only an opportunity cost. E) Answers A, B, and C are all correct. Answer: E Topic: Explicit cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

16) When Ford hires Ernst and Young Consulting to help Ford redesign its marketing, Ford's payment to Ernst and Young is classified as A) an explicit cost. B) depreciation. C) an implicit cost. D) normal profit. E) economic profit. Answer: A Topic: Explicit cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

17) A cost incurred in the production of a good or service and for which the firm does not need to make a direct monetary payment, is referred to as ________ cost. A) a minimized B) a maximized C) an explicit D) an implicit E) an invisible Answer: D Topic: Implicit cost Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

18) ________ cost is defined as a cost of production that does not entail a direct money payment. A) An explicit B) An implicit C) A total D) A fixed E) A marginal Answer: B Topic: Implicit cost Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

19) If a business owner decided to expand her business but rather than borrowing money from a bank used her own funds, then A) she would be unable to earn a normal profit. B) there is no cost associated with the expansion. C) she would forego the opportunity to earn interest on the money. D) the amount of her funds she used is an explicit cost. E) the amount of her funds she used is part of her normal profit. Answer: C Topic: Implicit cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

20) Which of the following is an implicit cost? i. wages paid to workers ii. the normal profit iii. the electric bill A) i only B) ii only C) i and ii D) ii and iii E) Neither i, ii, nor iii Answer: B Topic: Implicit cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

21) Which of the following is an example of an implicit cost? A) rent on a building B) the cost of fertilizer for a farmer C) the economic depreciation of capital equipment the business owns D) the cost of fuel and materials E) wages paid to workers Answer: C Topic: Implicit cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

22) Which of the following is an implicit cost in Jim's business venture? i. the salary Jim could have earned at another job ii. the interest Jim must pay on the loan he incurred to help open his business iii. the interest Jim lost when he used his savings to help open his business A) i only B) ii only C) iii only D) i and iii E) ii and iii Answer: D Topic: Implicit cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

23) Which of the following are correct statements about implicit and explicit costs? i. Normal profit is an implicit cost. ii. Economic depreciation is an explicit cost. iii. Wages are an explicit cost. A) ii and iii B) i and iii C) iii only D) i, ii, and iii E) i only Answer: B Topic: Implicit cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

24) The opportunity cost of owning and using a firm's capital is defined as the capital's A) variable cost. B) fixed cost. C) economic depreciation. D) nonpayment depreciation. E) explicit cost. Answer: C Topic: Economic depreciation Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

25) Economic depreciation is the A) fall in value of the firm's capital, calculating using IRS rules. B) opportunity cost of owning and using the firm's capital, measured as the change in market value. C) decrease in the value of finished goods and services that are held in inventories prior to being sold. D) term given to a fall in a company's stock price. E) name given to how accountants calculate the depreciation of the company's capital. Answer: B Topic: Economic depreciation Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

26) Suppose Billy owns a hair salon in Dallas. He has one large hair dryer for which he paid $1,000. If he can sell the dryer one year later for $800, his total economic depreciation equals A) $1,000. B) $200. C) $800. D) $1,800. E) None of the above answers is correct. Answer: B Topic: Economic depreciation Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

27) A firm pays $50,000 for a machine that is used in production for one year, after which it is sold for $40,000 to another firm. The $10,000 difference is A) an explicit cost of production. B) economic depreciation, an implicit cost of production. C) normal profit. D) not counted as an economic cost of production. E) not an opportunity cost because it is not actually paid. Answer: B Topic: Economic depreciation Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

28) Interest is considered a(n) A) explicit cost when the firm pays a bank to borrow money. B) implicit cost when the firm owner uses his or her own funds to buy capital. C) return to entrepreneurship if the firm owner uses her own funds to buy capital. D) form of depreciation if the cost of borrowing increases. E) Both answers A and B are true. Answer: E Topic: Interest Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: New AACSB: Application of knowledge

29) Normal profit is a(n) ________ cost because ________. A) implicit; it represents the cost of not running another firm B) explicit; a firm must pay income taxes on its profit C) implicit; it represents the cost of economic depreciation D) accounting; wages are considered an explicit cost E) depreciation; the equipment the firm owns wears out over time Answer: A Topic: Normal profit Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: New AACSB: Application of knowledge

30) In economics, a "normal profit" is the return to A) labor. B) capital. C) land. D) entrepreneurship. E) Answers B and D are correct. Answer: D Topic: Normal profit Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

31) The return to entrepreneurship is known as A) economic profit. B) normal profit. C) opportunity revenue. D) normal revenue. E) explicit profit. Answer: B Topic: Normal profit Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

32) A normal profit is defined as A) total revenue minus explicit costs. B) the same thing as accounting profit. C) the return to entrepreneurship. D) total revenue minus implicit costs. E) the economic profit minus the implicit costs. Answer: C Topic: Normal profit Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

33) Normal profit is A) part of the firm's opportunity costs. B) the same as economic profits. C) part of the firm's explicit costs. D) Answers A and B are correct. E) Answers A and C are correct. Answer: A Topic: Normal profit Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

34) A normal profit is A) part of a firm's opportunity cost. B) equal to total revenue minus total opportunity cost. C) the same as economic profit. D) the same as accounting profit. E) almost always zero if the company is run efficiently. Answer: A Topic: Normal profit Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

35) A firm's total revenue minus its total opportunity cost is called its A) accounting profit. B) normal profit. C) economic profit. D) abnormal profit. E) entrepreneur's profit. Answer: C Topic: Economic profit Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

36) Economic profit equals total revenue minus total A) explicit costs. B) opportunity costs. C) implicit costs. D) accounting costs. E) entrepreneur's costs. Answer: B Topic: Economic profit Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

37) Which of the following is true? A) Profit as calculated by accountants and economic profit are not necessarily equal. B) Profit as calculated by accountants is always smaller than economic profit. C) Economic profit ignores implicit costs. D) The Internal Revenue Service taxes the firm's economic profit but not its normal profit. E) The Internal Revenue Service taxes the firm's normal profit but not its economic profit. Answer: A Topic: Economic profit Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

38) April quit her job as an accountant at Ernst and Young, where she was paid $45,000 per year. She started her own landscaping business. She rents machines and tools for $50,000 and pays $10,000 as wages to her help. These are her only costs. April earned total revenue of $100,000. A) Her accountant calculates her profit as $40,000. B) She has an economic loss. C) Her explicit cost is $105,000. D) Both answers A and B are correct. E) Both answers A and C are correct. Answer: D Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

39) Jennifer owns a pig farm near Salina, Kansas. Last year she earned $39,000 in total revenue while incurring $38,000 in explicit costs. She could have earned $27,000 as a teacher in Salina. These are all her revenue and costs. Therefore Jennifer earned an A) accounting profit of $1,000 but incurred an economic loss of $26,000. B) accounting profit of $1,000 but incurred an economic loss of $65,000. C) accounting profit of $1,000 but incurred an economic loss of $38,000. D) economic profit of $1,000. E) None of the above answers is correct. Answer: A Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

40) Suppose a firm's total revenue is $1,000,000. The firm has incurred explicit costs of $750,000. There is also $50,000 of forgone wages by the owner, $10,000 of forgone interest by the owner, $3,000 worth of economic depreciation, and $20,000 worth of normal profit. What is the firm's economic profit? A) $250,000 B) $200,000 C) $190,000 D) $167,000 E) $180,000 Answer: D Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

41) Dr. Khan starts his own dental practice after quitting his $150,000 job at The Mall Dental Clinic. His revenues for the first year are $500,000. He paid $90,000 in rent for the dental office, $60,000 for his office manager's salary, $24,000 for the dental hygienist, $150,000 for insurance, and $6,000 for other miscellaneous costs. The normal profit from running his business is $20,000. A) His accounting profit is $350,000. B) His economic profit is $150,000. C) His economic profit is zero. D) His accounting profit is zero. E) None of the above answers is correct. Answer: C Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

42) Dr. Khan starts his own dental practice after quitting his $150,000 job at The Mall Dental Clinic. His revenues for the first year are $500,000. He paid $90,000 in rent for the dental office, $60,000 for his office manager's salary, $24,000 for the dental hygienist, $150,000 for insurance, and $6,000 for other miscellaneous costs. The normal profit from running his business is $20,000. A) His explicit costs are $330,000. B) His implicit costs are $170,000. C) His economic profit is zero. D) Only answers A and C are correct. E) Answers A, B, and C are correct. Answer: E Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

43) Suppose that a firm earned $500,000 in total revenue. At the same time, it incurred labor costs of $200,000; economic depreciation of $50,000; normal profit of $75,000; interest paid to the bank of $25,000; and used other factors of production that cost $100,000. The economic profit earned by the firm equals A) $275,000. B) $175,000. C) $50,000. D) $200,000. E) $500,000. Answer: C Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

44) Bill is an economics professor who earns $40,000 teaching but decides to leave and fulfill his dream of catering barbecues. During his first year of barbecuing he earned total revenue of $60,000. He spent $30,000 on food and supplies. He also paid his wife $10,000 to help serve food. The normal profit for an entrepreneur running a barbecue business is $3,000. He also rented an industrial grill/fry truck for $12,000. An accountant would conclude that Bill's profit was A) $30,000. B) $20,000. C) $8,000. D) -$2,000. E) $40,000. Answer: C Topic: Accounting profit Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

45) Bill is an economics professor who earns $37,000 teaching but decides to leave and fulfill his dream of catering barbecues. During his year of barbecuing he earned total revenue of $60,000. He spent $30,000 on food and supplies. He also paid his wife $10,000 to help serve food. The normal profit for an entrepreneur running a barbecue business is $3,000. Bill also rented an industrial grill/fry truck for $12,000. Bill had an economic A) profit of $20,000. B) loss of -$32,000. C) loss of -$42,000. D) profit of $28,000. E) profit of zero. Answer: B Topic: Economic loss Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

46) The paramount goal of a firm is to A) maximize profit. B) maximize sales. C) maximize total revenue. D) minimize costs. E) force its competitors into bankruptcy. Answer: A Topic: Firm's goal Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

47) For a business, opportunity cost measures A) only the cost of labor and materials. B) only the implicit costs of the business. C) the cost of all the factors of production the firm employs. D) only the explicit costs the firm must pay. E) all of the firm's costs including its normal profit and its economic profit. Answer: C Topic: Opportunity cost Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

48) Costs paid in money to hire a resource is A) normal profit. B) an implicit cost. C) an explicit cost. D) an alternative-use cost. E) economic profit. Answer: C Topic: Explicit cost Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

49) Which of the following is an example of an implicit cost? A) wages paid to employees B) interest paid to a bank on a building loan C) the cost of using capital an owner donates to the business D) dollars paid to a supplier for materials used in production E) liability insurance payments made only once a year Answer: C Topic: Implicit cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

50) The opportunity cost of a firm using its own capital is A) economic depreciation. B) self ownership depreciation. C) economic loss. D) normal loss. E) capital loss. Answer: A Topic: Normal profit Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

51) The difference between a firm's total revenue and its total cost is its ________ profit. A) explicit B) normal C) economic D) accounting E) excess Answer: C Topic: Economic profit Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

10.2 Short-Run Production 1) The short run is the time frame A) during which the quantities of all resources are fixed. B) that is less than a year. C) during which the quantities of some resources are fixed. D) during which the quantities of all resources are variable. E) during which all costs are implicit costs. Answer: C Topic: Short run Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

2) The short run is A) less than one year. B) the time frame in which all resources are fixed. C) the time frame in which some resources are fixed. D) the time frame in which output is fixed. E) a time frame short enough so that some costs are explicit costs. Answer: C Topic: Short run Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

3) Austin owns the Fruit Bowl food truck. Which of the following would be short run decisions for Austin? i. how much fruit to buy ii. how many workers to hire iii. installing a new stove in his truck A) i and ii B) i, ii and iii C) i only D) ii only E) ii and iii Answer: A Topic: Short-run decisions Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: New AACSB: Application of knowledge

4) The short run is a time period that is A) equal to a day. B) too short to change the amount of labor hired. C) too short to change the size of the firm's plant. D) long enough to change the size of the firm's plant. E) too short to change the amount of any resource the firm employs. Answer: C Topic: Short run Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

5) To produce more output in the short run, a firm must employ more of A) all its resources. B) its fixed resources. C) its variable resources. D) the least costly resources regardless of whether they are fixed or variable. E) Firms cannot produce more output in the short run. Answer: C Topic: Short run Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

6) Which of the following is a list of fixed inputs for a hospital? A) bandages, casts, and other materials B) antibiotics, pain medication, and other prescription drugs C) the emergency room, intensive care unit, and other facilities D) the nurses, receptionists, and other employees E) the lobby, the doctors, and the electricity it uses Answer: C Topic: Fixed input Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

7) The long run is a time period that is A) five years or longer. B) long enough to change the amount of labor employed. C) long enough to change the size of the firm's plant and all other inputs. D) long enough to change the amount of labor employed but not to change the size of the plant. E) None of the above answers describes the long run. Answer: C Topic: Long run Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

8) The long run is defined as A) any time after six months. B) any time after one year. C) the period of time when all resources are fixed. D) the period of time when most (more than 50 percent) resources are variable. E) the period of time when all resources are variable. Answer: E Topic: Long run Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

9) The long run is a time period in which A) some of the firm's resources are fixed. B) all of the firm's resources are fixed. C) all of the firm's resources are variable. D) the firm cannot increase its output. E) all costs become explicit costs. Answer: C Topic: Long run Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

10) In the long run, A) some resources are fixed. B) all resources are variable. C) output cannot be varied. D) all resources are fixed. E) Both answers B and C are correct. Answer: B Topic: Long run Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

11) In the long run, the firm ________ change the number of workers it employs and ________ change the size of its plant. A) can; can B) can; cannot C) cannot; can D) cannot; cannot E) In order to answer the question, more information is needed about how long the long run is. Answer: A Topic: Long run Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

12) The total product curve shows the relationship between total product and A) cost. B) the quantity of labor. C) the average product. D) the marginal product. E) the marginal cost. Answer: B Topic: Total product curve Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

13) Moving along the total product curve, which of the following is held constant? A) quantity of labor B) total product C) technology D) total cost E) None of the above answers is correct. Answer: C Topic: Total product curve Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

14) Which of the following statements correctly describes a total product curve? A) Points above the total produce curve are efficient. B) The curve shows that output always increases as labor employed increases. C) The curve separates attainable outputs from unattainable outputs. D) The curve shows minimum levels of output. E) The curve first falls, reaches a minimum, and then rises. Answer: C Topic: Total product curve Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

15) The figure shows the total product curve for the Fruit Bowl food truck. When labor increases from 1 worker to 2 workers, total product increases to ________ meals and marginal product equals ________ bowls. A) 10; 5 B) 5; 10 C) 2; 2 D) 10; 2 E) 2; 5 Answer: A Topic: Total product curve Skill: Level 3: Using models Section: Checkpoint 10.2 Status: New AACSB: Application of knowledge

16) The figure shows the total product curve for the Fruit Bowl food truck. If the food truck increases production from 10 to 17 meals per hour, the marginal product is in the range where it ________ and the marginal product is ________ the average product. A) increases; greater than B) increases; less than C) decreases; greater than D) increases; is equal to E) does not change; is equal to Answer: A Topic: Marginal product and average product Skill: Level 3: Using models Section: Checkpoint 10.2 Status: New AACSB: Analytical thinking

17) The figure shows the total product curve for the Fruit Bowl food truck. If production increases from 19 to 20 meals per hour, the marginal product is in the range where it ________ and the marginal product ________ the average product. A) decreases; is greater than B) increases; is less than C) increases; is greater than D) reaches a maximum; equals E) decreases; is less than Answer: E Topic: Marginal product and average product Skill: Level 3: Using models Section: Checkpoint 10.2 Status: New AACSB: Analytical thinking

18) The figure shows the total product curve for the Fruit Bowl food truck. As the food truck hires ________ workers, the marginal product(s) ________. A) up to 3; are increasing B) up to 3; are decreasing C) between 3 and 5; are increasing D) between 3 and 5; equal to the average product E) over 4; are greater than the average product Answer: A Topic: Marginal product and average product Skill: Level 3: Using models Section: Checkpoint 10.2 Status: New AACSB: Analytical thinking

19) The marginal product of labor is the change in A) total cost from employing one more worker. B) total revenue from employing one more worker. C) average product from employing one more worker. D) total output from employing one more worker. E) total output divided by the change in cost from employing one more worker. Answer: D Topic: Marginal product Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

20) The marginal product of labor equals the change in ________ from a one-unit increase in the quantity of labor. A) total product B) average product C) total cost D) the slope of the average product curve E) the wage rate Answer: A Topic: Marginal product Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

21) The marginal product of labor is A) total product divided by labor. B) the change in total product divided by the increase in labor. C) a measure of labor. D) output that does not meet quality specifications. E) total product minus the quantity of labor. Answer: B Topic: Marginal product Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

22) When the slope of the total product curve is steep, the marginal product is A) zero. B) negative. C) high. D) low. E) not defined. Answer: C Topic: Marginal product Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

23) At the Punjab Bakery, two workers can decorate 14 cakes in an hour and three workers can decorate 18 cakes in an hour. The marginal product of the third worker is A) 18 cakes, and the average product for three workers is 6 cakes. B) 9 cakes and is equal to the average product. C) 4 cakes, and the average product for three workers is 6 cakes. D) 32 cakes, and the average product for three workers is 9 cakes. E) 6 cakes, and the average product for three workers is also 6 cakes. Answer: C Topic: Marginal product Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

24) Jill runs a factory that makes lie detectors in Little Rock, Arkansas. This month, Jill's 34 workers produced 690 machines. Suppose Jill adds one more worker and, as a result, her factory's output increases to 700. Jill's marginal product of labor from the last worker hired equals A) 10. B) 20. C) 690. D) 700. E) None of the above answers is correct. Answer: A Topic: Marginal product Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

25) If 9 workers can produce 1,550 units of output and 10 workers can produce 1,700 units of output, then the marginal product of the 10th worker is A) 1,700 units. B) 1,550 units. C) 150 units. D) 170 units. E) 155 units. Answer: C Topic: Marginal product Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

26) Increasing marginal returns always occurs when the A) marginal product of an additional worker exceeds the marginal product of the previous worker. B) average product of an additional worker exceeds the average product of the previous worker. C) marginal product of an additional worker is less than the marginal product of the previous worker. D) average product of an additional worker is less than the average product of the previous worker. E) marginal product of an additional worker exceeds the average product of the previous worker. Answer: A Topic: Increasing marginal returns Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

Quantity of Labor (workers) Total Product (units per hour)

0 0

1 2

2 5

3 9

4 5 6 15 18 17

27) The table above shows the total product schedule for The X Firm. Increasing marginal returns occur until the ________ worker because ________. A) 4th; the marginal product of the 4th worker exceeds the 3rd worker, but not the 5th worker B) 5th; output is maximized C) 5th; output declines with the 6th worker D) 3rd; the average product of labor is also increasing E) 4th; the average product of labor is also increasing Answer: A Topic: Increasing marginal returns Skill: Level 3: Using models Section: Checkpoint 10.2 Status: New AACSB: Analytical thinking

28) The table above shows the total product schedule for The X Firm. Decreasing marginal returns occur with the ________ worker because ________. A) 5th; the marginal product of labor for the 5th worker is less than the marginal product of the 4th worker B) 5th; the average product of labor is also declining C) 4th; output reaches is maximum D) 6th; output starts to decline E) 6th; the marginal product of labor is greater than the average product of labor Answer: A Topic: Decreasing marginal returns Skill: Level 3: Using models Section: Checkpoint 10.2 Status: New AACSB: Analytical thinking

29) The table above shows the total product schedule for The X Firm. The average product of labor is maximized at ________ workers because ________. A) 4; productivity is maximized when the 4th worker is employed B) 3; output starts to decrease with the 4th worker C) 5; output is maximized with the 5th worker D) 4; the marginal product of labor is increasing with the 4th worker E) 5; the APL exceeds the MPL for the 5th worker Answer: A Topic: Average product Skill: Level 3: Using models Section: Checkpoint 10.2 Status: New AACSB: Analytical thinking

30) Jeremiah runs a bullfrog farm in Frogville, Oklahoma. Jeremiah notices that each additional worker he employs adds more to the total output than does the previous worker. Jeremiah must be A) experiencing increasing marginal returns to labor. B) producing at a point where the average product of labor decreases as more workers are employed. C) producing at a point below his total product curve. D) mistaken because the law of decreasing returns points out that it cannot be the case that the marginal product increases as more workers are employed. E) producing at a point where the average product of labor exceeds the marginal product of labor. Answer: A Topic: Increasing marginal returns Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

31) Increasing marginal returns to labor A) occur when a particularly efficient worker is employed. B) describe the portion of a total product curve where the marginal product is negative. C) mean that two workers produce less than twice the output of one worker. D) are the result of specialization and division of labor in the production process. E) occur only when there are increasing marginal returns to capital. Answer: D Topic: Increasing marginal returns Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

32) When the marginal product of an additional worker is less than the marginal product of the previous worker, there are ________ returns to labor. A) increasing total B) decreasing total C) increasing marginal D) decreasing marginal E) constant average Answer: D Topic: Decreasing marginal returns Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

33) Decreasing marginal returns A) can be avoided if a firm watches costs. B) affect all firms, but at different production levels. C) affect all firms at the same level of production. D) disappear when the firm produces a large enough level of output. E) mean that the average product of labor starts as a negative number and then becomes positive. Answer: B Topic: Decreasing marginal returns Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

34) Decreasing marginal returns occur in the short run as more labor is hired to work in a fixed sized plant because A) less efficient and less productive workers are hired. B) adding more workers exhausts the possible gains from specialization. C) the entrepreneur does not know how to manage more workers. D) each worker will produce more than the worker previously hired. E) the plant becomes less specialized. Answer: B Topic: Decreasing marginal returns Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

35) The law of decreasing returns states that as a firm uses more of a A) fixed input, with a given quantity of variable inputs, the marginal product of the fixed input eventually decreases. B) variable input, total output will increase indefinitely. C) variable input, with a given quantity of fixed inputs, the marginal product of the variable input eventually decreases. D) variable input, output will begin to fall immediately. E) fixed input and a variable input, the marginal product of the fixed input and the marginal product of the variable input both decrease. Answer: C Topic: Law of decreasing returns Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

36) Average product is equal to A) marginal product + total product. B) total product ÷ marginal product. C) total product ÷ quantity of labor. D) total product × quantity of labor. E) marginal product × quantity of labor. Answer: C Topic: Average product Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

37) Jill runs a factory that makes lie detectors in Little Rock, Arkansas. This month, Jill's 34 workers produced 680 machines. Jill's average product of labor equaled ________ lie detectors per worker. A) 680 B) 34 C) 23 D) 20 E) None of the above answers is correct. Answer: D Topic: Average product Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

38) If 10 workers can produce 1,500 units of output and 11 workers can produce 1,600 units of output, then the average product of 11 workers is A) 1,600 units. B) 1,500 units. C) 145.5 units. D) 100 units. E) 136.4 units. Answer: C Topic: Average product Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Revised AACSB: Analytical thinking

39) Denise owns a plant that produces watch parts in Ohio. Denise noticed that when she hired the last worker, that worker's marginal product exceeded the marginal product of the previous worker. As a result, when the last worker was hired, Denise's average product of labor A) decreased. B) increased. C) did not change. D) perhaps changed, but there is not enough information to determine whether or not it did change. E) equals the marginal product of labor. Answer: B Topic: Average product Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

40) Kenya owns a lawn mowing company. His total product schedule is in the above table. The marginal product of the fourth worker is ________ lawns mowed per week. A) 80 B) 25 C) 20 D) 5 E) 320 Answer: D Topic: Marginal product Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

41) Kenya owns a lawn mowing company. His total product schedule is in the above table. When 4 workers are employed, the average product is ________ lawns mowed per week. A) 80 B) 25 C) 20 D) 5 E) 320 Answer: C Topic: Average product Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

42) Kenya owns a lawn mowing company. His total product schedule is in the above table. Decreasing marginal returns first occur with the A) first worker. B) second worker. C) third worker. D) fourth worker. E) fifth worker. Answer: B Topic: Decreasing marginal returns Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

43) The above table shows the total product schedule for Hair Today, a hair styling salon. Based on the table, the marginal product for Hair Today A) never reaches a maximum. B) decreases after the 1st worker. C) reaches a maximum with the 4th worker. D) reaches a maximum with the 3rd worker. E) reaches a maximum with the 5th worker. Answer: D Topic: Marginal product Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

44) The above table shows the total product schedule for Hair Today, a hair styling salon. The average product when four workers are hired is A) 10 hair stylings. B) 15 hair stylings. C) 20 hair stylings. D) 240 hair stylings. E) the same as when five workers are hired. Answer: B Topic: Average product Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

45) Which of the following is correct about marginal and average products? A) When the marginal product is increasing, the average product must be increasing. B) When the marginal product exceeds the average product, the average product must be increasing. C) When the average product is increasing, the marginal product must be decreasing. D) When the marginal product is decreasing, the average product must be decreasing. E) When the marginal product is increasing, the average product must be decreasing. Answer: B Topic: Marginal and average product Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

46) When the average product is at its maximum, A) the marginal product is increasing as output increases. B) the marginal product is negative. C) it is equal to the marginal product. D) total product is also at its maximum. E) total product is at its minimum. Answer: C Topic: Marginal and average product Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

47) Under which of the following sets of circumstances is it definitely the case that the average product increases as more labor is hired? A) Total product increases as more labor is hired. B) The marginal product is equal to the average product. C) The marginal product is positive. D) The marginal product is greater than the average product. E) The marginal product is less than the average product. Answer: D Topic: Marginal and average product Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

48) The average product is the greatest in the short run when the A) total product is maximized. B) marginal product is equal to zero. C) marginal product is maximized. D) marginal product is equal to the average product. E) marginal product is greater than the average product. Answer: D Topic: Marginal and average product Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

49) The table above shows the total product schedule for Rick's Lawn Service, a yard care company. The total product schedule shows A) increasing marginal returns when the 6th worker is hired. B) decreasing marginal returns when the 1st worker is hired. C) first increasing and then decreasing marginal returns. D) output first increases then increases. E) only decreasing marginal returns. Answer: C Topic: Total product schedule Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

50) The table above shows the total product schedule for Rick's Lawn Service, a yard care company. Increasing marginal returns A) end when the fourth worker is hired. B) occur at all levels of employment. C) occur as long as output increases. D) end when the second worker is hired. E) never occur. Answer: A Topic: Increasing marginal returns Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

51) The table above shows the total product schedule for Rick's Lawn Service, a yard care company. Decreasing marginal returns start to occur after the ________ worker is hired. A) first B) fourth C) fifth D) sixth E) third Answer: C Topic: Decreasing marginal returns Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

52) The table above shows the total product schedule for Rick's Lawn Service, a yard care company. When the 4th worker is hired, the ________ product of labor equals ________ lawns mowed. A) average; 60 B) average; 3.75 C) marginal; 3.75 D) marginal; 0 E) marginal; 15 Answer: B Topic: Average product Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

53) The table above shows the total product schedule for Rick's Lawn Service, a yard care company. The average product of labor ________ when the 7th worker is hired. A) reaches its maximum B) equals 1 lawn mowed C) equals 28 lawns mowed D) equals 4 lawns mowed E) equals 2 lawns mowed Answer: D Topic: Average product Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

54) The table above shows the total product schedule for Rick's Lawn Service, a yard care company. When the ________ worker is hired, the average product of labor ________ the marginal product of labor. A) 4th; exceeds B) 5th; exceeds C) 6th; exceeds D) 7th; is less than E) 7th; equals Answer: C Topic: Marginal and average product Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

55) The table above shows the total product schedule for Rick's Lawn Service, a yard care company. When does the average product of labor equal the marginal product of labor? A) between the 4th and 5th workers B) at the 5th worker C) between the 5th and 6th workers D) between the 6th and 7th workers E) between 0 workers and the 3rd worker Answer: D Topic: Marginal and average product Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

56) The short run is a time period during which A) some of the firm's resources are fixed. B) all of the firm's resources are fixed. C) all of the firm's resources are variable. D) the fixed cost equals zero. E) the firm cannot increase its output. Answer: A Topic: Short run Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

57) In the short run, firms increase output A) only by increasing the size of their plant. B) only by decreasing the size of their plant. C) only by increasing the amount of labor used. D) only by decreasing the amount of labor used. E) either increasing the amount of labor used or increasing the size of their plant. Answer: C Topic: Short run Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

58) Which of the following is correct? A) The short run for a firm can be longer than the long run for the same firm. B) The short run is the same for all firms. C) The long run is the time frame in which the quantities of all resources can be varied. D) The long run is the time frame in which all resources are fixed. E) The long run does not exist for some firms. Answer: C Topic: Long run Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

59) Marginal product equals A) the total product produced by a certain amount of labor. B) the change in total product that results from a one-unit increase in the quantity of labor employed. C) total product divided by the quantity of labor. D) the amount of labor needed to produce an increase in production. E) total product minus the quantity of labor. Answer: B Topic: Marginal product Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

60) If 6 workers can wash 42 cars a day and 7 workers can wash 50 cars a day, then the marginal product of the 7th worker equals A) 7.1 cars a day. B) 7 cars a day. C) 42 cars a day. D) 50 cars a day. E) 8 cars a day. Answer: E Topic: Marginal product Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Revised AACSB: Analytical thinking

61) Increasing marginal returns occur when the A) average product of an additional worker is less than the average product of the previous worker. B) marginal product of an additional worker exceeds the marginal product of the previous worker. C) marginal product of labor is less than the average product of labor. D) total output of the firm is at its maximum. E) total product curve is horizontal. Answer: B Topic: Increasing marginal returns Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

62) If 25 workers can pick 100 flats of strawberries per hour, then average product is A) 100 flats per hour. B) 125 flats per hour. C) 75 flats per hour. D) 4 flats per hour. E) More information is needed about how many flats 24 workers can pick. Answer: D Topic: Average product Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

10.3 Short-Run Cost 1) Total cost includes A) the cost of variable resources only. B) the cost of fixed resources only. C) the cost of both variable and fixed resources. D) the cost of neither variable nor fixed resources. E) all explicit costs and all the implicit costs that actually must be paid using money. Answer: C Topic: Total cost Skill: Level 1: Definition Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

2) Chuck owns a factory that produces leather footballs. His total fixed cost equaled $86,000 last year. His total cost equaled $286,000 last year. Hence Chuck's A) total variable cost was zero. B) incurred an economic loss. C) total variable cost equaled $200,000. D) total variable cost equaled $372,000. E) None of the above answers is correct. Answer: C Topic: Total cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

3) If Melissa owns a software company that incurs no fixed costs, then A) her total cost equals her total variable cost. B) she will earn an economic profit. C) her total variable cost is less than her total cost. D) her total cost equals zero. E) her marginal cost must equal zero. Answer: A Topic: Total cost Skill: Level 2: Using definitions Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

4) In the short run, a firm cannot change the amount of capital it uses. Therefore the cost of capital is a A) short-run cost. B) variable cost. C) productivity cost. D) fixed cost. E) marginal cost. Answer: D Topic: Total fixed cost Skill: Level 1: Definition Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

5) The cost that does not change as output changes is A) total fixed cost. B) average fixed cost. C) total variable cost. D) average variable cost. E) marginal cost. Answer: A Topic: Total fixed cost Skill: Level 1: Definition Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

6) Which of the following costs can be positive when output is zero? A) average variable cost B) total variable cost C) marginal cost D) total fixed cost E) None of the above because when output is zero there are no costs. Answer: D Topic: Total fixed cost Skill: Level 2: Using definitions Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

7) Which of the following is a fixed cost for ACME manufacturing? A) wages paid to labor B) the annual fire and theft insurance premiums C) the utility bill D) raw material costs E) the cost of shipping its product to market Answer: B Topic: Total fixed cost Skill: Level 2: Using definitions Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

8) Because the amount of labor a firm employs can be changed, the cost of labor is known as A) minimum cost. B) variable cost. C) maximum cost. D) fixed cost. E) an unavoidable cost. Answer: B Topic: Total variable cost Skill: Level 1: Definition Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

9) If a firm does not produce any output, its A) total fixed cost must be zero. B) economic profit must be positive. C) total variable cost must be zero. D) total costs must be zero. E) marginal cost must be zero. Answer: C Topic: Total variable cost Skill: Level 2: Using definitions Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

10) In the short run, total variable cost A) includes the cost of capital. B) includes the cost of labor. C) includes both the cost of capital and of labor. D) does not change when production changes. E) is positive when output is zero. Answer: B Topic: Total variable cost Skill: Level 2: Using definitions Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

11) The total variable cost curve ________ because ________ as output increases. A) slopes upward; variable cost increases B) slopes upward; marginal cost increases C) slopes downward; variable cost increases D) slopes downward; marginal cost increases E) is horizontal; fixed cost does not change Answer: A Topic: Total variable cost Skill: Level 2: Using definitions Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

12) Marginal cost equals A) total cost minus total variable cost. B) total fixed cost divided by total output. C) total variable cost divided by total output. D) the change in total cost that results from a one-unit increase in output. E) the change in fixed cost that results from a one-unit increase in output. Answer: D Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

13) The change in cost that results from a one-unit increase in output is called the A) average fixed cost. B) per-unit variable cost. C) per-unit total cost. D) marginal cost. E) average cost change. Answer: D Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

14) As a typical firm increases its output, its marginal cost A) is constant. B) decreases at first and then increases. C) increases at first and then decreases. D) decreases. E) is negative at first and then positive. Answer: B Topic: Marginal cost Skill: Level 2: Using definitions Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

15) When marginal cost is positive, total cost is ________ as output increases. A) increasing B) decreasing C) constant D) negative E) undefined Answer: A Topic: Marginal cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

16) If total fixed cost increases, which of the following will NOT change? A) total cost B) average fixed cost C) marginal cost D) average total cost E) ALL costs increase when total fixed cost increases. Answer: C Topic: Marginal cost Skill: Level 4: Applying models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

17) Scott owns a law-enforcement training operation in Boise, Idaho. He employs three trainers. The last trainer Scott hired increased Scott's total cost by $466 per week even though the trainer brought in only one new client. Hence Scott's A) total variable cost equals $466. B) marginal cost of the last client equals $466. C) marginal cost of the last worker equals $233. D) total variable cost equals $233. E) total fixed cost of the last client equals $466. Answer: B Topic: Marginal cost Skill: Level 2: Using definitions Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

OUTPUT 0 1 2 3 4 5

Total Cost $100 $140 $160 $200 $240 $330

Fixed Cost $100 $100 $100 $100 $100 $100

Average Variable Cost Variable Cost $40 $60 $100 $140 $230

$40 $30 $33.33 $35 $46

Average Total Cost $140 $80 $67 $60 $66

18) The table above gives the cost schedule for The X Firm. The data show that The X Firm's ________ curve is ________. A) ATC; U-shaped because the firm fixed costs are spread over larger amounts of output and the firm experiences decreasing marginal returns B) AFC; U-shaped because the firm spreads its fixed costs over larger and large amounts of output C) AVC; always declining because costs are divided across ever-increasing amounts of output D) MC; U-shaped because explicit costs exceed implicit costs E) ATC; U-shaped because output increases as costs increase Answer: A Topic: Average total cost curve Skill: Level 3: Using models Section: Checkpoint 10.3 Status: New AACSB: Analytical thinking

Labor (workers) 0 1 2 3 4

Output (bikes) 0 20 50 60 64

Total fixed Total variable costs (dollars) cost (dollars) 200 100

Total cost (dollars)

19) The table above gives costs at Jan's Bike Shop. Unfortunately, Jan's record keeping has been spotty. Each worker is paid $100 a day. Labor costs are the only variable costs of production. What is the total cost of producing 50 bikes? A) $100 B) $200 C) $300 D) $400 E) $500 Answer: D Topic: Total cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

20) The table above gives costs at Jan's Bike Shop. Unfortunately, Jan's record keeping has been spotty. Each worker is paid $100 a day. Labor costs are the only variable costs of production. What is the total fixed cost of producing 64 bikes? A) $200 B) $300 C) $400 D) $500 E) $600 Answer: A Topic: Total fixed cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

21) The table above gives costs at Jan's Bike Shop. Unfortunately, Jan's record keeping has been spotty. Each worker is paid $100 a day. Labor costs are the only variable costs of production. What is the total variable cost of producing 60 bikes? A) $200 B) $300 C) $400 D) $500 E) None of the above answers are correct. Answer: B Topic: Total variable cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

22) The Jerry-Berry Ice Cream Shoppe's total cost schedule is in the above table. Based on the table, which of the following is correct? A) The total fixed cost is $1. B) The average fixed cost of 1 gallon is $1.00. C) The average variable cost of 2 gallons of ice cream is $1.00 per gallon. D) Only answers A and B are correct. E) Answers A, B, and C are correct. Answer: E Topic: Costs Skill: Level 1: Definition Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

23) The Jerry-Berry Ice Cream Shoppe's total cost schedule is in the above table. Based on the table, the marginal cost of producing the fourth gallon of ice cream is A) $2. B) $3. C) $5. D) $8. E) $32. Answer: B Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

24) Paulette owns a pizza parlor. Her total cost schedule is in the above table. Her total fixed cost is equal to A) $20. B) $35. C) $79. D) $85. E) Some amount, but more information is needed to determine her fixed cost. Answer: A Topic: Total fixed cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

25) Paulette owns a pizza parlor. Her total cost schedule is in the above table. Her total variable cost of producing four pizzas per hour is A) $20. B) $49. C) $51. D) $71. E) Some amount, but more information is needed to determine this total variable cost. Answer: C Topic: Total fixed cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

26) Paulette owns a pizza parlor. Her total cost schedule is in the above table. Her marginal cost of producing the fifth pizza is A) $8. B) between $8.01 and $10.00. C) between $10.01 and $14.00. D) between $14.01 and $78.00. E) more than $78.01. Answer: A Topic: Marginal cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

27) In the above figure, curve A is the ________ curve and curve B is the ________ curve. A) total variable cost; total fixed cost B) total cost; total fixed cost C) total fixed cost; total variable cost D) total cost; total variable cost E) total variable cost; total cost Answer: D Topic: Total cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

28) In the above figure, curve A is the ________ curve and curve C is the ________ curve. A) total variable cost; total fixed cost B) total cost; total fixed cost C) total fixed cost; total variable cost D) total cost; total variable cost E) total variable cost; total cost Answer: B Topic: Total cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

29) Average variable cost equals A) fixed cost divided by output. B) total variable cost divided by output. C) marginal cost divided by output. D) marginal cost plus fixed cost. E) marginal cost multiplied by output. Answer: B Topic: Average variable cost Skill: Level 1: Definition Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

30) The graph shows the total cost for Phil's Phone Repair. The average total cost to repair ________ phones is ________. A) 5; $24.88 B) 5; $21.33 C) 5; $6.80 D) 4; $6.33 E) 4; $24.88 Answer: A Topic: Average total cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: New AACSB: Application of knowledge

31) The graph shows the total cost curve for Phil's Phone Repair. The total fixed cost of repairing ________ phones is ________. A) 5; $90 B) 6; $3 C) 5; $128 D) 5; $24.88 E) More information is needed to answer the question. Answer: A Topic: Total fixed cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: New AACSB: Application of knowledge

32) Average total cost is equal to A) average fixed cost + average variable cost. B) total cost ÷ quantity. C) the change in total cost when output changes by one unit. D) Answers A and B are correct. E) Answers A and C are correct. Answer: D Topic: Average total cost Skill: Level 1: Definition Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

33) The figure shows the cost curves for Phil's Phone Repair, a cell phone repair firm. When output is ________ repaired phones, average total cost is ________. A) below 12; increasing B) more than 12; increasing C) between 10 and 12; less than marginal cost D) greater than 5; constant E) less than 5; increasing Answer: B Topic: Average total cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: New AACSB: Application of knowledge

34) The figure shows the cost curves for Phil's Phone Repair, a cell phone repair firm. The figure shows marginal cost ________ which explains why ________. A) is decreasing up until 5 units; average total cost decreases B) is less than average total cost up until 12 units; average total cost decreases C) is greater than average total cost; average variable cost decreases D) is greater than average total cost when more than 12 phones are repaired; average total cost increases E) both B and D are correct Answer: E Topic: Marginal cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: New AACSB: Application of knowledge

35) The figure shows the cost curves for Phil's Phone Repair, a cell phone repair firm. If Phil increases his workers' wages, ________ curve(s) will shift ________. A) the MC, ATC and AVC; upward B) only the MC; upward C) only the AVC; upward D) the AVC and ATC; downward as production falls E) the MC, AVC and ATC; downward as production falls Answer: A Topic: Cost curves Skill: Level 3: Using models Section: Checkpoint 10.3 Status: New AACSB: Application of knowledge

36) The figure shows the cost curves for Phil's Phone Repair, a cell phone repair firm. Using this information, we know that the average product of repairing phones reaches A) a minimum when 10 phones are repaired each hour. B) equals the average of cost of repairing phones. C) a maximum when 10 phones are repaired each hour. D) a minimum when between 5 and 10 phones are repaired. E) a maximum when more that 12 phones are repaired. Answer: C Topic: Average product Skill: Level 5: Critical thinking Section: Checkpoint 10.3 Status: New AACSB: Analytical thinking

37) Average total cost equals A) the change in total cost divided by the change in output. B) total fixed cost divided by output. C) average fixed cost plus average variable cost. D) total cost minus total variable cost. E) average fixed cost plus average variable cost plus marginal cost. Answer: C Topic: Average total cost Skill: Level 1: Definition Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

38) Which of the following always decreases when output increases? A) total fixed cost B) marginal cost C) average variable cost D) average fixed cost E) total cost Answer: D Topic: Average fixed cost Skill: Level 1: Definition Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

39) The average fixed cost curve A) is always positively sloped. B) is U-shaped. C) has an upside-down U shape. D) is always negatively sloped. E) is horizontal. Answer: D Topic: Average fixed cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

40) The total product is 10 units. The average total cost is $30 and the average fixed cost is $10. What is the amount of the total variable cost? A) $20 B) $200 C) $300 D) $10 E) It is impossible to determine with the information given. Answer: B Topic: Average variable cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

41) If average variable costs increase as output increases, then A) total fixed cost must be increasing also. B) marginal cost must be greater than average variable cost. C) total cost must be constant. D) output must be zero. E) average total cost must be increasing also. Answer: B Topic: MC and AVC Skill: Level 2: Using definitions Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

42) An insurance agent rents a building and has a three-year lease. An increase in the rent for the building increases the agent's A) total cost and average variable cost. B) total variable cost and average variable cost. C) total fixed cost and total variable cost. D) total fixed cost and average fixed cost. E) total variable cost and total cost. Answer: D Topic: Average costs Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

43) The table above shows a total product schedule. Suppose that labor costs $20 per worker and fixed costs are $60. The total variable cost of producing 80 units equals A) less than $50. B) more than $50 and less than $70. C) more than $70 and less than $90. D) more than $90 and less than $120. E) more than $120. Answer: C Topic: Total variable cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

44) The table above shows a total product schedule. Suppose that labor costs $20 per worker and fixed costs are $60. The total cost of producing 80 units equals A) less than $5. B) more than $5 and less than $110. C) more than $110 and less than $120. D) more than $120 and less than $150. E) more than $150. Answer: D Topic: Total cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

45) The table above shows a total product schedule. Suppose that labor costs $20 per worker and fixed costs are $60. The average variable cost of producing 80 units equals ________ per unit. A) $0.75 B) $1.00 C) $1.75 D) $20 E) $0.25 Answer: B Topic: Average variable cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

46) The table above shows a total product schedule. Suppose that labor costs $20 per worker and fixed costs are $60. The average total cost of producing 80 units equals ________ per unit. A) $0.75 B) $1.00 C) $1.75 D) $60 E) $0.25 Answer: C Topic: Average total cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

47) Anna owns a dog grooming salon in Brunswick, Georgia. The above table has Anna's total product schedule. Anna pays each worker $300 per week and she pays rent of $600 a week for her salon. These are her only costs. When Anna has a staff of 2 workers, her total cost equals A) $1,200. B) $300. C) $10.00. D) $12.00. E) $600. Answer: A Topic: Total cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

48) Anna owns a dog grooming salon in Brunswick, Georgia. The above table has Anna's total product schedule. Anna pays each worker $300 per week and she pays rent of $600 a week for her salon. These are her only costs. When Anna has a staff of 2 workers, her average total cost equals A) $2,400. B) $300. C) $10.00. D) $12.00. E) $1,200. Answer: D Topic: Average total cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

49) Anna owns a dog grooming salon in Brunswick, Georgia. The above table has Anna's total product schedule. Anna pays each worker $300 per week and she pays rent of $600 a week for her salon. These are her only costs. When Anna has a staff of 2 workers, her average variable cost equals A) $2,400. B) $300. C) $6.00. D) $10.00. E) $600. Answer: C Topic: Average variable cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

50) Anna owns a dog grooming salon in Brunswick, Georgia. The above table has Anna's total product schedule. Anna pays each worker $300 per week and she pays rent of $600 a week for her salon. These are her only costs. When Anna has a staff of 2 workers, her average fixed cost equals A) $600. B) $6.00. C) $7.50. D) $10.00. E) $2,400. Answer: B Topic: Average fixed cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

51) Anna owns a dog grooming salon in Brunswick, Georgia. The above table has Anna's total product schedule. Anna pays each worker $300 per week and she pays rent of $600 a week for her salon. These are her only costs. When Anna has a staff of 6 workers, her total cost equals A) $2,400. B) $300. C) $7.50. D) $10.00. E) $1,800. Answer: A Topic: Total cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

52) Anna owns a dog grooming salon in Brunswick, Georgia. The above table has Anna's total product schedule. Anna pays each worker $300 per week and she pays rent of $600 a week for her salon. These are her only costs. When Anna has a staff of 6 workers, her average total cost equals A) $2,400. B) $300. C) $7.50. D) $10.00. E) $4,200. Answer: D Topic: Average total cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

53) Anna owns a dog grooming salon in Brunswick, Georgia. The above table has Anna's total product schedule. Anna pays each worker $300 per week and she pays rent of $600 a week for her salon. These are her only costs. When Anna has a staff of 6 workers, her average variable cost equals A) $2,400. B) $300. C) $7.50. D) $10.00. E) $1,800. Answer: C Topic: Average variable cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

54) Anna owns a dog grooming salon in Brunswick, Georgia. The above table has Anna's total product schedule. Anna pays each worker $300 per week and she pays rent of $600 a week for her salon. These are her only costs. When Anna has a staff of 6 workers, her average fixed cost equals A) $600. B) $2.50. C) $7.50. D) $10.00. E) $6.00. Answer: B Topic: Average fixed cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

Labor (workers) 0 5 10 15 20

Output (frijoles) 0 1,000 3,000 4,000 4,500

Total cost (dollars) 1,000 3,000 5,000 7,000 9,000

55) The above table gives some production and cost information for Flaming Fernando's, a restaurant that sells Fiery Frijoles. What is the total fixed cost of producing 4,500 frijoles? A) $1,000 B) $8,000 C) $9,000 D) $2,000 E) More information is needed to determine the answer. Answer: A Topic: Total fixed cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

56) The above table gives some production and cost information for Flaming Fernando's, a restaurant that sells Fiery Frijoles. Between what two levels of output does the marginal cost of producing Fiery Frijoles first begin to rise? A) 0 and 1,000 B) 1,000 and 3,000 C) 3,000 and 4,000 D) 4,000 and 4,500 E) None of the above answers is correct. Answer: C Topic: Marginal cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

57) The above table gives some production and cost information for Flaming Fernando's, a restaurant that sells Fiery Frijoles. What is the average variable cost of producing 1,000 frijoles? A) $1 B) $2 C) $3 D) $3,000 E) More information is needed to determine the answer. Answer: B Topic: Average variable cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

58) The above table gives some production and cost information for Flaming Fernando's, a restaurant that sells Fiery Frijoles. What is the average total cost of producing 4,500 frijoles? A) $2 B) $225 C) $9,000 D) $8,000 E) More information is needed to determine the answer. Answer: A Topic: Average total cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

59) The production and cost information provided in the table above for Flaming Fernando's, a restaurant that sells Fiery Frijoles, is for the A) short run because there are no variable costs. B) short run because there is a fixed cost. C) long run because there are no variable costs. D) long run because there are no fixed costs. E) short run and long run because the total cost increases as production increases. Answer: B Topic: Short run and long run Skill: Level 2: Using definitions Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

60) The vertical distance between total cost curve and total variable cost curve is equal to A) average fixed cost. B) total fixed cost. C) average variable cost. D) average total cost. E) marginal cost. Answer: B Topic: Cost curves Skill: Level 1: Definition Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

61) The U-shaped average total cost curve is A) a result of firms' wanting to find the output level where cost is at its minimum. B) unrealistic because average total cost always increases as output increases. C) the result of average fixed cost falling and decreasing marginal returns as output increases. D) a result of constant marginal returns. E) a result of increasing marginal returns. Answer: C Topic: Cost curves Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

62) The U-shape of the average variable, average total, and marginal cost curves reflects A) increasing marginal returns. B) decreasing marginal returns. C) both increasing and decreasing marginal returns. D) decreasing marginal product. E) the point that implicit costs become a smaller fraction of total cost as output increases. Answer: C Topic: Cost curves Skill: Level 2: Using definitions Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

63) The short-run average total cost, average variable cost, and marginal cost curves are all U-shaped because of i. constant total fixed cost. ii. increasing and then decreasing marginal returns as more labor is hired. iii. economies and diseconomies of scale as the plant size increases. A) i only B) ii only C) i and iii D) ii and iii E) i, ii, and iii Answer: B Topic: Cost curves Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

64) In a graph of a typical firm's AFC, ATC, and AVC curves, the A) AVC curve lies above the ATC curve. B) ATC curve lies below the AFC curve. C) distance between the ATC curve and the AVC curve equals the AFC. D) distance between the AVC curve and the AFC curve equals the ATC. E) AVC curve crosses the MC curve at the point where the MC is at its minimum. Answer: C Topic: Cost curves Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

65) As we observe the cost curves graph, we see that the A) MC curve intersects the ATC curve at its maximum. B) MC curve cannot be U-shaped. C) ATC curve always has a negative slope. D) MC curve intersects the AVC curve and ATC curve at their minimums. E) MC constantly falls as output increases. Answer: D Topic: Cost curves Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

66) In a figure showing the average total cost curve and the average variable cost curve, the vertical distance between the two curves is equal to the A) marginal cost. B) average fixed cost. C) total fixed cost. D) total variable cost. E) average marginal cost. Answer: B Topic: Cost curves Skill: Level 2: Using definitions Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

67) The vertical distance between the total cost curve and the total variable cost curve ________ as output increases and the vertical distance between the average total cost curve and average variable cost curve ________ as output increases. A) is constant; decreases B) decreases; is constant C) increases; decreases D) decreases; increases E) decreases; decreases Answer: A Topic: Cost curves Skill: Level 2: Using definitions Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

68) The marginal cost curve is U-shaped. Over the range of output for which the marginal cost is falling as output increases, the marginal product is A) increasing. B) decreasing. C) constant. D) probably changing, but there is no stable relationship between the marginal cost and the marginal product. E) not defined. Answer: A Topic: MC and MP Skill: Level 2: Using definitions Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

69) The relationship between the MP and MC curves is A) over the range where the MP curve has a negative slope, the MC curve also has a negative slope. B) there is no predictable relationship. C) over the range where the MC curve has a positive slope, the MP curve also has a positive slope. D) over the range where the MP curve has a positive slope, the MC curve has a negative slope. E) that the MP is not defined when the MC curve has a negative slope. Answer: D Topic: MC and MP Skill: Level 2: Using definitions Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

70) If marginal cost increases when output increases, then A) marginal product must decrease when output increases. B) average fixed cost is constant. C) total cost is constant. D) average variable cost must increase when output increases. E) average total cost must decrease when output increases. Answer: A Topic: MC and MP Skill: Level 2: Using definitions Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

71) If another worker is hired with a marginal product greater than the previously hired worker, which of the following will be true? A) total costs will decrease B) fixed costs will decrease C) marginal cost will increase D) marginal cost will decrease E) average fixed costs will increase Answer: D Topic: MC and MP Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

72) When the marginal product is increasing as the quantity increases, then as the quantity increases the A) average product is decreasing. B) marginal cost is decreasing. C) total cost is decreasing. D) total product is decreasing. E) fixed cost is increasing. Answer: B Topic: MC and MP Skill: Level 2: Using definitions Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

73) If we know the amount of total cost, average total cost, average variable cost, and marginal cost for each level of output, how can we find the level of output where the marginal product is the greatest? A) It is the output for which the marginal cost equals average variable cost. B) It is the output for which the total cost is maximized. C) It is the output for which the marginal cost is minimized. D) It is the output for which the marginal cost equals average total cost. E) There is no way to find where marginal product is the greatest knowing only cost data. Answer: C Topic: MC and MP Skill: Level 2: Using definitions Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

74) Cost curves shift if i. technology changes. ii. the prices of factors of production change. iii. productivity changes. A) i only B) i and iii C) ii only D) i and ii E) i, ii, and iii Answer: E Topic: Shifts in the cost curves Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

75) An increase in the price of labor (a variable resource) shifts A) all cost curves upward. B) the variable cost curves upward but leaves the fixed cost curves unchanged. C) the fixed cost curves upward but leaves the variable cost curves unchanged. D) the marginal cost curve rightward. E) none of the cost curves. Answer: B Topic: Shifts in the cost curves, prices of factors of production Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

76) Total cost is equal to the sum of A) total revenue and total cost. B) total variable cost and total product. C) total variable cost and total fixed cost. D) total fixed cost and total product. E) the marginal cost plus the total fixed cost plus the total variable cost. Answer: C Topic: Total cost Skill: Level 1: Definition Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

77) Total fixed cost is the cost of A) labor. B) production. C) a firm's fixed factors of production. D) only implicit factors of production. E) only explicit factors of production. Answer: C Topic: Total fixed cost Skill: Level 1: Definition Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

78) Jay set up his hot dog stand near the business district. His total variable cost includes the A) annual insurance for the hot dog stand. B) cost of buying the hot dog stand. C) cost of the hot dogs and condiments. D) interest he pays on the funds he borrowed to pay for advertising. E) revenue he gets when he sells his first hot dog each day. Answer: C Topic: Total variable cost Skill: Level 2: Using definitions Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

79) Marginal cost is equal to A) the total cost of a firm's production. B) total cost minus fixed cost. C) a cost that is not related to the quantity produced. D) the change in total cost that results from a one-unit increase in output. E) the change in fixed cost that results from a one-unit increase in output. Answer: D Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

80) To produce 10 shirts, the total cost is $80; to produce 11 shirts, the total cost is $99. The marginal cost of the 11th shirt is equal to A) $8. B) $9. C) $80. D) $99. E) $19. Answer: E Topic: Marginal cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

81) Average total cost equals A) marginal cost divided by output. B) average fixed cost plus average variable cost. C) total fixed cost plus total variable cost. D) marginal cost plus opportunity cost. E) marginal cost multiplied by the quantity of output. Answer: B Topic: Average total cost Skill: Level 1: Definition Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

82) To produce 10 shirts, the total cost is $80; to produce 11 shirts, the total cost is $99. The average total cost of the 11th shirt is equal to A) $8. B) $9. C) $80. D) $99. E) $19. Answer: B Topic: Average total cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

83) One of the major reasons for the U-shaped average total cost curve is the fact that A) there are increasing returns from labor regardless of the number of workers employed. B) there eventually are decreasing returns from labor as more workers are employed. C) prices fall as output increases. D) the average fixed cost increases as more output is produced. E) the variable cost decreases as more output is produced. Answer: B Topic: Cost curves Skill: Level 1: Definition Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

10.4 Long-Run Cost 1) Which of the following statements is true? A) In the long run, the average cost curve is always downward sloping. B) In the long run, the quantities of all inputs are fixed. C) In the long run, the firm's fixed costs are greater than its variable costs. D) In the long run, all costs are variable costs. E) In the long run, the total variable cost equals the total fixed cost. Answer: D Topic: Long run Skill: Level 2: Using definitions Section: Checkpoint 10.4 Status: Old AACSB: Reflective thinking

2) Which of the following is FALSE? A) Long-run average variable costs equal long-run average total costs. B) Fixed costs increase in the long run. C) As a firm produces more output, eventually it experiences diseconomies of scale. D) In the long run, both the amount of capital and labor used by the firm can be changed. E) In the long run, the firm has no fixed inputs. Answer: B Topic: Long run Skill: Level 2: Using definitions Section: Checkpoint 10.4 Status: Old AACSB: Reflective thinking

3) In the long run, A) all inputs can be varied. B) all inputs are fixed. C) some inputs are variable and other inputs are fixed. D) output is fixed. E) total variable cost cannot be changed. Answer: A Topic: Long run Skill: Level 2: Using definitions Section: Checkpoint 10.4 Status: Old AACSB: Reflective thinking

4) Which of the following is true in the long run? A) Total cost equals fixed cost. B) Total cost is constant. C) All costs are variable. D) Marginal cost equals zero. E) None of the above is true in the long run. Answer: C Topic: Long-run average cost Skill: Level 2: Using definitions Section: Checkpoint 10.4 Status: Old AACSB: Reflective thinking

5) When a firm's long-run average total cost falls as its output increases, the firm is experiencing A) economies of scale. B) diseconomies of scale. C) constant returns to scale. D) decreasing marginal returns. E) decreasing cost of marginal returns. Answer: A Topic: Economies of scale Skill: Level 1: Definition Section: Checkpoint 10.4 Status: Old AACSB: Reflective thinking

6) As output increases, economies of scale occur when the A) long-run average cost increases. B) long-run average cost decreases. C) short-run average total cost decreases. D) long-run average cost stays constant. E) long-run fixed cost decreases. Answer: B Topic: Economies of scale Skill: Level 2: Using definitions Section: Checkpoint 10.4 Status: Old AACSB: Reflective thinking

7) If a firm increases its output and its average cost decreases, the firm is experiencing which of the following? A) increasing marginal returns B) diseconomies of scale C) economies of scale D) random luck E) decreasing cost of marginal returns Answer: C Topic: Economies of scale Skill: Level 1: Definition Section: Checkpoint 10.4 Status: Old AACSB: Reflective thinking

8) The main source of economies of scale is A) reductions in the price of factors of production. B) greater specialization of both labor and capital. C) increasing average costs. D) decreasing marginal product. E) the ability to hire less labor. Answer: B Topic: Economies of scale Skill: Level 2: Using definitions Section: Checkpoint 10.4 Status: Old AACSB: Reflective thinking

9) The main sources of economies of scale are A) increasing marginal cost and decreasing marginal product. B) specialization of resources such as labor and capital. C) caused by the difficulty of coordinating and controlling large enterprises. D) decreasing marginal cost and increasing marginal product. E) an increase in a firm's bargaining power to lower the wage rate and the cost of capital as the firm's output increases. Answer: B Topic: Economies of scale Skill: Level 2: Using definitions Section: Checkpoint 10.4 Status: Old AACSB: Reflective thinking

10) Economies of scale can occur as a result of which of the following? A) increasing marginal returns as the firm increases its size B) lower fixed cost as the firm increases its size C) management difficulties as the firm increases its size D) greater specialization of labor and capital as the firm increases its size E) increased total cost when the firm increases its size Answer: D Topic: Economies of scale Skill: Level 2: Using definitions Section: Checkpoint 10.4 Status: Old AACSB: Reflective thinking

11) In the long run, if 1,000 units are produced at a cost of $8,000 and 1,200 units at a cost of $9,200, then over this range of output there are A) constant economies of scale. B) constant returns to scale. C) diseconomies of scale. D) economies of scale. E) constant diseconomies of scale. Answer: D Topic: Economies of scale Skill: Level 3: Using models Section: Checkpoint 10.4 Status: Old AACSB: Analytical thinking

12) Diseconomies of scale is A) a short run phenomenon. B) the result of decreasing marginal returns. C) a long run phenomenon. D) the result of increasing marginal returns. E) possible only when the firm's plant size is fixed. Answer: C Topic: Diseconomies of scale Skill: Level 1: Definition Section: Checkpoint 10.4 Status: Old AACSB: Reflective thinking

13) A firm decreases its scale of operation and discovers that its long-run average costs decrease. Which of the following does this indicate? A) Labor's marginal product has increased. B) Diseconomies of scale were absent in the larger plant. C) The firm's scale initially was so large that it experienced diseconomies of scale. D) The firm's scale initially was too small to experience economies of scale. E) Its long-run marginal cost was smaller with the larger plant than with the smaller plant. Answer: C Topic: Diseconomies of scale Skill: Level 3: Using models Section: Checkpoint 10.4 Status: Old AACSB: Reflective thinking

14) Diseconomies of scale is a result of A) mismanagement. B) difficulties of coordinating and controlling a large enterprise. C) specialization of labor, capital, and management. D) technological progress. E) larger fixed costs as the firm's production increases. Answer: B Topic: Diseconomies of scale Skill: Level 1: Definition Section: Checkpoint 10.4 Status: Old AACSB: Reflective thinking

15) When a firm becomes so large it is difficult to coordinate and control, it is most likely that A) economies of scale have begun. B) diseconomies of scale have begun. C) average total cost begins to fall. D) long-run average costs become negative. E) there are increasing marginal returns to increasing the firm's plant size. Answer: B Topic: Diseconomies of scale Skill: Level 2: Using definitions Section: Checkpoint 10.4 Status: Old AACSB: Reflective thinking

16) The long run average cost curve A) is the sum of a firm's short run average cost curves. B) shows the lowest average cost facing a firm as it increases output changing both its plant and labor force. C) initially rises when output increases and then falls when output increases. D) always falls as output increases. E) always rises as output increases. Answer: B Topic: Long-run average cost curve Skill: Level 1: Definition Section: Checkpoint 10.4 Status: Old AACSB: Reflective thinking

17) What does the long-run average cost curve show? A) the interaction between average fixed cost and marginal cost B) the lowest average cost to produce each output level in the long run C) the distinction between long-run fixed and long-run variable costs D) the lowest average marginal cost of producing each output level at any time E) Answers A, B, and C are correct. Answer: B Topic: Long-run average cost curve Skill: Level 1: Definition Section: Checkpoint 10.4 Status: Old AACSB: Reflective thinking

18) The long-run average cost curve is U-shaped because of which of the following? A) decreasing marginal returns as more labor is hired B) constant fixed costs as output is increased C) economies and diseconomies of scale D) increasing marginal returns as more labor is hired E) decreasing average fixed costs as output is increased Answer: C Topic: Long-run average cost curve Skill: Level 3: Using models Section: Checkpoint 10.4 Status: Old AACSB: Reflective thinking

19) The long-run average cost curve A) is an upside down U-shape. B) is constructed using the short-run marginal cost curves. C) shows economies and diseconomies of scale. D) Both answers A and B are correct. E) Both answers A and C are correct. Answer: C Topic: Long-run average cost curve Skill: Level 2: Using definitions Section: Checkpoint 10.4 Status: Old AACSB: Reflective thinking

20) The portion of the long-run average cost curve in which economies of scale are experienced shows that as output increases, the A) average total cost decreases. B) average total cost increases. C) marginal cost increases. D) marginal cost decreases. E) average variable cost is constant and the average fixed cost decreases. Answer: A Topic: Long-run average cost curve Skill: Level 2: Using definitions Section: Checkpoint 10.4 Status: Old AACSB: Reflective thinking

21) If a company triples its output and its average cost decreases, then the firm is definitely experiencing A) diseconomies of scale. B) decreasing marginal returns. C) increasing marginal returns. D) economies of scale. E) Both answers C and D are correct. Answer: D Topic: Long-run average cost curve Skill: Level 3: Using models Section: Checkpoint 10.4 Status: Old AACSB: Reflective thinking

22) When the long-run average cost curve is downward sloping, A) economies of scale are present. B) diseconomies of scale are present. C) the firm experiences constant returns to scale. D) the average fixed cost curve must be upward sloping. E) The premise of the question is wrong because long-run average cost curves never slope downward. Answer: A Topic: Long-run average cost curve Skill: Level 2: Using definitions Section: Checkpoint 10.4 Status: Old AACSB: Reflective thinking

23) The main source of economies of scale is A) better management. B) constant returns to plant size. C) specialization. D) long-run cost curves eventually sloping downward. E) increases in the labor force not matched by increases in the plant size. Answer: C Topic: Economies of scale Skill: Level 2: Using definitions Section: Checkpoint 10.4 Status: Old AACSB: Reflective thinking

24) Diseconomies of scale can occur as a result of which of the following? A) increasing marginal returns as the firm increases its size B) lower total fixed cost as the firm increases its size C) management difficulties as the firm increases its size D) greater specialization of labor and capital as the firm increases its size E) increases in the labor force not matched by increases in the plant Answer: C Topic: Diseconomies of scale Skill: Level 2: Using definitions Section: Checkpoint 10.4 Status: Old AACSB: Reflective thinking

25) In the long run, constant returns to scale necessarily occur when the firm increases its production and the firm's A) total cost increases. B) total cost does not change. C) average total cost increases. D) average total cost does not change. E) production increases by more than does the firm's total cost. Answer: D Topic: Constant returns to scale Skill: Level 1: Definition Section: Checkpoint 10.4 Status: Old AACSB: Reflective thinking

26) A firm's long-run average cost curve shows the ________ average cost at which it is possible to produce each output when the firm has had ________ time to change both its labor force and its plant. A) highest; sufficient B) lowest; sufficient C) lowest; insufficient D) highest; insufficient E) average; sufficient Answer: B Topic: Long-run average cost curve Skill: Level 1: Definition Section: Checkpoint 10.4 Status: Old AACSB: Reflective thinking

27) Economies of scale and diseconomies of scale explain A) cost behavior in the short run. B) profit maximization in the long run. C) the U-shape of the long-run average cost curve. D) the U-shape of the short-run average total cost curve. E) the U-shape of the marginal cost curves. Answer: C Topic: Long-run average cost curve Skill: Level 1: Definition Section: Checkpoint 10.4 Status: Old AACSB: Reflective thinking

28) Consider a Wal-Mart supercenter and a 7-Eleven store. In the long run, A) Wal-Mart or 7-Eleven may have economies of scale depending on how many customers are served. B) Wal-Mart will definitely have lower average costs because supercenters serve many more customers. C) The 7-Eleven store will definitely have lower average costs because their small stores are cheaper to build. D) Wal-Mart's average total cost will decline faster than the 7-Eleven store and experience diseconomies of scale. E) The 7-Eleven store's average total cost will be lower than Wal-Mart's and always experience economies of scale. Answer: A Topic: Eye on retailers' cost Skill: Level 4: Applying models Section: Checkpoint 10.4 Status: New AACSB: Analytical thinking

29) The graph shows long run costs for a firm. The firm experiences economies of scale A) up until 1,000 units are produced. B) once production exceeds 9,000 units. C) once production exceeds 5,000 units. D) only after 1,000 units are produced. E) when average costs are minimized at 5,000 units. Answer: A Topic: Economies of scale Skill: Level 3: Using models Section: Checkpoint 10.4 Status: New AACSB: Application of knowledge

30) The graph shows long run costs for a firm. If the firm produces ________ units, it will experience ________. A) less than 1,000; diseconomies of scale; average costs decrease B) 5,000; diseconomies of scale because average variable costs decrease C) more than 9,000; diseconomies of scale because managing larger firms results in higher costs D) more than 9,000; economies of scale because fixed costs are spread over large quantities E) less than 9,000; a diminishing marginal product of labor Answer: C Topic: Diseconomies of scale Skill: Level 4: Applying models Section: Checkpoint 10.4 Status: New AACSB: Application of knowledge

10.5 Chapter Figures

The figure above shows a firm's total product curve. 1) Which of the points show efficient production points? A) all points above the TP curve B) all points on the TP curve C) all the darkened points below the TP curve D) all the points above and on the TP curve E) all the darkened points below and on the TP curve Answer: B Topic: Total product curve Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

The figure above shows some of a firm's cost curves. 2) Based on the figure above, curve A is the firm's A) marginal cost curve. B) total cost curve. C) average total cost curve. D) total variable cost curve. E) total fixed cost curve. Answer: B Topic: Total cost Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

3) Based on the figure above, curve B is the firm's A) marginal cost curve. B) total cost curve. C) average total cost curve. D) total variable cost curve. E) total fixed cost curve. Answer: D Topic: Total cost Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

4) Based on the figure above, curve C is the firm's A) marginal cost curve. B) total cost curve. C) average total cost curve. D) total variable cost curve. E) total fixed cost curve. Answer: E Topic: Total cost Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

The figure above shows some of a firm's cost curves. 5) Based on the figure above, curve A is the firm's A) marginal cost curve. B) total cost curve. C) average total cost curve. D) average variable cost curve. E) average fixed cost curve. Answer: E Topic: Average total cost Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

6) Based on the figure above, curve B is the firm's A) marginal cost curve. B) total cost curve. C) average total cost curve. D) average variable cost curve. E) average fixed cost curve. Answer: D Topic: Average variable cost Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

7) Based on the figure above, curve C is the firm's A) marginal cost curve. B) total cost curve. C) average total cost curve. D) average variable cost curve. E) average fixed cost curve. Answer: C Topic: Average total cost Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

8) Based on the figure above, curve D is the firm's A) marginal cost curve. B) total cost curve. C) average total cost curve. D) average variable cost curve. E) average fixed cost curve. Answer: A Topic: Marginal cost Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

9) A firm's rent is a fixed cost. If the rent increases, then in the figure above ________ upward. A) only curve A shifts B) only curve B shifts C) only curve C shifts D) both curves A and C shift E) both curves B and C shift Answer: D Topic: Average total cost Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

10) A firm's utility bill is a variable cost. If the cost of utilities increases, then in the figure above ________ upward. A) only curve A shifts B) only curve B shifts C) only curve C shifts D) both curves A and C shift E) both curves B and C shift Answer: E Topic: Average total cost Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

The figure above shows a firm's average total cost and marginal cost curves. 11) Based on the figure above, the firm's marginal product curve slopes upward at levels of output between ________ and the firm's average product curve slopes upward at levels of output between ________. A) 4.0 and 7.0; 4.0 and 7.0 B) 0 and 7.0; 4.0 and 7.0 C) 4.0 and 7.0; 0 and 4.0 D) 0 and 4.0; 0 and 7.0 E) More information is needed to answer the question. Answer: D Topic: Cost curves Skill: Level 4: Applying models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

10.6 Integrative Questions

1) The table above shows A) a total product schedule. B) the market for labor. C) a production possibility frontier. D) a supply schedule. E) a demand for labor schedule. Answer: A Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking

2) Which of the following variables do you need to know to calculate marginal cost? i. change in total cost ii. marginal product of labor iii. change in quantity of labor used iv. change in output A) i and ii B) i and iv C) ii and iv D) i, iii, and iv E) ii only Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

3) The average product curve A) initially falls then rises. B) rises as average variable cost increases. C) initially rises and then falls. D) shows how productivity changes as output changes. E) intersects the marginal cost curve when the average product curve is at its maximum. Answer: C Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

4) Which of the following contributes to increasing marginal returns? A) decreasing implicit costs B) increasing explicit costs C) specialization of labor D) Both answers A and B are correct. E) Both answers A and C are correct. Answer: C Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

5) The law of decreasing returns applies to A) the long-run average cost curve. B) average total cost. C) diseconomies of scale. D) changes in a variable input with a given quantity of fixed inputs. E) changes in a fixed input with a given quantity of variable inputs. Answer: D Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

6) Once production has reached the maximum average product of labor, if production increases then A) average fixed cost rises. B) total costs decrease. C) total product decreases. D) decreasing marginal returns occur. E) the plant size must be increased. Answer: D Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

7) As output increases, average total cost decreases A) constantly. B) as the average product of labor decreases. C) initially and then starts to increase. D) in the long run and the short run. E) as long as average fixed cost decreases. Answer: C Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

8) Marginal cost A) is the difference between total cost and total fixed cost. B) increases as the marginal product of labor increases. C) decreases as the average product of labor increases. D) is the change in total cost arising from a one-unit increase in output. E) equals the change in variable cost divided by the change in fixed cost when output increases by one unit. Answer: D Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

9) Which of the following curves are U-shaped? i. average variable cost curve ii. average fixed cost curve iii. average total cost curve A) i and ii B) i and iii C) ii and iii D) i, ii, and iii E) only ii Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

10) The marginal cost curve intersects the ________ curves at their ________ points. A) average total cost and average fixed cost; minimum B) average product and marginal product; maximum C) average variable cost and total variable cost; maximum D) average total cost and average variable cost; minimum E) average product and marginal product; minimum Answer: D Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

11) If the average product of labor curve is rising, i. the average variable cost curve is falling. ii. the marginal cost curve is definitely falling. iii. the marginal product curve has reached its maximum. A) i and iii B) i only C) ii and iii D) i, ii, and iii E) ii only Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

10.7 Essay: Economic Cost and Profit 1) Jake opens a pig farm in Idaho. To start his farm, he uses his entire $50,000 of savings from his savings account. The bank was paying him $2,500 interest on his saving. Explain why the $2,500 is one of Jake's costs. Answer: When Jake provides the $50,000 to finance his farm's operations, he forgoes the $2,500 in interest. Thus the opportunity cost of the $50,000 is the interest income forgone and so the $2,500 is an implicit cost of running the farm. Topic: Implicit cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Written and oral communication

2) What is a normal profit? Is it part of the firm's opportunity costs, total revenue, or neither? Answer: The normal profit is the return to entrepreneurship. It is part of the firm's opportunity costs. Topic: Normal profit Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

3) What is the difference between a normal profit and an economic profit? Answer: A normal profit is the return to entrepreneurship and is part of the opportunity cost of operating a business. An economic profit is the difference between the firm's total revenue and its total opportunity cost. Because the normal profit is part of the firm's opportunity cost, an economic profit is a profit above and beyond a normal profit. If the firm earns an economic profit, the entrepreneur running the firm receives the normal profit plus the economic profit. Topic: Economic profit Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Written and oral communication

4) Professor Rush decided to quit teaching economics and opens a shoe store out at the mall. He gave up an annual income of $50,000 to open the store. A year after opening the shoe store, the total revenue for the year was $200,000. Rush's expenses were $30,000 for labor, rent was $18,000, and utilities were $1,200. He also had to purchase new shoes from manufacturers, at a cost of $60,000, which was financed by cashing in his savings of $60,000 that had been in a bank earning 8 percent per year. The normal profit from operating a shoe store in the mall is $20,000. Determine Professor Rush's explicit costs, implicit costs, and economic profit. Answer: The explicit costs are the cost of labor, the rent, the utilities, and the cost of the shoes. Thus the explicit cost equals $30,000 + $18,000 + $1,200 + $60,000 = $109,200. The implicit costs are the forgone income from the job he quit, the forgone interest, and the normal profit. The forgone interest is (8 percent) × ($60,000) = $4,800, so the total implicit costs equals $50,000 + $4,800 + $20,000 = $74,800. The economic profit equals the total revenue minus the total opportunity cost and the total opportunity cost equals the sum of the explicit and implicit costs. Therefore the total opportunity cost is $109,200 + $74,800 = $184,000. Thus the economic profit = $200,000 - $184,000 = $16,000. Topic: Costs and economic profit Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

5) Jessica is a young doctor who has just started her own practice. Her previous position paid her $80,000 a year. For office space, she uses a building which she owns and which she has rented in the past for $40,000 a year. Her total revenue from her new practice is $250,000. She pays $50,000 to other firms for materials and supplies, and she pays $40,000 in wages to her office nurse. Assume that Jessica's building and equipment do not depreciate and that her normal profit is $20,000. a. Which of Jessica's costs are explicit costs and what is their total? b. Which of Jessica's costs are implicit costs and what is their total? c. What is the opportunity cost of all factors of production employed by Jessica? d. What is Jessica's economic profit? Answer: a. Jessica's explicit costs are the wages and the amount she paid to other firms for material and supplies. Hence her explicit costs equal $40,000 + $50,000 = $90,000. b. Jessica's implicit costs are her forgone wages, the forgone rent on her building, and her normal profit. Hence her implicit costs equal $80,000 + $40,000 + $20,000 = $140,000. c. The opportunity cost equals the sum of explicit costs plus implicit costs, so Jessica's opportunity cost equals $90,000 + $140,000 = $230,000. d. Economic profit equals total revenue minus total opportunity cost, or $250,000 - $230,000 = $20,000. Topic: Costs and economic profit Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

10.8 Essay: Short-Run Production 1) What resources can a firm change in the short run? In the long run? Answer: In the short run, the firm can change its variable inputs. These would be inputs such as labor. The firm cannot change its fixed inputs, such as its capital stock. The inputs the firm cannot change are called its plant. In the long run, the firm can change all of its inputs. Indeed, the long run is defined as the period of time long enough so that the firm can change all of its inputs. Topic: Short run and long run Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Written and oral communication

2) What do economists mean when they say that a firm's plant is fixed? Answer: The phrase that a "firm's plant is fixed" refers to the fact that, in the short run, there are some resources that are fixed, that is, the quantity employed cannot be changed. These resources, which include factors such as the firm's capital, are collectively referred to as the firm's plant. Topic: Short run, plant Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Written and oral communication

3) What is the difference between decreasing marginal returns and negative marginal returns? Answer: Decreasing marginal returns occur when the marginal product of an additional worker is less than the marginal product of the previous worker. In this case, if the marginal product of the new worker is positive, the additional worker adds to total product, but adds less than did the previous worker. Negative marginal returns occur when an additional worker actually decreases total product. Topic: Marginal returns Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Written and oral communication

4) What does the average product of labor equal? Answer: The average product of labor equals the total product (the total output) divided by the quantity of labor. Topic: Average product Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

5) "If the marginal product of labor curve slopes downward, then the average product of labor curve necessarily must slope downward." Explain whether the previous statement is correct or incorrect? Answer: The statement is incorrect. The relationship between the marginal product and average product of labor is that when the marginal product of labor exceeds the average product of labor, the average product of labor curve slopes upward and when the marginal product of labor is less than the average product of labor, the average product of labor curve slopes downward. So, even if the marginal product of labor curve slopes downward, as long as it is above the average product of labor curve, the average product of labor curve slopes upward. Topic: Marginal product and average product Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Written and oral communication

6) The above table has the total product schedule for Jesse's Lawn Service. a. In the figure, label the axes and then graph the total product curve.

Find the average product for the different amounts of employment.

Answer:

a. The figure graphs the total product curve. b. The average product when 1 worker is employed is 3 lawns mowed per day; when 2 workers are employed, it is 4 lawns per day; when 3 workers are employed, it is 5 lawns per day; when 4 workers are employed, it is 5 lawns per day; and when 5 workers are employed, it is 4.2 lawns per day. Topic: Total product Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

7) Ajax Manufacturing has a fixed scale of plant with the levels of total product given in the table for different levels of labor. Complete the table by calculating the average product and marginal product.

Answer:

The completed table is above. Topic: Short-run production Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

8) The above table shows the total product schedule for Hair Today, a hair styling salon. a. What is the first worker's marginal product? The second worker? The third worker? The fourth worker? The fifth worker? b. Over what range of workers is there increasing marginal returns? Over what range is there decreasing marginal returns? Answer: a. The first worker's marginal product is 10 hair stylings. The second worker's marginal product is 15 hair stylings. The third worker's marginal product is 20 hair stylings. The fourth worker's marginal product is 15 hair stylings. The fifth worker's marginal product is 10 hair stylings. b. There are increasing marginal returns for the first 3 workers. After the third worker, there are decreasing marginal returns. Topic: Marginal product Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

10.9 Essay: Short-Run Cost 1) Jake is a corn farmer in Nebraska. He rents his land on a long-term lease for $250,000 a year. He pays his farm hands $128,000 a year. Is his rent a fixed cost or a variable cost? Are the wages he pays his workers a fixed cost or a variable cost? Briefly explain your answers. Answer: Jake's rent is a fixed cost. He is renting his land on a long-term lease and so the land is a fixed input. The wages Jake pays are a variable cost. Labor is a variable input so the wages are a variable cost. Topic: Fixed cost, variable cost Skill: Level 2: Using definitions Section: Checkpoint 10.3 Status: Old AACSB: Written and oral communication

2) "In the short run, even when output is zero, the firm still has some variable costs it must pay." Is the statement correct or incorrect? Briefly explain your answer. Answer: The statement is incorrect. When output is zero, there are no variable costs because there are no variable inputs being employed. However, in the short run there might be fixed resources, in which case the firm would still have some fixed costs it must pay. Topic: Fixed cost, variable cost Skill: Level 2: Using definitions Section: Checkpoint 10.3 Status: Old AACSB: Written and oral communication

3) When plotted against the total output, what does the total fixed cost curve look like? Answer: The total fixed cost curve is a horizontal straight line, indicating that at any level of output the total fixed cost does not change as output changes. Topic: Fixed cost curve Skill: Level 1: Definition Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

4) Downsizing is the practice of laying off workers in an attempt to decrease average total cost. Can laying off workers decrease average total cost? Is it possible for the firm to downsize and have its average total cost increase? Explain your answer. Answer: Yes, downsizing by laying off workers can decrease the firm's average total cost. And it is possible for a firm to downsize and increase its average total cost. Suppose that the firm initially is producing more output than the level that minimizes average total cost. In this case, downsizing by laying off workers decreases the amount of output the firm produces and the firm can move along its average total cost curve to a lower average total cost. However, the firm can lay off too many workers. If it lays off too many workers, it decreases its output so much that it moves along its average total cost curve enough that its average total costs wind up higher than they were initially. Topic: Average total cost curve Skill: Level 4: Applying models Section: Checkpoint 10.3 Status: Old AACSB: Written and oral communication

5) How do we calculate average fixed cost and why does average fixed cost fall as output increases? Answer: Average fixed cost is calculated by dividing total fixed cost by the quantity of output. Because total fixed cost stays the same for all levels of output, as the quantity produced increases, the average fixed cost decreases. Topic: Average fixed cost Skill: Level 2: Using definitions Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

6) The average total cost curve is U-shaped. At the quantity of output where average total cost is at its minimum, is the marginal cost curve above the average total cost curve, below the average total cost curve, or intersecting the average total cost curve? Answer: When the average total cost is at its minimum, the average total cost equals the marginal cost. Therefore at the quantity of output where the average total cost is at its minimum, the marginal cost curve intersects the average total cost curve. Topic: Marginal cost and average total cost curve Skill: Level 1: Definition Section: Checkpoint 10.3 Status: Old AACSB: Written and oral communication

7) Which average cost curves are U-shaped? Answer: Both the average total cost and the average variable cost curves are U-shaped. The only average cost curve that is not U-shaped is the average fixed cost curve. Topic: Why the average total cost curve is U-shaped Skill: Level 1: Definition Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking

8) What is the relationship between the marginal product of labor and the marginal cost? Answer: Initially, as each additional unit of labor is employed, the marginal product of labor increases. The cost of each worker is the same--the wage rate. Because each worker's cost is the same, but each additional worker produces more output than the previous worker, the cost of producing an additional unit of output decreases. The cost of producing an additional unit of output is the marginal cost. Therefore when the marginal product of labor is increasing, the marginal cost is decreasing. At some point, the marginal product of labor will reach a peak, at which level of output marginal cost is minimized. After that amount of output, the marginal product of an additional worker starts to decrease. When the marginal product decreases, the marginal cost increases; each worker costs the same to hire, but an additional worker produces less output than the previous worker. Therefore when the marginal product of labor is decreasing, the marginal cost is increasing. Topic: MP and MC Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Written and oral communication

9) Explain how new technologies, which increase productivity, affect the average variable cost, average total cost, and marginal cost curves. Answer: A technological change that increases productivity shifts the total product, average product, and the marginal product curves upward. Because the new technologies enable existing inputs to produce more output, this effect means that the average variable cost, average total cost, and marginal cost curves shift downward, reflecting the decrease in average and marginal costs. However, the new technologies often need to use more capital and less labor. In this case, the firm's fixed cost increases and its variable cost decreases. The increase in fixed cost leads to an increase in total cost while the decrease in variable cost leads to a decrease in total cost. Although the net effect is ambiguous, generally the total cost increases at low levels of output and decreases at higher levels of output. In this case, the average total cost curve shifts upward at lower levels of output and shifts downward at higher levels of output. Topic: Shifts in the cost curves, technology Skill: Level 2: Using definitions Section: Checkpoint 10.3 Status: Old AACSB: Written and oral communication

10) When the Rent-A-Limo Company negotiates its new labor contract it finds that the wages it must pay drivers have increased. How does this wage hike affect the Rent-A-Limo Company's average fixed cost, average variable cost, average total cost, and marginal cost? Answer: The drivers' wages are a variable cost because the number of drivers needed varies with how many limousines are rented. The increase in wages will have no effect on the average fixed cost but the average variable cost will increase. The increase in average variable cost leads to an increase in the average total cost and an increase in the marginal cost. Topic: Shifts in the cost curves, prices of factors of production Skill: Level 2: Using definitions Section: Checkpoint 10.3 Status: Old AACSB: Written and oral communication

11) The table above has the total product schedule for an imaginary good called a widget. Each unit of labor costs $25 and the total cost of capital is $100. a. Use this information to complete the table. In the table, TFC is the total fixed cost, TVC is the total variable cost, TC is the total cost, AFC is the average fixed cost, AVC is the average variable cost, ATC is the average total cost, and MC is the marginal cost.

b. Suppose that labor becomes twice as expensive (so that one unit of labor now costs $50) but nothing else changes. Complete the above table with the new cost schedules. If you plotted the cost curves, how would the increased wage rate affect the cost curves? Answer:

The completed table is above. All the costs in dollars.

b. The completed table is above. All the costs are in dollars. There would be no change in the total fixed and average fixed cost curves because the fixed cost did not change. The total cost, total variable cost, average total cost, average variable cost, and marginal cost curves would all shift upward. Topic: Short-run costs Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

12) This month, the local widget factory produced 100 widgets. The total variable cost of production was $500 and the average total cost of production was $8. a. What is the total cost? b. What is the total fixed cost? c. What is the average fixed cost? d. What is the average variable cost? Answer: a. Total cost can be calculated as average total cost times output, which is $8 × 100 = $800. b. Total fixed cost equals total cost minus total variable cost. The total cost from part (a) is $800. The total variable cost is $500. Therefore the total fixed cost is $800 - $500 = $300. c. Average fixed cost equals total fixed cost divided by output, which is $300 ÷ 100 = $3. d. Average variable cost equals total variable cost divided by output. The total variable cost from part (b) is $500, so the average variable cost is $500 ÷ 100 = $5. Topic: Short-run costs Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

13) Acme produces rocket shoes for use by slow coyotes. Acme's total cost schedule is given in the table below. Acme's total fixed cost is $12. Complete the table. (In the table, TFC is the total fixed cost, TVC is the total variable cost, AFC is the average fixed cost, AVC is the average variable cost, and ATC is the average total cost.)

Answer:

The completed table is above. Topic: Short-run costs Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

14) Rufus runs a skunk-skinning service in West Virginia. He employs skinners at a wage rate of $240 a week for each one. He leases the shack where his workers work for $200 per week. The rent is fixed for the next two years. Last week his 10 employees managed to skin a total of 300 skunks. a. What is the average product of labor for Rufus's company? b. What is Rufus' total variable cost per week? c. What is the average variable cost for Rufus's company? d. If Rufus adds his brother Jethro to his staff, at a wage rate of $240 a week, and his company can now skin 310 skunks per week, what is Rufus's new average variable cost? Answer: a. The average product of labor is 30 skunks skinned per worker. b. The total variable cost per week is $2,400. c. The average variable cost is $8 per skunk skin. d. The new total variable cost is $2,640. Hence the new average variable cost is $8.52 per skunk skin. Topic: Short-run costs Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

15) The above table gives the total cost schedule for oil changes at the local Jiffy Lube. a. What is Jiffy Lube's total fixed cost? b. What is the total variable cost of 2 oil changes? c. What is the average variable cost of 4 oil changes? d. What is the average fixed cost of 2 oil changes? e. What is the marginal cost of the 3rd oil change? Answer: a. The total fixed cost is $10. At zero output, the total variable cost is $0, so the entire cost, $10, must be the fixed cost. b. The total variable cost of 2 oil changes is $25. The total cost, TC, is $35 and from part (a) the total fixed cost, TFC, is $10. The total variable cost, TVC, is equal to TC - TFC or $35 - $10 = $25. c. The average variable cost for 4 oil changes is $17.50. Start similarly to part (b) by calculating that the total variable cost, TVC, for 4 oil changes is $70. Then, the average variable cost, AVC, equals the total variable cost divided by output, or TVC ÷ Q. In this case, the AVC is equal to $70 ÷ 4 = $17.50. d. The average fixed cost of 2 oil changes is $5. The average fixed cost, AFC, equals the total fixed cost divided by output, or TFC ÷ Q. From part (a), the total fixed cost is $10, so the average fixed cost equals $10 ÷ 2 = $5. e. The marginal cost is $15. Marginal cost is defined as the change in the total cost that results from a one-unit increase in output. The total cost of 2 oil changes is $35 and the total cost of 3 oil changes is $50. Therefore the change in the total cost is $15, which is the marginal cost. Topic: Short-run costs Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

16) Suppose the local newspaper hires students to fold and bag newspapers for delivery and pays them $20 per shift. Five students can fold and bag 300 newspapers per shift. The fourth student added 50 newspapers to total output. The cost of the capital the firm uses is fixed at $50 per shift. a. Is the newspaper operating in the long run or short run? Why? b. What is the average product of 5 students? c. Calculate the total fixed cost, total variable cost, and total costs of folding and bagging 300 newspapers. d. Calculate the average fixed cost, average variable cost, and average total costs of folding and bagging 300 newspapers. e. What is the marginal cost of one of the 50 newspapers folded and bagged by the fourth student? Answer: a. The firm is operating in the short run because its capital cost is fixed. b. Average product equals 300 ÷ 5 = 60 newspapers per shift. c. Total fixed cost = $50, total variable cost = 5 × $20 = $100, and so total cost = $50 + $100 = $150. d. Average fixed cost = $50 ÷ 300 = $0.17, average variable cost = $100 ÷ 300 = $0.33, and average total cost = $150 ÷ 300 = $0.50 (alternatively, average total cost = average fixed cost + average variable cost = $0.17 + $0.33 = $0.50). e. Marginal cost = change in total cost divided by change in output, or $20 ÷ 50 = $0.40. Topic: Production and cost Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

17) Draw an average total cost curve, an average variable cost, and a marginal cost curve all on the same graph. Make sure to correctly label the axes. What relationship must exist between the marginal cost curve and the average total cost and average variable cost curves? Answer:

Typical cost curves are above. The average variable cost curve, AVC, and average total cost curve, ATC, are U-shaped. The marginal cost curve, MC, intersects the AVC curve and ATC curve at their minimum points. Topic: Short-run cost curves Skill: Level 3: Using models Section: Checkpoint 10.3 Status: Old AACSB: Analytical thinking

10.10 Essay: Long-Run Cost 1) In the long run all costs are variable costs. Why? Answer: The long run is defined as the time frame over which all resources can be varied. The costs of the variable inputs are the variable costs. Taken together, these definitions imply that in the long run all inputs are variable inputs so all costs are variable costs. Topic: Long-run costs Skill: Level 1: Definition Section: Checkpoint 10.4 Status: Old AACSB: Written and oral communication

2) Which curve shows the lowest average total cost at which it is possible to produce each output when the firm has time to change both its labor force and plant size? Answer: The long-run average cost curve shows the lowest average total cost at which it is possible to produce each output when the firm has had time to change all its inputs. Topic: Long-run average cost curve Skill: Level 1: Definition Section: Checkpoint 10.4 Status: Old AACSB: Reflective thinking

3) What is the long-run average cost curve? What are the three ranges of output and in what order do they occur? Briefly define each of the three ranges. Answer: The long-run average cost curve shows the lowest average cost at which it is possible to produce each output when the firm has time to change both its labor force and its plant size. The long-run average cost curve is U-shaped and shows three possible production ranges. In order, these ranges are: economies of scale, constant returns to scale, and diseconomies of scale. Economies of scale are when a firm increases its output and its average total cost decreases. Constant returns to scale are when a firm increases its output and its average total cost does not change. Finally, diseconomies of scale are when a firm increases its output and its average total cost increases. Topic: Long-run average cost curve Skill: Level 1: Definition Section: Checkpoint 10.4 Status: Old AACSB: Written and oral communication

4) Are the short-run average total cost curve and the long-run average cost both U-shaped for the same reasons? If so, carefully explain these reasons. If not, explain why each curve is U-shaped. Answer: The curves are U-shaped for quite different reasons. In the short run, the firm's plant, that is, its capital, is fixed. Therefore the only way to increase output is by increasing the quantity of the variable resource, labor. Initially as labor increases, there are gains from specialization and division of labor, which leads the marginal product to rise and the average total cost to fall as more workers are employed. Eventually, however, the firm runs up against its capital constraint and workers must share tools and building space. As this happens, decreasing marginal returns begin and average total cost eventually begins to rise. In the long run, both labor and capital are variable. As a firm expands its use of both resources and thereby increases its output, gains from specialization of both labor and capital cause average total costs to fall. Eventually, however, the business becomes so large it is difficult to coordinate and control. When this happens, long-run average total cost begins to rise. Thus the short-run average total cost is U-shaped because more workers must make do with the same amount of plant. The long-run average cost curve is U-shaped because the very scale of the firm's operations makes it difficult to control efficiently and effectively. Topic: Long-run and short-run average cost curves Skill: Level 4: Applying models Section: Checkpoint 10.4 Status: Old AACSB: Written and oral communication

5) What are economies of scale? What is the main source of economies of scale? Answer: Economies of scale are features of the firm's technology so that when the firm increases its output its average total cost decreases. Economies of scale result because of specialization. When a firm increases its plant size, the capital can be more specialized and hence produce more output than less specialized, more generalized capital. Similarly, when a firm increases its labor force, it can hire more specialists, each of whom is better at doing his or her assigned task than a less specialized individual. As a result of specialization, the firm's average total cost decreases. Topic: Economies of scale Skill: Level 1: Definition Section: Checkpoint 10.4 Status: Old AACSB: Written and oral communication

6) What are diseconomies of scale and why might they occur? Answer: Diseconomies of scale are features of the firm's technology so that when the firm increases its output its average total cost rises. Diseconomies of scale can arise from the sheer size of a firm. As a firm grows larger, it becomes increasingly more difficult to manage. Communicating information up and down the management hierarchy as well as communicating between managers and workers on the same level becomes more costly. In this case, the firm experiences diseconomies of scale, that is, its long-run average cost increases as it expands the scale of its operation by producing yet more output. Topic: Diseconomies of scale Skill: Level 1: Definition Section: Checkpoint 10.4 Status: Old AACSB: Written and oral communication

7) A firm increases its output and its average total costs remain unchanged. Is the firm experiencing increasing returns to scale, constant returns to scale, or decreasing returns to scale? Answer: The firm is experiencing constant returns to scale. Topic: Constant returns to scale Skill: Level 2: Using definitions Section: Checkpoint 10.4 Status: Old AACSB: Reflective thinking

8) Jones Production started business with a small scale plant. Fortunately for Smith, the owner of Jones Production, the business grew rapidly. The table below gives the total costs and the associated output for each year. a. Complete the table by finding the average cost for each scale.

b. Over what range of total product (output) did Jones Production experience economies of scale, constant returns to scale, and diseconomies of scale? Answer:

a. The completed table is above. b. There are economies of scale from 100 to 500 units of output, constant returns to scale from 500 to 1,000 units of output, and diseconomies of scale from 1,000 to 2,500 units of output. Topic: Long-run average cost Skill: Level 3: Using models Section: Checkpoint 10.4 Status: Old AACSB: Analytical thinking

9) Ayanna grows herbs. Last year she grew 2,000 pounds of herbs in a year while using 250 square feet of land and 1 worker. This year she doubled her land to 500 square feet, doubled her workers to 2, and grew 4,500 pounds of herbs. She sells her rare, organic herbs for $50 a pound. She pays her a worker $25,000 a year and rents her land for $100 per square foot for a year. These are her only costs. a. What was Ayanna's total cost last year and this year? b. What was Ayanna's average total cost last year and this year? c. Did Ayanna experience economies or diseconomies of scale? Answer: a. Ayanna's total cost last year was $50,000 and her total cost this year is $100,000. b. Ayanna's average total cost last year was $25 a pound and her average total cost this year is $22.22 a pound. c. Ayanna's average total cost decreased so she experienced economies of scale. Topic: Economies of scale Skill: Level 3: Using models Section: Checkpoint 10.4 Status: Old AACSB: Analytical thinking

10) The above figure represents the average total cost curves of a wheat farmer. a. Which average total cost curve has the lowest average total cost of producing 30,000 bushels of wheat? b. Over what range of output is the farmer experiencing economies of scale? c. Over what range of output is the farmer experiencing diseconomies of scale? d. Which average total cost curve has the lowest possible average cost of production? e. Which average total cost curve represents the largest plant? Answer: a. ATC3 has the lowest average total cost to produce 30,000 bushels of wheat. b. The farmer is experiencing economies of scale between 0 to 30,000 bushels of wheat. c. The farmer is experiencing diseconomies of scale for more than 30,000 bushels of wheat. d. ATC3 has the lowest possible average total cost, which occurs at 30,000 bushels of wheat. e. ATC4 represents the largest plant. Topic: Long-run average cost curve Skill: Level 3: Using models Section: Checkpoint 10.4 Status: Old AACSB: Analytical thinking

Essential Foundations of Economics, 8e (Bade) Chapter 11 Perfect Competition 11.1 A Firm's Profit-Maximizing Choices 1) A market with a large number of sellers A) can only be a perfectly competitive market. B) might be an oligopoly or a perfectly competitive market. C) might be a monopolistically competitive or a perfectly competitive market. D) might be a perfectly competitive, monopolistically competitive, oligopoly, or monopoly market. E) can only be a monopolistically competitive market. Answer: C Topic: Market types Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

2) What is the difference between perfect competition and monopolistic competition? A) Perfect competition has a large number of small firms while monopolistic competition does not. B) Perfect competition has barriers to entry while monopolistic competition does not. C) Perfect competition has no barriers to entry, while monopolistic competition does. D) In perfect competition, firms produce identical goods, while in monopolistic competition, firms produce slightly different goods. E) In monopolistic competition, firms produce identical goods, while in perfect competition, firms produce slightly different goods. Answer: D Topic: Market types Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

3) A perfectly competitive firm A) sells a product that has perfect substitutes. B) has a perfectly inelastic demand. C) has a perfectly elastic supply. D) Answers A and B are correct. E) Answers A and C are correct. Answer: A Topic: Perfect competition, definition Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

4) In which market structure do firms exist in very large numbers, each firm produces an identical product, and there is freedom of entry and exit? A) monopoly B) oligopoly C) only perfect competition D) only monopolistic competition E) both perfect competition and monopolistic competition Answer: C Topic: Perfect competition, definition Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

5) The characteristics that describe a perfectly competitive industry include A) many firms selling an identical product. B) one firm selling to many buyers. C) many firms selling a slightly differentiated product. D) a few firms selling to many buyers. E) None of the above answers is correct. Answer: A Topic: Perfect competition, definition Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

6) The ________ market is an example of ________ type of market. A) corn; a perfectly competitive B) mattress; a monopoly C) car insurance; an oligopoly D) airplane manufacturing; a monopolistically competitive E) cell phone; a perfectly competitive Answer: A Topic: Perfect competition Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: New AACSB: Application of knowledge

7) In part, perfect competition arises if i. each firm's minimum efficient scale is large relative to demand. ii. each firm produces a good or service identical to those produced by its many competitors. iii. there are significant barriers to entry. A) i only B) ii only C) i and ii D) iii only E) ii and iii Answer: B Topic: Perfect competition, definition Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

8) In which of the following market types do all firms sell products so identical that buyers do not care from which firm they buy? A) perfect competition B) monopolistic competition C) oligopoly D) monopoly E) perfect competition and monopolistic competition Answer: A Topic: Perfect competition, definition Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

9) Each firm in a perfectly competitive industry A) produces a good that is slightly different from that of the other firms. B) produces a good that is identical to that of the other firms. C) attains economies of scale so that its efficient size is large compared to the market as a whole. D) has control over at least one unique resource to separate themselves from their competitors. E) has an important influence on the market price of the good or service being produced. Answer: B Topic: Perfect competition, definition Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

10) A market in which many firms sell identical products is A) a monopoly. B) an oligopoly. C) only perfectly competition. D) only monopolistic competition. E) both perfect competition and monopolistic competition. Answer: C Topic: Perfect competition, definition Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

11) One requirement for an industry to be perfectly competitive is that in the industry there A) are a few firms who control the market. B) are many firms for whom the efficient scale of production is small. C) is one firm that sells a product with no close substitutes. D) are many firms selling different products. E) is a barrier to entry that makes the entry of new firms difficult. Answer: B Topic: Perfect competition, definition Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

12) One requirement for an industry to be perfectly competitive is that A) there are no restrictions on entry into or exit from the market. B) there are multiple restrictions on entry into or exit from the market. C) there are many firms selling different products. D) sellers and buyers have imperfect information about prices. E) the many firms sell slightly different products. Answer: A Topic: Perfect competition, definition Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

13) One requirement for an industry to be perfectly competitive is that A) sellers and buyers have imperfect information about prices. B) established firms have no advantage over new firms. C) established firms have a significant advantage over new firms. D) different firms produce widely different products. E) many firms produce slightly different products. Answer: B Topic: Perfect competition, definition Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

14) A perfectly competitive market arises when A) the market demand is small relative to the output of a firm. B) there are many buyers but few sellers. C) the market demand is very large relative to the output of one seller. D) a firm has control over a unique resource. E) each of the many firms produces a slightly different product. Answer: C Topic: Perfect competition, definition Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

15) Perfect competition is characterized by all of the following EXCEPT A) a large number of buyers and sellers. B) no restrictions on entry into or exit from the industry. C) considerable advertising by individual firms. D) buyers and sellers are well informed about prices. E) firms produce an identical product. Answer: C Topic: Perfect competition, definition Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

16) Which of the following is the best example of a perfectly competitive market? A) farming B) diamonds C) athletic shoes D) soft drinks E) electricity distribution Answer: A Topic: Perfect competition, definition Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

17) Which of the following market types has the fewest number of firms? A) perfect competition B) monopolistic competition C) oligopoly D) monopoly E) perfect competition and monopolistic competition Answer: D Topic: Monopoly, definition Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

18) A monopoly occurs when A) each of many firms produces a product that is slightly different from that of the other firms. B) one firm sells a good that has no close substitutes and a barrier blocks entry for other firms. C) there are many firms producing the same product. D) a few firms control the market. E) one firm is larger than the many other firms that make an identical product. Answer: B Topic: Monopoly, definition Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

19) In which market structure does one firm sell a good or service with no close substitutes and there is a barrier blocking the entry of new firms? A) only monopoly B) only oligopoly C) perfect competition D) monopolistic competition E) either monopoly or oligopoly Answer: A Topic: Monopoly, definition Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

20) When one firm sells a good or service that has no close substitutes and a barrier blocks the entry of new firms, what type of market is this? A) perfect competition B) only monopoly C) oligopoly D) only monopolistic competition E) either monopoly or monopolistic competition Answer: B Topic: Monopoly, definition Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

21) ________ a large number of firms competing by making similar but slightly different products. A) Monopoly requires B) Perfect competition requires C) Monopolistic competition requires D) Oligopoly requires E) Both perfect competition and monopolistic competition require Answer: C Topic: Monopolistic competition, definition Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

22) A market is classified as monopolistically competitive when A) there is a barrier that blocks entry by other firms. B) a small number of firms compete. C) many firms produce the same product. D) many firms produce a slightly differentiated product. E) there is one firm that sells a good or service with no close substitutes. Answer: D Topic: Monopolistic competition, definition Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

23) In which market structure is there a large number of firms producing slightly differentiated products? A) monopoly B) oligopoly C) only perfect competition D) only monopolistic competition E) either perfect competition or monopolistic competition Answer: D Topic: Monopolistic competition, definition Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

24) A market is classified as an oligopoly when A) a few firms compete. B) many firms produce a slightly differentiated product. C) no matter how many firms are in the market, a barrier blocks entry by other new firms. D) many firms produce the same product. E) only one firm sells a product with no close substitutes. Answer: A Topic: Oligopoly, definition Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

25) Which of the following market types has only a few competing firms? A) perfect competition B) monopolistic competition C) oligopoly D) monopoly E) perfect competition and monopolistic competition Answer: C Topic: Oligopoly, definition Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

26) In which market structure are there a small number of firms competing? A) only monopoly B) only oligopoly C) perfect competition D) monopolistic competition E) either monopoly or oligopoly Answer: B Topic: Oligopoly, definition Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

27) A market is ________ when a small number of firms compete. A) a monopoly B) perfectly competitive C) monopolistically competitive D) an oligopoly E) either monopolistically competitive or an oligopoly Answer: D Topic: Oligopoly, definition Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

28) The U.S. oil industry has only a few firms in it, so an economists is likely to describe the industry as A) a monopoly. B) an oligopoly. C) perfectly competitive. D) monopolistically competitive. E) Both answers C and D can be correct. Answer: B Topic: Market types Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

29) The firm's over-riding objective is to A) earn a normal profit. B) maximize normal profit. C) maximize economic profit. D) maximize total revenue. E) avoid an economic loss. Answer: C Topic: Firm's goal Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

30) Normal profit is A) the same thing as economic profit. B) the return to entrepreneurship. C) total revenue minus the total opportunity cost of production. D) the point of profit when total revenue is maximized. E) part of the firm's total revenue. Answer: B Topic: Normal profit Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

31) In a perfectly competitive market, the type of decision a firm has to make is different in the short run than in the long run. Which of the following is an example of a perfectly competitive firm's short-run decision? A) the profit-maximizing level of output B) how much to spend on advertising and sales promotion C) what price to charge buyers for the product D) whether or not to enter or exit an industry E) whether or not to change its plant size Answer: A Topic: Short-run decisions Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

32) To maximize its profit, in the short run a perfectly competitive firm decides A) what price to charge for its product. B) what quantity of output to produce. C) whether to exit the market. D) whether to increase the size of its plant. E) how much advertising it should undertake. Answer: B Topic: Short-run decisions Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

33) A perfectly competitive firm can A) sell all of its output at the prevailing market price. B) set a higher price to customers who are willing to pay more. C) raise its price in order to increase its total revenue. D) sell additional output only by lowering its price. E) usually not sell all the output it produces, but still "over-produces" because there are some periods when it can sell the extra output at very profitable prices. Answer: A Topic: Price takers Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

34) In a perfectly competitive market, one farmer's barley is A) completely different from another farmer's barley. B) a perfect substitute for another farmer's barley. C) a monopolized product in that farmer's local market. D) a monopolized product in the national market. E) slightly different from another farmer's barley. Answer: B Topic: Price takers Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

35) A firm in perfect competition is a price taker because A) there are no good substitutes for its good. B) many other firms produce identical products. C) it is very large. D) its demand curves are downward sloping. E) its demand curve is vertical at the profit-maximizing quantity. Answer: B Topic: Price takers Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

36) The price charged by a perfectly competitive firm is A) the same as the market price. B) different than the price charged by competing firms. C) lower the more the firm produces. D) higher the more the firm produces. E) indeterminate. Answer: A Topic: Price takers Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

37) For a perfectly competitive firm, the price of its good is equal to the firm's marginal revenue because A) information about price changes is hard to come by for small sellers. B) price and marginal revenue are the same economic concepts. C) individual perfectly competitive firms cannot influence the market price by changing their output. D) the firm's total revenue cannot be changed by anything the firms can do. E) there are only a small number of firms in the market. Answer: C Topic: Price takers Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

38) A large number of sellers all selling an identical product implies which of the following? A) market chaos B) the inability of any seller to change the price of the product C) large losses incurred by all sellers D) horizontal market supply curves E) vertical market supply curves Answer: B Topic: Price takers Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

39) A firm that is a price taker faces A) an elastic supply curve. B) an inelastic supply curve. C) a perfectly elastic demand curve. D) a perfectly inelastic demand curve. E) an elastic but not perfectly elastic demand curve. Answer: C Topic: Price takers Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

40) We know that a perfectly competitive firm is a price taker because A) its MC curve slopes upward. B) its ATC curve is U-shaped. C) its demand curve is horizontal. D) MC and ATC are equal at the profit-maximizing amount of output. E) it has no supply curve. Answer: C Topic: Price takers Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

41) Suppose Pat's Paints is a perfectly competitive firm. If Pat's Paints' marginal revenue equals $5 per can, and Pat decides to sell 100 cans of paint, Pat's total revenue equals A) $5. B) $100. C) $500. D) $20. E) Information on the price of a can of paint is needed to answer the question. Answer: C Topic: Price takers Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

42) If a firm in a perfectly competitive market faces an equilibrium price of $5, its marginal revenue A) will be greater than $5. B) will be less than $5. C) maybe either greater or less than $5. D) will also be $5. E) will be any amount but $5. Answer: D Topic: Price takers Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

43) If demand for a seller's product is perfectly elastic, which of the following is true? i. The firm will sell no output if it sets the price its product above the market price. ii. There are many perfect substitutes for the seller's product. iii. The firm will sell no output if it sets the price its product below the market price. A) i only B) ii only C) iii only D) i and ii E) ii and iii Answer: D Topic: Demand Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

44) Cynthia is an Oklahoma wheat farmer. The demand for her wheat is A) perfectly inelastic. B) inelastic but not perfectly inelastic. C) elastic but not perfectly elastic. D) perfectly elastic. E) unit elastic. Answer: D Topic: Demand Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

45) Because perfectly competitive firms are price takers, each firm faces a demand that is A) perfectly inelastic. B) perfectly elastic. C) highly inelastic but never is it perfectly inelastic. D) unit elastic. E) highly elastic but never is it perfectly elastic. Answer: B Topic: Demand Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

46) If a perfectly competitive firm raised the price of its product, A) its profits would increase. B) the quantity of output it sells decreases to zero. C) rival firms will follow suit and raise their prices also. D) the firm will be forced to advertise more. E) its total revenue would rise but its total cost would rise by more. Answer: B Topic: Demand Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

47) If the wheat industry is perfectly competitive with a market price of $4 per bushel and Farmer Brown charged $5 per bushel, how many bushels would Farmer Brown sell? A) some, but fewer than he would at a price of $4 B) more than he would at a price of $4 C) just as many as he would at a price of $4 D) none E) More information is needed about the prices charged by the other wheat farmers. Answer: D Topic: Demand Skill: Level 4: Applying models Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

48) How does the demand for any one seller's product in perfect competition compare to the market demand for that product? A) They are identical. B) The demand for any one seller is proportionally smaller but otherwise identical to the market demand. C) The demand for any one seller's product is perfectly elastic while the market demand curve is downward sloping. D) There is no demand for any one seller's competitively sold product. E) The demand for any one seller's product is not perfectly elastic while the market demand is perfectly elastic. Answer: C Topic: Demand Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

49) For the perfectly competitive broccoli producers in California, the market demand curve for broccoli is A) a horizontal line. B) downward sloping. C) nonexistent. D) upward sloping. E) the same as the demand curve each firm faces. Answer: B Topic: Demand Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

50) The market demand curve in a perfectly competitive market is ________ and the demand curve for a perfectly competitive firm's output is ________. A) downward sloping; downward sloping B) downward sloping; horizontal C) horizontal; downward sloping D) horizontal; horizontal E) downward sloping; upward sloping Answer: B Topic: Demand Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

51) Elsie is a perfectly competitive dairy farmer. The market price of milk was $2.40 but just fell to $2.20 a gallon. Elsie A) can sell as much milk as she wants at $2.20 a gallon. B) will have to charge some customers $2.40 a gallon to stay in business. C) will produce the same amount of milk at both prices. D) can sell more at the lower price because the quantity demanded is higher at lower prices. E) will be able to charge her initial customers $2.40 a gallon. Answer: A Topic: Demand Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

52) For a perfectly competitive palm tree nursery in South Carolina, the total revenue curve is A) downward sloping. B) a horizontal line. C) upward sloping. D) U-shaped. E) undefined because the firm is perfectly competitive. Answer: C Topic: Total revenue Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

53) If the market price of a product is $14 and all sellers are price takers, then which of the following is correct? A) Each seller's total revenue line is graphed as an upward-sloping straight line. B) The demand curve for each seller's product is a downward-sloping straight line. C) Each seller can earn more total revenue by raising the price he or she charges above $14. D) The demand curve for each seller's product is a downward-sloping but not necessarily a straight line. E) Each seller's total revenue is graphed as an upside-down U-shaped curve. Answer: A Topic: Total revenue Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

54) Marginal revenue is A) the change in total revenue from a one-unit increase in the quantity sold. B) another name for total revenue. C) the change in total cost from producing an additional unit of output. D) the economic profit from producing an additional unit of output. E) less than price for a perfectly competitive firm. Answer: A Topic: Marginal revenue Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

55) A firm's marginal revenue is A) the change in total revenue that results from a one-unit increase in the quantity sold. B) total revenue minus total cost. C) the change in total revenue minus the change in total cost. D) the change in total revenue that results from an increase in the demand for the good or service. E) less than the market price for a perfectly competitive firm. Answer: A Topic: Marginal revenue Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

56) For a perfectly competitive firm, marginal revenue is A) less than the price. B) greater than the price. C) equal to the price. D) equal to the change in profit from selling one more unit. E) undefined because the firm's demand curve is horizontal. Answer: C Topic: Marginal revenue Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

57) In perfect competition, marginal revenue A) increases as more is sold. B) decreases as more is sold. C) is equal to the market price. D) is zero. E) is always greater than marginal cost. Answer: C Topic: Marginal revenue Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

58) For a perfectly competitive firm, the market price of a good is A) a given which the firm cannot change. B) determined by the firm in order to maximize its profit. C) equal to the firm's marginal revenue. D) Answers A and B are correct. E) Answers A and C are correct. Answer: E Topic: Marginal revenue Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

59) The marginal revenue curve for a perfectly competitive firm is A) horizontal. B) vertical. C) upward sloping. D) downward sloping. E) a straight line coming out of the origin with a 45 degree slope. Answer: A Topic: Marginal revenue Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

60) In the above, a marginal revenue curve for a perfectly competitive firm is shown in Figure A) W. B) X. C) Y. D) Z. E) X and Figure Z. Answer: D Topic: Marginal revenue Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

61) As a perfectly competitive firm produces more and more of a good, its economic profit A) constantly increases. B) constantly decreases. C) first decreases, then increases. D) first increases, then decreases. E) does not change. Answer: D Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

62) As a perfectly competitive firm's output increases, its total revenue ________ and its total cost ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; increases Answer: A Topic: Profit maximization Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

63) In a perfectly competitive industry, when a firm is producing so that its total revenue equals its total cost, the firm is A) making an economic profit. B) incurring an economic loss. C) making zero economic profit. D) definitely not maximizing its profit. E) None of the above answers is correct because the relationship between total revenue and total cost has nothing to do with the firm's profit or loss. Answer: C Topic: Profit maximization Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

64) For a syrup producer in central Vermont, profit is maximized at the level of output for which total A) revenue exceeds total cost by the largest amount. B) revenue exceeds total cost by the smallest amount. C) revenue is maximized. D) cost is minimized. E) revenue equals total cost. Answer: A Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

65) A firm maximizes its profit by producing the amount of output such that A) marginal revenue equals marginal cost. B) marginal revenue exceeds marginal cost by some amount. C) marginal revenue is maximized. D) marginal cost is minimized. E) marginal revenue exceeds marginal cost by the maximum amount possible. Answer: A Topic: Profit maximization Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

66) For a perfectly competitive firm, profit maximization occurs when output is such that A) total revenue (TR) is maximized. B) total cost (TC) is minimized. C) marginal revenue (MR) = marginal cost (MC). D) average total cost (ATC) is minimized. E) total revenue (TR) equals total cost (TC). Answer: C Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

67) A perfectly competitive firm will maximize profit when the quantity produced is such that the A) firm's total revenue is equal to total cost. B) firm's marginal revenue is equal to the price. C) firm's marginal revenue is equal to its marginal cost. D) price exceeds the firm's marginal cost by as much as possible. E) firm's marginal revenue exceeds its marginal cost by the maximum amount possible. Answer: C Topic: Profit maximization Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

68) For a perfectly competitive firm, profit is maximized at the output level where i. total revenue exceeds total cost by the largest amount. ii. marginal revenue equals marginal cost. iii. price equals marginal cost. A) i only B) ii only C) ii and iii D) i and ii E) i, ii, and iii Answer: E Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

69) If a perfectly competitive wheat farmer is maximizing its profit and then increases its output, the farmer's A) total revenue increases, but total cost rises by more so that the farmer's total profit decreases. B) total revenue decreases and total cost increases, both thereby decreasing the farmer's total profit. C) total revenue does not change but total cost increases, thereby decreasing the farmer's total profit. D) marginal revenue increases, but so does marginal cost, so that the farmer's total profit increases. E) total revenue and total cost both rise, but the effect on the farmer's total profit is uncertain. Answer: A Topic: Profit maximization Skill: Level 4: Applying models Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

70) To increase its profit, a perfectly competitive firm will produce more output when A) price is greater than average fixed cost. B) price is greater than marginal cost. C) marginal cost is less than average total cost. D) average variable cost is greater than average fixed cost. E) price is greater than average variable cost. Answer: B Topic: Profit maximization Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

71) In a perfectly competitive market, the market price is $23. At the current level of output, a firm has a marginal cost of $28. What should the firm do? A) produce a larger output to make more profit B) nothing, it is currently maximizing profit C) produce less output to make more profit D) shut down E) raise the price of its product Answer: C Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

72) A perfectly competitive firm is producing at the quantity where marginal cost is $6 and average total cost is $4. The price of the good is $5. To maximize its profit, this firm should A) raise its price. B) lower its price. C) increase its output. D) decrease its output. E) increase the price it charges for its product. Answer: D Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

73) Suppose that a perfectly competitive firm's marginal revenue equals $12 when it sells 10 units of output. If the marginal cost of producing the 10th unit is $14, to maximize its profit the firm should A) do nothing because it is already maximizing its profit. B) decrease its production. C) increase its production. D) shut down. E) increase the price it charges for its product. Answer: B Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

74) Shama is producing candles in a perfectly competitive market. When she produces 500 candles, her total cost is $250. If she produces one additional candle, her total cost increases to $260. In order to maximize her profit, she should produce the additional candle A) if the market price for a candle is $12. B) only if the market price exceeds $260 for a candle. C) only if the market price exceeds $250 for a candle. D) if the market price for a candle exceeds $0.50. E) if her price exceeds her average total cost. Answer: A Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

75) Jennifer's Bakery Shop produces baked goods in a perfectly competitive market. If Jennifer decides to produce her 100th batch of cookies, the marginal cost is $120. She can sell this batch of cookies at a market price of $110. To maximize her profit, Jennifer should A) not produce this additional batch. B) produce this batch of cookies because they will help lower her average fixed cost. C) charge $120 for this batch. D) shut down. E) produce this batch of cookies because their MR exceeds their MC. Answer: A Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

76) Henry, a perfectly competitive lime grower in Southern California, notices that the market price of limes is greater than his marginal cost. What should Henry do? A) expand his output to increase profits B) shut down and incur a loss equal to his total fixed cost C) advertise his limes to be able to sell more output D) look for the output level where marginal revenue minus marginal cost is maximized E) shut down and earn no profit but also incur no loss Answer: A Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

77) Jerry's Jellybean Factory produces 2,000 pounds of jellybeans per month and sells them in a perfectly competitive market. The marginal cost is $3 per pound, the average variable cost is $2 per pound, and the beans sell for $4 per pound. Jerry A) is maximizing profit. B) is incurring an economic loss and should shut down. C) could increase his profit by producing more beans. D) could increase his profit by producing fewer beans. E) could increase his profit by raising the price of his beans. Answer: C Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

78) If a perfectly competitive firm's marginal revenue is greater than its marginal cost, as it increases its output, its profit ________ and the price it can charge for its product ________. A) increases; does not change B) decreases; falls C) increases; falls D) decreases; rises E) decreases; does not change Answer: A Topic: Profit maximization Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

79) Mark owns a cattle ranch near Hugo, Oklahoma. Mark is currently producing beef at an output level where marginal revenue exceeds marginal cost. In order to maximize his profit, Mark should A) not change his output. B) decrease his output. C) increase his output. D) shut down his ranch. E) probably change his output, but more information is needed to determine if he should increase, decrease, or not change it. Answer: C Topic: Profit maximization Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

80) During the winter, theme parks in Orlando close earlier than in the summer. The reason the theme parks close early during the winter is because during that season the marginal revenue from staying open later is ________ the marginal cost. A) greater than B) less than C) equal to D) zero compared to E) not comparable to Answer: B Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

81) A perfectly competitive firm is earning an economic profit when total fixed costs increase. Assuming the firm does not shut down, in the short run the firm will A) charge a higher price. B) produce more output so the extra revenue will cover the increased costs. C) produce less output to decrease total costs. D) continue producing the same quantity as before but will make less economic profit. E) continue producing the same quantity as before and continue making the same economic profit as before. Answer: D Topic: Profit maximization Skill: Level 4: Applying models Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

82) The above table has the total revenue and total cost schedule for Omar, a perfectly competitive grower of rutabagas. When Omar produces 2 bushels of rutabagas, his total profit equals A) $0. B) $20. C) $28. D) -$8. E) $48. Answer: D Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

83) The above table has the total revenue and total cost schedule for Omar, a perfectly competitive grower of rutabagas. Omar's total profit is maximized when he produces ________ bushels of rutabagas. A) 3 B) 5 C) 6 D) 8 E) 7 Answer: B Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

84) The above table has the total revenue and total cost schedule for Omar, a perfectly competitive grower of rutabagas. When Omar maximizes his profit, Omar's profit equals A) $80. B) $11. C) $30. D) $16. E) $105. Answer: D Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

85) The above figure illustrates a perfectly competitive firm. Curve A represents the A) MR curve. B) ATC curve. C) MC curve. D) AVC curve. E) AFC curve. Answer: A Topic: Profit maximization Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

86) The above figure illustrates a perfectly competitive firm. Curve B represents the A) MR curve. B) ATC curve. C) MC curve. D) AVC curve. E) AFC curve. Answer: C Topic: Profit maximization Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

87) The above figure illustrates a perfectly competitive firm. Curve C represents the A) MR curve. B) ATC curve. C) MC curve. D) market demand curve. E) AFC curve. Answer: B Topic: Profit maximization Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

88) The above figure illustrates a perfectly competitive firm. If the market price is $40 a unit, to maximize its profit (or minimize its loss) the firm should A) shut down. B) produce more than 10 and less than 30 units. C) produce 30 units. D) produce more than 30 units and less than 40 units. E) produce 40 units. Answer: E Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

89) The above figure illustrates a perfectly competitive firm. If the market price is $10 a unit, to maximize its profit (or minimize its loss) the firm should A) shut down. B) produce between 10 and less than 30 units. C) produce 30 units. D) produce more than 30 units and less than 40 units. E) produce 40 units. Answer: A Topic: Shut down Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

90) If a firm shuts down, it A) makes zero economic profit. B) incurs an economic loss equal to its total variable cost. C) incurs an economic loss equal to its total fixed cost. D) makes a normal profit. E) might make an economic profit, zero economic profit, or incur an economic loss. Answer: C Topic: Shut down Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

91) If a struggling perfectly competitive furniture store in Detroit shuts down, it incurs an economic loss equal to its A) marginal cost. B) total fixed cost. C) total variable cost. D) average variable cost. E) average total cost. Answer: B Topic: Shut down Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

92) A perfectly competitive firm will shut down when the price is just below the minimum point on the A) average fixed cost curve. B) average total cost curve. C) marginal cost curve. D) average variable cost curve. E) marginal revenue curve. Answer: D Topic: Shut down Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

93) Under which of the following conditions will a profit-maximizing perfectly competitive firm shut down in the short run? A) when it is making a normal profit B) whenever its marginal cost is less than its marginal revenue C) when the price is less than its minimum average variable cost D) whenever its total cost is greater than its total revenue E) when the price is less than its minimum average total cost Answer: C Topic: Shut down Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

94) A perfectly competitive firm will continue to operate in the short run when the market price is below its average total cost if the A) marginal revenue is greater than marginal cost. B) price is at least equal to the minimum average variable cost. C) total fixed costs are less than total revenue. D) marginal cost is minimized. E) price is also less than the minimum average variable cost. Answer: B Topic: Shut down Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

95) If the price is less than a perfectly competitive firm's minimum average variable cost, the firm A) makes an economic profit. B) operates and incurs an economic loss equal to total fixed cost. C) operates and incurs an economic loss equal to average variable cost. D) shuts down and incurs an economic loss equal to total fixed cost. E) shuts down and incurs an economic loss equal to average variable cost. Answer: D Topic: Shut down Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

96) Which of the following is true if a firm shuts down? i. The price is less than minimum average variable cost. ii. The firm is able to avoid an economic loss. iii. The firm incurs a loss equal to its total variable cost. A) i only B) i and ii C) i and iii D) iii only E) ii only Answer: A Topic: Shut down Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

97) If the market price is $50 for a unit of a good produced in a perfectly competitive market and the firm's minimum average variable cost is $52, then to maximize its profit (or minimize its loss) the firm should A) definitely produce the unit. B) shut down. C) not produce the unit but remain open. D) not produce the unit. Whether the firm should shut down or remain open cannot be determined without more information. E) produce the unit only if the price exceeds the average fixed cost. Answer: B Topic: Shut down Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

98) Suppose a perfectly competitive firm's minimum average variable cost is $3 when it produces 50. If the price is $2 and the firm's marginal cost is $2, the firm should A) continue to produce, but produce more than 50. B) continue to produce 50. C) continue to produce, but produce less than 50. D) shut down. E) continue to operate, but to determine the amount of production needs more information than is given. Answer: D Topic: Shut down Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

99) Under what conditions would a perfectly competitive cotton farmer who is incurring an economic loss temporarily stay in business? A) if the total revenue exceeds the total fixed cost B) if the total revenue exceeds the total variable cost C) if the total revenue is positive D) if the total revenue is increasing E) if the marginal revenue exceeds the price Answer: B Topic: Shut down Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

100) The largest loss a profit-maximizing perfectly competitive firm can incur in the short run equals its A) average variable cost multiplied by output. B) total fixed cost. C) marginal cost multiplied by the number of units produced. D) average total cost multiplied by the number of units produced. E) total variable cost. Answer: B Topic: Shut down Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

101) The rutabaga market is perfectly competitive and the price of a ton of rutabagas rises. As a result, Rudy, a rutabaga farmer, will A) decrease his output of rutabagas. B) not change his output of rutabagas because Rudy's firm is a price taker. C) increase his output of rutabagas. D) at first decrease and then increase his output of rutabagas. E) probably change his output of rutabagas, but more information is needed about the change in the marginal revenue of a ton of rutabagas. Answer: C Topic: Firm's short-run supply curve Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

102) A perfectly competitive firm's short-run supply curve is A) horizontal at the market price. B) its total cost curve above the AVC. C) its marginal cost curve below the marginal revenue curve. D) its marginal cost curve above the AVC curve. E) its marginal revenue curve below the ATC curve. Answer: D Topic: Firm's short-run supply curve Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

103) The firm's supply curve is its A) marginal cost curve above the average variable cost curve. B) marginal cost curve below the average variable cost curve. C) average variable cost curve above the marginal cost curve. D) average total cost curve above the marginal cost curve. E) marginal revenue curve above the average total cost curve. Answer: A Topic: Firm's short-run supply curve Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

104) Which of the following will increase a perfectly competitive seller's short-run supply and shift the firm's short-run supply curve rightward? A) an increase in the market price B) a decrease in average fixed costs C) a decrease in marginal cost D) Both answers A and B are correct. E) Both answers A and C are correct. Answer: C Topic: Firm's short-run supply curve Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

105) The four market types are A) perfect competition, imperfect competition, monopoly, and oligopoly. B) oligopoly, monopsony, monopoly, and imperfect competition. C) perfect competition, monopoly, monopolistic competition, and oligopoly. D) oligopoly, oligopolistic competition, monopoly, and perfect competition. E) perfect competition, imperfect competition, monopoly, and duopoly. Answer: C Topic: Market types Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

106) A requirement of perfect competition is that i. many firms sell an identical product to many buyers. ii. there are no restrictions on entry into (or exit from) the market, and established firms have no advantage over new firms. iii. sellers and buyers are well informed about prices. A) i only B) i and ii C) iii only D) i and iii E) i, ii, and iii Answer: E Topic: Perfect competition, definition Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

107) A perfectly competitive firm is a price taker because A) many other firms produce the same product. B) only one firm produces the product. C) many firms produce a slightly differentiated product. D) a few firms compete. E) it faces a vertical demand curve. Answer: A Topic: Price takers Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

108) The demand curve faced by a perfectly competitive firm is A) horizontal. B) vertical. C) downward sloping. D) upward sloping. E) U-shaped. Answer: A Topic: Demand Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

109) For a perfectly competitive corn grower in Nebraska, the marginal revenue curve is A) downward sloping. B) the same as its demand curve. C) upward sloping. D) U-shaped. E) vertical at the profit maximizing quantity of production. Answer: B Topic: Marginal revenue Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

110) A perfectly competitive firm maximizes its profit by producing at the point where A) total revenue equals total cost. B) marginal revenue is equal to marginal cost. C) total revenue is equal to marginal revenue. D) total cost is at its minimum. E) total revenue is at its maximum. Answer: B Topic: Profit maximization Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

111) If the market price is lower than a perfectly competitive firm's average total cost, the firm will A) immediately shut down. B) continue to produce if the price exceeds the average fixed cost. C) continue to produce if the price exceeds the average variable cost. D) shut down if the price exceeds the average fixed cost. E) shut down if the price is less than the average fixed cost. Answer: C Topic: Shut down Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

112) One part of a perfectly competitive trout farm's supply curve is its A) marginal cost curve below the shutdown point. B) entire marginal cost curve. C) marginal cost curve above the shutdown point. D) average variable cost curve above the shutdown point. E) marginal revenue curve above the demand curve. Answer: C Topic: Firm's short-run supply curve Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

113) Use the figure above to answer this question. We know the figure shows ________ market because the ________. A) a perfectly competitive; marginal revenue curve is horizontal B) an oligopoly; average total cost is U-shaped C) a perfectly competitive; average total cost is U-shaped D) a monopolistically competitive; marginal revenue curve is horizontal E) a monopoly; marginal cost curve is U-shaped Answer: A Topic: Perfect competition Skill: Level 3: Using models Section: Checkpoint 11.1 Status: New AACSB: Application of knowledge

114) Use the figure above to answer this question. If the firm is maximizing profit, it will produce ________ units and make an economic profit of ________. A) 1,000; $4,000 B) 1,200; $3,600 C) 1,000; $10,000 D) 1,200; $12,000 E) 1,400; $10,000 Answer: B Topic: Perfect competition Skill: Level 3: Using models Section: Checkpoint 11.1 Status: New AACSB: Application of knowledge

115) Use the figure above to answer this question. If the firm produces ________ units, total cost will equal ________. A) 1,200; $12,000 B) 1,000; $10,000 C) 1,200; $3,600 D) 1,000; $6,000 E) 1,200; $8,400 Answer: E Topic: Perfect competition Skill: Level 3: Using models Section: Checkpoint 11.1 Status: New AACSB: Application of knowledge

116) Use the figure above to answer this question. Which of the following is true regarding the firm's its supply decision? A) We cannot determine the shut down point without more information. B) The shut down point is 1,000 units. C) The shut down point is 1,200 units. D) Shut down occurs if the price falls to $7. E) The shut down point is greater than 1,400 units as average total cost reaches a maximum. Answer: A Topic: Shut down point Skill: Level 3: Using models Section: Checkpoint 11.1 Status: New AACSB: Application of knowledge

11.2 Output, Price, and Profit in the Short Run 1) The market supply in the short run for the perfectly competitive industry is A) the same as each producer's supply. B) the sum of the supply schedules of all firms. C) divided up according to each firm's selling price. D) set at the maximum price a buyer will pay for one unit. E) equal to the average of each firm's supply schedule. Answer: B Topic: Market supply Skill: Level 1: Definition Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

2) If there are 1,000 identical rice farmers who are each willing to supply 200 bushels of rice at $2 per bushel, what price and quantity combination is a point on the market supply curve for rice? A) $2 and 200 bushels B) $2 and 200,000 bushels C) $2,000 and 200,000 bushels D) $2,000 and 1,000 bushels E) $2 and 1,000 farmers Answer: B Topic: Market supply Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

3) In the short run, a perfectly competitive firm ________ make an economic profit and ________ incur an economic loss. A) might; will never B) will never; might C) might; might D) will never; will never E) will definitely; will never Answer: C Topic: Short-run equilibrium Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

4) In the short run, a perfectly competitive firm A) can make only zero economic profit. B) can possibly make an economic profit or possibly incur an economic loss. C) produces the level of output that sets the average total cost equal to the market price. D) can vary all its inputs. E) can change only its fixed inputs. Answer: B Topic: Short-run equilibrium Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

5) In the short run, a perfectly competitive firm can experience which of the following? i. an economic profit ii. an economic loss but it continues to stay open iii. an economic loss equal to its total fixed cost when it shuts down A) only i B) i and ii C) i and iii D) ii and iii E) i, ii, and iii Answer: E Topic: Short-run equilibrium Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

6) If a perfectly competitive seller is maximizing profit and is making zero economic profit, which of the following will this seller do? A) go to work in the next-best earning opportunity B) shut down, with a loss equal to total fixed cost C) continue at the current output, making zero economic profit D) increase production in order to make an economic profit E) remain open but decrease production in order to make an economic profit Answer: C Topic: Short-run equilibrium Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

7) If a perfectly competitive firm finds that the price exceeds its ATC, then the firm A) will raise its price to increase its economic profit. B) will lower its price to increase its economic profit. C) is making an economic profit. D) is incurring an economic loss. E) is making zero economic profit. Answer: C Topic: Economic profit Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

8) For a perfectly competitive sugar producer in Haiti, a short-run economic profit will occur if the price of each ton of sugar sold is A) greater than the average total cost of producing sugar. B) equal to the average total cost of producing sugar. C) less than the average total cost of producing sugar. D) rising as more sugar is sold. E) greater than the marginal revenue of each ton of sugar. Answer: A Topic: Economic profit Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

9) If Henry, a perfectly competitive lime grower in Southern California, can sell his limes at a price greater than his average total cost, Henry will A) incur an economic loss. B) incur an accounting loss. C) have an incentive to shut down. D) make an economic profit. E) make zero economic profit. Answer: D Topic: Economic profit Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

10) If a perfectly competitive firm's average total cost is less than the price, then the firm A) incurs an economic loss. B) makes an economic profit. C) makes zero economic profit. D) makes either zero economic profit or an economic profit depending on whether the marginal revenue is equal to or greater than the price. E) None of the above answers is correct because the relationship between the price and average total cost has nothing to do with the firm's profit. Answer: B Topic: Economic profit Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

11) If the market price is $50 per unit for a good produced in a perfectly competitive market and the firm's average total cost is $52, then the firm A) incurs an economic loss of $2 per unit. B) makes an economic profit of $2 per unit. C) makes zero economic profit. D) incurs a total economic loss of $52. E) More information is needed to determine the firm's economic profit or loss per unit. Answer: A Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

12) Peter's Pencils is a perfectly competitive company producing pencils. Suppose Peter is producing 1,000 pencils an hour. If the total cost of 1,000 pencils is $500, the market price per pencil is $2, and the marginal cost is $2, then Peter A) makes an economic profit because marginal revenue is equal to marginal cost at this output level. B) should decrease his output to increase his profit. C) is maximizing his profit and is making an economic profit. D) should increase his output to increase his profit. E) is not maximizing his profit but is making zero economic profit anyway. Answer: C Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

13) Suppose that marginal revenue for a perfectly competitive firm is $20 . When the firm produces 10 units, its marginal cost is $20, its average total cost is $22, and its average variable cost is $17. Then to maximize its profit in the short run, the firm A) should stay open and incur an economic loss of $20. B) must increase its output to increase its profit. C) must decrease its output to increase its profit. D) should shut down. E) should not change its production because it is already maximizing its profit and is making an economic profit. Answer: A Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

14) A perfectly competitive firm is producing 50 units of output, which it sells at the market price of $23 per unit. The firm's average total cost is $20. What is the firm's total revenue? A) $23 B) $150 C) $1,000 D) $1,150 E) $20 Answer: D Topic: Economic profit, total revenue Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

15) A perfectly competitive firm is producing 50 units of output and selling at the market price of $23. The firm's average total cost is $20. What is the firm's total cost? A) $23 B) $150 C) $1,000 D) $1,150 E) $20 Answer: C Topic: Economic profit, total cost Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

16) A perfectly competitive firm is producing 50 units of output and selling at the market price of $23. The firm's average total cost is $20. What is the firm's economic profit? A) $23 B) $150 C) $1,000 D) $1,150 E) $50 Answer: B Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

17) For a perfectly competitive syrup producer whose average total cost curve does not change, an economic profit could turn into an economic loss if the A) market demand for syrup decreases. B) marginal cost curve shifts downward. C) market demand for syrup does not change. D) market demand for syrup increases. E) price of syrup rises. Answer: A Topic: Economic loss Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

18) For a perfectly competitive rancher in Wyoming, if the price does not change, an economic profit could turn into an economic loss if the A) average total cost curve shifts downward. B) average total cost curve does not change. C) average total cost curve shifts upward. D) marginal cost curve shifts downward. E) average fixed cost decreases. Answer: C Topic: Economic loss Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

19) A perfectly competitive firm should shut down in the short-run if price falls below the minimum of A) marginal cost. B) marginal revenue. C) average total cost. D) fixed costs. E) average variable costs. Answer: E Topic: Economic loss Skill: Level 1: Definition Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

20) Computer memory chips are produced on wafers, each wafer having many separate chips that are separated and sold. The above table shows costs for a perfectly competitive producer of computer memory chips. If the market price of a wafer is $2,400 dollars, how many wafers will the firm produce? A) 0 B) 4 or 5 C) 3 or 4 D) 1 or 2 E) 6 Answer: B Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

21) Computer memory chips are produced on wafers, each wafer having many separate chips that are separated and sold. The above table shows costs for a perfectly competitive producer of computer memory chips. If the market price of a wafer is $2,400 dollars, the firm is A) making zero economic profit. B) making an economic profit of $12,000 an hour. C) incurring an economic loss of $2,800 an hour. D) incurring an economic loss of $2,000 an hour. E) making an economic profit of $2,400 an hour. Answer: D Topic: Economic loss Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

22) Computer memory chips are produced on wafers, each wafer having many separate chips that are separated and sold. The above table shows costs for a perfectly competitive producer of computer memory chips. This firm will produce as long as the market price of a wafer is above A) $1,300. B) $1,400. C) $7,900. D) $2,800. E) $9,800. Answer: A Topic: Shut down Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

23) The above figure shows a perfectly competitive firm. If the market price is $15, the firm A) is incurring an economic loss. B) is making an economic profit. C) is making zero economic profit. D) will immediately shut down. E) might shut down but more information is needed about the AVC. Answer: B Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

24) The above figure shows a perfectly competitive firm. If the market price is $10, the firm A) is incurring an economic loss. B) is making an economic profit. C) is making zero economic profit. D) will immediately shut down. E) might shut down but more information is needed about the AVC. Answer: C Topic: Normal profit Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

25) The above figure shows a perfectly competitive firm. If the market price is $5, the firm A) is making an economic profit. B) is making zero economic profit. C) will immediately shut down. D) will not shut down. E) might shut down but more information is needed about the AVC. Answer: E Topic: Economic loss Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

26) The above figure shows a perfectly competitive firm. If the market price is more than $20 per unit, the firm A) will definitely shut down to minimize its losses. B) will stay open to produce and will make zero economic profit. C) will stay open to produce and will incur an economic loss. D) will stay open to produce and will make an economic profit. E) might shut down but more information is needed about the fixed cost. Answer: D Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

27) The above figure shows a perfectly competitive firm. If the market price is $20 per unit, the firm A) will definitely shut down to minimize its losses. B) will stay open to produce and will make zero economic profit. C) will stay open to produce and will incur an economic loss. D) will stay open to produce and will make an economic profit. E) might shut down but more information is needed about the fixed cost. Answer: B Topic: Normal profit Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

28) The above figure shows a perfectly competitive firm. If the market price is $15 per unit, the firm A) will definitely shut down to minimize its losses. B) will stay open to produce and will make zero economic profit. C) will stay open to produce and will incur an economic loss. D) will stay open to produce and will make an economic profit. E) might shut down but more information is needed about the fixed cost. Answer: C Topic: Economic loss Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

29) The above figure shows a perfectly competitive firm. If the market price is $5 per unit, the firm A) will definitely shut down to minimize its losses. B) will stay open to produce and will make zero economic profit. C) will stay open to produce and will incur an economic loss. D) will stay open to produce and will make an economic profit. E) might shut down but more information is needed about the fixed cost. Answer: A Topic: Shut down Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

30) The figure above shows a perfectly competitive firm. If the market price is $40 per unit, then the firm produces ________ units and makes an economic profit that is ________. A) more than 45; more than $400 B) 40; more than $400 C) 40; less than $400 D) 30; equal to zero E) 30; more than $250 Answer: B Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

31) The figure above shows a perfectly competitive firm. If the market price is $20 per unit, then the firm produces ________ units and makes an economic profit that is ________. A) more than 30; more than $100 B) 30; more than $100 C) 20; less than $400 D) 0; zero E) 30; zero Answer: E Topic: Normal profit Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

32) Bill owns a lawn-care company in Windermere, Florida, whose cost curves are illustrated in the above figure. The market equilibrium price in this perfectly competitive market equals $32 per lawn mowed. At this price, how many lawns will Bill mow per week? A) more than 10 and less than 30 B) 30 C) 40 D) 50 E) 0 Answer: C Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

33) Bill owns a lawn-care company in Windermere, Florida, whose cost curves are illustrated in the above figure. The market equilibrium price in this perfectly competitive market equals $32 per lawn mowed. Bill's average total cost curve is ATC, so his total cost of production equals A) $0 because Bill shuts down. B) more than $0 and less than $1,200 per week. C) more than $1,200 and less than $1,400 per week. D) more than $1,400 per week and less than $1,800 per week. E) more than $1,800 per week. Answer: B Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

34) Bill owns a lawn-care company in Windermere, Florida, Florida, whose cost curves are illustrated in the above figure. The market equilibrium price in this perfectly competitive market equals $32 per lawn mowed. If Bill's average total cost curve is ATC, his total economic ________ equals ________. A) loss; $800 per week B) profit; $1,280 per week C) profit; $480 per week D) loss; $1,280 per week E) profit; $32 per week Answer: C Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

35) If the market supply curve and market demand curve for a good intersect at 600,000 units and there are 10,000 identical firms in the market, then each firm is producing A) 600,000 units. B) 60,000,000,000 units. C) 60,000 units. D) 60 units. E) 10,000 units. Answer: D Topic: Market supply Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

36) In the short run, a perfectly competitive firm A) must make an economic profit. B) must incur an economic loss. C) must make zero economic profit. D) might make an economic profit, zero economic profit, or incur an economic loss. E) None of the above answers is correct. Answer: D Topic: Short-run equilibrium Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

37) A perfectly competitive firm definitely makes an economic profit in the short run if price is A) equal to marginal cost. B) equal to average total cost. C) greater than average total cost. D) greater than marginal cost. E) greater than average variable cost. Answer: C Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

38) If a perfectly competitive firm is maximizing its profit and is making an economic profit, which of the following is correct? i. Price equals marginal revenue. ii. Marginal revenue equals marginal cost. iii. Price is greater than average total cost. A) i only B) i and ii only C) ii and iii only D) i and iii only E) i, ii, and iii Answer: E Topic: Economic profit Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

39) The market for watermelons in Alabama is perfectly competitive. A watermelon producer making zero economic profit could make an economic profit if the A) average total cost of selling watermelons does not change. B) average total cost of selling watermelons rises. C) average total cost of selling watermelons falls. D) marginal cost of selling watermelons does not change. E) marginal cost of selling watermelons rises. Answer: C Topic: Economic profit Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

40) Juan's Software Service Company is in a perfectly competitive market. Juan has total fixed cost of $25,000, average variable cost for 1,000 service calls is $45, and marginal revenue is $75. Juan's makes 1,000 service calls a month. What is his economic profit? A) $5,000 B) $25,000 C) $45,000 D) $75,000 E) $50,000 Answer: A Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

41) If a perfectly competitive firm finds that price is less than its ATC, then the firm A) will raise its price to increase its economic profit. B) will lower its price to increase its economic profit. C) is making an economic profit. D) is incurring an economic loss. E) is making zero economic profit. Answer: D Topic: Economic loss Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

42) A perfectly competitive furniture-rental firm in Phoenix incurs an economic loss if the average total cost of each rental is A) greater than the marginal revenue of each rental. B) less than the marginal revenue of each rental. C) equal to the marginal revenue of each rental. D) equal to the price of each rental. E) greater than the average variable cost of each rental. Answer: A Topic: Economic loss Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

43) Consider a perfectly competitive market experiencing good times. In the short run, the equilibrium price will ________ and firms will earn a(n) ________. A) increase; economic profit as the new price exceeds average total cost B) increase; normal profit as the new price exceeds average total cost C) decrease; economic loss as new firms enter the industry D) decrease; economic profit as firms exit the industry E) may increase or decrease; normal profit depending on their costs Answer: A Topic: Short-run equilibrium Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

44) Use the figure above to answer this question. Consider a perfectly competitive market experiencing good times. Figure ________ shows a firm maximizing profit in the short run because it produces ________ units and makes an economic profit of ________. A) A; 100; $2 per unit B) A; 90; $3 per unit C) B; 100; $0 per unit D) C; 100; $3 per unit E) C; 110; $2 per unit Answer: A Topic: Short-run equilibrium Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

45) Use the figure above to answer this question. Figure ________ shows a short-run equilibrium in good times because the firm makes a(n) ________. A) A; economic profit B) A; normal profit C) B; normal profit D) B; economic loss E) C; normal profit Answer: A Topic: Short-run equilibrium Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

46) Use the figure above to answer this question. Consider a perfectly competitive firm in a short run equilibrium. Figure ________ shows a firm in bad times because the firm makes a(n) ________. A) A; economic loss of $4 per unit if the firm decides to operate B) A; economic loss of $4 so it must close C) B; economic loss of $3 per unit D) B; economic profit because the price exceeds average variable cost E) C; normal profit and can stay open in the long run Answer: A Topic: Short-run equilibrium Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

47) Use the figure above to answer this question. Consider a perfectly competitive firm in a short run equilibrium. Figure ________ shows a firm in bad times because the firm produces ________ units and makes a(n) ________. A) A; 100; economic loss B) A; 110; economic loss C) B; 90; economic profit D) C; 100; economic loss E) C; 100; normal profit Answer: A Topic: Short-run equilibrium Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

48) Suppose a perfectly competitive firm is incurring an economic loss. Consequently, the i. firm's average total cost exceeds the price. ii. firm's economic loss equals its total fixed cost. iii. firm cannot maximize profit. A) i and ii only B) i only C) i, ii and iii D) iii only E) ii and iii Answer: B Topic: Short-run equilibrium Skill: Level 5: Critical thinking Section: Checkpoint 11.2 Status: New AACSB: Application of knowledge

49) If perfectly competitive firms are entering or exiting a market, it must be true that the market A) is in the short run. B) is in the long run. C) is in the short run only if the firms' economic profits equal $0. D) is in the long run only if the firms' economic profits are positive. E) is in a long-run equilibrium because average variable costs are no longer relevant. Answer: A Topic: Short-run equilibrium Skill: Level 5: Critical thinking Section: Checkpoint 11.2 Status: New AACSB: Analytical thinking

11.3 Output, Price, and Profit in the Long Run 1) When new firms enter the perfectly competitive Miami bagel market, the market A) supply curve shifts leftward. B) supply curve does not change. C) demand curve shifts rightward. D) supply curve shifts rightward. E) demand curve shifts leftward. Answer: D Topic: Entry Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

2) If new firms enter a perfectly competitive industry, the market supply A) does not change. B) becomes more price elastic. C) becomes more price inelastic. D) increases. E) decreases because each firm produces less than before the entry. Answer: D Topic: Long-run equilibrium, entry Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

3) Alice, Bud, and Celia can produce rubber bands in a perfectly competitive market. If they enter the market, the minimum average total cost for a bundle of rubber bands, for the three of them is $2, $3, and $4, respectively. If the market price is $2.10 per bundle, then A) all three of them will enter the market. B) only Alice will enter the market. C) Alice and Bud will enter the market. D) Bud and Celia will enter the market. E) Alice and Celia will enter the market. Answer: B Topic: Long-run equilibrium, entry Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

4) Suppose a perfectly competitive market is in long-run equilibrium and then there is a permanent increase in the demand for that product. The new long-run equilibrium will have A) fewer firms in the market. B) more firms in the market. C) the same number of firms in the market. D) probably a different number of firms, but it is not possible to determine if there will be more or fewer firms. E) a permanent decrease in supply. Answer: B Topic: Long-run equilibrium, entry Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Analytical thinking

5) When firms in a perfectly competitive market are earning an economic profit, in the long run A) no new firms will enter the market. B) new firms will enter the market. C) firms will exit the market. D) the long-run average cost curve shifts downward. E) the initial firms continue to earn an economic profit. Answer: B Topic: Long-run equilibrium, entry Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

6) When all firms in a perfectly competitive market are earning ________, we can state that the market is in a ________ equilibrium. A) a normal profit; long-run B) an economic profit; long-run C) a normal profit; short-run D) an economic profit; short-run E) A and D are correct. Answer: E Topic: Long-run equilibrium Skill: Level 3: Using models Section: Checkpoint 11.3 Status: New AACSB: Application of knowledge

7) The figure shows a perfectly competitive market that was in a long-run equilibrium on demand curve D0. Due to a permanent change in demand to D1, existing firms will begin to make an economic ________ which will result in ________ the market. A) loss; new firms entering B) profit; existing firms exiting C) profit; new firms entering D) loss; some existing firms exiting E) loss; all remaining firms exiting Answer: C Topic: Long-run equilibrium, entry and exit Skill: Level 4: Applying models Section: Checkpoint 11.3 Status: New AACSB: Application of knowledge

8) The graph shows a perfectly competitive market that was in a long-run equilibrium on demand curve D0. Due to a permanent change in demand to D2, the price in the market will ________ causing existing firms to ________ which means that ________ the market. A) decrease; incur an economic loss; some firms will exit B) decrease; earn a larger economic profit; new firms will enter C) increase; earn a smaller economic profit; new firms will enter D) decrease; earn a smaller economic profit; new firms will enter E) increase; earn a larger economic profit; some firms will exit Answer: A Topic: Long-run equilibrium, entry and exit Skill: Level 4: Applying models Section: Checkpoint 11.3 Status: New AACSB: Application of knowledge

9) Consider a perfectly competitive market that was in a long-run equilibrium when a permanent increase in demand occurs. Which of the following will occur as a result? i. The existing firms will start to earn an economic profit. ii. New firms will be motivated to enter the market. iii. Some firms that cannot meet the new demand will exit the market. A) i, ii and iii B) i and ii only C) ii and iii only D) iii only E) i and iii Answer: B Topic: Long-run equilibrium, entry and exit Skill: Level 4: Applying models Section: Checkpoint 11.3 Status: New AACSB: Application of knowledge

10) If perfectly competitive lawn care firms are making an economic profit, then A) wages will be bid up until the economic profit are gone. B) the firms must be superior and will continue to make an economic profit. C) new firms will enter the industry. D) they are not equating marginal revenue to marginal cost. E) government regulation will be imposed to decrease their profit. Answer: C Topic: Long-run equilibrium, entry Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

11) If perfectly competitive firms are making an economic profit, then A) the market must be in long-run equilibrium but cannot be in a short-run equilibrium. B) some firms will exit the market. C) new firms will enter the market. D) the market might be in a long-run equilibrium but not a short-run equilibrium. E) the market cannot be in either a short-run or a long-run equilibrium. Answer: C Topic: Long-run equilibrium, entry Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

12) The corn market is perfectly competitive, with thousands of corn farmers. In the 2000s, the price of corn soared so that new farmers entered the corn market. Initially, entry ________ the economic profit of the initial corn farmers and in the long run the initial corn farmers ________. A) increased; made an even greater economic profit than initially B) decreased; made zero economic profit C) increased; made zero economic profit D) decreased; incurred an economic loss E) increased; made an economic profit Answer: B Topic: Long-run equilibrium, entry Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

13) If firms in a perfectly competitive industry are earning an economic profit, then in the ________, firms will ________ the industry. A) short run; enter B) long run; enter C) short run; exit D) long run; exit E) More information about the firms' costs and the price of the product is needed to determine if firms enter or exit the industry. Answer: B Topic: Long-run equilibrium, entry Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

14) When new firms enter a perfectly competitive market, the market supply curve shifts ________ and the price ________. A) rightward; falls B) rightward; rises C) leftward; falls D) leftward; rises E) rightward; does not change Answer: A Topic: Long-run equilibrium, entry Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

15) When firms in a perfectly competitive market incur economic losses, exit by some firms means the market supply will A) increase. B) decrease. C) not change. D) become vertical. E) become the same as the individual producers' supplies. Answer: B Topic: Exit Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

16) To eliminate losses in a perfectly competitive market, firms exit the industry. This exit results in A) an increase in market supply. B) a decrease in market supply. C) an increase in market demand. D) a decrease in market demand. E) a decrease in both the market supply and the market demand. Answer: B Topic: Long-run equilibrium, exit Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

17) Suppose a perfectly competitive market is in short-run equilibrium. Firms that are incurring a ________ economic loss ________. A) persistent; increase their output to increase their profit B) temporary; exit the industry C) temporary; decrease their production but definitely stay open D) persistent; exit the industry and shift the market supply curve leftward E) persistent; exit the industry and shift the market supply curve rightward Answer: D Topic: Long-run equilibrium, exit Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

18) In the long run, existing firms exit a perfectly competitive market A) only if economic profits are zero. B) if they make a positive economic profit. C) if normal profits are greater than zero. D) only if they incur an economic loss. E) if they either make a normal profit or if they incur an economic loss. Answer: D Topic: Long-run equilibrium, exit Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

19) In the long run, perfectly competitive firms will exit the market if the price is A) higher than average variable cost. B) equal to average total cost. C) less than average total cost. D) equal to average fixed cost. E) equal to marginal revenue. Answer: C Topic: Long-run equilibrium, exit Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

20) A perfectly competitive market is in equilibrium and then demand decreases. The decrease in demand means the market price will ________ and eventually there will be ________. A) rise; entry by new firms B) fall; exit by existing firms C) fall; entry by new firms D) rise; exit by existing firms E) fall; neither entry nor exit because the market is perfectly competitive Answer: B Topic: Long-run equilibrium, exit Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

21) Catfish farming is a perfectly competitive industry. Catfish farmers suffered tremendous economic losses in the late 2000s. As a result, A) some new catfish farmers entered the market. B) some catfish farmers exited the market. C) no catfish farmers entered or exited this market. D) the supply of catfish increased in 2010. E) new demanders entered the market after some firms had exited. Answer: B Topic: Long-run equilibrium, exit Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

22) Keith is a perfectly competitive carnation grower. The market price is $2 per dozen carnations. Keith's average total cost to grow carnations is $2.50 per dozen. In the long run, Keith will A) raise his price to more than $2.50 per dozen carnations. B) raise his price to $2.50 per dozen carnations. C) exit the industry if the price and his costs do not change. D) incur an economic loss. E) continue to make an economic profit. Answer: C Topic: Long-run equilibrium, exit Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

23) If concerns about mad-cow disease impose economic losses on the perfectly competitive cattle ranchers, exit by the ranchers combined with no further changes in the demand for beef will force the price of beef to A) decrease. B) not change. C) increase. D) fluctuate, with the trend being lower prices. E) probably change, but more information about the market supply of beef is needed to answer the question. Answer: C Topic: Long-run equilibrium, exit Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Analytical thinking

24) Suppose a perfectly competitive market is in a short-run equilibrium. If some firms exit the market, the profit of the remaining firms ________; if some firms enter the market, the profit of each existing firm ________. A) decreases; is unchanged B) increases; decreases C) increases; is unchanged D) is unchanged; is unchanged E) decreases; increases Answer: B Topic: Long-run equilibrium, entry and exit Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

25) In the long run, perfectly competitive firms produce at the output level that has the minimum A) marginal cost. B) average total cost. C) average variable cost. D) average fixed cost. E) total revenue. Answer: B Topic: Long-run equilibrium Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

26) In a perfectly competitive industry, i. entry by new firms shifts the market supply curve rightward. ii. exit by existing firms shifts the market supply curve leftward. iii. at all times existing firms make only zero economic profit. A) ii and iii B) ii only C) i and iii D) i and ii E) i, ii, and iii Answer: D Topic: Long-run equilibrium Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

27) If it does not shut down, a perfectly competitive firm produces where marginal cost is equal to the marginal revenue A) only in the short run. B) only in the long run. C) always to maximize its profit. D) only if it is not possible to produce where price equals average variable cost. E) only if it is not possible to produce where price is greater than average total cost. Answer: C Topic: Long-run equilibrium Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

28) In the long run, a perfectly competitive firm makes A) a positive economic profit. B) zero economic profit. C) negative economic profit, that is, an economic loss. D) zero accounting profit. E) either a positive economic profit or a normal profit. Answer: B Topic: Long-run equilibrium Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

29) In the long run, a perfectly competitive firm will A) be able to make an economic profit. B) produce but incur an economic loss. C) make zero economic profit. D) not produce and will incur an economic loss equal to its total fixed cost. E) not produce but not incur an economic loss. Answer: C Topic: Long-run equilibrium Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

30) In the long run, a perfectly competitive firm A) can make either an economic profit or a normal profit. B) incurs an economic loss. C) makes zero economic profit. D) can make an economic profit, zero economic profit, or incur an economic loss. E) makes an economic profit. Answer: C Topic: Long-run equilibrium Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

31) The cranberry market is perfectly competitive. Reports that consuming cranberries can lead to improved health result in a permanent increase in the demand for cranberries and an immediate upward jump in the price of cranberries. As time passes, the price of cranberries ________ and the initial firms' economic ________. A) falls; profit will be eliminated B) rises still higher; loss will be eliminated C) rises still higher; profit will not change D) falls; loss will be increased E) falls; profit will not change Answer: A Topic: Long-run equilibrium Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

32) Suppose a perfectly competitive market is in long-run equilibrium with a price of $12. Then there is a permanent increase in demand. As a result, in the short run the market price ________ and in the long run the number of firms ________ and the price is ________ the price was in the short run. A) rises; does not change; is equal to B) rises; increases; higher than C) rises; does not change; lower than D) falls; decreases; is equal to E) rises; increases; lower than Answer: E Topic: External economies Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

33) If perfectly competitive firms are maximizing their profit and are making an economic profit, the market ________ in a short-run equilibrium and ________ in a long-run equilibrium. A) is; is B) is; is not C) is not; is D) is not; is not E) is; might be Answer: B Topic: Permanent change in demand Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

34) A market is initially in a long-run equilibrium and there is a permanent increase in demand. After the new long-run equilibrium is reached, there A) are more firms in the market. B) are fewer firms in the market. C) are the same number of firms in the market. D) probably is a different number of firms in the market, but more information is needed to determine if the number of firms rises, falls, or perhaps does not change. E) is no change in the market. Answer: A Topic: Permanent change in demand Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

35) A permanent decrease in demand definitely A) shifts a firm's average total cost curve downward. B) creates diseconomies for individual firms. C) lowers the market price. D) decreases the number of firms in the industry. E) shifts a firm's average total cost curve upward. Answer: D Topic: Permanent change in demand Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

36) The rutabaga market is perfectly competitive. Research is published claiming that eating rutabagas leads to gaining weight and so the demand for rutabagas permanently decreases. The permanent decrease in demand results in a A) lower price, economic losses by rutabaga farmers, and entry into the market. B) lower price, economic losses by rutabaga farmers, and exit from the market. C) higher price, economic profits for rutabaga farmers, and entry into the market. D) higher price, economic losses by rutabaga farmers, and exit from the market. E) lower price, economic profits for rutabaga farmers, and entry into the market. Answer: B Topic: Permanent change in demand Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Analytical thinking

37) Technological change A) usually requires an investment in a new plant. B) is implemented in the short run. C) almost always increases the costs of production. D) almost always increases the variable costs of production. E) cannot help a firm to earn an economic profit in either the short run or the long run. Answer: A Topic: Technological change Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

38) When a firm adopts new technology, generally its A) cost curves shift upward. B) cost curves shift downward. C) cost curves are unaffected. D) supply curve shifts leftward. E) production permanently decreases. Answer: B Topic: Technological change Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

39) In a market undergoing technological change, firms that A) adopt the new technology temporarily incur an economic loss. B) adopt the new technology temporarily make an economic profit. C) do not adopt the new technology temporarily make an economic profit. D) do not adopt the new technology increase their market share. E) do not adopt the new technology continue to make a normal profit. Answer: B Topic: Technological change Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

40) If the technology associated with producing fiber-optic cable continues to advance, over time the cost of producing fiber-optic cable will A) decrease, firms that use the new technology will make an economic profit, and in the long run new firms will enter the market. B) decrease, firms that use the new technology will incur an economic loss, and in the long run some firms will exit the industry. C) increase, firms that use the new technology will make an economic profit, and in the long run new firms will enter the market. D) increase, firms that use the new technology will incur an economic loss, and in the long run some firms will exit the industry. E) decrease, firms that do not use the new technology will make an economic profit, and in the long run new firms will enter the market. Answer: A Topic: Technological change Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

41) Technology reduces the average cost of production, so in the long run i. perfectly competitive firms produce at a lower average cost. ii. the market price of the good falls. iii. firms with older plants either exit the market or adopt the new technology. A) i only B) i and ii C) iii only D) i and iii E) i, ii, and iii Answer: E Topic: Technological change Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

42) Technological change allows perfectly competitive firms to ________ and leads to ________. A) lower their costs; lower prices for consumers B) raise their prices; higher prices for consumers C) lower their costs; higher prices so the firms can earn economic profits in the long run D) raise their costs; higher prices and maximum profits in the long run E) lower their costs; deadweight loss Answer: A Topic: Technological change Skill: Level 5: Critical thinking Section: Checkpoint 11.3 Status: New AACSB: Analytical thinking

43) Suppose the cost of a CD is $20. As online retailers enter the market with new technology, the price of CDs ________, and traditional music stores find that ________. A) decreases; their AVC exceeds the new lower price and they exit the industry B) decreases; their ATC curve shifts lower and their profit increases C) increases; they compete with online retailers at the new higher price D) increases; their costs have risen due to the new technology E) decreases; they compete with online retailers with higher profits Answer: A Topic: Eye on record stores Skill: Level 5: Critical thinking Section: Checkpoint 11.3 Status: New AACSB: Analytical thinking

44) In the long run, new firms enter a perfectly competitive market when A) normal profit is greater than zero. B) economic profit is equal to zero. C) normal profit is equal to zero. D) economic profit is greater than zero. E) the existing firms are weak because they are incurring economic losses. Answer: D Topic: Long-run equilibrium, entry Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

45) If perfectly competitive firms are making an economic profit, the economic profit A) attracts entry by more firms, which lowers the price. B) can be earned both in the short run and the long run. C) is less than the normal profit. D) leads to a decrease in market demand. E) generally leads to firms exiting as they seek higher profit in other markets. Answer: A Topic: Long-run equilibrium, entry Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

46) If perfectly competitive firms are making an economic profit, then A) the market is in its long-run equilibrium. B) new firms enter the market and the equilibrium profit of the firms already in the market decreases. C) new firms enter the market and the equilibrium profit of the firms already in the market increases. D) firms exit the market and the economic profit of the surviving firms in the market decreases. E) firms exit the market and the economic profit of the surviving firms in the market increases. Answer: B Topic: Long-run equilibrium, entry Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

47) As a result of firms leaving the perfectly competitive frozen yogurt market in the early 2000s, the market A) supply curve shifted leftward. B) supply curve did not change. C) demand curve shifted rightward. D) supply curve shifted rightward. E) demand curve shifted leftward. Answer: A Topic: Exit Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

48) Firms exit a competitive market when they incur an economic loss. In the long run, this exit means that the economic losses of the surviving firms A) increase. B) decrease until they equal zero. C) decrease until economic profits are earned. D) do not change. E) might change but more information is needed about what happens to the price of the good as the firms exit. Answer: B Topic: Long-run equilibrium, exit Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

49) If firms in a perfectly competitive market are incurring economic losses, then as time passes firms ________ and the market ________. A) enter; demand curve shifts leftward B) enter; supply curve shifts rightward C) exit; demand curve shifts leftward D) exit; supply curve shifts rightward E) exit; supply curve shifts leftward Answer: E Topic: Long-run equilibrium, exit Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

50) In the long run, a firm in a perfectly competitive market will A) make zero economic profit, so that its owners earn a normal profit. B) make zero normal profit but its owners will make an economic profit. C) remove all competitors and become a monopolistically competitive firm. D) incur an economic normal loss but not earn a positive economic profit. E) remove all competitors and become a monopoly. Answer: A Topic: Long-run equilibrium Skill: Level 1: Definition Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

51) Technological change brings a ________ to firms that adopt the new technology. A) permanent economic profit B) temporary economic profit C) permanent economic loss D) temporary economic loss E) temporary normal profit Answer: B Topic: Technological change Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

52) Perfect competition ________ an efficient outcome because ________. A) achieves; total surplus is maximized B) achieves; marginal benefit equals marginal cost C) does not achieve; firms do not get to choose their price D) does not achieve; firms produce goods with perfect substitutes E) Both A and B are correct. Answer: E Topic: Efficient equilibrium Skill: Level 5: Critical thinking Section: Checkpoint 11.3 Status: New AACSB: Analytical thinking

53) In a perfectly competitive market, a(n) ________ occurs because ________. A) efficient outcome; total surplus is maximized B) deadweight loss; firms minimize average minimum cost C) efficient outcome; the fair rules condition is met D) deadweight loss; firms must be price takers E) deadweight loss; total surplus is minimized Answer: A Topic: Efficient equilibrium Skill: Level 5: Critical thinking Section: Checkpoint 11.3 Status: New AACSB: Analytical thinking

54) Perfect competition ________ a fair outcome ________. A) achieves; because both the fair rules and fair results conditions are met B) achieves; because total surplus is maximized C) does not achieve; because entrepreneurs only earn a normal profit D) does not achieve; because firms must be price takers E) may achieve; if average total costs are minimized Answer: A Topic: Fairness Skill: Level 5: Critical thinking Section: Checkpoint 11.3 Status: New AACSB: Analytical thinking

11.4 Chapter Figures

The figure above shows a firm's total revenue and total cost curves. 1) Based on the figure above, when the firm maximizes its profit, it produces ________ cans per day. A) 0 B) more than 0 and less than 5 C) 5 or more but less than 10 D) 10 E) more than 10 Answer: D Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

2) To maximize its profit, the firm in the figure above produces ________ cans per day and ________. A) 0; incurs an economic loss of less than $20 B) between 3 to 5 cans; earns a normal profit C) 10; earns an economic profit of $2.90 D) 10; earns an economic profit of $29 E) more than 10; earns an economic profit Answer: D Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

The figure above shows a firm's marginal revenue and marginal cost curves. 3) Based on the figure above, the price of a can is $8; if the price increased to $12, then the firm would A) produce zero cans. B) decrease the amount of cans produces it but not to zero. C) not change the amount of cans it produces. D) increase the amount of cans it produces. E) More information is needed to determine what action the firm will take. Answer: D Topic: Profit maximization Skill: Level 4: Applying models Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

4) Suppose the firm's marginal cost of producing a can increases by $1 per can. Then, based on the figure above, the firm would A) produce zero cans. B) decrease the amount of cans it produces but not to zero cans. C) not change the amount of cans it produces. D) increase the amount of cans it produces. E) More information is needed to determine what action the firm will take. Answer: B Topic: Profit maximization Skill: Level 4: Applying models Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

The figure above shows the cost curves and marginal revenue curve for a perfectly competitive firm. 5) Based on the figure above, what is the price of a can? A) $0 B) $3.00 per can C) $5.14 per can D) None of the above prices is correct. E) More information is needed to determine the price of a can. Answer: B Topic: Perfect competition, definition Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

6) Based on the figure above, if the firm produces 7 cans per day, the firm ________ maximizing its profit and is ________. A) is; incurring an economic loss B) is; making a normal profit C) is; making an economic profit D) is not; incurring an economic loss E) is not; making a normal profit Answer: A Topic: Economic loss Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

7) Suppose the price of a can was $5.14. In this case, to maximize its profit, the firm illustrated in the figure above would A) increase its production and would make an economic profit. B) not change its production and would make a normal profit. C) not change its production and would make an economic profit. D) increase its production and would incur an economic loss. E) not change its production and would incur an economic loss. Answer: A Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

8) The firm in the figure above is ________ that is equal to ________. A) making an economic profit; $5.14 × 7 B) making an economic profit; $3.00 × 7 C) incurring an economic loss; $5.14 × 7 D) incurring an economic loss; ($5.14 - $3.00) × 7 E) making an economic profit; ($5.14 - $3.00) × 7 Answer: D Topic: Economic loss Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

The figure above shows some of a firm's cost curves and its marginal revenue curve. 9) Based on the figure above, what is the price of a can? A) $0 B) $8.00 per can C) $5.10 per can D) None of the above prices is correct. E) More information is needed to determine the price of a can. Answer: B Topic: Perfect competition, definition Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

10) Based on the figure above, if the firm produces 10 cans per day, the firm ________ maximizing its profit and is ________. A) is; incurring an economic loss B) is; making zero economic profit C) is; making an economic profit D) is not; incurring an economic loss E) is not; making zero economic profit Answer: C Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

11) Suppose the price of a can was $5.10. In this case, to maximize its profit, the firm illustrated in the figure above would A) decrease its production and would make an economic profit. B) not change its production and would make zero economic profit. C) not change its production and would make an economic profit. D) decrease its production and would incur an economic loss. E) not change its production and would incur an economic loss. Answer: A Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

12) The firm in the figure above has a total cost equal to A) $5.10 × 10. B) $8.00 × 10. C) ($5.10 - $8.00) × 10. D) ($8.00 - $5.10) × 10. E) None of the above answers is correct because more information is needed. Answer: A Topic: Total cost Skill: Level 4: Applying models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

13) The firm in the figure above has a total revenue equal to A) $5.10 × 10. B) $8.00 × 10. C) ($5.10 - $8.00) × 10. D) ($8.00 - $5.10) × 10. E) None of the above answers is correct because more information is needed. Answer: B Topic: Total revenue Skill: Level 4: Applying models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

14) The firm in the figure above is ________ that is equal to ________. A) making an economic profit; $8.00 × 10 B) making an economic profit; $5.10 × 10 C) incurring an economic loss; $5.10 × 10 D) incurring an economic loss; ($8.00 - $5.10) × 10 E) making an economic profit; ($8.00 - $5.10) × 10 Answer: E Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

The above figure shows some a firm's cost curves and its marginal revenue curve. 15) Based on the figure above, what is the price of a can? A) $0 B) $3.00 per can C) $5.15 per can D) None of the above prices is correct. E) More information is needed to determine the price of a can. Answer: B Topic: Perfect competition, definition Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

16) Based on the figure above, if the firm produces 7 cans per day, the firm ________ maximizing its profit and is ________. A) is; incurring an economic loss B) is; making zero economic profit C) is; making an economic profit D) is not; incurring an economic loss E) is not; making zero economic profit Answer: A Topic: Economic loss Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

17) Suppose the price of a can was $5.14. In this case, to maximize its profit the firm illustrated in the figure above would A) increase its production and would make an economic profit. B) not change its production and would make zero economic profit. C) not change its production and would make an economic profit. D) increase its production and would incur an economic loss. E) not change its production and would incur an economic loss. Answer: A Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

18) The price for the shutdown point is A) $5.14. B) between $3.01 and $5.13. C) $3.00. D) between $0 and $2.99. E) greater than $5.15. Answer: D Topic: Shut down Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

19) The firm in the figure above has a total cost equal to A) $5.14 × 7. B) $3.00 × 7. C) ($5.14 - $3.00) × 7. D) ($3.00 - $5.14) × 7. E) None of the above answers is correct because more information is needed. Answer: A Topic: Total cost Skill: Level 4: Applying models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

20) The firm in the figure above has a total revenue equal to A) $5.14 × 7. B) $3.00 × 7. C) ($5.14 - $3.00) × 7. D) ($3.00 - $5.14) × 7. E) None of the above answers is correct because more information is needed. Answer: B Topic: Total revenue Skill: Level 4: Applying models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

21) The firm in the figure above is ________ that is equal to ________. A) making an economic profit; $5.14 × 7 B) making an economic profit; $3.00 × 7 C) incurring an economic loss; $5.14 × 7 D) incurring an economic loss; ($5.14 - $3.00) × 7 E) making an economic profit; ($5.14 - $3.00) × 7 Answer: D Topic: Economic loss Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

11.5 Integrative Questions 1) Consider a short-run equilibrium in a perfectly competitive market. Suppose that the firms' average total cost and marginal cost schedules differ. In the short run, A) all firms in the market must be able to make an economic profit. B) all firms produce equal amounts of output. C) some firms might incur an economic loss, but still produce output. D) some firms might make an economic profit and, as a result, shut down. E) all firms in the market must be able to make either positive or zero economic profit. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

2) The above figure shows three possible average total cost curves. If all firms in a perfectly competitive industry each have an average total cost curve identical to ATC0, each produces 20 units, and the market price of the good is $16 per unit, then A) the firms make an economic profit of $8 per unit. B) firms will enter the industry and the number of firms increases. C) the firms' ATC curves will eventually shift to become the same as ATC1. D) firms will exit the industry and the number of firms decreases. E) Both answers A and B are correct. Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

3) The above figure shows three possible average total cost curves. If all firms in a perfectly competitive industry each have an average total cost curve identical to ATC2, each produces 40 units, and the market price of the good is $20 per unit, then A) the firms incur an economic loss of $12 per unit. B) firms will enter the industry and the number of firms increases. C) the firms' ATC curves will eventually shift to become the same as ATC1. D) firms will exit the industry and the number of firms decreases. E) Both answers A and D are correct. Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

4) The above figure shows three possible average total cost curves. If all firms in a perfectly competitive industry each have an average total cost curve identical to ATC1, each produce 30 units, and the market price of the good is $16 per unit, then the firms A) make zero economic profit and firms neither enter nor exit the industry. B) make zero economic profit and so some firms exit the industry. C) incur an economic loss and so some firms exit the industry. D) incur an economic loss and so new firms enter the industry. E) make an economic profit and new firms enter the industry. Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

5) The above figure shows three possible average total cost curves. If all firms in a perfectly competitive industry each have an average total cost curve identical to ATC1, each produce 30 units, and the market price of the good is $16 per unit, then the firms A) make zero economic profit and new firms enter the market. B) make zero economic profit and no firms enter or exit the market. C) make zero economic profit and some firms exit the market. D) incur an economic loss and some firms exit the market. E) make an economic profit and new firms enter the market. Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

6) If firms in a perfectly competitive industry are earning an economic profit and new firms enter the industry, then A) consumer surplus decreases. B) the existing firms' economic profit decreases. C) there must be external benefits to consumption of the good. D) the new firms must incur an economic loss. E) Both answers A and B are correct. Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking

7) Suppose that each of 8,000 firms in a perfectly competitive industry produces 1,000 units of a good and maximizes profits when the price of the good is $10. If there is a permanent increase in demand, in the short run each firm produces ________ 1,000 units and in the long run the number of firms is ________ 8,000. A) more than; more than B) less than; more than C) less than; less than D) more than; less than E) exactly; more than Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

8) Suppose that each of 10,000 perfectly competitive firm in an industry produces 1,000 units of a good and earns an economic profit when the price of the good is $10. In the long run, definitely A) each firm increases its production above 1,000 units. B) the number of firms is more than 10,000. C) consumer surplus decreases. D) producer surplus increases. E) the number of firms is less than 10,000. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

11.6 Essay: A Firm's Profit-Maximizing Choices 1) Is the number of sellers in the market the only thing that is different in each of the four market types economists study? Answer: No, the number of sellers is not the only factor that differs; the degree of similarity of each firm's product also plays a role. For instance, in a perfectly competitive market, each firm sells an identical product whereas in a monopolistically competitive market, each firm sells a slightly different product. Topic: Market types Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Written and oral communication

2) Why do you never see firms in a perfectly competitive market advertise their product? Answer: Advertising has costs and benefits for the typical firm. The cost is the expense of running the advertising and the forgone value of the next best use of the firm's funds. The benefit of advertising is the increased probability that the firm can increase the demand for its good or service. Therein lies the problem for perfectly competitive firms. Perfectly competitive firms sell an identical product. Who is going to believe an asparagus farmer in California that runs a television ad proclaiming that her asparagus is better than other farmers? If demand is not increased by the ad, which is likely, the only thing that is certain is that the farmer's costs have increased. Along with the higher costs comes decreased profit and an increased likelihood of going out of business. Topic: Market types Skill: Level 5: Critical thinking Section: Checkpoint 11.1 Status: Old AACSB: Written and oral communication

3) What are the four types of markets? Give a brief description of each type. Answer: The four types of markets are perfect competition, monopoly, monopolistic competition, and oligopoly. ∙ Perfect competition has many firms selling identical products to many buyers, with no barriers to entry or exit. ∙ Monopoly has one firm selling a good with no close substitutes and a barrier that blocks the entry of new firms. ∙ Monopolistic competition has many firms making similar but not identical products with no barriers to entry or exit. ∙ Oligopoly has a small number of generally large firms producing either identical or differentiated products. Topic: Market types Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

4) What four conditions define a perfectly competitive market? Answer: The four conditions are that: a. many firms sell an identical product to many buyers. b. there are no restrictions on entry into (or exit from) the market. c. established firms have no advantage over new firms. d. sellers and buyers are well informed about prices. Topic: Perfect competition Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

5) "Perfectly competitive firms have total control over the price they set for their product." Explain why the previous statement is correct or incorrect. Answer: The statement is incorrect. Perfectly competitive firms are price takers, which means that they have no control over the price of their product. They must "take" the price given to them by the market as a whole, that is, they must take the price determined by the market demand and market supply. Topic: Price takers Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Written and oral communication

6) Does a perfectly competitive producer have any incentive to lower its price so it is below the current market price? Explain your answer. Answer: A perfectly competitive producer has no incentive to lower its price because the producer can sell all he or she produces at the going market price. In this case, a producer will not lower the price he or she charges because no additional sales can be garnered. Hence it is nonsensical to undercut the market price because the lower price means lower revenue and hence lower profit. Topic: Price takers Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Written and oral communication

7) Why are perfectly competitive ranchers in Montana price takers? Answer: Because one farmer's beef is identical to another farmer's, each farmer's beef is a perfect substitute for all other farmers' beef. In addition, there are over one million ranchers in the United States. As a result, no individual rancher can impact the market price by increasing or decreasing production. Therefore each rancher faces a perfectly elastic demand. Each can sell all of the beef desired at the market price, but not one penny more. Once the market sets the price, the rancher must take as given whatever the price might be. Topic: Price takers Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Written and oral communication

8) "A perfectly competitive firm is called a price maker because all the firms together must make the market price." Is the previous statement correct or incorrect? Briefly explain your answer. Answer: The statement is false. A perfectly competitive firm is called a "price taker" because the firm must take whatever price the market determines. Any single firm's actions cannot affect the market price. Topic: Price takers Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Written and oral communication

9) If a perfectly competitive firm manufacturing chairs produces 100 more chairs, what happens to the market price of a chair? Answer: The price will not change. Any one perfectly competitive firm is such a small part of the market that a change in its output has virtually no effect on the price. This result is why the firm's marginal revenue equals its price: No matter how much (or how little) the firm produces, the marginal revenue from one more unit always equals the price of the product. Topic: Price takers Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Written and oral communication

10) Pineapple growing is a perfectly competitive industry. How does the market demand curve for pineapples compare to the demand curve for an individual pineapple grower? Answer: The market demand curve for pineapples is downward sloping. The demand curve for an individual pineapple grower is a horizontal line. In other words, the demand faced by an individual grower is perfectly elastic whereas the market demand is not perfectly elastic. Topic: Demand Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

11) What is the shape of the demand curve faced by the perfectly competitive firm, and why? Answer: The demand curve faced by a perfectly competitive firm is horizontal, that is, the demand is perfectly elastic. A perfectly competitive firm is one of many sellers in the market that produce identical products. A single firm's output is small relative to the market demand so the firm cannot influence the market price by increasing or decreasing its output. It can sell any quantity it chooses at the going price. Hence the firm's demand curve is a horizontal line at the market price. Topic: Demand Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Written and oral communication

12) Why does the profit-maximizing level of production occur at the point where marginal revenue equals marginal cost? Answer: If a firm produces at a level where marginal revenue is greater than marginal cost, more profit could be gained by increasing output. Why? Because the added revenue (the marginal revenue) from producing another unit exceeds the added cost (the marginal cost) of producing the unit. Therefore the firm should increase production until no more additional profit can be earned, which occurs where marginal revenue equals marginal cost. Similarly, if a firm produces at a level where marginal cost exceeds marginal revenue, the firm's profit would rise by decreasing output. In this case, the saved costs (the marginal cost) exceed the lost revenue (the marginal revenue). Therefore the firm should decrease production until the point at which marginal cost equals marginal revenue. Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Written and oral communication

13) If the market price faced by a perfectly competitive firm increases, in the short run how does the firm respond? Answer: If the market price rises, a perfectly competitive firm increases its output. Essentially the firm moves upward along its marginal cost curve, thereby increasing the quantity the firm will supply. Topic: Firm's short-run supply curve Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Written and oral communication

14) What is a perfectly competitive firm's short-run supply curve? Answer: A perfectly competitive firm's short-run supply curve is its marginal cost curve above the minimum average variable cost. Topic: Firm's short-run supply curve Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

15) If the price received by a perfectly competitive firm is less than its average variable cost, what will the firm do in the short run? Why? Answer: If the price is less than the average variable cost, the firm will shut down in the short run. By shutting down, the firm will incur an economic loss equal to its fixed cost. Whereas if the firm operated, its economic loss would be larger. Therefore the firm minimizes its loss by shutting down. Topic: Shut down Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Written and oral communication

16) Will a perfectly competitive firm ever produce in the short run even though it is suffering an economic loss? Answer: Yes, a perfectly competitive firm will continue to produce even though it is suffering an economic loss if the price exceeds the minimum average variable cost. In this case, even though the firm has an economic loss, if it shut down, its economic loss would be larger. Topic: Shut down Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Written and oral communication

17) What must be the case if a perfectly competitive firm's economic loss is less by shutting down rather than by producing and selling some output? Answer: If a firm's economic loss is greater when it produces and sells some output than when it shuts down, it is the case that the price of the product is less than the average variable cost. When the price is less than the average variable cost, the firm's economic loss is less if it shuts down than if it produces and sells output. Topic: Shut down Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Written and oral communication

18) Pete is a perfectly competitive rose grower. The above table gives quantities and the price for which Pete can sell his roses. a. What is Pete's total revenue if he sells 1 dozen roses? 2 dozen roses? 3 dozen roses? 4 dozen roses? b. What is the marginal revenue of the 2nd dozen roses sold? Of the 3rd dozen? Of the 4th dozen? Answer: a. The total revenue when 1 dozen roses is sold is $12. When Pete sells 2 dozen roses, the total revenue is $24. When 3 dozen roses are sold, the total revenue is $36. And the total revenue when 4 dozen roses are sold is $48. b. The marginal revenue is always $12 per dozen roses. Topic: Total revenue, marginal revenue Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

19) Farmer Brown produces corn in a perfectly competitive market. Farmer Brown produces and sells 500 bushels of corn. The market supply and demand curves are illustrated in the above figure. a. What is Farmer Brown's total revenue? b. What is Farmer Brown's marginal revenue? Answer: a. Total revenue = price × quantity. The price is determined by the intersection of the demand and supply curves, $6 a bushel. As a result, Farmer Brown's total revenue is $6 × 500 = $3,000. b. For a perfectly competitive firm, the marginal revenue equals the price, so Farmer Brown's marginal revenue is $6. Topic: Total revenue, marginal revenue Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

20) The table below gives Amy's total cost schedule for producing holiday wreaths. Amy is a perfect competitor and can sell each wreath for $9. a. Complete the table by calculating Amy's total revenue and her profit or loss schedule.

b. When Amy is producing 4 wreaths, what is her total cost? What is her total revenue? What is her economic profit or economic loss? c. What number of wreaths maximizes Amy's profit? Answer:

a. The completed table is above. b. When Amy is producing 4 wreaths, her total cost is $28, her total revenue is $36, and her economic profit is $8. c. Amy can produce 6 or 7 wreaths, with a maximum economic profit of $14. Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

21) Jimmy grows corn. His total revenue and total cost are in the above table. What quantity of corn maximizes his profit and what is his profit? What is the marginal revenue and marginal cost at this quantity? Answer: Jimmy's profit is greatest if he grows either 40,000 or 50,000 bushels of corn. His (economic) profit at either amount is $10,000 a week. Between 40,000 and 50,000 bushels of corn, Jimmy's marginal revenue is $30,000, or $3 per bushel and his marginal cost is $30,000, or $3 per bushel. Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

22) The above table gives the quantity of output and the total cost for a perfectly competitive firm that can sell all of its output at $9 per unit. a. Find the profit maximizing level of output for this firm. b. How much economic profit is the firm making? Answer:

a. Total revenue equals price times quantity sold. We can find the total revenue for this firm because the market price is a constant $9. The total revenue schedule is given in the table above. The total profit (or loss) equals total revenue minus total cost. The last column shows that the total profit is largest if either 2 or 3 units are produced. b. When the firm produces either 2 or 3 units of output, the total economic profit is $6. Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

23) The table below shows the total cost schedule for a perfectly competitive firm. The market price is $250 per unit. Complete the table.

Answer:

The completed table is above. Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

24) Acme is a perfectly competitive firm. It has the total cost schedule given in the above table. Acme's product sells for $8.00 per unit. What amount of output is the most profitable and what is Acme's economic profit or economic loss? Answer: Acme's profit-maximizing level of output is 7 units. Acme's total economic profit equals its revenue, $56.00 ($8.00 per unit × 7 units), minus its total cost, $49.80 at this level of output, or $56.00 $49.80 = $6.20. Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

25) Acme is a perfectly competitive firm. It has the cost schedules given in the above table and has a fixed cost of $12.00. The price of Acme's product is $14.20. What is Acme's most profitable amount of output? What is Acme's total economic profit or loss? Answer: The profit maximizing level of output is either 7 or 8 units. Acme's total economic profit is the economic profit per unit times the number of units produced. The economic profit per unit equals the price minus the average total cost. To calculate average total cost, note that when Acme produces 8 units, the average variable cost per unit is $6.50 and the average fixed cost is $1.50, so Acme's average total cost equals $8.00. Thus Acme makes an economic profit of $14.20 - $8.00 = $6.20 per unit. Hence Acme's total economic profit is ($6.20) × (8 units) = $49.60. Acme's total economic profit when it makes 7 units is (except for rounding) identical. Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

26) Acme is a perfectly competitive firm. It has the cost schedules given in the above table and has a fixed cost of $12.00. The price of Acme's product is $4.00. What is Acme's most profitable amount of output? What is Acme's total economic profit or loss? Answer: Acme's most profitable (which means, in this case, minimum loss) is output of 0 units. The price is below Acme's minimum average variable cost, so Acme shuts down. Acme's economic loss equals its fixed costs, $12.00. Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

27) The above figure illustrates a perfectly competitive wheat farmer. a. What will be the firm's profit-maximizing price and output? b. When the farmer produces 25,000 bushels of wheat, the difference between the firm's average total cost and the price is at its maximum. Explain why this amount of wheat either is or is not the 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 maximization Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

28) The above diagram shows the cost curves for a perfectly competitive wheat farmer. At what price does the wheat farmer shut down? Answer: The wheat farmer shuts down if the price is less than the minimum average variable cost. So in the figure, the wheat farmer shuts down if the price is less than $2 per bushel. Topic: Shut down point Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking

11.7 Essay: Output, Price, and Profit in the Short Run 1) Can a perfectly competitive firm make an economic profit in the short run? Can it incur an economic loss? Answer: In the short run, a perfectly competitive firm can make an economic profit or incur an economic loss. Indeed, the firm also can make a normal profit in the short run. Basically, any profit or loss outcome is possible in the short run. Topic: Economic profit, economic loss Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

2) If the market price is less than a perfectly competitive firm's average total cost, what sort of profit or loss is the firm earning? Answer: If the price is less than the average total cost, the firm is incurring an economic loss. Topic: Economic loss Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

3) What is the relationship between the price, P, and the average total cost, ATC, for a firm in perfect competition that makes an economic profit? That makes zero economic profit? That incurs an economic loss? Answer: If the price is greater than the average total cost, P > ATC, the firm makes an economic profit. If the price equals the average total cost, P = ATC, the firm makes zero economic profit. If the price is less than the average total cost, P < ATC, the firm incurs an economic loss. Topic: Economic profit, economic loss Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Written and oral communication

4) John keeps beehives and sells 100 quarts of honey per month. The honey market is perfectly competitive, and the price of a quart of honey is $10. John has an average variable cost of $5 and an average fixed cost of $3. At 100 quarts per month, John's marginal cost is $10. a. Is John maximizing his profit? If not, what should John do? b. Calculate John's total revenue, total cost, and total economic profit or economic loss when he produces 100 quarts of honey. Answer: a. Yes, John is maximizing his profit because marginal revenue (price) equals marginal cost. b. Total revenue equals price times quantity = $10 × 100 = $1,000. Total cost equals average total cost times quantity = ($5 + $3) × 100 = $800. Economic profit equals total revenue minus total cost = $1,000 $800 = $200. Topic: Economic profit Skill: Level 4: Applying models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

5) The above diagram shows the cost curves for a perfectly competitive wheat farmer. At what price(s) does the wheat farmer earn an economic profit? Earn a normal profit? Incur an economic loss? How many bushels of wheat does the farmer produce if the price is $3 per bushel? If the price is $0.50 per bushel? Answer: At any price that exceeds the minimum of the average total cost the farmer makes an economic profit. So the farmer makes an economic profit if the price is greater than $2 per bushel. The farmer makes zero economic profit if the price equals the minimum total cost. So the farmer makes zero economic profit if the price is $2 per bushel. Finally, the farmer incurs an economic loss if the price is less than the minimum average total cost. So the farmer incurs an economic loss if the price is less than $2 per bushel. If the price is $3 per bushel, the farmer produces 30,000 bushels of wheat per year. If the price is $0.50 per bushel, the farmer has shut down because the price is less than the minimum average variable cost and so the farmer produces 0 bushels per year. Topic: Economic profit Skill: Level 4: Applying models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

11.8 Essay: Output, Price, and Profit in the Long Run 1) "For a perfectly competitive market, an economic profit attracts new firms. But when these firms enter the market, the price falls and the economic profit is eliminated." Are the previous statements correct or incorrect? What is the long-run profit or loss outcome for firms in a perfectly competitive market? Answer: The statements are correct. As the statements point out, in the long run the economic profit of perfectly competitive firms is eliminated by entry. Similarly, an economic loss will be eliminated by exit. Therefore the long-run equilibrium profit for a perfectly competitive firm is a normal profit. Topic: Entry Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

2) In the long run, perfectly competitive firms cannot make an economic profit. Why? Answer: An economic profit attracts entry by new firms. As new firms enter the market, the market supply increases and the market supply curve shifts rightward. The increase in supply decreases the price. And, as the price falls, the economic profit is eliminated. Topic: Long-run equilibrium, entry Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

3) The U-pick berry market is perfectly competitive. Suppose that all U-pick blueberry farms have the same cost curves and all are making an economic profit. What happens as time passes? What is the longrun equilibrium outcome? Answer: The presence of economic profit attracts new firms into the U-pick blueberry market. As the new firms (the new farmers) enter the market, the supply of U-pick blueberries increases. The increase in the supply drives the price lower and decreases the economic profits of the existing farmers. New farmers continue to enter the market as long as there is the possibility of an economic profit. Eventually enough new firms enter so that the price is driven so low that the economic profit is eliminated. All the firms make zero economic profit, which will keep them in business but will provide no incentive for new firms to enter the market. At this point, the long-run equilibrium has been reached. Topic: Long-run equilibrium, entry Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Written and oral communication

4) When will new firms enter a perfectly competitive market? When does entry stop? Answer: New firms will enter a perfectly competitive market as long as the existing firms are making an economic profit. Essentially the new firms enter in order to make an economic profit themselves. Entry will stop when it is no longer possible to make an economic profit, which occurs when the existing firms are making zero economic profit. Topic: Long-run equilibrium, entry Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Written and oral communication

5) Describe how economic losses are eliminated in a perfectly competitive industry. Answer: If firms are incurring economic losses, some will exit in the long run. When firms exit, the market supply decreases and the market supply curve shifts leftward. When supply decreases, the price rises. As the price rises, the surviving firms increase production and their economic losses are eliminated. Topic: Long-run equilibrium, exit Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Written and oral communication

6) Pumpkin growing is a perfectly competitive industry. Suppose that pumpkin growers are all incurring an economic loss. What happens as time passes? What is the long-run equilibrium outcome? Answer: Because the firms are incurring an economic loss, as time passes some firms will exit the market, perhaps by switching to other crops, or perhaps by closing entirely. As farmers leave the market, the supply of pumpkins decreases. The supply curve shifts leftward and the price of a pumpkin rises. As the price rises, the economic losses of the remaining firms decrease. Eventually enough farmers leave the market so that the price rises sufficiently so that the remaining firms make zero economic profit and no longer incur an economic loss. At that point, the long-run equilibrium is reached because there is no further incentive for any firms to leave the market. Topic: Long-run equilibrium, exit Skill: Level 4: Applying models Section: Checkpoint 11.3 Status: Old AACSB: Written and oral communication

7) Suppose a farmer raising beef is making a normal profit. Then, because of a scare about mad cow disease, the demand for beef decreases drastically. What happens to the profits of the beef farmer in the short run and in the long run? Answer: In the short run, the fall in beef prices will decrease the farmer's profits. With the fall in price, the farmer will incur an economic loss. If the price is high enough so the revenue covers the farmer's variable costs, the farmer will continue to operate. In the long run, if demand continues to remain depressed, some farmers will exit the market until the remaining farmers earn a normal profit once again. Topic: Long-run equilibrium, exit Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Written and oral communication

8) How does a decrease in the demand for wheat ultimately lead to normal profits for wheat growers in the long run? Answer: If the demand for wheat decreases, the price of wheat falls and many wheat farmers incur economic losses. These losses lead to some farmers shutting down their operations. As these farmers exit the market, the supply of wheat decreases. A decrease in the supply of wheat pushes wheat prices back up. The process of exit and rising prices continues until finally the price of wheat rises enough so that the surviving wheat farmers are earning a normal profit. At this time, which occurs in the long run, the economic losses have disappeared and no further exit occurs. The wheat market is back in its long-run equilibrium. Topic: Long-run equilibrium, exit Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Written and oral communication

9) Entry by competitive firms decreases the market price, while exit by competitive firms increases the market price. Explain why firms enter or exit an industry and why these price changes occur. Answer: Competitive firms will enter an industry where economic profits exist in an attempt to make an economic profit. As new firms enter, the supply increases and the supply curve for the product shifts rightward. The increase in supply drives the price lower. Firms exit an industry when economic losses are incurred. As they leave, supply decreases and the supply curve shifts leftward. The decrease in the supply forces the price higher. Entry and exit continue until the remaining firms in the industry are making zero economic profit. Topic: Long-run equilibrium, entry and exit Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Written and oral communication

10) In the long run, a perfectly competitive firm makes zero economic profit. What incentive does the firm have to stay in business if it is making zero economic profit? Answer: Zero economic profits do not mean no profit whatsoever. The owners of the firm are still making a normal profit. A normal profit compensates the firm's owners enough to keep the firm in business because it is equal to the owner's opportunity cost. Hence the firm has the incentive to stay in business. Topic: Long-run equilibrium Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Written and oral communication

11) With regard to its profits and losses, how is the short run different from the long run for a perfectly competitive firm? Answer: The firm can make an economic profit, incur an economic loss in the short run, or make zero economic profit in the short run. In the long run, however, the only possible outcome is making zero economic profit. An economic profit attracts entry by new firms and economic losses lead to exit by some firms. Thus, after entry or exit is complete in the long run, the remaining firms will earn zero economic profit. Topic: Long-run equilibrium Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Written and oral communication

12) During the middle of the 2000s, the price of gasoline soared and there was a movement to switch to fuels made from a mixture of gasoline and ethanol. Ethanol can be made from corn. The price of corn skyrocketed and then, after a couple of years, the price decreased. What might have led to these price changes in the corn market? Answer: There are thousands upon thousands of corn farmers in the United States. In the middle of the 2000s, high gasoline prices led to movement to incorporate ethanol into gasoline. Ethanol can be made from corn so the demand for corn increased. As a result of the increase in market demand for corn, the price of corn increased dramatically. Corn farmers were getting a high price and making large economic profits. In the long run, unable to prevent the flow of information to prospective corn farmers, the word got out that economic profit was possible in this arena. Over time, more farmers switched to growing corn, so more corn farmers entered the market, which led to a large increase in the supply of corn. As supply increased, the price of corn dropped. Thus the higher price was the short-run result of an increase in demand. The falling price reflected the adjustment to the long-run equilibrium, as new corn farmers entered the market. Topic: Long-run equilibrium Skill: Level 5: Critical thinking Section: Checkpoint 11.3 Status: Old AACSB: Written and oral communication

13) The above figure shows the cost curves of a profit-maximizing perfectly competitive firm. If the price equals $7, a. how much will the firm produce? b. how much is the firm's average total, average variable, and marginal costs? c. how much is the firm's total, total variable, and total fixed costs? d. how much is the firm's total revenue and economic profit? e. what will happen in this market in the long run? Answer: a. The firm will produce 40 units of output because that is where the marginal revenue equals the marginal cost. b. The firm's average total cost equals $4, its average variable cost equals $3, and its marginal cost equals $7. c. The firm's total cost is $160 (= $4 × 40), its total variable cost is $120 (= $3 × 40), and its total fixed cost is $40 (= $160 - $120). d. The firm's total revenue is $280 (= $7 × 40) and its economic profit is $120 (= $280 - $160). e. In the long run, firms will enter the market in response to the economic profit. The market supply curve will shift rightward, the price will fall, and the economic profit will be eliminated. Topic: Long-run equilibrium, entry Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Analytical thinking

14) American restaurants receive their supply of baby back-ribs from American farms and from farms in Denmark. In the figures above, the left diagram shows the perfectly competitive market for baby back ribs in the United States. The right figure shows the situation at Premium Standard Farm in Kansas, one of the many U.S. farms supplying these ribs. Now assume that the United States imposes a ban on European meat in response to the foot-andmouth disease that has infected livestock in Europe. (Which the United States did a few years ago.) In particular, suppose that the U.S. ban decreases the supply by 40 tons a year. Using the figure on the left, show the impact of this ban on the baby back rib market. Using the figure on the right, show the impact on Premium Standard Farm in Kansas.

Answer:

The ban on European meat decreases the supply of baby back ribs and shifts the supply curve leftward, as shown by the shift from S1 to S2. The price rises to $4 a pound. As the figure on the right shows, the MR curve for the Premium Standard Farm will shift upward, from MR1 to MR2. As a result, the farm increases its production to 40,000 pounds of ribs. Because the price exceeds the average total cost, the Premium Standard Farm makes an economic profit. Topic: Long-run equilibrium, exit Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Analytical thinking

15) Suppose the bobby pin industry is perfectly competitive. The price of a packet of bobby pins is $2.00. Pins and Needles, Inc. is a firm in this industry and is producing 1,000 packets of bobby pins per day at the point where the MC = MR. The average cost of production at this output level is $1.50 per packet. a. What is the marginal cost of the 1,000th packet? b. Is this firm making an economic profit, zero economic profit, or an economic loss? How much? c. Is the firm in long-run equilibrium? Why or why not? Answer: a. The price per packet is $2, which is also the Pins and Needles' marginal revenue. The marginal cost of the 1,000th packet is equal to marginal revenue, so for Pins and Needles the marginal cost is $2 per packet. b. The firm is making a $0.50 economic profit per unit (which equals the price minus the average total cost). Because Pins and Needles produces 1,000 packets, its total economic profit is $500. c. The firm is making an economic profit, so it is not in long-run equilibrium. In the long run, a perfectly competitive firm cannot make an economic profit. The only outcome possible in the long run is zero economic profit. Topic: Long-run equilibrium Skill: Level 4: Applying models Section: Checkpoint 11.3 Status: Old AACSB: Analytical thinking

Essential Foundations of Economics, 8e (Bade) Chapter 12 Monopoly 12.1 Monopoly and How it Arises 1) A major characteristic of monopoly is A) a single seller of a product. B) multiple sellers of a product. C) two sellers of a product. D) a few sellers of differentiated products. E) a few sellers of an identical product. Answer: A Topic: Monopoly Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

2) A monopoly is a market with A) many suppliers each producing an identical product. B) no barriers to entry. C) many substitutes. D) one supplier. E) many suppliers each producing a slightly different product. Answer: D Topic: Monopoly Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

3) The good produced by a monopoly A) has perfect substitutes. B) has no substitutes at all. C) has no close substitutes. D) can be easily duplicated. E) must be unable to be resold. Answer: C Topic: Monopoly Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

4) One of the requirements for a monopoly is that A) products are high priced. B) there are several close substitutes for the product. C) there is a product with no close substitutes. D) the product cannot be produced by small firms. E) there is no barrier to entry. Answer: C Topic: Monopoly Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

5) We define a monopoly as a market with A) one supplier and no barriers to entry. B) one supplier with barriers to entry. C) many suppliers with no barriers to entry. D) many suppliers with barriers to entry. E) a few suppliers and barriers to entry. Answer: B Topic: Monopoly Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

6) Which of the following is a characteristic of monopoly? A) The firm faces competition from many other firms. B) The firm produces a product that has many close substitutes. C) There are barriers to enter the market. D) The firm's demand is perfectly elastic. E) The firm produces a product identical to that produced by its many competitors. Answer: C Topic: Monopoly Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

7) A monopoly produces a product ________ and there ________ barriers to entry into the market. A) identical to its many competitors; are B) with no close substitutes; are C) identical to its many competitors; are no D) with no close substitutes; are no E) slightly different from those of its many competitors; are Answer: B Topic: Monopoly Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

8) A monopoly A) is not protected by barriers to entry. B) produces a good with no close substitutes. C) faces a downward-sloping demand curve. D) Both answers A and B are correct. E) Both answers B and C are correct. Answer: E Topic: Monopoly Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

9) A monopoly A) must determine the price it will charge. B) faces extensive competition from firms making close substitutes. C) cannot price discriminate because such a pricing strategy is illegal in the United States. D) has no control over the price it can charge. E) Both answers B and C are correct. Answer: A Topic: Monopoly Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

10) A major characteristic of monopoly is that A) no barriers to entry exist. B) the product is identical to that produced by other companies. C) a barrier to entry keeps out competitors. D) competition is intense. E) a few firms compete with each other. Answer: C Topic: Monopoly Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

11) Which of the following firms is most likely to be a monopoly? A) local restaurant B) local distributor of natural gas C) local book store D) clothing store E) local bank Answer: B Topic: Monopoly Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

12) An example of a monopoly would be A) one of many U.S. wheat farmers. B) one of the few U.S. auto makers. C) AT&T cell phone service. D) the local water company. E) Taco Bell. Answer: D Topic: Monopoly Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

13) Which of the following describes a barrier to entry? A) something that establishes a barrier to expanding output B) anything that protects a firm from the arrival of new competitors C) a government regulation that bars a monopoly from earning an economic profit D) firms already in the market incurring economic losses so that no new firm wants to enter the market E) Firms are legally prohibited from exiting the market in order to enter another market. Answer: B Topic: Monopoly, barriers to entry Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

14) Mylan Pharmaceuticals holds a patent on the EpiPen - designed to inject epinephrine into shock victims. In 2016, Mylan received criticism for charging $600 for this life-saving drug. The market for EpiPens is considered ________ which means that the price of an Epipen ________ its marginal cost. A) a monopoly; is greater than B) perfect competition; equals C) a monopoly; equals D) monopolistic competition; is greater than E) an oligopoly; equals Answer: A Topic: Monopoly, definition Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: New AACSB: Application of knowledge

15) Mylan Pharmaceuticals holds a patent on the EpiPen - designed to inject epinephrine into shock victims. In 2016, Mylan received criticism for charging $600 for this life-saving drug. Mylan's patent is a ________ Mylan to charge a price ________. A) legal barrier to entry and forces; equal to marginal revenue B) legal barrier to entry and allows; greater than marginal cost C) natural barrier to entry and allows; greater than marginal cost D) ownership barrier to entry and forces; equal to marginal cost E) natural barrier to entry and forces; greater than marginal revenue Answer: B Topic: Monopoly, definition Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: New AACSB: Application of knowledge

16) Your local water company is a considered A) a natural monopoly and will be regulated. B) an oligopoly and will be able to charge a price greater than marginal cost. C) monopoly and will not be able to charge a price greater than marginal revenue. D) perfect competition because everyone needs tap water. E) monopolistic competition and will be able to charge a price greater than marginal cost. Answer: A Topic: Natural monopoly Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: New AACSB: Application of knowledge

17) The graph shows the the LRAC facing a ________ where ________ of scale exist when 5 million units are produced. A) monopoly; diseconomies B) natural monopoly; diseconomies C) natural monopoly; economies D) oligopoly; economies E) oligopoly; diseconomies Answer: C Topic: Natural monopoly Skill: Level 3: Using models Section: Checkpoint 12.1 Status: New AACSB: Analytical thinking

18) The graph shows that ________ can meet the market demand at a cost of ________ per unit when ________ million units are produced. A) one firm; 10 cents; 5 B) one firm; 20 cents; 3 C) 3 firms; 10 cents; 5 D) 5 firms; 10 cents; 1 E) 5 firms; 20 cents; 5 Answer: A Topic: Natural monopoly Skill: Level 3: Using models Section: Checkpoint 12.1 Status: New AACSB: Analytical thinking

19) A barrier to entry is A) the economic term for diseconomies of scale. B) illegal in most markets. C) anything that protects a firm from the arrival of new competitors. D) a factor that increases competition because firms must continue to operate in the market in which they were founded. E) the same as rent seeking. Answer: C Topic: Monopoly, barriers to entry Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

20) A natural barrier to entry is defined as a barrier that arises because of A) technology that allows one firm to meet the entire market demand at lower average total cost than could two or more firms. B) patents or licenses that exclude others from producing a good or service. C) many firms producing the good and thereby allowing choice for all consumers. D) anticompetitive practices by a firm that keep other firms from producing. E) one firm owning a key natural resource. Answer: A Topic: Monopoly, barriers to entry Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

21) Natural barriers to entry arise when, over the relevant range of output, there A) are diseconomies of scale. B) are constant returns to scale. C) are several firms who produce at the lowest average cost. D) are economies of scale. E) is one firm that owns a key natural resource. Answer: D Topic: Monopoly, barriers to entry Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

22) A natural monopoly exists when A) diseconomies of scale exist in an industry. B) one firm can supply an entire market at a lower average total cost than can two or more firms. C) a firm can engage in price discrimination. D) the producers in an industry have formed a cartel. E) a monopoly firm faces a horizontal demand curve. Answer: B Topic: Natural monopoly Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

23) If a single firm can meet the entire market demand at a lower average total cost than a larger number of smaller firms, the single firm is A) price discriminating. B) a natural monopoly. C) a legal monopoly. D) efficient when profit maximizing. E) an ownership-of-the-market monopoly. Answer: B Topic: Natural monopoly Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

24) A natural monopoly is one that arises from A) patent law. B) economies of scale. C) copyright law. D) any government-imposed barrier to entry. E) mergers. Answer: B Topic: Natural monopoly Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

25) A natural monopoly A) arises as a result of legal barriers to entry. B) occurs when one firm controls a natural resource. C) arises when one firm can meet the entire market demand at a lower average total cost than two or more firms. D) Both answers A and B are correct. E) Both answers A and C are correct. Answer: C Topic: Natural monopoly Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

26) Which of the following would create a natural monopoly? A) ownership of all the available units of a necessary input B) an exclusive right granted to supply a good or service C) requirement of a government license before the firm can sell the good or service D) technology enabling a single firm to produce at a lower average total cost than two or more firms E) a patent granted the producer of the good or service Answer: D Topic: Natural monopoly Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

27) If the technology for producing a good enables one firm to meet the entire market demand at a lower average total cost than two or more firms could, then that firm has A) patented the market. B) a natural monopoly. C) increasing average total costs. D) a legal barrier to entry. E) a discriminatory monopoly. Answer: B Topic: Natural monopoly Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

28) For a natural monopoly, economies of scale A) exist along the long-run average cost curve at least until it crosses the market demand curve. B) and diseconomies of scale exist along the long-run average cost curve at least until it crosses the market demand curve. C) lead to a legal barrier to entry. D) as well as constant returns to scale and diseconomies of scale exist along the long-run average cost curve at least until it crosses the market demand curve. E) are totally absent. Answer: A Topic: Natural monopoly Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

29) A natural monopoly arises when A) one firm controls the supply of a unique resource. B) a firm has many small firms that it can control. C) there are firms which act together as a monopoly. D) the long-run average cost curve slopes downward as it crosses the demand curve. E) one firm naturally convinces the government to limit competition in the market. Answer: D Topic: Natural monopoly Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

30) A natural monopoly's average cost curve i. intersects the demand curve while the average cost curve slopes downward. ii. reaches its minimum before it intersects the demand curve. iii. intersects the demand curve below the intersection of the marginal cost curve and the demand curve. A) i only. B) ii only. C) iii only. D) i and iii. E) i, ii, and iii. Answer: A Topic: Natural monopoly Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

31) The long-run average cost curve of a natural monopoly A) is positively sloped until it crosses the demand curve. B) intersects the demand curve while it is negative sloped. C) intersects the demand curve while it is positively sloped. D) is the natural monopoly's supply curve. E) is the same as the natural monopoly's demand curve. Answer: B Topic: Natural monopoly Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

32) Which of the following is an example of a natural monopoly? A) the Pittsburgh Penguins hockey team, a National Hockey League team B) Ford Motors, the large automobile producing company C) Florida Power and Light, an electric utility in Florida D) Sony, the Japanese producer of the Playstation III E) JCPenney, the large department store chain Answer: C Topic: Natural monopoly Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

33) Which of the following is an example of a natural monopoly? A) the trademark protecting Gatorade B) the talents of Tom Hanks C) the local water company D) the patent on an Intel processor E) De Beers' ownership of a large fraction of the world's diamonds Answer: C Topic: Natural monopoly Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

34) Which of the following goods is the best example of a natural monopoly? A) distribution of electricity B) diamonds C) first-class mail D) a patented good E) blouses Answer: A Topic: Natural monopoly Skill: Level 3: Using models Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

35) Which of the following is the best example of a natural monopoly? A) ownership of the only ferry across Puget Sound for twenty miles B) the United States Postal Service C) the cable television company in your hometown D) owning the only licensed taxicab in town E) producing a patented drug Answer: C Topic: Natural monopoly Skill: Level 3: Using models Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

36) Ownership of a necessary input creates what type of barrier to entry? A) legal barrier to entry B) natural barrier to entry C) a public franchise D) a government license E) ownership barrier to entry Answer: E Topic: Ownership barrier to entry Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

37) Which of the following is a legal barrier to entry? i. public franchise ii. government license iii. patent A) iii only B) i and iii C) ii and iii D) i, ii, and iii E) i and ii Answer: D Topic: Legal barriers to entry Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

38) A monopoly will arise if A) two out of three of a town's pizzerias go out of business and only one new pizzeria opens. B) the town council passes a law granting Nick's Pizza the exclusive right to operate in that town. C) Papa Joe's Pizza becomes the largest pizza producer in town and Nick's Pizza stays small in size. D) several big pizza chains force several small pizzerias out of business. E) people decide they like pizza more than before so some pizzeria's gain new customers. Answer: B Topic: Monopoly Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

39) Which of the following can be a barrier to entry? i. ownership of a necessary input ii. requiring a government license iii. large diseconomies of scale A) i only B) ii only C) i and iii D) i and ii E) i, ii, and iii Answer: D Topic: Legal barriers to entry Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

40) Which barrier to entry is an exclusive right granted to the author or composer of a literary, musical, dramatic or artistic work? A) patent B) copyright C) public franchise D) government license E) natural barrier Answer: B Topic: Legal barriers to entry Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

41) The U.S. Postal Service has a monopoly over first-class mail service because A) the government has granted this agency a public franchise. B) stamps are copyrighted. C) stamps are trademarked. D) stamps are patented. E) it owns a vital resource, namely all mailboxes. Answer: A Topic: Legal barriers to entry Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

42) The U.S. Postal Service's monopoly on first-class mail service is the result of A) a natural monopoly. B) a patent. C) a public franchise. D) a government license. E) an ownership barrier to entry. Answer: C Topic: Legal barriers to entry Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

43) The makers of the movie Titanic have some monopoly power over this film because the A) movie is patented. B) name Titanic is trademarked. C) movie is protected by copyright law. D) government has issued the maker of this movie a public franchise. E) owner never price discriminated in marketing the movie. Answer: C Topic: Legal barriers to entry Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

44) Patents i. encourage the invention of new products and production methods. ii. generally discourage innovation. iii. are exclusive rights granted to the inventor of a product or service. A) i only B) ii only C) ii and iii D) i and iii E) i, ii, and iii Answer: D Topic: Legal barriers to entry Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

45) Patents A) are granted only to competitive firms and not monopolies. B) require that monopolies increase the amount they produce. C) increase the incentive to capture economies of scale. D) increase the incentive to innovate. E) grant the holder a monopoly that lasts forever. Answer: D Topic: Gains from monopoly Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

46) Patents A) are a legal barrier to entry. B) remove legal barriers to entry. C) create economies of scale. D) decrease the incentive to innovate. E) are prohibited in the United States. Answer: A Topic: Gains from monopoly Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

47) To encourage invention and innovation, the government provides A) patents. B) public franchises. C) government licenses. D) natural monopolies. E) easily obtained ownership barriers to entry. Answer: A Topic: Legal barriers to entry Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

48) Which of the following is NOT correct about patents? A) Patents encourage invention of new products. B) Patents stimulate innovation. C) A patent is a barrier to entry. D) Patents enable a firm to be a permanent monopoly. E) Patents are granted to the inventor of a product or service. Answer: D Topic: Legal barriers to entry Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

49) Which of the following is an example of a person or firm that is most likely to have been granted a public franchise? A) medical doctor B) taxi cab driver C) the local pizza parlor D) the local telephone company E) the local Honda dealership Answer: D Topic: Legal barriers to entry Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

50) In States where the government runs liquor stores, the monopoly results from A) economies of scale. B) legal restrictions. C) control of an essential resource. D) patents. E) public fear. Answer: B Topic: Legal barriers to entry Skill: Level 3: Using models Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

51) Which of the following statements is correct? A) Monopolies are guaranteed to earn an economic profit. B) The market demand and the firm's demand are the same for a monopoly. C) Monopolies have perfectly inelastic demand for the product sold. D) Because a monopoly is the only firm in the market, its supply curve is the same as the market demand curve. E) Because a monopoly is the only firm in the market, its marginal revenue curve must be the same as the market demand curve. Answer: B Topic: Price strategies Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

52) A monopoly is A) a price taker. B) able to ignore the demand for its product when setting its price. C) able to set the price for its product. D) able to earn only a normal profit in the long run. E) a firm with no marginal revenue curve. Answer: C Topic: Price strategies Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

53) If a monopoly wants to sell a larger quantity, it must A) set a higher price. B) maintain the current price. C) set a lower price. D) implement new technology. E) increase the barrier to entry that protects it. Answer: C Topic: Price strategies Skill: Level 3: Using models Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

54) A gas station in the mountains of Oregon has a monopoly over the retail gas market within a 50-mile radius. The station decides not to price discriminate. As a result, all consumers will pay A) the highest price each consumer is willing to pay. B) the lowest price possible. C) a single price. D) multiple prices. E) a price that depends on their willingness to pay. Answer: C Topic: Price strategies, single price Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

55) A single-price monopoly A) sets a single, different price for each consumer. B) sets a single price for all consumers. C) asks each consumer what single price they would be willing to pay. D) sets a single, different price for each of two different groups. E) sells each unit of its output for the single, highest price that the buyer of that unit is willing to pay. Answer: B Topic: Price strategies, single price Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

56) A price-discriminating monopoly is a monopoly that A) sells its output at a single price to all of its customers. B) sells different units of a good or service at different prices. C) has control over the resources used to produce the product. D) has a license to sell the product. E) illegally charges different customers different prices for the good it produces. Answer: B Topic: Price strategies, price discrimination Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

57) Price discrimination occurs when a firm A) charges customers different prices for different goods. B) is able to sell different units of a good at different prices. C) charges customers the same price for different goods. D) can determine which of the many market equilibrium prices it will charge. E) has a marginal cost curve that is horizontal. Answer: B Topic: Price strategies, price discrimination Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

58) Price discrimination is A) always illegal in the United States. B) defined as charging the same price to all consumers. C) defined as charging different prices for different units. D) setting the price to minimize the quantity sold. E) Both answers A and C are correct. Answer: C Topic: Price strategies, price discrimination Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

59) A ________ monopoly sells different units of its good or service for ________. A) price-discriminating; different prices B) price-discriminating; the same price C) single-price; the same price D) single-price; different prices E) Both Answers A and C are correct. Answer: E Topic: Price strategies, price discrimination Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

60) To be able to price discriminate, a firm must A) have a public franchise. B) be a natural monopoly. C) be able to prevent resales of its good. D) have a patent. E) have an ownership barrier to entry. Answer: C Topic: Price strategies, price discrimination Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

61) Which of the following statements is correct? A) Any firm can price discriminate. B) Only firms that sell high-priced products can price discriminate. C) In order to price discriminate, a firm must sell a good or service that cannot be resold. D) In order to price discriminate, the firms must sell a low-priced product. E) Price discrimination is always illegal. Answer: C Topic: Price strategies, price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

62) Price discrimination is prevented in situations where A) customers can resell the good. B) firms have monopolies. C) there are legal barriers to entry. D) there are no close substitutes for the good or service. E) customers have different willingnesses to pay for the good. Answer: A Topic: Price strategies, price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

63) In order for a hotel to successfully price discriminate so that senior citizens are given a discount, the hotel must be able to A) offset the economic loss from charging senior citizens a lower price by lowering the marginal cost of renting rooms to senior citizens. B) lower its prices to younger customers too. C) prevent senior citizens from reselling their rooms to younger customers. D) shift its demand curve rightward. E) determine if a senior citizen can pay a higher price. Answer: C Topic: Price strategies, price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

64) Which of the following is an example of price discrimination? A) UPS charges more if a package is sent from New York to Hawaii and less if it is sent from New York to New Jersey. B) Frank's Furniture shop charges no delivery fee for furniture delivered within Dutchess County but charges $40 delivery fee outside of the county. C) Albert pays 25 percent less on prescription drugs because he is a senior citizen. D) Only answers A and B are correct. E) Answers A, B, and C are all correct. Answer: C Topic: Price strategies, price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

65) Firms that can effectively price discriminate A) can be either perfectly competitive firms or monopolies. B) can prevent the resale of their products. C) have only one class of buyers, buyers willing to pay a high price. D) Both answers A and B are correct. E) Both answers A and C are correct. Answer: B Topic: Price strategies, price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

66) A monopoly market has A) a few firms. B) a single firm. C) two dominating firms in the market. D) only two firms in it. E) some unspecified number of firms in it. Answer: B Topic: Monopoly Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

67) Two types of barriers to entry are called ________ barriers to entry and ________ barriers to entry. A) legal; illegal B) natural; legal C) natural; illegal D) natural; rent seeking E) ownership; rent seeking Answer: B Topic: Monopoly, barriers to entry Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

68) A natural monopoly is one that arises from A) patent law. B) copyright law. C) a firm buying all of a natural resource. D) economies of scale. E) ownership of a natural resource. Answer: D Topic: Natural monopoly Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

69) A legal barrier is created when a firm A) has economies of scale, which allow it to produce at a lower cost than two or more firms. B) is granted a public franchise, government license, patent, or copyright. C) produces a unique product or service. D) produces a standardized product or service. E) has an ownership barrier to entry. Answer: B Topic: Legal barriers to entry Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

70) Pizza producers charge one price for a single pizza and almost give away a second one. This is an example of A) monopoly. B) a barrier to entry. C) behavior that is not profit-maximizing. D) price discrimination. E) rent seeking. Answer: D Topic: Price strategies, price discrimination Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

71) A ________ between price and quantity sold because ________. A) monopoly faces a tradeoff; to sell a larger quantity, it must lower its price B) monopoly does not face a tradeoff; it controls market entry and can sell at any price and any quantity C) natural monopoly faces a tradeoff; it can always price discriminate D) natural monopoly does not face a tradeoff; it is a price maker E) perfectly competitive firm faces a tradeoff; it is a price taker Answer: A Topic: Price strategies Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Analytical thinking

72) A ________ can price discriminate if, in part, it ________. A) natural monopoly; is the only seller of a good or service B) monopoly; can prevent resales of its product C) monopoly; is the only seller of a good or service D) perfectly competitive firm; can sell goods at a lower price than a monopoly E) perfectly competitive firm; changes from a price taker to a price maker Answer: B Topic: Price strategies, price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Analytical thinking

12.2 Single-Price Monopoly 1) The demand curve for a monopoly is A) horizontal because the demand is perfectly elastic. B) downward sloping. C) vertical because the demand is perfectly inelastic. D) upward sloping. E) undefined because it is the only supplier in the market. Answer: B Topic: Demand Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

2) If a monopoly wants to sell a greater quantity of output, it must A) lower its price. B) raise its price. C) tell consumers to buy more because it's a monopolist. D) raise its marginal cost. E) change its fixed costs. Answer: A Topic: Demand Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

3) A single-price monopoly A) must practice price discrimination. B) can lower its price for only a few select consumers if it wants to increase its sales. C) will set its price equal to a consumer's willingness to pay. D) must lower the price for all customers if it wants to increase its sales. E) is able to raise its price as high as it wants and consumers must still buy from it because it is a monopoly. Answer: D Topic: Demand Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

4) Total revenue is equal to A) the change in price resulting from a one-unit increase in quantity sold. B) the amount people will buy at a given price. C) the change in the quantity sold when you change the price by one unit. D) price multiplied by the quantity sold. E) the price at which the good or service is sold. Answer: D Topic: Total revenue Skill: Level 1: Definition Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

5) For a monopoly, marginal revenue is equal to A) the amount people buy at a given price. B) the amount people buy between two prices. C) the change in total revenue brought about by a one-unit increase in quantity sold. D) the price multiplied by the quantity sold. E) the price of the product. Answer: C Topic: Marginal revenue Skill: Level 1: Definition Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

6) For a single-price monopoly, price is A) equal to marginal revenue. B) greater than marginal revenue. C) less than marginal revenue because the firm must lower its price in order to sell another unit of output. D) less than marginal revenue because the firm cannot increase its total revenue when the demand curve is downward sloping. E) equal to zero because the firm is not a price taker. Answer: B Topic: Price and marginal revenue Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

7) Which of the following is always true for a single-price monopolist? A) P > MR B) P < MR C) P = MR D) P = elasticity of demand E) None of the above answers is correct because none of them is always true. Answer: A Topic: Price and marginal revenue Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

8) For a single-price monopolist, why is marginal revenue less than price? A) Because the firm is a price taker. B) To sell another unit, the price must be lowered. C) Demand is elastic when another unit is sold. D) Demand is inelastic when another unit is sold. E) The question is false because marginal revenue is always equal to price. Answer: B Topic: Price and marginal revenue Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

9) A monopoly will never operate on the ________ portion of its demand curve because there an increase in price ________ total revenue and ________ total cost thereby increasing the firm's total profit. A) elastic; decreases; increases B) unit elastic; does not change; increases C) inelastic; increases; decreases D) inelastic; increases; increases E) inelastic; decreases; decreases Answer: C Topic: Elasticity and total revenue Skill: Level 3: Using models Section: Checkpoint 12.2 Status: New AACSB: Application of knowledge

10) The marginal revenue for a single-price monopoly with a downward-sloping demand curve A) is less than the price. B) is greater than the price. C) is equal to the price. D) might be more than, less than, or equal to the price, depending on whether the slope of the demand curve exceeds 1.0 in magnitude. E) might be more than, less than, or equal to the price, depending on whether the price elasticity of demand exceeds 1.0 in magnitude. Answer: A Topic: Price and marginal revenue Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

11) A single-price monopoly faces a linear demand curve. If the marginal revenue for the second unit is $20, then the marginal revenue for the A) first unit is less than $20. B) third unit is less than $20. C) third unit is more than $20. D) third unit is also $20. E) more information is needed to determine if the marginal revenue for the third unit is more than, less than, or equal to $20. Answer: B Topic: Marginal revenue Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

12) A single-price monopoly can sell 2 units for $8.50 per unit. In order to sell 3 units, the price must be $8.00 per unit. The marginal revenue from selling the third unit is A) $24.00. B) $8.50. C) $7.00. D) $6.50. E) $17.00. Answer: C Topic: Marginal revenue Skill: Level 4: Applying models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

13) A single-price monopoly can sell 10 units of its product at a price of $45 each but to sell 11 units, the monopoly must cut the price to $44. What is the marginal revenue of the extra unit sold? A) $484 B) $450 C) $44 D) $34 E) -$1 Answer: D Topic: Marginal revenue Skill: Level 4: Applying models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

14) Suppose a monopoly can sell 10 units of output for $21. In order to sell 11 units of output, the price must fall to $20. What is the marginal revenue of the 11th unit? A) $41 B) $20 C) $10 D) $1 E) $220 Answer: C Topic: Marginal revenue Skill: Level 4: Applying models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

15) Suppose a single-price monopoly sells 3 units of a good at $20 per unit. If the monopoly sells 4 units, the total revenue increases to $72. What is the marginal revenue of the fourth unit? A) $52 B) $18 C) $60 D) $12 E) $20 Answer: D Topic: Marginal revenue Skill: Level 4: Applying models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

16) Suppose a single-price monopoly sells 3 units of a good at $20 per unit. If the monopoly sells 4 units, the total revenue increases to $72. What price is being charged for 4 units? A) $52 each B) $18 each C) $60 each D) $12 each E) $20 each Answer: B Topic: Total revenue Skill: Level 4: Applying models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

Price (dollars per haircut) 5 10 15 20 25 30

Quantity demanded (haircuts per day) 50 40 30 20 10 0

17) Christy's Haircuts, the sole supplier of haircuts in a small town, faces the demand schedule shown in the table above. What is Christy's marginal revenue from the 25th haircut? A) zero B) $5.00 C) $17.50 D) $50.00 Answer: B Topic: Marginal revenue Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

18) Christy's Haircuts, the sole supplier of haircuts in a small town, faces the demand schedule shown in the table above. What is Christy's marginal revenue from the 35th haircut? A) zero B) -$5.00 C) $5.00 D) $12.50 Answer: B Topic: Marginal revenue Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

Quantity (units) 1 2 3 4 5 6

Price (dollars per unit) 8 7 6 5 4 3

19) The table above gives the demand for a monopolist's output. Between which two quantities is marginal revenue equal to 0? A) 4 and 5 B) 3 and 4 C) 2 and 3 D) 1 and 2 Answer: A Topic: Marginal revenue Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

20) The table above gives the demand for a monopolist's output. Between which two quantities is demand elastic? A) 6 and 5 B) 5 and 4 C) 4 and 3 D) 3 and 2 Answer: A Topic: Marginal revenue Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

21) The table above gives the demand for a monopolist's output. What is the total revenue in when 3 units of output are produced? A) $21 B) $20 C) $18 D) $6 Answer: C Topic: Marginal revenue Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

22) The table above gives the demand for a monopolist's output. What is the marginal revenue when output is increased from 5 to 6 units? A) $18 B) $4 C) $3 D) -$2 Answer: D Topic: Marginal revenue Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

23) The table above gives the demand for a monopolist's output. What is the marginal revenue when output is increased from 2 to 3 units? A) $18 B) $4 C) $7 D) $6 Answer: B Topic: Marginal revenue Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

24) The demand curve facing a single-price monopoly A) lies below the marginal revenue curve. B) lies above the marginal revenue curve. C) is the same as only the marginal revenue curve. D) is the same as only the marginal cost curve. E) is the same as both the marginal revenue curve and the marginal cost curve. Answer: B Topic: Marginal revenue curve Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

25) A single-price monopoly has a marginal revenue curve that is A) horizontal and equal to price. B) downward sloping and lies below the demand curve. C) upward sloping and is the same as its supply curve. D) downward sloping and lies above the demand curve. E) vertical at the profit-maximizing quantity. Answer: B Topic: Marginal revenue curve Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

26) If Microsoft is a monopoly and currently charges prices where its demand is elastic, then Microsoft's marginal revenue is A) negative. B) positive. C) zero. D) minimized. E) undefined. Answer: B Topic: Marginal revenue and elasticity Skill: Level 1: Definition Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

27) When marginal revenue is positive, total revenue ________ when output increases and demand is ________. A) decreases; elastic B) decreases; inelastic C) increases; elastic D) increases; inelastic E) does not change; unit elastic Answer: C Topic: Marginal revenue and elasticity Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

28) The relationship between marginal revenue and elasticity is A) when demand is elastic, marginal revenue is positive and when demand is inelastic, marginal revenue is negative. B) whenever the elasticity is positive, marginal revenue is positive. C) whenever the elasticity is negative, marginal revenue is positive. D) when demand is elastic, marginal revenue is negative and when demand is inelastic, marginal revenue is positive. E) that total revenue equals zero at the quantity for which the demand is unit elastic. Answer: A Topic: Marginal revenue and elasticity Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

29) If total revenue falls when output increases, marginal revenue is A) positive. B) negative. C) zero. D) greater than total revenue. E) elastic. Answer: B Topic: Marginal revenue and total revenue Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

30) If the Boston Red Sox baseball team is currently charging a ticket price where its demand is inelastic, then the Red Sox's marginal revenue is A) negative. B) positive. C) zero. D) maximized. E) undefined. Answer: A Topic: Marginal revenue and elasticity Skill: Level 1: Definition Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

31) Allegiant Air holds a natural monopoly on most of the routes it serves in the United States. Allegiant Air's marginal revenue will ________ when its total revenue ________. A) equal $0; is maximized B) be negative; is maximized C) be positive; is maximized D) inelastic; is increasing E) elastic; is increasing Answer: A Topic: Marginal revenue and total revenue Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

32) Allegiant Air holds a natural monopoly on most of the routes it serves in the United States. Allegiant Air ________ operate on the ________ portion of its demand curve when total revenue is ________. A) will always; elastic; increasing B) will usually; elastic; decreasing C) will never; elastic; increasing D) will always; inelastic; increasing E) will never; inelastic; increasing Answer: A Topic: Marginal revenue and total revenue Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

33) Use the figure above to answer this question. Mary is the only veterinarian in a small town. To maximize her profit, Mary will choose to treat ________ animals per hour and charge ________ per customer in order to ________. A) 4; $50; maximize profit B) 6; $20; maximize profit C) 6; $30; minimize average total cost D) 4; $50; operate on the inelastic portion of her demand curve E) 6; $20; minimize cost in order to attract more customers Answer: A Topic: Monopoly outcome Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

34) Use the figure above to answer this question. Mary is the only veterinarian in a small town and rents a space for her practice. If Mary's landlord decided to charge ________ per hour in rent, Mary would ________. A) $20 more; earn $0 economic profit B) $20 more; still earn an economic profit because she is a monopolist C) $30 more; earn $0 economic profit D) $10 less; raise her prices and earn a higher profit E) $30 more; operate on the inelastic portion of her demand curve Answer: A Topic: Monopoly outcome Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

35) If the single restaurant in an Eastern Kentucky town is currently charging a price for its ham and eggs where the demand is unit elastic, its marginal revenue for ham and eggs is A) negative. B) positive. C) zero. D) maximized. E) undefined. Answer: C Topic: Marginal revenue and elasticity Skill: Level 1: Definition Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

36) Suppose that along a linear demand curve, the elasticity of demand is equal to 1 when the price is $4 and the quantity is 100 units. Then the A) total revenue is at its maximum when 100 units are produced. B) marginal revenue is positive at 100 units. C) marginal revenue is negative at 100 units. D) Both answers A and B are correct. E) Both answers A and C are correct. Answer: A Topic: Marginal revenue and elasticity Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

37) Suppose that along a linear demand curve, the elasticity of demand is equal to 1 when the price is $4 and the quantity is 100 units. Then the A) marginal revenue is negative when output exceeds 100 units. B) elasticity of demand is less than 1 when output exceeds 100 units. C) marginal revenue is 0 when output equals 100 units. D) Only answers A and B are correct. E) Answers A, B, and C are correct. Answer: E Topic: Marginal revenue and elasticity Skill: Level 4: Applying models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

38) The above table gives the demand schedule for a monopoly. The demand is elastic at all prices between A) $6 and $1. B) $5 and $1. C) $3 and $1. D) $6 and $4. E) $4 and $3. Answer: D Topic: Marginal revenue and elasticity Skill: Level 4: Applying models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

39) The above table gives the demand schedule for a monopoly. The demand is inelastic over the entire price range between A) $6 and $1. B) $5 and $1. C) $3 and $1. D) $6 and $4. E) $4 and $3. Answer: C Topic: Marginal revenue and elasticity Skill: Level 4: Applying models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

40) To maximize its profit, a single-price monopoly produces the amount of output so that its marginal revenue A) equals zero. B) equals its marginal cost. C) exceeds its marginal cost but not necessarily by as much as possible. D) is less than its marginal cost. E) exceeds its marginal cost by as much as possible. Answer: B Topic: Single-price monopoly, profit maximization Skill: Level 1: Definition Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

41) The maximum profit for a single-price monopoly is found when the firm produces the level of output so that A) marginal revenue equals marginal cost. B) price equals marginal cost. C) it can charge the highest possible price. D) marginal revenue exceeds marginal cost by as much as possible. E) total revenue equals total cost. Answer: A Topic: Single-price monopoly, profit maximization Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

42) To maximize its profit, a perfectly competitive firm produces so that ________ and a single-price monopoly produces so that ________. A) MR = MC; MR > MC B) MR > MC; MR = MC C) MR = MC; MR = MC D) MR > MC; MR > MC E) P = ATC; P = ATC Answer: C Topic: Single-price monopoly, profit maximization Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

43) In order to maximize its profit, a single-price monopoly produces the amount of output so that A) P = MC. B) MR = MC. C) P = MC - MR. D) P = MR. E) P = ATC. Answer: B Topic: Single-price monopoly, profit maximization Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

44) Which of the following is ALWAYS true when a single-price monopolist maximizes its profit? A) P = MC B) P = MR C) MR = MC D) MC = ATC E) P > ATC Answer: C Topic: Single-price monopoly, profit maximization Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

45) Which of the following is NOT correct about a single-price monopoly? A) Maximum profit is found where demand is the most inelastic. B) Marginal revenue is negative when demand is inelastic. C) Marginal revenue is positive when demand is elastic. D) To sell more output, the firm must lower its price. E) To maximize its profit, the firm produces so that marginal revenue equals marginal cost. Answer: A Topic: Single-price monopoly, profit maximization Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

46) Which of the following is correct for a single-price monopoly? i. The firm can determine the quantity it produces and the price it charges. ii. It would never profitably produce output in the inelastic range of its demand. iii. Its marginal revenue is less than price. A) i only B) i and iii C) ii only D) ii and iii E) i, ii, and iii Answer: E Topic: Single-price monopoly, profit maximization Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

47) Suppose that a monopoly is currently producing the quantity at which marginal revenue is less than marginal cost. The monopoly can increase its profit by A) shutting down. B) lowering its price and increasing its output. C) raising its price and decreasing its output. D) lowering its price and decreasing its output. E) not changing its price and increasing its output. Answer: C Topic: Single-price monopoly, profit maximization Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

48) A single-price monopoly is producing at an output level where marginal revenue is $15, marginal cost is $13, and price is $20. This monopoly is A) not maximizing its profit and should decrease output to increase its profit. B) not maximizing its profit and should increase output to increase its profit. C) maximizing its profit but should shut down. D) maximizing its profit and should not shut down. E) maximizing its profit but still should decrease output to earn even more profit. Answer: B Topic: Single-price monopoly, profit maximization Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

49) The above table gives the demand schedule for a single-price monopoly. The marginal revenue first becomes negative when going from A) 1 unit to 2 units. B) 2 units to 3 units. C) 3 units to 4 units. D) 4 units to 5 units. E) None of the above; the total revenue is always positive so the marginal revenue must always be positive. Answer: D Topic: Marginal revenue Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

50) The above table gives the demand schedule for a single-price monopoly. If the marginal cost is $3, the profit maximizing output for the monopoly will be between A) 1 to 2 units. B) 2 to 3 units. C) 3 to 4 units. D) 4 to 5 units. E) Exactly 5 units. Answer: B Topic: Single-price monopoly, profit maximization Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

51) Suppose the Busy Bee Caf is the monopoly producer of hamburgers in Hugo, Oklahoma. The above figure represents the demand, marginal revenue, and marginal cost curves for this establishment. What quantity will the Busy Bee produce to maximize its profit? A) 20 hamburgers per hour B) 30 hamburgers per hour C) 50 hamburgers per hour D) 0 hamburgers per hour. E) 10 hamburgers per hour Answer: A Topic: Single-price monopoly, profit maximization Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

52) Suppose the Busy Bee Caf is the monopoly producer of hamburgers in Hugo, Oklahoma. The above figure represents the demand, marginal revenue, and marginal cost curves for this establishment. What price will the Busy Bee charge to maximize its profit? A) $5.00 for a hamburger B) $3.00 for a hamburger C) $2.00 for a hamburger D) $1.00 for a hamburger E) $4.00 for a hamburger Answer: B Topic: Single-price monopoly, profit maximization Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

53) Suppose the Busy Bee Caf is the monopoly producer of hamburgers in Hugo, Oklahoma. The above figure represents the demand, marginal revenue, and marginal cost curves for this establishment. In order to maximize profit, the Busy Bee produces ________ hamburgers per hour and sets a price of ________ per hamburger. A) 20; $3.00 B) 20; $1.00 C) 30; $2.00 D) 30; $4.00 E) 50; $5.00 Answer: A Topic: Single-price monopoly, profit maximization Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

54) Suppose the Busy Bee Caf is the monopoly producer of hamburgers in Hugo, Oklahoma. The above figure represents the demand, marginal revenue, and marginal cost curves for this establishment. If the Busy Bee produces 40 hamburgers per hour, then A) marginal revenue will exceed marginal cost. B) profit will be maximized. C) marginal revenue will be negative. D) marginal revenue will be maximized. E) both the marginal revenue and the price will be negative. Answer: C Topic: Single-price monopoly, profit maximization Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

55) The figure above shows the demand, marginal revenue, and marginal cost curves for Paul's Parrot Pillows, a single-price monopoly producer of pillows stuffed with parrot feathers. When Paul maximizes his profit, he produces ________ pillows per hour. A) 1,000 B) 3,000 C) 4,000 D) 0 E) 2,000 Answer: B Topic: Single-price monopoly, profit maximization Skill: Level 4: Applying models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

56) The figure above shows the demand, marginal revenue, and marginal cost curves for Paul's Parrot Pillows, a single-price monopoly producer of pillows stuffed with parrot feathers. When Paul maximizes his profit, the price per pillow is A) $70. B) $60. C) $40. D) $100. E) $30. Answer: A Topic: Single-price monopoly, profit maximization Skill: Level 4: Applying models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

57) The figure above shows the demand, marginal revenue, and marginal cost curves for Paul's Parrot pillows, a single-price monopoly producer of pillows stuffed with parrot feathers. When Paul maximizes his profit, the difference between marginal cost and price A) $0. B) $40. C) $60. D) $30. E) $20. Answer: D Topic: Single-price monopoly, profit maximization Skill: Level 4: Applying models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

58) The figure above shows the demand, marginal revenue, and marginal cost curves for Paul's Parrot pillows, a single-price monopoly producer of pillows stuffed with parrot feathers. When Paul maximizes his profit, the price is ________ per pillow and the marginal cost is ________ per pillow. A) $60; $60 B) $60; $40 C) $70; $60 D) $70; $40 E) $100; $40 Answer: D Topic: Single-price monopoly, profit maximization Skill: Level 4: Applying models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

59) The figure above shows the demand, marginal revenue, and marginal cost curves for Paul's Parrot pillows, a single-price monopoly producer of pillows stuffed with parrot feathers. When Paul maximizes his profit, his total economic profit is A) $60. B) $405. C) $0. D) $210,000. E) unknown because more information is needed to determine Paul's profit. Answer: E Topic: Single-price monopoly, profit maximization Skill: Level 4: Applying models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

60) In the above figure, the profit-maximizing output for this single-price monopoly is ________ units and the price is ________. A) 200; $10 B) 300; $20 C) 500; $50 D) 200; $30 E) 300; $30 Answer: D Topic: Single-price monopoly, profit maximization Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

61) A single-price monopoly has marginal revenue and marginal cost equal to $19 at 15 units of output where the price on the demand curve is $38. At what price will this firm sell the output? A) $19 B) $38 C) $285 D) $570 E) There is not enough information given to answer the question. Answer: B Topic: Single-price monopoly, profit maximization Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

62) A single-price monopoly has marginal cost of $23 and marginal revenue of $28. Which of the following is definitely correct? A) It is maximizing profit. B) To increase profit, it should produce less. C) To increase profit, it should produce more. D) It should shut down. E) It is making an economic profit. Answer: C Topic: Single-price monopoly, profit maximization Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

63) A profit-maximizing output for a single-price monopoly is determined by the intersection of the ________ curves and the profit-maximizing price is found on the ________ curve. A) marginal cost and marginal revenue; marginal revenue B) marginal cost and marginal revenue; demand C) total revenue and total cost; total revenue D) marginal cost and average total cost; demand E) demand and supply; supply Answer: B Topic: Single-price monopoly, profit maximization Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

64) For a single-price monopoly, A) if marginal cost exceeds marginal revenue, profits will increase if output decreases. B) if marginal revenue exceeds marginal cost, profits will increase if output decreases. C) there are several different price and output combinations that maximize profit. D) marginal revenue will be greater than price if demand is elastic. E) marginal revenue will be greater than price if demand is inelastic. Answer: A Topic: Single-price monopoly, profit maximization Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

65) A single-price monopoly has marginal revenue and marginal cost equal to $19 at 15 units of output where the price on the demand curve is $38. At this output, average total cost is $15. What is the total profit earned? A) $225 B) $285 C) $345 D) $570 E) $19 Answer: C Topic: Single-price monopoly, profit maximization Skill: Level 4: Applying models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

66) A single-price monopoly has marginal revenue and marginal cost equal to $19 at 15 units of output where the price on the demand curve is $38. What is the firm's total revenue? A) $38 B) $285 C) $570 D) $19 E) There is not enough information given to answer the question. Answer: C Topic: Single-price monopoly, profit maximization Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

67) If a single-price monopoly is making a large economic profit, what keeps other firms from competing away the profit? A) There are barriers to entry. B) The monopoly must be keeping the amount earned secret. C) The market must be too small. D) The existing firm's ATC must be too large to allow competitors to enter and earn an economic profit. E) Nothing, other firms will enter and will compete away the profit. Answer: A Topic: Single-price monopoly, long run Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

68) In contrast to competitive firms, single-price monopolies A) do not have to worry about market demand. B) sell only if demand is inelastic. C) can never incur a loss. D) can make an economic profit indefinitely. E) must take the price that is determined by the market demand and market supply. Answer: D Topic: Single-price monopoly, long run Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

69) A monopolist can make an economic profit in the long run because of A) the relatively elastic demand for its product. B) the relatively inelastic demand for its product. C) the firm's price setting behavior. D) barriers to entry. E) the fact that the firm produces where MR = MC. Answer: D Topic: Single-price monopoly, long run Skill: Level 1: Definition Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

70) Why can a monopoly make an economic profit in the long run? A) because there are close substitutes for the firm's product B) because the firm is protected by barriers to entry C) because the firm produces where MR = MC D) because P > MR E) ALL of the above are reasons why a monopoly can make an economic profit in the long run. Answer: B Topic: Single-price monopoly, long run Skill: Level 1: Definition Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

71) For a single-price monopoly, price is A) greater than marginal revenue. B) one half of marginal revenue. C) equal to marginal revenue. D) unrelated to marginal revenue. E) always less than average total cost when the firm maximizes its profit. Answer: A Topic: Marginal revenue Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

72) A single-price monopoly can sell 1 unit for $9.00. To sell 2 units, the price must be $8.50 per unit. The marginal revenue from selling the second unit is A) $17.50. B) $17.00. C) $8.50. D) $8.00. E) $9.00 Answer: D Topic: Marginal revenue Skill: Level 4: Applying models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

73) When demand is elastic, marginal revenue is A) positive. B) negative. C) zero. D) increasing as output increases. E) undefined. Answer: A Topic: Marginal revenue and elasticity Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

74) To maximize its profit, a single-price monopoly produces the quantity at which A) the difference between marginal revenue and marginal cost is as large as possible. B) marginal revenue equals marginal cost. C) average total cost is at its minimum. D) the marginal cost curve intersects the demand curve. E) the marginal revenue curve intersects the horizontal axis. Answer: B Topic: Single-price monopoly, profit maximization Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

75) Once a monopoly has determined how much it produces, it will charge a price that A) is determined by the intersection of the marginal cost and average total cost curves. B) minimizes marginal cost. C) is determined by its demand curve. D) is independent of the amount produced. E) is equal to its average total cost. Answer: C Topic: Single-price monopoly, profit maximization Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

76) Use the figure above to answer this question. Pam gives the only piano lessons in town. In order to maximize profit, Pam should give ________ lessons per day. A) 2 B) 4 C) 5 D) 6 E) 12 Answer: B Topic: Monopoly outcome Skill: Level 3: Using models Section: Checkpoint 12.2 Status: New AACSB: Application of knowledge

77) Use the figure above to answer this question. Pam gives the only piano lessons in town. In order to maximize profit, Pam should give ________ per day and charge ________ per lesson. A) 4; $40 B) 2; $50 C) 4; $20 D) 4; $30 E) 6; $30 Answer: A Topic: Monopoly outcome Skill: Level 3: Using models Section: Checkpoint 12.2 Status: New AACSB: Application of knowledge

78) Use the figure above to answer this question. Pam gives the only piano lessons in town. In order to maximize profit, Pam should charge ________ per lesson and will earn a total economic profit of ________. A) $30; $30 B) $40; $160 C) $40; $40 D) $20; $80 E) $30; $0 Answer: C Topic: Monopoly outcome Skill: Level 3: Using models Section: Checkpoint 12.2 Status: New AACSB: Application of knowledge

12.3 Monopoly and Competition Compared 1) Assume someone organizes all farms in the nation into a monopoly. What is the monopoly's marginal cost curve? A) It is a horizontal line at the competitive industry's price. B) It is a vertical line at the formerly competitive industry's quantity. C) It is a vertical line at the monopoly's chosen output level. D) It is the formerly competitive industry's supply curve. E) It is the same as the formally competitive industry's average total cost curve. Answer: D Topic: Monopoly and competition compared Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

2) Assume someone organizes all farms in the nation into a single-price monopoly. What is the monopoly's marginal revenue curve? A) It is a horizontal line at the competitive industry's price. B) It is a line that lies below the new monopoly's demand curve. C) It is a vertical line at the monopoly's chosen output level. D) It is identical to the demand curve for the monopolist's output. E) It is a line that lies above the new monopoly's demand curve. Answer: B Topic: Monopoly and competition compared Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

3) Compared to a perfectly competitive industry, a single-price monopoly produces A) more output. B) less output. C) the same output. D) some amount that might be more, less, or the same depending on whether the monopoly's marginal revenue curve lies above, below, or on its demand curve. E) some amount that might be more, less, or the same depending on whether the monopoly's marginal cost curve lies above, below, or on its marginal revenue curve. Answer: B Topic: Monopoly and competition compared, output Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

4) Assume someone organizes all farms in the nation into a single-price monopoly. As a result, the amount of food produced A) remains constant. B) decreases. C) increases. D) might increase or decrease depending on whether the demand for food is elastic or inelastic. E) might increase or decrease depending on whether the monopoly's marginal revenue curve lies below or above its demand curve. Answer: B Topic: Monopoly and competition compared, output Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

5) Compared to a perfectly competitive market, a single-price monopoly sets A) a lower price. B) the same price. C) a higher price. D) a price that might be higher, lower, or the same depending on whether the monopoly's marginal revenue curve lies above, below, or on its demand curve. E) a price that might be higher, lower, or the same depending on whether the monopoly's marginal cost curve lies above, below, or on its marginal revenue curve. Answer: C Topic: Monopoly and competition compared, price Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

6) Assume someone organizes all farms in the nation into a single-price monopoly. As a result, the price consumers pay for food A) does not change, that is, it remains constant. B) falls. C) rises. D) might rise or fall depending on whether the demand for food is elastic or inelastic. E) might rise or fall depending on whether the monopoly's marginal revenue curve lies above or below its demand curve. Answer: C Topic: Monopoly and competition compared, price Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

7) If we compare a perfectly competitive market to a single-price monopoly with the same costs, the monopoly sells A) the same quantity at a higher price. B) a smaller quantity at a higher price. C) a larger quantity at a lower price. D) a larger quantity at a higher price. E) a smaller quantity at the same price. Answer: B Topic: Monopoly and competition compared, output and price Skill: Level 2: Using definitions Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

8) When compared to a perfectly competitive market, a single-price monopoly with the same costs produces ________ output and charges ________ price. A) a larger; a lower B) a smaller; a lower C) the same; a higher D) a smaller; a higher E) a smaller; the same Answer: D Topic: Monopoly and competition compared, output and price Skill: Level 2: Using definitions Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

9) A single-price monopoly transfers A) consumer surplus to producers. B) producer surplus to consumers. C) economic profit to consumers. D) economic profit to the government. E) economic profit to deadweight loss. Answer: A Topic: Monopoly and competition compared, surpluses Skill: Level 2: Using definitions Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

10) Assume someone organizes all farms in the nation into a monopoly. As a result, consumer surplus will A) not change. B) increase. C) decrease. D) either increase, decrease, or not change depending if the monopoly's marginal revenue curve lies below, above, or is the same as its demand curve. E) None of the above answers is correct because the effect on consumer surplus depends on whether the monopoly is a single-price or a price-discriminating monopoly. Answer: C Topic: Monopoly and competition compared, surpluses Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

11) Assume someone organizes all farms in the nation into a monopoly. Which of the following occurs? i. Consumer surplus decreases. ii. Economic profit increases. iii. A deadweight loss is created. A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: E Topic: Monopoly and competition compared, surpluses Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

12) When a perfectly competitive industry is taken over by a monopoly, some consumer surplus is transferred to the monopolist in the form of A) marginal cost. B) economic profit. C) deadweight loss. D) taxes. E) average variable cost. Answer: B Topic: Monopoly and competition compared, surpluses Skill: Level 4: Applying models Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

13) Which of the following statements is FALSE? A) A perfectly competitive market produces more output and charges a lower price than a monopoly. B) A perfectly competitive firm produces where MR = MC but a monopoly produces where MR > MC. C) In a perfectly competitive market, the price is equal to the marginal cost, but in a market with a singleprice monopoly, price exceeds marginal cost. D) The consumer surplus is smaller for a market with a monopoly than for a perfectly competitive market. E) In the long run, a monopoly can earn a larger economic profit than can a perfectly competitive firm. Answer: B Topic: Monopoly and competition compared Skill: Level 2: Using definitions Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

14) Suppose the grocery store market in Kansas City is perfectly competitive. Then one store buys all the others and becomes a single-price monopoly. The figure above shows the relevant demand and cost curves. When the market is perfectly competitive, the price of a pound of steak is A) $4. B) $8. C) $12. D) $20. E) $2. Answer: B Topic: Monopoly and competition compared, price Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Analytical thinking

15) Suppose the grocery store market in Kansas City is perfectly competitive. Then one store buys all the others and becomes a single-price monopoly. The figure above shows the relevant demand and cost curves. When the market is a monopoly, the price of a pound of steak is A) $4. B) $8. C) $12. D) $20. E) $2. Answer: C Topic: Monopoly and competition compared, price Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Analytical thinking

16) Suppose the grocery store market in Kansas City is perfectly competitive. Then one store buys all the others and becomes a single-price monopoly. The figure above shows the relevant demand and cost curves. When the market is perfectly competitive, the price of a pound of steak is ________ and when it is a monopoly, the price of a pound of steak is ________. A) $4; $20 B) $8; $4 C) $8; $12 D) $4; $8 E) $4; $12 Answer: C Topic: Monopoly and competition compared, price Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Analytical thinking

17) Suppose the grocery store market in Kansas City is perfectly competitive. Then one store buys all the others and becomes a single-price monopoly. The figure above shows the relevant demand and cost curves. When the market is perfectly competitive, the quantity of steak is A) 2,000 pounds. B) 3,000 pounds. C) 4,000 pounds. D) 5,000 pounds. E) less than 2,000 pounds. Answer: B Topic: Monopoly and competition compared, output Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Analytical thinking

18) Suppose the grocery store market in Kansas City is perfectly competitive. Then one store buys all the others and becomes a single-price monopoly. The figure above shows the relevant demand and cost curves. When the market is a monopoly, the quantity of steak is A) 2,000 pounds. B) 3,000 pounds. C) 4,000 pounds. D) 5,000 pounds. E) less than 2,000 pounds. Answer: A Topic: Monopoly and competition compared, output Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Analytical thinking

19) Suppose the grocery store market in Kansas City is perfectly competitive. Then one store buys all the others and becomes a single-price monopoly. The figure above shows the relevant demand and cost curves. When the market is perfectly competitive, the quantity of steak is ________ pounds, and when the market is a monopoly, the quantity of steak is ________ pounds. A) 2,000; 4,000 B) 3,000; 2,000 C) 4,000; 4,000 D) 5,000; 3,000 E) 4,000; less than 2,000 pounds. Answer: B Topic: Monopoly and competition compared, output Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Analytical thinking

20) The figure above shows the demand, marginal revenue, and marginal cost curves for Paul's Parrot pillows, a monopoly producer of pillows stuffed with parrot feathers. When Paul maximizes his profit, Paul produces ________ pillows per hour, and if the market was perfectly competitive, ________ pillows per hour would be produced. A) 0; 4,000 B) 3,000; 4,000 C) 4,000; 4,000 D) 3,000; 3,000 E) 0; 3,000 Answer: B Topic: Monopoly and competition compared Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Analytical thinking

21) The figure above shows the demand, marginal revenue, and marginal cost curves for Paul's Parrot pillows, a monopoly producer of pillows stuffed with parrot feathers. When the pillow market is a monopoly, the price of a pillow is ________, and if the pillow market is perfectly competitive, the price of a pillow is ________. A) $40; $20 B) $70; $60 C) $40; $60 D) $60; $40 E) $100; $40 Answer: B Topic: Monopoly and competition compared Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Analytical thinking

22) The figure above shows the demand curve, marginal revenue curve, and marginal cost curve. The amount of consumer surplus when the market has a monopoly producer is A) ace. B) abf. C) bcd. D) bcef. E) acd. Answer: B Topic: Monopoly and competition compared, surpluses Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Analytical thinking

23) The figure above shows the demand curve, marginal revenue curve, and marginal cost curve. The amount of consumer surplus when the market has a monopoly producer is ________ and the amount of consumer surplus when the market is perfectly competitive is ________. A) abf; ace B) abf; bcd C) ace; bcd D) ace; abf E) bcd; ace Answer: A Topic: Monopoly and competition compared, surpluses Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Analytical thinking

24) The figure above shows the demand curve, marginal revenue curve, and marginal cost curve. The deadweight loss when the market has a monopoly producer is A) ace. B) abf. C) bcd. D) bcef. E) acd. Answer: C Topic: Monopoly and competition compared, surpluses Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Analytical thinking

25) In the above figure, a perfectly competitive market will have a price of ________, and a single-price monopoly will have a price of ________. A) P1 and quantity of Q1; P2 and quantity of Q2 B) P2 and quantity of Q2; P1 and quantity of Q1 C) P3 and quantity of Q3; P1 and quantity of Q1 D) P2 and quantity of Q2; P3 and quantity of Q1 E) P2 and quantity of Q1; P1 and quantity of Q1 Answer: B Topic: Monopoly and competition compared, output and price Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Analytical thinking

26) In the above figure, for a single-price monopoly the consumer surplus is equal to the area A) abP1. B) acP2. C) bce. D) bed. E) cQ20P2. Answer: A Topic: Monopoly and competition compared, surpluses Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Analytical thinking

27) In the above figure, for a single-price monopoly the deadweight loss is equal to the area A) abP1. B) acP2. C) bce. D) bed. E) P1beP3. Answer: C Topic: Is monopoly efficient? Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Analytical thinking

28) Comparing a perfectly competitive market to a single-price monopoly with the same costs, we see that A) both markets are equally efficient in their use of resources. B) the monopoly market always is more efficient in the use of resources. C) the perfectly competitive market achieves efficiency in resource use while the monopoly market does not. D) the monopoly market achieves efficiency in resource use while perfectly competitive market does not. E) None of the above answers is correct because comparing a perfectly competitive market to a monopoly is impossible. Answer: C Topic: Is monopoly efficient? Skill: Level 2: Using definitions Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

29) A monopoly creates a deadweight loss because the monopoly A) sets a price that is too low. B) makes a normal profit. C) does not maximize profit. D) produces less than the efficient quantity. E) produces more than the efficient quantity. Answer: D Topic: Is monopoly efficient? Skill: Level 2: Using definitions Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

30) Monopolies are inefficient because, at the profit-maximizing output level, A) MC = MR. B) MC does not equal MR. C) MB = MC. D) MB does not equal MC. E) P = ATC. Answer: D Topic: Is monopoly efficient? Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

31) Compared to a similar perfectly competitive industry, a single-price monopoly A) creates a deadweight loss and decreases economic profit. B) produces more output. C) creates a deadweight loss and decreases consumer surplus. D) is more efficient because there is no wasteful competition. E) sets a lower price because there is less competition. Answer: C Topic: Is monopoly efficient? Skill: Level 2: Using definitions Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

32) Use the figure above to answer this question. If the market is operating efficiently, A) 1,000 units will be produced and no deadweight loss will occur. B) 800 units will be produced and profits will be maximized. C) consumers will pay $30 per unit. D) consumers will pay $20 per unit and a deadweight loss will occur. E) both A and C are correct. Answer: E Topic: Monopoly and competition compared, output and price Skill: Level 3: Using models Section: Checkpoint 12.3 Status: New AACSB: Application of knowledge

33) Use the figure above to answer this question. If a monopoly maximized profit, A) 800 units will be produced and a deadweight loss equal to area ABC will occur. B) 1,000 units will be produced and a deadweight loss equal to area ABC will occur. C) 1,000 units will be produced and there is no deadweight loss. D) 800 units will be produced and a deadweight loss equal to area EFB will occur. E) 1,000 units will be produced and a deadweight loss equal to area FBGA occurs. Answer: A Topic: Monopoly and competition compared, deadweight loss Skill: Level 3: Using models Section: Checkpoint 12.3 Status: New AACSB: Application of knowledge

34) Use the figure above to answer this question. If a monopoly controls the market and maximizes profit, the firm chooses price and output equal to ________. If the market operates competitively, price and output equal ________. A) $30 and 1,000 units; $40 and 800 units B) $40 and 800 units; $30 and 1,000 units C) $40 and 800 units; $30 and 800 units D) $20 and 1,000 units; $40 and 1,000 units E) $30 and 800 units; $40 and 1,000 units Answer: B Topic: Monopoly and competition compared, output and price Skill: Level 3: Using models Section: Checkpoint 12.3 Status: New AACSB: Application of knowledge

35) In a monopoly, producers ________ and consumers ________. A) gain; lose B) lose; lose C) lose; gain D) gain; gain E) gain; do not gain or lose Answer: A Topic: Is monopoly fair? Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

36) If a perfectly competitive industry becomes a monopoly and the costs do not change, which of the following allocation of costs and benefits applies? A) The producer benefits, but consumers and society are harmed. B) The producer and society are harmed, but consumers benefit. C) The producer and society benefit, but consumers are harmed. D) The producer is harmed, but consumers and society benefit. E) The producer, consumers, and society all benefit. Answer: A Topic: Is monopoly fair? Skill: Level 2: Using definitions Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

37) Several firms want to be the only horse carriage service in a small tourist town and must pay the city for a license to operate as a monopoly. Competition among the potential firms will result in A) bidding up the price of the license so that the winning firm makes $0 economic profit. B) the winning firm making an economic profit because it will be a price maker. C) the winning firm making an economic profit because it will have no competition. D) the winning firm making an economic profit because rent seeking cannot occur. E) a $0 economic profit because monopolies are illegal. Answer: A Topic: Rent seeking Skill: Level 5: Critical thinking Section: Checkpoint 12.3 Status: New AACSB: Analytical thinking

38) The Seattle Mariners baseball team has a monopoly on major league baseball in the Northwest. If the Mariners could be purchased by anyone with enough money, we could argue that this purchase is fair according to the A) fair rules test. B) fair results test. C) fair price test. D) fair output test. E) allocative fairness test. Answer: A Topic: Is monopoly fair? Skill: Level 2: Using definitions Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

39) Rent seeking is the act of obtaining special treatment by ________ to create ________. A) a monopoly; consumer surplus B) the government; economic profit C) consumers; a monopoly D) the government; consumer surplus E) competitive producers; a monopoly Answer: B Topic: Rent seeking Skill: Level 1: Definition Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

40) Rent seeking is defined as A) charging higher prices for an apartment. B) the act of obtaining special treatment by the government to create an economic profit. C) charging a price below marginal cost. D) selling a greater quantity than is profitable. E) charging different prices for different units of the good or service. Answer: B Topic: Rent seeking Skill: Level 1: Definition Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

41) Rent seeking A) is the act of obtaining special treatment by the government to create economic profit. B) is the attempt to get rent from tardy renters. C) occurs when landlords advertise for apartments and other property for rent. D) is an attempt to sell a property and capture economic profit. E) occurs when a firm charges different prices for different units of its good or service. Answer: A Topic: Rent seeking Skill: Level 1: Definition Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

42) If a producer wants a monopoly with a legal barrier to entry, how can this be done? i. The producer can spend funds lobbying to attain passage of the legal barrier to entry. ii. The producer can purchase an existing monopoly. iii. The producer can make rent seeking expenditures. A) i and ii B) i and iii C) ii and iii D) i, ii, and iii E) None of the above are ways to acquire a monopoly with a legal barrier to entry. Answer: D Topic: Rent seeking Skill: Level 2: Using definitions Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

43) Competition among rent seekers results in A) higher rents. B) firms earning normal profits. C) firms setting lower prices. D) lower costs. E) all competing firms earning an economic profit. Answer: B Topic: Rent-seeking equilibrium Skill: Level 2: Using definitions Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

44) When a rent-seeking equilibrium is reached, the A) economic profit is maximized. B) economic profit is eliminated by legislation. C) economic profit is eliminated. D) consumer surplus is greater than without rent seeking. E) consumer surplus is eliminated. Answer: C Topic: Rent-seeking equilibrium Skill: Level 2: Using definitions Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

45) If a perfectly competitive industry is taken over by a single firm that operates as a single-price monopoly, the price will ________ and the quantity will ________. A) fall; decrease B) fall; increase C) rise; decrease D) rise; increase E) not change; decrease Answer: C Topic: Monopoly and competition compared, output and price Skill: Level 4: Applying models Section: Checkpoint 12.3 Status: Old AACSB: Analytical thinking

46) Comparing single-price monopoly to perfect competition, monopoly A) increases the amount of consumer surplus. B) has the same amount of consumer surplus. C) has no consumer surplus. D) decreases the amount of consumer surplus. E) decreases the amount of economic profit. Answer: D Topic: Monopoly and competition compared, surpluses Skill: Level 2: Using definitions Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

47) Is a single-price monopoly efficient? A) Yes, because it creates a deadweight loss. B) No, because it creates a deadweight loss. C) Yes, because consumers gain and producers lose some of their surpluses. D) Yes, because consumers lose and producers gain some of their surpluses. E) Yes, because it produces the quantity at which MR = MC. Answer: B Topic: Is monopoly efficient? Skill: Level 2: Using definitions Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

48) Monopolies ________ fair and ________ efficient. A) are always; are not B) might be; are always C) might be; might be D) are always; are always E) are never; are always Answer: C Topic: Is monopoly fair? Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

49) In equilibrium, rent seeking eliminates the A) deadweight loss. B) economic profit. C) consumer surplus. D) demand for the product. E) opportunity to price discriminate. Answer: B Topic: Rent-seeking equilibrium Skill: Level 2: Using definitions Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

12.4 Price Discrimination 1) To be able to price discriminate, a firm must A) lower prices for all customers. B) raise prices for all customers. C) be able to identify and separate different types of buyers. D) sell a product that can be resold. E) Both answers B and C are correct. Answer: C Topic: Price discrimination Skill: Level 1: Definition Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

2) Which of the following must exist for a firm to engage in price discrimination? A) The firm must be able to identify and separate its buyers into different classes, and the low-price buyers cannot resell the product to the high-price buyers. B) The firm must face an inelastic demand. C) The firm must be able to realize economies of scale. D) The firm must have no more than one class of buyer. E) The firm must be a natural monopoly. Answer: A Topic: Price discrimination Skill: Level 1: Definition Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

3) A price-discriminating monopoly charges A) the same price to every buyer for the same product. B) a different price to different types of buyers for the same product, even though there are no differences in costs. C) a different price to different buyers, because the costs are different. D) different prices to buyers for different products. E) each customer a price that equals the marginal cost of serving that customer. Answer: B Topic: Price discrimination Skill: Level 1: Definition Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

4) Price discrimination is possible, in part, because A) costs of production vary as output increases. B) monopolies are regulated. C) monopolies don't profit maximize. D) the willingness to pay can vary among groups of buyers. E) monopolies face horizontal demand curves. Answer: D Topic: Price discrimination Skill: Level 1: Definition Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

5) Arnie's Airlines is a monopoly airline that is able to price discriminate. If Arnie's decides to price discriminate, then A) Arnie's profit decreases. B) consumer surplus decreases. C) Arnie's revenues decrease. D) Arnie's sells fewer tickets. E) Arnie's will see all of his tickets at a single price. Answer: B Topic: Price discrimination Skill: Level 3: Using models Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

6) With price discrimination, a monopoly A) converts consumer surplus into economic profit. B) converts producer surplus into economic profit. C) can charge a single price to all customers. D) produces less output than if it does not price discriminate. E) converts consumer surplus into deadweight loss. Answer: A Topic: Price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

7) One way a monopoly can convert additional consumer surplus into economic profit is to A) lower prices. B) raise prices. C) price discriminate. D) become more competitive. E) produce where price equals average total cost. Answer: C Topic: Price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

8) An airline company A) cannot price discriminate because it is against the law. B) price discriminates by charging higher prices to business travelers. C) price discriminates by charging lower prices to business travelers. D) price discriminates even though its profits are lower because competition forces it to do so. E) has fewer customers because it price discriminates than it would have if it did not price discriminate. Answer: B Topic: Price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

9) A price-discriminating monopoly A) sells a larger quantity than it would if it were a single-price monopoly. B) is illegal. C) cannot offer discounts. D) cannot control the price of its product. E) makes a smaller economic profit than it would if it were a single-price monopoly. Answer: A Topic: Price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

10) Compared to setting a single price, if a firm can price discriminate it A) makes a larger economic profit. B) makes a lower economic profit. C) makes zero economic profit. D) has no change in its economic profit from when it set a single price. E) might increase, decrease, or not change its economic profit depending on whether as a single-price monopoly its marginal revenue curve was above, below, or the same as its demand curve. Answer: A Topic: Price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

11) The key idea behind price discrimination is to convert consumer surplus into A) a barrier to entry. B) economic profit. C) deadweight loss. D) monopoly power. E) total cost. Answer: B Topic: Price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

12) If a firm successfully price discriminates, it increases i. consumer surplus. ii. deadweight loss. iii. economic profit. A) i only B) ii only C) iii only D) i and iii E) i and ii Answer: C Topic: Price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

13) Arnie's Airlines is a monopoly airline that is able to price discriminate. If Arnie's decides to price discriminate, then A) Arnie's profit increases. B) consumer surplus increases. C) Arnie's revenues decrease. D) Arnie's sells fewer tickets. E) Arnie can no longer set a price that depends upon the buyer's willingness to pay. Answer: A Topic: Price discrimination Skill: Level 3: Using models Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

14) Arnie's Airlines decides to offer different fares to different customers for the same trip. Arnie's price discriminates because Arnie A) wants to convert consumer surplus to deadweight loss. B) wants to help some buyers with lower fares. C) has different costs for the same flight. D) wants to convert consumer surplus to economic profit. E) wants to convert producer surplus to consumer surplus. Answer: D Topic: Price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

15) Which of the following is true regarding price discrimination? i. It converts consumer surplus to economic profit. ii. A price discriminator must be a monopoly. iii. To be able to price discriminate, the firm must be able to identify different types of buyers. A) i and ii B) i and iii C) ii and iii D) ii only E) i, ii, and iii Answer: B Topic: Price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

16) Compared to the situation in which it sets a single price, a monopoly that price discriminates ________ its economic profit and ________ its output. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) increases; does not change Answer: A Topic: Price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

17) A "buy one, get one for half price" promotion is an example of A) price discriminating among units of a good. B) price discriminating among groups of buyers. C) a legal monopoly. D) a natural monopoly. E) marketing by a perfectly competitive firm designed to increase the firm's sales. Answer: A Topic: Price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

18) Why do publishers print the first edition of a book by a popular author in hard cover and not in paperback? A) Hard cover books are long lasting and paperbacks can rip easily. B) Readers who want to read the book as soon as it comes out will be willing to pay a higher price compared to those who can wait for the paperback edition. C) A hardcover is the publishers' way of rewarding the avid readers. D) Publishers are not sure of the demand. E) Publishers cannot price discriminate. Answer: B Topic: Price discrimination Skill: Level 5: Critical thinking Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

19) Which of the following statements about price discrimination is false? A) Price discrimination is a method for a seller to capture some consumer surplus. B) Compared to a single-price monopoly, the number of units sold increases when a monopoly price discriminates. C) Charging less for a second pizza that is identical to the first is an example of price discrimination. D) Price discrimination increases a monopoly's profit. E) All forms of price discrimination are illegal. Answer: E Topic: Price discrimination Skill: Level 3: Using models Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

20) If a firm is able to convert every dollar of consumer surplus to economic profit, the firm has achieved A) discrimination among units of a good. B) discrimination between groups of buyers. C) perfect price discrimination. D) perfect cost minimization. E) the normal amount of economic profit. Answer: C Topic: Perfect price discrimination Skill: Level 1: Definition Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

21) With perfect price discrimination, a monopoly can extract the ________ price each customer is willing to pay and thereby obtain the entire ________ surplus. A) maximum; consumer B) minimum; producer C) maximum; producer D) minimum; consumer E) None of the above answers is correct. Answer: A Topic: Perfect price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

22) When a firm is able to engage in perfect price discrimination, its marginal revenue curve A) lies below its demand curve. B) is the same as its demand curve. C) lies above its demand curve. D) is the same as its supply curve. E) is undefined because it does not exist. Answer: B Topic: Perfect price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

23) If a monopoly can perfectly price discriminate, then its marginal revenue curve will be A) the same as its demand curve. B) the same as its supply curve. C) the same as its marginal cost curve. D) a vertical line at the profit-maximizing quantity of output. E) undefined because it does not exist. Answer: A Topic: Perfect price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

24) Under which of the following does a monopoly's demand curve become its marginal revenue curve? A) all types of monopoly B) only single-price monopoly C) only perfect price discrimination D) only price discrimination on the basis of the number of units purchased E) any monopoly that price discriminates Answer: C Topic: Perfect price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

25) With perfect price discrimination ________, and production is expanded until marginal revenue equals ________. A) the firm's demand curve becomes its marginal revenue curve; marginal cost B) the firm's demand curve becomes its marginal revenue curve; average total cost C) the firm's marginal revenue curve bisects the angle with which demand intersects the price-axis; marginal cost D) the firm's marginal revenue curve bisects the angle with which demand intersects the price-axis; average total cost E) economic profit is maximized when the lowest price equals marginal cost; average total cost. Answer: A Topic: Perfect price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

26) Compared to a single-price monopoly, when a monopoly can perfectly price discriminate, the deadweight loss A) increases. B) decreases. C) remains the same. D) becomes infinite. E) probably changes, but more information is needed to determine if it increases, decreases, or remains constant. Answer: B Topic: Perfect price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

27) With perfect price discrimination, the level of output A) exceeds the efficient quantity. B) is the same as the amount produced by any monopoly that price discriminates. C) is the same as the amount produced in a perfectly competitive market. D) equals the amount produced by a single-price monopoly. E) is unknown. Answer: C Topic: Perfect price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

28) Under which of the following is consumer surplus zero? A) all types of monopoly B) only single-price monopoly C) only perfectly price-discriminating monopoly D) only price discrimination on the basis of the number of units purchased E) perfect competition Answer: C Topic: Perfect price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

29) The deadweight loss with perfect price discrimination is A) equal to the deadweight loss of a single-price monopoly. B) sometimes less than and sometimes more than the deadweight loss of a single-price monopoly. C) more than the deadweight loss of a single-price monopoly. D) zero. E) larger than the deadweight loss with perfect competition. Answer: D Topic: Perfect price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

30) Which of the following industries is most likely closest to achieving perfect price discrimination? A) the airline industry B) the wheat industry C) the textbook industry D) the toilet paper industry E) the soft drink industry Answer: A Topic: Eye on the U.S. economy, airline price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

31) Which of the following must a firm be able to do to successfully price discriminate? i. divide buyers into different groups according to their willingness to pay ii. prevent resale of the good or service iii. identify into which group (high willingness to pay or low willingness to pay) a buyer falls A) ii only B) i and ii C) i and iii D) iii only E) i, ii, and iii Answer: E Topic: Price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

32) Which of the following is (are) price discrimination? i. charging different prices based on differences in production cost ii. charging business flyers a higher airfare than tourists iii. charging more for the first pizza than the second A) i only B) ii only C) ii and iii D) i and iii E) i, ii, and iii Answer: C Topic: Price discrimination Skill: Level 1: Definition Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

33) When a monopoly price discriminates, it A) increases the amount of consumer surplus. B) decreases its economic profit. C) converts consumer surplus into economic profit. D) converts economic profit into consumer surplus. E) has no effect on the deadweight loss in the market. Answer: C Topic: Price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

34) If a monopoly is able to perfectly price discriminate, then consumer surplus is A) equal to zero. B) maximized. C) unchanged from what it is with a single-price monopoly. D) unchanged from what it is in a perfectly competitive industry. E) not zero but is less than with a single-price monopoly. Answer: A Topic: Perfect price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

35) With perfect price discrimination, the quantity of output produced by a monopoly is ________ the quantity produced by a perfectly competitive industry. A) greater than but not equal to B) less than C) equal to but not greater than D) not comparable to E) either greater than or equal to Answer: C Topic: Perfect price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.4 Status: Old AACSB: Analytical thinking

12.5 Monopoly Regulation 1) ________ natural monopolies is a commonly used, potential solution to the problems presented by natural monopolies. A) Breaking up firms that are B) Regulating C) Outlawing price discrimination by D) Refusing to grant patents to E) Giving incentives to firms to become Answer: B Topic: Regulation Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

2) The social interest theory of regulation is defined as the A) use of regulations to maximize firms' profits. B) use of regulations to assure an efficient use of resources. C) removal of regulations on business activities. D) implementation and removal of regulations on the cable TV industry. E) use of rate of return regulation. Answer: B Topic: Social interest theory Skill: Level 1: Definition Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

3) The social interest theory of regulation is that A) regulators help producers maximize economic profit. B) regulation seeks to increase the government's revenue. C) regulation causes producers to produce at a point where they are earning normal profits. D) regulation seeks an efficient use of resources. E) regulation focuses on the consumers' interests and ignores producers' interests. Answer: D Topic: Social interest theory Skill: Level 1: Definition Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

4) The social interest theory of regulation assumes that A) regulation is against the public interest. B) the public is indifferent to regulation. C) regulation seeks an efficient use of resources. D) the public cares deeply about regulation. E) regulators are captured by the firms being regulated. Answer: C Topic: Social interest theory Skill: Level 1: Definition Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

5) The social interest theory of regulation asserts that regulation A) seeks an efficient use of resources. B) is aimed at keeping prices as low as possible. C) helps firms maximize economic profit. D) of a natural monopoly must be done using rate of return regulation. E) does not work for society as well as would allowing the firms freedom from regulation. Answer: A Topic: Social interest theory Skill: Level 1: Definition Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

6) Who receives benefits if regulation works according to social interest theory? A) the entire economy B) cohesive interest groups C) everyone not in the cohesive interest group D) the regulators E) It is impossible to determine who benefits. Answer: A Topic: Social interest theory Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

7) Under the social interest theory of regulation, the goal of regulating natural monopolies is A) to provide a larger, though not maximum, profit for the firms. B) to use average cost pricing. C) to provide an outcome similar to the competitive outcome. D) to provide a the maximum profit for the firms. E) None of the above answers is correct. Answer: C Topic: Social interest theory Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

8) Capture theory is A) an economic theory of regulation. B) a model about perfect competition. C) the same as the public interest theory. D) the theory that regulators capture firms' attention by dictating a very low price. E) a theory that explains behavior of competitive firms. Answer: A Topic: Capture theory Skill: Level 1: Definition Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

9) The theory that regulation helps producers to maximize profit is the A) social interest theory. B) consumer surplus theory. C) antitrust theory. D) capture theory. E) oligopoly theory of regulatory bodies. Answer: D Topic: Capture theory Skill: Level 1: Definition Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

10) The capture theory of regulation is that regulations A) help producers to maximize economic profits. B) mean producers suffer losses. C) result in diseconomies of scale. D) benefit society, not producers. E) benefit the regulators, not the producers or the consumers. Answer: A Topic: Capture theory Skill: Level 1: Definition Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

11) The capture theory of regulation assumes that regulation benefits A) producers. B) consumers. C) government. D) the general public. E) the regulators. Answer: A Topic: Capture theory Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

12) The capture theory of regulation predicts that A) regulation helps producers to maximize profits. B) regulators capture the firm's economic profit and transfer it to consumers as consumer surplus. C) regulators eliminate the deadweight loss a monopoly can create. D) resources are used efficiently. E) regulators capture the firm's economic profit and transfer it to themselves. Answer: A Topic: Capture theory Skill: Level 1: Definition Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

13) The capture theory of regulation is defined as A) the use of regulations to assure the efficient use of resources. B) the constant reapplication of regulation on the cable TV industry. C) the use of regulation to assist producers to maximize profits. D) the removal of regulations on business activities. E) regulation that focuses on consumers' interests and ignores producers' interests. Answer: C Topic: Capture theory Skill: Level 1: Definition Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

14) Suppose that a regulatory agency helps producers maximize economic profit. This type of regulation coincides with A) a natural monopoly. B) a marginal cost pricing rule. C) an average cost pricing rule. D) the capture theory of regulation. E) the social interest theory of regulation. Answer: D Topic: Capture theory Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

15) The capture theory of regulation predicts that regulations bring ________ to producers and impose ________ on any individual consumer. A) small benefits; small costs B) small benefits; large costs C) large benefits; small costs D) large benefits; large costs E) large benefits; no costs Answer: C Topic: Capture theory Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

16) When economies of scale exist so that one firm can meet the entire market demand at a lower average total cost than two or more firms, A) a natural monopoly develops. B) the monopoly encounters competition. C) economic profit is reduced to zero. D) the monopoly converts all of the consumer surplus into economic profit. E) there is always the opportunity to price discriminate. Answer: A Topic: Natural monopoly Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

17) A firm that is a natural monopoly A) can supply the entire market at a lower average total cost than two or more firms. B) has very small fixed costs and very large marginal costs. C) is infrequently regulated because having one firm serve the market is economically sound. D) cannot make an economic profit if it is not regulated because it must serve a very large customer base. E) produces the efficient quantity of output when it is not regulated. Answer: A Topic: Natural monopoly Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

18) A natural monopoly A) sells to a single buyer. B) sets price equal to marginal revenue. C) is a firm than can supply the market at lower average total cost than two or more firms. D) produces a natural resource. E) faces a horizontal demand curve. Answer: C Topic: Natural monopoly Skill: Level 1: Definition Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

19) Today, you might be buying from a regulated natural monopoly when you purchase A) a car, a truck, or a bicycle. B) a computer, a phone, or a camera. C) natural gas or electricity. D) a house, a condominium, or a plot of land. E) food in a grocery store or in a restaurant. Answer: C Topic: Natural monopoly Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

20) Fixed costs are ________ in a natural monopoly, so average total cost ________ as output increases. A) large; increases B) large; decreases C) small; increases D) small; decreases E) nonexistent; decreases Answer: B Topic: Natural monopoly Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

21) A marginal cost pricing rule sets marginal cost equal to A) minimum average variable cost. B) price. C) average cost. D) marginal revenue. E) the smaller of price or marginal revenue. Answer: B Topic: Natural monopoly, marginal cost pricing rule Skill: Level 1: Definition Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

22) For a regulated natural monopoly, the marginal cost pricing rule is a rule that sets price ________ marginal cost and achieves an ________ amount of output. A) equal to; efficient B) above; inefficient C) below; efficient D) equal to; inefficient E) above; efficient Answer: A Topic: Natural monopoly, marginal cost pricing rule Skill: Level 1: Definition Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

23) How should a natural monopoly be regulated under the social interest theory of regulation? A) by setting price equal to the average cost of production B) by allowing a price that maximizes the profit of the natural monopoly C) by using a marginal cost pricing rule D) by subsidizing other producers to compete with the monopoly E) by using rate of return regulation Answer: C Topic: Natural monopoly, marginal cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

24) The outcome of regulating a natural monopoly using the marginal cost pricing rule is A) that the firm makes a normal profit. B) that the firm maximizes its profit. C) that consumer surplus is less than what it would be if the firm maximized its profit. D) an efficient level of production. E) that the firm makes an economic profit. Answer: D Topic: Natural monopoly, marginal cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

25) For a natural monopoly, the efficient quantity is produced when the firm is regulated so that A) P = ATC. B) P > ATC. C) P = MC. D) P > MC. E) P < MC. Answer: C Topic: Natural monopoly, marginal cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

26) If a natural monopoly is regulated using A) a marginal cost pricing rule, the firm maximizes its profit. B) an average cost pricing rule, the firm incurs an economic loss. C) a total cost pricing rule, the firm will exit the industry. D) a marginal cost pricing rule, the firm incurs an economic loss. E) an average cost pricing rule, the firm maximizes its profit. Answer: D Topic: Natural monopoly, marginal cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

27) Under a marginal cost pricing rule, a natural monopoly A) makes a reasonable profit. B) makes an economic profit. C) earns accounting profits, but breaks even in economic terms. D) incurs an economic loss. E) makes a normal profit, but it cannot be determined whether or not it makes an accounting profit. Answer: D Topic: Natural monopoly, marginal cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

28) A natural monopoly that is regulated to set price equal to marginal cost A) makes an economic profit. B) makes zero economic profit. C) incurs an economic loss. D) could make an economic loss, an economic profit, or zero economic profit. E) makes zero normal profit. Answer: C Topic: Natural monopoly, marginal cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

29) Which of the following explains why the marginal cost pricing rule results in an economic loss for a natural monopoly? A) The ATC curve is downward sloping throughout the relevant range, therefore the MC is lower than the ATC. B) The demand curve is downward sloping, therefore price falls as quantity increases. C) The MC is constant and equal to price. D) Because output is determined by setting MC equal to the price, consumer surplus is maximized. E) The firm's MR is always less than its price. Answer: A Topic: Natural monopoly, marginal cost pricing rule Skill: Level 3: Using models Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

30) Regulated natural monopolies can obey a marginal cost pricing rule and still make a normal profit by engaging in A) least cost pricing and average cost pricing. B) price discrimination and two-part tariff pricing. C) zero profit pricing. D) profit-maximizing pricing. E) None of the above answers is correct because a natural monopoly regulated using a marginal cost pricing rule always incurs an economic loss. Answer: B Topic: Natural monopoly, marginal cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

31) Which of the following is an example of a two-part tariff? A) price discrimination based on the buyers' willingness to pay B) charging a hookup fee plus a monthly charge equal to marginal cost C) higher sales tax on specific products D) different prices based on the cost of production and quantity bought E) A regulated firm uses marginal cost pricing for some customers and average cost pricing for other customers. Answer: B Topic: Natural monopoly, marginal cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

32) One way a company can cover its costs and, at the same time, obey a marginal cost pricing rule is by A) choosing output levels according to the profit-maximizing rule. B) using price discrimination. C) increasing production. D) decreasing production. E) decreasing its marginal cost but not changing its average total cost. Answer: B Topic: Natural monopoly, marginal cost pricing rule Skill: Level 3: Using models Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

33) If a regulatory agency sets the price equal to marginal cost for a natural monopoly, the A) government might have to provide a subsidy to the firm to keep it in business. B) price is the same as the unregulated monopoly price. C) firm makes an economic profit, though not the maximum economic profit. D) firm makes the maximum economic profit. E) firm makes zero economic profit. Answer: A Topic: Natural monopoly, marginal cost pricing rule Skill: Level 3: Using models Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

34) What problem is caused by subsidizing a natural monopoly regulated using a marginal cost pricing rule? A) The regulated firm ends up earning an economic profit. B) Consumers pay too much for the product of the monopoly. C) This policy is a two-part tariff, which creates inefficiency. D) The taxes required to gain the revenue used as the subsidy result in a deadweight loss that subtracts from gains in efficiency which result from use of the marginal cost pricing rule. E) The regulated firm goes out of business if it is subsidized. Answer: D Topic: Natural monopoly, marginal cost pricing rule Skill: Level 3: Using models Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

35) With a natural monopoly, A) no regulation is necessary because it is a natural monopoly. B) regulation takes the form of forcing competition from new firms. C) regulation takes the form of forcing the company out of business. D) regulation can take the form of average cost pricing to allow coverage of costs. E) regulation takes the form of breaking the company into several competing firms. Answer: D Topic: Natural monopoly, average cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

36) When a firm is regulated so it uses an average cost pricing rule, the price A) exceeds average total cost. B) equals marginal cost. C) is less than marginal cost. D) equals average total cost. E) equals marginal revenue. Answer: D Topic: Natural monopoly, average cost pricing rule Skill: Level 1: Definition Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

37) For a natural monopoly to cover its total cost, its price must equal its A) average total cost. B) marginal cost. C) demand. D) total fixed cost. E) marginal revenue. Answer: A Topic: Natural monopoly, average cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

38) When used with a natural monopoly, an average cost pricing rule results in A) the efficient level of output. B) economic losses for the firm. C) the need for government to subsidize the natural monopoly. D) zero economic profit for the firm. E) the firm making an economic profit. Answer: D Topic: Natural monopoly, average cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

39) With an average cost pricing rule, the quantity produced by the natural monopoly is ________ the quantity produced with a marginal cost pricing rule. A) greater than B) less than C) equal to D) greater than in the long run and less than in the short run than E) not comparable to Answer: B Topic: Natural monopoly, average cost pricing rule Skill: Level 1: Definition Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

40) A natural monopoly's output is less if it is regulated with A) a marginal cost pricing rule than if it is unregulated. B) an average cost pricing rule than if it is unregulated. C) an average cost pricing rule than if it is regulated with a marginal cost pricing rule. D) a marginal cost pricing rule than if it is regulated with an average cost pricing rule. E) More information about the firm's demand is needed to determine how its output depends on what regulation it faces. Answer: C Topic: Natural monopoly, marginal cost and average cost pricing rules Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

41) If we compare regulating a natural monopoly using a marginal cost pricing rule to using an average cost pricing rule, we see that output is A) greater with marginal cost pricing, but average cost pricing allows for costs to be covered. B) the same under both cases, but the profit is greater with average cost pricing. C) greater under average cost pricing, but profits are greater with marginal cost pricing. D) the same but profits are greater with marginal cost pricing. E) greater with marginal cost pricing, and the firm's profit is larger with marginal cost pricing. Answer: A Topic: Natural monopoly, marginal cost and average cost pricing rules Skill: Level 3: Using models Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

42) Gene's Car Wash is a natural monopoly. To wash 100 cars a week, if Gene is unregulated, he would charge a price of $10. Gene's average total cost for washing 100 cars is $8, his average variable cost is $6, and his marginal cost is $4. If Gene is regulated using a marginal cost pricing rule, the price he is allowed to charge to wash 100 cars is A) $10. B) $8. C) $6. D) $4. E) $400. Answer: D Topic: Natural monopoly, marginal cost and average cost pricing rules Skill: Level 3: Using models Section: Checkpoint 12.5 Status: Old AACSB: Analytical thinking

43) Gene's Car Wash is a natural monopoly. To wash 100 cars a week, if Gene is unregulated, he would charge a price of $10. Gene's average total cost for washing 100 cars is $8, his average variable cost is $6, and his marginal cost is $4. If Gene is regulated using an average cost pricing rule, the price he is allowed to charge to wash 100 cars is A) $10. B) $8. C) $6. D) $4. E) $400. Answer: B Topic: Natural monopoly, marginal cost and average cost pricing rules Skill: Level 3: Using models Section: Checkpoint 12.5 Status: Old AACSB: Analytical thinking

44) The above figure represents the market for cable television in Oakland, Florida. Time Warner Communications (TWC) is the sole provider of cable television to the residents of this Central Florida community. If TWC is left unregulated, how many households in Oakland are served? A) 20,000 B) 30,000 C) 40,000 D) 50,000 E) 10,000 Answer: A Topic: Natural monopoly, marginal cost pricing rule Skill: Level 3: Using models Section: Checkpoint 12.5 Status: Old AACSB: Analytical thinking

45) The above figure represents the market for cable television in Oakland, Florida. Time Warner Communications (TWC) is the sole provider of cable television to the residents of this Central Florida community. If TWC is left unregulated, what is the price of cable television in Oakland? A) $40 B) $30 C) $20 D) $10 E) $50 Answer: B Topic: Natural monopoly, average cost pricing rule Skill: Level 3: Using models Section: Checkpoint 12.5 Status: Old AACSB: Analytical thinking

46) The above figure represents the market for cable television in Oakland, Florida. Time Warner Communications (TWC) is the sole provider of cable television to the residents of this Central Florida community. If TWC operated under a marginal cost pricing rule, how many households in Oakland are served? A) 20,000 B) 30,000 C) 40,000 D) 50,000 E) 10,000 Answer: C Topic: Natural monopoly, marginal cost pricing rule Skill: Level 3: Using models Section: Checkpoint 12.5 Status: Old AACSB: Analytical thinking

47) The above figure represents the market for cable television in Oakland, Florida. Time Warner Communications (TWC) is the sole provider of cable television to the residents of this Central Florida community. If TWC operated under a marginal cost pricing rule, what is the price of cable television in Oakland? A) $40 B) $30 C) $20 D) $10 E) $0 Answer: D Topic: Natural monopoly, marginal cost pricing rule Skill: Level 3: Using models Section: Checkpoint 12.5 Status: Old AACSB: Analytical thinking

48) The above figure represents the market for cable television in Oakland, Florida. Time Warner Communications (TWC) is the sole provider of cable television to the residents of this Central Florida community. If TWC operated under an average cost pricing rule, how many households in Oakland are served? A) 20,000 B) 30,000 C) 40,000 D) 50,000 E) None of the above answers is correct. Answer: B Topic: Natural monopoly, marginal cost pricing rule Skill: Level 3: Using models Section: Checkpoint 12.5 Status: Old AACSB: Analytical thinking

49) The above figure represents the market for cable television in Oakland, Florida. Time Warner Communications (TWC) is the sole provider of cable television to the residents of this Central Florida community. If TWC operated under an average cost pricing rule, what is the price of cable television in Oakland? A) $40 B) $30 C) $20 D) $10 E) $50 Answer: C Topic: Natural monopoly, average cost pricing rule Skill: Level 3: Using models Section: Checkpoint 12.5 Status: Old AACSB: Analytical thinking

50) The above figure represents the market for cable television in Oakland, Florida. Time Warner Communications (TWC) is the sole provider of cable television to the residents of this Central Florida community. Compared to a marginal cost pricing rule, under an average cost pricing rule, TWC ________ output by ________ households. A) increases; 20,000 B) decreases; 10,000 C) increases; 30,000 D) decreases; 50,000 E) decreases; 40,000 Answer: B Topic: Natural monopoly, marginal cost and average cost pricing rules Skill: Level 3: Using models Section: Checkpoint 12.5 Status: Old AACSB: Analytical thinking

51) Rate of return regulation is designed to allow a natural monopoly to A) make an economic profit. B) make zero economic profit. C) underestimate its average cost. D) compete with any firm entering the market. E) make zero normal profit. Answer: B Topic: Natural monopoly, rate of return regulation Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

52) When a regulatory agency uses rate of return regulation, the A) agency is able to eliminate the deadweight loss. B) firm's managers have an incentive to inflate the firm's costs. C) regulated firm's profit must be maximized for the market to be efficient. D) regulated firm must receive a government subsidy. E) the agency is using a form of marginal cost pricing. Answer: B Topic: Natural monopoly, rate of return regulation Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

53) Managers of a natural monopoly regulated using rate of return regulation have an incentive to A) exaggerate the firm's costs. B) underestimate the firm's costs. C) minimize the monopoly's deadweight loss. D) make zero economic profit. E) exaggerate the firm's profit. Answer: A Topic: Natural monopoly, rate of return regulation Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

54) A natural monopoly A) faces more competition after regulation. B) might exaggerate its costs if it is regulated using rate of return regulation. C) might falsely minimize its costs if it is regulated using rate of return regulation. D) might falsely minimize its costs if it is regulated using a marginal cost pricing rule. E) is allowed to maximize its profit under a marginal cost pricing rule. Answer: B Topic: Natural monopoly, rate of return regulation Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

55) One of the tendencies that is common among firms regulated using rate of return regulation is to A) increase production to an inefficient level. B) inflate the costs of production. C) incur an economic loss. D) understate the costs of production. E) overstate their total revenue. Answer: B Topic: Natural monopoly, rate of return regulation Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

56) When regulated using rate of return regulation, who benefits from the practice of some natural monopolies to count sumptuous offices, free baseball tickets, golf excursions, and limousines as costs of production? A) stockholders B) managers of the monopoly C) customers of the monopoly D) regulators of the industry E) None of the above answers is correct. Answer: B Topic: Natural monopoly, rate of return regulation Skill: Level 3: Using models Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

57) Price cap regulation is defined as regulation that A) imposes a price ceiling on the regulated firm. B) encourages firms to exaggerate costs to increase profits. C) uses marginal cost pricing to ensure efficient output. D) uses average cost pricing to ensure costs are covered. E) is essentially the same as rate of return regulation. Answer: A Topic: Price cap regulation Skill: Level 1: Definition Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

58) Price cap regulation is regulation that A) is a marginal cost pricing rule. B) is an average cost pricing rule. C) imposes a price ceiling on the regulated firm. D) has the same incentive effects as does rate of return regulation. E) is the same as allowing the firm to operate as if it was totally unregulated. Answer: C Topic: Price cap regulation Skill: Level 1: Definition Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

59) Price cap regulation A) does not provide incentives to firms to minimize their costs because firms cannot change prices. B) sets the maximum price these firms can charge. C) gives firms the incentive to exaggerate their costs. D) Both answers A and C are correct. E) Both answers A and B are correct. Answer: B Topic: Price cap regulation Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

60) Price cap regulation involves A) setting the monopoly's price equal to its average total cost. B) setting the monopoly's price equal to its profit-maximizing price. C) setting a maximum price the monopoly may charge. D) assuming a natural monopoly will not charge a higher than profit-maximizing price. E) setting the monopoly's price equal to its marginal cost. Answer: C Topic: Price cap regulation Skill: Level 1: Definition Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

61) The process of price cap regulation includes which of the following? i. a price ceiling ii. marginal cost pricing iii. average cost pricing A) i only B) ii only C) i and ii D) ii and iii E) i and iii Answer: A Topic: Price cap regulation Skill: Level 1: Definition Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

62) Under earnings-sharing regulation, if a firm's profits ________ above a certain level, they must be shared with the firm's ________. A) rise; customers B) fall; customers C) rise; suppliers D) fall; suppliers E) rise; competitors Answer: A Topic: Earnings sharing regulation Skill: Level 1: Definition Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

63) Earning-sharing regulation involves A) setting the monopoly's price equal to its average total cost. B) requiring that the monopoly share its profits with its customers if the profits rise above a certain level. C) setting a maximum price the monopoly may charge and maintaining it for many years. D) assuming a natural monopoly will not charge a higher than profit-maximizing price. E) setting the monopoly's price equal to its marginal cost. Answer: B Topic: Earnings sharing regulation Skill: Level 1: Definition Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

64) The theory that regulation seeks an efficient use of resources is the A) social interest theory. B) producer surplus theory. C) consumer surplus theory. D) capture theory. E) deadweight loss theory. Answer: A Topic: Social interest theory Skill: Level 1: Definition Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

65) Which of the following best describes the capture theory of regulation? i. Regulation seeks an efficient use of resources. ii. Regulation is aimed at keeping prices as low as possible. iii. Regulation helps firms maximize economic profit. A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: C Topic: Capture theory Skill: Level 1: Definition Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

66) At a level of output when regulators require a natural monopoly to set a price that is equal to marginal cost, the firm A) makes zero economic profit. B) makes an economic profit. C) incurs an economic loss. D) makes a normal-economic profit. E) makes either zero economic profit or an economic profit, depending on whether the firm's average total cost equals or is less than its marginal cost. Answer: C Topic: Natural monopoly, marginal cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

67) If a natural monopoly is told to set price equal to average cost, then the firm A) is not able to set marginal revenue equal to marginal cost. B) automatically also sets price equal to marginal cost. C) will make a substantial economic profit. D) will incur an economic loss. E) sets a price that is lower than its marginal cost. Answer: A Topic: Natural monopoly, average cost pricing rule Skill: Level 3: Using models Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

12.6 Chapter Figures

The figure above shows a firm's demand and average total cost curves. 1) The situation in the figure above creates a barrier to entry for a second firm because i. a second firm that produced as many kilowatt-hours as the first firm would see the market price fall beneath its cost and would incur an economic loss. ii. a second firm that produced fewer kilowatt-hours than the first firm would have to charge a higher price and would not gain many customers. iii. the first firm's average total cost curve indicates it has been given a patent for the product. A) i only B) ii only C) iii only D) i and ii E) i and iii Answer: D Topic: Natural monopoly Skill: Level 3: Using models Section: Checkpoint 12.1 Status: Old AACSB: Analytical thinking

The figure above shows a monopoly's total revenue and total cost curves. 2) Using the figure above, which of the following statements is (are) correct? i. MR = MC when 3 haircuts are produced. ii. If the firm charges each customer the same price for a haircut, the price of a haircut is $42. iii. The firm's MC equals $30. A) i only B) ii only C) i and ii D) i and iii E) None of the above is correct. Answer: A Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

3) Using the figure above, which of the following statements are correct? i. MR = MC = $42 when 3 haircuts are produced. ii. If the firm charges each customer the same price for a haircut, the price of a haircut is $14. iii. The firm's economic profit is $12. A) i only B) ii only C) i and ii D) i and iii E) i, ii, and iii Answer: D Topic: Monopolistic competition, output and price Skill: Level 4: Applying models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

4) Using the figure above, which of the following statements are correct? i. When 3 haircuts are produced, the firm's ATC is $10. ii. If the firm charges each customer the same price for a haircut, the price of a haircut is $14. iii. The firm is NOT a perfect competitor. A) i only B) ii only C) i and ii D) i and iii E) i, ii, and iii Answer: E Topic: Monopolistic competition, output and price Skill: Level 4: Applying models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

The above figure shows a market. 5) If the market was a monopoly, the quantity would be ________ and the price would be ________; if the market tis perfectly competitive, the quantity would be ________ and the price would be ________. A) Q1; P1; Q2; P2 B) Q2; P1; Q1; P2 C) Q1; P1; Q2; P1 D) Q1; P2; Q2; P1 E) Q1; P2; Q1; P1 Answer: D Topic: Monopoly and competition compared Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Analytical thinking

6) The figure above shows that monopoly is ________ because it produces a level of output at which ________. A) inefficient; marginal benefit equals marginal cost B) efficient; marginal benefit equals marginal cost C) efficient; marginal benefit exceeds marginal cost D) inefficient; marginal benefit exceeds marginal cost E) efficient; producer surplus is maximized Answer: D Topic: Monopoly and competition compared Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Analytical thinking

7) If the market in the figure above is a profit-maximizing single-price monopoly, consumer surplus is the area A) ABH. B) BFGH. C) ACG. D) BCD. E) ACE. Answer: A Topic: Monopoly and competition compared, surpluses Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Analytical thinking

8) If the market in the figure above is perfectly competitive, consumer surplus is the area A) ABH. B) BFGH. C) ACG. D) BCD. E) ACE. Answer: C Topic: Monopoly and competition compared, surpluses Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Analytical thinking

9) If the market in the figure above is a profit-maximizing single-price monopoly, the deadweight loss is the area A) ABH. B) BFGH. C) ACG. D) BCD. E) ACE. Answer: D Topic: Monopoly and competition compared, surpluses Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Analytical thinking

10) If the market in the figure above is a profit-maximizing single-price monopoly, the producer surplus is the area A) ABH. B) BFGH. C) ACG. D) BDEH. E) ACE. Answer: D Topic: Monopoly and competition compared, surpluses Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Analytical thinking

11) If the market in the figure above changes from perfectly competitive to a profit-maximizing singleprice monopoly, the amount of the gain in producer surplus is the area A) ABH. B) BFGH. C) ACG. D) BDEH. E) ACE. Answer: B Topic: Monopoly and competition compared, surpluses Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Analytical thinking

The figure above shows a natural monopoly regulated using a marginal cost pricing rule. 12) In the figure above, an A) efficient output results, but the firm incurs a loss per household which must be subsidized in some way. B) inefficient output results, though the firm covers its costs. C) efficient output results, though marginal costs exceed average total costs. D) inefficient output results because the firm cannot cover its costs. E) efficient output results because consumer surplus is maximized. Answer: A Topic: Natural monopoly, marginal cost pricing rule Skill: Level 3: Using models Section: Checkpoint 12.5 Status: Old AACSB: Analytical thinking

13) In the figure above, the length of the double sided arrow is the A) consumer surplus. B) deadweight loss. C) producer surplus. D) economic loss per unit. E) economic profit. Answer: D Topic: Natural monopoly, marginal cost pricing rule Skill: Level 3: Using models Section: Checkpoint 12.5 Status: Old AACSB: Analytical thinking

14) In the figure above, the dark triangle is the A) consumer surplus. B) deadweight loss. C) producer surplus. D) total cost. E) economic profit. Answer: A Topic: Natural monopoly, marginal cost pricing rule Skill: Level 3: Using models Section: Checkpoint 12.5 Status: Old AACSB: Analytical thinking

The figure above shows a natural monopoly. 15) In the figure above, if the firm is regulated using an average cost pricing rule, the firm A) avoids an economic loss, but produces less than the efficient quantity and creates a deadweight loss. B) incurs an economic loss, but produces the efficient quantity and creates a deadweight loss. C) avoids an economic loss, is able to produce the efficient quantity, and therefore avoids creating a deadweight loss. D) avoids an economic loss, produces the efficient quantity, and creates a deadweight loss. E) incurs an economic loss, produces the efficient quantity, and avoids creating a deadweight loss. Answer: A Topic: Natural monopoly, average cost pricing rule Skill: Level 3: Using models Section: Checkpoint 12.5 Status: Old AACSB: Analytical thinking

16) In the figure above, if the firm is regulated using an average cost pricing rule, the deadweight loss created is equal to the area of A) ABG. B) BEFG. C) BCFG. D) BCE. E) None of the above because there is no deadweight loss created. Answer: D Topic: Natural monopoly, average cost pricing rule Skill: Level 3: Using models Section: Checkpoint 12.5 Status: Old AACSB: Analytical thinking

17) In the figure above, if the firm is regulated using a marginal cost pricing rule, the deadweight loss created is equal to the area of A) ABG. B) BEFG. C) BCFG. D) BCE. E) None of the above because there is no deadweight loss created. Answer: E Topic: Natural monopoly, marginal cost pricing rule Skill: Level 3: Using models Section: Checkpoint 12.5 Status: Old AACSB: Analytical thinking

18) In the figure above, if the firm is regulated using an average cost pricing rule, the consumer surplus created is equal to the area of A) ABG. B) BEFG. C) BCFG. D) BCE. E) None of the above because there is no consumer surplus created. Answer: A Topic: Natural monopoly, average cost pricing rule Skill: Level 3: Using models Section: Checkpoint 12.5 Status: Old AACSB: Analytical thinking

19) In the figure above, if the firm is regulated using a marginal cost pricing rule, the consumer surplus created is equal to the area of A) ABG. B) ACF. C) BCFG. D) BCE. E) None of the above because there is no consumer surplus created. Answer: B Topic: Natural monopoly, marginal cost pricing rule Skill: Level 3: Using models Section: Checkpoint 12.5 Status: Old AACSB: Analytical thinking

20) In the figure above, if the firm is regulated using an average cost pricing rule, the economic loss created is equal to the area of A) ABG. B) BEFG. C) BCFG. D) BCE. E) None of the above because there is no economic loss created. Answer: E Topic: Natural monopoly, average cost pricing rule Skill: Level 3: Using models Section: Checkpoint 12.5 Status: Old AACSB: Analytical thinking

12.7 Integrative Questions 1) A monopoly can arise when A) there are diseconomies of scale. B) there are barriers to entry and no close substitutes for the good being produced. C) a firm cannot price discriminate. D) firms engage in rent seeking. E) a firm must set MR equal to MC in order to maximize its profit. Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

2) The total revenue test using the price elasticity of demand A) explains why monopolies will only operate on the elastic portion of their demand curve. B) explains why monopolies will only operate on the inelastic portion of their demand curves. C) demonstrates why a monopoly can earn an economic profit in the long run. D) determines whether a monopoly can perfectly price discriminate or not. E) cannot be used for a price discriminating monopoly. Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking

3) A monopoly definitely incurs an economic loss if A) it produces where its marginal revenue equals its marginal cost. B) its average total cost is greater than price. C) it cannot perfectly price discriminate. D) it price discriminates. E) The statement errs because a monopoly cannot incur an economic loss. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

4) A difference between a perfectly competitive industry and a monopoly is that A) in the long run, firms in a perfectly competitive industry make zero economic profit and a monopoly can make an economic profit. B) a firm in a perfectly competitive industry can perfectly price discriminate but a monopoly cannot. C) only monopolies have an incentive to maximize profit. D) perfectly competitive firms can have a public franchise. E) a barrier to entry protects perfectly competitive firms in the short run and protects a monopoly in the long run. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

5) If a monopoly engages in rent seeking, i. its average total cost curve is lower than otherwise. ii. it might or might not make an economic profit depending on how many other competitors also are rent seeking. iii. it necessarily incurs an economic loss. A) i only B) ii only C) iii only D) i and ii E) i and iii Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

6) If a monopoly can perfectly price discriminate, A) all the demanders pay one price. B) it minimizes its profit. C) it produces the same amount of output as would be produced if the market was a perfectly competitive industry. D) it produces less output than would be produced if the market was a perfectly competitive industry. E) it creates the same amount of consumer surplus as would be created if the market was a perfectly competitive industry. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

7) Which of the following is NOT a requirement for a firm to be able to price discriminate? A) monopoly power B) groups of customers with different willingness to pay for the good C) economies of scale D) ability to keep the members of different customer groups separate E) ability to prevent resales of the product by customers Answer: C Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

8) Monopolies arise when there are A) many substitutes but there are no barriers to entry. B) no close substitutes and there are no barriers to entry. C) no close substitutes and there are barriers to entry. D) many substitutes and there barriers to entry. E) None of the above answers are correct because the existence of a monopoly has nothing to do with the presence or absence of barriers to entry. Answer: C Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

9) The assumption that regulation relentlessly seeks out deadweight loss and seeks to eliminate it is called the A) social interest theory of regulation. B) capture theory of regulation. C) Coase theory of regulation. D) socially optimal theory of regulation. E) predatory theory of regulation. Answer: A Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking

10) The figure above shows a natural monopoly that the government must regulate. If the government uses ________, the firm produces ________ units per week. A) the HHI; 50 B) an average cost pricing rule; 30 C) rate of return regulation; 40 D) social interest regulation; 30 E) a marginal cost pricing rule; 20 Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

11) The figure above shows a natural monopoly that the government must regulate. Which of the following pairs most likely results in similar outcomes? A) marginal cost pricing and rate of return regulation B) marginal cost pricing and a two-part tariff C) average cost pricing and rate of return regulation D) predatory pricing and price caps E) marginal cost pricing and price cap regulation Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

12.8 Essay: Monopoly and How it Arises 1) What are the conditions that define a monopoly? Answer: There is only one firm producing a good or service with no close substitutes for the good or service sold and there are barriers to entry that prevent competing firms from entering the market. Topic: Monopoly Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

2) Describe the three general types of barriers. Answer: Barriers to entry can be divided into legal barriers, ownership barriers, natural barriers. Legal barriers occur when government action blocks competition in a market. For instance, the government could grant a public franchise, government license, patent, or copyright. In all cases, the government action prevents other firms from entering the market. Ownership barriers occur when a firm buys a significant portion of a natural resource. For instance, DeBeers controls over 80 percent of the world's diamond market. The last barrier to entry is a natural barrier. A natural barrier to entry occurs when economies of scale are so large that they make it possible for one firm to meet the entire market demand at a lower price than could two or more firms. In this case, the market will "naturally" evolve to become a monopoly as a larger firm uses its cost advantage to cut its price and drive its high-cost, smaller competitors out of business. Topic: Monopoly Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Written and oral communication

3) Are some monopolies created by government legislation that gives a firm the unique right to produce a good or service? Answer: Yes, some monopolies are created by government legislation, such as patent or copyright laws and the granting of public franchises. Monopolies that are created because of legal barriers to entry are called legal monopolies. Topic: Legal barriers to entry Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

4) What is a legal barrier to entry? Answer: A legal barrier to entry arises when entry is restricted because the government has granted a franchise, patent, license, or copyright to one person or firm. Topic: Legal barriers to entry Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

5) Competition keeps prices lower for consumers. So why do we have patent laws? Answer: Patent laws are necessary to promote innovation. Without such laws an inventor might spend countless hours and a great deal of money developing a new product, put the product out into the market only to have a competitor copy it without incurring any of the time or costs to develop it. In the long run, this prospect would serve as a mighty disincentive to innovate and so would drastically reduce the supply of new products that come into the market. Topic: Legal barriers to entry Skill: Level 3: Using models Section: Checkpoint 12.1 Status: Old AACSB: Written and oral communication

6) What is price discrimination? Answer: A firm price discriminates when it sells different units of a good or service for different prices. For instance, a firm price discriminates when it sells its good or service to different people for different prices, such as when airlines charge different customers different fares for the same flight. A firm also price discriminates when it sells different units of its product to the same person for different prices, such as when an ice cream store charges a lower price for a second scoop of ice cream. Topic: Price discrimination Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Written and oral communication

12.9 Essay: Single-Price Monopoly 1) A monopoly, unlike a perfect competitor, has total control in its market because it is the single producer. Why, then, must a single-price monopoly decrease its price if it wants to increase its output? Answer: Because the monopoly does control the market, the monopoly sets the price at the maximum level that sells all the output the monopoly produces. This maximum price is determined from the demand for the product. The downward sloping market demand curve shows that the only way to increase the quantity consumers will buy is to lower the price. As a result, when a monopoly wants to produce more output, demanders will not buy the additional output at the initial price. As the downward sloping demand curve indicates, in order to sell the extra production, the monopolist must lower its price. Topic: Demand Skill: Level 4: Applying models Section: Checkpoint 12.2 Status: Old AACSB: Written and oral communication

2) What is the relationship between the marginal revenue curve and the demand curve for a single-price monopoly? Answer: For a single-price monopoly, price exceeds marginal revenue. The price is obtained from the demand curve, so for a single-price monopoly, the marginal revenue curve lies below the demand curve. Topic: Marginal revenue Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Written and oral communication

3) How does marginal revenue compare to price for a single-price monopoly? Answer: Marginal revenue is less than price. Topic: Marginal revenue Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

4) What does the marginal revenue equal when a monopoly's total revenue is maximized? What is the elasticity of demand when the total revenue is maximized? Answer: When the total revenue is at its maximum, the marginal revenue equals 0 and the elasticity of demand equals 1. Topic: Total revenue Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

5) A monopoly can set any price it wants. So why does it still produce at a point where MR = MC, just like a perfectly competitive firm? Answer: The point where MR = MC maximizes any firm's profit for the same reason it maximizes a perfectly competitive firm's profit. In particular, any unit for which MR > MC is a profitable unit to produce and so the firm wants to produce all of these units. As it increases its output, its total profit increases even as the difference between MR and MC shrinks. But as long as MR > MC, the unit is profitable and therefore is produced. Eventually the firm gets to the point where MR = MC. The firm does not want to go beyond this level of output, because for every unit beyond it MC > MR. Producing these units would lower the firm's profit. So, once it starts producing, the firm won't stop producing additional units of output before it reaches the level for which MR = MC. Then, once it reaches this point, it won't go beyond this amount. Therefore the condition MR = MC determines the profit maximizing level of output. Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Written and oral communication

6) "A single-price monopoly will always charge a price that is on the elastic range of the demand for the monopoly's output." Explain why the previous statement is correct or incorrect. Answer: The statement is correct. Only when the demand is elastic is marginal revenue positive. (When demand is unit elastic, marginal revenue is zero and when demand is inelastic marginal revenue is negative.) Because marginal cost is always positive, a single-price monopoly will always produce in the elastic range of the demand because it produces where marginal cost equals marginal revenue. Hence the price that the monopoly sets will always be on the elastic range of the demand. Topic: Profit maximization, price Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Written and oral communication

7) Why will a profit-maximizing, single-price monopoly NEVER produce the amount of output that maximizes its total revenue? Answer: When total revenue is at its maximum, the demand is unit elastic and marginal revenue equals zero. However, to maximize its profit, a single-price monopoly produces so that its marginal revenue equals its marginal cost. If marginal revenue equals zero, then in order for this level of output to maximize the monopoly's profit, marginal cost also must equal zero. But marginal cost will never equal zero because to produce another unit always incurs some costs. Because marginal cost cannot equal zero, it is impossible for a profit-maximizing single-price monopoly to produce the amount of output that maximizes its total revenue. Topic: Profit maximization Skill: Level 5: Critical thinking Section: Checkpoint 12.2 Status: Old AACSB: Written and oral communication

8) Can a monopoly make an economic profit in the long run? Explain your answer. Answer: A monopoly can make an economic profit in the long run. The fact that the monopoly is protected by a barrier to entry allows the firm to make an economic profit in the long run. If the monopoly is making an economic profit, other competitors want to enter the market but the barrier to entry keeps them out. Topic: Profit maximization, long run Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Written and oral communication

9) What kind of profit can a monopoly make in the short run? In the long run? Explain your answers. Answer: In the short run, a monopoly can make an economic profit, zero economic profit, or incur an economic loss. In other words, any sort of profit outcome is possible in the short run. In the long run, a monopoly can make an economic profit or zero economic profit. A monopoly will not incur an economic loss in the long run because it would shut down. The key result that differentiates it from firms in other types of markets is that a monopoly can make an economic profit in the long run. It can do so because there are barriers to entry. These barriers prevent other firms from entering the market and usurping part of the economic profit. Topic: Profit maximization, long run Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Written and oral communication

10) The table below gives a monopoly's demand schedule. Complete the table by calculating the total revenue and the marginal revenue.

Answer:

The completed table is above. Topic: Marginal revenue Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

11) The table below gives a monopoly's demand schedule. Complete the table by calculating the total revenue and the marginal revenue.

Answer:

The completed table is above. Topic: Marginal revenue Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

12) The demand schedule for a single-price monopoly is given in the table below. Calculate the marginal revenue.

Answer:

The completed table is above. Topic: Marginal revenue Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

13) 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 price elasticity of demand at the revenue maximizing price? Answer: a. Demand is elastic from 0 to 20 pounds of fish. b. Demand is inelastic from 20 to 40 pounds of fish. c. Total revenue is maximized when the price is $8 a pound. d. Total revenue is maximized when demand is unit elastic. Topic: Marginal revenue and elasticity Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

14) A single-price monopoly has the demand and marginal cost schedules given in the above table. What is the profit-maximizing level of output and price? Answer: The profit-maximizing output is 3 units, because that is the quantity for which the marginal revenue equals the marginal cost. The price is $18 a unit. Topic: Single-price monopoly, profit maximization Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

15) In the figure below, draw and label the demand and cost curves of a monopoly. Identify the quantity a single-price monopoly will produce by labeling it Qm and identify the price by labeling it Pm.

Answer:

The completed figure is above. Topic: Single-price monopoly, profit maximization Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

16) Ron's Hamburger Joint is the only restaurant in town. The above figure represents Ron's cost, the market demand, and marginal revenue curves. Ron operates as a single-price monopoly. a. How many hamburgers does Ron produce? b. What price does Ron charge for a hamburger? c. What is Ron's total revenue? d. What is his total cost? e. What is Ron's economic profit? Answer: a. Ron produces 20 hamburgers per hour. b. The price is $6 for a hamburger. c. Ron's total revenue is $120 an hour. d. Ron's total cost is $80 an hour. e. Ron's economic profit is $40 an hour. Topic: Single-price monopoly, profit maximization Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

12.10 Essay: Monopoly and Competition Compared 1) "A single-price monopoly charges a higher price and produces more output than a perfectly competitive industry." Is the previous statement correct or incorrect? Explain your answer. Answer: The statement is partially correct because a monopoly charges a higher price than is the case in a perfectly competitive industry. However the statement also is partially incorrect because the monopoly produces less output than is the case in a perfectly competitive industry. Topic: Monopoly and competition compared, output and price Skill: Level 2: Using definitions Section: Checkpoint 12.3 Status: Old AACSB: Written and oral communication

2) Compare the outcome in a market with a single-price monopoly to that in a perfectly competitive market. Answer: The monopoly charges a higher price and produces less output than in a perfectly competitive market. The monopoly creates a deadweight loss by producing less than the efficient quantity of output, whereas a perfectly competitive market produces the efficient quantity of output and so has no deadweight loss. The monopoly decreases consumer surplus and increases producer surplus from what they would be if the market is perfectly competitive. Topic: Monopoly and competition compared, output and price Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Written and oral communication

3) Explain how a single-price monopoly determines its output and price. Compare this process to how a perfectly competitive firm determines its output and price. Answer: Single-price monopolies follow the same profit-maximizing rule as perfectly competitive firms and set their output level where marginal revenue equals marginal cost. However, unlike perfectly competitive firms, monopolies have control over price and can charge as much as the market will bear; therefore, given the quantity they produce, the monopoly chooses its price from the market demand curve. Topic: Monopoly and competition compared, output and price Skill: Level 4: Applying models Section: Checkpoint 12.3 Status: Old AACSB: Written and oral communication

4) Which creates a larger deadweight loss, perfect competition or a single-price monopoly? Answer: The single-price monopoly creates a larger deadweight loss because perfect competition does not create a deadweight loss. Topic: Monopoly and competition compared, deadweight loss Skill: Level 2: Using definitions Section: Checkpoint 12.3 Status: Old AACSB: Written and oral communication

5) 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 monopoly, price is higher, output is lower, consumer surplus is less, economic profit is larger, and total surplus is smaller relative to a competitive industry. Topic: Monopoly and competition compared, surpluses Skill: Level 2: Using definitions Section: Checkpoint 12.3 Status: Old AACSB: Written and oral communication

6) "Compared to a competitive market, a single-price monopoly decreases the consumer surplus and increases the economic profit." Is the previous statement correct or incorrect? Explain your answer. Answer: The statement is correct. A single-price monopoly produces less than a competitive market and sets a higher price, both of which decrease the consumer surplus but increase the economic profit. Topic: Monopoly and competition compared, surpluses Skill: Level 2: Using definitions Section: Checkpoint 12.3 Status: Old AACSB: Written and oral communication

7) Suppose the government breaks up a single-price monopoly and turns it into a perfectly competitive industry. What will happen to price and the quantity produced? What will happen to the monopoly's economic profit and the deadweight loss associated with the monopoly? Answer: The price will fall and output will increase to the efficient level. The monopoly's economic profit will revert to the consumers as consumer surplus as the price falls and the quantity increases. The deadweight loss will be eliminated as output and the consumer surplus increase. Topic: Monopoly and competition compared, surpluses Skill: Level 4: Applying models Section: Checkpoint 12.3 Status: Old AACSB: Written and oral communication

8) What is rent seeking? How does rent seeking affect the deadweight loss from monopoly? Answer: Rent seeking is the act of obtaining special treatment by the government to create economic profit or to divert consumer surplus or producer surplus away from someone else. Often, rent seeking takes the form of lobbying to increase the economic profit of the lobbyist. Rent seeking increases the deadweight loss from monopoly. With rent seeking, not only does the monopoly create the (standard) deadweight loss, but also resources are used up in the process of rent seeking itself. Topic: Rent seeking Skill: Level 1: Definition Section: Checkpoint 12.3 Status: Old AACSB: Written and oral communication

9) "Because of rent seeking, a monopoly may end up earning a normal profit." Is the previous statement correct or incorrect? Why? Answer: The statement is correct. Competition among rent seekers might cause the successful person striving to create a monopoly to pay so much in order to create the monopoly that, when taking into account the cost of creating the monopoly, the person earns only a normal profit. Topic: Rent seeking Skill: Level 1: Definition Section: Checkpoint 12.3 Status: Old AACSB: Written and oral communication

10) The above figure represents a perfectly competitive industry that is taken over by a single firm and operated as a monopoly. a. What was the competitive price and quantity? b. What is the monopoly price and quantity? c. What area represents consumer surplus under perfect competition? d. What area represents consumer surplus under monopoly? e. What area represents the deadweight loss of monopoly? Answer: a. The competitive price was P2 and the competitive quantity was Q2. b.

The monopoly price is P3 and the monopoly quantity is Q1.

The consumer surplus with perfect competition is the area P4P2c.

d. The consumer surplus with monopoly is the area P4P3a. e.

The deadweight loss from the monopoly is the area abc.

Topic: Monopoly and competition compared, surpluses Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Analytical thinking

12.11 Essay: Price Discrimination 1) Define price discrimination. What factors must be present in order for a firm to price discriminate? Why do firms price discriminate? Answer: Price discrimination is selling a good or service at a number of different prices. In order to price discriminate, the firm must be able to identify and separate different types of buyers. In particular, the firm must be able to identify which buyers are willing to pay a higher price than other buyers. And the firm must sell a product that cannot be resold. Therefore it must not be possible for a buyer who pays a low price to resell the product to a buyer who is willing to pay a higher price. Firms price discriminate because it increases their profit. By price discriminating the firm can charge a buyer a price that is closer to the maximum price the buyer is willing to pay. By setting the price closer to the maximum a buyer is willing to pay the firm can gain added total revenue and thereby added economic profit. Topic: Price discrimination Skill: Level 1: Definition Section: Checkpoint 12.4 Status: Old AACSB: Written and oral communication

2) Give an example of price discrimination. Answer: Price discrimination occurs when senior citizens get cheaper drugs, students get discounts at movies, or children under two can enter museums free. Topic: Price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

3) "Price discrimination allows a monopoly to increase its economic profit by capturing part of the consumer surplus and turning it into economic profit." Is the previous statement correct or incorrect? If the statement is correct, why is it important in understanding firms' behaviors? If it is incorrect, why is it incorrect? Answer: The statement is correct. The statement is important because it explains why firms want to price discriminate, namely because they can convert some of the consumer surplus into extra economic profit. Hence firms endeavor to price discriminate because if they can do so, they can increase their economic profit. Topic: Price discrimination Skill: Level 2: Using definitions Section: Checkpoint 12.4 Status: Old AACSB: Written and oral communication

4) Why do some firms price discriminate? Relate your answer to the common practice of public colleges charging lower tuition to in-state students and higher tuition to out-of-state students. Answer: Price discrimination helps businesses capture more consumer surplus and hence increase their economic profit. Basically the firm charges more to people who are willing to pay more. For a public college, out-of-state students will likely have a higher willingness to pay for attending that college because, by leaving their home state, they are demonstrating that they truly want to attend the college. If the college charged in-state residents the same tuition as out-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: Level 2: Using definitions Section: Checkpoint 12.4 Status: Old AACSB: Written and oral communication

5) Compare and contrast the effect of perfect competition to the effect of perfect price discrimination on: a. efficiency. b. consumer surplus. c. economic profit in the long run. Answer: a. Both perfect competition and perfect price discrimination create efficiency. b. Consumers receive consumer surplus with perfect competition. However, there is no consumer surplus with perfect price discrimination. c. Perfectly competitive firms cannot earn an economic profit in the long run. A perfectly price discriminating monopoly earns the maximum amount of economic profit. Topic: Perfect price discrimination Skill: Level 4: Applying models Section: Checkpoint 12.4 Status: Old AACSB: Written and oral communication

6) Which produces more output: a perfectly price discriminating monopoly or a single-price monopoly? Answer: The monopoly practicing perfect price discrimination produces more output. Indeed, a perfectly price discriminating monopoly produces the efficient level of output. Topic: Perfect price discrimination Skill: Level 3: Using models Section: Checkpoint 12.4 Status: Old AACSB: Reflective thinking

7) A monopolist has the market demand and marginal cost schedules given in the above table. If the monopoly can perfectly price discriminate, what is the profit-maximizing level of output and price? Answer: As a perfectly price discriminating monopoly, the profit-maximizing level of output is 4 units and the price ranges from $22 to $16 for each unit. Topic: Perfect price discrimination Skill: Level 3: Using models Section: Checkpoint 12.4 Status: Old AACSB: Analytical thinking

8) The above figure represents the cost, market demand, and marginal revenue curves for a monopoly. a. Indicate the price and quantity a single-price monopoly selects by labeling the price Pm and the quantity Qm. b. In the figure, lightly shade in the area that represents the single-price monopoly's economic profit. c. Indicate the quantity a perfectly price-discriminating monopoly selects by labeling it Qppd. d. In the figure, more darkly shade in the area that represents the additional economic profit the monopoly earns as a result of the perfect price discrimination.

Answer:

The price is labeled Pm and the quantity is labeled Qm.

b. c.

The single-price monopoly's economic profit is the lightly shaded rectangle. The quantity is labeled Qppd.

d. The additional profit is the two darker areas in the figure. Topic: Perfect price discrimination Skill: Level 4: Applying models Section: Checkpoint 12.4 Status: Old AACSB: Analytical thinking

12.12 Essay: Monopoly Regulation 1) "Under the social interest theory of regulation, regulators attempt to maximize profits for the owners of the firms being regulated." Is the previous statement correct or incorrect? Answer: The statement is incorrect. The social interest theory is the theory that regulators seek an efficient use of resources. The capture theory of regulation is the theory that regulators attempt to maximize the producers' economic profit. Topic: Social interest theory Skill: Level 1: Definition Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

2) What is the social interest theory of regulation? How does it differ from the capture theory of regulation? Answer: The social interest theory of regulation is that regulators seek an efficient use of resources. The capture theory asserts that producers "capture" the regulators so that the regulation is designed to help the producers maximize their economic profit. Topic: Social interest theory Skill: Level 1: Definition Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

3) "The theory that regulation seeks an efficient use of resources is called the capture theory of regulation." Is the previous statement correct or incorrect? Answer: The statement is incorrect. The capture theory is the theory that the regulated producers "capture" the regulators and so the regulators help the producers maximize their economic profit. The theory that regulation seeks an efficient use of resources is the "social interest" theory. Topic: Capture theory Skill: Level 1: Definition Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

4) Describe the difference between social interest theory of regulation and the capture theory of regulation. Answer: Both are theories of regulation but they differ according to what they see as to the goal of the regulation. The social interest theory assumes that regulation that seeks an efficient use of resources. It asserts that the political process works to eliminate deadweight loss by using appropriate regulations. The capture theory proposes that producers bend the regulators to their will so that resources are not used efficiently because regulated market outcomes favor producers. Everyone else but producers bears the cost of this regulation. Because this cost is a small amount per person, no one finds it worthwhile to propose legislation to avoid it. Topic: Public interest, capture theory Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Written and oral communication

5) Why are water companies considered a natural monopoly? Answer: Once one water company incurs the cost of establishing a physical connection to one customers' home or place of business, the marginal cost of providing service falls rapidly over time as more and more service is provided. For instance, once a main pipe is buried under a street, adding additional customers on the street is relatively cheap. Economies of scale make it very cost prohibitive for another firm to enter the market, leaving one water company as the provider of the service in that area. Topic: Natural monopoly Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Written and oral communication

6) "If a natural monopoly is regulated using a marginal cost pricing rule, the firm makes zero economic profit." Is the previous statement correct or incorrect? Answer: The statement is incorrect. If a firm is regulated using a marginal cost pricing rule, the firm incurs an economic loss. Topic: Natural monopoly, marginal cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

7) "If Michigan's electric utilities were allowed to use marginal cost pricing, it would lead to economic profits for these utilities." Is the previous statement correct or incorrect? Answer: The statement is incorrect. Imposing marginal cost pricing on natural monopolies results in the firms incurring economic losses not economic profits. Topic: Natural monopoly, marginal cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

8) When a natural monopoly is regulated using a marginal cost pricing rule, what can you say about the firm's profit and the market's efficiency? Answer: Using a marginal cost pricing rule, the monopoly is incurring an economic loss. However, there is an efficient quantity of output produced so that the market is efficient with no deadweight loss. Topic: Natural monopoly, marginal cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

9) If a natural monopoly is regulated using the marginal cost pricing rule, how will that affect prices, outputs, profits, and the distribution of surpluses? What are the pros and cons to this method of regulation? Answer: The marginal cost pricing rule sets the regulated price equal to the price where the marginal cost curve intersects the demand curve. This price is lower than the monopoly price, and results in a higher level of output. The monopoly's economic profit is eliminated; in fact, this rule results in the firm making economic losses, as marginal cost is less than average total cost for a natural monopoly. Because output increases to the point where marginal cost equals price, consumer surplus is maximized. The advantage of this method of regulation is that it results in the efficient level of output. The disadvantage of this method is that means the firm will incur an economic loss. Unless subsidized by the government, allowed to price discriminate, or allowed to use a two-part tariff, the firm will eventually exit the industry, as no firm can operate at a loss in the long run. Topic: Natural monopoly, marginal cost pricing rule Skill: Level 4: Applying models Section: Checkpoint 12.5 Status: Old AACSB: Written and oral communication

10) What is an average cost pricing rule? Why do regulatory agencies use it for natural monopolies? Answer: Average cost pricing means that the firms will equate their price to their average total cost. It is used by regulatory agencies, because if a natural monopoly is forced to charge a perfectly competitive price (using a marginal cost pricing rule), the firm will not be able to cover its costs. Even if the firm is allowed to price discriminate or use a two-part tariff, it still might not be able to cover its losses. So average cost pricing is considered a second-best solution: it allows the natural monopoly to make a normal profit but does not allow it to set its price as high as it would were it unregulated. Topic: Natural monopoly, average cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Written and oral communication

11) "When electric utilities are regulated using an average cost pricing rule, they will earn zero economic profit." Is the previous statement correct or incorrect? Why? Answer: The statement is correct. An average cost pricing rule requires that the firm set its price equal to its average total cost. When price equals average total cost, the firm earns zero economic profit. Topic: Natural monopoly, average cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

12) When a natural monopoly is regulated using an average cost pricing rule, what can you say about the firm's profit and the market's efficiency? Answer: Using an average cost pricing rule, the monopoly is earning zero economic profit. However, there is an inefficient quantity of output produced so that the market is inefficient and there is a deadweight loss. Topic: Natural monopoly, average cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Reflective thinking

13) Electric utilities are often considered natural monopolies and are regulated. When would the price be highest: when the utility is not regulated, when it is regulated using an average cost pricing rule, or when it is regulated using a marginal cost pricing rule? When would its price be lowest? Answer: The price would be highest if the utility was left unregulated and could set the profitmaximizing price. The price is lowest if the utility is regulated using a marginal cost pricing rule. Topic: Natural monopoly, regulations Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Written and oral communication

14) Compare and contrast the marginal cost and average cost pricing rules for regulating natural monopolies. Answer: Marginal cost pricing sets the price equal to the marginal cost. It does so by determining the price using the intersection of the marginal cost curve and the demand curve. Marginal cost pricing results in an efficient level of output but the firm incurs an economic loss. Average cost pricing sets the price equal to the average total cost. It does so by determining the price using the intersection of the average cost curve and the demand curve. Average cost pricing results in an inefficient level of output and zero economic profit, that is, the owners' earn a normal profit. Topic: Natural monopoly, regulations Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Written and oral communication

15) What are a marginal cost pricing rule and an average cost pricing rule? What are the disadvantages and advantages of each? Answer: Natural monopolies can be regulated using a marginal cost pricing rule, so that the firm must set its price equal to its marginal cost, or by using an average cost pricing rule, so that the firm must set its price equal to its average total cost. The advantage of the marginal cost pricing rule is that the resulting output is efficient; the disadvantage is that the firm suffers an economic loss. The advantage of the average cost pricing rule is the firm earns zero economic profit; the disadvantage is that it produces an inefficient quantity of output. Topic: Natural monopoly, regulations Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Written and oral communication

16) Why do some utilities have an incentive to exaggerate their costs of production? Answer: Because utilities are generally allowed to charge prices that cover their average cost of production, a utility might want to incur higher than normal costs (maybe from lush carpets, hunting lodges, tickets to sporting events, and so forth). If the utility exaggerates its costs, the regulators are likely to simply order higher rates to cover the higher costs, and so the utility executives can enjoy benefits (the carpet, hunting lodge, sporting events) without incurring any personal costs. Topic: Natural monopoly, cost exaggeration Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Written and oral communication

17) What potential problem is there with rate of return pricing? Answer: The monopolist might exaggerate its costs and mislead the regulator. In this case, the regulator allows the firm to increase its price, so the monopolist has no incentive to operate efficiently and cost effectively. Topic: Natural monopoly, cost exaggeration Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Written and oral communication

18) How can managers of natural monopolies exaggerate their costs? Answer: By increasing on-the-job luxury items such as sumptuous office suites, limousines, golf competitions at expensive locations, company jets, and other non-necessary expenditures, the managers can exaggerate their costs over what is truly necessary to produce the product. Topic: Natural monopoly, cost exaggeration Skill: Level 2: Using definitions Section: Checkpoint 12.5 Status: Old AACSB: Written and oral communication

19) Briefly describe and discuss the different ways a natural monopoly can be regulated: Marginal cost pricing, average cost pricing, rate of return regulation, and price cap regulation. Answer: Marginal cost pricing: The regulated price is set equal to marginal cost. In this case, the efficient quantity is produced so there is no deadweight loss. Consumer surplus is maximized. The firm incurs an economic loss unless it can raise revenues in an additional way, such as using price discrimination or a two-part tariff. Average cost pricing: The regulated price is set equal to average cost. While this form of regulation does not produce an efficient outcome, it allows firms to make a normal profit. There is a deadweight loss. Rate of return regulation: The regulated price enables a regulated firm to earn a specified target percent return on its capital. If a regulator could observe the firm's total cost and also know that the firm minimized total cost, the regulation would be the same as average cost pricing. In some cases, however, the firm is able to "capture" the regulator, which enables the firm to exaggerate it costs and so set its price and produce the amount of output that it would were it an unregulated monopoly. Price cap regulation: The regulator sets a price ceiling. The firm can charge any price it wants below the price cap and keep some or all of any economic profit it makes. This regulation induces the firm to operate efficiently and control costs. If the firm makes a profit that is too high, the regulator might impose earnings share regulation, which requires the firm to make refunds to customers when profits rise above a target level. Topic: Natural monopoly, regulations Skill: Level 3: Using models Section: Checkpoint 12.5 Status: Old AACSB: Written and oral communication

20) In the figure above, complete the graph of the electric utility company by adding the marginal revenue and marginal cost curves. Assume the marginal cost is constant at 4¢ per kilowatt-hour. Now discuss the marginal cost pricing rule and the average cost pricing rule regulators might use to regulate the firm. Be sure to state the price and quantity that are selected for each option. Also, what price and quantity does the firm select if it is not regulated?

Answer:

The completed figure is above. Two methods regulators might use to regulate the firm are a marginal cost pricing rule and an average cost pricing rule. If the regulators use a marginal cost pricing rule, the firm must set its price equal to its marginal cost. In the figure, the firm sets a price of 4¢ a kilowatt-hour and produces 400 megawatts per hour. The firm produces the efficient quantity of output, but it incurs an economic loss because ATC > P. If the regulators use an average cost pricing rule, the firm must set its price equal to its average total cost. In the figure, the firm sets a price of 8¢ a kilowatt-hour and produces 300 megawatts per hour. In this case the firm covers its costs (so that it earns a normal profit) but it produces an inefficient amount of output. Finally, if the firm is allowed to maximize its profit, it produces where its MR = MC. So the firm produces 200 megawatts of power and, setting its price from its demand curve, charges a price of 12¢ per kilowatt-hour. Topic: Natural monopoly Skill: Level 3: Using models Section: Checkpoint 12.5 Status: Old AACSB: Analytical thinking

21) The above figure shows the demand for cable and the cable company's cost of providing cable. a. What price and quantity will be produced if the company is unregulated and profit maximizes? b. What price and quantity will be produced if the company is regulated using the marginal cost pricing rule? c. What is the advantage of the marginal cost pricing rule? d. What price and quantity will be produced if the company is regulated using the average cost pricing rule? e. What is the advantage of the average cost pricing rule? Answer: a. The price will be $90 per month and the quantity will be 20,000 households. b. The price will be $30 per month and the quantity will be 40,000 households. c. This rule results in the efficient level of production. d. The price will be $60 per month and the quantity will be 30,000 households. e. This rule results in the firm making a normal profit. Topic: Natural monopoly Skill: Level 3: Using models Section: Checkpoint 12.5 Status: Old AACSB: Analytical thinking

22) The above figure illustrates the market for electric power that is served by the one utility in Alberta, Canada. a. If the government did not regulate this utility, what would be the price of a kilowatt hour in this region and how much power would be generated? b. If the government regulates the utility and chooses an average cost pricing rule, what would be the price of a kilowatt hour and how much power would be generated? c. If the government regulates the utility and chooses a marginal cost pricing rule, what would be the price of a kilowatt hour and how much power would be generated? Answer: a. The price would be 12¢ a kilowatt hour and 20 megawatts per hour would be generated. b. The price would be 8¢ a kilowatt hour and 30 megawatts per hour would be generated. c. The price would be 4¢ a kilowatt hour and 40 megawatts per hour would be generated. Topic: Natural monopoly Skill: Level 3: Using models Section: Checkpoint 12.5 Status: Old AACSB: Analytical thinking

23) The above figure represents the cost and demand curves for a natural monopoly that is regulated using a marginal cost pricing rule. a. What is the quantity? b. What price is charged? c. What area represents the consumer surplus when the firm is regulated using a marginal cost pricing rule? d. What distance represents the firm's loss per unit when the firm is regulated using a marginal cost pricing rule? Answer: a. The quantity is the efficient quantity, Q3. b.

The price is P2.

c. When the firm is regulated using a marginal cost pricing rule, the consumer surplus is equal to the area of the triangle P1dP2. d. The loss per unit is the amount equal to the distance cd. Topic: Natural monopoly, marginal cost pricing rule Skill: Level 3: Using models Section: Checkpoint 12.5 Status: Old AACSB: Analytical thinking

24) The above figure shows the demand, marginal revenue, and cost curves for a natural monopoly. a. Which price and quantity is set if the capture theory is correct? b. If production is at the price and quantity specified in part (a), what area represents the economic profit? c. If production is at the price and quantity specified in part (a), what area represents the deadweight loss? d. If production is at the price and quantity specified in part (a), what area represents the consumer surplus? Answer: a. The profit-maximizing price and quantity are P2 and Q1. b.

The economic profit equals the area of the rectangle P2abP3.

c. The deadweight loss is the area of the triangle acd. d. The consumer surplus is the area of the triangle P1aP2. Topic: Capture theory Skill: Level 3: Using models Section: Checkpoint 12.5 Status: Old AACSB: Analytical thinking

Essential Foundations of Economics, 8e (Bade) Chapter 13 Monopolistic Competition and Oligopoly 13.1 What is Monopolistic Competition? 1) An industry with a large number of firms, differentiated products, and free entry and exit is called A) perfect competition. B) monopolistic competition. C) oligopoly. D) monopoly. E) monopolistic oligopoly. Answer: B Topic: Monopolistic competition, definition Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

2) One characteristic of monopolistic competition is that it has A) many firms producing a slightly differentiated product. B) many firms producing identical goods. C) one firm producing a unique good. D) a few firms producing a slightly differentiated product. E) large barriers to entry. Answer: A Topic: Monopolistic competition, definition Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

3) Which market structure is characterized by the following characteristics? i. A large number of firms compete. ii. Each firm produces a differentiated product. iii. Firms are free to enter and exit. A) perfect competition B) duopoly C) oligopoly D) monopolistic competition E) monopoly Answer: D Topic: Monopolistic competition, definition Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

4) In monopolistic competition, each firm supplies a small part of the market. This occurs because A) there are barriers to entry. B) there are no barriers to exit. C) there is a large number of firms. D) firms produce differentiated products. E) there is a large number of buyers. Answer: C Topic: Monopolistic competition, definition Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

5) Monopolistic competition is a market structure in which A) firms face barriers to entry. B) a large number of firms compete. C) firms produce and sell an identical product. D) firms face perfectly elastic demand for their product. E) the firms have no ability to influence the price of their product. Answer: B Topic: Monopolistic competition Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

6) Monopolistic competition is defined as a type of market structure in which A) many firms produce the good. B) firms produce a homogeneous good. C) there are barriers to entry. D) firms can make an economic profit in the long run. E) firms can easily enter the market but cannot easily exit from it. Answer: A Topic: Monopolistic competition Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

7) What does monopolistic competition have in common with perfect competition? A) a large number of firms and freedom of entry and exit B) a standardized product C) product differentiation D) the ability to earn an economic profit in the long run E) barriers to exit but no barriers to entry Answer: A Topic: Monopolistic competition, definition Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

8) What does monopolistic competition have in common with monopoly? A) a large number of firms B) a downward-sloping demand curve C) the ability to collude with respect to price D) mutual interdependence E) barriers to entry Answer: B Topic: Monopolistic competition, definition Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

9) If a large number of firms are competing, the market could be A) perfect competition or monopolistic competition. B) perfect competition or monopoly. C) monopolistic competition or oligopoly. D) monopolistic competition or monopoly. E) oligopoly or monopoly. Answer: A Topic: Monopolistic competition, definition Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

10) In both monopolistic competition and perfect competition, A) firms sell identical products. B) there is easy entry and exit. C) firms are price takers. D) firms face horizontal demand curves. E) the marginal revenue curve and the demand curve are the same. Answer: B Topic: Monopolistic competition, definition Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

11) Which of the following is NOT a characteristic of monopolistic competition? A) few firms compete B) easy entry and exit C) small market share D) differentiated product E) no barriers to entry or exit Answer: A Topic: Monopolistic competition, definition Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

12) A firm in monopolistic competition ________ influence its price and ________ influence the market average price. A) can; can B) can; cannot C) cannot; can D) cannot; cannot E) can; only in the short run can Answer: B Topic: Monopolistic competition, definition Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

13) The women's dress industry is monopolistically competitive because each firm has A) a large market share. B) a very small market share. C) no market share. D) no competition for their market share. E) struck a deal with the many other firms about what price will be charged. Answer: B Topic: Monopolistic competition, definition Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

14) It would be impossible for members of the fast-food industry to collude to fix prices because A) there are too many fast-food firms in the market. B) collusion is illegal. C) there are not enough fast-food firms in the market. D) the price of fast-food is too low. E) demanders would not buy from firms that collude. Answer: A Topic: Monopolistic competition, definition Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

15) Because of the number of firms in monopolistic competition, A) each firm has a large market share. B) it is possible for the firms to collude. C) no one firm can dominate the market. D) one firm has the ability to dictate market conditions. E) each firm must carefully monitor what its competitors do. Answer: C Topic: Monopolistic competition, definition Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

16) In an industry with a large number of firms, A) each firm will produce a large quantity, relative to market demand. B) one firm will dominate the market. C) collusion is impossible. D) competition is eliminated. E) barriers to exit must exist. Answer: C Topic: Monopolistic competition, definition Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

17) The freedom of entry and exit in monopolistic competition means that firms A) enter the market when economic losses are being suffered. B) exit the market when economic profits are being earned. C) enter the market when normal profits are being earned. D) can enter a market to compete for economic profits and leave when economic losses are being incurred. E) find it easy to permanently earn an economic profit. Answer: D Topic: Monopolistic competition, definition Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

18) In monopolistic competition, the products of different sellers are A) identical. B) similar but slightly different. C) unique without any close or perfect substitutes. D) perfect substitutes. E) either identical or differentiated. Answer: B Topic: Product differentiation Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

19) A differentiated product has A) many perfect substitutes. B) no close substitutes. C) no substitutes of any kind. D) close but not perfect substitutes. E) many different complements. Answer: D Topic: Product differentiation Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

20) Product differentiation involves making a product that is A) slightly different from the products of competing firms. B) no different than the products of competing firms. C) very different from the products of competing firms. D) completely different from the products of competing firms. E) cheaper than the products of competing firms. Answer: A Topic: Product differentiation Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

21) Product differentiation means A) firms sell products that are very dissimilar. B) products sold by different firms are slightly different. C) charging a higher price to consumers with high willingness to pay. D) charging a lower price to consumers with low willingness to pay. E) that a single firm sells many different types of products. Answer: B Topic: Product differentiation Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

22) Which of the following is the best example of a differentiated product? A) beets in the local supermarket B) diamonds C) airlines D) running shoes E) electricity Answer: D Topic: Product differentiation Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

23) Because of product differentiation, firms A) do not have to compete because their products are unique. B) cannot compete on price. C) can compete on the basis of quality. D) are unable to compete by using advertising. E) must compete on only price. Answer: C Topic: Product differentiation Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

24) Which of the following is true about monopolistic competition but false about perfect competition? A) There is a large number of independently acting sellers. B) There are no barriers to entry. C) Firms can earn an economic profit in the short run. D) Firms compete on their product's price as well as its quality and marketing. E) Firms cannot earn an economic profit in the long run. Answer: D Topic: Monopolistic competition, definition Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

25) Product differentiation allows a firm to compete with another firm on the basis of A) efficiency. B) elasticity. C) quality, price, and advertising. D) the level of output and the price. E) demand. Answer: C Topic: Product differentiation Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Revised AACSB: Reflective thinking

26) In monopolistic competition, the presence of a large number of firms making a differentiated product means that A) each firm can set the price of its particular product. B) each firm must charge the same price. C) the price is established by collusive behavior. D) each firm must produce the same quantity. E) firms cannot compete with each other on the basis of price. Answer: A Topic: Monopolistic competition Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

27) In monopolistic competition, a firm can set the price for its product because of A) easy entry and exit. B) economic profits. C) product differentiation. D) many competitors. E) the firm's upward sloping demand curve. Answer: C Topic: Monopolistic competition Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

28) Firms in monopolistic competition have demand curves that are A) horizontal. B) vertical. C) downward sloping. D) upward sloping. E) U-shaped. Answer: C Topic: Monopolistic competition, demand curve Skill: Level 4: Applying models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

29) As a firm in monopolistic competition sets the price for its product, the firm faces a tradeoff between A) supply and demand. B) efficiency and equity. C) internal and external economies of scale. D) price and the quantity it can sell. E) its marginal revenue and its price. Answer: D Topic: Monopolistic competition, demand curve Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

30) An example of a firm in monopolistic competition is A) your local water company. B) the sole cable television company. C) the many Chinese restaurants in San Francisco. D) Kansas Power and Light, the sole provider of electricity in Kansas City. E) Shaniq, a wheat farmer. Answer: C Topic: Monopolistic competition, examples Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Application of knowledge

31) Which of the following is the best example of a monopolistically competitive industry? A) land-based long distance telephone service B) wheat farming C) the local electricity producer D) manufacturing of shirts E) cable television Answer: D Topic: Monopolistic competition, examples Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Application of knowledge

32) The United Company competes with many other firms each producing slightly different products. Firms freely enter and exit this industry. The type of industry United Company operates in is A) a monopoly. B) monopolistic competition. C) oligopoly. D) perfect competition. E) oligopolistic monopoly. Answer: B Topic: Monopolistic competition, examples Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Application of knowledge

33) Measures of concentration A) refer to the concentration of customers in a certain area. B) measure whether the market is dominated by a small number of firms. C) measure the concentration of a large number of firms in a certain area. D) have high values for perfect competition. E) measure how concentrated a firm's sales are among certain types of goods. Answer: B Topic: Four-firm concentration ratio Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

34) The four-firm concentration ratio is the percentage of ________ accounted for by the four largest firms in an industry. A) profit B) supply C) total revenue D) total cost E) marginal cost Answer: C Topic: Four-firm concentration ratio Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

35) If you have found the percentage of the value of total revenue accounted for by the four largest firms in an industry, you have found the A) elasticity of demand value. B) elasticity of supply value. C) Herfindahl-Hirschman Index. D) four-firm concentration ratio. E) monopolistic concentration index. Answer: D Topic: Four-firm concentration ratio Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

36) If the four-firm concentration ratio of an industry is A) near 100, the industry is considered very competitive. B) less than 40, the industry is considered an oligopoly. C) over 40, the industry is considered monopolistic competition. D) less than 40, the industry is considered monopolistic competition. E) close to 0, the industry is considered a monopoly. Answer: D Topic: Four-firm concentration ratio Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

37) Which of the following four-firm concentration ratios would be the best indication of a perfectly competitive industry? A) 2 percent B) 31 percent C) 78 percent D) 100 percent E) 50 percent Answer: A Topic: Four-firm concentration ratio Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

38) Which of the following is correct? A) Monopoly has a four-firm concentration ratio of 100. B) Perfect competition has a four-firm concentration ratio near zero. C) Monopolistic competition has a four-firm concentration ratio of more than 40. D) Both answers A and B are correct. E) Both answers A and C are correct. Answer: D Topic: Four-firm concentration ratio Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

39) If the four-firm concentration ratio equals 0.1 percent for the Mexican tomato industry, then this industry is best characterized as A) a monopoly. B) monopolistic competition. C) an oligopoly. D) perfect competition. E) either a monopoly or monopolistic competition. Answer: D Topic: Four-firm concentration ratio Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Application of knowledge

40) Which of the following four-firm concentration ratios is consistent with monopolistic competition? A) 100 percent B) 75 percent C) 25 percent D) 0 percent E) 91 percent Answer: C Topic: Four-firm concentration ratio Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

41) Which of the following four-firm concentration ratios would be the best indicator of an oligopoly? A) 0.25 percent B) 31 percent C) 78 percent D) 100 percent E) 11 percent Answer: C Topic: Four-firm concentration ratio Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

42) If the four-firm concentration ratio for the market for diapers is 73 percent, then this industry is best characterized as A) a monopoly. B) monopolistic competition. C) an oligopoly. D) perfect competition. E) either a monopoly or monopolistic competition. Answer: C Topic: Four-firm concentration ratio Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

43) The table above shows the revenue figures for the top four firms along with a total for the remaining firms in the fast-food industry. What is the four-firm concentration ratio for the industry? A) 200 B) 20 percent C) 25 percent D) 80 percent E) 100 percent Answer: B Topic: Four-firm concentration ratio Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

44) What is the four-firm concentration ratio if the four largest firms in an industry account for 5 percent, 6 percent, 7 percent, and 8 percent of total revenue? A) 26 percent B) 174 percent C) 1,680 D) There is enough information given to answer the question, but none of the answers above are correct. E) There is not enough information given to answer the question. Answer: A Topic: Four-firm concentration ratio Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

45) The square of the percentage market share of each firm summed over the 50 largest firms in a market is the A) elasticity of demand value. B) elasticity of supply value. C) Herfindahl-Hirschman Index. D) four-firm concentration ratio. E) fifty-firm concentration ratio. Answer: C Topic: Herfindahl-Hirschman Index Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

46) The Herfindahl-Hirschman Index measures market concentration in an industry by summing the square of the percentage market shares for A) the 4 largest firms. B) the 50 smallest firms. C) the 4 smallest firms. D) the 50 largest firms. E) all firms in the market. Answer: D Topic: Herfindahl-Hirschman Index Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

47) The Herfindahl-Hirschman Index is the ________ of the percentage market share of each firm summed over the largest 50 firms in a market. A) sum B) square C) square root D) cube E) negative Answer: B Topic: Herfindahl-Hirschman Index Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

48) If the Herfindahl-Hirschman Index in the market for single-use cameras equals 10,000, then the singleuse camera industry is best characterized as A) a monopoly. B) monopolistic competition. C) an oligopoly. D) perfect competition. E) either a monopoly or monopolistic competition. Answer: A Topic: Herfindahl-Hirschman Index Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Application of knowledge

49) If the HHI for the widget industry is 1,200, then the market structure is A) a monopoly. B) monopolistic competition. C) an oligopoly. D) perfect competition. E) impossible to determine Answer: B Topic: Herfindahl-Hirschman Index Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Application of knowledge

50) A market in which the Herfindahl-Hirschman Index exceeds 1,800 is considered to be A) competitive. B) not competitive. C) moderately competitive. D) purely competitive. E) either a monopoly or monopolistic competition. Answer: B Topic: Herfindahl-Hirschman Index Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

51) When the Herfindahl-Hirschman Index for an industry is A) very small, the industry can be perfectly competitive. B) very large, the industry can be perfectly competitive. C) 10,000, the industry is perfectly competitive. D) very small, the industry can be a monopoly. E) above 5,000, the industry is considered not very competitive, and when it is below 5,000, the industry is considered very competitive. Answer: A Topic: Herfindahl-Hirschman Index Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

52) If there are four firms in an industry with market shares of 50 percent, 40 percent, 5 percent, and 5 percent, the Herfindahl-Hirschman Index is A) 100. B) 4,150. C) 25. D) 3,450. E) undefined because there are not 50 firms in the industry. Answer: B Topic: Herfindahl-Hirschman Index Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

53) What is the Herfindahl-Hirschman Index if the four firms in an industry account have market shares of 62 percent, 15 percent, 15 percent, and 8 percent? A) 100 B) 4,358 C) 111,600 D) 2,822 E) 6,200 Answer: B Topic: Herfindahl-Hirschman Index Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

54) The three largest firms in an industry have market shares of 40 percent, 30 percent, and 2 percent. The remaining 47 firms in the industry each have a market share of 1 percent. The Herfindahl-Hirschman Index (HHI) for this industry is A) 2,551. B) 5,184. C) 24,061. D) 10,000. E) 3,013. Answer: A Topic: Herfindahl-Hirschman Index Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

55) Suppose there are 7 firms in the candy industry with the market shares shown above. What is the HHI for the industry? A) 1,850 B) 2,000 C) 6,400 D) 100 E) 20 Answer: B Topic: Herfindahl-Hirschman Index Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

56) A market is considered competitive if the Herfindahl-Hirschman Index (HHI) is ________ and its four-firm concentration ratio is ________. A) high; high B) high; low C) low; high D) low; low E) between 30 percent and 70 percent; greater than 5,000 Answer: D Topic: Herfindahl-Hirschman Index Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

57) For a monopolistically competitive firm, the demand curve A) is a horizontal line. B) has a positive slope. C) is vertical. D) has a negative slope. E) is the same as the marginal revenue curve. Answer: D Topic: Monopolistic competition Skill: Level 4: Applying models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

58) The marginal revenue curve facing a monopolistically competitive firm A) lies on its demand curve. B) lies above its demand curve. C) lies below its demand curve. D) is equal to its price curve. E) is parallel to its demand curve. Answer: C Topic: Monopolistic competition Skill: Level 4: Applying models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

59) When a firm maximizes its profit, which of the following is correct for firms in monopolistic competition and perfect competition? A) P = MC for both types of firms. B) P = MR = MC for firms in perfect competition and P > MR = MC for firms in monopolistic competition. C) MR = MC for firms in perfect competition and MR > MC for firms in monopolistic competition. D) P > MR = MC for firms in both perfect competition and monopolistic competition. E) P = ATC always for firms in both perfect competition and monopolistic competition. Answer: B Topic: Monopolistic competition Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

60) Firms in monopolistic competition determine the profit-maximizing level of output by producing A) the same output level as rivals do. B) where average total cost is minimized. C) at the point of minimum average fixed cost. D) where marginal revenue equals marginal cost. E) where price equals average total cost. Answer: D Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

61) In monopolistic competition, profit is maximized by producing so that marginal revenue A) equals price. B) is negative. C) equals marginal cost and which are less than price. D) equals average total cost but not marginal cost. E) equals marginal cost and equals price. Answer: C Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

62) A firm in monopolistic competition makes its decisions on quantity and price by A) taking price as given from the market and producing where MR = MC. B) taking both price and quantity as given from the market. C) producing where MR = MC and setting the price for this quantity from the demand curve. D) taking quantity as given from the market and setting the price for this quantity from the demand curve. E) producing where MR = MC and setting the price so that P = MR = MC. Answer: C Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

63) To maximize profit, a firm in monopolistic competition will produce the quantity where marginal revenue A) is greater than marginal cost. B) equals zero. C) is less than marginal cost. D) equals marginal cost. E) equals average total cost. Answer: D Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

64) If a monopolistically competitive seller's marginal cost is $3.56, the firm will increase its output if A) its marginal revenue is less than $3.56. B) its marginal revenue is equal to $3.56. C) its marginal revenue is more than $3.56. D) average total cost is less than $3.56. E) Both answers A and D are correct. Answer: C Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

65) If a monopolistically competitive seller's marginal cost is $3.56, the firm will decrease its output if A) its marginal revenue is less than $3.56. B) its marginal revenue is equal to $3.56. C) its marginal revenue is more than $3.56. D) its average total cost is equal to $4.00. E) Both answers B and D are correct. Answer: A Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

66) If a monopolistically competitive seller's marginal cost is $3.56, the firm will not change its output if A) its marginal revenue is less than $3.56. B) its marginal revenue is equal to $3.56. C) its marginal revenue is more than $3.56. D) its average total cost is equal to $3.56. E) Both answers B and D are correct. Answer: B Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

67) Kevin owns a personal training gymnasium in Orlando. The above figure shows the demand and cost curves for his firm, which competes in a monopolistically competitive market. Kevin will train how many clients per day? A) 4 B) 6 C) 10 D) between 2 and 4 E) None of the above answers is correct. Answer: A Topic: Monopolistic competition, output and price Skill: Level 4: Applying models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

68) Kevin owns a personal training gymnasium in Orlando. The above figure shows the demand and cost curves for his firm, which competes in a monopolistically competitive market. What price will Kevin charge per session? A) $100 B) $60 C) $40 D) $20 E) $80 Answer: B Topic: Monopolistic competition, output and price Skill: Level 4: Applying models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

69) Kevin owns a personal training gymnasium in Orlando. The above figure shows the demand and cost curves for his firm, which competes in a monopolistically competitive market. If Kevin trains 5 clients per day, he will ________ his profit and will ________. A) maximize; earn normal profit B) not maximize; earn a normal profit anyway C) maximize; earn an economic profit D) not maximize; earn an economic profit anyway E) not maximize; incur an economic loss Answer: D Topic: Monopolistic competition, output and price Skill: Level 4: Applying models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

70) The figure above shows a firm operating in a monopolistically competitive market. To maximize profit, the firm produces A) 80 units sold at $80 per unit and incurs an economic loss of $20 per unit. B) 100 units sold at $60 per unit. C) 80 units sold at $40 per unit and makes an economic profit of $60 per unit. D) 120 units in order to minimize cost. E) 80 units sold at $40 per unit and incurs an economic loss of $60 per unit. Answer: A Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 13.1 Status: New AACSB: Application of knowledge

71) The figure above shows a firm operating in a monopolistically competitive market. If nothing else changes, this firm A) should increase production to 120 units in order to reduce its cost. B) should stay open but decrease production below 80 units in order to reduce its cost. C) will exit the market because it is currently incurring an economic loss in the short run. D) will produce 100 units to eliminate the deadweight loss. E) will charge $100 per unit to eliminate the loss. Answer: C Topic: Monopolistic competition, economic loss Skill: Level 3: Using models Section: Checkpoint 13.1 Status: New AACSB: Application of knowledge

72) The above figure shows a restaurant engaged in monopolistic competition with other restaurants. The equilibrium price at this restaurant is ________ per meal. A) $20 B) $30 C) $50 D) less than $20 E) more than $50 Answer: C Topic: Monopolistic competition, output and price Skill: Level 4: Applying models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

73) The above figure shows a restaurant engaged in monopolistic competition with other restaurants. The equilibrium quantity at this restaurant is ________ meals per day. A) less than 150 B) between 151 and 250 C) between 251 and 350 D) between 451 and 450 E) more than 451 Answer: B Topic: Monopolistic competition, output and price Skill: Level 4: Applying models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

74) The above figure shows a motel engaged in monopolistic competition with other motels. The equilibrium price at this motel is ________ per room. A) $20 B) $30 C) $40 D) $50 E) $10 Answer: D Topic: Monopolistic competition, output and price Skill: Level 4: Applying models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

75) The above figure shows a motel engaged in monopolistic competition with other motels. The equilibrium quantity at this motel is ________ rooms per day. A) 200 B) 300 C) 400 D) 500 E) 100 Answer: B Topic: Monopolistic competition, output and price Skill: Level 4: Applying models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

76) The above figure shows a motel engaged in monopolistic competition with other motels. The figure above shows the ________ equilibrium in which the motel is ________. A) short-run; earning an economic profit B) short-run; earning a normal profit C) long-run; earning an economic profit D) long-run; earning a normal profit E) short-run; incurring an economic loss Answer: A Topic: Monopolistic competition, output and price Skill: Level 4: Applying models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

77) The major difference between monopolistic competition and monopoly is A) monopoly is a price setter and a firm in monopolistic competition is a price taker. B) only a monopoly can earn an economic profit in the long run. C) only a firm in monopolistic competition can earn an economic profit in the short run. D) how the quantity of output is determined. E) only firms in monopolistic competition are protected by barriers to entry. Answer: B Topic: Monopolistic competition, long run Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

78) In the long run in monopolistic competition, firms A) can earn an economic profit. B) incur an economic loss. C) can earn zero economic profit but not an economic profit. D) shut down if they are earning zero economic profit. E) earn either an economic profit or zero economic profit. Answer: C Topic: Monopolistic competition, long run Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

79) If firms in monopolistic competition are earning economic profits, eventually A) they shut down. B) they exit the industry. C) the market turns into a monopoly. D) new firms enter the industry. E) the firms in the market increase their production so that their economic profit disappears. Answer: D Topic: Monopolistic competition, long run Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

80) If a firm in monopolistic competition is earning an economic profit, A) it is in the long run. B) other firms can enter the market. C) it can do so because it is "monopolistic" and other firms will have a hard time competing with it. D) its average cost must exceed its marginal cost. E) The question errs because firms in monopolistic competition cannot earn an economic profit. Answer: B Topic: Monopolistic competition, long run Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

81) In the long run, firms in monopolistic competition earn zero economic profit because A) firms are free to enter and exit. B) their products are similar but slightly different. C) of over-reliance on product marketing. D) of collusion among the various sellers. E) their demand curves are horizontal. Answer: A Topic: Monopolistic competition, efficiency Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

82) In long-run equilibrium, a firm in monopolistic competition makes A) an economic profit, but the economic profit is less than it would be if the firm was a monopoly. B) an economic profit that is higher than what it would be if the firm was a monopoly. C) zero economic profit. D) an economic profit that is the same amount as it would be if the firm was a monopoly. E) an economic profit, an economic loss, or zero economic profit. Answer: C Topic: Monopolistic competition, long run profit Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

83) In monopolistic competition there are ________ barriers to entry, so therefore in the long run, economic profit ________. A) no; is substantial B) no; equals zero C) many; equals zero D) many; is substantial E) many; might be earned depending on the degree of product differentiation Answer: B Topic: Monopolistic competition, long run Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

84) In monopolistic competition, there are ________ barriers to entry and so firms in monopolistic competition ________ earn an economic profit in the long run. A) high; can B) high; cannot C) no; can D) no; cannot E) sometimes; can sometimes Answer: D Topic: Monopolistic competition, long run Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

85) Entry and exit continue in monopolistic competition until the remaining firms are A) earning an economic profit. B) incurring an economic loss. C) earning less than a normal profit. D) earning zero economic profit. E) producing the normal amount of product differentiation. Answer: D Topic: Monopolistic competition, long run Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

86) A firm in monopolistic competition is similar to a firm in perfect competition because they both A) can earn only zero economic profit in the long run. B) can earn only zero economic profit in the short run. C) maximize their profits by producing where P = MR = MC. D) Both answers A and C are correct. E) Both answers B and C are correct. Answer: A Topic: Monopolistic competition, long run Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

87) The primary reason why monopolistically competitive firms cannot earn an economic profit in the long run is because A) there are barriers to entry. B) there is freedom of entry. C) the antitrust laws prevent profit from increasing. D) recessions occur. E) they collude to earn a normal profit. Answer: B Topic: Monopolistic competition, long run Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

88) In monopolistic competition, the entry of new firms A) shifts existing firms' demand curves rightward. B) shifts existing firms' demand curves leftward. C) only results in a movement along the existing firms' demand curves. D) has no effect on the existing firms' demand curves. E) shifts existing firms' supply curves rightward. Answer: B Topic: Monopolistic competition, long run Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

89) When a monopolistically competitive firm's demand curve shifts leftward, what happens to its marginal revenue curve? A) Nothing, the marginal revenue curve is unchanged. B) It disappears. C) It shifts rightward. D) It shifts leftward. E) None of the above is correct because the effect on the marginal revenue curve depends on whether the demand was initially elastic or inelastic. Answer: D Topic: Monopolistic competition, long run Skill: Level 4: Applying models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

90) If firms in monopolistic competition are earning economic profits, then A) they can expect to earn the profits indefinitely. B) new rivals enter the industry, and the demand for any seller's good decreases. C) the market demand becomes more inelastic. D) the industry is in long-run equilibrium. E) new rivals enter the industry, and the demand for any seller's good increases. Answer: B Topic: Monopolistic competition, long run Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

91) Nike is a firm in monopolistic competition. If Nike is earning an economic profit from new crosstraining shoe, over time the demand for these shoes A) increases as new firms enter the market. B) decreases as new firms enter the market. C) does not change as new firms enter the market. D) decreases as firms exit the market. E) increases as firms exit the market. Answer: B Topic: Monopolistic competition, long run Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Application of knowledge

92) In the long run, firms in monopolistic competition earn zero economic profit. When firms earn zero economic profit, in the long run they exit the industry. A) The first sentence is correct and the second sentence is incorrect. B) The first sentence is incorrect and the second sentence is correct. C) Both sentences are correct. D) Both sentences are incorrect. E) More information about the presence or absence of barriers to entry and exit is needed to determine if the statements are true or false. Answer: A Topic: Monopolistic competition, long run Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

93) When firms in monopolistic competition incur an economic loss, some firms will A) enter the industry and produce more products. B) exit the industry, and demand will increase for the firms that remain. C) exit the industry, and demand will decrease for the firms that remain. D) enter the industry, and demand will become more elastic for the original firms. E) exit the industry and other firms will enter. Answer: B Topic: Monopolistic competition, long run Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

94) When firms in monopolistic competition are making an economic profit, firms will A) enter the industry, and demand will increase for the original firms. B) exit the industry, and demand will increase for the firms that remain. C) exit the industry, and demand will decrease for the firms that remain. D) enter the industry, and demand will decrease for the original firms. E) enter the industry and then will exit the industry. Answer: D Topic: Monopolistic competition, long run Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

95) At a long-run equilibrium in monopolistic competition, price equals A) average total cost. B) marginal cost but not marginal revenue. C) marginal revenue but not marginal cost. D) zero. E) marginal revenue and marginal cost. Answer: A Topic: Monopolistic competition, long run Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

96) In the long run, a firm in monopolistic competition will produce A) where average total cost is minimized. B) where price equals average total cost but average total cost is not at its minimum. C) zero output. D) any possible amount of output. E) where price equals marginal cost. Answer: B Topic: Monopolistic competition, long run Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

97) Which of the following is NOT a characteristic of long-run equilibrium in monopolistic competition? A) The firm earns zero economic profit. B) Price is equal to average total cost. C) Production occurs at minimum average total cost. D) Marginal revenue is equal to marginal cost. E) Price exceeds marginal revenue. Answer: C Topic: Monopolistic competition, long run Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

98) Which of the following is TRUE about a firm in monopolistic competition in the long run? A) P = MC B) P = MR C) ATC = MC D) P = ATC E) MC = ATC Answer: D Topic: Monopolistic competition, long run Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

99) In the long-run, a firm in monopolistic competition produces at an output level where A) P > ATC and MR = MC. B) P > ATC and MR > MC. C) P = ATC and MR = MC. D) P = ATC and MR > MC. E) P = ATC and MC = ATC. Answer: C Topic: Monopolistic competition, long run Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

100) In monopolistic competition in the long run, firms A) make zero economic profit and require more capacity. B) incur an economic loss and require more capacity. C) make an economic profit and have excess capacity. D) make zero economic profit and have excess capacity. E) make an economic profit and require more capacity. Answer: D Topic: Monopolistic competition, excess capacity Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

101) 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) difference between the price charged by a monopoly and a monopolistically competitive firm with the same costs. E) None of the above answers is correct. Answer: E Topic: Monopolistic competition, excess capacity Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

102) In the long run, firms in monopolistic competition produce at a level that is ________ the efficient scale of output. A) less than B) equal to C) more than D) not comparable to E) All of the above are possible depending on market conditions. Answer: A Topic: Monopolistic competition, excess capacity Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

103) For a firm in monopolistic competition, the efficient scale is the amount of output at which ________ is a minimum. A) fixed cost B) average total cost C) average variable cost D) average fixed cost E) marginal cost Answer: B Topic: Monopolistic competition, excess capacity Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

104) Excess capacity exists when a firm produces A) more than the profit-maximizing level of output. B) less than the quantity that minimizes average total cost. C) less than the quantity that minimizes marginal cost. D) more than the quantity that minimizes marginal cost. E) None of the above answers is correct. Answer: B Topic: Monopolistic competition, excess capacity Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

105) If a firm is maximizing its profit and producing less than the output at which its average total cost is minimized, then that firm A) must be suffering an economic loss. B) must be earning an economic profit. C) has excess capacity. D) is producing at its capacity output. E) must be earning a normal profit. Answer: C Topic: Monopolistic competition, excess capacity Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

106) Which of the following is correct? A) A firm in monopolistic competition does not have excess capacity in the long run. B) A firm in perfect competition operates at maximum average total cost in the long run. C) In the long run, a firm in monopolistic competition maximizes its profit at a point where price is equal to average total cost but the average total cost is not minimized. D) In the long run, a firm in monopolistic competition earns zero economic profit and its price is equal to the minimum average total cost. E) In the long run, a firm in monopolistic competition can earn an economic profit because of product differentiation. Answer: C Topic: Monopolistic competition, excess capacity Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

107) A firm in monopolistic competition is A) efficient because in the long run it earns zero economic profit. B) efficient because it produces at the minimum average total cost. C) inefficient because price exceeds marginal cost. D) efficient because of the ease of entry. E) efficient because it produces where MR = MC. Answer: C Topic: Monopolistic competition, efficiency Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

108) Monopolistic competition is judged to be economically inefficient because A) the price is greater than marginal cost. B) firms earn zero economic profit in the long run. C) marginal revenue equals marginal cost. D) firms have deficient capacity in the long run. E) firms earn an economic profit in the long run. Answer: A Topic: Monopolistic competition, efficiency Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

109) One of the major benefits to society of monopolistic competition is A) high prices. B) restricted output. C) product differentiation. D) the excess capacity. E) the markup. Answer: C Topic: Monopolistic competition, efficiency Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

110) In monopolistic competition, there is inefficiency because price is greater than marginal cost. What brings about this inefficiency? A) high concentration, as indicated by the large concentration ratio B) product differentiation C) freedom of entry and exit D) marginal cost rises as more output is produced E) the fact there are many firms in the market Answer: B Topic: Monopolistic competition, efficiency Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

111) Even though monopolistic competition results in inefficiency, it does have which of the following benefits for society? A) Firms earn zero economic profit in the long run. B) Firms can earn an economic profit in the short run. C) Product variety benefits consumers. D) Marginal cost equals price in the long run. E) The premise of the question is incorrect because nothing in monopolistic competition justifies any economic inefficiency. Answer: C Topic: Monopolistic competition, efficiency Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

112) Which of the following is an advantage to society of monopolistic competition? A) production at the lowest possible average cost B) product variety C) only essential costs are incurred D) long-run profitability E) The firms have excess capacity so they are are always willing to increase their production. Answer: B Topic: Monopolistic competition, efficiency Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

113) In monopolistic competition there A) are many firms and many buyers. B) are several large firms. C) is one large firm. D) might be many, several, or one firm. E) are many firms but only a few buyers. Answer: A Topic: Monopolistic competition, definition Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

114) Product differentiation means A) making a product that has perfect substitutes. B) making a product that is entirely unique. C) the inability to set your own price. D) making a product that is slightly different from products of competing firms. E) making your demand curve horizontal. Answer: D Topic: Product differentiation Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

115) If the four-firm concentration ratio for the market for pizza is 28 percent, then this industry is best characterized as A) a monopoly. B) monopolistic competition. C) an oligopoly. D) perfect competition. E) oligopolistic competition. Answer: B Topic: Four-firm concentration ratio Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Application of knowledge

116) Each of the four firms in an industry has a market share of 25 percent. The Herfindahl-Hirschman Index equals A) 3,600. B) 100. C) 625. D) 25. E) 2,500. Answer: E Topic: Herfindahl-Hirschman Index Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

117) The larger the four-firm concentration ratio, the ________ competition within an industry; the larger the Herfindahl-Hirschman Index, the ________ competition within an industry. A) more; more B) more; less C) less; more D) less; less E) The premise of the question is wrong because the four-firm concentration ratio applies only to markets with four firms in it and these markets are, by definition, not competitive. Answer: D Topic: Herfindahl-Hirschman Index Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

118) A firm in monopolistic competition has ________ demand curve. A) a downward-sloping B) an upward-sloping C) a vertical D) a horizontal E) a U-shaped Answer: A Topic: Monopolistic competition, demand curve Skill: Level 4: Applying models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

119) A firm in monopolistic competition maximizes profit by producing the quantity at which A) marginal revenue equals marginal cost. B) price equals marginal revenue. C) price equals marginal cost. D) demand equals marginal cost. E) price equals average total cost. Answer: A Topic: Monopolistic competition, demand curve Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

120) Monopolistic competition is efficient when compared to A) perfect competition. B) complete product uniformity. C) the short run. D) the long run. E) None of the above answers is correct. Answer: B Topic: Monopolistic competition, efficiency Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

121) The absence of barriers to entry in monopolistic competition means that in the long run, firms A) earn an economic profit. B) earn zero economic profit. C) incur an economic loss. D) earn either an economic profit or zero economic profit. E) earn either zero economic profit or suffer an economic profit. Answer: B Topic: Monopolistic competition, long run profit Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

13.2 Innovation and Advertising 1) For a firm in monopolistic competition, innovation and product development are A) senseless because economic profit is always zero in the long run. B) necessary in order to have a chance of earning at least a short-run economic profit. C) inconsequential because each firm produces a different product. D) necessary to allow new firms to enter. E) uncommon because other firms already produce similar products. Answer: B Topic: Innovation and product development Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking

2) To maintain their economic profits, firms in monopolistic competition must continually engage in A) product innovation and development. B) lowering their product's price. C) raising their product's price. D) realizing short-run losses. E) making the demand for their product more elastic. Answer: A Topic: Innovation and product development Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking

3) Bounty paper towels is an example of a good produced in ________ market. This means that the firm ________ engage in advertising which will ________. A) a monopolistically competitive; will; increase average total cost B) a monopolistically competitive; will; not change average total cost C) a perfect competitively; will; increase average total cost D) a perfect competitively; will not; create an efficient outcome E) an oligopolistic; will not; create an efficient outcome Answer: A Topic: Monopolistic competition, innovation & advertising Skill: Level 3: Using models Section: Checkpoint 13.2 Status: New AACSB: Application of knowledge

4) Crest toothpaste, produced by Proctor & Gamble, is produced in a ________ market. This means that Proctor & Gamble must advertise in order to ________. A) perfectly competitive; differentiate their product B) monopolistically competitive; increase excess capacity C) monopolistically competitive; differentiate their product D) perfectly competitive; decrease the deadweight loss E) monopoly; differentiate their product Answer: C Topic: Monopolistic competition, innovation & advertising Skill: Level 3: Using models Section: Checkpoint 13.2 Status: New AACSB: Application of knowledge

5) Smart phone manufacturers differentiate their products because A) it is cheaper than using advertising. B) this is required to keep operating in an oligopoly. C) average total cost would otherwise increase. D) they want to prevent competition from driving their economic profit to $0 in the long run. E) it's the best way to signal their product's quality. Answer: D Topic: Monopolistic competition, innovation & advertising Skill: Level 5: Critical thinking Section: Checkpoint 13.2 Status: New AACSB: Analytical thinking

6) Nike hires professional athletes to advertise their products. What is Nike trying to accomplish with this advertising? i. Increase the elasticity of demand for its product. ii. Signal the products' quality. iii. Decrease the products' markup. A) ii only B) i and ii C) i, ii and iii D) i and iii E) ii and iii Answer: A Topic: Monopolistic competition, innovation & advertising Skill: Level 5: Critical thinking Section: Checkpoint 13.2 Status: New AACSB: Analytical thinking

7) Which of the following could occur when a monopolistically competitive firm decides to advertise? A) Demand will become more elastic and average total cost will increase. B) The firm's markup will increase. C) Excess capacity will be eliminated. D) A two-sided market can be created. E) Decrease the market's deadweight loss. Answer: A Topic: Monopolistic competition, innovation & advertising Skill: Level 5: Critical thinking Section: Checkpoint 13.2 Status: New AACSB: Analytical thinking

8) The shampoo industry is constantly coming out with new products. The reason is that when a firm introduces a new shampoo into the market, the demand for the shampoo becomes ________ temporarily and economic profit ________. A) more elastic; decreases B) less elastic; increases C) more elastic; increases D) less elastic; decreases E) unit elastic; increases Answer: B Topic: Innovation and product development Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Application of knowledge

9) A firm is spending the profit-maximizing amount on product development when A) people perceive the firm's product to be better than those of its competitors. B) the marginal cost of product development is equal to the marginal revenue from product development. C) the price of the good is higher than its marginal cost. D) the advertising costs are covered. E) the firm's total revenue exceeds its total costs. Answer: B Topic: Innovation and product development Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking

10) Firms decide how much to spend on product development and marketing by A) spending the same amount as they did in previous years. B) spending the historical average of 1/4 of total production cost. C) determining what it will take to eliminate excess capacity. D) balancing the cost and the benefit of product development and marketing. E) ensuring that the marginal cost of product development and marketing is less than or equal to the marginal cost of producing the good or service. Answer: D Topic: Innovation and product development Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking

11) For a firm in monopolistic competition to undertake product development, the marginal cost of the development must be ________ the marginal benefit of the development to consumers. A) greater than B) less than C) not comparable to D) equal to or less than E) None of the above because a monopolistically competitive firm undertakes product development if the marginal cost of the development is less than or equal to the marginal revenue to the firm from the development. Answer: E Topic: Innovation and product development Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking

12) Which of the following statements about product development in monopolistic competition is correct? i. Firms in monopolistic competition undertake too much product development for efficiency. ii. Firms in monopolistic competition undertake too little product development for efficiency. iii. Product development might allow the firm to temporarily earn an economic profit. A) i only B) ii only C) ii and iii D) i and iii E) iii only Answer: C Topic: Innovation and product development Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking

13) A firm in monopolistic competition A) has no control over the price of the product it is selling. B) might be selling a brand name product. C) does not advertise nor market its product. D) Both answers A and B are correct. E) Answers A, B, and C are correct. Answer: B Topic: Selling costs Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking

14) Firms attempt to create a consumer perception of product differentiation through i. packaging. ii. marketing. iii. advertising. A) i only B) ii only C) ii and iii D) i and iii E) i, ii, and iii Answer: E Topic: Selling costs Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking

15) Advertising is a ________ cost that is incurred by ________. A) variable; monopolies B) variable; perfectly competitive firms C) fixed; perfectly competitive firms D) fixed; monopolistically competitive firms E) marginal; monopolistically competitive firms Answer: D Topic: Selling costs Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking

16) How do advertising and other selling costs affect a firm? A) They shift the marginal cost curve upward. B) The only effect is that the excess capacity is reduced. C) The only effect is that the demand for the product increases. D) They shift the average total cost curve upward. E) The do not change demand and shift the average total cost curve downward. Answer: D Topic: Selling costs Skill: Level 4: Applying models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

17) In which of the following ways do advertising and other selling costs affect a firm's cost curves? i. Advertising expenditures increase total fixed costs. ii. Selling costs increase total fixed costs. iii. Advertising and other selling costs per unit of output decrease as output increases. A) i only B) i and ii C) iii only D) i and iii E) i, ii, and iii Answer: E Topic: Selling costs Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

18) In the long run, advertising by all firms in a monopolistically competitive industry A) increases all firms' demand. B) decreases all firms' demand. C) lowers all firms' costs. D) might increase or decrease the firms' prices. E) lowers all firms' prices. Answer: D Topic: Selling costs Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking

19) In the example of the Nike running shoe, we see that A) selling costs account for over half of a shoe's retail price. B) materials actually account for two-thirds of the retail price of the shoes. C) taxes account for one-quarter of the retail price of the shoes. D) production costs exceed selling costs by a wide margin. E) raw materials costs are by far the largest component of the total costs of producing the shoes. Answer: A Topic: Eye on your life, some selling costs you pay Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Application of knowledge

20) When weighing the efficiency of monopolistic competition, which of the following should be considered? i. The information provided by advertising ii. Product variety iii. The extra cost of excess capacity A) ii only B) i and iii C) ii and iii D) i, ii, and iii E) iii only Answer: D Topic: Efficiency of advertising Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking

21) Because economic profits are eliminated in the long run in monopolistic competition, to earn an economic profit firms continuously A) shut down. B) exit the industry. C) innovate and develop new products. D) declare bankruptcy. E) decrease their costs by decreasing their selling costs. Answer: C Topic: Innovation and product development Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking

22) A firm in monopolistic competition that introduces a new and differentiated product will temporarily have a ________ demand for its product and is able to charge ________. A) less elastic; a lower price than before B) less elastic; a higher price than before C) more elastic; a lower price than before D) more elastic; a higher price than before E) less elastic; the same price as before Answer: B Topic: Innovation and product development Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

23) The decision to innovate A) depends on the marketing department's needs. B) depends on whether the firm wants to benefit its customers. C) is based on the marginal cost and the marginal revenue of innovation. D) is unnecessary in a monopolistically competitive market. E) None of the above answers is correct. Answer: C Topic: Innovation and product development Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking

24) Advertising costs and other selling costs are A) efficient. B) fixed costs. C) variable costs. D) marginal costs. E) considered as part of demand because they affect the demand for the good. Answer: B Topic: Selling costs Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking

25) For a firm in monopolistic competition, selling costs A) increase costs and reduce profits. B) always increase demand. C) can change the quantity produced and lower the average total cost. D) can lower total cost. E) have no effect on the quantity sold. Answer: C Topic: Selling costs Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking

26) The efficiency of monopolistic competition A) is as clear-cut as the efficiency of perfect competition. B) depends on whether the gain from extra product variety offsets the selling costs and the extra cost that arises from excess capacity. C) comes from its excess capacity. D) is eliminated in the long run. E) is equal to that of monopoly. Answer: B Topic: Efficiency: the bottom line Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking

27) Consider the monopolistically competitive market for blue jeans. The lack of efficiency of the blue jean market is evidenced by ________ which may be offset by ________. A) excess capacity; variety and innovation B) variety and innovation; excess capacity C) the firms making zero economic profit; excess capacity D) signalling; economic profits E) advertising; economic profits Answer: A Topic: Monopolistic competition, efficiency Skill: Level 5: Critical thinking Section: Checkpoint 13.2 Status: New AACSB: Analytical thinking

28) Consider the monopolistically competitive market for running shoes. The market is considered inefficient because ________ but runners ________ which may make the inefficiency worthwhile. A) excess capacity occurs; pay lower prices B) a deadweight loss occurs; enjoy variety and innovation C) consumers obtain variety; pay lower prices D) demand is elastic; enjoy variety and innovation E) signalling occurs; pay lower prices Answer: B Topic: Monopolistic competition, efficiency Skill: Level 5: Critical thinking Section: Checkpoint 13.2 Status: New AACSB: Analytical thinking

13.3 Oligopoly 1) A firm faces a small number of competitors. This firm is competing in A) a monopoly. B) monopolistic competition. C) an oligopoly. D) perfect competition. E) a perfect multi-firm monopoly. Answer: C Topic: Oligopoly Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

2) Sammy's Inc. competes with a few other firms because there are natural barriers to entry. Sammy's operates in A) a perfectly competitive market. B) an oligopoly. C) a monopolistically competitive market. D) a monopoly. E) a natural monopolistically competitive market. Answer: B Topic: Oligopoly Skill: Level 1: Definition Section: Checkpoint 13.3 Status: Old AACSB: Application of knowledge

3) Herb's Inc. has a large share of its market and is tempted to collude with the few firms that are in its market. Herb's operates in A) an oligopoly. B) a monopolistically competitive market. C) a monopoly market. D) a perfectly competitive market. E) a collusively protected market. Answer: A Topic: Oligopoly Skill: Level 1: Definition Section: Checkpoint 13.3 Status: Old AACSB: Application of knowledge

4) Which of the following is found ONLY in oligopoly? A) Producers sell identical products. B) One firm's actions affect another firm's profit. C) Entry into the industry is blocked. D) Sellers face a downward sloping demand curve for their product. E) The firm's demand curve is horizontal. Answer: B Topic: Oligopoly Skill: Level 1: Definition Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

5) In an oligopoly, there are A) many firms and barriers to entry. B) many firms and no barriers to entry. C) few firms and barriers to entry. D) few firms and no barriers to entry. E) barriers to entry and only one firm. Answer: C Topic: Oligopoly Skill: Level 1: Definition Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

6) A cartel is A) a market structure with a small number of large firms. B) a market structure with a large number of small firms. C) a group of firms acting together to raise price, decrease output, and increase economic profit. D) a market with only two firms. E) another name for an oligopoly. Answer: C Topic: Cartel Skill: Level 1: Definition Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

7) A group of firms acting together to limit output, raise price, and increase economic profit is a called a A) duopoly. B) monopolistic oligopoly. C) competitive oligopoly. D) cartel. E) multi-firm competitive monopoly. Answer: D Topic: Cartel Skill: Level 1: Definition Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

8) A cartel is a collusive agreement among a number of firms that is designed to A) expand output and lower prices but not to a predatory level. B) restrict output and lower prices to a predatory level. C) restrict output and raise prices. D) expand output and raise prices. E) expand output and lower prices to a predatory level. Answer: C Topic: Cartel regulation Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

9) A cartel is A) a group of firms selling identical products but at slightly different prices. B) an agreement among firms to limit output, raise prices, and increase economic profit. C) the automobile producing industry. D) the only firm selling a particular product. E) an illegal agreement among firms which most often arises in monopolistically competitive markets. Answer: B Topic: Cartel Skill: Level 1: Definition Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

10) A group of firms that has entered into an agreement to restrict output and increase prices and profits is called A) a compliance. B) a cartel. C) an oligopoly. D) a duopoly. E) a multi-firm monopoly. Answer: B Topic: Cartel Skill: Level 1: Definition Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

11) If a few oil-producing countries in the Middle East decide to jointly limit the production of oil, A) they are forming a cartel. B) they would like the price of oil to be the same as if the market were perfectly competitive. C) game theory does not apply to their actions because they are nations, not firms. D) they will try to operate as a large, monopolistically competitive firm. E) they will agree to lower the price of oil in order to increase their profits. Answer: A Topic: Cartel Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Application of knowledge

12) Daryl's Inc. has formed a cartel with the two other firms in its industry. In which of the following market structures does Daryl's operate? A) monopolistic competition B) oligopoly C) perfect competition D) monopoly E) legally protected monopoly Answer: B Topic: Cartel Skill: Level 1: Definition Section: Checkpoint 13.3 Status: Old AACSB: Application of knowledge

13) Energizer and Duracell dominate the battery market. It is possible that they could ________ because they operate in ________. A) form a cartel and collude; an oligopoly B) earn $0 profit in the long run; a monopolistically competitive market C) form a cartel; a monopolistically competitive market D) collude; a perfect competitive market E) have excess capacity; a natural monopoly Answer: A Topic: Oligopoly Skill: Level 2: Using definitions Section: Checkpoint 13.3 Status: New AACSB: Application of knowledge

14) Consider Travel Trains and The Trolley - the only 2 firms that provide tourist transportation in a resort town. These two firms know that A) their actions affect each others' profits. B) they have no control over the prices they charge. C) they must price discriminate in order to earn a profit. D) they cannot earn an economic profit in the long run. E) it is legal for them to jointly determine their prices because they are the only two firms in the market. Answer: A Topic: Oligopoly, definition Skill: Level 2: Using definitions Section: Checkpoint 13.3 Status: New AACSB: Application of knowledge

15) Two doctors are the only veterinarians in town. These vets operate in ________ and can ________. A) an oligopoly; increase production to achieve economies of scale B) a natural monopoly; eliminate excess capacity by decreasing their production C) a duopoly; form an cartel to increase their profits (even though this would be illegal) D) duopoly; increase consumer surplus by forming a cartel (even though this would be illegal) E) a duopoly; decrease the deadweight loss in the market by forming a cartel (even though this would be illegal) Answer: C Topic: Oligopoly Skill: Level 2: Using definitions Section: Checkpoint 13.3 Status: New AACSB: Application of knowledge

16) A cartel is most likely to occur in A) perfect competition as firms compete by reducing cost. B) oligopoly as firms act together to raise prices and increase profits. C) monopolistic competition where firms collude to increase profits. D) oligopoly as firms compete to lower price and increase their own profits. E) monopoly because it faces no competition. Answer: B Topic: Cartel Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

17) "Duopoly" is A) another name for monopoly. B) a special type of monopolistic competition. C) a two-firm oligopoly. D) a game with three players. E) the situation when a firm sets a duo (two) of different prices for its customers. Answer: C Topic: Duopoly Skill: Level 1: Definition Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

18) A two-firm oligopoly is called a A) double monopoly. B) cartel. C) duopoly. D) monopolistic oligopoly. E) dual-market. Answer: C Topic: Duopoly Skill: Level 1: Definition Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

19) An oligopoly created because of economies of scale is called a A) natural oligopoly. B) legal oligopoly. C) public oligopoly. D) monopolistic oligopoly. E) scale oligopoly. Answer: A Topic: Natural oligopoly Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

20) When economies of scale limit the number of firms in an industry to 3, there is a A) natural monopoly. B) natural oligopoly. C) legal oligopoly. D) legal cartel. E) natural monopolistic competition. Answer: B Topic: Natural oligopoly Skill: Level 1: Definition Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

21) When a city licenses only 3 taxi firms to serve the market, the city has created a A) cartel. B) legal monopoly. C) monopolistically competitive market. D) legal oligopoly. E) natural oligopoly. Answer: D Topic: Legal oligopoly Skill: Level 1: Definition Section: Checkpoint 13.3 Status: Old AACSB: Application of knowledge

22) When oligopolies seek to operate as a single-price monopoly, the firms produce at the point where: A) P = MC. B) MR = MC. C) P < ATC. D) P = MR. E) MC = ATC. Answer: B Topic: Monopoly outcome Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Analytical thinking

23) When firms in an oligopoly successfully collude and do not cheat on a cartel agreement, they can achieve long-run economic profit similar to A) perfect competition. B) monopoly. C) monopolistic competition. D) non-colluding oligopolies. E) the firms in regulated industries. Answer: B Topic: Monopoly outcome Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

24) If firms in an oligopolistic industry successfully collude and form a cartel, what price and output will result? A) the monopoly price and output B) the competitive price and output C) the monopolistically competitive price and output D) a price higher than the monopoly price and, because there is more than one firm in the industry, more output than the monopoly amount E) a price lower than the competitive price and, because there are only a few firms in the industry, less output than the competitive amount Answer: A Topic: Monopoly outcome Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

25) When oligopolies operate like firms in perfect competition, the firms produce at the point where the A) price is less than the marginal cost. B) marginal cost equals the price. C) price exceeds the marginal cost by the greatest amount. D) price exceeds the average total cost by the greatest amount. E) marginal cost equals the average total cost. Answer: B Topic: Competitive outcome Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

26) If firms in an oligopolistic industry consistently cut their price to sell more output, what price and output will result? A) the monopoly price and output B) the competitive price and output C) the monopolistically competitive price and output D) a price lower than the competitive price and less output than the competitive amount E) a price lower than the competitive price and more output than the competitive amount Answer: B Topic: Competitive outcome Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

27) The range in which a duopoly's output falls is less than or equal to the output level in ________ and more than or equal to the output level in ________. A) monopolistic competition; monopoly B) monopolistic competition; perfect competition C) perfect competition; monopoly D) monopoly; monopolistic competition E) monopoly; perfect competition Answer: C Topic: Range of outcomes Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

28) In an oligopoly, output is A) less than the output in monopoly. B) greater than the output in perfect competition. C) in all circumstances the same as the output in perfect competition. D) somewhere between the output in monopoly and that in perfect competition outcomes. E) in all circumstances the same as the output in monopoly. Answer: D Topic: Range of outcomes Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

29) The possible alternatives for an oligopoly range from the monopoly case with ________ to the perfectly competitive case with ________. A) high output; low output B) low prices; high prices C) low profits; high profits D) low output; high output E) no cooperation among the firms; much cooperation among the firms Answer: D Topic: Range of outcomes Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

30) The above figure shows the market demand curve for long-distance telephone calls. Suppose the marginal cost of a long-distance telephone call is 2¢ a minute for a call no matter how many minutes of calls are made and there are 3 firms in the industry. If the firms in the industry operate as perfect competitors, there are ________ minutes of calls made per hour. A) between 0 and 3 million B) more than 3 million and less than or equal to 5 million C) more than 5 million and less than or equal to 7 million D) more than 7 million and less than or equal to 9 million E) more than 9 million Answer: D Topic: Competitive outcome Skill: Level 4: Applying models Section: Checkpoint 13.3 Status: Old AACSB: Analytical thinking

31) The above figure shows the market demand curve for long-distance telephone calls. Suppose the marginal cost of a long-distance telephone call is 2¢ a minute for a call no matter how many minutes of calls are made and there are 3 firms in the industry. If the firms in the industry operate as a monopoly, there are ________ minutes of calls made per hour. A) between 0 and 3 million B) more than 3 million and less than or equal to 5 million C) more than 5 million and less than or equal to 7 million D) more than 7 million and less than or equal to 9 million E) more than 9 million Answer: B Topic: Monopoly outcome Skill: Level 4: Applying models Section: Checkpoint 13.3 Status: Old AACSB: Analytical thinking

32) The above figure shows the market demand curve for long-distance telephone calls. Suppose the marginal cost of a long-distance telephone call is 2¢ a minute for a call no matter how many minutes of calls are made and there are 3 firms in the industry. If the firms in the industry operate as perfect competitors, the price of a call is ________ per minute and if the firms in the industry operate as a monopoly, the price of a call is ________ per minute. A) 2 cents; more than 3 cents and less than 4 cents B) more than 3 cents and less than 4 cents; more than 3 cents and less than 4 cents C) 1 cents; 2 cents D) 2 cents; either equal to 4 cents or more than 4 cents E) either equal to 4 cents or more than 4 cents; 2 cents Answer: A Topic: Range of outcomes Skill: Level 4: Applying models Section: Checkpoint 13.3 Status: Old AACSB: Analytical thinking

33) Which of the following statements is correct? A) A firm in oligopoly will charge a price that is lower than the price charged in perfect competition. B) If firms in oligopoly look only at their own self-interest in deciding the output they should produce, the total market output will exceed that of a monopoly. C) If one oligopolist reduces the price of its product, its demand curve shifts leftward. D) Because many producers join to form a cartel, the market becomes monopolistic competition. E) It is in the self-interest of each firm in an oligopoly to take the actions that maximize all the firms' joint profit. Answer: B Topic: Duopolists' dilemma Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

34) The major dilemma facing Boeing and Airbus is the A) fact that neither will respond to the behavior of the other. B) certainty surrounding the reaction of each firm to the behavior of the other firm. C) fact that if each firm separately tries to maximize its profit, it might wind up with less profit that otherwise. D) competition from other firms that drives their economic profit to zero. E) fact that when they collude to maximize their profit, the other firm's profit might be larger than its profit. Answer: C Topic: Duopolists' dilemma Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

35) Imagine a duopoly in which two firms, A and B, produce the monopoly profit-maximizing output and equally share the economic profit. If firm A increases output, A) both firms' profits increase. B) firm A's profits increase and firm B's profits decrease. C) firm B's profits increase and firm A's profits decrease. D) both firms' profits decrease. E) firm A's profits increase and firm B's profits do not change. Answer: B Topic: Duopolists' dilemma Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

36) Imagine a duopoly in which two firms, A and B, produce the monopoly profit-maximizing output and equally share the economic profit. If firm A increases its output, the market price ________ and total economic profit of the two firms combined ________. A) falls; decreases B) falls; increases C) rises; decreases D) rises; increases E) falls; does not change Answer: A Topic: Duopolists' dilemma Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

37) If one firm in a duopoly increases its production by one unit beyond the monopoly output, that firm's profit ________, the other firm's profit ________, and the total profit of the duopoly ________. A) increases; increases; increases B) does not change; does not change; does not change C) increases; decreases; does not change D) increases; does not change; increases E) increases; decreases; decreases Answer: E Topic: Duopolists' dilemma Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

38) Which of the following is true? In the above figure, if the market is A) a monopoly, output will be Q1 and price will be P3. B) a monopoly, output will be Q3 and price will be P3. C) perfect competition, output will be Q2 and price will be P2. D) perfect competition, output will be Q1 and price will be P1. E) perfect competition, output will be Q3 and price will be P3. Answer: C Topic: Competitive outcome Skill: Level 4: Applying models Section: Checkpoint 13.3 Status: Old AACSB: Analytical thinking

39) In the above figure, the output of an oligopoly will range between A) 0 and Q1. B) Q1 and Q2. C) Q1 and Q3. D) Q2 and Q3. E) 0 and Q2. Answer: B Topic: Range of outcomes Skill: Level 4: Applying models Section: Checkpoint 13.3 Status: Old AACSB: Analytical thinking

40) Boeing and Airbus have entered into a cartel agreement that will enable them to boost their profits. What occurs if Boeing decides to cheat on the agreement? i. Boeing lowers the price of its airplanes. ii. The total industry output increases. iii. The total profits in the airplane industry will decrease. A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: E Topic: Range of outcomes Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Application of knowledge

41) Oligopoly is a market structure in which A) many firms each produce a slightly differentiated product. B) one firm produces a unique product. C) a small number of firms compete. D) many firms produce an identical product. E) the number of firms is so small that they do not compete with each other. Answer: C Topic: Oligopoly Skill: Level 1: Definition Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

42) Collusion results when a group of firms i. act separately to limit output, lower prices, and decrease economic profits. ii. act together to limit output, raise prices, and increase economic profits. iii. in the United States legally fix prices. A) i only B) ii only C) iii only D) i and iii E) ii and iii Answer: B Topic: Collusion Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

43) A cartel is a group of firms A) acting separately to limit output, lower price, and decrease economic profit. B) acting together to limit output, raise price, and increase economic profit. C) legally fixing prices. D) acting together to erect barriers to entry. E) that compete primarily with each other rather than the other firms in the market. Answer: B Topic: Cartel Skill: Level 1: Definition Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

44) A market with only two firms is called a A) duopoly. B) two-firm monopolistic competition. C) two-firm monopoly. D) cartel. E) two-firm quasi monopoly. Answer: A Topic: Duopoly Skill: Level 1: Definition Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

45) For a duopoly, the maximum total profit is reached when the duopoly produces A) the same amount of output as the competitive outcome. B) the same amount of output as the monopoly outcome. C) an amount of output that lies between the competitive outcome and the monopoly outcome. D) more output than the competitive outcome. E) less output than the monopoly outcome. Answer: B Topic: Monopoly outcome Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

46) If a duopoly has reached the monopoly outcome, a firm can increase its profit if it and it alone ________ its price and ________ its production. A) raises; increases B) raises; decreases C) lowers; increases D) lowers; decreases E) raises; does not change Answer: C Topic: Duopolists' dilemma Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

47) If a duopoly has reached the monopoly outcome and only one firm increases its production, that firm's profit ________ and the other firm's profit ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) increases; does not change Answer: B Topic: Duopolists' dilemma Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Analytical thinking

48) Suppose a duopoly had reached the monopoly outcome and then the first firm increased its production. If the second firm next increases its production, the second firm's profit ________ and the first firm's profit ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) increases; does not change Answer: B Topic: Duopolists' dilemma Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Analytical thinking

13.4 Game Theory 1) The tool that economists use to analyze the mutual interdependence of oligopolies is A) economies of scale. B) the four-firm concentration ratio. C) game theory. D) the HHI. E) the efficient scale. Answer: C Topic: Game theory Skill: Level 1: Definition Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

2) Game theory is the tool that economists use to analyze strategic behavior, which is behavior that takes into account the ________ behavior of others and the mutual recognition of ________. A) unexpected; interdependence B) unexpected; independence C) expected; interdependence D) expected; independence E) random; profit Answer: C Topic: Game theory Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

3) Game theory is used to analyze the interactions among firms in A) oligopoly. B) perfect competition. C) monopoly. D) monopolistic competition. E) Both answers A and D are correct. Answer: A Topic: Game theory Skill: Level 1: Definition Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

4) Economists use game theory to analyze strategic behavior, which takes into account A) monopoly situations. B) the expected behavior of others and the recognition of mutual interdependence. C) the price-taking behavior of oligopolists. D) non-price competition. E) that increased demand decreases the market power of the firms in the market. Answer: B Topic: Game theory Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

5) The concepts of mutual interdependence and game theory illustrate the fact that firms competing in oligopoly A) consider the actions of the rivals before changing the price of their product. B) ignore the actions of their rivals when considering price changes. C) engage in frequent price changes. D) never change prices. E) will mutually determine the combined best outcome for all players. Answer: A Topic: Game theory Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

6) All games have which features? A) prices, rules, and payoffs B) rules, markets, and prices C) rules, strategies, and payoffs D) rules, strategies, and costs E) equilibrium, prices, and quantities Answer: C Topic: Game theory Skill: Level 1: Definition Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

7) The players in a game theory situation often do not act in their joint interest because of which of the following? A) They do not realize the benefit of cooperation. B) Players strive to minimize their opponents' profits. C) Players do not understand the game and its payoffs. D) It is not in each player's self-interest to cooperate. E) Players understand the game but they do not know which action(s) will benefit their joint interest. Answer: D Topic: Game theory Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

8) A Nash equilibrium i. is named after the Nobel prize winning economist, John Nash. ii. occurs when each player chooses the best strategy given the strategy of the other player. iii. must give the best possible outcome for each player. A) i only B) ii only C) iii only D) i and ii E) ii and iii Answer: D Topic: Nash equilibrium Skill: Level 1: Definition Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

9) A Nash equilibrium is defined as A) earning zero economic profit in the long run. B) forming a cartel with strong penalties for cheaters. C) relying on other game players to realize the benefit of cooperation. D) each player taking the best possible action given the action of the other player. E) each player taking the action that is best for all the players. Answer: D Topic: Nash equilibrium Skill: Level 1: Definition Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

10) A Nash equilibrium occurs when each player in a game takes the ________ given the action of the other player. A) worst possible action for himself or herself B) best possible action for himself or herself C) most unpredictable possible action D) most mutually beneficial possible action E) best possible action for the other player Answer: B Topic: Nash equilibrium Skill: Level 1: Definition Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

11) A Nash equilibrium in the duopoly game A) means that one player has greater market power. B) occurs when each player takes the best possible action regardless of the strategy chosen by other firms. C) will always lead to equilibrium in which the firms' total profit is the largest. D) can occur only if firms cooperate with each other. E) means that a firm must be able to determine its actions and the actions of its competitor. Answer: B Topic: Nash equilibrium Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

12) The prisoners' dilemma is an example of A) product differentiation. B) collusion. C) game theory. D) monopolistic competition. E) decision making in a monopoly. Answer: C Topic: Prisoners' dilemma Skill: Level 1: Definition Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

13) The prisoners' dilemma is A) an example of a duopoly game. B) a theory about why firms break the law. C) competition that can occur among firms in monopolistic competition. D) an example of the monopolist charging high prices. E) an example of a game that does not have a Nash equilibrium. Answer: A Topic: Prisoners' dilemma Skill: Level 1: Definition Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

14) In the prisoners' dilemma, each player is ________ regardless of the other players' actions. A) forced to confess B) forced to deny C) better off confessing D) better off denying E) going to go free Answer: C Topic: Prisoners' dilemma Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

15) The equilibrium in the prisoners' dilemma i. minimizes the prisoners' combined jail time. ii. has one prisoner confessing and the other denying. iii. is a Nash equilibrium. A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: C Topic: Prisoners' dilemma Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

16) In a prisoners' dilemma game, in the Nash equilibrium A) neither player gets his or her best outcome. B) both players get their best outcome. C) one player gets his or her best outcome and the other player does not. D) collusion would not alter the outcome. E) Either answer A or C might be correct depending on whether the players communicate with each other or do not communicate with each other. Answer: A Topic: Prisoners' dilemma Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

17) The table above shows the payoff matrix offered to two suspected criminals, Bonnie and Clyde. The payoffs are the years they will spend in prison. The suspected criminals are not allowed to communicate. Given the information in the payoff matrix, the Nash equilibrium is that Bonnie ________ and Clyde ________. A) confesses; denies B) confesses; confesses C) denies; denies D) denies; confesses E) denies; either confess or denies, either outcome is consistent with the Nash equilibrium Answer: B Topic: Prisoners' dilemma Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Analytical thinking

18) The table above shows the payoff matrix offered to two suspected criminals, Bonnie and Clyde. The payoffs are the years they will spend in prison. The suspected criminals are not allowed to communicate. Given the information in the payoff matrix, the Nash equilibrium is A) Bonnie confesses only if she thinks Clyde denies committing the crime. B) Clyde confesses only if he thinks Bonnie denies committing the crime. C) both Bonnie and Clyde confess to the crime. D) both Bonnie and Clyde deny committing the crime. E) Clyde confesses and Bonnie might either confess or not confess; either outcome is consistent with the Nash equilibrium. Answer: C Topic: Prisoners' dilemma Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Analytical thinking

19) The table above shows the payoff matrix offered to two suspected criminals, Bonnie and Clyde. The payoffs are the years they will spend in prison. The suspected criminals are not allowed to communicate. Which of the following statements correctly describes the equilibrium choices made by Bonnie and Clyde? A) The Nash equilibrium is the best outcome for Bonnie and Clyde. B) There is no equilibrium in this game. C) In the Nash equilibrium, both Bonnie and Clyde deny committing the crime. D) Bonnie and Clyde could improve upon the Nash equilibrium if they could communicate. E) Bonnie and Clyde get the best outcome for themselves because they are not allowed to communicate. Answer: D Topic: Nash equilibrium Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Analytical thinking

20) The table above shows the payoff matrix for two firms operating a Zipline duopoly in a resort town. If the firms can collude, industry profits equal ________ and both firms would offer ________ rides each. A) $10,000; 60 B) $6,000; 100 C) $5,000; 60 D) $5,000; 100 E) $10,000; 320 Answer: A Topic: Game theory Skill: Level 3: Using models Section: Checkpoint 18.3 Status: New AACSB: Application of knowledge

21) The table shows the payoff matrix for two firms operating a Zipline duopoly in a resort town. If the firms decide to compete, industry profits equal and both firms would offer ________ rides each. A) $6,000; 100 B) $5,000; 60 C) $9,000; 100 D) $9,000; 60 E) $10,000; 320 Answer: A Topic: Game theory Skill: Level 3: Using models Section: Checkpoint 18.3 Status: New AACSB: Application of knowledge

22) The table shows the payoff matrix for two firms operating a Zipline duopoly in a resort town. The Nash equilibrium for this market produces ________ rides per week with Firm X earning a profit of ________ and Firm Y earning a profit of ________. A) 200; $3,000; $3,000 B) 220; $3,000; $3,000 C) 200; $5,000; $3,000 D) 120; $10,000; $6,000 E) 220; $4,000; $5,000 Answer: A Topic: Game theory Skill: Level 3: Using models Section: Checkpoint 18.3 Status: New AACSB: Application of knowledge

23) The prisoners' dilemma is similar to the problem faced by firms in an oligopoly in the United States because A) mutual interdependence exists, and collusion is illegal in the United States, so the firms cannot legally communicate. B) collusion is legal in the United States, and firms can communicate their pricing decisions to each other. C) failure to cooperate leads to better outcomes than cooperation. D) private prisons are run by oligopolies. E) the firms can communicate, but mutual interdependence exists. Answer: A Topic: Nash equilibrium Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

24) In an oligopoly in which the firms have entered into a cartel agreement, the Nash equilibrium exhibits which of the following? A) firms jointly maximizing profits B) the firms cheating on the cartel agreement, which benefits society C) production at a price and output level close to monopolistic competition in the long run D) the firms cheating on the cartel agreement, which harms society E) one firm cheating on the cartel agreement and the other firms complying with the cartel agreement Answer: B Topic: Nash equilibrium Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

25) Long-run economic profits are most likely to be earned in A) perfect competition and oligopoly. B) perfect competition and monopoly. C) monopoly and oligopoly. D) oligopoly and monopolistic competition. E) perfect competition and monopolistic competition. Answer: C Topic: Duopoly game Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

26) If two duopolists can stick to a cartel agreement to boost their prices, then both A) earn greater profits than if they did not collude. B) price at marginal cost. C) price below average total cost. D) decrease their economic profits. E) increase their production so that each produces more than if they did not collude. Answer: A Topic: Duopoly game Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

27) If an oligopolistic game is repeatedly played, which of the following can occur? A) Players can learn ways to cooperate and earn an economic profit. B) The competitive price and output consistently is the final result. C) Firms can learn how to cheat more effectively on the other player. D) One firm will be driven out of business. E) An implicit agreement is reached in which one firm constantly cheats on the cartel and the other firm complies with it. Answer: A Topic: Repeated games Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

28) The only two firms in a market are trying to decide what price to charge. The payoff matrix for this duopoly game is shown above. The payoffs are thousands of dollars of economic profit. In the Nash equilibrium, Firm A will set a price of ________ and Firm B will set a price of ________. A) $10; $20 B) $20; $10 C) $10; $10 D) $20; $20 E) $20; something, but more information is needed to determine Firm B's price Answer: C Topic: Nash equilibrium Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Analytical thinking

29) The only two firms in a market are trying to decide what price to charge. The payoff matrix for this duopoly game is shown above. The payoffs are thousands of dollars of economic profit. In the above game, in the Nash equilibrium, A) Firm A and Firm B are both making $40,000 in economic profit. B) Firm A and Firm B are both making $55,000 in economic profit. C) Firm A is making $60,000 and Firm B is making $55,000 in economic profit. D) Firm A and Firm B are both making $60,000 in economic profit. E) Firm A and Firm B are both making $35,000 in economic profit. Answer: A Topic: Nash equilibrium Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Analytical thinking

30) The only two firms in a market are trying to decide what price to charge. The payoff matrix for this duopoly game is shown above. The payoffs are thousands of dollars of economic profit. Which of the following statements is correct? A) If the firms play this game repeatedly, one would end up charging $20 and the other $10. B) If the firms cooperate, they could both earn $55,000 in economic profit. C) The Nash equilibrium in this game is for both firms to set P = $20 because that maximizes their combined profit. D) Firm B's strategy is to always set P= $20 because that gives Firm B the highest possible profit. E) If Firm B sets P = $20, then Firm A will maximize its profit by setting its P = $20. Answer: B Topic: Repeated games Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Analytical thinking

31) Intel and AMD are a duopoly that produces CPU chips. Intel and AMD can conduct R&D or they cannot conduct R&D. The table above shows the payoff matrix for the two firms. The numbers are millions of dollars of profit. The Nash equilibrium is for Intel to ________ and for AMD to ________. A) conduct R&D; conduct R&D B) conduct R&D; not conduct R&D C) not conduct R&D; conduct R&D D) not conduct R&D; not conduct R&D E) conduct R&D; either conduct R&D or not conduct R&D, the equilibrium could be either choice for AMD Answer: A Topic: Nash equilibrium Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Analytical thinking

32) Intel and AMD are a duopoly that produces CPU chips. Intel and AMD can conduct R&D or they cannot conduct R&D. The table above shows the payoff matrix for the two firms. If AMD is playing a titfor-tat strategy, then if Intel conducted R&D last period, AMD A) definitely conducts R&D this period. B) definitely does not conduct R&D this period. C) might conduct R&D or might not conduct R&D, depending on Intel's profit. D) might conduct R&D or might not conduct R&D, depending on its profit. E) might conduct R&D or might not conduct R&D, but more information is needed to determine its action. Answer: A Topic: Repeated games Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Analytical thinking

33) Intel and AMD are a duopoly that produces CPU chips. Intel and AMD can conduct R&D or they cannot conduct R&D. The table above shows the payoff matrix for the two firms. AMD is playing a titfor-tat strategy and Intel did not conduct R&D last period. Then, of the following answers, Intel's total profit for the next two periods is the highest if Intel ________ R&D this period and ________ R&D next period. A) conducts; conducts B) does not conduct; conducts C) conducts; does not conduct D) does not conduct; does not conduct E) conducts; either conducts or does not conduct because the profit is the same in either case Answer: B Topic: Repeated games Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Analytical thinking

34) One of the main tools economists use to analyze strategic behavior is A) the Herfindahl-Hirschman Index. B) game theory. C) cartel theory. D) the collusion index. E) dual theory, which is used to study duopolies. Answer: B Topic: Game theory Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

35) Game theory reveals that A) the equilibrium might not be the best solution for the parties involved. B) firms in oligopoly are not interdependent. C) each player looks after what is best for the industry. D) if all firms in an oligopoly take the action that maximizes their profit, then the equilibrium will have the largest possible combined profit of all the firms. E) firms in an oligopoly choose their actions without regard for what the other firms might do. Answer: A Topic: Game theory Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

36) A Nash equilibrium occurs A) when each player acts without considering the actions of the other player. B) when each player takes the best possible action given the action of the other player. C) only when players use the tit-for-tat strategy. D) only when the game is played in Nashville, Tennessee. E) when each player takes the action that makes the combined payoff for all players as large as possible. Answer: B Topic: Nash equilibrium Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

37) The prisoners' dilemma game A) shows that prisoners are better off if they cooperate. B) shows it is easy to cooperate. C) has an equilibrium in which both prisoners are made as well off as possible. D) would have the same outcome even if the prisoners can communicate and cooperate. E) has an equilibrium in which one prisoner is made as well off as possible and the other prisoner is made as worse off as possible. Answer: A Topic: Prisoners' dilemma Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

38) A collusive agreement to form a cartel is difficult to maintain because A) each member firm can increase its own profits by cutting its price and selling more. B) forming a cartel is legal but frowned upon throughout the world. C) supply will decrease because of the high cartel price. D) demanders will rebel once they realize a cartel has been formed. E) each firm can increase its profit if it decreases its production even more than the decrease set by the cartel. Answer: A Topic: Duopolists' dilemma Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

39) Firms in oligopoly can achieve an economic profit A) always in the long run. B) if they cooperate. C) only if the demand for their products is inelastic. D) only if the demand for their products is elastic. E) if they reach the non-cooperative equilibrium. Answer: B Topic: Duopoly game Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

40) When duopoly games are repeated and a "tit for tat" strategy is used, A) the competitive outcome is more likely to be reached than when the game is played once. B) the monopoly outcome is more likely to be reached than when the game is played once. C) both firms begin to incur economic losses. D) one firm goes out of business. E) Because the game is repeated, it is impossible to predict whether the competitive or the monopoly outcome is more likely. Answer: B Topic: Repeated games Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

41) Oligopoly is A) always efficient. B) efficient only if the firms cooperate. C) efficient only if the firms play non-repeated games. D) generally not efficient. E) efficient only if the firms innovate. Answer: D Topic: Efficiency of oligopoly Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

13.5 Chapter Figures

The figure above illustrates a firm's demand and marginal revenue curves and its cost curves. 1) If the firm in the figure above attempted to minimize its average total cost by producing 100 pairs of Tommy jeans per day at an average total cost of $20 per pair and it sold those jeans for $80 per pair, the firm would A) earn zero economic profit. B) earn a larger economic profit that a firm that produced 125 jeans because the ATC of producing 125 jeans is higher than the ATC of producing 100 jeans. C) incur an economic loss. D) earn a smaller economic profit than a firm that produced 125 jeans. E) achieve an efficient use of resources. Answer: D Topic: Monopolistic competition, output and price Skill: Level 4: Applying models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

2) To maximize its profit, the firm in the figure above will produce ________ jeans and set a price ________ per pair of jeans. A) 150; between $50 and $25 B) 125; $25 C) 125; $50 D) 125; $75 E) None of the above answers are correct. Answer: D Topic: Monopolistic competition, output and price Skill: Level 4: Applying models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

3) When the firm in the figure above maximizes its profit, it earns an economic profit of A) $3,125. B) $6,250. C) $9,375. D) $5,625. E) None of the above answers are correct because the firm incurs an economic loss. Answer: B Topic: Monopolistic competition, output and price Skill: Level 4: Applying models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

4) The darkened area in the figure above is the A) deadweight loss. B) firm's economic profit. C) consumer surplus. D) firm's total cost. E) firm's total revenue. Answer: B Topic: Monopolistic competition, output and price Skill: Level 4: Applying models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

The figure above shows a firm's demand and marginal revenue curves and its cost curves. 5) As long as the firm illustrated above remains open, it will set a price of ________ per month and it will ________. A) $50; earn an economic profit B) $50; incur an economic loss C) $40; earn an economic profit D) $40; incur an economic loss E) less than $20; incur an economic loss Answer: B Topic: Monopolistic competition, output and price Skill: Level 4: Applying models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

6) The firm illustrated above is A) earning an economic profit of $400,000 per month. B) earning an economic profit of $2,000,000 per month. C) earning an economic profit of $1,600,000 per month. D) incurring an economic loss of $400,000 per month. E) incurring an economic loss of $1,600,000 per month. Answer: D Topic: Monopolistic competition, output and price Skill: Level 4: Applying models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

7) The darkened area in the figure above is the A) deadweight loss. B) firm's economic loss. C) consumer surplus. D) firm's total cost. E) firm's total revenue. Answer: B Topic: Monopolistic competition, output and price Skill: Level 4: Applying models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

8) If all firms in the industry have similar demand, marginal revenue, and cost curves as the firm in the figure above, in the long run A) nothing changes. B) some firms exit the industry and the economic losses of the remaining firms decrease. C) some firms exit the industry and the economic profits of the remaining firms increase. D) new firms enter the industry and the economic losses of the original firms decrease. E) new firms enter the industry and the economic profits of the original firms increase. Answer: B Topic: Monopolistic competition, long run Skill: Level 4: Applying models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

The figure above shows the market for airplanes. 9) Suppose the airplane market is an oligopoly. If the firms act as a monopolist, the price will be ________ and if the firms act as competitors the price will be ________. A) $13 million per plane; $1 million per plane B) $1 million per plane; $13 million per plane C) $13 million per plane; $13 million per plane D) $1 million per plane; $1 million per plane E) None of the above answers is correct. Answer: A Topic: Range of outcomes Skill: Level 4: Applying models Section: Checkpoint 13.3 Status: Old AACSB: Analytical thinking

10) Suppose the airplane market is an oligopoly. According to the figure above, if the firms act as a monopolist, the quantity produced will be ________ planes per week and if the firms act as competitors the quantity produced will be ________ planes per week. A) 6; 12 B) 12; 6 C) 0; 6 D) 12; 0 E) None of the above answers is correct. Answer: A Topic: Range of outcomes Skill: Level 4: Applying models Section: Checkpoint 13.3 Status: Old AACSB: Analytical thinking

11) Suppose the airplane market is an oligopoly. According to the figure above, the price can range as high as ________ and as low as ________. A) $13 million per plane; $1 million per plane B) $30 million per plane; $13 million per plane C) $13 million per plane; $13 million per plane D) $1 million per plane; $1 million per plane E) None of the above answers is correct. Answer: A Topic: Range of outcomes Skill: Level 4: Applying models Section: Checkpoint 13.3 Status: Old AACSB: Analytical thinking

12) Suppose the airplane market is an oligopoly. According to the figure above, the quantity produced can range as high as ________ planes per week and as low as ________ planes per week. A) 10; 4 B) 12; 6 C) 6; 0 D) 12; 0 E) None of the above answers is correct. Answer: B Topic: Range of outcomes Skill: Level 4: Applying models Section: Checkpoint 13.3 Status: Old AACSB: Analytical thinking

13.6 Integrative Questions 1) In a market in which firms operate in monopolistic competition, A) the HHI for a single firm exceeds 2,500. B) firms compete on price, quality and marketing. C) in the long run firms produce at their efficient scale. D) in the long run firms are not able to charge a markup. E) advertising is nonexistent. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

2) Firms in monopolistic competition A) face a downward-sloping demand curve. B) cannot charge a markup because there are no dominant firms. C) definitely do not benefit from advertising. D) produce at the efficient scale in the long run. E) generally have low to nonexistent selling costs. Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking

3) Which of the following is NOT similar between monopolistic competition and perfect competition? A) Many firms compete in the market. B) It's easy to enter the market. C) The firms have downward sloping demand curves. D) The firms might incur economic losses in the short run. E) In the long run, the firms earn zero economic profit. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

4) The clothing industry has many firms with differentiated products and no barriers to entry. The cereal industry has a few firms with either identical or differentiated products and moderate barriers to entry. The food industry is characterized as ________ and the cereal industry is characterized as ________. A) perfect competition; monopolistic competition B) monopolistic competition; oligopoly C) oligopoly; monopolistic competition D) perfect competition; perfect competition E) monopolistic competition; monopoly Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

5) Advertising costs A) make the marginal revenue more elastic. B) shift the ATC curve upward. C) shift the marginal cost curve rightward. D) indirectly shift the marginal cost curve upward. E) affect the marginal cost but not the total cost. Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

6) The above figure definitely shows A) a long-run equilibrium for a monopolistically competitive firm. B) an industry with few firms. C) a long-run equilibrium for a perfectly competitive firm. D) a long-run equilibrium for a perfectly competitive market. E) a short-run equilibrium for a monopoly. Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

7) The firm in the above figure has excess capacity of ________ meals per day. A) 0 B) between 1 and 10 C) between 11 and 20 D) more than 21 and 30 E) more than 31 Answer: C Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

8) The firm in the above figure has a markup of ________ per meal. A) $0 B) $4 C) $8 D) $10 E) more than $10 Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

9) The firm in the above figure has an economic profit of A) $0. B) $80. C) $160. D) more than $161. E) less than zero, that is, the firm has an economic loss. Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

10) Which of the following characterize a firm in monopolistic competition in the long run? i. operating at the minimum efficient scale ii. markups of price over marginal cost iii. zero economic profit A) i and ii B) i and iii C) ii and iii D) i, ii, and iii E) ii only Answer: C Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking

11) Firms in which of the following industries can earn an economic profit in the long run? A) both monopolistic competition and monopoly B) perfect competition C) monopoly D) monopolistic competition E) monopolistic competition and perfect competition Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

12) If a firm has excess capacity, it A) produces less than its efficient scale. B) should advertise to maximize profits. C) should decrease its markup to increase its profit. D) is a perfectly competitive firm. E) must face a horizontal demand curve. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

13) If a firm in the long run produces less than its efficient scale, it A) should raise its markup to increase its profit. B) should lower its markup to increase its profit. C) cannot be a perfectly competitive firm. D) should not advertise to increase its profit. E) must have its markup equal to zero. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

14) Crest Toothpaste offers new whitening toothpaste one year, a new gel swirl design the next year, and an improved cleaning formula the year after. Crest Toothpaste does this because it is A) a monopoly trying to decrease its costs. B) a perfectly competitive firm trying to increase its price. C) a monopolistically competitive firm trying to maintain its economic profit. D) driving its competitors out of business. E) a perfectly competitive firm trying to increase its costs so it can increase its price. Answer: C Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Application of knowledge

15) A characteristic common in both oligopoly and monopolistic competition is: A) a small number of firms compete in the market. B) natural or legal barriers prevent the entry of new firms into the market. C) each firm faces a downward-sloping demand curve. D) the firms in the market are interdependent. E) each firm has a large share of the market. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

16) When a market has barriers to entry, A) then in the long run it is possible for the firms to incur economic losses. B) then in the long run the only possible outcome for the firms is zero economic profit. C) then in the long run it might be possible for the firms to make economic profits. D) oligopolies cannot be created. E) the HHI almost always falls below 1,000. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

17) The range of output for a duopoly ranges between the A) perfectly competitive outcome and the monopolistically competitive outcome. B) efficient scale and the perfectly competitive outcome. C) minimum of ATC and the efficient scale. D) monopoly outcome and the perfectly competitive outcome. E) short-run perfectly competitive outcome and the long-run perfectly competitive outcome. Answer: D Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

18) What is the conclusion in the prisoners' dilemma? A) Firms should not enter a legal duopoly. B) Two prisoners acting in their own best interest harm their joint interest. C) There is no Nash equilibrium available to the prisoners. D) Prisoners do not act interdependently. E) Duopolies almost always reach their best outcome. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

13.7 Essay: What is Monopolistic Competition? 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, definition Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

2) "One of the defining features of monopolistic competition is product variety." Is the previous statement correct or incorrect? Answer: The statement is correct. In monopolistic competition firms compete by producing similar but slightly differentiated products. Topic: Monopolistic competition, definition Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

3) How do the characteristics of perfect competition and monopolistic competition differ? Answer: In monopolistic competition, the products sold are similar but differentiated, thereby enabling firms to compete on the basis of product development and marketing to further differentiate their products. In perfect competition the products are identical, thereby eliminating the opportunity for firms to compete by differentiating their product. Topic: Monopolistic competition, definition Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Written and oral communication

4) Why is collusion about the price and amount of output impossible in monopolistic competition? Answer: The smaller the number of firms, the more likely collusion is to occur. Monopolistic competition has too many firms for collusion to be successful. Topic: Monopolistic competition, definition Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

5) What do demand and marginal revenue curves look like in monopolistic competition? How do they compare to the demand and marginal revenue curves in perfect competition and monopoly? Answer: In monopolistic competition, the product is differentiated. This fact gives each firm some control over price, so each firm's demand curve is downward sloping. Because there are many close substitutes for these firms' goods, demand is elastic. These firms must lower their price to sell more; therefore the marginal revenue curve is beneath the demand curve. In perfect competition, the product is homogeneous, which makes firms price-takers, able to sell as much as they wish at the market price. Therefore, marginal revenue equals price, and the marginal revenue curve and the demand curve are the same and are horizontal. In monopoly, there is only one firm. The firm faces the market demand, which is steep, because there are no close substitutes for the good. The firm must lower its price to sell more, so for a single-price monopoly, the marginal revenue curve is beneath the demand curve. Topic: Monopolistic competition, definition Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Written and oral communication

6) How would a merger between Coca-Cola and Pepsi Cola affect the four-firm concentration ratio for the soft drink market? How would it affect the Herfindahl-Hirschman Index for the soft drink market? Answer: Both Coca-Cola and Pepsi Cola are among the four largest firms in the soft drink market, so a merger between the two firms would (drastically) raise the four-firm concentration ratio and (drastically) raise the Herfindahl-Hirschman Index. Topic: Four-firm concentration ratio Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

7) What is the Herfindahl-Hirschman Index and what does it measure? Answer: The Herfindahl-Hirschman Index, or HHI, is an index used to measure the extent to which a market is dominated by a small number of firms. The HHI equals the sum of the squared percentage market shares of each of the 50 largest firms in the market. A monopoly will have a HHI of 10,000 whereas perfect competition will have a small HHI. Topic: Herfindahl-Hirschman Index Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Written and oral communication

8) If the Herfindahl-Hirschman Index for an industry is 8,528, is the industry competitive or concentrated? Answer: With a Herfindahl-Hirschman Index of 8,528, the industry is quite concentrated or, in other words, the industry is not very competitive. Topic: Herfindahl-Hirschman Index Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

9) What is the difference between a four-firm concentration ratio and a Herfindahl-Hirschman Index? Answer: A four-firm concentration ratio is the percentage of the total revenue in an industry accounted for by the four largest firms in the industry. The Herfindahl-Hirschman Index sums the squares of the market shares of the 50 largest firms. Topic: Herfindahl-Hirschman Index Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

10) The four largest firms in an industry account for the following value of industry revenues: 12 percent, 8 percent, 5 percent and 4 percent. Calculate the four-firm concentration ratio. Would this industry be regarded as competitive or concentrated? Answer: The four-firm concentration ratio is 29 percent. The four-firm concentration ratio is less than 40 percent, so the industry would be regarded as competitive. Topic: Four-firm concentration ratio Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

11) An industry's total revenue is $100 million. The above table shows the total revenue of the four largest firms in an industry. a. Calculate this industry's four-firm concentration ratio. b. Is this industry competitive? c. What market type does it most likely represent? Answer: a. The four-firm concentration rate is 30 percent. b. Because the four-firm concentration ratio is relatively low, the industry is competitive. c. The industry is most likely monopolistic competition. Topic: Four-firm concentration ratio Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

12) An industry has only four firms, who have market shares of 45 percent, 25 percent, 20 percent, and 10 percent. What is the Herfindahl-Hirschman Index? Answer: The Herfindahl-Hirschman Index is 3,150. Topic: Herfindahl-Hirschman Index Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

13) Suppose there are ten firms that occupy the Odell, Oregon cherry pie market. The market share of each firm is listed in the above table. a. What is the Herfindahl-Hirschman Index for this market? b. If Firm H and Firm A merge, what is the new Herfindahl-Hirschman Index for this market? c. A severe winter causes every firm except A, B, and E to close. With only these three firms operating, Firm A's market share is 71 percent, Firm B's market share is 23 percent, and Firm C's market share is 6 percent. What is the Herfindahl-Hirschman Index for this market now? Answer: a. The Herfindahl-Hirschman Index is 1,782. b. Once firms H and A merge, the new Herfindahl-Hirschman Index is 2,038. c. The Herfindahl-Hirschman Index is now 5,606. Topic: Herfindahl-Hirschman Index Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

14) Listed in the above table are the total revenues for the firms in two different industries. Each industry has only eleven firms. Find the four-firm concentration ratio and the 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: Herfindahl-Hirschman Index Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

15) There are 9 firms in an industry with market shares in the table above. Calculate the HHI for the industry. What kind of market does this operate in and why? Answer: The HHI equals + + + + + + + + = 1,388. With this HHI, the concentration ratio is low and so the market is monopolistic competition. Topic: Herfindahl-Hirschman Index Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

16) The Herfindahl-Hirschman Index is used as a guideline to determine if a market is competitive or concentrated. Calculate the index value for each market described below. a. 100 firms, each of which produces 1 per cent of market output b. 50 firms, each of which produces 2 per cent of market output c. 25 firms, each of which produces 4 per cent of market output d. 20 firms, each of which produces 5 per cent of market output e. 10 firms, each of which produces 10 per cent of market output f. 5 firms, each of which produces 20 per cent of market output g. 2 firms, each of which produces 50 per cent of market output Answer: a. 100 × 1 = 100 b. 50 × 4 = 200 c. 25 × 16 = 400 d. 20 × 25 = 500 e. 10 × 100 = 1,000 f. 5 × 400 = 2,000 g. 2 × 2,500 = 5,000 Topic: Herfindahl-Hirschman Index Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

17) "A firm in monopolistic competition maximizes its profit by producing where its price is equal to its marginal cost." Is the previous statement correct or incorrect? Answer: The statement is incorrect. A firm in monopolistic competition maximizes its profit by producing where its marginal revenue equals its marginal cost. Because the marginal revenue is less than the price for a firm in monopolistic competition, it definitely is not the case that the firm produces where its price equals its marginal cost! Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Written and oral communication

18) How does a firm in monopolistic competition determine its price and quantity? What type of profit can it earn 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 earn an economic, a normal profit, or suffer an economic loss in the short run. In the long run, the firm cannot earn an economic profit; it can only earn a normal profit. Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Written and oral communication

19) What type of profit can a firm in monopolistic competition earn in the long run? Explain your answer. Answer: In the long run, a firm in monopolistic competition can earn only zero economic profit, that is, a normal profit. It will not incur an economic loss in the long run because it will close. It cannot earn a positive economic profit because there are no barriers to entry. So if a firm in monopolistic competition is earning 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 earn zero economic profit, so its owners make a normal profit. Topic: Monopolistic competition, long run Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Written and oral communication

20) Why are firms in monopolistic competition unable to earn an economic profit in the long run? Answer: While firms in monopolistic competition do not produce an identical product, such as perfectly competitive firms, they face the same problem other competitive firms face: freedom of entry. When firms in monopolistic competition are earning an economic profit, other firms will enter the market. Entry decreases the demand for the products of the existing firms and thereby decreases their economic profit. Firms will continue to enter the market until the economic profit equals zero. Topic: Monopolistic competition, long run Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Written and oral communication

21) Why does a firm in monopolistic competition earn zero economic profit rather than an economic profit in the long run? Answer: Entry into monopolistically competitive markets is easy because there are no barriers to entry. So when firms in monopolistic competition have an economic profit, other firms are attracted to enter the industry, thereby decreasing profits for everyone. Entry continues as long as there is an economic profit so, in the long run when all entry is completed, the firms earn zero economic profit. Topic: Monopolistic competition, long run Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Written and oral communication

22) What is excess capacity? What industry has excess capacity in the long run: perfect competition or monopolistic competition? Answer: The efficient scale of output is the level that minimizes the average total cost. Excess capacity occurs if the firm produces less than the amount of output that minimizes average total cost. In this case, the firm could boost its output and lower its average total cost. Firms in monopolistic competition have excess capacity. Firms in perfect competition produce at the minimum of the average total cost. They produce at the efficient scale of output and so do not have excess capacity. Topic: Monopolistic competition, excess capacity Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Written and oral communication

23) For a firm in monopolistic competition, define efficient scale and excess capacity. Briefly explain each. Answer: The efficient scale is the quantity produced when average total cost is at its minimum. In the long run, a firm in monopolistic competition operates below the efficient scale when maximizing profits. The difference between the efficient scale and the quantity produced by a firm is the excess capacity. Because the firm is not producing at the efficient scale, its average total cost is higher than if it produced at the efficient scale. Topic: Monopolistic competition, excess capacity Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

24) 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 its total economic profit is $22.00. The firm is in a short-run equilibrium because it is able to earn an economic profit. In the long run, entry will decrease its demand so that it no longer can earn an economic profit. Topic: Monopolistic competition, output and price Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

25) The above figure represents Tony's Pizza Parlor, a firm in monopolistic competition. a. What quantity will be produced? b. What price will be charged? c. What is Tony's total cost? d. What is Tony's total revenue? e. What is Tony's economic profit or loss? f. Is this a long-run equilibrium? Why or why not? Answer: a. 40 pizzas per day b. $12.00 per pizza c. $320 d. $480 e. Tony has an economic profit of $160. f. This is not a long-run equilibrium because Tony is earning an economic profit. In the long run, new firms will enter and Tony's economic profit will be eliminated. Topic: Monopolistic competition, output and price Skill: Level 4: Applying models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

26) Draw an example of a firm in monopolistic competition that is earning an economic profit. Be sure to label all the curves. Indicate the area that equals the firm's economic profit. Answer:

The completed figure is above. Topic: Monopolistic competition, output and price Skill: Level 4: Applying models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

27) The above figure represents a restaurant operating in monopolistic competition. a. What is the profit-maximizing level of output? b. What price will the firm charge? c. What is the firm's profit (or loss)? d. Is this a long-run equilibrium? Why or why not? e. Is this firm producing its efficient scale of output? Answer: a. The quantity is 20 meals a day. b. The price is $12 per meal. c. The firm is making zero economic profit, that is, the firm is earning a normal profit. d. This is a long-run equilibrium because the firm is making zero economic profits so there is no incentive for either entry or exit. e. No, the firm is not producing its efficient scale of output. It is producing less than the efficient scale. The efficient scale, where the average total cost is at is minimum, is 50 meals a day. Hence the firm has excess capacity. Topic: Monopolistic competition, long run Skill: Level 4: Applying models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

13.8 Essay: Innovation and Advertising 1) How do product development and marketing affect a firm in monopolistic competition? Answer: Product development and marketing have two effects on a firm. First, because these activities are costly, they increase the firm's costs and shift its costs curves upward. Second, they can increase the demand for the firm's products. Topic: Innovation and product development Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking

2) Why would a firm in a monopolistically competitive industry advertise? Answer: Similar to virtually every other business decision, advertising carries with it benefits and costs. While advertising causes the fixed costs to increase, and thereby shifts the average total cost curve upward, advertising also might increase the demand for the company's product by temporarily making people believe that the product is better than some other firm's product. Firms in monopolistic competition frequently advertise extensively in order to differentiate their product from those of their competitors and thereby increase the demand for their particular version of the product. Topic: Advertising Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking

3) Explain the role of advertising in monopolistic competition. Describe how advertising by all firms in a monopolistically competitive industry impacts a firm's ATC curve, its MC curve, its demand curve, and its MR curve. Answer: In order to maintain (or regain) economic profit, a firm in monopolistic competition must continually develop new products that are unique and/or of high quality (or make consumers believe this). Advertising lets firms signal this information. So all firms in monopolistic competition tend to advertise extensively. Advertising is a fixed cost and it shifts the ATC curve upward. Even though it shifts to the ATC curve upward, the total average cost might be lower if it increases the amount sold by enough. Because advertising is a fixed cost, it has no effect on the marginal cost, so the MC curve does not change. Because all firms advertise, advertising might or might not increase demand for a specific firm. When all firms advertise, the demand curve and marginal revenue curve for a specific firm become more elastic. Topic: Advertising Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Written and oral communication

4) Why are advertising 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, in part, through advertising. Topic: Advertising Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Revised AACSB: Reflective thinking

5) Explain how advertising costs in monopolistic competition affect the efficiency of monopolistic competition. Answer: The additional advertising 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, advertising 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: Advertising Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Revised AACSB: Written and oral communication

13.9 Essay: Oligopoly 1) Describe the characteristics of an oligopoly. Answer: There are a small number of firms that act interdependently. They are tempted to form a cartel and collude to increase profits. They can compete on price only (if they produce identical products) or compete on price, product quality and marketing (if they produce slightly different products). Natural or legal barriers prevent the entry of new firms. Topic: Oligopoly, definition Skill: Level 1: Definition Section: Checkpoint 13.3 Status: Old AACSB: Written and oral communication

2) "Because firms in an oligopoly are so large, they do not need to consider each other's actions." Is the previous statement correct or incorrect? Explain your answer. Answer: The statement is most definitely incorrect. Oligopoly is an industry in which only a few firms compete. Because there are only a few firms, the hallmark of oligopoly is mutual interdependence, that is, one firm's action will affect the other firms. The fact that in oligopoly each firm's actions affect its rivals is unlike the case in perfect competition or monopolistic competition, in which there are so many firms that one firm's actions have no effect on its rivals, or monopoly, in which there is only one firm and hence no rivals. Topic: Oligopoly Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Written and oral communication

3) What market structures other than oligopoly have the characteristic of one firm's actions affecting the actions of its competitors? Explain your answer. Answer: No other market structure has the characteristic that one firm's actions can affect the actions of its competitors. In monopoly, there are no competitors to affect. And in perfect competition and monopolistic competition, there are so many competitors that any one firm's actions have no measurable impact on its competitors. Oligopoly is unique in that it is the only market structure in which one firm's actions affect the actions of its competitors. Topic: Oligopoly Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Written and oral communication

4) What is a cartel? Answer: A cartel is a group of firms acting together to limit output, raise price and increase economic profit. Cartels are illegal in the United States. Cartels operate in a market structure with oligopolies. If firms can stick to the cartel agreement, the firms can earn an economic profit. However, cartels tend to break down because firms are tempted to cheat on their cartel partners and increase their own profit at the expense of their partners. Topic: Cartel Skill: Level 1: Definition Section: Checkpoint 13.3 Status: Old AACSB: Written and oral communication

5) Explain what a cartel is and the difficulties faced in maintaining a cartel. Answer: A cartel is a group of firms acting together to decrease output, raise price, and increase economic profit. The difficulty faced by a cartel is the fact that each member has the incentive to cheat on the cartel and increase its output. If a member increases its output and the rest of the cartel members do not, the cheating 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: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Written and oral communication

6) Why are cartels among firms usually kept secret? Answer: Cartels are typically kept secret because they are illegal. In the United States and many other countries, it is illegal for firms to collude to form a cartel. It is illegal because when firms collude they do so in order to restrict output, raise prices, and capture consumer surplus in order to increase their economic profit. Topic: Cartel Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Written and oral communication

7) What is the legal status of a cartel among firms in the United States? Answer: Cartels are illegal in the United States and in many other countries. Topic: Cartel Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

8) "If firms in an oligopoly operate as a monopoly, the industry produces the most output and if they operate as perfect competitors, the industry produces the least output." Is the previous statement correct or incorrect? Why? Answer: The statement is incorrect; it reverses the outcomes. If the firms in an oligopoly operate as a monopoly, the industry produces the least output and if they operate as perfect competitors, the industry produces the most output. Topic: Range of outcomes Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Written and oral communication

9) What is the best outcome for society: When firms in an oligopoly operate as a monopoly or when they act as perfect competitors? Briefly explain your answer. Answer: The best outcome for society is when the firms act as perfect competitors. Perfect competition produces the efficient quantity of output. A monopoly restricts the quantity of output it produces and creates a deadweight loss, which harms society So society is better off if the firms compete rather than collude and operate as a monopoly. Topic: Range of outcomes Skill: Level 1: Definition Section: Checkpoint 13.3 Status: Old AACSB: Written and oral communication

10) In the Boeing/Airbus oligopoly example discussed in the text, why did Boeing and Airbus have an incentive to produce more planes than the monopoly outcome? Answer: Both Boeing and Airbus wanted to produce more planes than the monopoly outcome because each realized that if it and it alone produced an additional plane, its profit increased. Of course, the profit of its competitor would decrease, but that does not matter to the calculations made by Boeing and Airbus. Topic: Range of outcomes Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Application of knowledge

11) The above figure shows the market for the three moving companies in a small nation. If the movers act as perfect competitors, what is the price per mile and the number of miles per year? If the movers collude and act as a single monopoly, what is the price per mile and the number of lines per year? Answer: If the movers compete, production will be where the demand and supply curves intersect, 300 million miles of moving per year. The price will be 8¢ per mile. If the movers can successfully collude, then production is at the point where MR = MC, only 200 million miles of moving per year, and the price is 12¢ per mile. Topic: Range of outcomes for an oligopoly Skill: Level 4: Applying models Section: Checkpoint 13.3 Status: Old AACSB: Analytical thinking

12) The figure above shows the market demand curve for a market with three firms. It also shows a firm's marginal cost curve. In this oligopoly, what is the range of output and prices? Why does this range of outcomes exist? Answer: If the firms operate as a monopoly, they produce a total of 200 units per day and set a price of $12 per unit. If the firms compete and operate as perfect competitors, they produce 400 units per day and the price is $4 per unit. The range of possible outcomes exists because firms in oligopoly have the choice of colluding to decrease output to monopoly levels or cheating on the cartel and increase output to its efficient level. A range of prices also exists between the monopoly price and the perfectly competitive price. Topic: Range of outcomes for an oligopoly Skill: Level 4: Applying models Section: Checkpoint 13.3 Status: Old AACSB: Analytical thinking

13) The table above has the market demand schedule in an industry that has two firms in it. The marginal cost of this product is zero because these two firms have exclusive ownership of the resource and it does not cost any additional amount to produce additional units. a. If the firms cooperate with each other so that they operate as a monopoly, what price will they charge and what (total) output will they produce? b. If the firms cannot cooperate but instead behave as perfect competitors, what will be the price and the (total) output they produce? Answer: a. As a monopoly, the price will be $15 and the total output will be 30 units. This price and output combination is where they maximize their total profit because it is here that the marginal revenue equals zero. (The marginal revenue equals zero because this is the price and output combination for which total revenue is maximized and marginal revenue equals zero when total revenue is maximized.) b. The perfectly competitive price is equal to marginal cost. Because marginal cost is equal to zero, the price will be $0 and the output will be 60 units. Topic: Range of outcomes for an oligopoly Skill: Level 4: Applying models Section: Checkpoint 13.3 Status: Old AACSB: Analytical thinking

13.10 Essay: Game Theory 1) What three characteristics do all games have in common? Answer: The all have rules, strategies, and payoffs. Topic: Games Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

2) What is a Nash equilibrium? Is this equilibrium the best outcome for the players? Give an example. Answer: John Nash proposed the concept of an equilibrium in a game where each player takes the best possible action given the action of other players. A Nash equilibrium is not necessarily the best one for the players. This can be seen in the prisoners' dilemma. Typically the prisoners' dilemma is a game where two prisoners are given rules and payoffs to encourage them to confess to a crime. The prisoners, acting in their own self-interest, confess to the crime to minimize their jail time and so confession is the Nash equilibrium. But if the players can communicate with each other, they can improve their position. If they can communicate, they both deny the crime and so both wind up doing less time in jail. Topic: Nash equilibrium Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Written and oral communication

3) "A Nash equilibrium occurs when both parties to a game end up worse off as a result of the decisions that are made." Is the previous definition of a Nash equilibrium correct or incorrect? Answer: The definition is incorrect. A Nash equilibrium is an equilibrium in which each player takes the best possible action given the action of the other player. Topic: Nash equilibrium Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Written and oral communication

4) OPEC, the Organization of Petroleum Exporting Countries, was formed in Baghdad in 1960. Since its formation, this cartel has suffered from a major problem with respect to the quota (limit) of output it assigns each member nation. What is OPEC's goal and what sort of quota do you think the cartel assigns? How and why do nations cheat on their quota? What happens when a nation cheats on its quota? Answer: In order to keep oil prices high, as has been the case since 2003, OPEC creates a target level of output designed to achieve a particular high price. OPEC's goal is to set a price high enough so that its member nations earn the maximum economic profit. Once the target output is set, OPEC assigns a production quota to each member. As long as each member adheres to its quota the price will remain high and stable. However, from time to time, individual nations cheat on the agreement by producing more oil than they are allowed. Nations cheat because they realize that if they alone cheat, the impact on oil prices will be slight but the impact on their profit will be large. Once this oil shows up on world markets, the supply of oil increases and prices begin to fall. Then, once prices begin to fall other members begin to panic and they start selling more oil too in order to get the highest price they can before a collapse takes place. If every nation cheats, the supply will increase more than if just a few do and the collapse in price becomes a self-realizing prophecy. Topic: Cartel cheating Skill: Level 1: Definition Section: Checkpoint 13.4 Status: Old AACSB: Application of knowledge

5) Why do oligopoly firms find it difficult to cooperate and not cheat on a cartel agreement? Answer: Firms in an oligopoly have large market shares. When they change their output or price, the firm affects not only its own revenue and profit but also the revenue and profit of other firms. For example, if a firm cheats on a cartel agreement by lowering its price, it will capture a larger market share. The competitors will see a decrease in their total revenue and their profit but the cheating firm's profit increases. If the firms cooperate, they could act like a monopoly and have the maximum joint profit but each firm has the temptation to cheat and produce more than its share. This temptation is strong because cheating will increase the cheater's revenue and profit substantially. Topic: Cartel cheating Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Written and oral communication

6) In a cartel, how does the number of firms affect the likelihood that the cartel will be able to successfully maintain a high price? Answer: The more firms that are involved in the cartel, the lower the likelihood that the cartel will be able to maintain a high price. Essentially, the larger the number of firms, the greater the probability that someone will cheat! Topic: Cartel cheating Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

7) What is the dilemma faced by firms in oligopoly? Answer: Because there are just a few large firms in an oligopoly, output and pricing decisions made by one firm affect the demand for other firms' goods. To maximize the total joint profit, the firms must cooperate, act like a monopoly so as to restrict output and earn monopoly profits. But each firm has an incentive to cheat on an agreement to restrict output because if it increases production it can (temporarily, at least) earn higher profits. But if all firms increase production, total profits will fall and the market will move toward the competitive equilibrium. Topic: Oligopolists' dilemma Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

8) "The duopolists' dilemma occurs when firms in a duopoly coordinate their decisions to achieve the best possible outcome." Is the previous statement correct or incorrect? Why? Answer: The statement is incorrect. The duopolists' dilemma occurs precisely because the firms do not coordinate their decisions and so the duopolists attain the worst combined outcome. Topic: Duopolists' dilemma Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

9) What is game theory and what light does it shed on the duopolists' dilemma? Answer: Game theory is a tool economists use to analyze the behavior of oligopolistic firms because game theory is a tool to study strategic behavior. Game theory shows that because these firms are interdependent, the decisions they make to promote their own self-interest can wind up harming all the firms. Thus the duopolists' dilemma is illustrated using game theory: Firms looking to earn for themselves the maximum possible profit can wind up earning less profit than if they had behaved less self-interestedly and more cooperatively. Topic: Duopolists' dilemma Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

10) Does an oligopoly produce the efficient quantity of output or does it create a deadweight loss? Do the firms want to produce the efficient quantity of output? Explain your answer. Answer: An oligopoly might or might not operate efficiently. It operates efficiently if the firms cheat on any agreement and increase output so that it is the same as the perfectly competitive level. In this case, price equals marginal cost and the outcome is efficient. There is no deadweight loss. From the firms' perspectives, this outcome is undesirable because the firms earn 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 earn an economic profit. Topic: Efficiency of oligopoly Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Reflective thinking

11) Sally's Mom is pretty sure her twins, Tim and John, together cut the hair off Sally's Barbie doll. She talks to them separately and gives them the following options. If they both confess they will have to pay Sally $10 each. If Tim confesses and John does not confess, Tim pays $15 and John pays $8. If Tim does not confess and John confesses, Tim has to pay $8 and John $15. If both do not confess, they both pay her $14. Sally's Mom has them in separate rooms and they cannot talk to each other. a. Complete the payoff matrix below.

If they reach the Nash equilibrium, what will Tim and John do?

Answer:

a. The complete payoff matrix is above. b. Tim and John will both deny involvement. Sally's doll remains bald, but Tim and John each pay Sally $14 so Sally has $28 for a new doll. Topic: Prisoners' dilemma Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Analytical thinking

12) Two competing firms in a duopoly must decide whether or not to offer consumers a coupon for their good. The payoff matrix above represents the daily profit available to the firms under the different coupon strategies. a. What strategies and payoffs are represented by quadrant A? b. What strategy will Firm 1 pursue if it believes that Firm 2 is offering a coupon? c. What quadrant represents the equilibrium that will result if the firms act independently (compete)? d. What quadrant represents the equilibrium that will result if the firms successfully collude? Answer: a. In quadrant A, Firm 1 offers a coupon while Firm 2 does not. As a result, Firm 1 earns $150 in profits and Firm 2 earns $60. b. If Firm 2 is offering a coupon and Firm 1 does not, Firm 1 will earn $75. If Firm 1 also offers a coupon, it will earn $100. Therefore, Firm 1 will also offer a coupon. c. Quadrant C. d. Quadrant B. Topic: Duopolists' dilemma Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Analytical thinking

13) Two firms are introducing an improved version of their toothpastes. They must decide whether or not to advertise their products. The table above gives the payoff matrix in terms of the economic profits they expect in each case. The payoffs are in terms of millions of dollars. a. What is the Nash equilibrium for the game? b. If they could cooperate, what strategy would they prefer? What would be the payoff? Answer: a. The Nash equilibrium has each firm advertising and hence each firm receiving $100 million in economic profit because both decided to advertise. b. If they could cooperate, they would both choose not to advertise. In this case, each would earn $140 million in economic profit. Topic: Duopolists' dilemma Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Analytical thinking

14) Two firms are competing in a duopoly and are trying to decide which price to set. The two prices under consideration are a high monopoly price and a low competitive level. If both seller A and seller B chose the monopoly price, each will earn $20 million of economic profit. However, if one picks the monopoly price while the other picks the competitive price, the high-price firm will lose $1 million while the low-price firm will earn $32 million. If both sell at the competitive level, they both earn a normal profit. Complete the payoff matrix below and determine the Nash equilibrium.

Answer:

The completed payoff matrix is above and has the economic profits in millions of dollars. The Nash equilibrium is for both to charge the competitive, low, price and earn a normal profit. Topic: Duopolists' dilemma Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Analytical thinking

15) Suppose two companies, Sony and Magnavox, are competing in a duopoly. If both companies charge a high price, they each earn $700 million in economic profit. If both companies charge a low price, they each earn $500 million in economic profit. If one company charges a high price and the other a low price, the company charging the higher price earns $450 million in economic profit and the company charging the lower price earns $800 million in economic profit. a. Complete the payoff matrix below for Sony and Magnavox.

Find the Nash equilibrium.

Answer:

a. The completed payoff matrix is above, with the entries in millions of dollars. b. The Nash equilibrium has each firm charging a low price and earning $500 million in economic profit. Topic: Duopolists' dilemma Skill: Level 3: Using models Section: Checkpoint 13.4 Status: Old AACSB: Analytical thinking

Essential Foundations of Economics, 8e (Bade) Chapter 14 GDP: A Measure of Total Production and Income 14.1 GDP, Income, and Expenditure 1) A measure of a country's production is its A) gross daily production. B) general daily product. C) general domestic production. D) gross domestic product. E) gross total output. Answer: D Topic: GDP Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

2) The total production within an economy is measured as A) Gross Home Product. B) Total Domestic Output. C) Annual Production Value. D) Gross Domestic Product. E) Total Annual Output. Answer: D Topic: GDP Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

3) Gross Domestic Product is equal to the market value of all the final goods and services ________ in a given period of time. A) produced within a country B) consumed within a country C) consumed by the citizens of a country D) produced by the citizens of a country E) produced and consumed within a country Answer: A Topic: GDP Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

4) Gross Domestic Product measures the A) quantity of the goods and services produced in a given year, listed item by item, within a country. B) income of the business sector within a country. C) market value of the final goods and services produced in a given year within a country. D) measures the market value of the domestic labor in a given year within a country. E) market value of the final goods and services consumed by households in a given year within a country. Answer: C Topic: GDP Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

5) Gross Domestic Product is the market value of all ________ produced within a country in a given period of time. A) final goods B) intermediate goods C) final services D) intermediate services E) final goods and services Answer: E Topic: GDP Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

6) To calculate GDP it is necessary to A) add the total amounts of all the goods produced. B) use the market price to place a dollar value on each good produced. C) use production cost to place a dollar value on all goods produced. D) use the average market price over the last five years to place a dollar value on all goods produced. E) average the cost of producing a good with the price of the good to place a dollar value on all goods produced. Answer: B Topic: GDP Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

7) How are final goods and services valued when measuring nominal GDP? A) at current market prices B) at base year prices C) at foreign exchange parity D) at factor market prices E) at producer cost Answer: A Topic: GDP Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

8) Measuring total production by valuing items at their market value allows us to A) separate the value of different goods with identical prices. B) separate the value of different goods with different prices. C) add together the value of different goods that have different prices. D) add together the value of identical goods that have identical prices. E) ignore the problem that goods and services differ in how long they last. Answer: C Topic: GDP Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

9) Wobet is a small country that produces only steak and potatoes. Steaks have a price of $10 each and potatoes have a price of $1 each. Suppose that Wobet produces 10 steaks and 20 potatoes in 2010. Using ________, Wobet has GDP equal to ________. A) market value; 30 units B) a market basket; 30 units C) market value; $120 D) real value; $120 E) a price index; $120 Answer: C Topic: GDP Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

10) To calculate GDP it is necessary to add up the market value of all the ________ produced within a country during a year. A) goods but not services produced B) goods and services produced C) intermediate goods and services produced D) final goods and services produced E) intermediate goods and services produced and all the final goods and services produced Answer: D Topic: GDP Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

11) GDP is best defined as the ________ in a given time period. A) number of goods and services produced within a country B) number of final goods and services produced within a country C) market value of the final goods and services produced within a country D) market value of the final goods and services consumed by a nation's citizens E) market value of all the goods and services produced within a country Answer: C Topic: GDP Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

12) If you make dinner for yourself, A) the market value of your dinner is added to GDP. B) your service in preparing the meal is valued at a cook's wage and added to GDP. C) none of what you bought to prepare for dinner is included in GDP. D) only the market value of ingredients that you purchased this year is added to GDP. E) the difference between the cost of the ingredients that you purchased this year and the market value of the dinner is added to GDP. Answer: D Topic: GDP Skill: Level 1: Definition Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

13) Gross Domestic Product is defined to be the market value of all the final goods and services produced during a given time period A) within a country. B) within and outside a country by that country's citizens. C) by citizens of the country, regardless of their place of residence. D) by only legal residents of the country. E) within a county minus the market value of all the final goods and services produced by that country's citizens outside the country. Answer: A Topic: GDP Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

14) Where are the final goods and services produced that are included in Germany's GDP? A) within Germany B) anywhere, as long as they are produced using German resources C) outside of Germany D) anywhere, as long as they are produced using German labor E) within Germany but only if they are produced using only German resources Answer: A Topic: GDP Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

15) GDP includes the goods and services produced A) within a country's borders by citizens and by non-citizens. B) by a country's legal citizens regardless of where in the world they are located. C) by a country's citizens but not by non-citizens within the country's borders. D) within a country's borders by citizens and non-citizens plus goods produced abroad by the country's citizens. E) within a country's borders by citizens and by non-citizens minus the production abroad by the country's citizens. Answer: A Topic: GDP Skill: Level 1: Definition Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

16) Which of the following is included in Germany's GDP? i. BMWs produced in a German-owned factory in South Carolina ii. the value of the stocks sold on the German stock exchange, the Frankfurt Stock Exchange iii. china produced by the English-owned Wedgewood Company at a factory in Berlin, Germany A) i and iii B) ii only C) iii only D) i and ii E) None of the above answers is correct. Answer: C Topic: GDP Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

17) Which of the following is included in U.S. GDP? i. the rental value of homes owned by U.S. citizens ii. the production of Suburban SUVs by GM in its plant in Mexico iii. tickets sold by U2 for concerts held in the United States A) ii only B) ii and iii C) i, ii and iii D) i and iii E) i only Answer: D Topic: GDP Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

18) Which of the following is NOT directly included in Canadian GDP? A) the purchase of tickets to a Kanye West concert in Montreal B) the sale of tickets to the Vancouver Olympics to U.S. citizens C) gasoline purchased by a tour bus operator in Quebec D) bus tickets sold to tourists for a tour bus ride in Montreal E) All of the items would be included in Canadian GDP. Answer: C Topic: GDP, final goods and services Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

19) Which of the following is NOT directly included in U.S. GDP? A) sales to tourists of beach umbrellas in Hilton Head, South Carolina B) sales of sandwiches at a Subway store in Bangor, Maine C) ticket sales to Ripley's Aquarium in Gatlinburg, Tennessee D) popcorn purchased by a movie theater chain in Georgia E) movie tickets purchased by consumers in Georgia Answer: D Topic: GDP, final goods and services Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

20) Which of the following is classified as a final good or service? i. tires bought by GM to put on new Tahoes ii. mustard bought by Subway to put on its sub sandwiches iii. your purchase of online access to the Wall Street Journal A) i and ii B) i, ii and iii C) iii only D) ii and iii E) ii only Answer: C Topic: GDP, final goods and services Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

21) Which of the following correctly describes a final good? i. A final good is bought by its final consumer. ii. A final good can be used by a firm as a component of another good or service. iii. Investment goods cannot be a final good. A) i only B) i and ii C) i, ii and iii D) i and iii E) ii and iii Answer: A Topic: GDP, final goods and services Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

22) Which of the following is a final good or service? A) the grilled chicken purchased by Taco Bell for use in their burritos B) a new replacement muffler installed by Midas Mufflers C) the fertilizer purchased by Royal Lawn and Landscape D) the computers purchased by Office Depot for sale to its customers E) the CPUs purchased by Dell to be used in their computers Answer: B Topic: GDP, final goods and services Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

23) Which of the following is a final good or service? A) tires purchased by Ford for use on one of their SUVs B) the new economics textbook you are using C) the hair gels used by a hair stylist at the local hair salon D) the butter used by a chef to make butter cream frosting E) the taco shells purchased by Taco Bell for use in their tacos Answer: B Topic: Intermediate goods and services Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

24) A restaurant buys fish to offer as a daily menu special. The purchase of the fish by the restaurant is A) a consumption expenditure. B) an investment. C) an intermediate good. D) an example of government expenditures on goods and services. E) part of net exports if the fish was caught beyond the U.S. border. Answer: C Topic: Intermediate goods and services Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

25) Which of the following is classified as an intermediate good? i. the purchase of a Big Mac by a college student ii. McDonald's purchase of pickles iii. a McDonald's restaurant owner's interest payment for the loan on her building A) ii only B) ii and iii C) i only D) i and iii E) i, ii and iii Answer: A Topic: Intermediate goods and services Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

26) Which of the following is an example of an intermediate good or service? A) gasoline purchased by Sam for her commute to work B) flour purchased by Jake to bake a cake for his spouse C) training seminars for employees of an accounting firm D) golf balls sold to Tiger Woods E) None of the above are examples of intermediate goods or services. Answer: C Topic: Intermediate goods and services Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

27) Which of the following would NOT be directly included in the U.S. GDP in 2010? A) the market value of restaurant meals sold in 2010 B) the market value of the jet fuel bought by Delta to use for its flights in 2010 C) the value of the automobiles produced in 2010 at the Toyota plant located in Georgetown, Kentucky D) legal services provided to first time home buyers during 2010 E) the purchase of a new home in Atlanta, Georgia in 2010 Answer: B Topic: Intermediate goods and services Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

28) One bag of coffee beans is sold for $7 to a cafe that uses it to brew coffee which it sells to customers for a total of $15. A second bag of coffee is sold directly to Joan for $7, who uses it to brew coffee for her family every morning. What is the contribution to GDP from the purchases of coffee beans and coffee? A) $7 B) $14 C) $15 D) $22 E) $29 Answer: D Topic: Intermediate goods and services Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

29) Consumption expenditure includes spending A) on intermediate goods and services by firms. B) on office supplies by firms. C) by households. D) by households and spending on office supplies by firms. E) by governments when they are buying goods and services that consumers also buy. Answer: C Topic: Consumption expenditure Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

30) Consumption goods and services include A) washing machines and tickets to football games. B) new homes and existing homes (as long as improvements have been made to the existing home). C) tickets to concerts and medical care provided to veterans by the government. D) new and used textbooks as long as they are sold via stores or online. E) vacation time accumulated by workers. Answer: A Topic: Consumption expenditure Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

31) Expenditures on U.S. produced steaks, shoes, and doctor visits are most likely classified as A) consumption expenditure. B) investment. C) government expenditure on goods and services. D) net exports of goods and services. E) net imports of goods and services. Answer: A Topic: Consumption expenditure Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

32) Investment is the expenditure done by A) savers. B) firms. C) governments. D) the rest of the world. E) Both answers A and B are correct. Answer: B Topic: Investment Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

33) Investment is defined as the purchase of A) any financial asset only. B) additions to inventories only. C) financial assets and inventories only. D) new capital goods and additions to inventories. E) new capital goods but not additions to inventories. Answer: D Topic: Investment Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

34) Which of the following is included as investment in GDP? i. cars produced during the year but unsold at the end of the year ii. new capital equipment produced and purchased during the year iii. purchases of a company's stocks and bonds A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: D Topic: Investment Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

35) Economists define investment to include purchases of A) capital goods and inventories. B) capital goods, household durable goods, and inventories. C) capital goods, such as tools, instruments, and buildings. D) capital goods, equity stocks, and bonds. E) capital goods, equity stocks, and inventories. Answer: A Topic: Investment Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

36) Investment includes A) GM's purchase of robotic machinery. B) student purchases of laptops. C) Wal-Mart's purchase of health insurance for its workers. D) the New York City Library's purchase of new books. E) wages paid to military personnel. Answer: A Topic: Investment Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

37) In measuring GDP, which of the following is included? A) the value of preparing meals at home B) the value of stocks and bonds bought and sold C) the value of used goods when they are sold D) the value of increases in business inventories E) the value of durable consumption goods but not the value of nondurable consumption goods Answer: D Topic: Investment, inventory Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

38) If a firm does not sell all of the goods that it produces in a given time period, then the goods A) do not count in GDP ever. B) do not count in GDP for that time period but always count next period. C) count positively in GDP as inventory investment. D) count negatively in GDP as inventory investment. E) count in GDP the period they are sold to the final user. Answer: C Topic: Investment, inventory Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

39) This year a firm produces $100 million worth of cars this year and sells $102 million worth of cars. Which of the following is true? A) GDP for this year will increase by $100 million. B) GDP for this year will increase by $102 million. C) Inventory investment will increase by $2 million. D) GDP for this year will increase by $202 million. E) The premise of the question is wrong because it is impossible for a firm to sell more than it produces in a given time period. Answer: A Topic: Investment, inventory Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

40) Bob's Funky T-shirts began the year with 1,000 shirts in inventory, produced 10,000 shirts during the year and ended the year with 1,100 shirts in inventory. The 100 shirts added to his inventory will be classified as A) consumption expenditure. B) investment. C) net exports of goods and services. D) exports of goods and services. E) nondurable consumption goods. Answer: B Topic: Investment, inventory Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

41) Kelly's Surf Shop orders 5,000 new surf boards at the beginning of the year but only sells 4,500 by the end of the year. How are the 500 unsold surfboards accounted for in Gross Domestic Product? A) They will be included in the nondurable consumption category of GDP. B) They will be included in the residential investment category of GDP. C) They will be included in the government spending category of GDP. D) They will be included in the inventory investment category of GDP. E) They will be included in the durable consumption category of GDP. Answer: D Topic: Investment, inventory Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

42) When measuring GDP, A) the government sector is not included because it is the public sector not the private sector. B) the government sector is counted, and the value of the government sector in GDP is equal to its tax revenue. C) only the federal government's expenditure on goods and services are included. D) the expenditure on goods and services by all levels of government are included. E) the government sector is not counted because it does not produce goods and services. Answer: D Topic: Government expenditure on goods and services Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

43) Government expenditures on goods and services include i. the New York City Library's purchase of new books. ii. Washington D.C.'s purchase of gas for its city buses. iii. California's payment of wages to prison guards. A) i and ii B) i and iii C) ii and iii D) i, ii and iii E) i only Answer: D Topic: Government expenditure on goods and services Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

44) Net exports of goods and services is equal to the value of A) exports plus the value of imports. B) imports minus the value of exports. C) domestic consumption minus the value of imports. D) exports minus the value of imports. E) domestic consumption minus the value of exports. Answer: D Topic: Net exports of goods and services Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

45) Net exports of goods and services are defined as the A) value of the goods we sell to foreigners. B) income we receive from selling goods to foreigners. C) value of exports minus the value of imports. D) value of exports minus the income we receive from foreigners. E) value of exports plus the income we receive from foreigners. Answer: C Topic: Net exports of goods and services Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

46) U.S. net exports include A) sales of Hollywood movies to the rest of the world. B) the production of Ford Mustangs in China that are sold in China. C) Honda automobiles produced and sold in Japan. D) the sale of shares of Nike stock on the New York Stock Exchange. E) the sale of U.S. government securities to U.S. citizens. Answer: A Topic: Net exports of goods and services Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

47) In calculating GDP, we must A) add the market value of imports and subtract the market value of exports. B) add the market value of exports and subtract the market value of imports. C) exclude net exports of goods and services (NX). D) add the value of the goods produced outside of the United States by American firms. E) subtract the market value of imports, because these goods are produced in a country other than the United States, and subtract the market value of exports, because these goods are consumed in a country other than the United States. Answer: B Topic: Net exports of goods and services Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

48) Which of the following expenditure components of GDP can be negative or positive? A) consumption expenditure B) investment C) government expenditure on goods and services D) net exports of goods and services E) None of the above because expenditure can never be negative. Answer: D Topic: Net exports of goods and services Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

49) Last year U.S. net exports of goods and services was negative. This fact means that last year A) there was an error made when calculating net exports of goods and services for the United States. B) the value of U.S. exports was greater than the value of U.S. imports. C) the value of U.S. exports was less than the value of U.S. imports. D) U.S. consumption expenditure plus investment was less than the value of exports plus the value of imports. E) U.S. consumption expenditure plus investment plus government expenditures on goods and services was less than the value of exports plus the value of imports. Answer: C Topic: Net exports of goods and services Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

50) When an American college student in Davis, California spends $200 on a pair of Louis Vuitton jeans (a famous French brand), U.S. consumption ________, U.S. net exports ________, and U.S. GDP ________. A) does not change; increases by $200; increases by $200 B) increases by $200; decreases by $200; does not change C) increases by $200; does not change; increases by $200 D) does not change; does not change; does not change E) does not change; decreases by $200; decreases by $200 Answer: B Topic: Net exports of goods and services Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

51) The purchase of a new Boeing fighter jet by Israel is classified in the U.S. GDP accounts as A) export expenditure. B) consumption expenditure. C) investment expenditure. D) government expenditure. E) import expenditure. Answer: A Topic: Net exports of goods and services Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

52) Gross Domestic Product equals A) Y = C + I - G + NX. B) Y = C - I + G + NX. C) Y = C + I + G + NX. D) Y = C - I - G - NX. E) Y = C + I + G - NX. Answer: C Topic: Total expenditure Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

53) Last year in Candamica, consumption expenditure was $20 billion, interest, rent, and profit were $2.5 billion, government expenditure on goods and services was $7 billion, net exports of goods and services was $5 billion, and investment was $2 billion. Hence total expenditure was A) $24.5 billion. B) $34.5 billion. C) $36.5 billion. D) $34 billion. E) undetermined without information about imports. Answer: D Topic: Total expenditure Skill: Level 1: Definition Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

54) Everything else the same, if government expenditure increases by $400 billion and imports increase by $400 billion, then GDP A) increases by $400 billion. B) increases by $200 billion. C) decreases by $400 billion. D) does not change. E) decreases by $200 billion. Answer: D Topic: Total expenditure Skill: Level 1: Definition Section: Checkpoint 14.1 Status: Old AACSB: Analytical thinking

55) Suppose that business firms spend $500 million on new capital equipment this year. Of this $500 million, $300 million was spent on domestically produced capital and $200 million was spent on foreignproduced capital. All else equal, these transactions contribute ________ to GDP. A) $0 B) $200 million C) $300 million D) $500 million E) $800 million Answer: C Topic: Total expenditure Skill: Level 1: Definition Section: Checkpoint 14.1 Status: Old AACSB: Analytical thinking

56) Undistributed profits ________ counted as part of GDP because ________. A) are not; households are not paid by the firms B) are; they can be used to buy other goods C) are; they are considered income paid to households and loaned back to firms D) are not; they are considered an intermediate good E) are; firms are required to pay corporate income taxes on them Answer: C Topic: Income approach Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

57) Total expenditure equals total income A) because firms pay out everything they receive as income to the factors of production. B) if firms earn zero profit. C) if firms do not save for future investment. D) only if firms sell all the goods they produce in a given time period. E) only if net taxes equals government expenditures on goods and services. Answer: A Topic: Circular flow Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

58) The circular flow shows that GDP measures i. total income. ii. total expenditures. iii. price changes. A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: D Topic: Circular flow Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

59) Because of the circular flows of expenditure and income in the economy, total ________ equals total ________ equals total ________. A) expenditure; investment; income B) expenditure; income; value of production C) consumption; expenditure; value of production D) investment; income; consumption E) consumption; investment; expenditure Answer: B Topic: Circular flow Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

60) In the circular flow, how are the "value of production," "income," and "expenditures" related? A) They have no relationship to each other. B) Once tax payments are subtracted at each stage, they are equal. C) Expenditures on GDP equals the value of production which equals income. D) Once net exports of goods and services are subtracted from GDP, all three are equal. E) Value of production always equals income, but expenditures is smaller because households save some of their income and do not spend it. Answer: C Topic: Circular flow Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

61) In a circular flow diagram, i. the value of production = income. ii. the value of production = expenditure. iii. expenditure = income. A) i, ii and iii are true statements. B) Only iii is a true statement. C) i and ii are true statements. D) i and iii are true statements. E) Only i is a true statement. Answer: A Topic: Circular flow Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

62) The abbreviation "GDP" stands for A) Gross Domestic Product. B) Gross Domestic Prices. C) General Domestic Prices. D) Great Domestic Prices. E) Government's Domestic Politics. Answer: A Topic: GDP Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

63) GDP is equal to the ________ value of all the final goods and services produced within a country in a given period of time. A) production B) market C) wholesale D) retail E) typical Answer: B Topic: GDP Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

64) The following are all final goods EXCEPT A) flour used by the baker to make cupcakes. B) bread eaten by a family for lunch. C) pencils used by a 6th grader in class. D) Nike shoes used by a basketball player. E) a computer used by Intel to design new computer chips. Answer: A Topic: GDP, final goods and services Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

65) Which of the following is directly included in the U.S. GDP for 2013? i. a 2013 Cadillac Escalade produced and sold as a new car in the United States in 2031 ii. tires produced in the United States, purchased by General Motors, and installed on a new Cadillac Escalade sold in 2013 iii. General Motors cars produced in Canada because General Motors is an American corporation A) i only B) ii only C) i and iii D) ii and iii E) i, ii, and iii Answer: A Topic: GDP within a country Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

66) Production by Honda, a Japanese firm, in the United States is included in ________ GDP and production by Nike Corporation, a U.S. firm, in Vietnam is included in ________ GDP. A) Japanese; U.S. B) U.S.; Vietnamese C) U.S.; U.S. D) Japanese; Vietnamese E) U.S. and Japanese; U.S. and Vietnamese Answer: B Topic: GDP within a country Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

67) Investment is defined as A) the purchase of a stock or bond. B) financial capital. C) what consumers do with their savings. D) the purchase of new capital goods by firms. E) spending on capital goods by governments. Answer: D Topic: Investment Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

68) In one year, a firm increases its production by $9 million and increases sales by $8 million. All other things in the economy remaining the same, which of the following is true? A) GDP increases by $8 million and inventory investment decreases by $1 million. B) GDP increases by $9 million and inventory investment increases by $1 million. C) Inventory investment decreases by $1 million. D) GDP increases by $8 million and investment increases by $1 million. E) GDP increases by $17 million. Answer: B Topic: Investment, inventory Skill: Level 1: Definition Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

69) Net exports of goods and services increase when A) exports of goods and services decrease and imports of goods and services do not change. B) consumption expenditure increases. C) exports of goods and services increase and imports of goods and services do not change. D) consumption expenditure decreases. E) imports of goods and services increase and exports of goods and services do not change. Answer: C Topic: Net exports of goods and services Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

70) Total expenditure equals A) C + I + G + NX. B) C + I + G - NX. C) C + I - G + NX. D) C - I + G + NX. E) C - I - G - NX. Answer: A Topic: Total expenditure Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

71) Total income in a country in 2012 is $780 billion. Total expenditure in the country A) cannot be determined. B) is greater than $780 billion. C) is $780 billion. D) is less than $780 billion. E) is either less than or equal to $780 billion. Answer: C Topic: Total expenditure Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

72) Total expenditure in the United States is equal to consumption expenditure plus investment A) plus government expenditure on goods and services plus imports of goods and services. B) minus government expenditure on goods and services minus imports of goods and services. C) plus government expenditure on goods and services plus exports of goods and services. D) plus government expenditure on goods and services plus exports of goods and services minus imports of goods and services. E) plus government expenditure on goods and services plus exports of goods and services plus imports of goods and services. Answer: D Topic: Total expenditure Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

73) The circular flow diagram includes which of the following players? A) households, firms, government, rest of the world B) households, factor markets, goods markets, firms C) factor markets, goods markets, financial markets, firms D) government, firms, financial markets, goods markets Answer: A Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 14.1 Status: New AACSB: Reflective thinking

74) In the circular flow diagram, S and NT are A) flows of money. B) flows of expenditures. C) flows of income. D) none of the above Answer: A Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 14.1 Status: New AACSB: Reflective thinking

14.2 Measuring U.S. GDP 1) In order to measure gross domestic product, we can follow A) only one approach: the circular flow approach. B) only one approach: the national accounts approach. C) two approaches: the expenditure approach and the income approach. D) three approaches: the expenditure approach, the income approach, and the production approach. E) three approaches: the expenditure approach, the income approach, and the market-based approach. Answer: C Topic: Measuring GDP Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

2) In 2016, U.S. GDP was A) $18 trillion using the expenditure approach. B) $18 trillion using the income approach. C) $18 trillion using the expenditure approach and $16 trillion using the income approach. D) $19 trillion using the income approach and $17 trillion using the expenditure approach. E) both A and B are correct. Answer: E Topic: Measuring GDP Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Revised AACSB: Reflective thinking

3) The expenditure approach to measuring GDP is done by using data on only A) consumption expenditure. B) consumption expenditure and investment. C) consumption expenditure, investment, government expenditure on goods and services, and net exports of goods and services. D) consumption expenditure, investment, and government expenditures. E) wages, rent, interest, and profit. Answer: C Topic: Expenditure approach Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

4) In comparing the magnitudes of the components of GDP according to the expenditure approach, we see that in the United States A) government expenditure on goods and services is the largest category. B) investment is the largest category. C) investment is much larger than government expenditure on goods and services. D) investment is less than government expenditure on goods and services. E) investment, government expenditure on goods and services, and consumption expenditure are all about the same size. Answer: D Topic: Expenditure approach Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

5) The largest expenditure category in the United States is A) consumption expenditure. B) investment. C) government expenditure on goods and services. D) net exports of goods and services. E) wages. Answer: A Topic: Expenditure approach Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

6) If consumption was 70 percent of GDP and investment and government expenditure were both 18 percent each, then we see that A) GDP can be over 100 percent because it is "gross" rather than "net." B) the error is due to rounding. C) exports must be less than imports. D) exports must be more than imports. E) we must subtract depreciation from investment so that the components of GDP do not exceed 100 percent. Answer: C Topic: Expenditure approach Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

7) In recent years, which of the following has been negative? A) consumption expenditure B) investment C) government expenditure on goods and services D) net exports of goods and services E) wages Answer: D Topic: Expenditure approach Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

8) In 2009 in the United States, consumption expenditure was $9,996 billion, investment was $1,559 billion, government expenditures on goods and services were $2,927 billion, and total exports were $1,492 billion. GDP equaled A) $12,641 billion. B) $10,120 billion. C) $11,488 billion. D) $14,415 billion. E) some amount, but there is not enough information given to calculate GDP. Answer: E Topic: Expenditure approach Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

9) The following table reports transactions that occurred in Whoville. Item Bottles of French Wine Boxes of Cereal Used Tires Shares of Twitter Stock Hours of Swimming Lessons

Price per Unit $20 $4 $15 $10 $5

Quantity 10 20 5 15 8

Nominal GDP in Whoville is A) $320. B) $545. C) $120. D) $395. E) $195. Answer: C Topic: Expenditure approach Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

10) Based on the data in the table above, what does GDP equal? A) $10,200 billion B) $10,400 billion C) $10,000 billion D) $9,800 billion E) $8,900 billion Answer: C Topic: Expenditure approach Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

11) The table gives data for a nation. What is the amount of the country's GDP? A) $6,000 billion B) $6,200 billion C) $6,600 billion D) $6,900 billion E) $5,800 billion Answer: B Topic: Expenditure approach Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

12) The table gives data for a nation. The value of the country's net exports of goods and services shows that the country's A) value of its exports exceeded the value of its imports. B) value of its imports are negative. C) net exports of goods and services are decreasing. D) value of its imports exceeded the value of its exports. E) value of its imports must equal zero. Answer: A Topic: Expenditure approach, net exports of goods and services Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

13) The value of used goods ________ counted as part of GDP ________. A) are; as long as they are classified as consumption goods B) are; as long as they are classified as investment goods C) are not; because they were counted during the period when they were counted as new goods D) are not; because most fall in value and would cause a decrease in the value of GDP E) may be; as long as their value has risen Answer: C Topic: Expenditures not in GDP, used goods Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

14) If the purchase of used goods was to be incorporated into measuring GDP using the expenditure approach, then A) we also will have to account for spending on financial assets. B) it will be very difficult to assign a fair market value to a used good. C) we will be counting the value of the used goods both at the time of their production and at the time of their re-sale. D) we will have to account for the natural depreciation that a used good experiences. E) consumption spending would need to be adjusted for depreciation. Answer: C Topic: Expenditures not in GDP, used goods Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

15) When calculating GDP, purchases of used goods are A) included at the original price. B) included by taking the original price and subtracting the (current) used price. C) included at the (current) used price. D) not included. E) included at the original price minus any depreciation. Answer: D Topic: Expenditures not in GDP, used goods Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

16) If you buy a five-year-old TV from a friend, the amount you paid for the TV is A) always added to consumption expenditures but not investment. B) always added to investment but not consumption. C) not included in this year's GDP. D) added to investment if the TV is expected to last more than 5 additional years and added to consumption if the TV is expected to last less than 5 additional years. E) included in this year's GDP only if the TV set was manufactured in the United States. Answer: C Topic: Expenditures not in GDP, used goods Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

17) When Jamie purchases a classic 1968 Plymouth Cuda convertible from Shane, GDP A) does not change, because the car was not produced this year. B) increases, because the car is a durable good and increases consumption. C) increases, because the car is a durable good and increases investment. D) does not change, because Jamie did not buy the car from a dealership. E) increases, because this expenditure decreases saving. Answer: A Topic: Expenditures not in GDP, used goods Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

18) Spending on financial assets ________ counted as part of GDP ________. A) are; because the cash exchanged represents an expenditure B) are not; because their purchase is not spending on goods or services C) are; as long as their purchase produces income D) are not; because interest must be paid on them E) may be; as long as their value increases Answer: B Topic: Expenditures not in GDP, financial assets Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

19) The purchase of 500 shares of Honda stock by the California State Employees' Pension fund A) is counted as consumption expenditure. B) is not counted as part of GDP. C) is counted as investment in the GDP accounts. D) is counted as part of export expenditure in the GDP accounts because Honda is a foreign firm. E) is counted as part of import expenditure in the GDP accounts because Honda is a foreign firm. Answer: B Topic: Expenditures not in GDP, financial assets Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

20) Recently, the government made adjustments to how GDP is calculated that included placing software purchases into the category of A) intermediate goods because software is not a final good. B) inventory and now software purchases are not directly counted as part of GDP. C) investment and now directly counts software purchases as part of GDP. D) net exports of goods and services because most software is written abroad. E) net operating surplus. Answer: C Topic: Eye on the U.S. economy, is a computer program an intermediate good? Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

21) Which of the following is true regarding the measurement of GDP? A) Wages and profit income are used in the income approach to GDP. B) Wages and consumption are used in the expenditure approach to GDP. C) Consumption and investment are used in the income approach to GDP. D) Government expenditure is only counted in the income approach to GDP. E) Investment and wages are expenditures, and are therefore are used in the expenditure approach to GDP. Answer: A Topic: Income approach Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

22) The income approach measures GDP by summing A) C + I + G + NX. B) the total production of all final goods and services produced in a year within a country's borders. C) the wealth of households, business and government. D) the incomes paid households for the resources they own. E) Both answers A and D are correct. Answer: D Topic: Income approach Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

23) The income approach to measuring GDP is based on summing A) the production of each industry. B) wages, interest, rent, and profits. C) the values of final goods, intermediate goods and services, used goods, and financial assets. D) consumption expenditure, investment, government expenditures on goods and services, and net exports of goods and services. E) consumption expenditure and wages. Answer: B Topic: Income approach Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

24) According to the income approach to measuring GDP, the largest income category is A) wages. B) interest. C) rent. D) profits. E) consumption expenditure. Answer: A Topic: Income approach Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

25) In 2009 in the United States, net domestic product at factor cost was $11,091 billion. Additionally, rent was $2,000 billion, profits were $1,000 billion, and interest was $358 billion. Hence wages were A) $7,733 billion. B) $9,091 billion. C) $10,091 billion. D) $8,091 billion. E) $12,091 billion. Answer: A Topic: Income approach Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

26) When measuring GDP by the income approach, wage income includes i. health-care insurance paid for by the firm for its employees. ii. Social Security contributions made by the firm. iii. wages paid during a worker's vacation time. A) i, ii and iii B) i and ii only C) i only D) ii only E) ii and iii only Answer: A Topic: Income approach, wage income Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

27) Which of the following are included in interest income? i. payments made for the use of land ii. income paid to households for loans they make iii. payments made by households for their borrowing A) i, ii and iii B) ii and iii only C) i and ii only D) ii only E) iii only Answer: B Topic: Income approach, interest income Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

28) The category of "rent" in the income approach to GDP A) includes the money paid to rent apartments only. B) includes the money paid to rent machinery only. C) includes the money paid to use land and other rented inputs. D) does not have any connection to owner-occupied housing. E) includes only the imputed rent for owner-occupied housing. Answer: C Topic: Income approach, rental income Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

29) Adding wages, interest, rent, and profits yields A) gross domestic product. B) gross domestic product at factor cost. C) net domestic product at factor cost. D) GNP. E) total expenditure. Answer: C Topic: Net domestic product at factor cost Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

30) The sum of all the income categories listed in the National Income and Product Accounts adds up to A) gross domestic product. B) net national product. C) disposable income after taxes. D) net domestic product at factor cost. E) gross national product. Answer: D Topic: Net domestic product at factor cost Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

31) Once the categories of income are totaled, the sum is called A) "GDP measured by the income approach." B) "net domestic product at factor cost" and is not equal to GDP. C) "net domestic product at factor cost" and is equal to GDP. D) "total income earned" and is equal to GDP. E) GNP and is not equal to GDP. Answer: B Topic: Net domestic product at factor cost Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

32) One reason the total sum of the income categories does not equal GDP is that A) GDP values goods and services at market prices and the income approach values them at factor cost. B) GDP values goods and services at retail prices and the income approach values them at wholesale cost. C) taxes are generally larger than subsidies and the depreciation of capital is negligible. D) GDP does not include depreciation, which is part of the income categories. E) people do not spend all their income, so the value of consumption expenditure is less than the value of wages. Answer: A Topic: Income approach, adjustments Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

33) After calculating net domestic product at factor cost, to calculate GDP using the income approach, in part we must add A) wages. B) net operating surplus. C) indirect taxes and depreciation. D) interest, rent, and profit. E) subsidies. Answer: C Topic: Income approach, adjustments Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

34) To measure GDP by using the income approach, we must add all incomes and then ________ depreciation and ________ net taxes less subsidies. A) neither add nor subtract; add B) add; neither add nor subtract C) add; add D) add; subtract E) subtract; add Answer: C Topic: Income approach, adjustments Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

35) If the statistical discrepancy is zero, in order to calculate GDP from the value of net domestic product at factor cost, we must add A) the value of intermediate goods and subtract the value of imports. B) direct taxes, subtract corporate profit, and add investment. C) indirect taxes, subtract subsidies, and add depreciation. D) subsidies, subtract indirect taxes and depreciation. E) indirect taxes, subsidies, and depreciation. Answer: C Topic: Income approach, adjustments Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

36) To calculate GDP using the income approach, one of the adjustments made to net domestic product at factor cost is to A) add depreciation. B) add investment. C) subtract investment. D) add consumption expenditure. E) subtract indirect taxes less subsidies. Answer: A Topic: Income approach, adjustments Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

37) Which adjustment(s) must be made to convert net domestic product to GDP? i. add indirect taxes ii. subtract subsidies iii. add depreciation A) i and iii B) i, ii and iii C) ii only D) iii only E) i and ii Answer: B Topic: Income approach, adjustments Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

38) Last year in a nation to the south, net domestic product at factor cost equaled $3,300 billion. Indirect taxes minus subsidies equaled $200 billion, depreciation equaled $800 billion, the statistical discrepancy equaled zero, and net operating surplus equaled $150 billion. The country's GDP was A) $2,300 billion. B) $3,500 billion. C) $4,300 billion. D) $4,450 billion. E) $4,150 billion. Answer: C Topic: Income approach, adjustments Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

39) The table above has information about an economy. Using this information, GDP equals A) $6,500 billion. B) $7,800 billion. C) $7,000 billion. D) $8,500 billion. E) some amount that cannot be calculated without information on the amount of government expenditures. Answer: B Topic: Income approach Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

40) Using the information in the table above, what does GDP equal? A) $365 billion B) $350 billion C) $650 billion D) $380 billion E) GDP cannot be calculated without information on the amount of investment. Answer: D Topic: Income approach Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

41) The expenditure approach values ________ and the income approach values ________. A) goods and services at market prices; services at factor prices B) goods and services at market prices; goods and services at factor prices C) only goods at market prices; only services at factor prices D) services only at factor prices; goods only at market prices E) goods and services at factor prices; goods and services at market prices Answer: B Topic: Expenditure approach and income approach Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

42) Which of the following would be included in Germany's GNP? A) the production of BMWs (made by a German-based company) in South Carolina B) the production of Michelin tires made in Germany by a French company and then sold directly to French consumers C) the production of BMWs in Germany D) the production of Michelin tires made in France by a French company and then sold to BMW in Germany for use in BMW cars E) Answers A and C are correct. Answer: E Topic: GNP Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

43) Real GDP measures the value of goods and services produced in a given year valued using A) base year prices. B) prices that prevail the same year. C) no prices. D) future prices. E) real rather than nominal prices. Answer: A Topic: Real GDP Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

44) Real GDP is the value of final goods and services produced in a year A) expressed in the prices of that same year. B) during a recession. C) minus depreciation. D) expressed in the prices of a base year. E) minus the value of all the intermediate goods produced. Answer: D Topic: Real GDP Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

45) Real GDP can increase if the i. quantities of goods and services produced decrease and prices fall by a smaller percentage. ii. quantities of goods and services produced decrease and prices fall by a larger percentage. iii. quantities of goods and services produced decrease and prices do not change. iv. quantities of goods and services produced increase. A) i only B) iii only C) iv only D) i and iii E) i, ii, and iii Answer: C Topic: Real GDP Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

46) ________ is most likely to contribute to an improvement in our living standard. A) An increase in real GDP B) An increase in the price level C) A decrease in nominal GDP D) An increase in depreciation E) An increase in the GDP deflator combined with a decrease in nominal GDP Answer: A Topic: Real GDP Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

47) Nominal GDP measures the value of goods and services produced in a given year valued using A) constant prices. B) prices of the same year. C) no prices. D) future prices. E) base year prices. Answer: B Topic: Nominal GDP Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

48) Nominal GDP is GDP A) computed with current market values. B) during a recession. C) minus depreciation. D) after adjusting for any price changes. E) that ignores depreciation. Answer: A Topic: Nominal GDP Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Revised AACSB: Reflective thinking

49) An increase in nominal GDP could result from an increase in i. production. ii. prices. iii. subsidies. A) i only B) ii only C) i and ii D) i and iii E) i, ii, and iii Answer: C Topic: Nominal GDP Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

50) Nominal GDP increases A) only if total production increases. B) only if prices increase. C) if either prices and/or total production increase. D) only if the productivity of resources increase. E) only if depreciation decreases. Answer: C Topic: Nominal GDP Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

51) When the value of nominal GDP increases from one year to the next, we know that one or two things must have happened during that time: A) The nation produced fewer goods and services and/or prices fell for goods and services. B) Consumption expenditure increased and/or corporate profits increased. C) Investment increased and/or payments to employees increased. D) The nation produced more goods and services and/or prices rose for goods and services. E) the value of real GDP must have increased and/or the price level must have decreased. Answer: D Topic: Nominal GDP Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

52) If nominal GDP increases from one year to the next, then A) production must have increased. B) production could have increased, decreased, or stayed the same. C) prices must have increased. D) prices and production must both have increased. E) prices and production must both have decreased. Answer: B Topic: Nominal GDP Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

53) Which of the following statement is correct? A) If nominal GDP increases, then real GDP must increase. B) If nominal GDP decreases, then real GDP must increase. C) If real GDP decreases, then nominal GDP must decrease. D) Nominal and real GDP can change either in the same direction or the opposite direction. E) If nominal GDP does not change, then real GDP cannot change. Answer: D Topic: Nominal GDP and real GDP Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

54) If nominal GDP increases this year, then real GDP A) must decrease. B) must increase. C) must not change. D) could increase, decrease, or not change. E) could either increase or not change but cannot decrease. Answer: D Topic: Nominal GDP and real GDP Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

55) Bobby was researching the economic growth of a country between 2006 and 2011. Using 2006 as the base year, he calculated a twelve percent increase for real GDP and a ten percent increase for nominal GDP. His results indicate that A) he made an error when calculating nominal GDP. B) the quantity of goods and services produced decreased over the period. C) the quantity of goods and services produced increased and prices decreased over the period. D) the quantity of goods and services produced and prices both decreased over the period. E) the quantity of goods and services produced did not change and prices decreased over the period. Answer: C Topic: Nominal GDP and real GDP Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

56) If real GDP is greater than nominal GDP for a particular year, then A) production must have fallen between the current year and the base year. B) production must have increased between the current year and the base year. C) prices must have fallen between the current year and the base year. D) prices must have risen between the current year and the base year. E) prices must have fallen between the current year and the immediate past year. Answer: C Topic: Nominal GDP and real GDP Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

57) During last year, a country produced 20,000 pizzas and 10,000 hamburgers and nothing else. The pizzas sold for $10.00 each and the hamburgers for $3.00 each. Nominal GDP was A) $230,000. B) $70,000. C) $460,000. D) $390,000. E) $360,000. Answer: A Topic: Nominal GDP Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

58) The base year is 2010. A country only produces MP3 players. The price of an MP3 player in 2008 was $50. The price of an MP3 player was $30 in 2010. The quantity of MP3 players produced in 2008 was 10,000 units and in 2010 was 20,000 units. Nominal GDP in 2010 equals A) $1,000,000. B) $500,000. C) $600,000. D) $200,000. E) an amount that cannot be determined without information about real GDP in 2010. Answer: C Topic: Nominal GDP Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

59) The base year is 2011. A country only produces Blu-ray players. The price of a Blu-ray player in 2011 was $100. The price of a Blu-ray player was $90 in 2012. The quantity of Blu-ray players produced in 2011 was 10,000 units and in 2012 was 10,500 units. Nominal GDP in 2012 equals A) $900,000. B) $945,000. C) $1,000,000. D) $1,050,000. E) an amount that cannot be determined without information about nominal GDP in 2008. Answer: B Topic: Nominal GDP Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

60) The base year is 2012. A country only produces Blu-ray players. The price of a Blu-ray player in 2012 was $100. The price of a Blu-ray player was $90 in 2013. The quantity of Blu-ray players produced in 2012 was 10,000 units and in 2013 was 10,500 units. Real GDP in 2012 equals A) $900,000. B) $945,000. C) $1,000,000. D) $1,050,000. E) an amount that cannot be determined without information about real GDP in 2007. Answer: C Topic: Real GDP Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

61) Assume that a small country produces only green peppers and red peppers. Last year, it produced 100 green peppers and 50 red peppers and sold them at prices of $2 per green pepper and $3 per red pepper. This year, it produced 150 green peppers and 60 red peppers and sold them at prices of $2 per green pepper and $4 per red pepper. What is real GDP this year if the base year is last year? A) $540 B) $400 C) $480 D) $350 E) $890 Answer: C Topic: Real GDP Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

Data for 2009

Data for 2010

62) The table above gives the production and prices for a small nation that produces only bread and soda. The base year is 2009. What is nominal GDP in 2009? A) $410 B) $450 C) $900 D) $550 E) $460 Answer: B Topic: Real GDP Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

63) The table above gives the production and prices for a small nation that produces only bread and soda. The base year is 2010. What is real GDP in 2010? A) $530 B) $1,080 C) $510 D) $210 E) $300 Answer: C Topic: Real GDP Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

64) When calculating real GDP, the reference base year A) allows us to account for changes in GNP compared to GDP. B) always reduces the value of GDP compared to GNP. C) allows us to calculate the value of the goods and services in terms of prices of that base year. D) usually increases the value of GNP compared to GDP. E) allows us to increase the value of goods and services. Answer: C Topic: Real GDP Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

65) In calculating GDP, economists A) measure total expenditure as the only true measure. B) can measure either total expenditure or total income. C) measure total income as the only true measure. D) measure total income minus total expenditure. E) measure total income plus total expenditure. Answer: B Topic: Expenditure approach and income approach Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

66) The expenditure approach to measuring GDP is based on summing A) wages, interest, rent, and profit. B) each industry's production. C) the total values of final goods, intermediate goods and services, used goods, and financial assets. D) consumption expenditure, investment, government expenditure on goods and services, and net exports of goods and services. E) consumption expenditure, investment, government expenditure on goods and services, and net exports of goods and services minus wages, interest, rent, and profit. Answer: D Topic: Expenditure approach Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

67) Which of the following is NOT included in the expenditure approach to calculating GDP? A) government expenditures on goods and services B) investment C) net exports of goods and services D) wages E) consumption expenditure Answer: D Topic: Expenditure approach Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

68) Suppose GDP is $10 billion, consumption expenditure is $7 billion, investment is $2 billion, and government expenditure on goods and services is $2 billion. Net exports of goods and services must be A) $1 billion. B) -$1 billion. C) $2 billion. D) -$2 billion. E) $10 billion. Answer: B Topic: Expenditure approach Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

69) According to the expenditure approach to measuring GDP, in the United States , the largest component of GDP is A) consumption expenditure. B) investment. C) government expenditure on goods and services. D) net exports of goods and services. E) wages. Answer: A Topic: Expenditure approach Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

70) Expenditures in GDP do not include A) used goods or financial assets. B) financial assets or investment. C) used goods or investment. D) investment, stocks, or bonds. E) government expenditures on goods and services. Answer: A Topic: Expenditure approach Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

71) Which of the following is NOT part of the income used in the income approach to measuring GDP? A) wages B) rent C) interest D) taxes paid by persons E) profit Answer: D Topic: Income approach Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

72) Which of the following is NOT included in the income approach to calculating GDP? A) interest B) wages C) net exports of goods and services D) profits E) rent Answer: C Topic: Income approach Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

73) The sum of the components of incomes is called A) net domestic product at market prices. B) gross domestic product at market prices. C) gross domestic product at factor cost. D) net domestic product at factor cost. E) GNP. Answer: D Topic: Net domestic product at factor cost Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

74) Nominal GDP can change A) only if prices change. B) only if the quantities of goods and services change. C) only if prices increase. D) if either prices or the quantities of goods and services change. E) only if prices and the quantities of the goods and services change. Answer: D Topic: Nominal GDP Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

75) A south sea island produces only coconuts. In 2012, the price of a coconut is $1 and the quantity produced is 200. In 2013, the price of a coconut is $1.50 and the quantity produced is 250. 2012 is the base year. Real GDP in 2013 is A) $375. B) $350. C) $200. D) $250. E) $1.50. Answer: D Topic: Real GDP Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

76) The difference between nominal GDP and real GDP is A) the indirect taxes used in their calculations. B) the prices used in their calculations. C) that nominal GDP includes the depreciation of capital and real GDP does not. D) that nominal GDP includes net exports of goods and services and real GDP includes net imports. E) that real GDP includes the depreciation of capital and nominal GDP does not. Answer: B Topic: Nominal GDP and real GDP Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

77) Since 1999, the purchase of computer software by firms has been considered A) an investment. B) an intermediate good. C) depreciation. D) none of the above Answer: A Topic: Eye on the U.S. economy, is a computer program an intermediate good? Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: New AACSB: Reflective thinking

78) Statistical discrepancy is calculated as A) GDP expenditure total - GDP income total. B) Real GDP-nominal GDP. C) Gross GDP-Net GDP. D) none of the above Answer: A Topic: Income approach, adjustments Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: New AACSB: Reflective thinking

14.3 The Use and Limitations of Real GDP 1) GDP is A) a perfect measure of the standard of living. B) a perfect measure of the value of production. C) a measure which includes the value of all newly produced goods and services. D) an imperfect measure of the standard of living. E) the only factor that affects our standard of living. Answer: D Topic: Standard of living Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

2) Even though it is not a perfect measure, economists can use real GDP to i. compare how the value of the goods and services produced in China have changed over the past 10 years. ii. look at the length of recessions and expansions in the United States. iii. compare the standard of living in China versus the standard of living in Vietnam. A) ii only B) i, ii and iii C) i and iii D) i and ii E) ii and iii Answer: B Topic: Standard of living Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

3) Although imperfect, which of the following is used as a measure of the standard of living? A) real GDP ÷ population B) real GDP × population C) nominal GDP × population D) nominal GNP ÷ population E) nominal GNP × population Answer: A Topic: Standard of living Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

4) In the United States, between 1961 and 2011, there has been i. a consistent , non-changing growth rate of potential GDP per person. ii. an increase in the standard of living based on real GDP per person. iii. fluctuations in real GDP per person around potential GDP per person. A) ii only B) i, ii and iii C) i and ii D) ii and iii E) i only Answer: D Topic: Standard of living Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

5) In 1961, real GDP totaled $575 billion and in 2011 it totaled $1,255 billion. Between 1961 and 2011, the population increased from 50 million to 100 million. Between 1961 and 2011, the standard of living based on real GDP per person A) increased from $11,500 to $12,550. B) increased by over 300 percent. C) increased by about 118 percent. D) decreased from $125,500 to $28,750. E) decreased by 9 percent. Answer: A Topic: Nominal GDP and real GDP Skill: Level 1: Definition Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking

6) If we use GDP to measure our standard of living, then our procedure is A) inaccurate because our standard of living does not depend only on goods and services. B) accurate because our standard of living depends solely on goods and services. C) inaccurate because our standard of living has nothing to do with goods and services. D) inaccurate because our standard of living only depends on used goods and services. E) accurate only if we use nominal GDP rather than real GDP. Answer: A Topic: Standard of living Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

7) The business cycle describes A) the change in potential GDP over time. B) the change in the standard of living across countries. C) the behavior of real GDP over time. D) the behavior of nominal GDP over time. E) the behavior of GNP over time. Answer: C Topic: Business cycle Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

8) The business cycle is defined as A) changes in the stock market. B) changes in financial markets. C) persistent growth in potential GDP. D) irregular ups and downs in production and jobs. E) the period of time during which the unemployment rate is rising. Answer: D Topic: Business cycle Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

9) The relationship between real GDP and potential GDP over the business cycle can be best summarized by which of the following statements? A) Real GDP fluctuates around potential GDP. B) Real GDP is always equal to potential GDP. C) Real GDP cannot be greater than potential GDP. D) Real GDP cannot be less than potential GDP. E) Real GDP cannot be equal to potential GDP. Answer: A Topic: Business cycle Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

10) Over the business cycle, A) potential GDP fluctuates around its trend. B) real GDP fluctuates around its trend. C) only potential GDP fluctuates around its trend and real GDP remains equal to its trend. D) only real GDP fluctuates around its trend and potential GDP remains equal to its trend. E) neither real GDP nor potential GDP fluctuates because they just grow smoothly along their trends. Answer: B Topic: Business cycle Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

11) During the business cycle, A) real GDP fluctuates around nominal GDP. B) nominal GDP fluctuates around real GDP. C) real GDP fluctuates around its trend. D) trend GDP fluctuates around real GDP. E) real GDP falls after the trough. Answer: C Topic: Business cycle Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

12) A business cycle has two turning points, which are the A) recession and trough. B) peak and recession. C) trough and peak. D) expansion and recession. E) peak and expansion. Answer: C Topic: Business cycle Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

13) The business cycle has two phases, A) expansion and peak. B) recession and trough. C) peak and trough. D) recession and expansion. E) expansion and trough. Answer: D Topic: Business cycle Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

14) Based on the figure above, in which quarter or quarters did a recession occur? A) between 2012, 2nd quarter to 2013, 2nd quarter and also between 2014, 2nd quarter to the end of the figure B) in 2013, 2nd quarter C) between 2013, 2nd quarter to 2014, 2nd quarter D) between 2014, 1st quarter to 2014 2nd quarter E) after 2013, 2nd quarter Answer: C Topic: Business cycle Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

15) Based on the figure above, in which quarter or quarters did an expansion occur? A) between 2012, 2nd quarter to 2013, 2nd quarter and also between 2014, 2nd quarter to the end of the figure B) in 2013, 2nd quarter C) between 2013, 2nd quarter to 2014, 2nd quarter D) in 2014, 2nd quarter E) There are no expansions illustrated in the figure. Answer: A Topic: Business cycle Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

16) Based on the figure above, in which quarter or quarters did a trough occur? A) between 2012, 2nd quarter to 2013, 2nd quarter and also between 2014, 2nd quarter to the end of the figure B) in 2013, 2nd quarter C) between 2013, 2nd quarter to 2014, 2nd quarter D) in 2014, 2nd quarter E) There are no troughs illustrated in the figure. Answer: D Topic: Business cycle Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

17) Based on the figure above, in which quarter or quarters did a peak occur? A) between 2012, 2nd quarter to 2013, 2nd quarter and also between 2014, 2nd quarter to the end of the figure B) in 2013, 2nd quarter C) between 2013, 2nd quarter to 2014, 2nd quarter D) in 2014, 2nd quarter E) There are no peaks illustrated in the figure. Answer: B Topic: Business cycle Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

18) A standard definition of recession is A) a period of expansion in many sectors of the economy. B) an increase in GDP that lasts for at least 6 months. C) a decrease in real GDP for at least two successive quarters. D) an increase in unemployment from one month to the next. E) a period of time when the unemployment rate exceeds 6.5 percent. Answer: C Topic: Business cycle, recession Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Revised AACSB: Reflective thinking

19) In order to be classified as a recession, a contraction of general economic activity must last at least A) one year. B) six months. C) one period. D) one quarter. E) None of the above because recessions do not have a minimum length. Answer: B Topic: Business cycle, recession Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

20) A recession conventionally is defined as a decrease in A) real GDP that lasts for at least six months. B) the growth rate of real GDP that lasts for at least six months. C) potential GDP that lasts for at least six months. D) real GDP that lasts for at least three months. E) the inflation rate that lasts for at least six months. Answer: A Topic: Business cycle, recession Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

21) A recession runs from the A) peak of the business cycle to its trough. B) peak of the business cycle to a recovery. C) expansion of a business cycle to its peak. D) trough of a business cycle to its peak. E) trough of a business cycle to its expansion. Answer: A Topic: Business cycle, recession Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

22) The U.S. economy is experiencing falling output, falling employment, falling incomes and rising unemployment. These conditions best describe a business cycle A) expansion. B) peak. C) trend. D) recession. E) trough. Answer: D Topic: Business cycle, recession Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

23) The U.S. economy is experiencing rising output, rising employment, rising incomes and falling unemployment. These conditions best describe a business cycle A) expansion. B) peak. C) trend. D) recession. E) trough. Answer: A Topic: Business cycle, expansion Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

24) The NBER describes a recession as A) "a period of significant decline in economic activity spread across the economy, lasting more then a few months." B) "a decrease in real GDP for two successive quarters." C) "a decrease in potential GDP for at least six months." D) "a decrease in the standard of living for at least one year." E) "a one year period with increases in the unemployment rate." Answer: A Topic: Business cycle, NBER Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Revised AACSB: Reflective thinking

25) The Great Moderation describes the period A) of relatively steady growth in real GDP between 1991 and 2008. B) of relatively steady growth in real GDP after the year 2000. C) between 2000 and 2008 when potential GDP did not increase. D) between 1990 and 2005 when real GDP grew significantly more slowly than did potential GDP. E) of very slow growth in real GDP after 1990. Answer: A Topic: Business cycle, history Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

26) Which of the following describe the United States economy in 2008 and and the start of 2009? A) The economy was in an expansion. B) The economy was in a recession. C) Real GDP per person increased. D) Real GDP reached a peak. E) None of the above answers is correct. Answer: B Topic: Business cycle, recession Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

27) U.S. real GDP A) precisely measures the improving standard of living in the United States. B) measures the change in the price level over time. C) excludes the value of underground production and leisure time. D) is not as accurate as nominal GDP when measuring standard of living changes over time. E) includes the value of underground production but excludes the value of leisure time. Answer: C Topic: Omissions from GDP Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

28) As measured, GDP omits which of the following? i. Illegal sales of goods and services ii. Changes in the amount of leisure time iii. Household production of goods and services A) i only B) i and ii C) ii and iii D) i and iii E) i, ii, and iii Answer: E Topic: Omissions from GDP Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

29) Excluding household and underground production leads to A) underestimation of real GDP but not nominal GDP. B) overestimation of real GDP but not nominal GDP. C) overestimation of both real GDP and nominal GDP. D) underestimation of both real GDP and nominal GDP. E) underestimation of real GDP an overestimation of nominal GDP. Answer: D Topic: Omissions from GDP Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

30) Goods and services such as environmental quality, leisure time, and household production are not included in GDP because they are not A) productive activities. B) for consumption. C) bought in markets. D) made for profit. E) really durable goods. Answer: C Topic: Omissions from GDP Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

31) Household production, such as baking bread at home, is not included in GDP because it A) has better quality than the bread in the store. B) has lower quality than the bread in the store. C) does not add anything of value to GDP. D) does not involve a market transaction. E) is not really production. Answer: D Topic: Household production Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

32) The calculation of GDP excludes the value of A) government expenditure on office supplies. B) households' purchases of shampoo. C) businesses' purchase of new machine tools. D) a family member painting the family home. E) expenditure on durable goods. Answer: D Topic: Household production Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

33) An example of household production excluded from GDP is A) household cleaning services provided by Merry Maids Incorporated. B) child care provided by a certified nanny. C) tree trimming you provide at your parents' home. D) plumbing work completed by Joe Fix-it. E) lawn care provided by a local lawn care company. Answer: C Topic: Household production Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

34) Babysitting services the oldest son provides his parents A) counts as nominal GDP but not real GDP. B) counts as real GDP but not nominal GDP. C) counts as real GDP and nominal GDP. D) does not count as real GDP nor nominal GDP. E) counts in both real and nominal GDP only if the son is not paid. Answer: D Topic: Household production Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

35) As more women decide to work outside the home and therefore hire others to work around their home, GDP will increase by A) only the value of the output produced by the newly working women. B) the value of the output produced by the newly working women minus the value of the household work they were previously performing. C) the value of the output produced by the newly working women plus the value of any household work they are now hiring someone to perform. D) only the value of the household work they are now hiring someone to perform. E) the value of the household work they were previously performing minus the value of the output produced by the newly working women. Answer: C Topic: Household production Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

36) Instead of taking the dirty laundry with you when you go back to visit your parents, you use a Laundromat. Your use of the Laundromat means that A) GDP will decrease and the country's standard of living will fall. B) your parents' contribution to GDP will increase. C) GDP will remain the same. D) what you paid for use of the Laundromat will be included in GDP. E) real GDP does not change because the clothes are still being laundered but nominal GDP rises since you are now paying for the service. Answer: D Topic: Household production Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

37) If you mow the lawn yourself, the lawn mowing is considered household production. If you pay Larry's Lawn Service to mow your lawn, the lawn mowing is considered A) a leisure time activity. B) a service, that will be counted as part of GDP. C) a service, but is not counted as part of GDP because it simply replaces a service you used to perform. D) rent, and therefore is counted as part of GDP. E) underground production because it replaces the underground production of you mowing your lawn. Answer: B Topic: Household production Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

38) Pat gives up a $40,000 per year job to stay at home and take care of the house. By so doing, Pat saves $15,000 in child care and house cleaning services which he now performs himself. The direct effect on GDP from Pat's decision is a decrease of A) $40,000. B) $55,000. C) $25,000. D) $15,000. E) $30,000. Answer: B Topic: Household production Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking

39) Which of the following is likely to be an unreported economic activity? A) a $250,000 bonus paid to the CEO of a company B) tips paid to a taxi driver C) the minimum wage paid to a teenager working at a McDonald's D) the brokerage fees paid to a broker at Merrill Lynch E) the purchase of shares of stock in Walgreen's Pharmacy Answer: B Topic: Underground production Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

40) The measurement of GDP handles underground production by A) including the amount produced in this sector of the economy in exactly the same way that all other production is included. B) omitting it because underground production is unreported to the government by the people involved. C) adding it at fixed prices that change only infrequently. D) adding an estimate of it because it is difficult to precisely measure underground production. E) omitting it because, being illegal, it has no effect on the nation's total production. Answer: B Topic: Underground production Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

41) Leisure time is ignored when calculating GDP because leisure time A) does not affect our standard of living. B) has been declining over time. C) is not an economic good. D) is not bought in a market. E) is not productive. Answer: D Topic: Leisure time Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

42) Which of the following is NOT included in measured U.S. GDP? A) the value of the pizzas produced at Pizza Hut in Kansas City B) the value of leisure time C) the value of the goods produced at a French owned plant in Atlanta, Georgia D) the value of the services produced by a lawyer in Tampa, Florida E) the value of a plane produced by Boeing in Washington and sold to Air France Answer: B Topic: Leisure time Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

43) Which of the following is directly accounted for in the calculation of GDP? A) the value of one hour of leisure as measured by the hourly wage one would otherwise earn by working B) the value of repairing your own kitchen sink as measured by the average rates charged by local plumbers C) cash earnings from an illegal poker game D) improvements in quality of life from the reduction of pollution E) None of the above items is accounted for in GDP. Answer: E Topic: Household production Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

44) Mexico City is notorious for its excessive pollution. Mexico's measure of GDP is A) decreased by the estimated value of the pollution's harm. B) not affected by the estimated value of the pollution's harm. C) increased by the estimated value of the pollution's harm. D) changed by the pollution only when comparing its GDP with the U.S. GDP. E) None of the above answers is correct. Answer: B Topic: Environmental quality Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

45) A new technology is discovered which results in all new cars producing 50 percent less pollution. Which of the following is true? A) GDP will increase to reflect the fact that the air we breathe is cleaner. B) GDP will increase if there is an increase in the production cost and price of the car. C) GDP increases anytime pollution is reduced. D) GDP will decrease. E) Real GDP increases because the air is cleaner, but nominal GDP does not change since air is free. Answer: B Topic: Environmental quality Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

46) The calculation of GDP using the income approach EXCLUDES A) rent. B) interest. C) environment quality. D) wages. E) profit. Answer: C Topic: Environmental quality Skill: Level 1: Definition Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

47) The Human Development Index was proposed because A) people confuse nominal GDP and real GDP. B) nominal GDP and real GDP are subjective measures. C) of the limitations of real GDP as a measure comparing the standard of living in different nations. D) the GDP deflator changes if the base year is changed. E) different nations have different populations. Answer: C Topic: Eye on the global economy, which country has the highest standard of living? Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

48) In the years after 1998, the most severe recession occurred during A) 1998. B) 2000-2001. C) 2008-2009. D) 1999-2001. E) 2005. Answer: C Topic: Business cycle Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

49) Which of the following is NOT part of the business cycle? A) recession B) peak C) inflation D) trough E) expansion Answer: C Topic: Business cycle Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

50) In the business cycle, what immediately precedes the time when real GDP is falling? A) recession B) peak C) depression D) trough E) expansion Answer: B Topic: Business cycle Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

51) Which of the following goods and services are omitted from GDP? A) household production B) capital goods C) expenditure on resources used to protect the environment D) government weather satellites E) services such as hair styling Answer: A Topic: Household production Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

52) GDP handles household production by A) estimating a dollar value of the goods purchased to do housework. B) estimating a dollar value of the services provided. C) ignoring it. D) including it in exactly the same way that all other production is included. E) including it in real GDP but not in nominal GDP because there are no prices paid for the work. Answer: C Topic: Household production Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

53) The underground economy A) is measured by government officials through tax returns. B) is difficult to describe but easy to measure. C) includes production that uses illegal workers who are paid less than minimum wage. D) includes mining production. E) is estimated by the government and the estimate is part of official GDP. Answer: C Topic: Underground production Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

54) You hire some of your friends to help you move to a new house. You pay them a total of $200 and buy them dinner at Pizza Hut. Which of the following is true? A) The $200 should be counted as part of GDP but not the dinner at Pizza Hut. B) If your friends do not report the $200 on their tax forms, it becomes part of the underground economy. C) The dinner at Pizza Hut should be counted as part of GDP, but not the $200. D) Hiring your friends is an illegal activity and should not be counted in GDP. E) Neither the $200 nor the dinner should be counted in GDP because both are household production. Answer: B Topic: Underground production Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

55) The value of leisure time is A) included in GDP and, in recent years, has become an increasing large part of GDP. B) excluded from GDP. C) zero. D) directly included in GDP but, in recent years, has become a decreasing large part of GDP. E) directly included in GDP and, in recent years, has not changed much as a fraction of GDP. Answer: B Topic: Leisure time Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

56) Leisure time A) is less valuable to us than the wage we earn for working. B) has steadily decreased over the years. C) is not valued as part of GDP. D) is not an economic good. E) is included in GDP and has become an increasingly large part of GDP. Answer: C Topic: Leisure time Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

57) A country with a real GDP per person similar to real GDP per person in the United States but with limited political freedom is generally considered to have A) a lower standard of living than the United States. B) a larger Human Development Index because the other country still needs to develop more political freedom. C) the same standard of living as the United States. D) an understated GDP. E) an overstated nominal GDP. Answer: A Topic: Political freedom Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

58) The alternative measure of the standard of living which adjusts GDP for the costs of greenhouse gas emissions and other negative influences on the environment is called A) Green GDP. B) Human Development Index. C) the standard of living. D) an understated GDP. E) environmental GDP. Answer: A Topic: Eye on the global economy, which country has the highest standard of living? Skill: Level 1: Definition Section: Checkpoint 14.3 Status: New AACSB: Reflective thinking

59) The alternative measure of the standard of living that adjusts GDP for the cost of depleting nonrenewable resources is called A) Happy Planet Index. B) Human Development Index. C) the standard of living. D) Green GDP. E) environmental GDP. Answer: A Topic: Eye on the global economy, which country has the highest standard of living? Skill: Level 1: Definition Section: Checkpoint 14.3 Status: New AACSB: Reflective thinking

60) Of the following, which country had the highest HDI in 2014? A) Norway B) Qatar C) Russia D) USA E) Canada Answer: A Topic: Eye on the global economy, which country has the highest standard of living? Skill: Level 3: Using models Section: Checkpoint 14.3 Status: New AACSB: Reflective thinking

61) Of the following, which country had the highest income in 2014? A) Norway B) Qatar C) Russia D) USA E) Canada Answer: B Topic: Eye on the global economy, which country has the highest standard of living? Skill: Level 3: Using models Section: Checkpoint 14.3 Status: New AACSB: Reflective thinking

62) The HDI does NOT include A) income. B) political freedom. C) life expectancy. D) health. E) education. Answer: B Topic: Eye on the global economy, which country has the highest standard of living? Skill: Level 2: Using definitions Section: Checkpoint 14.3 Status: New AACSB: Reflective thinking

63) Based on the figure above, a recession took place ________, and expansion occurred in ________. A) between 2nd quarter 2012 to 2nd quarter 2013, and also between 2nd quarter 2014 to the end of the figure; the 2nd quarter 2014 B) in 2013; 2nd quarter C) between 2nd quarter 2013 to 2nd quarter 2014; between 2nd quarter 2012 to 2nd quarter 2013, and also between 2nd quarter 2014 to the end of the figure D) between the 1st quarter 2014 to the 2nd quarter 2014; the 2nd quarter 2014 E) after 2nd quarter 2013; before the 2nd quarter 2013 Answer: C Topic: Business cycle Skill: Level 5: Critical thinking Section: Checkpoint 14.3 Status: New AACSB: Analytical thinking

64) Based on the figure above, a trough occurred ________, while the peak occurred ________. A) between the 2nd quarter 2012 to the 2nd quarter 2013; between the 2nd quarter 2014 to the end of the figure B) in the 2nd quarter 2013; in the 2nd quarter 2014 C) between the 2nd quarter 2013 to the 2nd quarter 2014; 2nd quarter of 2014 D) in 2nd quarter 2014; in the 2nd quarter 2013 E) There are no troughs and peaks illustrated in the figure. Answer: D Topic: Business cycle Skill: Level 5: Critical thinking Section: Checkpoint 14.3 Status: New AACSB: Analytical thinking

65) Based on the figure above, a peak occurred in ________, followed by the ________. A) the 2nd quarter 2012; expansion to the end of the figure B) in the 2nd quarter 2013; recession til the 2nd quarter 2014 C) the 2nd quarter 2014; expansion to the end of the figure D) in the 2nd quarter 2014; recession to the end of the figure E) the 2nd quarter 2012; expansion til the 2nd quarter 2013 Answer: B Topic: Business cycle Skill: Level 5: Critical thinking Section: Checkpoint 14.3 Status: New AACSB: Analytical thinking

66) Based on the figure above, a trough occurred in ________, followed by the ________. A) the 2nd quarter 2012; expansion to the end of the figure B) in the 2nd quarter 2013; recession til the 2nd quarter 2014 C) the 2nd quarter 2014; expansion to the end of the figure D) in the 2nd quarter 2014; recession to the end of the figure E) the 2nd quarter 2012; expansion til the 2nd quarter 2013 Answer: C Topic: Business cycle Skill: Level 5: Critical thinking Section: Checkpoint 14.3 Status: New AACSB: Analytical thinking

67) In order to identify the date of a business cycle peak, the NBER committee looks at data on A) industrial production. B) total employment. C) wholesale and retail sales. D) all of the above Answer: D Topic: Eye on boom and busts, how do we track economic booms and busts? Skill: Level 2: Using definitions Section: Checkpoint 14.3 Status: New AACSB: Reflective thinking

14.4 Appendix: Measuring Real GDP 1) Using the chained-dollar method to calculate real GDP, real GDP is calculated by A) valuing the current output at last year's real GDP prices. B) valuing the current output at current year prices. C) averaging the growth of output from one year to the next when the growth rates are calculated using this year's prices and using last year's prices. D) either A or C, depending which gives the larger value for real GDP. E) averaging the value of current output valued using base year prices and current output valued using current year prices. Answer: C Topic: Real GDP Skill: Level 3: Using models Section: Checkpoint 14.4 Status: Old AACSB: Reflective thinking

2) Janet calculated the GDP growth rates for France between 2015 and 2016. Using 2015 prices for both years, GDP increased 5 percent. Using 2016 prices for both years, GDP increased 1 percent. Hence the chained-price method will calculate that between these years, real GDP increased by A) 1 percent. B) 3 percent. C) 5 percent. D) 6 percent. E) 4 percent. Answer: B Topic: Real GDP Skill: Level 3: Using models Section: Checkpoint 14.4 Status: Revised AACSB: Analytical thinking

3) The table above gives some data about GDP in a country for two years. Using these the chained-dollar method for calculating real GDP, real GDP increased by ________ percent between these two years. A) 4 B) 5 C) 6 D) 10 E) 2 Answer: B Topic: Real GDP Skill: Level 4: Applying models Section: Checkpoint 14.4 Status: Old AACSB: Analytical thinking

4) Bananaland produces only bananas and sunscreen and the quantities and prices for 2015 and 2016 are given in the table above. The base year is 2015. Nominal GDP in 2015 is equal to A) $500. B) $625. C) $640. D) $800. E) $100. Answer: A Topic: Nominal GDP Skill: Level 3: Using models Section: Checkpoint 14.4 Status: Old AACSB: Analytical thinking

5) Bananaland produces only bananas and sunscreen and the quantities and prices for 2015 and 20163 are given in the table above. The base year is 2015. Nominal GDP in 2016 is equal to A) $500. B) $800. C) $640. D) $625. E) $200. Answer: B Topic: Nominal GDP Skill: Level 3: Using models Section: Checkpoint 14.4 Status: Old AACSB: Analytical thinking

6) Bananaland produces only bananas and sunscreen and the quantities and prices for 2015 and 2016 are given in the table above. The base year is 2015. Real GDP in 2015 is equal to A) $800. B) $640. C) $625. D) $500. E) $200. Answer: D Topic: Real GDP Skill: Level 3: Using models Section: Checkpoint 14.4 Status: Old AACSB: Analytical thinking

7) Bananaland produces only bananas and sunscreen and the quantities and prices for 2015 and 2016 are given in the table above. Between 2015 and 2016, which grew more rapidly, nominal GDP or real GDP? A) Nominal GDP grew more rapidly. B) Real GDP grew more rapidly. C) Both grew at the same rate. D) Because real GDP and nominal GDP use different prices, it is not possible to determine which grew most rapidly. E) More information is needed to determine which grew more rapidly. Answer: A Topic: Real GDP Skill: Level 3: Using models Section: Checkpoint 14.4 Status: Old AACSB: Analytical thinking

8) Bananaland produces only bananas and sunscreen and the quantities and prices for 2015 and 2016 are given in the table above. The base year is 2015. In 2016 which is larger, nominal GDP or real GDP? A) Nominal GDP is larger. B) Real GDP is larger. C) Both are the same size. D) The answer is ambiguous. E) More information is needed to determine which is larger. Answer: A Topic: Real GDP Skill: Level 3: Using models Section: Checkpoint 14.4 Status: Old AACSB: Analytical thinking

9) Real GDP measures the value of goods and services produced in a given year using A) base year prices. B) prices of that same year. C) no prices. D) future prices. E) government approved prices. Answer: A Topic: Real GDP Skill: Level 1: Definition Section: Checkpoint 14.4 Status: Old AACSB: Reflective thinking

10) In a small country, using prices of 2015, GDP in 2012 was $100 and GDP in 2016 was $110. Using prices of 2016, GDP in 2015 was $200 and GDP in 2016 was $210. The country's BEA will calculate ________ percent as the growth in real GDP between those years. A) 10 B) 5 C) 15 D) 7.5 E) None of the above answers is correct. Answer: D Topic: Real GDP Skill: Level 3: Using models Section: Checkpoint 14.4 Status: Old AACSB: Analytical thinking

11) Using prices from 2015, GDP grew 10 percent between 2015 and 2016; using prices from 2016, GDP grew 8 percent between 2015 and 2016. For its link back to the base year, the BEA will use ________ percent as the growth in real GDP between 2015 and 2016. A) 10 B) 8 C) 2 D) 18 E) 9 Answer: E Topic: Real GDP Skill: Level 3: Using models Section: Checkpoint 14.4 Status: Old AACSB: Analytical thinking

14.5 Integrative Questions 1) Depreciation is A) fall in the value of an exchange rate. B) the decrease in the value of capital resulting from its use and obsolescence. C) the decrease in the purchasing power of a dollar because of inflation. D) part of consumption expenditure. E) part of net domestic product at factor cost. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

2) Comparing nominal GDP of 2012 to nominal GDP of twenty years ago A) is an inaccurate measure of the change in total production. B) has no economic meaning. C) will be an accurate measure of the change in total production. D) determines the extent to which the cost of living changed. E) cannot be done because the two GDP measures use different prices. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

3) If real GDP increases over time, the cost of living will A) always remain constant. B) always decrease. C) always increase. D) either remain constant or increase. E) More information is needed to determine how the cost of living changes. Answer: E Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking

4) If both the production of goods and services increase and prices rise, then the change in nominal GDP A) definitely understates the change in production. B) definitely accurately reflect the change in production. C) definitely overstates the change in production. D) either understates or might accurately reflect the change in production. E) More information is needed to determine how the change in nominal GDP compares to the change in production. Answer: C Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Analytical thinking

5) The nation's supply of productive resources increases if A) investment is greater than depreciation. B) investment equals depreciation. C) investment is less than depreciation. D) Both answers A and B can be correct. E) None of the above answers is correct because the relationship between investment and depreciation has no bearing on the amount of the nation's productive resources. Answer: A Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Analytical thinking

6) If a wealthy woman marries her butler, quits paying him and does not hire a new butler, then A) GDP definitely decreases. B) GDP definitely does not change. C) GDP definitely increases. D) GDP either does not change or increases. E) There is not enough information given to reach a conclusion. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

14.6 Essay: GDP, Income, and Expenditure 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: GDP Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Written and oral communication

2) 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: GDP Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Written and oral communication

3) 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 is an example of an intermediate good. Topic: Final and intermediate goods Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Written and oral communication

4) 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 expenditure 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: Expenditure Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Written and oral communication

5) Investment, as included in GDP, consists of what? Answer: Investment is the purchase of new capital goods such as tools, instruments, machines, buildings, and other constructions and additions to inventories. Investment does not include the purchase or sale of stocks and bonds. Topic: Investment Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Written and oral communication

6) "The amount of new stocks and bonds issued in a year adds to the country's GDP." Is this assertion correct or incorrect? Explain your answer. Answer: The assertion is incorrect. Stocks and bonds are not counted in the country's GDP. GDP measures the production of final goods and services. Issuing new stocks or bonds does not produce a final good or service and so stocks and bonds are not included in GDP. Topic: Investment Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Written and oral communication

7) Are stocks and bonds considered part of the investment component of GDP? Answer: No, stocks and bonds are not part of the investment component of GDP. The investment component of GDP includes the purchase of new capital goods and changes in inventories. Stocks and bonds are not capital goods and are not changes in inventories, so they are not part of investment. Topic: Investment Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Written and oral communication

8) 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: Investment, inventory Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Written and oral communication

9) 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. 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: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Written and oral communication

10) 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 (income) 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: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Written and oral communication

14.7 Essay: Measuring U.S. GDP 1) "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: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Written and oral communication

2) What are the categories of expenditure used in the expenditure approach to measuring GDP? Answer: There are four expenditure categories. The expenditure approach calculates the sum of consumption expenditure, investment, government expenditure on goods and services, and net exports of goods and services. Net exports of goods and services are the difference between exports of goods and services and imports of goods and services. Topic: Expenditure approach Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Written and oral communication

3) The purchase and sale of three types of legal items are not included in this year's GDP. What are these three items? Answer: The three items are: used goods; financial assets; and, intermediate goods. Topic: Expenditures not in GDP Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

4) Are sales and purchases of used goods counted as part of GDP? Why or why not? Answer: Sales and purchases of used goods are not counted as part of GDP. GDP measures the production of final goods and services produced within a country in a given time period. So GDP for the United States for 2014 includes the goods and services produced within the United States during 2014. The point is that a used good has not been produced within the specified time period. In other words, a used automobile produced in 2012, then in 2014 traded in and resold within the United States was not produced in 2014. Because it was not produced in 2014, it is not a part of the GDP in 2014. (If the automobile was produced within the United States in 2012, the automobile was part of the U.S. GDP in 2012.) Topic: Expenditures not in GDP, used goods Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Written and oral communication

5) If you sell your textbook to your friend this year, does the sale count in this year's GDP? Answer: No, the sale would not count in this year's GDP because it is the sale of a used item. The sale of used items is not counted in GDP because GDP measures goods and services produced within a specified time frame. Unless your textbook was produced in this year, it will not count in this year's GDP. And, even if was produced this year, it has already been included in this year's GDP when it was initially sold as a new textbook. Topic: Expenditures not in GDP, used goods Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Written and oral communication

6) Explain how the purchases of used goods and of financial assets affect GDP. Answer: Used goods count in GDP for the year in which they were produced. Hence the purchase of a used good is not included in GDP. Purchases of financial assets, such as stocks, are a transfer of funds and not the purchase of a newly produced good or service. When the firm uses the funds it acquires from selling the stocks or bonds to purchase capital, the purchase of the capital will count as investment, but the initial purchase (and sale) of the financial asset itself does not count in GDP. Topic: Expenditures not in GDP, used goods and financial assets Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Written and oral communication

7) Explain why the purchase and sale of used goods and of financial assets are not included in the calculation of GDP even though transactions in these items amount to billions of dollars daily. Answer: GDP measures the value of the goods and services produced in a given year. The key phrase in the definition is "produced in a given year." Used goods are counted in the GDP of the year in which they are produced and so they are not counted if they are bought and sold again. Financial assets, such as buying and selling stocks and bonds, are not production. These transactions are purely financial and are simply the changing of the ownership of assets. Hence neither the purchase nor the sale of used goods nor of financial assets are included in GDP. Topic: Expenditures not in GDP, used goods and financial assets Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Written and oral communication

8) "When you purchase $1,000 of stock in Microsoft, your purchase is an investment and hence is part of GDP." Is this assertion correct? Explain your answer. Answer: The assertion is incorrect. Your purchase of $1,000 of Microsoft stock does not increase GDP because it is the purchase of a financial asset. The investment component of GDP is the purchase of new capital goods. Your purchase of stock is not the purchase of a new capital good and hence, as a purely financial transaction, it is not included in GDP. Topic: Expenditures not in GDP, financial assets Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Written and oral communication

9) 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. Finally, because records cannot be 100 percent complete, any statistical discrepancy needs to be added (or subtracted). Topic: Income approach, adjustments Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Written and oral communication

10) 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, adjustments Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Written and oral communication

11) Explain how GDP is measured according to the expenditure and income approaches. Answer: GDP can be measured using the expenditure approach or 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 wages (which is the compensation of employees) plus the net operating surplus (which is the sum of interest, rent, and profit). 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, then depreciation is added, and finally any statistical discrepancy is added. Topic: Expenditure approach and income approach Skill: Level 4: Applying models Section: Checkpoint 14.2 Status: Old AACSB: Written and oral communication

12) Assume a small nation has the following statistics: its consumption expenditure is $15 million, investment is $2 million, government expenditure on 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 expenditure on 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: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

13) 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: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

14) 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: Nominal GDP and real GDP Skill: Level 4: Applying models Section: Checkpoint 14.2 Status: Old AACSB: Written and oral communication

15) 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: Nominal GDP and real GDP Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Written and oral communication

16) 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: Nominal GDP and real GDP Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Written and oral communication

14.8 Essay: The Use and Limitations of Real GDP 1) Explain how our standard of living depends upon our level of real GDP per person, but there might not be a one-to-one relationship between the standard of living and real GDP per person. Give examples of things that can affect one, but not the other. Answer: Although GDP has a significant impact on our standard of living, it is not a perfect measure of the standard of living. GDP omits some factors that affect our standard of living. 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, health and life expectancy, or political freedom and social justice. All of these factors influence the quality of our life and hence our standard of living. Indeed, occasionally a change will affect GDP and the standard of living 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 the standard of living will increase. Or, if there is an increase in production that creates massive amounts of pollution, GDP increases even though the standard of living likely decreases. Topic: Real GDP and the standard of living Skill: Level 4: Applying models Section: Checkpoint 14.3 Status: Old AACSB: Written and oral communication

2) "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 living than people in Country B." Is this statement true or false? Explain your answer. Answer: The statement is false. Factors other than real GDP per person affect the standard of living. For instance, factors such as household production, underground production, leisure time, and environmental quality all affect the standard of living and all are omitted from real GDP per person. In addition, the standard of living is influenced by health and life expectancy as well as by the nation's political freedom and social justice, none of which is measured by real GDP per person. Although real GDP per person is an important factor in determining a country's standard of living, it is not the only factor. Topic: Real GDP and the standard of living Skill: Level 4: Applying models Section: Checkpoint 14.3 Status: Old AACSB: Written and oral communication

3) What is a business cycle? What are its phases and turning points? Answer: A business cycle is the periodic but irregular up-and-down movement in production and jobs. It has two phases and two turning points. As the economy slows and the growth in real GDP turns negative, the economy enters the recession phase of the business cycle. At the bottom of the recession phase is one turning point, the trough. As the economy moves through the trough, it enters the expansion part of the business cycle during which real GDP grows. Finally, as the economy reaches its high point and swings from an expansion to a recession, the economy passes through the other turning point, the peak. Topic: Business cycle Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Written and oral communication

4) When total output, income, employment, and trade decline for 6 to 12 months, the economy is in what part of the business cycle? Answer: When these real variables decline, the economy is in the recession phase of the business cycle. Topic: Business cycle Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Written and oral communication

5) 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, includes productive activities but does 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, is not reported to the government and hence is 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: Level 1: Definition Section: Checkpoint 14.3 Status: Old AACSB: Written and oral communication

6) What would happen to measured GDP if more people started hiring workers to do household 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: Level 1: Definition Section: Checkpoint 14.3 Status: Old AACSB: Written and oral communication

7) 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: Underground production Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Written and oral communication

8) While studying with your friend, your friend states, "Our leisure time increases GDP but lowers our standard of living 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 standard of living. People enjoy their leisure time and therefore having more leisure time raises their standard of living. Topic: Leisure time Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Written and oral communication

9) You buy 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: Leisure time Skill: Level 1: Definition Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

10) What is the Human Development Index? Answer: The Human Development Index, or HDI, has been developed by the United Nations. The HDI attempts to measure the well-being of people in a given country. This index takes into account the country's material well-being by looking at real GDP per person and also considers other key factors, such as life expectancy, health, and education levels. Topic: Eye on the global economy, which country has the highest standard of living? Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Written and oral communication

11) Explain how the United Nations uses the Human Development Index (HDI) to better measure the standard of living around the globe. Answer: Economists have long realized that the level of real GDP per person is not a total measure of a country's standard of living. The United Nations has constructed an index, referred to as HDI, that attempts to measure the well-being of people in a given country. This index takes into account the country's level of real GDP per person as well as also other key factors, such as life expectancy, health, and education levels. Topic: Eye on the global economy, which country has the highest standard of living? Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Written and oral communication

14.9 Essay: Appendix: Measuring Real GDP

1) The table gives data on the production and prices in a small economy. Use 2012 as the base period. a. What does nominal GDP equal in 2012? b. What does real GDP equal in 2012? c. What does nominal GDP equal in 2013? d. Using the chained-price method, what does real GDP equal in 2013? Answer: a. Nominal GDP in 2012 equals $8.00. Nominal GDP equals the sum of the market value of hot dogs ($6.00) plus the market value of Pepsi ($2.00). b. Real GDP in 2012 equals $8.00. Real GDP equals nominal GDP in the base period. c. Nominal GDP in 2013 equals $14.25. Nominal GDP equals the sum of the market value of hot dogs ($10.50) plus the market value of Pepsi ($3.75). d. Real GDP in 2013 equals $12.00. To calculate real GDP in 2013, we need the percentage change in production between 2012 and 2013 valuing the production at 2012 prices and at 2013 prices. Both percentage changes are 50 percent. (For example, using 2012 prices, production in 2012 is $8.00 and in 2013 is $12.00, a 50 percent increase.) Because both percentage changes are 50 percent, the average production change is 50 percent. Therefore real GDP in 2013 equals real GDP in 2012 multiplied by 150 percent, or ($8.00 × 1.50) = $12.00. Topic: Nominal GDP and real GDP Skill: Level 4: Applying models Section: Checkpoint 14.4 Status: Old AACSB: Analytical thinking

2) The table gives data on the production and prices in a small economy. Use 2012 as the base period. Using the chained-price method, what is the growth rate of real GDP from 2012 to 2013? Answer: To calculate the growth rate, it is necessary to calculate the growth rates using first 2012 and then 2013 prices and then take the average of the two rates. This procedure gives: Real GDP in 2012 using 2012 prices = 150 Real GDP 2013 using 2012 prices = 350 Real GDP 2012 using 2013 prices = 250 Real GDP 2013 using 2013 prices = 600 Growth rate using 2012 prices = 133.3 percent Growth rate using 2013 prices = 140.0 percent Hence the growth rate equals 136.7 percent, the average of 133.3 percent and 140.0 percent. Topic: Nominal GDP and real GDP Skill: Level 4: Applying models Section: Checkpoint 14.4 Status: Old AACSB: Analytical thinking

Essential Foundations of Economics, 8e (Bade) Chapter 15 Jobs and Unemployment 15.1 Labor Market Indicators 1) The Bureau of Labor Statistics (BLS) compiles information about employment by A) performing a census of every household in the nation. B) performing a quarterly survey 6,000,000 households. C) performing a monthly survey of 60,000 households. D) determining the average estimate of labor market specialists around the nation. E) contacting each of the 50 states' Departments of Labor. Answer: C Topic: Current population survey Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

2) In order to obtain the data used to calculate the unemployment rate, the Bureau of Labor Statistics A) adds the number of people collecting unemployment insurance from each state. B) adds the state unemployment claims reports. C) uses a survey from 60,000 households. D) adds together all the reports of layoffs from businesses. E) uses a survey from 160,000 firms. Answer: C Topic: Current population survey Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

3) The purpose of the Current Population Survey is to determine the A) number of people in the population. B) employment status of the population. C) age structure of the population. D) income level of the population. E) prices consumers pay for the goods and services they buy. Answer: B Topic: Current population survey Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

4) The working-age population includes A) those in jails and hospitals. B) youngsters between the ages of 14 and 16 if they are working at least part time. C) employed and unemployed people over the age of 16. D) only employed people over the age of 16. E) people over the age of 16 who are in the Army. Answer: C Topic: Current population survey, working-age population Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

5) Which of the following is true? A) To be classified as employed, you must be a full-time worker at a paid job. B) To be classified as employed, you must work at least 20 hours per week at a paid job. C) Part-time workers are all those who work less than 40 hours per week. D) To be classified as employed, you must work at least 1 hour per week at a paid job or 15 hours or more as an unpaid worker in your family business. E) If you are not working and turn down a job offer in the previous week, you are no longer classified as unemployed. Answer: D Topic: Current population survey, employed Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

6) An unpaid worker in a family business is classified as A) not in the labor force. B) employed no matter how many hours the person worked in the previous week. C) unemployed no matter how many hours the person worked in the previous week. D) employed if the person worked at least 15 hours in the previous week. E) unemployed only if the person worked no hours in the previous week. Answer: D Topic: Current population survey, employed Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

7) After graduating from college, Yunis, age 22, started working for his parents' real estate business as an unpaid assistant. He works 25 hours a week helping manage rental units. In the Current Population Survey, Yunis is considered A) part of the labor force and unemployed. B) part of the labor force and employed. C) not part of the labor force. D) a discouraged worker. E) part of the labor force but not part of the working-age population. Answer: B Topic: Current population survey, employed Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

8) If KeKe, age 32, worked 12 hours as a paid employee the week before the Current Population Survey, KeKe is classified in the Current Population Survey as ________ when calculating the unemployment rate. A) unemployed B) employed C) a discouraged worker D) not in the labor force E) underemployed Answer: B Topic: Current population survey, employed Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

9) Suppose a 23-year old graduate student is looking for a full-time job , but has to take a part-time job instead. He or she will be categorized in the Current Population Survey as ________ when calculating the unemployment rate. A) unemployed B) employed C) not in the labor force D) a discouraged worker E) underemployed Answer: B Topic: Current population survey, employed Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

10) Which of the following people would be classified as 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 E) Laura, who is unpaid but is working 10 hours a week in the family business she and her husband run Answer: A Topic: Current population survey, employed Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

11) In the Current Population Survey, a person is considered unemployed if the person A) is without a job. B) is working anything less than 40 hours per week. C) is working without pay. D) does not have a job and is actively looking for a job. E) is working less than 20 hours per week. Answer: D Topic: Current population survey, unemployed Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

12) To be considered unemployed, a worker must have had A) no employment during the week before the survey and be actively looking for a job. B) part-time employment while actively looking for a full-time job. C) no employment during the week before the survey and be actively looking for a job while a student. D) no employment during the day before the survey and be actively looking for a job. E) Both answers A and B are correct. Answer: A Topic: Current population survey, unemployed Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

13) If Brian, age 24, had no job but was available for work and had looked for a job the week before the survey, Brian is classified in the Current Population Survey as A) unemployed. B) employed. C) a discouraged worker. D) not in the labor force. E) not in the working-age population. Answer: A Topic: Current population survey, unemployed Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

14) Rob is considered unemployed in the Current Population Survey if he A) has looked for a job in the last four weeks but has not found a job. B) has worked at least 1 hour but not more than 15 hours as a paid employee during the last week. C) does not have a job and stopped looking for a job at least two months ago. D) has a part-time job but would like a full-time job. E) is in his last term of college before he graduates. Answer: A Topic: Current population survey, unemployed Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

15) Phillip is a 22-year old who has no job and is available for work, but has not actively looked for a job in the last month. The Current Population Survey identifies Phillip as ________, ________ the labor force, and ________ the working-age population. A) unemployed; part of; part of B) unemployed; part of; not part of C) not unemployed; not part of; part of D) not unemployed; not part of; not part of E) not unemployed; part of; part of Answer: C Topic: Current population survey, unemployed Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

The following are groups of individuals in the population: 1. Individuals who are under 16 2. Individuals in institutional care 3. Individual in the armed forces 4. Individuals working for pay at a fulltime job 5. Individuals who are employed 6. Individuals not employed but were available for work and were looking for work 7. Individuals not employed and looking for work 16) Using the table above, the Current Population Survey classifies the group of individuals who are left after subtracting from the total population groups 1, 2, and 3 as A) the working-age population. B) the labor force. C) employed. D) unemployed. E) discouraged workers. Answer: A Topic: Current population survey, working-age population Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

17) Using the table above, the Current Population Survey classifies the group of individuals who are left after subtracting from the total population groups 1, 2, 3, 4, 5, and 6 as A) not in the labor force. B) the labor force. C) employed. D) unemployed. E) discouraged workers. Answer: A Topic: Current population survey, labor force Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

18) Using the table above, the Current Population Survey classifies the group of individuals obtained by adding groups 5 and 6 as A) the working age population. B) the labor force. C) employed. D) unemployed. E) discouraged workers. Answer: B Topic: Current population survey, labor force Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

19) The working-age population consists of all the people in the population A) aged 16 and over. B) aged 16 to 65. C) aged 16 and over who are not in jail, hospital, or an institution or in the U.S. Armed Forces. D) aged 21 and over who are not in jail, hospital, or an institution or in the U.S. Armed Forces. E) who are employed plus the unemployed people. Answer: C Topic: Working-age population Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

20) If the number of people in the labor force ________, then ________. A) increases; the labor force participation rate increases B) increases; the unemployment rate definitely increases C) decreases; the unemployment rate definitely decreases D) decreases; the labor force participation rate increases E) decreases, the unemployment rate does not change Answer: A Topic: Labor force Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

21) The labor force is the A) number of employed people plus the number of unemployed people. B) total population divided by the number of employed people. C) number of employed people in the working-age population. D) working-age population minus the number of unemployed people. E) number of employed people minus the number of unemployed people. Answer: A Topic: Labor force Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

22) The labor force includes people who i. are less than 16 years of age. ii. are in institutions. iii. are actively seeking a job but do not have a job. A) i only B) i and iii C) i and ii D) iii only E) i, ii, and iii Answer: D Topic: Labor force Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

23) The labor force consists of A) the number of people who are employed. B) the number of people who unemployed and who are actively seeking work. C) the number of people in the working-age population who are employed or unemployed. D) all people in the population aged 16 and over who are not in jail, a hospital, or an institution or in the U.S. Armed Forces. E) the number of people who are employed minus the number of the people who are unemployed. Answer: C Topic: Labor force Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

24) 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. E) are employed minus the number of people who are unemployed. Answer: A Topic: Labor force Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

25) Which of the following persons is NOT considered a part of the labor force? A) Mary, who has a part-time job as a day care specialist B) Lones, an unemployed mechanic looking for a new job C) Jameson, an accountant who has been temporarily laid off during the holiday season D) Desire, a wealthy hedge fund manager who just took early retirement E) Lucy, who works 20 hours a week in her father's restaurant for no pay Answer: D Topic: Labor force Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

26) Jane is a 25-year-old, full-time student. She works part time in her school library and is paid $7 an hour. She is considered to be A) unemployed. B) not in the labor force. C) in the labor force but not working. D) employed. E) not in the working-age population because she is in college. Answer: D Topic: Labor force Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

27) People over the age 16 with full-time jobs are considered to be A) unemployed. B) not in the labor force. C) in the labor force and employed. D) in the labor force unemployed. E) in the working-age population only because they have full-time jobs. Answer: C Topic: Labor force Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

28) If Jose is 22-years old, is available to work but does not have a job and made no specific efforts to find a job for the previous month, Jose is classified in the Current Population Survey as A) unemployed. B) employed. C) not in the working-age population. D) not in the labor force. E) in the labor force but not in the working-age population. Answer: D Topic: Labor force Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

29) The size of the labor force is A) equal to the size of the population. B) less than the number of employed workers if the number of unemployed workers is small enough. C) less than the number of unemployed workers if the number of employed workers is small enough. D) greater than the number of employed workers as long as there are some unemployed workers. E) equal to the working-age population. Answer: D Topic: Labor force Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

30) The working-age population of people over the age of 16 can be divided into two groups, people A) in the labor force and people looking for work. B) in the labor force and people with a job. C) looking for work and those in the U.S. Armed Forces. D) in the labor force and people who are not in the labor force. E) with a job and people actively seeking a job. Answer: D Topic: Labor force Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

31) Assume the U.S. population is 300 million. If 200 million people are of working age, 125 million are employed, and 15 million are unemployed, what is the size of the labor force? A) 200 million B) 140 million C) 125 million D) 215 million E) 175 million Answer: B Topic: Labor force Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

32) The unemployment rate is the A) number of unemployed people. B) percentage of the population that does not have a job. C) percentage of the working-age population that does not have a job. D) percentage of the labor force that does not have a job. E) percentage of employed people that does not have a job. Answer: D Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

33) 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. E) employed people who can't find a job. Answer: C Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

34) The unemployment rate equals 100 multiplied by the A) number of people unemployed divided by the labor force. B) number of people unemployed divided by the population. C) number of people unemployed divided by the number of people employed. D) labor force divided by the number of people unemployed. E) number of people unemployed divided by the working-age population. Answer: A Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

35) 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. E) (number of people unemployed ÷ number of people employed) × 100. Answer: B Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

36) The unemployment rate is equal to A) (labor force ÷ population) × 100. B) (number of employed people ÷ labor force) × 100. C) (number of unemployed people ÷ labor force) × 100. D) (number of unemployed people ÷ number of employed) × 100. E) (number of unemployed people ÷ working-age population) × 100. Answer: C Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

37) The unemployment rate is the number of people unemployed divided by the A) population, then multiplied by 100. B) labor force participation rate, then multiplied by the population. C) labor force, then multiplied by 100. D) number of people employed, then multiplied by 100. E) working-age population, then multiplied by 100. Answer: C Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

38) In calculating the unemployment rate, part-time workers over the age of 16 are counted as A) employed. B) unemployed. C) not in the labor force. D) employed if they are part-time workers for noneconomic reasons and unemployed if they are involuntary part-time workers. E) not in the working-age population. Answer: A Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

39) If a significant number of part-time workers successfully find full-time employment, then A) the unemployment rate will fall. B) the labor force participation rate will increase. C) the unemployment rate will remain unchanged. D) the unemployment rate will rise. E) Both answers A and B are correct. Answer: C Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

40) Suppose the population is 300 million people, the labor force is 200 million people, the number of people employed is 185 million, and the working-age population is 170 million people. What is the unemployment rate? A) 92.5 percent B) 7.5 percent C) 8.8 percent D) 5 percent E) 20 percent Answer: B Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

41) If 160 million people are employed, 15 million people are unemployed, and the population is 280 million people, the unemployment rate is A) 57 percent. B) 62.5 percent. C) 9.4 percent. D) 8.6 percent. E) not possible to calculate without data on the labor force. Answer: D Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

42) Suppose the population of Timmy Town is 1,000 people and the working-age population is 800. If 200 of these people are unemployed, the unemployment rate in Timmy Town is A) 2 percent. B) 1/5 × 100. C) 1/8 × 100. D) 1/4 × 100. E) There is not enough information provided to calculate the unemployment rate. Answer: E Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

43) Suppose the working-age population is 500 million, the labor force is 200 million, and the unemployment rate is 15 percent. The number of unemployed people is A) 30 million. B) 75 million. C) 45 million. D) 105 million. E) 15 million. Answer: A Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

44) In fall 2009, the population of the United States was 301 million, the working-age population was 235.7 million, the total number of people employed and unemployed was 154.9 million, and the total number of unemployed people was 14.7 million. What is the unemployment rate? A) 51 percent B) 6.2 percent C) 4.9 percent D) 9.5 percent E) 4.6 percent Answer: D Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

45) Using the table above, the working-age population is A) 155 million. B) 170 million. C) 195 million. D) 250 million. E) 220 million. Answer: C Topic: Working-age population Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

46) Using the table above, the number of people in the labor force is A) 145 million. B) 165 million. C) 175 million. D) 195 million. E) 185 million. Answer: C Topic: Labor force Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

47) Using the table above, the unemployment rate is A) 5.13 percent. B) 5.88 percent. C) 6.45 percent. D) 6.90 percent. E) 5.71 percent. Answer: E Topic: Unemployment rate Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

48) Using the table above, the unemployment rate is A) 11.2 percent. B) 6.3 percent. C) 4.2 percent. D) 10 percent. E) 5.8 percent. Answer: C Topic: Unemployment rate Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

49) Using the table above, the labor participation rate is A) 67 percent. B) 48 percent. C) 75 percent. D) 83 percent. E) 40 percent. Answer: C Topic: Labor force participation rate Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

50) In the table above, the number of unemployed people is A) 2,000. B) 1,000. C) 1,100. D) 11,000. E) 3,000. Answer: B Topic: Unemployment Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

51) In the table above, the unemployment rate is A) 12 percent. B) 10 percent. C) 8 percent. D) 6 percent. E) 11 percent. Answer: B Topic: Unemployment rate Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

52) Using the table above, the labor force participation rate is A) 83.3 percent. B) 90.0 percent. C) 10.0 percent. D) 11.1 percent. E) 100 percent. Answer: A Topic: Labor force participation rate Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

53) Based on the above table, the unemployment rate is A) 10 percent. B) 11.1 percent. C) 7.1 percent. D) 5.4 percent. E) 8.6 percent. Answer: A Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

54) Based on the above table, the labor force participation rate is A) 71.4 percent. B) 82 percent. C) 53.6 percent. D) 75 percent. E) 64.3 percent. Answer: A Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

55) In the table above, the size of the labor force is A) 80 million. B) 46 million. C) 42 million. D) 40 million. E) 34 million. Answer: C Topic: Labor force Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

56) In the table above, the unemployment rate is A) 50.0 percent. B) 15.0 percent. C) 10.0 percent. D) 4.8 percent. E) 5.0 percent. Answer: D Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

57) Using the data in the above table, the labor force is A) 140.0 million. B) 152.1 million. C) 154.2 million. D) 250.0 million. E) 127.9 million. Answer: B Topic: Labor force Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

58) Using the data in the above table, the unemployment rate is A) 9.3 percent. B) 8.6 percent. C) 8.0 percent. D) 4.8 percent. E) 4.6 percent. Answer: C Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

59) Using the data in the above table, the labor force participation rate is A) 60.8 percent. B) 56 percent. C) 4.8 percent. D) 61.6 percent. E) 64.4 percent. Answer: A Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

60) From the table above, which gives data about the U.S. labor market in 1933, the labor force is A) 48 million. B) 60 million. C) 65 million. D) 100 million. E) 12 million. Answer: B Topic: Labor force Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

61) From the table above, which gives data about the U.S. labor market in 1933, the labor force participation rate is A) 12 percent. B) 48 percent. C) 60 percent. D) 95 percent. E) 65 percent. Answer: C Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

62) From the table above, which gives data about the U.S. labor market in 1933, the unemployment rate is A) 2 percent. B) 18 percent. C) 20 percent. D) 25 percent. E) 35 percent. Answer: C Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

63) If the working age population ________ and the labor force does not change, the ________. A) increases; labor force participation rate will increase B) increases; labor force participation rate will decrease C) increases; unemployment rate will increase D) decreases; unemployment rate will increase E) decreases; labor force will increase Answer: B Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

64) The labor force participation rate is equal to A) (labor force ÷ population) × 100. B) (labor force ÷ working-age population) × 100. C) (number of employed workers ÷ labor force) × 100. D) (number of employed workers ÷ working-age population) × 100. E) (number of employed workers ÷ population) × 100. Answer: B Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

65) The labor force participation rate is the A) labor force divided by the working-age population, then multiplied by 100. B) number of people employed divided by the labor force, then multiplied by 100. C) labor force divided by the population, then multiplied by 100. D) discouraged workers divided by the labor force, then multiplied by 100. E) number of people employed divided by the population, then multiplied by 100. Answer: A Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

66) If the number of employed people is 150 million, the number of unemployed people is 50 million, and the working-age population equals 285 million people, the labor force participation rate is A) 70.2 percent. B) 81 percent. C) 17.5 percent. D) 25 percent. E) 52.6 percent. Answer: A Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

67) If the working-age population is 20 million and labor force is 13 million, the labor force participation rate is A) 65 percent. B) 35 percent. C) 153 percent. D) 60 percent. E) impossible to calculate because data on the number of employed workers is needed. Answer: A Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

68) Suppose the U.S. population is 275 million. If 210 million people are of working age, 135 million are employed, and 6 million are unemployed, what is the labor force participation rate? A) 67 percent B) 76 percent C) 49 percent D) 64 percent E) 51 percent Answer: A Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

69) In January of 2001, the population of the United States was 276.8 million, the working-age population was 210.2 million, the total number of people employed was 140 million, and the total number of people unemployed was 5.0 million. What was the labor force participation rate? A) 78 percent B) 56 percent C) 69 percent D) 90 percent E) 67 percent Answer: C Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

70) In August of 2013, the number of employed persons in the United States was 144.2 million, the number of unemployed persons was 11.3 million, and the number of persons not in the labor force was 90.5 million. What was the labor force in August of 2013? A) 53.7 million B) 144.2 million C) 155.5 million D) 132.9 million E) There is not enough information to answer this question. Answer: C Topic: Labor force Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

71) In August of 2013, the number of employed persons in the United States was 144.2 million, the number of unemployed persons was 11.3 million, and the number of persons not in the labor force was 90.5 million. What was the unemployment rate in August of 2013? A) 7.3% B) 7.8% C) 12.4% D) 8.5% E) There is not enough information to answer this question. Answer: A Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

72) In August of 2013, the number of employed persons in the United States was 144.2 million, the number of unemployed persons was 11.3 million, and the number of persons not in the labor force was 90.5 million. What was the working-age population in August of 2013? A) 155.5 million B) 234.7 million C) 246.0 million D) 101.8 million E) There is not enough information to answer this question. Answer: C Topic: Working-age population Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

73) In August of 2013, the number of employed persons in the United States was 144.2 million, the number of unemployed persons was 11.3 million, and the number of persons not in the labor force was 90.5 million. What was the labor force participation rate in August of 2013? A) 92.7% B) 63.2% C) 58.2% D) 58.6% E) There is not enough information to answer this question. Answer: B Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

74) If half of all unemployed individuals suddenly gave up looking for work, the unemployment rate would ________ and the labor force participation rate would ________. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase E) There is not enough information to answer this question. Answer: A Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

75) A weakness that could be noted about the unemployment rate is that it A) does not account for the underutilization of workers. B) considers marginally attached workers as unemployed. C) overestimates the number of part-time workers. D) does not count part-time workers. E) counts discouraged workers as employed. Answer: A Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

76) A marginally attached worker i. does not have a job and has not looked for one in the last month. ii. is available and willing to work. iii. must work at least 1 hour per week. A) iii only B) ii only C) ii and iii D) i and ii E) i only Answer: D Topic: Marginally attached worker Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

77) A marginally attached worker is A) a person who is not happy with his or her job. B) someone who works part-time more than 25 hours per week but wants full-time work. C) someone who does not have a job but is available and willing to work and has made specific but unsuccessful efforts to find a job during the past 4 weeks. D) someone who does not have a job but is available and willing to work but has not made specific efforts to find a job during the past 4 weeks. E) another name for an unemployed worker. Answer: D Topic: Marginally attached worker Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

78) A marginally attached worker is A) a worker who is unhappy at his or her job. B) a worker who is looking for a job but can't find one. C) a worker who does not have a job and is available and wants one but has not made any efforts to find a job within the previous four weeks. D) a person who only works part time but wants full-time work. E) counted as unemployed in the official labor market statistics. Answer: C Topic: Marginally attached worker Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

79) Which of the following would be considered a marginally attached worker? i. Amy, who is working 20 hours per week at her father's business ii. Carl, who isn't working and has not looked for work in 3 months because he has been turned down for work when he last looked iii. Keke, who quit her job to take care of her daughter A) ii only B) i and ii C) ii and iii D) i only E) i, ii, and iii Answer: A Topic: Marginally attached worker Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

80) Suppose that Mel (who is 27) is not working, but looked for a job as recently as 2 months ago. Mel would like a job and he is available for work. He is considered A) unemployed. B) a member of the labor force and unemployed. C) a member of the labor force, but not unemployed. D) a member of the working-age population. E) a marginally attached worker. Answer: E Topic: Marginally attached worker Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

81) Which of the following would be considered a marginally attached worker? i. Lou, who worked 15 hours unpaid at her mother's store last month ii. Sylvia, who is not working and hasn't looked for work in 3 months iii. Meredith, who is no longer working after taking early retirement from her employer A) i and iii B) i and ii C) i only D) ii only E) i, ii and iii Answer: D Topic: Marginally attached worker Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

82) Andrew is not working, but is available and willing to work after finishing a month-long mission trip for his church. While on his mission, Andrew did not look for work. Andrew is considered A) unemployed. B) part of the labor force. C) a marginally attached worker. D) a discouraged worker. E) Both answers A and B are correct. Answer: C Topic: Marginally attached worker Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

83) People who are willing and able to work but are not looking for work because they have been discouraged by their previous futile efforts are called A) unemployed workers. B) discouraged workers. C) unhappy workers. D) involuntarily unemployed. E) part-time lookers. Answer: B Topic: Discouraged workers Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

84) Discouraged workers who are over 16 years old are i. not counted as unemployed. ii. part of the working-age population. iii. part of the labor force. A) i only B) ii only C) i and ii D) ii and iii E) i, ii, and iii Answer: C Topic: Discouraged workers Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

85) Discouraged workers are included in the calculation of the i. unemployment rate. ii. labor force participation rate. iii. working-age population. A) i only B) ii only C) i and ii D) iii only E) ii and iii Answer: D Topic: Discouraged workers Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

86) Discouraged workers A) would decrease the unemployment rate if they were added to the number of unemployed workers. B) would increase unemployment rate if they were added to the number of unemployed workers. C) are counted as one-half of a worker in the unemployment statistics. D) are counted as unemployed workers when the unemployment rate is calculated. E) are not included in the calculation of the unemployment rate, the labor force, or the working-age population. Answer: B Topic: Discouraged workers Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

87) Rick lost his job as a logistics and distribution coordinator nearly three years ago. After a long and failed search, Rick finally gives up and stops looking for a new job. Rick's decision to suspend his job search causes the unemployment rate to ________ and the labor force participation rate to ________. A) increase; decrease B) decrease; decrease C) stay the same; decrease D) increase; stay the same E) increase; increase Answer: B Topic: Discouraged workers Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

88) In 2008 as the recession worsened, suppose discouraged workers were included as part of the unemployment rate. Which of the following would have occurred? A) The unemployment rate would have increased. B) The unemployment rate would have decreased. C) The labor force participation rate would not have changed. D) The unemployment rate would not have changed. E) The labor force participation rate would have decreased. Answer: A Topic: Discouraged workers Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

89) Part-time workers are defined as people who are working A) less than 20 hours per week. B) between 20 and 35 hours per week. C) less than 35 hours per week. D) more than 10 hours per week. E) fewer hours than they would want. Answer: C Topic: Part-time workers Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

90) A worker is considered part time if the worker A) usually works less than 40 hours per week. B) is not employed but is actively looking for work. C) is a full-time student without a job. D) usually works less than 35 hours per week. E) is not employed and is not actively looking for work. Answer: D Topic: Part-time workers Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

91) Harry works at the video rental store for 20 hours per week. He's asked his boss to allow him to work 40 hours per week, but has been told that business is too slow. Harry is considered A) a discouraged worker. B) an involuntary part-time worker. C) a marginally attached worker. D) not in the labor force. E) a job seeker. Answer: B Topic: Part-time workers Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

92) People who are working up to 34 hours per week but would like to work more are considered A) involuntary part-time workers. B) discouraged workers. C) job leavers. D) job seekers. E) unemployed. Answer: A Topic: Part-time workers Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

93) Involuntary part-time workers are not working more hours due to A) economic reasons. B) a lack of training and skills. C) an increase in the labor force. D) family reasons. E) educational commitments. Answer: A Topic: Part-time workers Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

94) Julie works part-time for economic reasons. She would be considered A) an involuntary part-time worker. B) a discouraged worker. C) a job seeker. D) not in the labor force. E) unemployed as calculated by the Bureau of Labor statistics. Answer: A Topic: Part-time workers Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

95) Involuntary part-time workers are workers who A) work less than 35 hours but would like to work full time. B) work more than 35 hours but would like to work less than 35 hours. C) work have lost their jobs within the last four weeks and are seeking another job. D) work less than 35 hours by choice. E) have withdrawn from the labor market. Answer: A Topic: Part-time workers Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

96) In measuring the unemployment rate, part-time workers are ________, and discouraged workers are ________. A) included as employed; included as unemployed B) excluded; included as unemployed C) included as employed; excluded D) excluded; excluded E) included as unemployed if they are involuntary part-time workers; excluded Answer: C Topic: Discouraged workers, part-time workers Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

97) In a country with a working-age population of 200 million, 140 million people are employed and 20 million are unemployed. The size of the labor force is A) 200 million. B) 160 million. C) 140 million. D) 20 million. E) 120 million. Answer: B Topic: Labor force Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

98) Assume the U.S. population is 300 million. If the working age population is 240 million, 150 million are employed, and 6 million are unemployed, what is the labor force? A) 300 million B) 240 million C) 156 million D) 150 million E) 144 million Answer: C Topic: Labor force Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

99) To be counted as employed by the BLS, in the week before the survey the person must have worked for pay A) at least 1 hour. B) at least 5 hours. C) more than 20 hours. D) 40 hours. E) None of the above is right because the BLS counts as employed anyone who works volunteer hours at a non-profit institution. Answer: A Topic: Current population survey, employed Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

100) Which of the following people would be considered unemployed? A) Sam, a part-time worker who wishes to work full time B) Pat, who gave up looking for a job because he was discouraged about his job prospects C) Victoria, who does not have a job and has been actively searching for work, but turned down a job paying less than she desired D) Shirley, who is working but expects to be laid off at the end of the month E) Bobby, a full-time student in his last term before he graduates and who has not yet started to look for a job Answer: C Topic: Current population survey, employed Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

101) Bo is available and willing to work but has not actively looked for work in the past month. Bo is ________ of the labor force and is ________. A) part; counted as unemployed B) part; not counted as unemployed C) not part; not counted as unemployed D) not part; counted as unemployed only if he has had a job within the last 12 months E) not part; counted as unemployed regardless of whether or not he has had a job within the last 12 months Answer: C Topic: Current population survey, unemployed Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

102) Which of the following statements about the United States is (are) correct? i. The labor force is larger than the number of employed people. ii. The labor force is larger than the number of unemployed people. iii. The number of unemployed people is larger than the number of employed people. A) ii only B) iii only C) ii and iii D) i and ii E) i, ii, and iii Answer: D Topic: Employment and unemployment Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

103) The unemployment rate equals A) (number of people without a job ÷ population)× 100. B) (number of people unemployed ÷ labor force) × 100. C) (number of people without a job ÷ working-age population) × 100. D) (number of people unemployed ÷ population) × 100. E) [(working-age population - number of people employed) ÷ labor force] × 100. Answer: B Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

104) If the working age population is 200 million, 150 million are employed, and 6 million are unemployed, the unemployment rate is A) 3.0 percent. B) 25.0 percent. C) 4.0 percent. D) 12.0 percent. E) 3.8 percent. Answer: E Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

105) Suppose the population is 250 million people, the labor force is 150 million people, the number of people employed is 130 million and the working-age population is 200 million people. What is the unemployment rate? A) 8.0 percent B) 10.0 percent C) 13.3 percent D) 20 million E) 15.4 percent Answer: C Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

106) The table above gives the number of people employed and the number of people unemployed in Canada, Japan, and the United States on the average during 1999. In 1999, the unemployment rate in ________ was the highest and the unemployment rate in ________ was the lowest. A) the United States; Japan B) Canada; the United States C) Japan; Canada D) Canada; Japan E) Japan; the United States Answer: B Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

107) The table above shows data reported by the Office for National Statistics for the United Kingdom in September 2000. In September 2000, the unemployment rate is A) 5.5 percent. B) 1,619 thousand. C) 3.5 percent. D) 3.7 percent. E) 5.8 percent. Answer: A Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

108) The table above shows data reported by the Office for National Statistics for the United Kingdom in September 2000. In September 2000, the labor force participation rate is A) 59.7 percent. B) 63.1 percent. C) 34.8 percent. D) 40.3 percent. E) 58.3 percent. Answer: B Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

109) Discouraged workers and marginally attached workers are A) counted as employed by the BLS but are not part of the labor force. B) counted as employed by the BLS and are part of the labor force. C) counted as unemployed by the BLS and are part of the labor force. D) not part of the labor force. E) counted as unemployed by the BLS but are not part of the labor force. Answer: D Topic: Discouraged workers Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

110) While in school, Kiki spends 20 hours a week as a computer programmer for Microsoft and studies 30 hours a week. A) Kiki is classified as a full-time worker, working 50 hours a week. B) Kiki is classified as a part-time worker, working 30 hours a week. C) Kiki is classified as a part-time worker, working 20 hours a week. D) Because Kiki is a student, she is not classified as working. E) Because Kiki is a student, she is classified as a full-time worker, working 20 hours a week at a paid job. Answer: C Topic: Part-time workers Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

111) Part-time workers for noneconomic reasons are people who A) work less than 35 hours a week but would like to work more than 35 hours a week. B) work more than 35 hours a week but would like to work less than 35 hours a week. C) have lost their jobs within the last four weeks and are seeking another job. D) do not want to work full time. E) are discouraged workers. Answer: D Topic: Part-time workers Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

112) The table shows data reported by Statistics Canada for 1999. In 1999, the unemployment rate was A) 1.2 million. B) 5.0 percent. C) 7.6 percent. D) 7.9 percent. E) 6.1 percent. Answer: C Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

15.2 Labor Market Trends and Fluctuations 1) The average U.S. unemployment rate from 1948 has been about A) 10.7 percent. B) 19.7 percent. C) 5.8 percent. D) 2.7 percent. E) 15.7 percent. Answer: C Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

2) Unemployment rates in the United States during the past 60 years A) have remained between 4 and 6 percent. B) have risen and fallen in a range between approximately 10 and 25 percent. C) have risen and fallen in a range between approximately 4 and 10 percent. D) have fallen steadily from approximately 10 percent 40 years ago to near 2 percent today. E) have risen steadily and today are near all-time highs. Answer: C Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

3) A main reason for the low unemployment rate from 1995 through most of the 2000s was because of A) higher oil prices. B) the government's policy of tightening immigration policies. C) the rapid development of the Internet industry and other new technologies. D) government's more liberal social benefit programs. E) increased defense expenditures by the government. Answer: C Topic: Recent unemployment rates Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

4) During a recession, the unemployment rate A) is, by definition, above 25 percent. B) is, by definition, above 10 percent. C) usually increases but not necessarily to 10 percent or 25 percent. D) remains constant. E) usually decreases. Answer: C Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

5) The unemployment rate generally ________ during recessions and generally ________ during expansions. A) increases; decreases B) decreases; increases C) increases; increases D) decreases; decreases E) increases; does not change Answer: A Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

6) During a recession the unemployment rate generally ________ and during an expansion the unemployment rate generally ________. A) rises; falls B) rises; rises C) falls; rises D) rises; does not change E) does not change; falls Answer: A Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

7) During an expansion, the unemployment rate generally A) rises. B) falls. C) is not affected. D) is, by definition, below 5 percent. E) is higher than during a recession. Answer: B Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

8) Which of the following describe the United States' unemployment rate over the last 80 years? i. The unemployment rate has decreased each year since the Great Depression. ii. The unemployment rate has averaged about 5.7 percent since 1929. iii. Job creation due to defense spending and consumer spending in the 1960s drove the unemployment rate to one of its lowest level. A) i and ii only B) ii and iii only C) i, ii and iii D) i only E) i and iii Answer: B Topic: Unemployment rate since 1929 Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

9) The highest unemployment rate in U.S. history was about A) 10.2 percent in 2009. B) 5.9 percent in 1972. C) 10 percent in 1982. D) 25 percent in 1933. E) 52 percent in 1939. Answer: D Topic: Unemployment rate since 1929 Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

10) During the Great Depression, the unemployment rate rose to a maximum of about A) 10 percent. B) 13 percent. C) 25 percent. D) 50 percent. E) 67 percent. Answer: C Topic: Unemployment rate since 1929 Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

11) The unemployment rates during the last 10 years in the Eurozone was A) constantly lower than the unemployment rate in the United States and not rising toward the U.S. unemployment rate. B) constantly lower than the unemployment rate in the United States but were rising toward the U.S. unemployment rate. C) more or less constant at 3 percent. D) generally higher than the U.S. unemployment rate. E) approximately equal to those in the United States, with some years the U.S. unemployment rate being slightly higher and in other years the U.S. unemployment rate being slightly lower. Answer: D Topic: Eye on the global economy, unemployment around the world Skill: Level 1: Definition Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

12) Over the past two decades, the unemployment rates in A) the Eurozone have been generally less than U.S. unemployment rates. B) the Eurozone have been generally greater than U.S. unemployment rates. C) the United Kingdom have almost always been much greater than the U.S. unemployment rates. D) Canada are less than the U.S. unemployment rates. E) Japan are much larger than those in the United States. Answer: B Topic: Eye on the global economy, unemployment around the world Skill: Level 1: Definition Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

13) Across developed and newly industrialized economies, since 1989 the United States has generally had A) a higher unemployment rate than Japan and Hong Kong and a lower unemployment rate than the Eurozone countries. B) a lower unemployment rate than Japan and Hong Kong. C) a higher unemployment rate than the Eurozone countries. D) the same unemployment rate as Canada. E) a lower unemployment rate than Hong Kong and a higher unemployment rate than Japan and the Eurozone countries. Answer: A Topic: Eye on the global economy, unemployment around the world Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

14) Countries with higher than average unemployment rates have ________ compared to the United States. A) less regulated labor markets B) lower levels of technology C) higher levels of technology D) more generous unemployment benefits and more regulated labor markets E) a higher labor force participation rate Answer: D Topic: Eye on the global economy, unemployment around the world Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

15) In the United States over the last 50 years, A) the labor force participation rate for women has increased to match that for women in other developed countries. B) both women's and men's labor force participation rates have increased due to technology. C) the change in men's labor force participation rate explains the behavior of the unemployment rate. D) the labor force participation rate for women has increased to near 60 percent. E) women's earning power has remained fairly constant. Answer: D Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

16) In the United States, over the past 50 years the total labor force participation rate A) has increased. B) has decreased. C) has remained more or less constant. D) has fluctuated substantially. E) first decreased slightly and then increased significantly. Answer: A Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

17) Since 1960, the labor force participation rate in the United States has A) increased for men and women. B) decreased for men and women. C) increased for men and decreased for women. D) increased for women and decreased for men. E) increased for women and not changed for men. Answer: D Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

18) Between 1960 and 2010, the labor force participation rate for women A) increased until about 1996. B) decreased in most years. C) did not change. D) first rose sharply and then, after 1996, fell equally sharply. E) did not change until 1992, after which it generally increased. Answer: A Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

19) As technology advancements have led to more white collar jobs, A) the unemployment rate has steadily fallen. B) the labor force participation rate for men and women have increased. C) a higher percentage of men of working age have entered the labor force. D) the labor force participation rate for women has increased over the last 50 years. E) the labor force participation rate for women has decreased since 1960. Answer: D Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

20) Since 1960, the labor force participation rate in the United States A) has remained remarkably stable. B) has generally decrease. C) has generally increased. D) at first rose sharply and then gradually decreased. E) at first gradually decreased and in recent years has risen sharply. Answer: C Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

21) The upward trend in the U.S. labor force participation rate the past 50 years is explained by A) the increase in the population. B) the increase in the male labor force participation rate. C) the increase in the number of discouraged workers. D) the increase in the female labor force participation rate. E) Both answers B and D are correct. Answer: D Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

22) The total U.S. labor force participation rate increased over the past 50 years because A) the female labor force participation rate increased. B) more men are retiring early. C) fewer women are attending college. D) many blue-collar jobs with rigid work hours have been created in the last decade. E) the male labor force participation rate increased. Answer: A Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

23) Which of the following statements are true concerning the labor force participation rate? i. The labor force participation rate for women in the United States has increased since 1959. ii. The labor force participation rates for women across different countries have converged to about 50 percent. iii. The labor force participation rate for men in the United States has decreased since 1959. A) i and ii B) i, ii and iii C) i and iii D) iii only E) i only Answer: C Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

24) Over the last 50 years, in the United States the labor force participation rate for women ________, the labor force participation rate for men ________, and the over-all labor force participation rate ________. A) increased; decreased; increased B) increased; decreased; did not change C) did not change; increased; increased D) increased; did not change; increased E) decreased; increased; increased Answer: A Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

25) Over the last 50 years, the U.S. labor force participation rate of men has ________ by ________ the labor force participation of women has ________. As a result, the overall U.S. labor force participation has ________. A) decreased; less than; increased; increased B) decreased; more than; increased; decreased C) decreased; about the same rate as; increased; remained steady D) increased; less than; decreased; decreased E) increased; more than; decreased; increased Answer: A Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

26) In part, the increase in the labor force participation rate in the United States over the last 50 years can be attributed to A) unsuccessful job seekers becoming discouraged workers. B) technological change in the home increasing the time available for paid employment. C) recessionary periods followed by longer expansionary periods. D) early retirement by men in the labor force. E) the large increase in the men's labor force participation rate overcoming the large decrease in the women's labor force participation rate. Answer: B Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

27) Which of the following help explain the increase in the U.S. labor force participation rate for women? i. There was a significant fall in the number of children women were choosing to have. ii. There was an increase in the educational level of women. iii. Technological change in the home increased the time available for work outside the home. A) i only B) ii only C) i and ii D) ii and iii E) i, ii, and iii Answer: D Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

28) In the United States, a reason for the increase of the labor force participation rate for women is that A) an increase in wealth allowed men to retire early. B) more women pursued a college education and received higher wages upon graduation. C) improved Social Security benefits are available for women if they work. D) there has been a decrease in jobs with flexible hours. E) fewer women married. Answer: B Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

29) Over the past 50 years, the U.S. labor force participation rate has decreased for i. men. ii. women. iii. the over-all labor force. A) i only B) ii only C) i and iii D) ii and iii E) i, ii, and iii Answer: A Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

30) Between 1960 and 2010, the labor force participation rate for men A) increased in most years. B) decreased in most years. C) did not change. D) fluctuated, first rising until about 1989 and after that, then falling. E) did not change until 1992, after which it generally increased. Answer: B Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

31) Since 2008, the U.S. labor force participation rate for men has ________ and for women has ________. A) gone up; gone up B) gone down; gone up C) been flat; gone down D) been flat; been flat E) gone down; gone down Answer: E Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

32) In 1994, the Bureau of Labor Statistics started to report A) the unemployment rate weekly to provide a better picture of the labor market. B) alternative measures of the unemployment rate that include narrower measures of the labor market. C) alternative measures of the unemployment rate that include broader measures of the labor market. D) the unemployment rate by surveying 200,000 households. E) B and C are correct answers. Answer: E Topic: Unemployment rate, different measures Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

33) U-1 is a more ________ measure of unemployment rate than the conventional U-3 measure and U-1 counts as unemployed workers who ________. A) narrow; have been unemployed for 15 weeks or more weeks B) narrow; have been laid off C) broad; have been laid off D) broad; who are discouraged workers E) broad; are marginally attached to the labor force Answer: A Topic: Unemployment rate, different measures Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

34) Which is true concerning U-2? i. It does not count marginally attached workers as unemployed. ii. It counts as unemployed workers who were laid off. iii. It is smaller than U-3. A) i only B) i and ii C) i and iii D) ii and iii E) i, ii and iii Answer: E Topic: Unemployment rate, different measures Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

35) U-4, U-5 and U-6 are A) all broader measures of the unemployment rate. B) all narrower measures of the unemployment rate. C) not used by the Bureau of Labor Statistics because they include too much variability. D) narrower measures of the labor force participation rate. E) broader measures of the labor force participation rate. Answer: A Topic: Unemployment rate, different measures Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

36) During the recessions of 2001 and 2008-09, A) all measures of the unemployment rate (U-1 through U-6) increased. B) only the broader measures of the unemployment rate increased. C) only the narrower measures of the unemployment rate increased. D) the labor force participation rate for women increased. E) the labor force participation rate for men increased. Answer: A Topic: Unemployment rate, different measures Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

37) During the 2008-09 recession, the U-6 measure of the unemployment rate A) which counts marginally attached workers and discouraged workers as unemployed, reached 17 percent. B) which counts marginally attached workers and discouraged workers as employed, reached 10 percent. C) which counts marginally attached workers as unemployed but does not count discouraged workers as unemployed, reached 17 percent. D) which counts all part time workers as employed, reached 12 percent. E) which counts discouraged workers as unemployed but does not count marginally attached workers as unemployed, reached 17 percent. Answer: A Topic: Unemployment rate, different measures Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

38) In the United States, part-time workers are A) more numerous than full-time workers. B) less numerous than full-time workers. C) about as numerous as full-time workers. D) considered discouraged workers. E) counted as unemployed in all measures of the unemployment rate. Answer: B Topic: Part-time workers Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

39) In the United States, from 1980 to 2011, the percentage of A) part-time workers who are part time for economic reasons has risen during recessions and fallen during expansions. B) part-time workers who are part time for economic reasons has increased significantly to over 30 percent. C) part-time workers who are part time for noneconomic reasons has risen during recessions and fallen during expansions. D) part-time workers who are part time for noneconomic reasons has increased significantly to over 30 percent. E) None of the above answers is correct. Answer: A Topic: Part-time workers Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

40) In the United States, the percentage of part-time workers who are part time for noneconomic reasons A) has fallen by almost one half since 1980. B) does not fluctuate much with the business cycle. C) rises during an expansionary period and falls during a recessionary period. D) has averaged about 33 percent of all workers. E) has increased in most years since 1980. Answer: B Topic: Part-time workers Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

41) Since 1980, the percentage of part-time workers who are part time for economic reasons A) has steadily decreased. B) has steadily increased. C) at first increased, then generally decreased. D) generally increased in recessions and decreased in expansions. E) has remained approximately constant. Answer: D Topic: Part-time workers Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

42) During a recession, the percentage workers who are part time for economic reasons A) increases more rapidly than the percentage of part-time workers. B) decreases more rapidly than the percentage of part-time workers. C) increases proportionately with the percentage of part-time workers. D) decreases proportionately to the percentage of part-time workers. E) does not change even though the percentage of part-time workers increases. Answer: A Topic: Part-time workers Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

43) Which of the following statements is true regarding part-time workers? A) Part-time workers are divided those who voluntary choose part-time work and those who work parttime due to economic reasons. B) The percentage of workers who are part time due to non-economic reasons rise significantly during recessions. C) The percentage of workers who are part time due to economic reasons does not change much over the business cycle. D) The percentage of workers who are part time due to non-economic reasons is about the same percentage as those who are voluntary reasons. E) Part-time workers who are part-time for economic reasons are included in the unemployment rate, but part-time workers who are part time for noneconomic reasons are not included in the unemployment rate. Answer: A Topic: Part-time workers Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

44) In the 2008-09 recession, the percentage of part-time workers due to economic reasons A) doubled from 3 percent to 6 percent. B) equalled the unemployment rate for those who are part-time workers due to non-economic reasons. C) rose to almost 18 percent. D) did not include teenagers. E) decreased slightly over the period. Answer: A Topic: Part-time workers Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

45) From 1948 to 2011, the average unemployment rate in the United States was approximately A) 3.1 percent. B) 5.8 percent. C) 12.0 percent. D) 24.4 percent. E) 9.6 percent. Answer: B Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

46) During a recession, the unemployment rate ________ and the percentage of part-time workers who are involuntary part-time workers ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls E) rises; does not change Answer: A Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

47) From 1981 to 2011, the unemployment rate in the United States A) was always lower than the unemployment rate in Japan. B) almost always equaled the unemployment rate in Canada. C) generally rose while the unemployment rate in the Eurozone fell. D) was generally lower than the unemployment rate in the Eurozone. E) was usually higher than the unemployment rate in Canada. Answer: D Topic: Eye on the global economy, unemployment around the world Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

48) Since 1960, in the United States the labor force participation rate for men has ________ and for women has ________. A) increased; increased B) increased; decreased C) decreased; increased D) decreased; decreased E) not changed; increased Answer: C Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

49) Between 1960 and 2011, A) both the male and female labor force participation rates increased. B) the male labor force participation rate decreased rapidly, the female labor force participation rate decreased slowly, and the two rates are now equal. C) the male labor force participation rate decreased and the female labor force participation rate increased. D) both the male and female labor force participation rates decreased slowly. E) the male labor force participation rate did not change and the female labor force participation rate increased. Answer: C Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

50) The women's labor force participation rate is A) higher in Japan than in the United States. B) higher in the United States than in France. C) higher in Italy than in the United States. D) higher in Spain than in Iceland. E) higher in the United States than in Iceland or Norway. Answer: B Topic: Global labor force participation rates Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

51) In a recession, which unemployment rate is the highest? A) the U-1 unemployment rate B) the U-6 unemployment rate C) the U-2 unemployment rate D) the U-3 unemployment rate E) None of the above answers is correct because the highest unemployment rate changes from one recession to the next. Answer: B Topic: Unemployment rate, different measures Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

52) In 2012, part-time workers for noneconomic reasons were about ________ of total employment, and part-time workers for economic reasons were about ________ of total employment. A) 3 percent; 25 percent B) 17 percent; 17 percent C) 2 percent; 12 percent D) 13 percent; 20 percent E) 13 percent; 6 percent Answer: E Topic: Part-time workers Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

53) The percentage of workers who work part time for noneconomic reasons A) decreases during a recession as the number of discouraged workers increases. B) does not fluctuate much at all with the business cycle. C) fluctuates strongly with the business cycle. D) has decreased from 30 percent of the labor force in 1980 to 20 percent in 2011. E) has trended upward since 1980. Answer: B Topic: Part-time workers Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

54) In the United States, the percentage of part-time workers who would like full-time work A) increases in recessions and decreases in expansions. B) changes very little from expansion to recession. C) in 2013 was almost 100 percent of all part-time workers. D) Both answers A and C are correct. E) Both answers B and C are correct. Answer: A Topic: Involuntary part-time workers Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

55) The number of part-time workers for economic reasons ________ during recessions and the number of part-time workers for noneconomic reasons ________ during recessions. A) increases; increases B) increases; decreases C) increases; does not change D) does not change; does not change E) decreases; increases Answer: C Topic: Part-time workers Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

56) From 1981 to 2016, the unemployment rate in the United States A) was always lower than the unemployment rate in Japan. B) almost always equaled the unemployment rate in Canada. C) generally rose while the unemployment rate in the Eurozone fell. D) was generally higher than the unemployment rate in Japan. E) was usually higher than the unemployment rate in Canada. Answer: D Topic: Eye on the global economy, unemployment around the world Skill: Level 2: Using definitions Section: Checkpoint 15.2 Status: New AACSB: Reflective thinking

57) From 1981 to 2016, the unemployment rate in the United States A) was always lower than the unemployment rate in Japan. B) almost always equaled the unemployment rate in Canada. C) generally rose while the unemployment rate in the Eurozone fell. D) was generally lower than the unemployment rate in the Eurozone. E) was usually higher than the unemployment rate in Canada. Answer: D Topic: Eye on the global economy, unemployment around the world Skill: Level 2: Using definitions Section: Checkpoint 15.2 Status: New AACSB: Reflective thinking

58) The women's labor force participation rate is A) higher in Japan than in the United States. B) higher in the United States than in Italy. C) higher in Italy than in the United States. D) higher in Spain than in Iceland. E) higher in the United States than in Iceland or Norway. Answer: B Topic: Global labor force participation rates Skill: Level 2: Using definitions Section: Checkpoint 15.2 Status: New AACSB: Reflective thinking

59) The women's labor force participation rate is A) higher in Japan than in the United States. B) lower in the United States than in Iceland C) higher in Italy than in the United States. D) higher in Spain than in Iceland. E) higher in the United States than in Iceland or Norway. Answer: B Topic: Global labor force participation rates Skill: Level 2: Using definitions Section: Checkpoint 15.2 Status: New AACSB: Reflective thinking

60) National differences in women's labor force participation rates are explained by A) cultural differences. B) percentage of women with college degree. C) both A and B D) geopolitical location. E) population size. Answer: C Topic: Global labor force participation rates Skill: Level 2: Using definitions Section: Checkpoint 15.2 Status: New AACSB: Reflective thinking

61) National differences in women's labor force participation rates are explained by A) family friendly labor market policies. B) percentage of women with college degree. C) cultural differences. D) all of the above E) none of the above Answer: D Topic: Global labor force participation rates Skill: Level 2: Using definitions Section: Checkpoint 15.2 Status: New AACSB: Reflective thinking

62) Looking at the industrialized economies, the differences in unemployment rates A) were large during early 1980s. B) narrowed through the 1990s and early 2000s. C) widened after the 2008-2009 recession. D) all of the above E) none of the above Answer: D Topic: Eye on the global economy, unemployment around the world Skill: Level 2: Using definitions Section: Checkpoint 15.2 Status: New AACSB: Reflective thinking

15.3 Unemployment and Full Employment 1) Frictional unemployment is the result of A) an economic recession. B) the economic decline of major industries. C) the normal process of jobs being created and destroyed. D) people not getting along (having friction) with their employers. E) changing weather throughout the year. Answer: C Topic: Types of unemployment, frictional Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

2) As firms search for the best employee to fill an opening and the unemployed search for the job that best fits their skills, the economy experiences A) structural unemployment. B) frictional unemployment. C) cyclical unemployment. D) changes in the business cycle. E) avoidable unemployment. Answer: B Topic: Types of unemployment, frictional Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

3) 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) the economy entering a strong expansion. E) changes in the weather. Answer: B Topic: Types of unemployment, frictional Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

4) ________ unemployment changes slowly and depends on ________. A) Frictional; the skills of the unemployed B) Seasonal; the rate at which people enter and exit the labor force C) Frictional; the rate at which people enter and exit the labor force D) Structural; the rate at which people enter the labor force E) Structural; the inflation rate Answer: C Topic: Types of unemployment, frictional Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

5) The ongoing normal creation and destruction of jobs creates A) frictional unemployment. B) structural unemployment. C) avoidable unemployment. D) cyclical unemployment. E) destructive unemployment. Answer: A Topic: Types of unemployment, frictional Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

6) Which type of unemployment is a permanent and healthy phenomenon in a dynamic economy? A) cyclical B) avoidable C) structural D) frictional E) unavoidable Answer: D Topic: Types of unemployment, frictional Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

7) The amount of frictional unemployment depends on A) the phase of the business cycle. B) the time of the year. C) international competition. D) demographic factors and unemployment benefits. E) Both answers A and B are correct. Answer: D Topic: Types of unemployment, frictional Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

8) A reduction in unemployment benefits will A) decrease the amount of frictional unemployment. B) increase the amount of frictional unemployment. C) not change the amount of frictional unemployment because unemployment benefits affects only cyclical unemployment. D) not change the amount of frictional unemployment because unemployment benefits affects only structural unemployment. E) increase the amount of cyclical unemployment. Answer: A Topic: Types of unemployment, frictional Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

9) Bill just graduated with his degree in economics. Through Career Services he submitted his resume to several companies and he will visit them during the next two weeks. Bill is considered A) not in the labor force. B) frictionally unemployed. C) structurally unemployed. D) cyclically unemployed. E) employed because he is visiting firms. Answer: B Topic: Types of unemployment, frictional Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

10) Jordan recently quit her job as a marketing consultant in Washington, D.C. and is looking for a betterpaying job with an advertising agency in New York. Jordan is considered to be A) cyclically unemployed. B) structurally unemployed. C) not in the labor force. D) frictionally unemployed. E) a discouraged worker. Answer: D Topic: Types of unemployment, frictional Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

11) Which of the following would be considered unemployed as part of normal labor market turnover? i. Juliet, who was fired when the company where she worked went bankrupt in a recession ii. Hannah, who quit her job to find one that better suited her skills iii. Charlotte, who started looking for a job upon graduation from high school A) ii and iii B) i and ii C) i, ii and iii D) i and iii E) iii only Answer: A Topic: Types of unemployment, frictional Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

12) Rosina Gonzales quit her job in Pennsylvania and moved to California to be close to her family. She is currently looking for work, so she would be considered A) a discouraged worker. B) frictionally unemployed. C) cyclically unemployed. D) avoidably unemployed. E) not in the labor force because she moved more than 150 miles. Answer: B Topic: Types of unemployment, frictional Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

13) Beth has just quit her job, moved to a new city, and is looking for a new job. Beth is A) frictionally unemployed. B) structurally unemployed. C) distance unemployed. D) cyclically unemployed. E) locationally unemployed. Answer: A Topic: Types of unemployment, frictional Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

14) Mary has decided that the she does not like Iowa and has decided to quit her job as a medical technician and move to Arizona. Mary's unemployment as she searches for a new job is best classified as A) cyclical. B) distance. C) structural. D) frictional. E) traveling. Answer: D Topic: Types of unemployment, frictional Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

15) Which of the following correctly describes "frictional unemployment"? A) Frictional unemployment includes only people who are job losers. B) Frictional unemployment includes only people who are job leavers. C) Frictional unemployment occurs mainly during recessions. D) Frictional unemployment is a normal occurrence in a growing economy. E) Frictional unemployment falls in recessions and rises in expansions. Answer: D Topic: Types of unemployment, frictional Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

16) Higher ________ in Canada than in the United States help(s) explain why ________ unemployment is higher in Canada than in the United States. A) unemployment benefits; frictional B) unemployment benefits; structural C) prices; frictional D) prices; structural E) investment; structural Answer: A Topic: Types of unemployment, frictional Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

17) Unemployment benefits in western Europe are more generous than in the United States. As a result, ________ in the United States. A) frictional unemployment is lower B) frictional unemployment is higher C) structural unemployment is higher D) avoidable unemployment is lower E) cyclical unemployment is higher Answer: A Topic: Types of unemployment, frictional Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

18) 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. E) changing weather patterns through the year. Answer: A Topic: Types of unemployment, structural Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

19) Structural unemployment is the result of A) voluntary job quitting by workers. B) changing labor needs by firms during the year. C) technology changes or foreign competition. D) changes in the family structure. E) downturns in the business cycle. Answer: C Topic: Types of unemployment, structural Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

20) Which type of unemployment arises when changes in technology or international competition change the skills needed to perform jobs or change the location of jobs? A) cyclical B) fluctuating C) structural D) frictional E) skill-set Answer: C Topic: Types of unemployment, structural Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

21) Structural unemployment includes people who become unemployed from A) changes in the seasons. B) normal changes in the labor force. C) technological changes. D) changes in the business cycle. E) going back to school. Answer: C Topic: Types of unemployment, structural Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

22) An employee who is fired from his or her job because he or she lacks the skills required to accomplish the task, is part of ________ unemployment. A) frictional B) cyclical C) unskilled D) structural E) withdrawal Answer: D Topic: Types of unemployment, structural Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

23) Structural unemployment usually lasts ________ period of time ________ unemployment A) a longer; than frictional B) a shorter; than frictional C) a shorter; than seasonal D) a shorter; than cyclical E) the same; as cyclical Answer: A Topic: Types of unemployment, structural Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

24) Which type of unemployment is most likely to lead unemployed workers to retrain or relocate? A) cyclical B) forced C) structural D) frictional E) search Answer: C Topic: Types of unemployment, structural Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

25) 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 i. seasonal unemployment. ii. structural unemployment. iii. cyclical unemployment. A) i only B) ii only C) i and iii D) i and ii E) ii and iii Answer: B Topic: Types of unemployment, structural Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

26) During 2009, General Motors announced that it would close its Saturn facilities in the United States because of the foreign competition it faced. This corporate move A) increased structural unemployment. B) increased avoidable unemployment. C) increased cyclical unemployment. D) had no impact on unemployment. E) decreased frictional unemployment. Answer: A Topic: Types of unemployment, structural Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

27) After 15 years with Ford Motor Corporation, one summer Cameron loses his job. His boss explained that his position has been downsized after the technological advances in automobile production. Cameron is best considered A) not in the labor force. B) frictionally unemployed. C) structurally unemployed. D) cyclically unemployed. E) avoidably unemployed. Answer: C Topic: Types of unemployment, structural Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

28) Juan recently lost his job as a travel agent, which he has had for 20 years, because the demand for his services has fallen over time as more and more people book their vacations online. Unfortunately, Juan has not been able to find a new job because he lacks the skills needed to get hired in other industries where job growth is occurring. Juan is considered to be A) structurally unemployed. B) frictionally unemployed. C) cyclically unemployed. D) a marginally attached worker. E) not in the labor force. Answer: A Topic: Types of unemployment, structural Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

29) For twenty years, Jim was a customer service representation at a call center in Minnesota. In order to save money, his firm moved the call center to India and laid off Jim two years ago. Jim has been unable to find a similar job anywhere. Jim's unemployment is best classified as A) cyclical. B) transported. C) structural. D) frictional. E) competitive. Answer: C Topic: Types of unemployment, structural Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

30) Joann has just lost her job because her company was faced with more foreign competition and decided to restructure, which reduced the number of jobs at the company. Joann is A) frictionally unemployed. B) structurally unemployed. C) transported unemployed. D) cyclically unemployed. E) internationally unemployed. Answer: B Topic: Types of unemployment, structural Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

31) Joe has been unable to find a job because he lacks the necessary computer skills. Joe is A) frictionally unemployed. B) structurally unemployed. C) educationally unemployed. D) cyclically unemployed. E) skill-set unemployed. Answer: B Topic: Types of unemployment, structural Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

32) Cyclical unemployment includes people who become unemployed from A) changes in the seasons. B) changes in international competition. C) technological changes. D) changes in the business cycle. E) normal labor market turnover. Answer: D Topic: Types of unemployment, cyclical Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

33) The type of unemployment that arises from a decrease in real GDP is called A) frictional unemployment. B) structural unemployment. C) non-expansion unemployment. D) cyclical unemployment. E) downturn unemployment. Answer: D Topic: Types of unemployment, cyclical Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

34) Which type of unemployment is the consequence of downturns in the business cycle? A) cyclical B) expansionary C) structural D) frictional E) natural Answer: A Topic: Types of unemployment, cyclical Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

35) The unemployment that fluctuates over the business cycle is called A) frictional unemployment. B) structural unemployment. C) full unemployment. D) cyclical unemployment. E) natural unemployment. Answer: D Topic: Types of unemployment, cyclical Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

36) Cyclical unemployment is A) the total of structural and frictional unemployment. B) always greater than the total of structural and frictional unemployment. C) created by a recession. D) higher when the economy is expanding. E) part of frictional unemployment. Answer: C Topic: Types of unemployment, cyclical Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

37) John has been laid off from his job because of a general downturn in the economy. John's unemployment is best classified as A) cyclical. B) full. C) structural. D) frictional. E) avoidable. Answer: A Topic: Types of unemployment, cyclical Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

38) Janae was fired from her job with Microsoft in the 2008-09 recession because Microsoft's sales dipped. Janae's unemployment would be best classified as A) frictional unemployment. B) structural unemployment. C) sales-related unemployment. D) cyclical unemployment. E) natural unemployment. Answer: D Topic: Types of unemployment, cyclical Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

39) In 2008, as the economy moved into a recession, A) cyclical unemployment increased. B) structural unemployment decreased. C) natural unemployment decreased. D) frictional unemployment was not affected. E) the number of marginally attached workers decreased. Answer: A Topic: Types of unemployment, cyclical Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

40) During a recession, cyclical unemployment ________ and real GDP ________. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases E) does not change; decreases Answer: B Topic: Types of unemployment, cyclical Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

41) An economic recession produces A) an increase in cyclical unemployment. B) an increase in structural unemployment. C) an increase in natural unemployment. D) a decrease in cyclical unemployment. E) a decrease in natural unemployment. Answer: A Topic: Types of unemployment, cyclical Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

42) Cyclical unemployment A) is always a constant amount of unemployment. B) is higher during an expansion. C) decreases during a recession. D) fluctuates over the business cycle. E) fluctuates but not in response to the business cycle. Answer: D Topic: Types of unemployment, cyclical Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

Consider the following people: ∙ Chris quits his job as an automobile mechanic to pursue his college education full-time. ∙ Darrelo was laid off from her technical support job because of a strike by production workers and is currently looking for a new job. ∙ Rita graduated from college and is currently looking for a job. ∙ Armondo quit his old job and will begin his new job in four days. ∙ Thorton was fired from his job as a steel worker because of massive imports of steel and he is looking for a new job. ∙ Jung was laid off from his job as an appraiser because the firm's business declined because of a general downturn in the economy and he is currently looking for a new job as an appraiser.

43) According to the scenario above, in which of the following groups are all the people frictionally unemployed? A) Rita and Darrelo B) Chris, Rita, and Thorton C) Rita and Jung D) Darrelo and Jung E) Jung Answer: A Topic: Types of unemployment, frictional Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

44) According to the scenario above, in which of the following groups are all the people cyclically unemployed? A) Jung B) Darrelo C) Jung and Rita D) Jung and Thorton E) Thorton Answer: A Topic: Types of unemployment, cyclical Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

45) According to the scenario above, in which of the following groups are all the people structurally unemployed? A) Thorton B) Jung C) Thorton and Darrelo D) Darrelo and Thorton E) Rita, Armondo, and Chris Answer: A Topic: Types of unemployment, structural Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

46) During a recession, the average duration of unemployment tends to A) increase. B) decrease. C) remain constant. D) be unpredictable. E) be about the same as during an expansion. Answer: A Topic: How long does it take to find a job? Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

47) During a recession, the duration of unemployment ________ and the unemployment rate is ________ the natural rate of unemployment. A) lengthens; greater than B) lengthens; less than C) shortens; greater than D) shortens; equal to E) does not change; equal to Answer: A Topic: How long does it take to find a job? Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

48) The average duration of unemployment A) decreases during recessions and increases during expansions. B) increases during recessions and decreases during expansions. C) does not vary with the business cycle. D) decreases all the time. E) increases all the time. Answer: B Topic: How long does it take to find a job? Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

49) Which is true regarding cyclical unemployment? i. Cyclical unemployment is positive at business cycle peaks. ii. Cyclical unemployment is negative at business cycle troughs. iii. Cyclical unemployment is zero at full employment. A) iii only B) i, ii and iii C) i and iii D) i only E) i and ii Answer: A Topic: Types of unemployment, cyclical Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

50) At full employment there is no A) unemployment. B) cyclical unemployment. C) avoidable unemployment. D) frictional unemployment. E) structural unemployment. Answer: B Topic: Full employment Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

51) Full employment occurs when A) the unemployment rate is zero. B) the cyclical unemployment rate is zero. C) the frictional unemployment rate is zero. D) the sum of frictional and structural unemployment is zero. E) the structural unemployment rate is zero. Answer: B Topic: Full employment Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

52) Full employment occurs when A) structural unemployment is zero. B) cyclical unemployment is zero. C) frictional unemployment is zero. D) structural and frictional unemployment are zero. E) the unemployment rate equals zero. Answer: B Topic: Full employment Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

53) When the economy is at full employment, A) 100 percent of the labor force is employed. B) there is no structural or cyclical unemployment. C) there is no cyclical unemployment. D) there is only frictional unemployment. E) the natural unemployment rate equals zero. Answer: C Topic: Full employment Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

54) Full employment means that A) the unemployment rate is below 6 percent. B) there is no cyclical unemployment. C) the unemployment rate is zero. D) the frictional unemployment rate is equal to the structural unemployment rate. E) there is no frictional unemployment. Answer: B Topic: Full employment Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

55) 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. E) frictional unemployment rate is equal to 0 percent. Answer: B Topic: Full employment Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

56) 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. E) structural unemployment rate equals zero. Answer: A Topic: Full employment Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

57) Full employment is the level of unemployment that occurs A) when everyone looking for a job has a job. B) when cyclical unemployment is zero. C) when frictional and structural unemployment are zero. D) when frictional, structural, and cyclical unemployment are zero. E) None of the above answers is correct. Answer: B Topic: Full employment Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

58) Full employment means that A) 100 percent of the labor force have jobs. B) only those who are willing, able and looking for work are unemployed. C) the cyclical unemployment rate is zero. D) the natural unemployment rate is zero. E) the frictional unemployment rate is zero. Answer: C Topic: Full employment Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

59) At full employment there still exists some unemployment because A) some portion of our population will always be too lazy to work. B) there are always people too old or young to be in the labor force. C) the U.S. economy is constantly creating and destroying jobs. D) it is unnatural to have all people work 40 hours per week. E) real GDP can never exceed potential GDP. Answer: C Topic: Full employment Skill: Level 1: Definition Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

60) In 2012, real GDP in the United States was below potential GDP. This fact definitely means that A) the unemployment rate was near 10 percent. B) the unemployment rate was above the natural unemployment rate. C) the economy was in an expansion. D) cyclical unemployment had been decreasing. E) frictional unemployment was negative. Answer: B Topic: Natural unemployment rate Skill: Level 1: Definition Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

61) 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. E) unnecessary unemployment. Answer: C Topic: Natural unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

62) Natural unemployment equals the sum of A) cyclical and frictional unemployment. B) cyclical, business, and structural unemployment. C) frictional and structural unemployment. D) business and cyclical unemployment. E) cyclical and structural unemployment. Answer: C Topic: Natural unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

63) The natural unemployment rate A) includes only frictional and structural unemployment. B) is equal to zero when there are no economic fluctuations. C) is easy to measure. D) is very stable in value across time. E) includes some frictional, structural, and cyclical unemployment. Answer: A Topic: Natural unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

64) The natural unemployment rate is A) another name for the average annual rate of unemployment. B) another name for the cyclical unemployment rate. C) the sum of cyclical and frictional unemployment rates. D) the unemployment rate that is not associated with the business cycle. E) the sum of cyclical, structural, and frictional unemployment rates. Answer: D Topic: Natural unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

65) 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. E) the natural unemployment rate is zero. Answer: D Topic: Natural unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

66) The natural unemployment rate occurs A) at the full employment level of unemployment. B) when the structural unemployment rate equals zero. C) when the frictional unemployment rate equals zero. D) when the sum of frictional and structural unemployment equals zero. E) when the unemployment rate equals zero. Answer: A Topic: Natural unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

67) If the unemployment rate is less than the natural unemployment rate, then A) there is no frictional unemployment. B) cyclical unemployment is greater than zero. C) real GDP is less than potential GDP. D) real GDP is greater than potential GDP. E) frictional unemployment is negative. Answer: D Topic: Natural unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

68) At the peak of a business cycle, the A) cyclical unemployment rate is positive. B) unemployment rate is above the natural unemployment rate. C) frictional unemployment rate is zero. D) unemployment rate is below the natural unemployment rate. E) natural unemployment rate is negative. Answer: D Topic: Natural unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

69) The natural unemployment rate is A) equal to the sum of frictional, cyclical, and seasonal unemployment. B) not known with certainty. C) equal to zero. D) the same for all industrialized countries. E) equal to the sum of frictional, structural, and cyclical unemployment. Answer: B Topic: Natural unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

70) Potential GDP is A) the value of the maximum amount of output that can be produced at any given time. B) the amount of real GDP that the economy would produce if it were at full employment of all resources. C) another name for real GDP. D) the amount of real GDP that the economy would produce if the unemployment rate was zero. E) the amount of real GDP that the economy would produce if all unemployment was cyclical unemployment. Answer: B Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

71) Potential GDP is the level of output produced when the unemployment rate is A) equal to the natural unemployment rate. B) greater than the natural unemployment rate. C) less than the natural unemployment rate. D) zero. E) made up of only cyclical unemployment. Answer: A Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

72) Potential GDP is reached when A) unemployment is zero. B) there is no cyclical unemployment. C) unemployment is above full employment. D) unemployment is below full employment. E) the natural unemployment rate equals zero. Answer: B Topic: Potential GDP Skill: Level 1: Definition Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

73) Which of the following is true? A) Real GDP fluctuates around potential GDP. B) Potential GDP fluctuates around real GDP. C) Nominal GDP fluctuates around real GDP. D) Real GDP fluctuates around nominal GDP. E) When real GDP equals potential GDP, both equal nominal GDP. Answer: A Topic: Potential GDP and real GDP Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

74) During a recession, A) real GDP is equal to potential GDP. B) real GDP is less than potential GDP. C) real GDP is greater than potential GDP. D) the relationship between real GDP and potential GDP no longer exists. E) the actual unemployment rate is less than the natural unemployment rate. Answer: B Topic: Potential GDP and real GDP Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

75) When the unemployment rate is greater than the natural unemployment rate, real GDP is A) greater than potential GDP. B) less than potential GDP. C) unrelated to potential GDP. D) equal to potential GDP. E) greater than full employment GDP. Answer: B Topic: Potential GDP and real GDP Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

76) As the unemployment rate increases, A) potential GDP decreases. B) real GDP decreases. C) both real GDP and potential GDP decrease. D) potential GDP increases. E) full employment GDP decreases. Answer: B Topic: Potential GDP and real GDP Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

77) When the unemployment rate is ________ the natural unemployment rate, real GDP is ________ potential GDP. A) below; above B) above; the same as C) the same as; below D) the same as; above E) above; above Answer: A Topic: Potential GDP and real GDP Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

78) Tommy graduates from college and starts to look for a job. Tommy is A) frictionally unemployed. B) structurally unemployed. C) cyclically unemployed. D) unnecessarily unemployed. E) employed because he is looking for work. Answer: A Topic: Types of unemployment, frictional Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

79) Which of the following people is frictionally unemployed? A) Cara, an executive who lost her job because her company could not compete with foreign competition and whose skills are not wanted by other companies B) Tran, a building construction supervisor who was fired because of a downturn in the building industry that is the result of a general downturn in the economy C) Eugene, a pharmaceutical drug salesman who was laid off when his company lost a large contract with an HMO D) Amanda, a sales associate at J.C. Penney who quit her job to attend school full time E) Samantha, who worked part-time in J.C. Penney to help with the Christmas rush but was laid off in January Answer: C Topic: Types of unemployment, frictional Skill: Level 1: Definition Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

80) If an entire industry relocates to a foreign country, the relocation leads to a higher rate of ________ unemployment. A) frictional B) structural C) structural and frictional D) cyclical E) structural and cyclical Answer: B Topic: Types of unemployment, structural Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

81) An increase in unemployment benefits ________ and an increase in international competition that changes the location of jobs ________. A) increases structural unemployment; decreases frictional unemployment B) decreases structural unemployment; decreases cyclical unemployment C) decreases cyclical unemployment; decreases cyclical unemployment D) increases frictional unemployment; increases structural unemployment E) decreases cyclical unemployment; increases cyclical unemployment Answer: D Topic: Types of unemployment, frictional and structural unemployment Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

82) Who is cyclically unemployed? A) Casey, who lost his job because the technology changed so he was no longer needed B) Katrina, an assistant manager who quit her job to search for a better job closer to home C) Kathy, a steelworker who was laid off but has stopped looking for a new job because she can't find a new job D) David, a new car salesman who lost his job because the economy went into a recession E) Samantha, who quit her job to return to college to earn her MBA Answer: D Topic: Types of unemployment, cyclical Skill: Level 1: Definition Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

83) At full employment, there is no A) unemployment. B) frictional unemployment. C) structural and seasonal unemployment. D) cyclical unemployment. E) structural unemployment. Answer: D Topic: Full employment Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

84) When the economy is at full employment, A) the natural unemployment rate equals zero. B) the amount of cyclical unemployment equals zero. C) the amount of structural unemployment equals zero. D) there is no unemployment. E) the amount of frictional unemployment equals zero. Answer: B Topic: Full employment Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

85) Which of the following lowers frictional unemployment? A) more young people in the economy B) decreasing unemployment benefits C) increasing the pace of technological change D) increasing the minimum wage E) None of the above answers are correct because all of the answers raise frictional unemployment. Answer: B Topic: Types of unemployment, frictional Skill: Level 1: Definition Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

86) When the unemployment rate is less than the natural unemployment rate, real GDP is ________ potential GDP. A) greater than B) less than C) unrelated to D) equal to E) not comparable to Answer: A Topic: Potential GDP and real GDP Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

87) If real GDP exceeds potential GDP, then the unemployment rate ________ the natural unemployment rate. A) equals B) is greater than C) is less than D) The premise of the question is incorrect because the relationship between real GDP and potential GDP has nothing to do with the relationship between the unemployment rate and the natural unemployment rate. E) The premise of the question is incorrect because real GDP can never exceed potential GDP. Answer: C Topic: Potential GDP and real GDP Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

88) When the unemployment rate is ________ the natural unemployment rate, real GDP is ________. A) above; increasing B) above; above potential GDP C) below; above potential GDP D) below; increasing E) equal to; either equal to potential GDP or above potential GDP Answer: C Topic: Potential GDP and real GDP Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

89) The actual unemployment rate was above the natural unemployment rate during: A) 1981-1982 recession B) 1990-1991 recession C) 2001 recession D) 2008-2009 recession E) all of the time periods above. Answer: E Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.3 Status: New AACSB: Reflective thinking

90) The unemployment rate tends to A) generally rises during recessions B) generally falls during expansions C) fluctuates independently of the business cycle D) A and B E) none of the above Answer: D Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.3 Status: New AACSB: Application of knowledge

91) Z-pop ratio is A) the percentage of the working age population that is fully utilized. B) the percentage of the working age population in the labor force. C) the percentage of the working age population which is unemployed. D) the percentage of the working age population that is underused. E) none of the above. Answer: A Topic: Eye on full employment Skill: Level 1: Definition Section: Checkpoint 15.3 Status: New AACSB: Reflective thinking

92) People counted as fully utilized for the computation of the Z-Pop ratio are A) working full time B) working part-time for non-economic reasons C) those who say they do not want a job D) all of the above E) none of the above Answer: D Topic: Eye on full employment Skill: Level 1: Definition Section: Checkpoint 15.3 Status: New AACSB: Reflective thinking

93) During the 2008-2009 recession, Z-Pop ratio A) decreased B) increased C) stayed the same D) all of the above E) none of the above Answer: A Topic: Eye on full employment Skill: Level 1: Definition Section: Checkpoint 15.3 Status: New AACSB: Reflective thinking

94) Based on the actual and natural unemployment rates in the first quarter of 2016, the US economy is ________. Based on the Z-Pop ratio in 2016, the US economy ________. A) back to full employment; has underused labor B) underutilized; is back to pre-recession level C) is above potential GDP; has underused labor D) is below potential GDP; is back to pre-recession level E) none of the above Answer: A Topic: Eye on full employment Skill: Level 3: Using models Section: Checkpoint 15.3 Status: New AACSB: Reflective thinking

95) The duration of unemployment spells A) varies over the business cycle. B) has no relationship to the business cycle. C) is the longest at the business cycle peak. D) is constant over the business cycle. E) none of the above Answer: A Topic: Eye on the U.S. economy Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: New AACSB: Reflective thinking

96) In 2016, the duration of unemployment spells was about A) 11 weeks B) 37 weeks C) 6 weeks D) 25 weeks E) none of the above Answer: A Topic: Eye on the U.S. economy Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: New AACSB: Reflective thinking

15.4 Integrative Questions Consider the following people: • Chris quits his job as an automobile mechanic to pursue his college education full-time. • Arrelo is temporarily laid off from her technical support job because of a strike by production workers. • Schurita graduated from college in May and is currently looking for a job. • Bo quit his job on September 1 and then, after looking for a new job, will begin his new job on October 1. • Terri retired from his job on May 1. • Vicki works part-time at Bainen Press to help pay her college tuition. 1) Bo's actions would A) have no impact on the September unemployment rate or the October unemployment rate. B) raise the September unemployment rate and lower the October unemployment rate. C) raise the September unemployment rate and not change the October unemployment rate. D) classify him as out of the labor force in September. E) raise the September unemployment rate and the October unemployment rate. Answer: B Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking

2) Vicki would be classified as A) a voluntary part-time worker. B) unemployed. C) an involuntary part-time work. D) not in the labor force because she is a full-time student. E) a discouraged worker. Answer: A Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking

3) When the unemployment rate equals the natural unemployment rate, most likely the economy is producing A) on the production possibilities frontier. B) within the production possibilities frontier. C) beyond the production possibilities frontier. D) either on or within the production possibilities frontier. E) either on or beyond the production possibilities frontier. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

4) Producing an amount of GDP equal to potential GDP is most consistent with the economy producing A) on the production possibilities frontier. B) within the production possibilities frontier. C) beyond the production possibilities frontier. D) either on or within the production possibilities frontier. E) either on or beyond the production possibilities frontier. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

5) After the passage of the North American Free Trade Agreement, which made it less expensive to import goods from Mexico, workers in some industries found their factories being relocated to Mexico to take advantage of lower labor costs. These workers experienced what type of unemployment? A) cyclical B) trade C) structural D) frictional E) foreign Answer: C Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking

6) If the Federal government expands its support of education and retraining of workers who have been unemployed for a relatively long length of time, which type of unemployment would the education and retraining most likely be targeted? A) cyclical B) government C) structural D) frictional E) discouraged Answer: C Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking

7) During the Great Depression of the 1930s when the unemployment rate was exceptionally high due to the Great Depression, the government had employment programs, such as the Civilian Conservation Corps, which built campsites and planted trees. These programs were aimed at reducing which type of unemployment? A) cyclical B) avoidable C) structural D) frictional E) discouraged Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking

8) Suppose people decide to buy fewer GE stoves. If General Electric reduces the number of its employees to reduce its costs but no other stove company does so, which type of unemployment results? A) cyclical B) marginal C) structural D) frictional E) discouraged Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking

15.5 Essay: Labor Market Indicators 1) 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: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Written and oral communication

2) 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: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Written and oral communication

3) Define the unemployment rate and labor-force participation rate. Discuss the differences between these two rates. Answer: The unemployment rate is defined as

× 100 and the labor force

participation rate is defined as

× 100. The two measures give different

perspectives on the labor market. The labor force participation rate tells the percentage of the workingage 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: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Written and oral communication

4) 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 not made specific efforts to find a job within the past four weeks. Essentially, a marginally attached worker is someone who wants a job but has a weak "attachment" to the job market and so he or she stops looking. Topic: Marginally attached worker Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Written and oral communication

5) What are the reasons some people choose to be part-time workers? Answer: Some people are part-time workers for economic reasons: They want full-time work but cannot find it. These people are called "involuntary part-time workers." Other people choose to be part time for non-economic reasons. These reasons include health problems, family or personal responsibilities, and/or educational commitments that limit availability for work. Topic: Part-time workers Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Written and oral communication

6) 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: Labor force Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

7) 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. Hence the number of unemployed people is (400 million) × (5 percent) = 20 million people. Topic: Unemployment Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

8) Suppose that the 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: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

9) 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: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

10) 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: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

11) 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 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, discouraged workers Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

12) 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, discouraged workers Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

13) Based on the information in the above table, what is the unemployment rate? Answer: The unemployment rate equals (6 million unemployed ÷ 139 million labor force) × 100 = 4.3 percent. Topic: Unemployment rate Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

14) Based on the information in the above table, what is the labor force participation rate? Answer: The labor force participation rate equals (139 million labor force ÷ 207 million working-age population) × 100 = 67.1 percent. Topic: Labor force participation rate Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

15.6 Essay: Labor Market Trends and Fluctuations 1) How does the unemployment rate change in a recession and in an expansion? Answer: During a recession, the unemployment increases. During an expansion, the unemployment rate decreases. Topic: Unemployment rate Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

2) Over the last 50 years, a. How has the labor force participation rate changed? b. How have the men's and women's labor force participation rates changed? Answer: a. Over the past 50 years, the overall labor force participation rate has increased. b. Over the past 50 years, the men's labor force participation rate has decreased and the women's labor force participation rate has increased. Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Written and oral communication

3) Over the last 50 years, how has the women's labor force participation rate changed? What are reasons for this change? Answer: Over the past 50 years, the women's labor force participation rate has increased. Four reasons can be advanced for the increase. First, more women are graduating from college. As college graduates, their salaries are higher and these higher salaries have attracted women to the labor force. Second, technological change has created a large number of white collar jobs with flexible hours, jobs women find attractive. Third, technological change in the home has decreased the amount of time necessary to do some tasks around the house and hence increased the amount of time some women can offer to the paid workplace. Finally, more families have felt the need to have two incomes in order to bolster tight budgets. Topic: Labor force participation rate Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Written and oral communication

4) Explain how the labor force participation rate, the unemployment rate, and the percentage of the labor force employed part time 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. The percentage of the labor force employed part time tends to increase during a recession as part-time workers for economic reasons increase. Topic: Labor market in a recession Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Written and oral communication

15.7 Essay: Unemployment and Full Employment 1) 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—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 in an expansion, cyclical unemployment decreases. Hence, cyclical unemployment increases during a recession and decreases during an expansion. Topic: Types of unemployment Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Written and oral communication

2) 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 firms that lose business might release workers and these people also are frictionally unemployed. Topic: Types of unemployment, frictional Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Written and oral communication

3) 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: Types of unemployment, frictional Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Written and oral communication

4) 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: Types of unemployment, frictional and structural unemployment Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Written and oral communication

5) 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: Types of unemployment, structural Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Written and oral communication

6) 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: Types of unemployment, structural Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Written and oral communication

7) 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: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Written and oral communication

8) 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: Full employment, natural unemployment rate, potential GDP Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Written and oral communication

9) For the past decade, the unemployment rate in Western Europe has been higher than the unemployment rate in the United States. Based on this fact, is the natural unemployment rate larger in Western Europe or in the United States? Why might the natural rates differ between the two areas? Answer: The natural unemployment rate is probably higher in Western Europe than in the United States. A major reason why this difference exists is that unemployment benefit payments in Western Europe are higher than in the United States, so people stay frictionally unemployed longer in Western Europe. Topic: Natural unemployment rate Skill: Level 1: Definition Section: Checkpoint 15.3 Status: Old AACSB: Written and oral communication

10) 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: Potential GDP and real GDP Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Written and oral communication

11) 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: Potential GDP and real GDP Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Written and oral communication

12) 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: Potential GDP and real GDP Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Written and oral communication

Essential Foundations of Economics, 8e (Bade) Chapter 16 The CPI and the Cost of Living 16.1 The Consumer Price Index 1) The CPI stands for A) Citizens Paying Index. B) Corporate Pricing Index. C) Consumer Paying Index. D) Consumer Price Index. E) Corporate/Consumer Payment Index. Answer: D Topic: CPI Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

2) The Consumer Price Index is calculated by the A) Bureau of Labor Statistics. B) Department of Labor. C) Department of Commerce. D) Federal Reserve Bank of New York. E) Society for Consumer Protection. Answer: A Topic: CPI Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

3) The CPI is a measure of the A) percentage change in the price level. B) average prices of all goods. C) average prices paid by consumers for a fixed basket of goods and services. D) average prices of all goods and services produced. E) average change in the output of the goods and services purchased by a typical urban consumer. Answer: C Topic: CPI Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

4) The Consumer Price Index (CPI) measures the changes of the A) prices paid by consumers for a fixed market basket of consumer goods and services. B) quantities of a fixed market basket of goods produced by businesses. C) lowest prices paid by consumers for a fixed market basket of consumer goods and services. D) prices paid by all businesses for a fixed market basket of production resources. E) prices paid by consumers and businesses for a fixed market basket of goods and services. Answer: A Topic: CPI Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

5) The Consumer Price Index measures the average prices paid by A) businesses for a fixed market basket of resources. B) businesses for the most frequently used basket of resources. C) urban consumers for a fixed market basket of goods and services. D) urban consumers for the goods and services that most frequently change in price. E) businesses and consumers for a market basket of goods and services. Answer: C Topic: CPI Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

6) For the CPI to provide an accurate measure of the prices paid by urban consumers, it is necessary to A) assign equal weights to all the goods and services included in the market basket surveyed so that nothing is over-weighted. B) have a market basket that is consistent and corresponds to what households actually purchase. C) have prices stated in dollars so consumers can compare what they spend. D) change the market basket each month to reflect the changes that consumers make. E) make certain that the incomes of the consumers surveyed do not change because such a change would affect the market basket of the goods and services they buy. Answer: B Topic: CPI Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

7) The CPI is calculated by the Bureau of Labor Statistics on a frequency of every A) week. B) month. C) quarter. D) year. E) decade, along with the Census. Answer: B Topic: CPI Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

8) Constructing the CPI involves which of the following stages? i. conducting the monthly price survey ii. converting the CPI to an international index iii. selecting CPI market basket A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: D Topic: CPI, construction Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

9) The Consumer Expenditure Survey measures A) households' spending patterns. B) the wholesale price on what consumers buy so that a markup percentage can be found. C) the maximum price buyers will pay for a good or service. D) consumers' incomes. E) the jobs at which consumers work. Answer: A Topic: CPI construction Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

10) To measure the CPI, the BLS economic assistants check the prices of A) about 8,000 goods and services every year. B) about 8,000 goods and services every month. C) about 80,000 goods and services every month. D) about 80,000 goods and services every year. E) only the goods and services whose prices have changed every month. Answer: C Topic: CPI, construction Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

11) To measure the CPI, the BLS economic assistants check the prices of A) all the goods and services produced in a given year. B) some of the consumer goods but none of the services produced in a given year. C) about 80,000 goods and services each month. D) about 80,000 goods and services each quarter. E) only the prices of the goods and services whose prices have changed. Answer: C Topic: CPI, construction Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

12) The prices of the goods and services in the CPI market basket are collected A) monthly. B) yearly. C) quarterly. D) infrequently. E) only when the CPI market basket is determined by the Consumer Expenditure Survey. Answer: A Topic: CPI, construction Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

13) The price survey of the goods contained in the CPI market basket is conducted A) every ten years, along with the Census. B) infrequently, because of its high cost. C) every year. D) monthly. E) every quarter. Answer: D Topic: CPI, construction Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

14) The reference base period that the BLS uses to measure the CPI is A) 1982-1984. B) 1993-1995. C) 1998-2000. D) 1967-1969. E) 2005. Answer: A Topic: CPI, reference base period Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

15) The reference base period for the CPI is A) the previous year. B) whatever the political party that is in control of Congress decides. C) currently 1913. D) the period of time the CPI is defined to equal 100. E) currently 2005. Answer: D Topic: CPI, reference base period Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Revised AACSB: Reflective thinking

16) The reference base period for the CPI has an index number of ________ and is currently ________. A) 100; 1982-1984 B) 100; 2010-2012 C) 0; 2006-2008 D) 1; 2014-2016 E) 100; 2014-2016 Answer: A Topic: CPI, base period Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Revised AACSB: Reflective thinking

17) The value of the CPI for the reference base period is always A) 100. B) 0. C) 1. D) 50. E) None of the above, because the value of the CPI is not always the same for all reference base periods. Answer: A Topic: CPI, reference base period Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

18) The items included in the CPI are A) final goods produced in the United States. B) final goods and services produced in the United States. C) goods and services consumed by the typical urban household. D) only goods and services produced within the current year and consumed by the typical household. E) goods but not services consumed by the typical urban household. Answer: C Topic: CPI, basket Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Written and oral communication

19) The Consumer Price Index market basket contains A) the minimal dietary requirements of an average urban household. B) the U.S.-produced goods and services purchased by an average urban household. C) the ideal calorie intake of each member of an average urban household. D) the goods and services purchased by an average urban household. E) the goods and services that the economists working for the BLS believes consumers should buy. Answer: D Topic: CPI, basket Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

20) The Consumer Price Index measures the average of the prices paid by urban consumers for a ________ of consumer goods and services. A) random selection B) changing selection C) fixed market basket D) subjective selection E) least-cost market basket Answer: C Topic: CPI, basket Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

21) The CPI market basket is determined by A) tax return data of households. B) supermarket purchases recorded by scanner technology. C) profit releases of the largest companies. D) a consumer survey. E) surveys asking large retail companies, such as Wal-Mart, about their sales of consumer goods and services. Answer: D Topic: CPI, basket Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

22) For the CPI, the market basket of goods and services is modified A) each time the Consumer Expenditures Survey is conducted. B) about every 10 to 20 years. C) each month when the Price Survey is completed. D) each year to reflect changes in consumer purchasing habits. E) at the discretion of the President. Answer: A Topic: CPI, basket Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

23) According to the CPI basket, the largest item in the households' budgets is A) food. B) housing. C) transportation. D) education. E) apparel. Answer: B Topic: CPI, basket Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

24) Which item has the largest weight in the CPI basket? A) apparel B) food and beverages C) housing D) transportation E) recreation Answer: C Topic: CPI, basket Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Revised AACSB: Reflective thinking

25) The CPI market basket A) contains one unit of each good purchased by the average consumer. B) weights the goods and services according to the budget of an average urban household. C) is comprised of a representative sample of the goods that the government guesses people buy. D) includes only goods and not services. E) includes only U.S.-produced goods and services. Answer: B Topic: CPI, basket Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

26) The CPI market basket A) weights the goods and services according to the budget of an average urban household. B) determines the best possible way of taxing the average urban household. C) determines how the spending patterns of the average urban household change from month to month. D) determines how spending patterns change from urban household to urban household. E) changes from one month to the next in order to calculate the CPI. Answer: A Topic: CPI, basket Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

27) When calculating the CPI, the Bureau of Labor Statistics A) weights the price of goods and services in the basket relative to the importance of the average urban household budget. B) sums the prices of the goods and services in the average urban household consumption basket. C) weights the price of all goods and services produced in a year within a country's borders. D) multiplies by 100 the average price of goods and services in the average urban consumer's basket. E) makes certain to weight the goods and services equally so that no one product is over-weighted. Answer: A Topic: CPI, basket Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

28) The more money an average household spends on one specific type of good or service per month, the A) smaller the relative importance of that item in the CPI market basket. B) larger the relative importance of that item in the CPI market basket. C) costlier it will be to conduct the Consumer Expenditure Survey. D) less significant an increase in the price of that good or service will be for the household. E) more frequently its price is checked when calculating the CPI. Answer: B Topic: CPI, basket Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

29) Which of the following changes would have the largest impact on the CPI? A) a one percent increase in the cost of housing B) a one percent increase in the cost of transportation C) a one percent increase in the cost of medical care D) a one percent increase in the cost of education E) a one percent increase in the cost of apparel Answer: A Topic: CPI, basket Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

30) In 2013, the reference base period for the CPI for the nation of Wobet, a typical consumer spent $30 on potatoes and $150 on steak. Which of the following is true? A) The quantity of steak in the basket is larger than the quantity of potatoes. B) The quantity of potatoes in the basket is larger than the quantity of steak. C) The quantity of the two goods in the basket is the same. D) We cannot say exactly how many of each good are in the basket. E) None of the above answers is correct. Answer: D Topic: CPI, basket Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

31) In 2013, the reference base period for the CPI for the nation of Webot, a typical consumer spent $30 on potatoes and $150 on steak. If the price of steak is $15 and the price of potatoes is $1 then there are ________ units of steak and ________ units of potatoes in the CPI market basket. A) 30; 150 B) 10; 30 C) 150; 30 D) 5; 30 E) None of the above answers is correct. Answer: B Topic: CPI, basket Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

32) Consumers in Beachland consume only two goods, sodas and DVDs. If they spend $10 on sodas and $90 on DVDs a month, how many sodas and DVDs are in their CPI market basket if the price of a soda is $1 and the price of a DVD is $9? A) 9 sodas and 1 DVD B) 1 soda and 9 DVDs C) 10 sodas and 9 DVDs D) 10 sodas and 10 DVDs E) It is impossible to determine the market basket without information on the quantity of at least one of the two goods consumed. Answer: D Topic: CPI, basket Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

33) When the price of, say, a package of rice changes, what must the BLS do next? A) immediately incorporate the new price into the CPI B) determine if the new price is consistent with other price changes for the period C) determine if the size, quality, weight, or packing of the rice has changed and adjust the price accordingly D) ignore the price change E) immediately incorporate the new price into the CPI only if the price has fallen Answer: C Topic: CPI, basket Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

34) The formula for the CPI is A) (Cost of CPI market basket at current period prices ÷ Cost of CPI market basket at next year's prices) × 100. B) (Cost of CPI market basket at current period prices ÷ Cost of CPI market basket at base period prices) × 100. C) (Cost of CPI market basket at base period prices ÷ Cost of CPI market basket at current period prices) × 100. D) (Cost of CPI market basket this year × Cost of CPI market basket at base period prices) ÷ 100. E) (Cost of CPI market basket this year × Cost of CPI market basket at base period prices) × 100. Answer: B Topic: CPI formula Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

35) Each month the CPI is calculated by A) recording the new prices and making no other calculation. B) multiplying the current cost of the CPI market basket by the base period cost and then dividing by 100. C) subtracting the base period cost of the CPI market basket from the current cost and then dividing by 100. D) dividing the current cost of the CPI market basket by the base period cost and then multiplying by 100. E) subtracting the current period cost of the CPI market basket from the base period cost and then multiplying by 100. Answer: D Topic: CPI formula Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

36) The table above gives the CPI for a nation. Based on the table, we can determine that the reference base period is A) 1994. B) 1996. C) 1998-2000. D) 2002. E) More information about when the Consumer Expenditure Survey was undertaken is needed to answer the question. Answer: C Topic: CPI formula Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

37) If the cost of the CPI market basket at current period prices is $1,000 and the cost of the CPI market basket at base period prices is $250, the CPI is A) 4.0. B) 400. C) 250. D) 100. E) 2.50. Answer: B Topic: CPI, base period Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

38) To find the cost of the CPI market basket in the base period prices we have to multiply the A) quantities in the CPI market basket by the base period prices. B) quantities in the CPI market basket by the current period prices. C) current period quantities in the CPI market basket by the base period prices. D) current period quantities in the CPI market basket by the current period prices. E) quantities in the CPI market basket by the base period prices and then multiply by 100. Answer: A Topic: Measuring the CPI Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

39) To find the cost of the CPI market basket in the current period we have to multiply the A) quantities in the CPI market basket by the base period prices. B) quantities in the CPI market basket by the current period prices. C) current period quantities in the CPI market basket by the base period prices. D) current period quantities in the CPI market basket by the current period prices. E) quantities in the CPI market basket by the base period prices and then multiply by 100. Answer: B Topic: Measuring the CPI Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

40) When the cost of the CPI market basket increases from one year to the next, we know that A) on the average, current prices are less than past year prices. B) the quantities of the goods and services contained in the CPI market basket have increased on the average. C) the prices of the goods and services contained in the CPI market basket have increased on the average. D) on the average, current prices are below base year prices. E) either the quantities of the goods and services contained in the CPI market basket have increased on the average and/or the prices of the goods and services contained in the CPI market basket have increased on the average. Answer: C Topic: Measuring the CPI Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

41) If the prices of the goods and services contained in the CPI market basket increase from the base period to the next year, we know that A) the inflation rate is falling. B) the next year's CPI will be above 100. C) the next year's CPI will be below 100. D) the cost of the CPI market basket at next year's prices is lower than the cost of the CPI market basket at base period prices. E) the market basket used by the BLS must be changed next year to reflect consumers' new expenditures. Answer: B Topic: Measuring the CPI Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

42) If the cost of the CPI market basket at current period prices is $275 and the cost of the CPI market basket at base period prices is $350, the CPI is A) 79. B) 100. C) 127. D) 350. E) 275. Answer: A Topic: CPI and inflation rate Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

43) Suppose the CPI for this year is 133.7. This number means that A) on average, goods cost $133.70 each this year. B) prices rose 33.7 percent over the last year. C) prices rose 133.7 percent over the base year. D) prices rose 33.7 percent over the base year. E) prices rose 133.7 percent over the last year. Answer: D Topic: Inflation rate Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

44) Suppose that the cost of the CPI basket of goods and services rises from $137 in 2010, which is the base year, to $159 in 2011. The CPI in 2011 is ________ and the inflation rate from 2010 to 2011 is ________. A) 86; 14 percent B) 86; 22 percent C) 116; 22 percent D) 116; 16 percent E) There is not enough information to answer this question. Answer: C Topic: CPI and inflation rate Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

45) Suppose that last year, the price of strawberries was $2 and the price of milk was $1. This year, the price of milk is $2 and the price of strawberries is $1. Which of the following statements is true? A) The CPI does not change because the change in the two prices is the same. B) The CPI increases because milk is more expensive. C) The CPI decreases because strawberries are cheaper. D) The CPI might increase or decrease depending on the quantities in the CPI market basket. E) The change in the CPI depends how the market basket changed between the two years. Answer: D Topic: Measuring the CPI Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

46) Suppose that the CPI basket contains only 40 heads of cauliflower and 60 bunches of broccoli. If the price of cauliflower goes down by $1 per head and the price of broccoli goes up by $1 per bunch, then A) the CPI does not change. B) the CPI increases. C) the CPI decreases. D) the CPI might increase or decrease depending how the quantities are affected by the price changes. E) There is not enough information to answer this question. Answer: B Topic: Measuring the CPI Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

47) In a small, agricultural nation, consumers buy only steak and potatoes. In 2009, the base year, the typical consumer spent $potatoes on strawberries and $100 on steak. The price of potatoes is $1 and the price of steak is $2 in 2009. In 2009, the price of potatoes is $2 and the price of steak is $1. The CPI for 2010 is A) 80. B) 125. C) 100. D) 110. E) 25 percent. Answer: C Topic: CPI Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

48) The data in the table above shows the consumption by families in a small (poor) economy. The families consume only salt and bread. The reference base period is 2011. The cost of the CPI market basket in 2011 is A) $64.00. B) $3.50. C) $52.00. D) $5.00. E) $100. Answer: C Topic: CPI, basket Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

49) The data in the table above shows the consumption by families in a small (poor) economy. The families consume only salt and bread. The reference base period is 2011. The cost of the CPI market basket in 2010 is A) $5.00. B) $64.00. C) $8.50. D) $52.00. E) unable to be calculated because information is needed about the quantities purchased in 2010. Answer: B Topic: CPI, basket Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

50) The data in the table above shows the consumption by families in a small (poor) economy. The families consume only salt and bread. The reference base period is 2011. The CPI in 2011 is A) 100. B) 94.2. C) 106.2. D) 124. E) 140.5. Answer: A Topic: Measuring the CPI Skill: Level 4: Applying models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

51) The data in the table above shows the consumption by families in a small (poor) economy. The families consume only salt and bread. The reference base period is 2011. The CPI in 2012 is A) 100. B) 118.8 C) 123.1 D) 23.1 E) 18.8 Answer: C Topic: Measuring the CPI Skill: Level 4: Applying models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

52) The data in the table above shows the consumption by families in a small (poor) economy. The families consume only salt and bread. The reference base period is 2011. The inflation rate between 2011 and 2012 is A) 52.5 percent. B) 123.1 percent. C) 23.1 percent. D) 18.8 percent. E) 118.8 percent. Answer: C Topic: Inflation Skill: Level 4: Applying models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

53) Consumers in a country buy only two goods, pens and CDs. The prices and quantities purchased by urban households are in the table above. If 2011 is the reference base year, the cost of the CPI market basket in the base year is A) $3,400. B) $3,408. C) $3,580. D) $3,508. E) $3,500. Answer: A Topic: Measuring the CPI Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

54) Consumers in a country buy only two goods, pens and CDs. The prices and quantities purchased by urban households are in the table above. The reference base year is 2011. If the current year is 2012, the cost of the CPI market basket in 2012 is A) $3,400. B) $3,588. C) $3,580. D) $3,508. E) $3,500. Answer: B Topic: Measuring the CPI Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

55) Consumers in a country buy only two goods, sneakers and manicures. The prices and quantities purchased by urban households are in the table above. The reference base year is 2011. For these data, the CPI for 2012 is A) 145. B) 100. C) 160. D) 10. E) 110. Answer: E Topic: Measuring the CPI Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

56) Consumers in a country buy only two goods, sneakers and manicures. The prices and quantities purchased by urban households are in the table above. The reference base year is 2011. For these data, the CPI for 2011 is A) 3. B) 100. C) 160. D) 110. E) 145. Answer: B Topic: Measuring the CPI Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

57) Consumers in a country buy only two goods, sneakers and manicures. The prices and quantities purchased by urban households are in the table above. The reference base year is 2011. The inflation rate between 2011 and 2012 is A) $15. B) 15.0 percent. C) $10. D) 10.3 percent. E) 9.0 percent. Answer: D Topic: Inflation Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

Item Magazines Movie tickets Pizzas

Quantity (2013) 400 50 100

Price (2013) $5.00 $6.00 $10.00

Quantity (2014) 450 200 120

Price (2014) $4.50 $8.00 $10.50

The data in the table above shows the consumption by families in an economy. The year 2013 is the reference base period. 58) Based on the table above, the cost of the base period market basket in the base period is A) $3,300. B) $21.00. C) $3,250. D) $4,650. E) $4,885. Answer: A Topic: Measuring the CPI Skill: Level 4: Applying models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

59) The information in the above table gives the 2000 base period market basket and prices used to construct the CPI for a small nation. The table also has 2010 prices. What is the value of the CPI for the base period 2000? A) 140 B) 133 C) 100 D) 75 E) 30 Answer: C Topic: Measuring the CPI Skill: Level 4: Applying models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

60) The information in the above table gives the 2000 base period market basket and prices used to construct the CPI for a small nation. The table also has 2010 prices. What is the value of the CPI for 2010? A) 140 B) 133 C) 100 D) 71.4 E) 142 Answer: A Topic: Measuring the CPI Skill: Level 4: Applying models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

Item Magazines Movie tickets Pizzas

Quantity (2013) 400 50 100

Price (2013) $5.00 $6.00 $10.00

Quantity (2014) 450 200 120

Price (2014) $4.50 $8.00 $10.50

The data in the table above shows the consumption by families in an economy. The year 2013 is the reference base period. 61) Based on the table above, the cost of the base period market basket in 2013 is A) $3,300. B) $4,885. C) $4,650. D) $3,885. E) None of the above answers is correct. Answer: A Topic: Measuring the CPI Skill: Level 4: Applying models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

62) Based on the table above, the CPI for 2013 is A) 100. B) 98.5. C) 102.5. D) 5.0%. E) 105.1. Answer: A Topic: Measuring the CPI Skill: Level 4: Applying models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

63) Based on the table above, the CPI for 2014 is A) 98.5. B) 105.1. C) 102.5. D) 5.0 percent. E) 100. Answer: A Topic: Measuring the CPI Skill: Level 4: Applying models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

64) Based on the table above, between 2013 and 2014, the inflation rate in this country was A) -1.5 percent. B) 105.1 percent. C) 2.5 percent. D) 98.5 percent. E) -2.5 percent. Answer: A Topic: Inflation rate Skill: Level 4: Applying models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

65) A country reports the total expenditures on the fixed CPI basket for the past three years. The cost of the CPI basket in 2010 was $23,000, the cost of the CPI basket for the reference base period, 2011, was $23,805, and the cost of the CPI basket in 2012 was $24,500. The CPI for 2010 is A) 96.6. B) 100.0. C) 103.5. D) 106.5. E) 23.0. Answer: A Topic: Measuring the CPI Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

66) A country reports the total expenditures on the fixed CPI basket for the past three years. The cost of the CPI basket in 2010 was $23,000, the cost of the CPI basket for the reference base period, 2011, was $23,805, and the cost of the CPI basket in 2012 was $24,500. The CPI for 2012 is A) 93.9. B) 97.2. C) 102.9. D) 106.5. E) 245.0. Answer: C Topic: Measuring the CPI Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

67) When the CPI rises ________, the inflation rate is ________. A) steadily; zero B) rapidly; high C) slowly; high D) rapidly; low E) rapidly; either high, low, or zero depending on whether production of output is increasing, decreasing, or not changing. Answer: B Topic: CPI and inflation rate Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

68) The inflation rate is the A) percentage change in the composition of the CPI market basket from the base year to the next year. B) percentage change in the CPI from one year to the next year. C) difference between the current period CPI and the base period CPI. D) difference between the base period CPI and the current period CPI. E) difference in the price level from one year to the next multiplied by 100. Answer: B Topic: Inflation Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

69) The inflation rate measures the A) average price of the goods and services consumed by urban consumers. B) percentage change in the CPI from one year to the next year. C) cost of the CPI market basket at current period prices divided by the cost of the CPI market basket at base period prices. D) percentage change in the quantity of goods and services consumed by urban consumers. E) cost of the CPI market basket at base period prices divided by the cost of the CPI market basket at current period prices. Answer: B Topic: Inflation Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

70) Which of the following formulas is used to calculate the inflation rate? A) inflation rate = 100 × B) inflation rate = 100 × C) Inflation rate = 100 × D) Inflation rate = 100 × E) inflation rate = 100 × Answer: C Topic: Inflation Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

71) If the CPI is 231.4 in one year and is 241.2 in the next year, then the inflation rate equals A) (241.2 - 231.4) × 100. B)

× 100.

Answer: B Topic: Inflation Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

72) If the CPI decreases from one year to the next, then the inflation rate is A) positive. B) above 100. C) below 100. D) negative. E) 0. Answer: D Topic: Inflation Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

73) Suppose in year 1 the CPI is 90, in year 2 the CPI is 100, and in year 3 the CPI is 110. Then, inflation is A) 100 percent in year 1. B) 11 percent between years 1 and 2. C) 11 percent between years 2 and 3. D) 10 percent between years 2 and 3. E) Both answers B and D are correct. Answer: B Topic: Inflation Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

74) A country's CPI was 84.5 last year and 100.0 this year. The inflation rate was A) 84.5 percent. B) 18.3 percent. C) 15.5 percent. D) 7.29 percent. E) -18 percent. Answer: B Topic: Inflation Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

75) If the CPI this year is 240 and the CPI in the previous year was 200, what is the annual inflation rate? A) 40.0 percent B) 20.0 percent C) 50 percent D) 16.7 percent. E) -16.7 percent Answer: B Topic: Inflation Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

76) The CPI was 170 last year and is 190 this year. What is the inflation rate between these two years? A) 10.5 percent B) 20 percent C) 11.8 percent D) 18 percent E) 15.0 percent Answer: C Topic: Inflation Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

77) In the current year, the CPI is 122 and during the previous year the CPI was 115. The inflation rate between these years is A) 5.7 percent. B) 6.1 percent. C) -5.7 percent. D) -6.1 percent. E) 1.61 percent. Answer: B Topic: Inflation Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

78) In the current year, the CPI is 160 and during the previous year the CPI was 181. The inflation rate between these years is A) 11.6 percent. B) 13.1 percent. C) -11.6 percent. D) -13.1 percent. E) -013.1 percent. Answer: C Topic: Inflation Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

79) The inflation rate between last year and this year was 14 percent. The CPI was 118 this year. What was the CPI last year? A) 104.0 B) 103.5 C) 104.5 D) 105.0 E) 103.0 Answer: B Topic: Inflation Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

80) If the price index last year was 100 and today it is 167, what is the inflation rate over this period? A) -67 percent B) -6.7 percent C) 33 percent D) 67 percent E) 167 percent Answer: D Topic: Inflation Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

81) If the current period has a CPI of 143, then the amount of inflation since the base period is A) 143 percent. B) 43 percent. C) 57 percent. D) 157 percent. E) unknown without knowing the base period's CPI. Answer: B Topic: Inflation and the price level Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

82) Suppose a report from the Bureau of Labor Statistics states that the CPI for the year 2012 was 152. What is the percentage point increase in the prices of the goods and services since the reference base period? A) 152 percent B) 52 percent C) 100 percent D) 48 percent E) 252 percent Answer: B Topic: Inflation Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

83) If in Switzerland in January, 2009 the CPI was 187.4 and in January, 2010 it was 191.1, then the inflation rate in 2010 was A) 1.9 percent. B) 3.7 percent. C) -1.9 percent. D) unknown without the base period index number. E) unknown without the real prices. Answer: A Topic: Inflation Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

84) The CPI for 2012 was 121, and for 2013 it was 132. What was the inflation rate between 2012 and 2013? A) 9.09 percent B) 11 percent C) 10 percent D) 8.3 percent E) 121.0 percent Answer: A Topic: Inflation Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

85) Looking at the annual inflation rates in the United States from 2000 to 2015, we see that they A) were above 10 percent throughout the period. B) were at or below 5 percent throughout the period and was negative for a year. C) started low, but increased to over 9 percent by the end of the period. D) started out above 10 percent but fell to 5 percent by the end of the period. E) were negative for most of the years during this period. Answer: B Topic: Recent inflation Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Revised AACSB: Reflective thinking

86) In the United States between 1973 and 2015, the inflation rate A) increased every year. B) only decreased during the late 1990s. C) only increased during the late 1970s and 1980. D) peaked during the late 1970s and 1980 and was at its generally lowest in the 1990s and 2000s. E) has been relatively constant at approximately 4 percent to 6 percent per year. Answer: D Topic: Recent inflation Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Revised AACSB: Reflective thinking

87) Looking at the historical values for annual inflation in the United States as measured by the Consumer Price Index, it is clear that inflation was A) higher on average during the 1990s than during the 1970s. B) higher on average during the 2000s than during the 1970s. C) never less than 0 percent at any time during the last 50 years. D) higher on average during the 1970s than during the 1980s. E) was never greater than 10 percent at any time during the last 50 years. Answer: D Topic: Recent inflation Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

88) Since 1305, of the following centuries the inflation rate has been the highest during the A) 17th century. B) 16th century. C) 20th century. D) 14th century. E) 15th century. Answer: C Topic: Eye on the past, 700 years of inflation and deflation Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

89) If we look back at inflation data since 1300, we see that A) during the 20th century we have finally solved the problem of high inflation. B) the Industrial Revolution caused the highest inflation rates. C) the discovery of America caused prices to fall drastically. D) inflation has been highest in the 20th and 21st centuries. E) the most rapid inflation occurred prior to 1600. Answer: D Topic: Eye on the past, 700 years of inflation and deflation Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

90) According to the historical record of inflation since the 1300s, the inflation rate A) became highest in the twentieth century. B) was at its lowest after Columbus arrived to America. C) was at its highest during the Industrial Revolution. D) has always been consistently high. E) was higher in the 1300s than in the 1900s. Answer: A Topic: Eye on the past, 700 years of inflation and deflation Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

91) Since 1300, the inflation rate has been greater than 2 percent per year and reaching its highest peaks A) primarily before 1400. B) primarily between 1400 and 1500. C) primarily between 1500 and 1700. D) primarily between 1700 and 1900. E) primarily after 1900. Answer: E Topic: Eye on the past, 700 years of inflation and deflation Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

92) If a country had a CPI of 105.0 last year and a CPI of 102.0 this year, then A) the average prices of goods and services increased between last year and this year. B) the average prices of goods and services decreased between last year and this year. C) the average quality of goods and services decreased between last year and this year. D) there was an error when calculating the CPI this year. E) the quantity of consumer goods and services produced decreased between last year and this year. Answer: B Topic: CPI Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

93) The period for which the Consumer Price Index is defined to equal 100 is called the A) reference base period. B) base period. C) starting point. D) zero period. E) beginning period. Answer: A Topic: CPI, base period Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

94) Suppose the market basket of consumer goods and services costs $180 using the base period prices, and the same basket of goods and services costs $300 using the current period prices. The CPI for the current year period equals A) 166.7. B) 66.7. C) 160.0. D) 60.0. E) 300.0. Answer: A Topic: CPI formula Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

95) Suppose the CPI last year was 82.3 and this year is 90.9. Based on this information, we can calculate that the inflation rate in 1981 was A) 10.4 percent. B) 8.6 percent. C) 90.9 percent. D) 82.3 percent. E) 9.09 percent. Answer: A Topic: Inflation Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

96) In the United States, the inflation rate since 1999 generally was A) higher than between 1979 to 1981. B) higher than in the 1980s. C) lower than between 1979 to 1981. D) much higher than between 1985 to 1995. E) negative. Answer: C Topic: Recent inflation Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

97) Which item accounts for the second largest share in the CPI basket? A) apparel B) food and beverages C) transportation D) housing E) recreation Answer: C Topic: CPI, basket Skill: Level 1: Definition Section: Checkpoint 16.1 Status: New AACSB: Reflective thinking

98) Which three categories account for the largest share in the CPI basket? A) apparel, recreation, other B) food and beverages, medical care, education C) housing, transportation, food and beverages D) housing, medical care, education E) recreation, apparel, housing Answer: C Topic: CPI, basket Skill: Level 1: Definition Section: Checkpoint 16.1 Status: New AACSB: Reflective thinking

99) If we look back at inflation data since 1300, we see that ________ saw a temporary burst in inflation followed by a period of deflation. A) discovery of America in 1492 B) World War II C) 16th century D) Industrial Revolution E) global financial crisis of 2008-2009 Answer: D Topic: Eye on the past, 700 years of inflation and deflation Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: New AACSB: Reflective thinking

100) Deflation is a situation in which A) the CPI is falling. B) the output growth rate is negative. C) inflation is accompanied by unemployment. D) all of the above E) none of the above Answer: A Topic: Inflation Skill: Level 1: Definition Section: Checkpoint 16.1 Status: New AACSB: Reflective thinking

101) Deflation is a situation in which A) inflation rate is negative. B) the output growth rate is negative. C) unemployment is rising along with inflation. D) all of the above E) none of the above Answer: A Topic: Inflation Skill: Level 1: Definition Section: Checkpoint 16.1 Status: New AACSB: Reflective thinking

16.2 The CPI and Other Price Level Measures 1) If we compare the CPI to a perfect cost of living index, we find that they are A) the same thing. B) different because the cost of living has nothing to do with prices. C) different because the CPI does not measure prices. D) different because the CPI uses a fixed basket and has some measurement difficulties. E) not the same because the CPI has a fixed reference base period. Answer: D Topic: CPI versus cost of living index Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

2) Economists agree that the CPI A) is a near perfect measure of the cost of living. B) has no relation to the cost of living. C) is a possibly biased measure of the cost of living. D) almost always shows the cost of living rising less rapidly than is the case in reality. E) overstates inflation by about 4.1 percentage points a year. Answer: C Topic: CPI versus cost of living index Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

3) When economists speak of the CPI bias, they are referring to A) the tendency for the CPI to overstate price changes. B) the tendency for the CPI to understate price changes. C) the tendency for the CPI to understate inflation. D) errors in measuring the prices used in the CPI. E) the tendency for government officials to impose their values on the data. Answer: A Topic: CPI bias Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

4) Which of the following is NOT a source of bias in the CPI? i. quality change bias ii. new goods bias iii. quantity change bias A) i only B) ii only C) iii only D) i and ii E) ii and iii Answer: C Topic: CPI bias Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

5) Which of the following makes the Consumer Price Index a less accurate measure of the cost of living? i. The monthly price survey conducted to collect information about prices is very unreliable. ii. The existence of a new goods bias in the calculation of the CPI iii. The existence of a quality change bias in the calculation of the CPI A) i only B) ii only C) ii and iii D) i and ii E) i, ii, and iii Answer: C Topic: CPI bias Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

6) Which of the following is a bias in the CPI? i. new goods bias ii. index change bias iii. commodity substitution bias A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: D Topic: CPI bias Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

7) The CPI is biased because it A) takes into account the changes in product quality. B) takes into account the changes in technology. C) does not always take into account the changes in product quality. D) accurately measures the cost of living but not the cost of producing. E) does not include services. Answer: C Topic: CPI bias Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

8) If the CPI is used as a cost of living index, incomes that are adjusted to reflect the changes in the CPI will A) increase by more than the actual change in the cost of living. B) decrease by more than the actual change in the cost of living. C) increase by more than the actual change in quantities. D) decrease by more than the actual change in quantities. E) generally rise by about 2 percent a year because the standard of living generally rises by about 2 percent a year. Answer: A Topic: CPI bias Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

9) The presence of new goods that are of higher quality than the old goods leads the BLS to A) update the market basket every time a new good is available. B) do nothing because at least some people still buy the old goods. C) try to separate price differences from improvements in quality. D) actually understate the cost of living when calculating the CPI. E) immediately update the reference base period used in calculating the CPI. Answer: C Topic: CPI bias, new goods Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

10) When a good gets better from one year to the next, the CPI has a what is called A) new goods bias. B) quality change bias. C) commodity substitution bias. D) outlet substitution bias. E) magnitude of change bias. Answer: B Topic: CPI bias, quality change Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

11) An example of the quality change bias, and not a new goods bias, in the calculation of the CPI is a price increase in A) Coke versus Pepsi. B) DVDs purchased on Craigslist, an online classified website. C) a 2013 GPS unit versus a 2008 GPS unit. D) etexts versus used books. E) pants purchased by a first-time shopper at Aeropostale. Answer: C Topic: CPI bias, quality change Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

12) The quality change bias is most likely to put ________ into the CPI and so ________ the inflation rate. A) a downward bias; understate B) an upward bias; understate C) an upward bias; overstate D) a downward bias; overstate E) a random bias; randomly overstate or understate Answer: C Topic: CPI bias, quality change Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

13) When discussing the CPI, the term "commodity substitution bias" refers to changes in A) prices that lead business to change the items they buy. B) quantities that lead households to change the items they buy. C) prices that lead households to change the items they buy. D) income that lead households to change the items they buy. E) stores so that consumers switch from one store to another. Answer: C Topic: CPI bias, commodity substitution bias Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

14) The commodity substitution bias is most likely to put ________ into the CPI and so ________ the inflation rate. A) a downward bias; understate B) an upward bias; understate C) an upward bias; overstate D) a downward bias; overstate E) a random bias; randomly overstate or understate Answer: C Topic: CPI bias, commodity substitution bias Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

15) The CPI overstates inflation because the average consumer buys A) the same basket of goods every week. B) more of those goods whose relative price has risen. C) less of those goods whose relative price has risen. D) lower quality goods if they have a choice. E) a generally random assortment of goods and services each week because what is purchased depends on what the consumer needs. Answer: C Topic: CPI bias, commodity substitution bias Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

16) In constructing the CPI, the BLS has to deal with commodity substitution bias, which is defined as A) consumers' substitution of discount stores for full service stores to avoid the higher prices in the full service stores. B) consumers' substitution of cheaper goods for goods whose prices increase. C) the bias from quality changes in existing products that cause prices to increase. D) the bias from new goods being introduced that are more expensive than older goods. E) the bias that arises because the BLS changes the CPI market basket each month. Answer: B Topic: CPI bias, commodity substitution bias Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

17) The fact the consumers substitute one good for another when prices change is A) taken into account by the fixed market basket used in calculating the CPI. B) not taken into account by the fixed market basket used in calculating the CPI. C) not important to economists. D) a reason why the CPI is used to calculate inflation rates. E) a reason why the CPI understates the actual change in the cost of living. Answer: B Topic: CPI bias, commodity substitution bias Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

18) When the price of broccoli increase relative to cauliflower, people who buy fresh vegetables respond by buying more cauliflower and fewer broccoli. As a result, the CPI has A) a new goods bias. B) a quality change bias. C) a commodity substitution bias. D) an outlet substitution bias. E) a new price bias. Answer: C Topic: CPI bias, commodity substitution bias Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

19) Suppose the Bureau of Labor Statistics uses Ballpark Franks as the hot dogs used when calculating the consumer price index. During 2012, Oscar Mayer aggressively reduces prices. Consumers respond by purchasing more Oscar Mayer and less Ballpark Franks. The 2012 CPI is likely to A) overstate the average prices paid by consumers. B) overstate the average prices paid by businesses. C) understate the average prices paid by consumers. D) understate the average prices paid by businesses. E) neither understate nor overstate the average prices because some consumers will still buy Ballpark Franks. Answer: A Topic: CPI bias, commodity substitution bias Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

20) An example of the commodity substitution bias in the calculation of the CPI is a price increase in A) turkey when the price of chicken doesn't rise. B) a GPS unit versus a AAA map book. C) a 2014 Toyota Camry versus a 2005 Honda Civic. D) etexts versus used books bought through Craigslist. E) new homes because people's incomes have increased. Answer: A Topic: CPI bias, commodity substitution bias Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

21) Suppose higher prices lead consumers to switch from shopping at Abercrombie & Fitch to shopping at Wal-Mart. If the CPI does not reflect this change, it is referred to as A) a new goods bias. B) a quality change bias. C) an outlet substitution bias. D) a new price bias. E) store bias. Answer: C Topic: CPI bias, outlet substitution bias Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

22) If higher prices cause buyers to shop at discount stores, the CPI has A) a new goods bias. B) a quality change bias. C) a commodity substitution bias. D) an outlet substitution bias. E) a discounted bias. Answer: D Topic: CPI bias, outlet substitution bias Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

23) The outlet substitution bias is most likely to put ________ and so ________ the inflation rate. A) a downward bias into the CPI; understate B) an upward bias into the CPI; understate C) an upward bias into the CPI; overstate D) a downward bias into the CPI; overstate E) no bias into the CPI because it is such a small effect; have no effect on Answer: C Topic: CPI bias, outlet substitution bias Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

24) An example of the outlet substitution bias in the calculation of the CPI is a price increase in A) GPS units versus AAA map books. B) olive oil versus vegetable oil. C) a 2014 Honda Civic relative to a 2004 Honda Civic. D) textbooks bought through the campus bookstore relative to textbooks via Craigslist. E) a trip to Mexico for a couple that had previously taken vacations in Europe. Answer: D Topic: CPI bias, outlet substitution bias Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

25) Which of the following statements about the CPI is (are) correct? i The only significant bias in the CPI is the commodity substitution bias. ii. The CPI probably overstates inflation by 1.1 percentage points a year. iii. As far as the bias in the CPI is concerned, the new goods bias and the outlet substitution biases are irrelevant. A) i only B) ii only C) iii only D) i and iii E) i and ii Answer: B Topic: CPI bias, magnitude Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

26) The bias in the CPI distorts private contracts because A) a future payment that is linked to the CPI is likely to be raised above the true increase in the price level. B) a worker that links her salary to the CPI is likely to be worse off than a worker that doesn't link her salary to the CPI. C) a lender that links the interest payments on the loan to the CPI is likely to be worse off than a lender that does not link the interest payments on the loan to the CPI. D) a future increase in a payment that is linked to the CPI is likely to be less than the true increase in the price level. E) the CPI cannot properly account for what goods and services a typical urban consumer buys. Answer: A Topic: CPI bias, private contracts Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

27) If a private wage contract is agreed upon with a cost of living adjustment such that wage hikes are equal to increases in the CPI, A) the employer benefits because wages will rise less than the change in actual prices. B) workers exactly keep pace with changes in the cost of living. C) workers benefit because the CPI increases more rapidly than does the cost of living. D) the CPI bias means that workers benefit if the price level rises and the employer benefits if the price level falls. E) the CPI bias means that workers benefit if the price level falls and the employer benefits if the price level rises. Answer: C Topic: CPI bias, private contracts Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

28) Mark has a two-year wage contract with his employer. Mark's wage contract specifies a $50,000 salary for the first year, and specifies a salary increase equal to the percentage increase in the CPI during the second year. The percentage increase in the CPI during the year was 4.0 percentage points. If the CPI overstates inflation by 1.0 percentage point, at the end of the first year Mark's salary increased by ________ more than it would have without the upward bias. A) $50 B) $3,000 C) $500 D) $1,500 E) $2,000 Answer: C Topic: CPI bias, private contracts Skill: Level 1: Definition Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking

29) Because a third of government outlays are linked directly to the CPI, as time passes, the CPI bias means that the government's outlays are A) larger than needed to keep pace with the cost of living. B) smaller than needed to keep pace with the cost of living. C) exactly equal to the changes in the cost of living. D) larger than needed to keep pace with the cost of living if the CPI is falling from one year to the next, otherwise the outlays are smaller than needed to keep pace with the cost of living. E) smaller than needed to keep pace with the cost of living if the CPI is falling from one year to the next, otherwise the outlays are larger than needed to keep pace with the cost of living. Answer: A Topic: CPI bias, government outlays Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

30) The bias in the CPI affects government outlays because the overstatement of inflation A) increases fiscal pressure. B) increases government outlays by more than what is justified. C) decreases social welfare benefits. D) decreases government outlays by more than what is justified. E) means that tax receipts are less than what is needed to cover government outlays. Answer: B Topic: CPI bias, government outlays Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

31) Because the CPI overstates inflation, A) when wages are linked to the CPI, workers' wages become too low as time passes. B) as time passes, government payments are increasingly lower than intended. C) as time passes, government outlays are increased by more than necessary to compensate for inflation. D) workers do not receive adequate compensation for price changes. E) most contracts use the GDP deflator to measure inflation. Answer: C Topic: CPI bias, government outlays Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

32) When comparing the annual inflation rate in the United States based on the CPI with the annual inflation rate based on the PCEPI, the data show that the two inflation rates A) move in opposite directions. B) remained constant over the forty year period after 1979. C) steadily increased over the forty year period after 1979. D) move up and down in similar but not identical ways. E) both fluctuate, but the fluctuations have little relationship to each other. Answer: D Topic: PCEPI and the CPI Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Revised AACSB: Reflective thinking

33) If we compare the last 30 years of inflation as recorded by the CPI and the PCEPI, we find that the A) two measures fluctuate together. B) CPI inflation rate has consistently been at least 5 percentage points above the PCEPI inflation rate. C) PCEPI inflation rate has consistently been at least 5 percentage points above the CPI inflation rate. D) two measures give very different inflation rates for most years. E) the CPI inflation rate was always positive, but the PCEPI inflation rate was frequently negative. Answer: A Topic: PCEPI and the CPI Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Revised AACSB: Reflective thinking

34) When we compare the records of the CPI and the PCEPI over time, the A) two are very different in magnitude. B) PCEPI tends to exceed the CPI. C) CPI tends to exceed the PCEPI. D) two measures are identical. E) CPI tends to exceed the PCEPI when inflation is high, and the PCEPI tends to exceed the CPI when inflation is low. Answer: C Topic: PCEPI and the CPI Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Revised AACSB: Reflective thinking

35) When comparing the annual inflation rate in the United States based on the CPI with the annual inflation rate based on the PCEPI, the data show that the A) CPI measure tends to exceed the PCEPI measure. B) PCEPI measure tends to exceed the CPI measure. C) CPI measure and the PCEPI measure are equal. D) CPI measure and PCEPI measure move in opposite directions. E) CPI deflator and PCEPI cannot be compared because they measure prices of different baskets of goods and services. Answer: A Topic: PCEPI and the CPI Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Revised AACSB: Reflective thinking

36) All of the following can create a bias in the CPI EXCEPT the A) new goods bias. B) outlet substitution bias. C) commodity substitution bias. D) GDP price index bias. E) quality change bias. Answer: D Topic: CPI bias Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

37) An example of the new goods bias in the calculation of the CPI is a price increase in A) butter relative to margarine. B) an iPod player relative to a Walkman. C) a 2013 Honda Civic Si Coupe relative to a 2013 Honda Civic Si Sedan. D) textbooks bought through the campus bookstore relative to textbooks bought through Amazon.com. E) a Caribbean cruise for a couple who has never been on a cruise before. Answer: B Topic: CPI bias, new goods Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

38) The price of dishwashers has remained relatively constant while the quality of dishwashers has improved. The CPI A) is adjusted monthly to reflect the improvement in quality. B) is increased monthly to reflect the increased quality of dishwashers. C) has an upward bias if it is not adjusted to take account of the higher quality. D) has an upward bias because it does not reflect the increased production of dishwashers. E) should not take account of any quality changes because it is a price index not a quality index. Answer: C Topic: CPI bias, quality change Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

39) Joe buys chicken and beef. If the price of beef rises and the price of chicken does not change, Joe will buy ________ for the CPI. A) more beef and create a new goods bias B) more chicken and create a commodity substitution bias C) the same quantity of beef and chicken and create a commodity substitution bias D) less chicken and beef and create a quality change bias E) more chicken and eliminate the commodity substitution bias Answer: B Topic: CPI bias, commodity substitution bias Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

40) The CPI bias was estimated by the Congressional Advisory Commission on the Consumer Price Index as A) understating the actual inflation rate by about 5 percentage points a year. B) understating the actual inflation rate by more than 5 percentage points a year. C) overstating the actual inflation rate by about 1 percentage point a year. D) overstating the actual inflation rate by more than 5 percentage points a year. E) understating the actual inflation rate by about 1 percentage point a year. Answer: C Topic: CPI bias, magnitude Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

41) A consequence of the CPI bias is that it A) decreases government outlays. B) increases international trade. C) reduces outlet substitution bias. D) distorts private contracts. E) means that it is impossible to measure the inflation rate. Answer: D Topic: CPI bias, private contracts Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

42) The GDP deflator is a measure of A) taxes and subsidies. B) changes in quantities. C) prices. D) depreciation. E) changes in nominal GDP. Answer: C Topic: GDP price index Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

43) The Boskin Congressional Advisory Commission reported that the CPI overstated inflation by A) 1.1 percentage points a year. B) 1.1 percentage points a month. C) 11 percentage points a year. D) 1.1 percentage points a quarter. E) none of the above. Answer: A Topic: CPI bias, government outlays Skill: Level 1: Definition Section: Checkpoint 7.2 Status: New AACSB: Reflective thinking

44) When we compare the data on the CPI , PCEPI, C-CPI, and core inflation over time, A) C-CPI rises the slowest. B) PCEPI tends to exceed the CPI. C) CPI tends to exceed the PCEPI. D) Core inflation rises the fastest. E) CPI tends to exceed the PCEPI when inflation is high, and the PCEPI tends to exceed the CPI when inflation is low. Answer: C Topic: PCEPI and the CPI Skill: Level 3: Using models Section: Checkpoint 7.2 Status: New AACSB: Analytical thinking

45) Core inflation A) includes current prices of goods and services from the consumption expenditure component of GDP. B) is equal to a chained-CPI. C) excludes prices of food and energy. D) is equal to PCEPI. E) two of the above answers are true Answer: C Topic: Core inflation Skill: Level 1: Definition Section: Checkpoint 7.2 Status: New AACSB: Reflective thinking

46) Using the CPI to calculate the inflation rate ________ the underlying inflation rate and using the core inflation ________ it. A) overstates; also overstates B) understates; also understates C) overstates; understates D) understates; overstates E) none of the above Answer: C Topic: Core inflation Skill: Level 3: Using models Section: Checkpoint 7.2 Status: New AACSB: Analytical thinking

16.3 Nominal and Real Values 1) The difference between nominal and real is A) nominal is measured in current dollars and real is measured in dollars of a given year. B) real is measured in current dollars and nominal is measured in dollars of a given year. C) nominal is a number stated in dollars and real is stated with an index number. D) real is a number stated in dollars and nominal is stated with an index number. E) both nominal and real are measured with index numbers, only the nominal index is greater than 100 and the real index is less than 100. Answer: A Topic: Nominal and real values Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

2) When the nominal price of a good increases over time, the real cost of buying the good A) must increase. B) decreases because income also increases over time. C) does not change because income also increases over time. D) might increase, decrease, or stay the same depending on how much the CPI changed. E) might increase, decrease, or stay the same depending on how much income changed. Answer: D Topic: Money values at different dates Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

3) To compare the price of a loaf of bread produced in 1993 with the price of a loaf produced in this year, you should compare the value of the bread in A) real prices. B) nominal prices. C) real quantity. D) nominal quantity. E) CPI quantity. Answer: A Topic: Money values at different dates Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

4) To compare the real price of gas in 1975 to the real price in 2013, we need to know A) just the two nominal prices in both years. B) the two prices in both years and the inflation rate in 2013. C) the two prices in both years and the CPI in both years. D) the two prices in both years and the two interest rates in both years. E) the two prices in both years and the two inflation rates in both years. Answer: C Topic: Money values at different dates Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

5) Suppose the CPI in 1983 is 100 and the CPI this year is 172. These values for the CPI mean that A) inflation between the two years was 172 percent. B) typically, a good whose price was $100 in 1983 had a price of $172 this year. C) typically, a good whose price was $172 in 1983 had a price of $100 this year. D) typically, a good whose price was $100 in 1983 had a price of $139 this year. E) typically, a good whose price was $100 in 1983 had a price of $58 this year. Answer: B Topic: Money values at different dates Skill: Level 4: Applying models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

6) In February 2010, the price of gasoline in the Florida was $2.629 per gallon and the CPI was 202.4 with a base period of 1982 to 1984. What was the real price of gasoline per gallon in base period dollars? A) $2.629 per gallon B) $1.00 per gallon C) $1.29 per gallon D) $5.32 per gallon E) $1.809 per gallon Answer: C Topic: Money values at different dates Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

7) If the price of a soda was 15 cents in 1970, when the CPI was 50, and 50 cents in 2007 when the CPI was 172, then the real price of A) a soda has risen 567 percent. B) a soda has risen 350 percent. C) the 1970 soda in 2007 dollars is 52 cents. D) the 2007 soda in 1970 dollars is $3.44. E) the soda was 15 cents in 1970 and 50 cents in 2007. Answer: C Topic: Money values at different dates Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

8) If average annual tuition at public 4-year colleges was $1,908 in 1990, when the CPI was 130.7, and $8,655 in 2012 when the CPI was 229.6, then the real cost of annual tuition A) rose by 158 percent during that period. B) rose by 354 percent during that period. C) rose by 75.7 percent during that period. D) fell by 158 percent during that period. E) fell by 354 percent during that period. Answer: A Topic: Money values at different dates Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

9) If the price of a soda was 15 cents in 1970, when the CPI was 50, and 50 cents in 2007, when the CPI was 172, then A) prices on average have increased 567 percent. B) prices on average have increased 244 percent. C) the price of the soda was greater in real value in 1970 than in 2007. D) the price of a soda has increased a greater percentage than the CPI. E) the real price of a soda is the same in 1970 and 2007. Answer: C Topic: Money values at different dates Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

10) In June 1960, the price of gasoline in the Midwest was $0.169 per gallon and the CPI was 29.6 with a base period of 1982 to 1984. What was the real price of gasoline per gallon in base period dollars? A) $0.05 per gallon B) $0.057 per gallon C) $0.169 per gallon D) $0.571 per gallon E) $0.296 per gallon Answer: D Topic: Money values at different dates Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

11) In 2001, Pablo earned $200 per week at his job. In 2011, Pablo earned $240 per week. If the CPI in 2001 was 100 and the CPI in 2011 was 152, then A) Pablo was better off in 2011 because his weekly wage was higher. B) the 2001 wage measured in 2011 dollars is $157.89. C) the 2011 wage measured in 2001 dollars is $157.89. D) the 2001 wage measured in 2011 dollars is $131.58. E) the 2001 wage measured in 2011 dollars is $100. Answer: C Topic: Money values at different dates Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

12) During 1990, a Hershey candy bar cost $.85. By 2007, the same Hershey candy bar cost $1.25. If the CPI was 130.7 in 1990 and 180.5 in 2007, the price of the 1990 Hershey candy bar in 2007 prices is A) greater than the price of the 2007 Hershey candy bar. B) less than the price of the 2007 Hershey candy bar. C) equivalent to the price of the 2007 Hershey candy bar. D) perhaps greater than, perhaps less, or perhaps the same depending on whether the CPI in 2007 has been adjusted to reflect 2007 prices. E) not able to be determined given the information in the question. Answer: B Topic: Money values at different dates Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

13) A ham and cheese sandwich at the local deli costs $4.99 in 2005. If the CPI in 2005 was 90.0 and the CPI today is 121.0, the equivalent price for the ham and cheese sandwich today is A) $4.99. B) $5.54. C) $5.29. D) $6.71. E) $6.04. Answer: D Topic: Money values at different dates Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

14) If prices have increased since the base period, then A) real GDP is smaller than nominal GDP. B) real GDP is larger than nominal GDP. C) real GDP is equal to nominal GDP. D) there is no way to adjust nominal GDP so that it equals real GDP. E) real GDP can no longer be compared to nominal GDP. Answer: A Topic: Nominal GDP and real GDP Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

15) If prices have decreased since the base period, then A) real GDP is smaller than nominal GDP. B) real GDP is larger than nominal GDP. C) real GDP is equal to nominal GDP. D) there is no way to adjust nominal GDP so that it equals real GDP. E) real GDP can no longer be compared to nominal GDP. Answer: B Topic: Nominal GDP and real GDP Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

16) During this year, nominal GDP in Syldavia was $720 billion and real GDP was $720 billion. The GDP price index in Syldavia in this year was A) 0, because nominal GDP equaled real GDP. B) 100. C) 720. D) -1. E) 720 billion. Answer: B Topic: Nominal GDP and real GDP Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

17) Real GDP is $1,400 billion and nominal GDP is $1,800. The GDP price index equals A) 100.0. B) 77.0. C) 128.6. D) 2.86. E) 222.2. Answer: C Topic: Nominal GDP and real GDP Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

18) The GDP price index can be interpreted as A) (nominal GDP ÷ real GDP) × 100. B) (real GDP ÷ nominal GDP) × 100. C) (nominal GDP + real GDP) ÷ 100. D) (nominal GDP - real GDP) ÷ 100. E) (real GDP - nominal GDP) ÷ 100. Answer: A Topic: Nominal GDP and real GDP Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

19) If for a given year nominal GDP is $2,000 billion and real GDP is $1,500 billion, then the GDP price index is A) 133. B) 1.33. C) 100. D) 0.75. E) 750. Answer: A Topic: Nominal GDP and real GDP Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

20) If nominal GDP is $2,000 billion and the GDP price index is 120, then real GDP is ________ billion. A) $2,000 B) $1,667 C) $16.67 D) $240 E) $6 Answer: B Topic: Nominal GDP and real GDP Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

21) If the GDP price index is 125 and nominal GDP is $130 billion, then real GDP equals ________ billion. A) $104.00 B) $162.50 C) $96 D) $1.04 E) $9.6 Answer: A Topic: Nominal GDP and real GDP Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

22) Suppose that in 2012, real GDP is larger than nominal GDP. The GDP price index in 2012 is definitely A) negative. B) larger than the GDP price index in 2012. C) less than the GDP price index in 2012. D) greater than 100. E) less than 100. Answer: E Topic: Nominal GDP and real GDP Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

23) The ________ is the average hourly wage rate measured in current dollars, while the ________ is the average hourly rate measured in the dollars of a given reference base year. A) real interest rate; nominal interest rate B) nominal wage rate; real wage rate C) real wage rate; nominal wage rate D) nominal interest rate; real interest rate E) inflation rate; real wage rate Answer: B Topic: Nominal and real wage rates Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

24) In order to determine if the quantity of goods and services that an hour's work can buy has increased or decreased between 2000 and 2012, one should compare the A) 2000 nominal wage with the 2012 nominal wage. B) 2000 real wage with the 2012 nominal wage. C) 2000 real wage with the 2012 real wage. D) 2000 nominal wage with the 2012 real wage. E) 2000 nominal wage with the 2012 nominal wage and the 2000 real wage with the 2012 real wage because both are important factors determining if workers can buy more or fewer goods with an hour's work. Answer: C Topic: Real wage Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

25) A change in the real wage rate measures the change in the A) price of goods and services that an hour's work can buy. B) nominal wage of an hour's work. C) quantity of goods and services that an hour's work can buy. D) inflation rate affecting the labor market. E) CPI. Answer: C Topic: Real wage Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

26) Suppose that residents of France have seen their real wage rate increase over time. This means that A) French workers' inflation rate has increased over time. B) French workers have increased their average hours of labor over time. C) French workers have received increases in their nominal wage rate over time. D) French workers have increased buying power. E) the CPI must have decreased over time. Answer: D Topic: Real wage Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

27) The change in the quantity of goods and services that an hour's work can buy is measured by the A) nominal wage. B) real wage. C) CPI. D) real interest rate. E) inflation rate. Answer: B Topic: Real wage Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

28) When firms decide how much labor to hire, one of the factors that influences them is the A) nominal wage rate plus the inflation rate. B) nominal wage rate divided by the price level and then multiplied by 100. C) nominal wage rate minus the inflation rate. D) real wage rate plus the inflation rate. E) nominal wage rate divided by the inflation rate and then multiplied by 100. Answer: B Topic: Real wage Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

29) Which of the following formulas would you use to calculate the nominal wage rate? A) nominal wage rate = real wage rate ÷ CPI B) nominal wage rate = real wage rate × CPI C) nominal wage rate = (real wage rate × CPI) ÷ 100 D) nominal wage rate = (real wage rate × CPI) × 100 E) nominal wage rate = (real wage rate ÷ CPI) × 100 Answer: C Topic: Nominal and real wage rates Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

30) Nominal and real wage rates A) must always change by the same amount. B) must always change in opposite directions by the same amount. C) must always change in the same direction but could change by different amounts. D) could change in opposite directions. E) must always change in the same direction, and the nominal wage rate must change more rapidly than the real wage rate. Answer: D Topic: Nominal and real wage rates Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

31) In the United States between 1981 and 2012, the A) nominal wage rate increased more than the real wage rate. B) real wage rate increased more than the nominal wage rate. C) nominal and real wage rates increased the same amount. D) real and the nominal wage rates decreased the same amount. E) nominal wage rate decreased and the real wage rate increased. Answer: A Topic: Nominal and real wage rates Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

32) If there is inflation and we compare the changes in a nominal variable over time versus its real counterpart, such as the nominal wage rate versus the real wage rate, we find that the A) two increase at about the same rate because of inflation. B) real wage rate increases faster because of inflation. C) nominal wage rate increases faster because of inflation. D) two decrease at about the same rate because of inflation. E) two change at a rate that does not depend on the inflation rate. Answer: C Topic: Nominal and real wage rates Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

33) Which of the following statements about the nominal and the real wage rates is correct? A) The nominal wage rate equals the real wage rate divided by the CPI and then multiplied by 100. B) The nominal wage rate is measured in the dollars of a base year. C) The real wage rate is measured in current year dollars. D) The real wage rate indicates how many goods and services can be purchased with an hour's labor. E) The real wage rate equals the nominal wage rate multiplied by the CPI then divided by 100. Answer: D Topic: Nominal and real wage rates Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

34) If the nominal wage is $30 in 2011 and the CPI is 202 in 2011, then the real wage in 1982-1984 dollars A) is $30. B) is $14.85. C) is $1.48. D) is $29.00. E) cannot be calculated without the past year wage rate. Answer: B Topic: Real wage Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

35) In 2008, Cameron began his career with SBC. His starting salary was $32,000. By 2012, his salary increased to $35,000. If the CPI was 100.0 in 2008 and 107.5 in 2012, Cameron's 2012 real income is A) $32,000. B) $32,558. C) $34,400. D) $37,625. E) $35,000. Answer: B Topic: Real wage Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

36) Your starting salary is $35,000 per year. After one year, you are given a raise that increases your nominal salary. Which of the following salaries would you prefer the most? A) a $36,000 salary with a CPI of 103.0 B) a $38,000 salary with a CPI of 104.0 C) a $39,000 salary with a CPI of 109.0 D) a $39,000 salary with a CPI of 110.0 E) a $37,000 salary with a CPI of 106.0 Answer: B Topic: Real wage Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

37) If you are earning $20,000 this year and the CPI is 165, your real income in base year prices is A) $121.21. B) $12,121.21. C) $20,000. D) $16,500. E) $33,000. Answer: B Topic: Real wage Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

38) If your real income in base year prices is $50,000, then if the CPI is 170, what is your nominal income? A) $29,411.76 B) $50,000.00 C) $85,000.00 D) $71,428.57 E) $70,000.00 Answer: C Topic: Real wage Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

39) If your nominal income is $75,000 and your real income in base year prices is $60,000, what is the CPI? A) 100 B) 125 C) 80 D) 250 E) 200 Answer: B Topic: Real wage Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

40) If your nominal income is $80,000 and your real income in base year prices is $71,500, what is the CPI? A) 89 B) 100 C) 112 D) 106 E) 150 Answer: C Topic: Real wage Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

41) Sharisse brags to her mother that her starting salary as a management trainee is $36,000, much higher than her mother's starting salary of $21,000 as a management trainee several years ago. If the CPI the year Sharisse begins work is 181.2 and the CPI the year her mother started work was 109.1, Sharisse is A) wrong. Adjusting for price changes, her salary is less than her mother's salary. B) wrong. Adjusting for quantity changes, her salary is less than her mother's salary. C) correct. Adjusting for price changes, her salary is more than her mother's salary. D) correct. Adjusting for quantity changes, her salary is more than her mother's salary. E) maybe wrong and maybe right. Adjusting for quantity changes, her salary is less than her mother's salary but with the information given we are unable to further adjust for price changes. Answer: C Topic: Money values at different dates Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

42) In 2008, the nominal minimum wage rate was $7.25 an hour and the CPI was 200. The real minimum wage rate in 2008 was A) $3.63 an hour. B) $14.50 an hour. C) $1450 an hour. D) $26.32 an hour. E) $7.25 an hour. Answer: A Topic: Real wage Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

43) In 2012, the nominal wage rate for unionized carpenters was $37.50 and the CPI was 204. Calculate the real wage rate for this group of workers. A) $37.50 B) $47.09 C) $5.44 D) $18.38 E) $1.84 Answer: D Topic: Real wage Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

44) Suppose Mack's wage was $7.00 an hour in 2001 and was $12.00 per hour in 2012. The CPI was 94 in 2001 and 201 in 2012. The 2001 wage in terms of 2012 dollars is A) $14.97. B) $14.07. C) $3.48. D) $13.16. E) $7.00. Answer: A Topic: Real wage Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

45) Your wage this year is $15 per hour and the CPI is 178. Next year you get a raise to $17 and the CPI rises to 185. What has happened? A) Your real wage has increased but by a smaller percentage than your nominal wage. B) Your nominal wage has increased but your real wage has declined. C) Your real wage rate has increased by a larger percentage than your nominal wage. D) Your real and nominal wages have each increased by the same percentage. E) Your nominal wage has increased but your real wage has not changed. Answer: A Topic: Real wage Skill: Level 4: Applying models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

46) If your real income falls during a period of inflation, then your nominal income might have A) increased more rapidly than the price level. B) increased at the same rate as the price level. C) increased more slowly than the price level. D) decreased more slowly than the price level. E) More information is needed to determine if your nominal income increased more slowly, more rapidly, or at the same rate as the price level. Answer: C Topic: Nominal and real variables Skill: Level 4: Applying models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

47) If you get an 8 percent increase in your nominal income, your real income A) definitely increases. B) increases only if the inflation rate is more than 8 percent. C) increases only if the inflation rate is equal to 8 percent. D) increases only if the inflation rate is less than 8 percent. E) increases if the inflation rate is more than or equal to 8 percent. Answer: D Topic: Nominal and real variables Skill: Level 4: Applying models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

48) If we look at the nominal versus real wage rates paid to Presidents over time, we find that A) George Washington was paid a higher real wage rate than Bill Clinton. B) George W. Bush is the highest paid according to real wage rates. C) the real wage rate has steadily increased to $400,000 per year. D) the nominal wage has increased and decreased at different times because of inflation. E) George W. Bush's nominal wage is about equal to the average nominal wage paid all presidents. Answer: A Topic: Eye on the past, real wage rates of U.S. Presidents Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Written and oral communication

49) The percentage return on a loan expressed in terms of goods and services is the A) nominal wage rate. B) real interest rate. C) real wage rate. D) nominal interest rate. E) CPI interest rate. Answer: B Topic: Real interest rate Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

50) The real interest rate equals the A) nominal interest rate - inflation rate. B) nominal interest rate + inflation rate. C) (nominal interest rate ÷ inflation rate). D) inflation rate - nominal interest rate. E) (nominal interest rate + inflation rate) × 100. Answer: A Topic: Real interest rate Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

51) To convert the nominal interest rate to the real interest rate, we A) divide the nominal interest rate by the inflation rate. B) multiply the nominal interest rate by the inflation rate. C) subtract the inflation rate from the nominal interest rate. D) add the inflation rate to the nominal interest rate. E) subtract the nominal interest rate from the inflation rate and then multiply by 100. Answer: C Topic: Real interest rate Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

52) The real interest rate equals the A) nominal interest rate multiplied by 100. B) nominal interest rate divided by 100. C) nominal interest rate minus the inflation rate. D) inflation rate minus the nominal interest rate. E) nominal interest rate divided by the inflation rate and then multiplied by 100. Answer: C Topic: Real interest rate Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

53) If the inflation rate is greater than the nominal interest rate, then the A) real interest rate will be negative. B) real interest rate will be positive. C) inflation rate will increase. D) inflation rate will decrease. E) nominal interest rate will be negative. Answer: A Topic: Real interest rate Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

54) If the nominal interest rate is greater than the real interest rate, A) it is an indication of economic growth. B) inflation must be occurring. C) lenders must lose because they can only make loans using the real interest rate. D) the real interest rate must be negative. E) None of the above answers is correct because it is not possible for the nominal interest rate to exceed the real interest rate. Answer: B Topic: Real interest rate Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

55) The real interest rate is negative if the inflation rate A) exceeds the nominal interest rate. B) exceeds the real interest rate. C) is equal to the nominal interest rate. D) is less than the nominal interest rate. E) equals zero. Answer: A Topic: Real interest rate Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

56) Which of the following is true? A) The real interest rate is always positive. B) The nominal interest rate is usually negative. C) The real interest rate can be negative. D) The real interest rate can never be zero. E) The nominal interest rate is usually less than the real interest rate. Answer: C Topic: Real interest rate Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

57) If the CPI is 170 at the beginning of the year and 181 at the end, and a bank is paying a nominal interest rate of 6 percent, we see that A) the real interest rate is negative. B) the interest nominal rate is negative. C) the real interest rate is positive and is less than 1 percent. D) the real interest rate is positive and is larger than 1 percent. E) the real interest rate is equal to zero. Answer: C Topic: Real interest rate Skill: Level 4: Applying models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

58) If the bank returns $1,060 on the $1,000 deposited for a year during which inflation was 4 percent, the real interest rate is A) 6 percent. B) 10 percent. C) -2 percent. D) 2 percent. E) 16 percent. Answer: D Topic: Real interest rate Skill: Level 4: Applying models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

59) Citicorp charges an 11 percent interest rate on all new car loans. If the inflation rate is 6 percent, Citicorp receives a real interest rate of A) 11 percent. B) 6 percent. C) 1.83 percent. D) 5 percent. E) 0.54 percent. Answer: D Topic: Real interest rate Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

60) Chloe has a $15,000 personal loan at a nominal interest rate of 8 percent. If the inflation rate is 3 percent, what is the real interest rate paid on the loan? A) 8 percent B) 5 percent C) 11 percent D) 3 percent E) 2.67 percent Answer: B Topic: Real interest rate Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

61) Caroline has saved $100,000 for her retirement. She earned 4 percent interest on that money during the year 2013. If the inflation rate was 1 percent in 2013, what was Caroline's real interest rate? A) $4,000 B) 4 percent C) 3 percent D) 1 percent E) 5 percent Answer: C Topic: Real interest rate Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

62) If the real interest rate is 5 percent when the inflation rate is 4 percent, the nominal interest rate is A) 1 percent. B) 9 percent. C) 20 percent. D) .80 percent. E) 1.25 percent. Answer: B Topic: Real interest rate Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

63) If the real interest rate is 7 percent when the nominal interest is 12 rate is percent, the inflation rate is A) -5 percent. B) 5 percent. C) 19 percent. D) 1.7 percent. E) 7 percent. Answer: B Topic: Real interest rate Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

64) If you have a mortgage on your house at 6 percent and the inflation rate when the mortgage was acquired was 3 percent but has since increased and is now 8 percent per year; the current real interest rate is A) 14 percent per year. B) 6 percent per year. C) 0 percent per year. D) -2 percent per year. E) 8 percent per year. Answer: D Topic: Real interest rate Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

65) The table above has information about the CPI, nominal wage rate, and nominal interest rate for the country of Syldavia for the years 2010 to 2012. The reference base year is 2010. The inflation rate in Syldavia from 2010 to 2011 was A) -5.0 percent. B) 5.0 percent. C) 9.5 percent. D) 3.0 percent. E) -9.5 percent. Answer: A Topic: Inflation rate Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

66) The table above has information about the CPI, nominal wage rate, and nominal interest rate for the country of Syldavia for the years 2010 to 2012. The reference base year is 2011. The inflation rate in Syldavia from 2011 to 2012 was A) 8.0 percent. B) 8.4 percent. C) 3.0 percent. D) 4.0 percent. E) 10.3 percent. Answer: B Topic: Inflation rate Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

67) The table above has information about the CPI, nominal wage rate, and nominal interest rate for the country of Syldavia for the years 2010 to 2012. The reference base year is 2010. The real wage rate in Syldavia during 2011 was A) $14.00. B) $15.00. C) $15.79. D) $14.22. E) $14.25. Answer: C Topic: Real wage rate Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

68) The table above has information about the CPI, nominal wage rate, and nominal interest rate for the country of Syldavia for the years 2010 to 2012. The reference base year is 2010. The real interest rate in Syldavia during 2012 was A) 2.8 percent. B) 5.2 percent. C) 9.0 percent. D) 0.6 percent. E) 8.4 percent. Answer: D Topic: Real interest rate Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

69) The CPI was 225 in 2008 and 232.2 in 2009. The nominal interest rate during this period was 1.4 percent. What was the real interest rate during this period? A) 3.2 percent B) 1.8 percent C) 4.6 percent D) -3.2 percent E) -1.8 percent Answer: E Topic: Real interest rate Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

70) If we look at real and nominal interest rates in the United States since 1976, we see that A) the nominal interest rate has always been less than the real interest rate because of inflation. B) the real interest rate has almost always been less than the nominal interest rate because of inflation. C) at times the nominal interest rate has been greater than the real interest rate and at times has been less than it. D) the difference between the nominal and real interest rates has widened during the 1990s because of inflation. E) both the nominal and real interest rates were negative in the highly inflationary 1970s. Answer: B Topic: Nominal and real interest rates Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Revised AACSB: Written and oral communication

71) Looking at real and nominal interest rates in the United States since 1976, we see that the A) nominal interest rate has at times been negative. B) real interest rate has been greater than 10 percent for most years. C) real interest rate has at times been negative. D) real interest rate was above 5 percent during the low inflation of the 1970s. E) real interest is generally greater than the nominal interest rate. Answer: C Topic: Nominal and real interest rates Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Revised AACSB: Written and oral communication

72) In 2011, apples cost $1.49 a pound. Suppose the CPI was 120 in 2011 and 140 in 2012. If there is no change in the real price of an apple in 2012, what is the price of a pound of apples in 2012? A) $2.74 B) $1.69 C) $1.66 D) $1.74 E) $1.28 Answer: D Topic: Money values at different dates Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

73) In 1970 the CPI was 39, and in 2000 it was 172. A local phone call cost $0.10 in 1970. What is the price of this phone call in 2000 dollars? A) $1.42 B) $0.39 C) $1.72 D) $0.44 E) $0.23 Answer: D Topic: Money values at different dates Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

74) Nominal GDP is $12.1 trillion and real GDP is $11.0 trillion. The GDP price index is A) 90.1. B) 121. C) 1.10. D) 91.0. E) 110. Answer: E Topic: GDP price index Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

75) If real GDP is greater than nominal GDP then the GDP price index A) is greater than 100. B) is less than 100. C) is equal to 100. D) is either equal to or greater than 100. E) None of the above answers is correct because we need to choose a new base year. Answer: B Topic: GDP price index Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

76) Nominal GDP was $12.1 trillion and real GDP is $11 trillion. The GDP price index is A) 90.1. B) 121.0. C) 1.10. D) 91.0. E) 110.0. Answer: E Topic: GDP price index Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

77) The nominal wage rate is the A) minimum hourly wage that a company can legally pay a worker. B) average hourly wage rate measured in the dollars of a given reference base year. C) minimum hourly wage rate measured in the dollars of a given reference base year. D) average hourly wage rate measured in current dollars. E) wage rate after inflation has been adjusted out of it. Answer: D Topic: Nominal wage Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

78) The average starting salary for a history major is $29,500. If the CPI was 147.5, the real salary is A) $200.00 an hour. B) $20,000. C) $35,000. D) $43,513. E) $14,750. Answer: B Topic: Real wage Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

79) Since 1981, the A) real wage rate increased steadily. B) nominal wage rate increased and the real wage rate did not change by very much. C) real wage rate increased more than the nominal wage rate. D) nominal wage rate increased at an uneven pace whereas the increase in the real wage rate was steady and constant. E) nominal wage rate and real wage rate both decreased. Answer: B Topic: Nominal and real wage rates Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

80) The real interest rate is equal to the A) nominal interest rate plus the inflation rate. B) nominal interest rate minus the inflation rate. C) nominal interest rate times the inflation rate. D) nominal interest rate divided by the inflation rate. E) inflation rate minus the nominal interest rate. Answer: B Topic: Real interest rate Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

81) You borrow at a nominal interest rate of 10 percent. If the inflation rate is 4 percent, then the real interest rate is A) the $10 in interest you have to pay. B) 16 percent. C) 2.5 percent. D) 6 percent. E) 14 percent. Answer: D Topic: Real interest rate Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

82) In the United States for the last 40 years, the nominal interest rate A) and the real interest rate both decreased in almost every year. B) and the real interest rate were both constant in almost every year. C) was constant in most years and the real interest rate fluctuated. D) exceeded the real interest rate in virtually all the years. E) exceeded the real interest rate in about one half of the years and the real interest rate was greater than the nominal interest rate in the other half of the years. Answer: D Topic: Nominal and real interest rates Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Written and oral communication

83) Between the base period and the next period, prices stay constant. The GDP price index in the next period A) cannot be calculated without knowing how much the quantity changed. B) will equal 0 because there is no change. C) is equal to 100 because there is no change. D) is equal to 1 because there is no change. E) is equal to 50 because there is no change. Answer: C Topic: Nominal GDP and real GDP Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

84) The GDP deflator is A) a measure of the level of production. B) always greater than 100. C) the price level during the base year. D) a measure of the price level. E) equal to nominal GDP during the base year. Answer: D Topic: GDP price index Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

85) The GDP deflator measures A) the price level. B) the quantity level. C) real GDP. D) nominal GDP. E) the quality of the goods and services in GDP. Answer: A Topic: GDP price index Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

86) If the GDP price index is 137, this value means that prices have increased A) 137 percent in the last year. B) 37 percent in the last year. C) 37 percent since the base year. D) 137 percent since the base year. E) 63 percent since the base year. Answer: C Topic: GDP price index Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

87) For the purpose of measuring the cost of living for consumers, one reason the GDP price index is NOT a good substitute for the CPI is because the GDP price index A) compares a current year basket of goods with a base year basket of goods. B) compares current year's prices with base year's prices. C) includes the prices of exported goods, which are not consumed in the United States. D) and the CPI move in the same direction over time. E) has a larger bias than does the CPI. Answer: C Topic: GDP price index and the CPI Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

88) If Caterpillar Inc. raises the price of earth-moving equipment that it manufactures in Illinois, then the CPI will ________ and the GDP deflator will ________. A) increase; increase B) increase; not change C) not change; increase D) not change; not change E) increase; increase by less than the CPI Answer: C Topic: GDP price index and the CPI Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

89) If the price of used cars rises, then the CPI will ________ and the GDP deflator will ________. A) increase; increase B) increase; not change C) not change; increase D) not change; not change E) increase; increase by more than the CPI Answer: B Topic: GDP price index and the CPI Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

90) If the price of rocket fuel imported from Russia and used by NASA suddenly increases, then the U.S. CPI will ________ and the U.S. GDP deflator will ________. A) increase; increase B) increase; not change C) not change; increase D) not change; not change E) increase; increase by more than the CPI Answer: D Topic: GDP price index and the CPI Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

91) The fact that the CPI is a biased measure of the inflation rate means government outlays will A) increase at a faster rate than the actual inflation rate. B) increase at the same rate as the actual inflation rate. C) increase at a slower rate than the actual inflation rate. D) sometimes increase faster and sometimes increase slower than the actual inflation rate depending on whether the actual inflation rate exceeds 1.1 percent per year or is less than 1.1 percent per year. E) None of the above because the bias in inflation measured using the CPI has nothing to do with government outlays. Answer: A Topic: CPI bias, government outlays Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

16.4 Chapter Figures

1) The trends displayed in the table can best be explained by A) the nominal wage rate has increased at a rate about equal to the inflation rate. B) the real wage rate has increased at a rate about equal to the inflation rate. C) service industries have increased as a proportion of the economy and they tend to have higher nominal wage rates. D) the inflation rate has been rising over the time period. E) None of the above can explain the trends in the figure. Answer: A Topic: Real wage rate Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

16.5 Integrative Questions 1) In the 1970s, a period of a high rate of inflation, a news magazine article listed people who were losing from inflation because their real purchasing power was falling. Those who lost the most were university professors. Which of the following explains this? A) The marginal benefit of their work was falling. B) Their wage rates did not increase as much as the CPI. C) Their wage rates increased more rapidly than the CPI. D) The professors suffered from the CPI bias. E) The professors' market basket was different than the market basket used to calculate the CPI. Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking

16.6 Essay: The Consumer Price Index 1) What are the three stages of constructing the CPI? Answer: The first stage is to select the CPI market basket. The market 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 market 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 market basket using current-period prices divided by the cost of the market basket in the reference base period. Topic: CPI Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

2) "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 market basket are collected monthly so that the CPI can be computed monthly. Topic: CPI, construction Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

3) If you have the cost of the CPI market basket at current prices and the cost of the CPI market basket at base period prices, how do you calculate the CPI? Answer: CPI =

× 100.

Topic: CPI, construction Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

4) 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 hence can be used to calculate the inflation rate. The inflation rate is equal to: Inflation rate =

× 100.

Topic: Inflation Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

5) 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 market 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: Inflation Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

6) If the base year CPI market basket costs $250 and next year the CPI market basket costs $275, what is next year's CPI? Answer: The CPI equals 100 × ($275/$250) = 110. Topic: Measuring the CPI Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

7) The table above gives the purchases of an average consumer in a small economy. (These consumers purchase only loaves of bread and jugs of soda.) Suppose 2010 is the reference base period. a. What quantities are in the CPI market basket? b. What is the cost of the CPI market basket using 2010 prices? c. What is the cost of the CPI market basket using 2011 prices? d. What is the CPI in 2011? Answer: a. The quantities in the CPI market basket are the 2010 quantities because 2010 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 2010 prices is (20 loaves × $3) + (20 jugs × $2) = $100. c. The cost of the CPI basket using 2011 prices is (20 loaves × $4) + (20 jugs × $1.50) = $110. Note that the quantities used in this calculation are the quantities in the CPI market basket. d. The CPI in 2011 equals 100 multiplied by the cost of the CPI market basket at 2011 prices divided by the cost of the CPI basket at 2010 (base period) prices. The CPI equals . Topic: Measuring the CPI Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

8) The table above gives the purchases of a typical consumer in a country comprised of one large city. These consumers purchase only restaurant meals and parking. The year 2010 is the reference base period. a. Find the total cost of the CPI market basket for 2010 and 2011. b. What is the CPI in 2010 and in 2011? c. What is the inflation rate between 2010 and 2011? Answer: a. The total cost of the CPI market basket in 2010 equals (100 meals × $10) + (50 parking × $100) = $6,000. The total cost of the CPI market basket in 2011 equals (100 meals × $12) + (50 parking × $97.50) = $6,075. The quantities are the same in 2010 and 2011. If the quantities differed, the 2010 quantities would be used because 2010 is the base year. b. The CPI in 2010 is 100 because 2010 is the base period. (Alternatively, the CPI in 2010 equals ($6,000)/$6,000) × 100 = 100.) The CPI in 2011 equals ($6075)/($6,000) × 100 = 101.25. c. The inflation rate between 2010 and 2011 equals (101.25 - 100)/(100) × 100 = 1.25 percent. Topic: Measuring the CPI Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

9) The table above gives the CPI market basket for 2010 and 2011. Suppose that 2010 is the reference base period. a. What is the cost of the CPI market basket in 2010? b. What is the cost of the CPI market basket in 2011? c. What is the CPI for 2010? d. What is the CPI for 2011? Answer: a. The cost of the CPI market basket in 2010 is $1,520.00. b. The cost of the CPI market basket in 2011 is $1,712.50. c. The CPI for 2010 is 100 because 2010 is the base period. d. The CPI for 2011 equals ($1,712.50)/($1,520.00) × 100 = 112.66. Topic: Measuring the CPI Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

10) 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 Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

11) Last year the CPI was 177.1 and this year the CPI was 180.9. What is the inflation rate between these two years? Answer: The inflation rate equals 100 × (180.9 - 177.1)/(177.1) = 2.1 percent. Topic: Inflation Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

12) 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 Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

16.7 Essay: The CPI and Other Price Level Measures 1) Is the CPI a biased measure of the inflation rate? Explain your answer. Answer: There are 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 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: CPI bias, sources Skill: Level 1: Definition Section: Checkpoint 16.2 Status: Old AACSB: Written and oral communication

2) "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: CPI bias, commodity substitution bias Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Written and oral communication

3) 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 the price of Coke rises 20 percent 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 market basket of goods and services. So, if the market basket contains, say, 10 bottles of Coke and 8 bottles of Pepsi, the market 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: CPI bias, commodity substitution bias Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Written and oral communication

4) 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: CPI bias, distortions Skill: Level 1: Definition Section: Checkpoint 16.2 Status: Old AACSB: Written and oral communication

5) "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: CPI bias, distortion of private contracts Skill: Level 1: Definition Section: Checkpoint 16.2 Status: Old AACSB: Written and oral communication

6) What, if any, is the impact of the CPI bias on government spending and taxes? 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. Additionally, taxes revenue is linked to the CPI because the CPI is used to adjust the income levels at which higher tax rates apply. Because the CPI overstates the actual inflation rate, the income levels are adjusted so they are higher than is appropriate. As a result, the government's tax revenue is lower than otherwise. Topic: CPI bias, government outlays Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Written and oral communication

16.8 Essay: Nominal and Real Values 1) Explain the difference between a nominal value and a real value. Answer: A nominal value is the actual price that is paid or the actual wage received. If today you pay $1 for a can of Pepsi, this amount is a nominal value. A real value is adjusted for changes in the price level. To compare prices or wages across years, the nominal values need to be converted to real values. In other words, you need to compare values in the same dollars. This conversion is necessary because a dollar today is not worth the same as a dollar 20 years ago. Topic: Nominal and real values Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Written and oral communication

2) When the nominal price of a good increases over time, must its real price also increase? Answer: No, even though the nominal price of a good increases, its real price might decrease. For instance, the nominal price of motorcycles has increased between 1970 and 2010, but their real price has decreased because the CPI increased even more rapidly. Topic: Nominal and real values Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Written and oral communication

3) What is the difference between nominal variables and real variables? Discuss the calculations undertaken to determine the real wage rate and the real interest rate. Explain why the real wage rate and real interest rate are real variables. Answer: Nominal variables are measured using current dollars; real variables are measured using dollars of a given base year. More generally, nominal variables are in terms of current dollars whereas real variables are in terms of the quantity of goods and services that can be purchased. The real wage rate equals the nominal wage rate divided by the CPI. The real interest rate equals the nominal interest rate minus the inflation rate. The real wage rate is a real variable because it provides the purchasing power of an hour's labor. The real interest rate is a real variable because it provides the purchasing power gained as interest on a loan. Topic: Nominal and real values Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Written and oral communication

4) In 1995, the CPI was 152.5 and the price of an economics textbook was $70.00 and a music CD was $16.00. If the CPI was 172.3 in 2011, what were the prices of the economics textbook and the music CD in 2011 dollars? Answer: To adjust the two prices, the ratio of the CPI in 2011 to the CPI in 1995 is needed. This ratio is (172.3)/(152.5) = 1.13. Then multiply the 1995 prices by this ratio to convert the prices to 2011 dollars. This yields a 2011 dollar price for the textbook of ($70.00 × 1.13) = $79.10 and a 2011 dollar price for the CD of ($16.00 × 1.13) = $18.08. Topic: Money values at different dates Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

5) In 1979, the price of gasoline was $1.389 per gallon and the CPI was 72.6. In 2003, the price of gasoline was $1.589 per gallon and the CPI was 182.9. Find the real price of gasoline in 1979 and 2003 in terms of base period dollars. Answer: To adjust the price in 1979, the ratio of the CPI in the base period to the CPI in 1979 is needed. The base period CPI is 100, so this ratio is (100)/(72.6) = 1.38. Then multiply the 1979 price by this ratio to convert the price to base period dollars, which yields a base period price for the gallon of gasoline of ($1.389 per gallon × 1.38) = $1.92 per gallon. To adjust the price in 2003, a similar procedure is followed. The ratio of the CPI in the base period to the CPI in 2003 is (100)/(182.9) = 0.55. Then multiply the 2003 price by this ratio to covert the price to base period dollars, which yields a base period price for the gallon of gasoline of ($1.589 per gallon × 0.55) = $0.87 per gallon. Topic: Money values at different dates Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

6) Scott worked in a large foreign country. He retired in 2008 and his pension income is fixed at $1,500 per month. The table above gives the CPI in this country. What is the real monthly value of his pension in the years between 2008 and 2011? Answer: To calculate the real value of the pension, divide the $1,500 pension by the CPI and then multiply by 100. This calculation gives the real values as: 2008, $1,500.00; 2009, $1,463.41; 2010, $1,415.09; 2011: $1,351.52. Topic: Money values at different dates Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

7) For each of the following values of nominal GDP and real GDP, calculate the GDP price index. 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 price index equals ($600 ÷ $800) × 100, which is 75. b. The GDP price index equals ($900 ÷ $900) × 100, which is 100. c. The GDP price index equals ($1,200 ÷ $1,000) × 100, which is 120. Topic: Nominal GDP and real GDP Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

8) If nominal GDP is $230 for a period and real GDP is $200 for the same period, what is the GDP price index for this period? Answer: The GDP price index equals 115, or (100) × ($230 ÷ $200). Topic: Nominal GDP and real GDP Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

9) The table above has real and nominal GDP for two years for a foreign country. a. What does the GDP price index equal in 2010? What does the value of the GDP price index tell you about 2010? b. What does the GDP price index equal in 2011? Answer: a. The GDP price index equals (100) × (nominal GDP ÷ real GDP). In 2010, the GDP price index equals (100) × ($3,300 trillion ÷ $3,300 trillion) = 100. Because the GDP price index equals 100, we can determine that 2010 is a base year. b. In 2011, the GDP price index equals (100) × ($4,200 ÷ $3,600) = 116.67. Topic: Nominal GDP and real GDP Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

10) Explain how the nominal wage rate is converted into the real wage rate. Explain why this process of conversion changes the nominal wage rate into the real wage rate. Answer: The real wage rate equals the nominal wage rate divided by the CPI. The nominal wage rate equals the dollars that are paid for an hour's labor. The CPI is a measure of the prices of the goods and services that the typical consumer purchases. Hence dividing the number of dollars for an hour's labor by the prices for the goods and services purchased gives, as its result, the number of goods and services that can be purchased by the hour's labor. Topic: Nominal and real wage rates Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Written and oral communication

11) Define the nominal wage rate and the real wage rate. Can the nominal wage rate increase faster than the real wage rate? Answer: The nominal wage rate is the wage rate measured in current dollars and the real wage rate is the wage rate measured in constant dollars. More generally, the nominal wage rate is the number of dollars received for an hour's work and the real wage rate is the number of goods and services that can be purchased with an hour's work. The nominal wage rate increases faster than the real wage rate when prices are increasing, that is, when inflation occurs. Topic: Nominal and real wage rates Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Written and oral communication

12) Suppose the base reference period is 1982-1984. If your nominal wage rate is $8.00 per hour when the CPI is 180, what is your real wage rate in 1982-1984 dollars? Answer: The real wage rate equals 100 times the nominal wage rate divided by the CPI. Hence the real wage rate equals 100 × ($8.00)/(180) = $4.44. Topic: Real wage rate Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

13) Define the nominal interest rate and the real interest rate. Discuss the relationship between the nominal interest rate and the real interest rate. Answer: The nominal interest rate is the percentage return on a loan expressed in dollars. The real interest rate is the percentage return on a loan expressed in purchasing power. In other words, the nominal interest rate is the number of dollars received in interest for a loan and the real interest rate is the goods and services the interest can buy. The real interest rate equals the nominal interest rate minus the inflation rate. Topic: Nominal and real interest rates Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Written and oral communication

14) During periods when the inflation rate is positive, how does the real interest rate compare to the nominal interest rate? Answer: The real interest rate equals the nominal interest rate minus the inflation rate or, by rearranging, the nominal interest rate equals the real interest rate plus the inflation rate. This latter specification shows that when the inflation rate is positive, the nominal interest rate is greater than the real interest rate. Topic: Nominal and real interest rates Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Written and oral communication

15) "The real interest rate is found by dividing the nominal interest rate by the CPI." Is this statement true or false? Answer: The statement is false. The real interest rate equals the nominal interest rate minus the inflation rate, not divided by it. Topic: Nominal and real interest rates Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

16) Explain how the real interest rate could be negative and how this situation would benefit the borrower. Answer: When people borrow money, they pay a nominal interest rate to the lender. Inflation decreases the real buying power of the payments made to repay the loan. If the inflation rate is greater than the nominal interest rate, then the real interest rate is negative. In this case, the lender actually loses by lending money to the borrower because the quantity of goods and services the lender can buy with the proceeds of the loan has actually decreased. Topic: Real interest rate Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Written and oral communication

17) In the late 1970s, the inflation rate was over 10 percent per year. Many home mortgage lending institutions had mortgages outstanding that had been made in the 1960s at nominal interest rates of around 5 percent per year. Many of these lending institutions failed. What can explain the high failure rate of lenders in the late 1970s? Answer: The real interest rate the lenders were earning was 5 percent per year minus 10 percent per year inflation, making the real interest rate significantly negative, -5 percent per year. With the negative real interest rate, these financial institutions were incurring losses and eventually many were forced into bankruptcy. Topic: Real interest rate Skill: Level 4: Applying models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

18) If the nominal interest rate equals 10 percent and the inflation rate equals 6 percent, what does the real interest rate equal? Answer: The real interest rate equals the nominal interest rate minus the inflation rate, or in this case, 10 percent minus 6 percent, which equals 4 percent. Topic: Real interest rate Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

Essential Foundations of Economics, 8e (Bade) Chapter 17 Potential GDP and Economic Growth 17.1 Potential GDP 1) The Classical macroeconomic model proposes that A) government intervention is required to help the economy reach its potential. B) real GDP equals potential GDP as long as inflation equals zero. C) changes in the quantity of money are critical in driving economic growth. D) markets work efficiently to produce the best macroeconomic outcomes. E) socialism produces the most efficient economic outcomes for a society. Answer: D Topic: Macroeconomic models Skill: Level 4: Applying models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

2) The Keynesian macroeconomic model states that A) the economy is inherently unstable and government intervention is required to maintain continued economic growth. B) markets work efficiently to produce the best macroeconomic outcomes. C) fluctuations in the quantity of money are responsible for most economic recessions. D) changes in technology generate business cycles. E) the economy is fairly stable. Answer: A Topic: Macroeconomic models Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

3) According the Keynesian macroeconomic model, which of the following was responsible for starting the Great Depression? A) too little private spending B) too little government spending C) high taxes D) decreases in the quantity of money E) decreases in technology Answer: A Topic: Macroeconomic models Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

4) Which of the following ideas reflect the Monetarist macroeconomic model? i. The Monetarist model supports the Classical model, in general. ii. Decreases in the growth rate of the quantity of money trigger recessions. iii. Government intervention is an appropriate tool to steady the economy. A) i and ii B) i only C) i, ii and iii D) ii and iii E) i and iii Answer: A Topic: Macroeconomic models Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

5) The Monetarist model expands the Keynesian model by proposing that A) decreases in the quantity of money lead to higher interest rates. B) the government should lower taxes promote economic growth. C) decreases in tax rates generate higher consumption. D) decreases in the growth rate of the quantity of money trigger expansions by controlling inflation. E) markets should be left alone to determine the optimal outcome. Answer: A Topic: Macroeconomic models Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

6) The Lucas Wedge shows A) the negative impact a slowdown in real GDP growth has on potential GDP. B) the increased impact of government spending on real GDP. C) the negative impact inflation has on consumer spending. D) the positive impact lower taxes have on real GDP. E) whether a country needs to slow its real GDP growth rate. Answer: A Topic: Eye on the U.S. economy Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Written and oral communication

7) The Lucas Wedge is estimated to A) total over $509,000 per person as a result of the slowdown in the growth rate of real GDP. B) have reached about $13,000 per person in the last year. C) be about 2 percent of real GDP per year. D) be negative due to the severe recession in 2008-2009. E) be positive in some years and negative in others. Answer: A Topic: Eye on the U.S. economy Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Revised AACSB: Written and oral communication

8) Which of the following would have the biggest payoff? A) restoring real GDP growth to its 1960s growth rate B) eliminating the Okun Gap C) increasing the Okun Gap D) making the Okun Gap equal the Lucas Wedge E) increasing the Lucas Wedge Answer: A Topic: Eye on the U.S. economy Skill: Level 4: Applying models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

9) The level of real GDP the economy produces at full employment is called A) sustainable GDP. B) nominal GDP. C) potential GDP. D) maximum GDP. E) Lucas GDP. Answer: C Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

10) The level of real GDP the economy produces at full employment is A) nominal GDP. B) potential GDP. C) never reached in reality. D) called the Lucas level. E) real GDP. Answer: B Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

11) Suppose that Australia has fully employed all of its resources. This situation means that Australia A) is operating at its potential GDP. B) is growing at a faster rate than the United States. C) has a negative Okun Gap. D) has a positive Lucas Wedge. E) is experiencing zero unemployment. Answer: A Topic: Potential GDP Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

12) If the economy is fully employed, which of the following is true? A) The price level equals 100. B) Real and nominal GDP are equal. C) Real and potential GDP are equal. D) The unemployment rate is zero. E) Real GDP cannot increase. Answer: C Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

13) Potential GDP is the level of A) real GDP that the economy would produce if it was at full employment. B) nominal GDP that the economy would produce if it was at full employment. C) real GDP that the economy would produce if there was no inflation. D) nominal GDP that the economy would produce if there was no inflation. E) real GDP that the economy would produce if there was no unemployment. Answer: A Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

14) Potential GDP is A) equal to the maximum amount of goods and services that can be produced at any given time. B) another name for real GDP. C) the level of output produced when the economy is fully employed. D) a measure of the short term fluctuations in real GDP. E) another name for nominal GDP. Answer: C Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

15) Potential GDP A) is the same as real GDP. B) is the same as nominal GDP. C) is another name for the Lucas Wedge. D) is the level of output produced when the economy is fully employed. E) shows that the Okun Gap vastly exceeds the Lucas Wedge. Answer: D Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

16) If New Zealand is operating at potential GDP, which of the following is true? i. New Zealand only has frictional and structural unemployment. ii. There is no inflation in New Zealand. iii. New Zealand has positive net exports. A) i, ii and iii B) i only C) i and ii D) i and iii E) ii only Answer: B Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

17) The idea that potential GDP is the sustainable upper limit of production means that A) real GDP may be temporarily larger than potential GDP, but not permanently. B) the economy is operating environmentally efficiently. C) real GDP may be temporarily less than potential GDP. D) inflation must always occur in a growing economy. E) unemployment can only temporarily be zero in a healthy economy. Answer: A Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

18) Suppose an economist stated that Brazil had achieved its potential GDP 2013. This would imply that at this level of real GDP, Brazil experienced A) peak in its business cycle in 2013. B) unemployment equal to zero. C) inflation equal to zero. D) full employment. E) a negative Okun Gap. Answer: D Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

19) Suppose Germany's economy is experiencing full employment. This means that, in Germany, A) the unemployment rate is equal to zero. B) real GDP is equal to potential GDP. C) real GDP is greater than potential GDP. D) potential GDP is greater than real GDP. E) real GDP equals nominal GDP. Answer: B Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

20) At full employment, actual ________ equals ________. A) nominal GDP; potential GDP B) real GDP; potential GDP C) real GDP; nominal GDP D) potential GDP; nominal GDP E) unemployment; zero Answer: B Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

21) Which of the following is true? A) Real GDP fluctuates around potential GDP. B) Potential GDP fluctuates around nominal GDP. C) Nominal GDP fluctuates around real GDP. D) Real GDP never equals potential GDP. E) The Okun Gaps are much larger than the Lucas Wedge. Answer: A Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

22) Over the business cycle, real GDP fluctuates around A) the business cycle trough. B) the business cycle peak. C) nominal GDP. D) potential GDP. E) the Lucas Wedge. Answer: D Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

23) Which of the following statement or statements are correct about potential GDP? i. Actual real GDP equals potential GDP when the economy is at full employment. ii. Real GDP can be less than potential GDP. iii. When real GDP equals potential GDP, it also equals nominal GDP. A) i only B) ii only C) ii and iii D) i and ii E) i, ii, and iii Answer: D Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

24) Choose which statement is most correct. A) Real GDP can never exceed potential GDP. B) Real GDP must always equal potential GDP. C) At times, real GDP can exceed potential GDP. D) Nominal GDP can never exceed potential GDP. E) Nominal GDP must always equal potential GDP. Answer: C Topic: Above full-employment equilibrium Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

25) The amount of real GDP produced at any one time depends on i. a fixed amount of capital. ii. a fixed level of technology. iii. decisions people make about leisure versus working. A) ii only B) ii and iii C) i and ii D) i only E) i, ii and iii Answer: E Topic: Production function Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

26) The sustainable upper limit of real GDP is a level of GDP that is A) greater than potential GDP, but by how much greater is unknown and controversial. B) less than potential GDP, but by how much less is unknown and controversial. C) potential GDP. D) determined only by what is the full employment equilibrium in the labor market. E) None of the above answers is correct because there is no sustainable upper limit to real GDP because real GDP can always be increased. Answer: C Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

27) As an economic expansion approaches its peak, it is very likely that real GDP will A) exceed nominal GDP. B) exceed potential GDP. C) equal nominal GDP but not potential GDP. D) be less than potential GDP. E) equal nominal GDP and equal potential GDP. Answer: B Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

28) During a business cycle recession, it is very likely that real GDP will A) exceed nominal GDP. B) be less than potential GDP. C) equal nominal GDP but not equal potential GDP. D) equal nominal GDP and equal potential GDP. E) be greater than potential GDP. Answer: B Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

29) A country reports that its actual real GDP is greater than its potential GDP. It must be that A) an error was made when calculating actual real GDP. B) the price level is increasing. C) more workers decided to quit work in order to enjoy leisure time. D) the excess by which real GDP exceeds potential GDP is only temporary, and eventually real GDP will decrease to be equal to potential GDP. E) None of the above answers is correct because it is impossible for a country's real GDP to exceed its potential GDP. Answer: D Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

30) A country's potential GDP is determined, in part, by A) the equilibrium price level. B) demand and supply in the labor market. C) the Lucas Wedge. D) actual real GDP. E) the Okun Gap. Answer: B Topic: Production function and labor market basics Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

31) To determine GDP from the production function, we need to know A) the quantity of labor employed. B) the quantity of labor available for work. C) the unemployment rate. D) the quantity of labor supplied by firms. E) the real wage rate. Answer: A Topic: Production function and labor market basics Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

32) At any given time, which factor of production is NOT fixed? A) labor B) technology C) entrepreneurship D) land E) money Answer: A Topic: Production function Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

33) The production function is a relationship between the amount of labor employed and A) the maximum quantity of real GDP that can be produced. B) the maximum quantity of nominal GDP that can be produced. C) the wage rate paid to the workers. D) all other resources at different levels of employment. E) the amount of labor workers supply. Answer: A Topic: Production function Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

34) The production function describes the relationship between A) the real wage and the quantity of labor supplied. B) real GDP and the quantity of labor employed. C) real and potential GDP. D) real and nominal GDP. E) potential GDP and the real wage rate. Answer: B Topic: Production function Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

35) The ________ describes the relationship between the amount of labor employed and real GDP. A) production function B) production possibilities frontier C) Lucas Wedge D) inflation rate E) Okun Gap Answer: A Topic: Production function Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

36) The production function shows that potential GDP increases when the A) price level rises. B) price level falls. C) inflation rate falls. D) quantity of labor employed increases. E) the wage rate falls. Answer: D Topic: Production function Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

37) The production function displays A) increasing returns. B) real returns. C) diminishing returns. D) average returns. E) normal returns. Answer: C Topic: Diminishing returns Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

38) Diminishing returns means that A) each additional unit of labor produces successively less real GDP. B) hiring more labor results in less real GDP. C) each extra unit of real GDP produced requires less labor. D) each additional unit of labor produces successively more real GDP. E) hiring more labor must lower the real wage rate. Answer: A Topic: Diminishing returns Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

39) The idea of "diminishing returns" means that real GDP ________ as the quantity of labor increases. A) increases at a slower rate B) decreases at a slower rate C) increases at a faster rate D) decreases at a faster rate E) does not change Answer: A Topic: Diminishing returns Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

40) According to the production function, as the quantity of labor employed increases, real GDP increases A) at an increasing rate. B) at a decreasing rate. C) at a constant rate. D) and then eventually decreases. E) until it reaches potential GDP, and then it no longer changes. Answer: B Topic: Diminishing returns Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

41) As additional units of labor hours are employed, holding all other factors constant, along the production function, A) real GDP increases at an increasing rate. B) nominal GDP decreases at an increasing rate. C) real GDP increases at a decreasing rate. D) real GDP increase at a constant rate. E) real GDP initially decreases and then starts to increase. Answer: C Topic: Diminishing returns Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

42) The idea that the production function exhibits ________ implies that ________. A) diminishing returns; the Lucas Wedge increases at output increases B) diminishing returns; each additional unit of labor employed generates an ever-decreasing amount of real GDP C) increasing returns; potential GDP is always increasing D) increasing returns; output should increase steadily as technology grows E) constant returns; each additional unit of labor employed generates an increasing amount of real GDP Answer: B Topic: Diminishing returns Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

43) As the quantity of labor employed increases, the production functions exhibits a A) positive, linear relationship. B) positive relationship, with each additional unit of labor producing less additional real GDP. C) positive relationship, with each additional unit of labor producing more additional real GDP. D) negative, linear relationship. E) U-shaped curve. Answer: B Topic: Diminishing returns Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

44) Diminishing returns along a production function means that each additional hour of labor employed A) produces a successively smaller additional amount of real GDP. B) produces a successively larger additional amount of real GDP. C) produces a constant additional amount of real GDP. D) does not produce any additional real GDP. E) forces the real wage rate to rise. Answer: A Topic: Diminishing returns Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

45) The production function shows that as employment increases, real GDP A) increases at an increasing rate. B) increases at a decreasing rate. C) increases at a constant rate. D) decreases at a decreasing rate. E) increases until it reaches potential GDP and then it starts to decrease. Answer: B Topic: Diminishing returns Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

46) Diminishing returns, so that each additional hour of labor employed produces successively smaller additional amounts of real GDP, exist because A) labor is not very productive. B) extra labor produces more output. C) all other factors are held fixed. D) the price level rises as more workers are employed. E) additional workers are paid higher wage rates. Answer: C Topic: Diminishing returns Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

47) As more labor is hired, moving along the production function, diminishing returns occur because A) workers are overworked and so their productivity decreases. B) the wage rate paid is too low and so workers decrease their work effort. C) there are fixed quantities of other resources. D) the real wage rate must increase in order to hire additional workers. E) real GDP increases more rapidly the more workers are hired. Answer: C Topic: Diminishing returns Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

48) A reason a nation faces diminishing returns along a production function is because A) unemployment always exists. B) potential GDP is fixed. C) the quantity of physical capital is fixed. D) full employment is not possible. E) the wage rate is fixed while moving along the production function. Answer: C Topic: Diminishing returns Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

49) ________ in the United States ________ in most European countries. A) GDP per hour; is greater than GDP per hour B) Average weekly hours; are greater than average weekly hours C) The Okun Gap; is equal to the Okun Gap D) The Lucas Wedge; is greater than the Lucas Wedge E) Both A and B are true. Answer: E Topic: Eye on the global economy, why do Americans earn more Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Written and oral communication

50) The gap in GDP between the United States and Europe can be explained by the fact that A) U.S. labor is more productive than European labor. B) prices are higher in the United States. C) the Okun Gap is larger in the United States. D) income taxes are higher in the United States. E) equilibrium employment is higher in Europe. Answer: A Topic: Eye on the global economy, why do Americans earn more Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Written and oral communication

51) Employing an additional 1 billion hours of labor increases real GDP by $12 billion. Employing another 1 billion hours beyond the first 1 billion increases real GDP by $11 billion. Hence we can conclude from this information that as employment increases, real GDP A) increases at an increasing rate. B) decreases at an increasing rate. C) decreases at a decreasing rate. D) increases at a decreasing rate. E) falls from $12 billion to $11 billion as more workers are hired. Answer: D Topic: Diminishing returns Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

52) If adding an initial 100 billion labor hours per year increases real GDP by $3 trillion, diminishing returns informs us that an additional 100 billion labor hours per year will increase real GDP by A) exactly $3 trillion. B) less than $3 trillion. C) more than $3 trillion. D) either exactly $3 trillion or by less than $3 trillion, depending on whether the real wage rate remains constant or rises. E) some amount but there is not enough information to tell by how much. Answer: B Topic: Diminishing returns Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

53) The table above gives a nation's production function. Which of the following is NOT an attainable combination of real GDP and labor? A) real GDP of $4.0 trillion and labor of 90 billion hours per year B) real GDP of $4.7 trillion and labor of 110 billion hours per year C) real GDP of $4.0 trillion and labor of 70 billion hours per year D) real GDP of $5.2 trillion and labor of 90 billion hours per year E) real GDP of $5.5 trillion and labor of 150 billion hours per year Answer: D Topic: Production function Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

54) In 2015, real GDP in the United States was $65 per hour worked. In major European economies, real GDP averaged on $50 per hour worked. This difference is explained by the points that ________ and ________. A) Americans work more hours than Europeans; Americans produce more per hour than Europeans B) Americans are equally as productive as Europeans; Americans work more hours on average C) Americans work the same number of hours per week as Europeans on average; Americans are less productive due to technology differences D) Americans take more vacations than Europeans; Americans take more sick days than Europeans E) Americans work less hours than Europeans; Americans take less sick days than Europeans Answer: A Topic: Real GDP Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Revised AACSB: Application of knowledge

55) The above figure shows a nation's production function. Point A is A) attainable if the economy is inefficient. B) unattainable given the state of the economy. C) attainable if the nation uses resources efficiently. D) the maximum amount of real GDP the nation can produce. E) the labor market equilibrium quantity of employment and real GDP. Answer: B Topic: Production function Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

56) The above figure shows a nation's production function. Point B is A) unattainable. B) attainable if the nation uses resources inefficiently. C) attainable if the nation uses resources efficiently. D) the maximum amount of real GDP the nation can ever produce. E) Both answers C and D are correct. Answer: C Topic: Production function Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

57) The above figure shows a nation's production function. Point B is ________ and ________ because ________. A) attainable; efficient; the nation is using resources efficiently B) attainable; inefficient; the nation is using resources inefficiently C) unattainable; inefficient; the nation is using resources inefficiently D) unattainable; inefficient; the nation is using resources efficiently but they could be more efficient E) unattainable; efficient; the nation would be using resources efficiently if they could attain this level of production Answer: A Topic: Production function Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

58) The above figure that most accurately shows a production function is A) Figure A. B) Figure B. C) Figure C. D) Figure D. E) Both Figure A and Figure B; Figure A for an economy with an excess of labor and Figure B for an economy with a shortage of labor. Answer: B Topic: Production function Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

59) Based on the production function in the above figure, which of the following is an attainable combination of labor and real GDP? i. 300 billion hours of labor and real GDP of $20 trillion ii. 300 billion hours of labor and real GDP of $8 trillion iii. 100 billion hours of labor and real GDP of $12 trillion A) i only B) ii only C) iii only D) ii and iii E) i and ii Answer: B Topic: Production function Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

60) Suppose that the Australian economy initially uses 50 billion hours of labor to produce $5 trillion of real GDP. If 50 billion more hours are employed and Australia's real GDP increases by $4 trillion more, A) Australia's production function exhibits diminishing returns. B) Australia's production function exhibits increasing returns. C) Australia has an Okun Wedge of $1 trillion. D) Australia has positive Lucas Wedge. E) Australia's production possibility frontier has a positive slope. Answer: A Topic: Production function Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

61) The real wage rate is the ________ divided by the ________. A) quantity of labor demanded; quantity of labor supplied B) nominal wage rate; price level C) quantity of labor supplied; quantity of labor demanded D) nominal wage rate; inflation rate E) equilibrium quantity of employment; potential GDP Answer: B Topic: Real wage rate Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

62) Suppose the price of a product is $4 and the nominal wage that the firm must pay is $20. Then the firm's real wage is A) $20. B) $80. C) $5. D) $0.20. E) $4. Answer: C Topic: Real wage rate Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

63) The benefit to the firm of hiring another worker is A) the nominal wage. B) the price level. C) the real wage. D) the extra output produced by the worker. E) measured as the height of the production function. Answer: D Topic: Demand for labor Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

64) The quantity of labor demanded is the labor hours all A) firms plan to hire at a given real wage rate. B) firms plan to hire at a given nominal wage rate. C) employees plan to work at a given real wage rate. D) employees plan to work at a given nominal wage rate. E) Both answers A and C are correct. Answer: A Topic: Demand for labor Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

65) The total labor hours that all the firms in the economy plan to hire during a given time period at one particular real wage rate is the A) demand for labor. B) quantity of labor demanded. C) supply of labor. D) quantity of labor supplied. E) quantity of jobs supplied. Answer: B Topic: Demand for labor Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

66) If the real wage rate decreases from $14.00 per hour to $13.00 per hour, the A) quantity demanded of labor increases. B) demand for labor increases. C) quantity supplied of labor increases. D) supply of labor increases. E) equilibrium quantity of employment must decrease. Answer: A Topic: Demand for labor Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

67) When all other influences on firms' hiring plans remain the same, the A) lower the real wage rate, the greater is the quantity of labor supplied B) higher the real wage rate, the greater is the quantity of labor demanded. C) lower the real wage rate, the smaller is the quantity of labor demanded. D) lower the real wage rate, the greater is the quantity of labor demanded. E) None of the above answers is correct because firms' hiring decisions depend on how profitable hiring a worker is, which depends on how much added profit the worker can create. Answer: D Topic: Demand for labor Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

68) The lower the real wage rate, the A) fewer workers firms can profitably hire. B) more workers firms can profitably hire. C) more workers will supply labor. D) higher the nominal wage rate. E) larger the quantity of labor supplied. Answer: B Topic: Demand for labor Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

69) The demand for labor reflects the point that the A) lower the real wage rate, the greater the quantity of labor demanded. B) higher the real wage rate, the greater the quantity of labor demanded. C) real wage rate does not affect the quantity demanded of labor. D) nominal wage rate and not the real wage rate determines the quantity of labor demanded. E) demand for labor depends on the supply of labor. Answer: A Topic: Demand for labor Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

70) An increase in the real wage rate ________ the quantity of labor demanded and ________ the quantity of labor supplied. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; does not change Answer: C Topic: Demand for labor, supply of labor Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

71) The demand for labor curve is A) a vertical line because firms have to hire labor. B) upward sloping, showing that as the real wage rate increases, more workers are hired. C) a horizontal line because we assume that the real wage rate is fixed. D) downward sloping, showing that the quantity of labor demanded increases when the real wage falls. E) U-shaped. Answer: D Topic: Demand for labor Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

72) A firm's demand for labor depends on the A) nominal wage rate because it pays workers in dollars. B) real wage rate, which equals the nominal wage divided by the price level. C) real wage rate, which equals the nominal wage divided by the hours worked. D) nominal wage rate, which equals the real wage divided by the price level. E) supply of labor. Answer: B Topic: Demand for labor Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

73) The quantity of labor demanded by a firm depends upon A) the nominal wage rate not the real wage rate. B) the real wage rate not the nominal wage rate. C) both the real wage rate and the nominal wage rate. D) neither the real wage rate nor the nominal wage rate. E) either the real wage rate or the nominal wage rate, depending whether the price level is increasing or decreasing. Answer: B Topic: Demand for labor Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

74) A firm hires labor up to the point where the A) real wage rate equals the nominal wage rate. B) additional hour of labor produces extra output that equals the real wage rate. C) additional hour of labor produces extra output that equals the nominal wage rate. D) firm can sell the extra output. E) real wage rate exceeds the nominal wage rate. Answer: B Topic: Demand for labor Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

75) Firms hire more labor as long as A) the real wage rate is less than the additional output the labor produces. B) the real wage rate is greater than the additional output the labor produces. C) extra labor will produce more output. D) the nominal wage rate exceeds the real wage rate. E) the nominal wage rate is less than the real wage rate. Answer: A Topic: Demand for labor Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

76) As long as an additional worker hired by a firm produces A) more output than the real wage rate, the firm will hire that worker. B) more output than the real wage rate, the firm will not hire that worker. C) less output than the real wage rate, the firm will hire that worker. D) some output, the firm will hire that worker. E) more output than the nominal wage rate, the firm will hire that worker. Answer: A Topic: Demand for labor Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

77) Hershey Chocolate Factory pays a money wage rate equal to $30 per hour and sells its candy bars for $1.50 each. Hershey Chocolate Factory should hire labor until an additional unit of labor produces ________ candy bars an hour. A) 45 B) 1.5 C) 20 D) 30 E) 10 Answer: C Topic: Demand for labor Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

78) The Bubby Gum factory produces bubble gum. Joanne is one of the employees, and she produces 10 packs of bubble gum per hour. Joanne's money wage rate is $12 per hour. Based on this information, the Bubby Gum company should A) keep Joanne because she creates a profit for the firm. B) fire Joanne because she creates a loss for the firm. C) decrease Joanne's wage rate because she is paid too much. D) increase its demand for labor. E) None of the above answers is correct because more information about Joanne's real wage is needed to decide what to do. Answer: E Topic: Demand for labor Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

79) The Bubby Gum factory produces bubble gum. Joanne is one of the employees, and she produces 10 packs of bubble gum per hour. Joanne's money wage rate is $12 per hour. If a packet of bubble gum sells for $1.00, then A) Joanne is creating a $2.00 per hour loss for the firm. B) Joanne is creating a $2.00 per hour profit for the firm. C) the Bubby Gum company should decrease the price of the bubble gum so it sells more and makes a larger profit. D) the Bubby Gum company should pay Joanne more. E) None of the above answers is correct because more information about Joanne's real wage is needed to decide what to do. Answer: A Topic: Demand for labor Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

80) The Bubby Gum factory produces bubble gum. Joanne is one of the employees, and she produces 10 packs of bubble gum per hour. Joanne's money wage rate is $12 per hour. If a packet of bubble gum sells for $1.00, then Joanne ________ because ________. A) is creating a $2.00 per hour loss for the firm; her real wage rate is more than her output per hour B) is creating a $2.00 per hour profit for the firm; her real wage rate is more than her output per hour C) should recommend that the Bubby Gum company should decrease the price of the bubble gum; it would sell more and bring a larger profit D) should ask for a raise in pay; then her real wage would be less than her output per hour E) is the last person the Bubby Gump company will employ; an additional hire would produce equal the amount of additional labor to real wage per hour Answer: A Topic: Demand for labor Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

81) To maximize profits, firms hire labor as long as A) each additional hour hired produces more additional output than the real wage rate. B) the total hours hired produces more additional output than the real wage rate. C) each additional hour hired produces more additional output than the nominal wage rate. D) the quantity of labor supplied increases as the real wage rate increases. E) workers continue to supply labor to the firm. Answer: A Topic: Demand for labor Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

82) For a household, the opportunity cost of not working is the A) nominal wage rate. B) real wage rate. C) cost of living. D) price level. E) demand for labor. Answer: B Topic: Supply of labor Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

83) Which of the following statements is (are) true? i. As the real wage rate increases, the household's income decreases, which influences people to work more hours. ii. As the real wage rate increases, the quantity of labor demanded increases. iii. As the real wage rate increases, the opportunity cost of not working increases. A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: C Topic: Supply of labor Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

84) As demonstrated by the labor supply schedule, the quantity of labor supplied depends on A) the nominal wage. B) the amount of labor that firms want to hire. C) the real wage. D) the value of the dollar. E) workers' productivity. Answer: C Topic: Supply of labor Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

85) The supply of labor is defined as the relationship between the real wage rate and the A) quantity of labor supplied by firms. B) amount of jobs supplied by firms. C) quantity of labor supplied by households. D) amount of jobs supplied by households. E) equilibrium quantity of employment. Answer: C Topic: Supply of labor Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

86) Which of the following statements is true? A) According to the labor supply curve, as the real wage rises, employers are willing to provide more jobs. B) According to the labor supply curve, as the real wage rises, workers are willing to provide more hours of labor. C) According to the labor supply curve, as the real wage rises, employers are willing to provide fewer jobs. D) According to the labor supply curve, as the real wage rises, workers are willing to provide fewer hours of labor. E) According to the labor supply curve, as the real wage rises, more workers leave the labor force. Answer: B Topic: Supply of labor Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

87) Households increase the quantity of labor supplied when the A) real wage rate rises because the opportunity cost of not working falls. B) nominal wage rate rises because the real wage rate must also rise. C) real wage rate rises because the opportunity cost of not working rises. D) nominal wage rate falls because the opportunity cost of not working rises. E) income tax rises because an increase in the income tax increases the demand for labor. Answer: C Topic: Supply of labor Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

88) Households increase the quantity of labor supplied when A) the real wage rate increases. B) the real wage rate decreases. C) job opportunities increase. D) the nominal wage decreases and the price level rises. E) income taxes increase. Answer: A Topic: Supply of labor Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

89) Holding all other influences constant, the quantity of labor supplied in a given time period depends A) inversely on the real wage rate so that a higher real wage decreases the quantity of labor supplied. B) directly on the real wage rate so that a higher real wage increases the quantity of labor supplied. C) inversely on the quantity of labor demanded. D) on the money wage rate not the real wage rate. E) directly on the quantity of labor demanded. Answer: B Topic: Supply of labor Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

90) When all other influences on work plans remain the same, the A) lower the real wage rate, the smaller the quantity of labor supplied. B) higher the real wage rate, the greater the quantity of labor demanded. C) lower the real wage rate, the greater the quantity of labor supplied. D) lower the real wage rate, the smaller the quantity of labor demanded. E) lower the real wage rate, the larger the labor force participation. Answer: A Topic: Supply of labor Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

91) The quantity of labor supplied increases as the real wage rises because A) higher real wages mean that nominal wages have increased. B) the opportunity cost of working increases. C) the quantity of labor demanded increases. D) the opportunity cost of leisure rises. E) labor force participation decreases so that only serious workers are left in the labor force. Answer: D Topic: Supply of labor Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

92) As the real wage rate rises, the opportunity cost of A) working rises. B) saving rises. C) leisure rises. D) leisure falls. E) buying goods and services rises. Answer: C Topic: Supply of labor Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

93) The labor force participation rate A) increases as the real wage increases. B) decreases as the real wage increases. C) has nothing to do with the real wage rate. D) increases as the opportunity cost of working increases. E) is one of the major reasons that firms pay efficiency wages. Answer: A Topic: Labor force participation Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

94) The labor market is in equilibrium whenever A) the nominal wage rate is decreasing. B) the nominal wage rate is increasing. C) the nominal wage rate is not changing. D) the real wage rate is increasing. E) the quantity of labor demanded equals the quantity of labor supplied. Answer: E Topic: Labor market equilibrium Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

95) A surplus of labor is eliminated by ________ in the real wage rate and a shortage of labor is eliminated by ________ in the real wage rate. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease E) None of the above answers is correct because shortages and surpluses are eliminated by changes in the demand for labor and the supply of labor, not the wage rate. Answer: C Topic: Labor market equilibrium Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

96) A surplus in the labor market indicates that the A) real wage rate is above the equilibrium wage rate but it is too low to eliminate the surplus of labor. B) quantity of labor demanded is less than the quantity of labor supplied. C) real wage rate has to rise before the labor market will reach equilibrium. D) workers are not looking for work because they enjoy their leisure time. E) real wage rate is less than the equilibrium wage rate. Answer: B Topic: Labor market equilibrium Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

97) When the labor market is in equilibrium so that the quantity of labor supplied equals the quantity demanded, A) there is no unemployment. B) the economy is at full employment. C) nominal GDP equals real GDP. D) there is no inflation. E) real GDP might be more than, less than, or equal to potential GDP. Answer: B Topic: Labor market equilibrium Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

98) When the labor market is in equilibrium, i. the quantity demanded of labor equals the quantity supplied. ii. there is full employment. iii. potential GDP is produced. A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: E Topic: Labor market equilibrium Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

99) When the labor market is in equilibrium, A) there is excess labor supplied, which keeps real GDP less than potential GDP. B) there is full employment, which means that real GDP equals potential GDP. C) the real wage rate falls to equal the nominal wage rate because real GDP is greater than potential GDP. D) the real wage rate rises to allow real GDP to equal potential GDP. E) there is full employment but real GDP might be greater than, less than, or equal to potential GDP. Answer: B Topic: Labor market equilibrium Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

100) In a labor market without an efficiency wage, minimum wage, or union wage, when the real wage rate exceeds the equilibrium real wage rate, there is a ________ of labor and the real wage rate will ________. A) surplus; fall B) shortage; fall C) shortage; rise D) surplus; rise E) surplus; not change because only efficiency wages or union wages can change. Answer: A Topic: Labor market equilibrium Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

101) The table above shows the labor demand and labor supply schedules for a nation. The equilibrium real wage rate is ________ and the equilibrium quantity of labor is ________ billions of hours per year. A) $25; 260 B) $20; 280 C) $20; 260 D) $15; 260 E) $40; 320 Answer: B Topic: Labor market equilibrium Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

102) The tables above show a nation's labor demand and labor supply schedules and its production function. The equilibrium real wage rate is ________ and the equilibrium quantity of labor is ________ billion hours per year. A) $50; 100 B) $40; 90 C) $30; 80 D) $40; 80 E) $20; 110 Answer: B Topic: Full employment and potential GDP Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

103) The tables above show a nation's labor demand and labor supply schedules and its production function. Given the equilibrium in the labor market, potential GDP is A) $3.0 trillion. B) $3.7 trillion. C) $4.2 trillion. D) $4.5 trillion. E) $2.0 trillion. Answer: C Topic: Full employment and potential GDP Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

104) In the United States between the 1970s and the 2000s, the productivity of labor increased. This increase led to A) an increase in the demand for labor. B) an increase in the supply of labor. C) a downward shift of the production function. D) a decrease in the supply of labor. E) no change in either the demand for or the supply of labor. Answer: A Topic: Demand for labor Skill: Level 4: Applying models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

105) ________ adopts the view that aggregate fluctuations are a natural consequence of an expanding economy. A) Classical macroeconomics B) Keynesian economics C) Monetarist macroeconomics D) The Lucas Wedge E) The Okun Gap Answer: A Topic: New macroeconomics Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Revised AACSB: Reflective thinking

106) Potential GDP A) is the quantity of GDP produced when the economy is at full employment of all resources. B) can never be exceeded. C) can never be attained. D) is another name for real GDP. E) is another name for nominal GDP. Answer: A Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

107) With fixed quantities of capital, land, and entrepreneurship and fixed technology, the amount of real GDP produced increases when ________ increases. i. the quantity of labor employed ii. the inflation rate iii. the price level A) i only B) ii only C) iii only D) ii and iii E) i, ii, and iii Answer: A Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

108) The production function graphs the relationship between A) nominal GDP and real GDP. B) real GDP and the quantity of labor employed. C) real GDP and capital. D) nominal GDP and the quantity of labor employed. E) real GDP and the supply of labor. Answer: B Topic: Production function Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

109) The quantity of labor demanded definitely increases if the A) real wage rate rises. B) real wage rate falls. C) nominal wage rate rises. D) nominal wage rate falls. E) supply of labor decreases. Answer: B Topic: Demand for labor Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

110) The supply of labor curve has a ________ slope because as the real wage rate rises, ________. A) negative; firms hire fewer workers B) positive; the opportunity cost of leisure rises C) positive; the opportunity cost of leisure falls D) negative; households work more hours E) positive; firms offer more jobs Answer: B Topic: Supply of labor Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

111) The real wage rate is $35 an hour. At this wage rate there are 100 billion labor hours supplied and 200 billion labor hours demanded. There is a A) shortage of 300 billion hours of labor. B) shortage of 100 billion hours of labor. C) surplus of 100 billion hours of labor. D) surplus of 300 billion hours of labor. E) shortage of 200 billion hours of labor. Answer: B Topic: Labor market equilibrium Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

112) When the labor market is in equilibrium, real GDP ________ potential GDP. A) is greater than B) is equal to C) is less than D) might be greater than, less than, or equal to E) is not comparable to Answer: B Topic: Labor market equilibrium Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

113) Compared to the U.S. production function, the European production function is A) higher. B) lower. C) the same. D) lower than the U.S. production function at low levels of employment and higher than the U.S. production function at high levels of employment. E) higher than the U.S. production function at low levels of employment and lower than the U.S. production function at high levels of employment. Answer: B Topic: Eye on the global economy, why do Americans earn more Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

114) The substantially larger real GDP per worker in the United States then in Europe is explained by A) greater production per hour B) longer work hours C) better US technology D) all of the above E) none of the above Answer: D Topic: Eye on the global economy, why do Americans earn more Skill: Level 5: Critical thinking Section: Checkpoint 8.1 Status: New AACSB: Analytical thinking

115) The U.S. labor demand curve lies to the ________ of the European demand curve because the U.S. labor is ________ than the EU labor, and U.S. employers are ________ for a given quantity of labor than European employers are. A) left; more productive; willing to pay more B) right; more productive; willing to pay more C) left; less productive; paying less D) right; less productive; paying less E) none of the above Answer: B Topic: Eye on the global economy, why do Americans earn more Skill: Level 5: Critical thinking Section: Checkpoint 8.1 Status: New AACSB: Analytical thinking

116) The European labor supply curve lies to the ________ of the U.S. labor supply curve because higher income taxes and benefits in Europe mean that to induce a person to work in Europe, European firms must offer a ________ wage rate then a firm in the United States must offer. A) left; higher B) right; lower C) left; lower D) right; higher E) none of the above Answer: A Topic: Eye on the global economy, why do Americans earn more Skill: Level 5: Critical thinking Section: Checkpoint 8.1 Status: New AACSB: Analytical thinking

117) U.S. equilibrium employment is ________ European equilibrium employment and the U.S. equilibrium real wage rate is ________ the European equilibrium real wage rate. A) greater than; higher than B) greater than; equal to C) less than; higher than D) less than; less than E) greater than; less than Answer: A Topic: Eye on the global economy, why do Americans earn more Skill: Level 5: Critical thinking Section: Checkpoint 8.1 Status: New AACSB: Analytical thinking

118) The above figure that most accurately shows a production possibilities frontier is A) Figure A. B) Figure B. C) Figure C. D) Figure D. E) Both Figure A and Figure B; Figure A for an economy with an excess of labor and Figure B for an economy with a shortage of labor. Answer: B Topic: Production function Skill: Level 3: Using models Section: Checkpoint 8.1 Status: New AACSB: Analytical thinking

119) Based on the production function in the above figure, which of the following is unattainable combination of labor and real GDP? i. 300 billion hours of labor and real GDP of $20 trillion ii. 300 billion hours of labor and real GDP of $8 trillion iii. 100 billion hours of labor and real GDP of $12 trillion A) i only B) ii only C) iii only D) i and iii E) i and ii Answer: D Topic: Production function Skill: Level 3: Using models Section: Checkpoint 8.1 Status: New AACSB: Analytical thinking

120) Based on the production function in the above figure, which of the following is an attainable combination of labor and real GDP? i. 300 billion hours of labor and real GDP of $20 trillion ii. 300 billion hours of labor and real GDP of $8 trillion iii. 100 billion hours of labor and real GDP of $8 trillion A) i only B) ii only C) iii only D) ii and iii E) i and ii Answer: D Topic: Production function Skill: Level 3: Using models Section: Checkpoint 8.1 Status: New AACSB: Analytical thinking

121) The figure above shows the U.S. supply of labor curve. What would be the effect on the labor supply curve of U.S. policies that allow more immigration? A) rightward shift of the supply of labor curve B) movement upward along the supply of labor curve from a point such as C to a point such as B C) movement downward along the supply of labor curve from a point such as A to a point such as B D) leftward shift of the supply of labor curve E) None of the above answers is correct because there would be no change in the supply of labor curve. Answer: A Topic: Supply of labor curve Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: New AACSB: Analytical thinking

122) The figure above shows the U.S. supply of labor curve. What would be the effect on the labor supply curve of U.S. policies that restrict immigration? A) rightward shift of the supply of labor curve B) movement upward along the supply of labor curve from a point such as C to a point such as B C) movement downward along the supply of labor curve from a point such as A to a point such as B D) leftward shift of the supply of labor curve E) None of the above answers is correct because there would be no change in the supply of labor curve. Answer: D Topic: Supply of labor curve Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: New AACSB: Analytical thinking

123) The figure above shows the U.S. supply of labor curve. What would be the effect on the labor supply curve of a higher income tax rate? A) rightward shift of the supply of labor curve B) movement upward along the supply of labor curve from a point such as C to a point such as B C) movement downward along the supply of labor curve from a point such as A to a point such as B D) leftward shift of the supply of labor curve E) None of the above answers is correct because there would be no change in the supply of labor curve. Answer: D Topic: Supply of labor curve Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: New AACSB: Analytical thinking

124) The figure above shows the U.S. supply of labor curve. How would more generous unemployment benefits affect the labor supply curve? A) rightward shift of the supply of labor curve B) movement upward along the supply of labor curve from a point such as C to a point such as B C) movement downward along the supply of labor curve from a point such as A to a point such as B D) leftward shift of the supply of labor curve E) None of the above answers is correct because there would be no change in the supply of labor curve. Answer: D Topic: Supply of labor curve Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: New AACSB: Analytical thinking

125) The figure above shows the U.S. supply of labor curve. What was the effect of the bulge in birth rates during the 1940s and early 1950s on the supply of labor during the 1970s? A) a rightward shift of the supply of labor curve B) The supply of labor curve became steeper C) a movement downward along the supply of labor curve from a point such as A to a point such as B D) a leftward shift of the supply of labor curve E) None of the above answers is correct because there was no change in the supply of labor curve. Answer: A Topic: Supply of labor curve Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: New AACSB: Analytical thinking

17.2 The Basics of Economic Growth 1) Economic growth is defined as A) a decrease in the rate of inflation. B) an increase in employment. C) a sustained expansion of production possibilities. D) an increase in the wage rate. E) an increase in the nation's population. Answer: C Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

2) Economic growth is a sustained expansion of production possibilities, as measured by the increase in ________ over time. A) real GDP B) population C) inflation D) the price level E) employment Answer: A Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

3) A country will likely experience an increase in poverty if A) its population decreases over time. B) its real GDP growth rate decreases or slows over time. C) its inflation rate decreases or slows over time. D) its real GDP per person growth rate increases over time. E) it does not receive foreign aid. Answer: B Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

4) Economic growth is defined as equal to the increase in A) employment. B) population. C) real GDP. D) the price level. E) the inflation rate. Answer: C Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

5) Which of the following variables is used to determine a country's economic growth? i. real GDP ii. wages iii. inflation A) i and ii B) i, ii and iii C) ii and iii D) i only E) i and iii Answer: D Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

6) The growth rate of real GDP equals A) [(employment in the current year - employment in previous year)/employment in previous year] × 100. B) [(real GDP in current year - real GDP in previous year) ÷ real GDP in previous year] × 100. C) [(real GDP in previous year - real GDP in current year) ÷ real GDP in previous year] × 100. D) [(real GDP in current year - real GDP in previous year) ÷ real GDP in current year] × 100. E) (real GDP in current year - real GDP in previous year) × 100. Answer: B Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

7) If real GDP was $13.1 trillion in 2013 and $13.3 in 2014, what is the growth rate? A) 15.0 percent B) -1.5 percent C) 1.5 percent D) $0.2 trillion E) 2.1 percent Answer: C Topic: Calculating growth rates Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

8) Suppose France's real GDP grew from $750 billion in 2010 to $821 billion in 2011. What was the growth rate of France's real GDP? A) 10 percent B) 9.5 percent C) 9.1 percent D) 8.6 percent E) $71 billion Answer: B Topic: Growth rate Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

9) U.S. real GDP in 2007 was $13.25 trillion and U.S. real GDP in 2008 was $13.31 trillion. What was the economic growth rate of the United States during this period? A) 18 percent B) -1.36 percent C) 0.45 percent D) 6.9 percent E) $1.8 trillion Answer: C Topic: Calculating growth rates Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

10) If real GDP in year 1 is $72 million and real GDP in year 2 is $87 million, then the growth rate of real GDP is A) 15 percent. B) $15 million. C) 20.8 percent. D) 17 percent. E) 83 percent. Answer: C Topic: Calculating growth rates Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

11) In 2008, real GDP in the United States was $13,312 billion. In 2009, real GDP in the United States was $13,112 billion. What was the U.S. economic growth rate from 2008 to 2009? A) -1.5 percent B) 1.5 percent C) 0.98 percent D) 0.12 percent E) $200 million Answer: A Topic: Growth rate Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

12) Using the data in the table above, the growth rate of real GDP for 2010 is equal to A) 9.09 percent. B) 7.00 percent. C) 5.00 percent. D) 4.76 percent. E) 10.0 percent. Answer: B Topic: Calculating growth rates Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

13) Using the data in the table above, real GDP per person in 2009 is A) $70,000. B) $71,429. C) $75,000. D) $70 trillion. E) 7 percent. Answer: A Topic: Calculating growth rates Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

14) Using the data in the table above, the growth rate of real GDP has A) increased from year to year. B) increased more rapidly from year to year. C) remained constant from year to year. D) slowed from year to year. E) probably changed, but more information is needed about the price level to determine by how much it has changed. Answer: A Topic: Calculating growth rates Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

15) Suppose India wants to measure how much the standard of living has changed over the last decade. Which piece of data should India use? A) population B) real GDP per person C) real GDP D) wages E) inflation Answer: B Topic: Standard of living Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

16) To measure the change in the standard of living, it is best to use the growth rate A) from the Rule of 70. B) of real GDP. C) of the population. D) of real GDP per person. E) of the price level. Answer: D Topic: Standard of living Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

17) In growth theory, the change in a country's standard of living is measured by the change in A) real GDP per person. B) real GDP. C) the nation's capital stock. D) wages per person. E) employment. Answer: A Topic: Standard of living Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

18) A measure of growth in the standard of living is the growth in A) real GDP. B) population. C) real GDP minus the growth in population. D) population minus the growth in real GDP. E) employment. Answer: C Topic: Standard of living Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

19) Growth in the standard of living is measured by the increase in A) real GDP. B) the Rule of 70. C) employment. D) real GDP per person. E) consumption. Answer: D Topic: Standard of living Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

20) The growth rate of real GDP per person equals the A) population growth rate plus the growth rate of real GDP. B) change in the economic growth rate divided by the change in the population growth rate. C) the economic growth rate per person divided by the change in the population growth rate. D) growth rate of real GDP minus the growth rate of the population. E) population growth rate plus the growth rate of real GDP then divided by the initial level of real GDP. Answer: D Topic: Growth rate, real GDP per person Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

21) If real GDP grows at a faster rate than does population, then the standard of living, as measured by real GDP per person, A) improves. B) worsens. C) remains the same. D) cannot be measured. E) either improves, worsens, or stays the same, depending on the size of the population and the actual level of real GDP. Answer: A Topic: Growth rate, real GDP per person Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

22) The population in the current year is 31.5 million and the real GDP is $814 million. The previous year's statistics were a population of 31 million and a real GDP of $800 million. The change in the standard of living, measured by growth in real GDP per person, is A) 1.6 percent. B) 7.75 percent. C) 0.13 percent. D) 6 percent. E) 0 percent. Answer: C Topic: Growth rate, real GDP per person Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

23) Assume the population growth rate is 2 percent and the real GDP growth rate is 5 percent. The change in standard of living, as measured by the growth rate in real GDP per person, is A) 7 percent. B) 2.5 percent. C) 5 percent. D) 3 percent. E) -3 percent. Answer: D Topic: Growth rate, real GDP per person Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

24) Real GDP in the country of Oz is growing at 5 percent and its population is growing at 2 percent. In the country of Lilliput, real GDP is growing at 4 percent and its population is growing at 0.5 percent. Thus, A) real GDP per person in Oz is growing at a faster rate than in Lilliput. B) real GDP per person in Lilliput is growing at a faster rate than in Oz. C) real GDP per person in Lilliput is growing at the same rate as in Oz. D) real GDP per person in Lilliput is growing at a rate that is not comparable to that in Oz. E) We need more information to determine if real GDP per person in Lilliput is growing faster or slower than real GDP per person in Oz. Answer: B Topic: Growth rate, real GDP per person Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

25) If the U.S. population grew at a 0.9 percent and real GDP grew at a 4.4 percent during the same period, what was the growth rate of real GDP per person? A) 3.5 percent B) 5.3 percent C) 4.0 percent D) -3.5 percent E) 4.4 percent Answer: A Topic: Growth rate, real GDP per person Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

26) If real GDP grows at a rate of 6 percent and population grows at a rate of 2 percent, then real GDP per person grows at a rate of A) 4 percent. B) 2 percent. C) 0.5 percent. D) -3 percent. E) 8 percent. Answer: A Topic: Growth rate, real GDP per person Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

27) Iceland's real GDP grows at a rate of 2.6 percent and population grows at a rate of 0.8 percent. Iceland's real GDP per person grows at a rate of A) 1.8 percent. B) 2.6 percent. C) 3.4 percent. D) 3.0 percent. E) 3.2 percent. Answer: A Topic: Growth rate, real GDP per person Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

28) If an economy's growth rate of real GDP is 3 percent per year and the growth rate of the population is 2.5 percent per year, the growth rate of real GDP per person is A) 3 + 2.5 = 5.5 percent per year. B) [(3 - 2.5) ÷ 2.5] × 100 = 20 percent per year. C) [(2.5 - 3) ÷ 3] × 100 = 16.6 percent per year. D) 3 - 2.5 = 0.5 percent per year. E) 2.5 - 3 = -0.5 percent per year. Answer: D Topic: Growth rate, real GDP per person Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

29) In 2009, U.S. real GDP decreased by 3 percent and the population grew by 1 percent. Thus, real GDP per person A) increased 2 percent. B) decreased 2 percent. C) increased 4 percent. D) decreased 4 percent. E) decreased 3 percent. Answer: D Topic: Growth rate, real GDP per person Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

30) If a country experiences a real GDP growth rate of 1 percent and population growth of 2 percent, then the growth rate of real GDP per person is A) 3 percent. B) 2 percent. C) 1 percent. D) -1 percent. E) 0 percent. Answer: D Topic: Growth rate, real GDP per person Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

31) During 2008, Swaziland had a real GDP growth rate of 1.8 percent and a real GDP growth rate per person of -1.3 percent. These rates indicate that in Swaziland A) there was an error when calculating the growth rates because the growth rate of real GDP per person cannot be negative. B) the population growth rate was negative. C) the population grew at a faster rate than real GDP. D) poverty levels are declining. E) real GDP grew more rapidly than did the population. Answer: C Topic: Growth rate, real GDP per person Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

32) In India last year, the growth rate of real GDP was 3.5 percent and the population grew from 1,000 million people to 1,100 million. Real GDP per person A) increased by 13.5 percent. B) decreased by 6.5 percent. C) increased by 6.5 percent. D) decreased by 13.5 percent. E) increased by 3.5 percent. Answer: B Topic: Growth rate, real GDP per person Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

33) Belgium's real GDP per person is $33,000 and Austria's is $34,700. The population growth rate in Belgium is 0.13 percent and the growth rate of real GDP is 3.0 percent. The population growth rate in Austria is 0.08 percent and the growth rate of real GDP is 3.3 percent. If these growth rates continue, how many years will it take for Belgium's real GDP per person to equal Austria's real GDP per person? A) Belgium's standard of living will never equal Austria's. B) just over 23 years C) just over 24 years D) just over 21 years E) over 230 years Answer: A Topic: Growth rate, real GDP per person Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

34) If Country A's real GDP is growing at 6 percent per year and Country B's real GDP is growing at 6 percent per year, then the standard of living is A) growing more rapidly in Country A. B) higher in Country B. C) changing at the same rate in Country A and Country B. D) growing more slowly in Country A. E) changing at the same rate in Country A and Country B only if the rate of population growth is the same in both countries. Answer: E Topic: Growth rate, real GDP per person Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

35) If Country A's real GDP per person is growing at 6 percent and Country B's real GDP per person is growing at 3 percent, then A) the standard of living is higher in Country A. B) the standard of living is higher in Country B. C) the standard of living is growing more rapidly in Country A. D) We cannot say whose standard of living is growing more rapidly without knowing the population growth rate. E) We cannot say whose standard of living is growing more rapidly without knowing the growth rate of real GDP. Answer: C Topic: Growth rate, real GDP per person Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

36) According to the data in the table above, A) the standard of living improved between year 1 and year 2. B) the standard of living worsened between year 1 and year 2. C) as measured by real GDP per person, the standard of living remained the same between year 1 and year 2. D) real GDP grew more rapidly than population between year 1 and year 2. E) real GDP grew more slowly than population between year 1 and year 2. Answer: C Topic: Standard of living Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

37) According to the data in the table above, real GDP grew at a rate of ________ between year 1 and year 2. A) 10 percent B) 1 percent C) 50 percent D) 5 percent E) 55 percent Answer: A Topic: Calculating growth rates Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

38) According to the data in the table above, real GDP per person grew at a rate of ________ between year 1 and year 2. A) 10 percent B) 0 percent C) 1 percent D) 5 percent E) 50 percent Answer: B Topic: Growth rate, real GDP per person Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

39) The Rule of ________ can be used to calculate the number of years that it takes for the level of a variable to ________. A) 20; double B) 70; triple C) 70; double D) 20; triple E) thumb; double Answer: C Topic: Rule of 70 Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

40) The Rule of 70 states that the level of a variable will double in A) 70 years. B) the number of years equal to the variable's annual rate of growth divided by 70. C) the number of years equal to 70 divided by the variable's annual growth rate. D) the number of years equal to the variable's annual growth rate minus 70. E) the number of years equal to 70 multiplied by the variable's annual growth rate expressed as a decimal. Answer: C Topic: Rule of 70 Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

41) The Rule of 70, as applied to real GDP growth, can be used to find the A) real GDP growth rate necessary to double growth. B) number of years it takes for the level of real GDP to double. C) growth rate of real GDP. D) number of years it takes for the growth rate of real GDP to double. E) population growth rate necessary to double the GDP growth rate. Answer: B Topic: Rule of 70 Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

42) The Rule of 70 can be used to calculate the A) economic growth rate per month. B) population growth rate per year. C) number of years it would take for the level of any variable to double. D) 70 percent level of the economic growth rate. E) economic growth rate per year. Answer: C Topic: Rule of 70 Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

43) Approximately how long will it take Ethiopia to double its real GDP per person of $100 if its growth rate of real GDP per person is 0.9 percent? A) 63 years B) 77.7 years C) 70 years D) 109 years E) 100 years Answer: B Topic: Rule of 70 Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

44) If Country A's real GDP grows at a rate of 14 percent per year, about how many years will it take for Country A's real GDP to double? A) 10 B) 7 C) 5 D) 30 E) 14 Answer: C Topic: Rule of 70 Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

45) According to the Rule of 70, if a country grows at 2.0 percent per year instead of 1.5 percent per year, how many fewer years will it take to double its level of real GDP? A) It will take 11.6 years fewer. B) It will take 35 years fewer. C) It will take 58.3 years fewer. D) It will take 20 years fewer. E) It will take 17.9 years fewer. Answer: A Topic: Rule of 70 Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

46) The annual growth rate of an economy is 10 percent. The economy's GDP will double in about ________ years. A) 7 B) 10 C) 12 D) 14 E) 20 Answer: A Topic: Rule of 70 Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

47) Using the rule of 70, a sustained 3 percent per year real GDP growth rate will A) last for 70 years. B) double the current level of real GDP in about 23 years. C) double the current level of real GDP in about 210 years. D) double the current level of real GDP in about 70 years. E) double the current level of real GDP in about 40 years. Answer: B Topic: Rule of 70 Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

48) A nation's annual growth rate of real GDP per person is 2 percent. Its standard of living will A) double in 35 years. B) not change because its population is growing. C) fall because of its population growth. D) double in 10 years. E) double in 50 years. Answer: A Topic: Rule of 70 Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

49) If a country experiences a real GDP growth rate of 6 percent, real GDP will double in A) 10 years. B) 11.67 years. C) 14 years. D) 17.5 years. E) 16.67 years. Answer: B Topic: Rule of 70 Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

50) This year, real GDP per person in Country A is eight times real GDP per person in Country B. If Country B's real GDP per person grows at a rate of 5 percent, about how many years will it take for Country B to reach the level of real GDP per person in Country A in this year? A) 14 years B) 28 years C) 56 years D) 42 years E) It will never reach Country A's level of GDP per person. Answer: D Topic: Rule of 70 Skill: Level 4: Applying models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

51) This year Iceland has a real GDP per person that is approximately 8 times greater than that of Cape Verde. Cape Verde's growth rate of real GDP per person was 5.2 percent. If Cape Verde maintains this current growth rate, approximately how many years will it take for Cape Verde's real GDP per person to reach the same level that Iceland has this year? A) 13.5 years B) 20 years C) 27 years D) 40 years E) 54 years Answer: D Topic: Rule of 70 Skill: Level 4: Applying models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

52) If it took 20 years for real GDP to double, what was the growth rate of real GDP? A) 4.5 percent B) 3.0 percent C) 3.5 percent D) 4 percent E) 5 percent Answer: C Topic: Rule of 70 Skill: Level 4: Applying models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

53) In this year, Country A has a real GDP per person that is 4 times greater than that of Country B. Country B's growth rate of real GDP per person is 3.5 percent per year. How many years will it take for Country B's real GDP per person to reach the same level that Country A had in this year? A) 10 years B) 20 years C) 40 years D) 60 years E) 56 years Answer: C Topic: Rule of 70 Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

54) Suppose Mexico's real GDP per person in 2008 is $6,000 and the U.S. real GDP per person is $24,000. Mexico has annual growth in real GDP per person of 5 percent. Approximately how many years will it take Mexico to equal $24,000 of real GDP per person? A) 14 years B) 18 years C) 28 years D) 36 years E) 40 years Answer: C Topic: Rule of 70 Skill: Level 4: Applying models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

55) For the world, what period of time experienced the fastest growth rate of real GDP per person? A) around 500 B.C. B) around 400 A.D. C) between 1000 A.D. and 1500 A.D. D) after about 1850 A.D. E) between 1500 A.D. and 1850 A.D. Answer: D Topic: Eye on the past, how fast has real GDP per person grown? Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

56) Real GDP per person averaged $330 a year (in 2015 dollars) from 1,000,000 BC until 1620. During this time there was a period when it rose to ________ around ________ because ________. A) $410; 1620; the Pilgrim Fathers began to arrive in the Americas B) $410; 1492; Columbus sailed to the Americas C) $400; 400 BC; the Roman Empire collapsed D) $500; 500 BC; of the gains from human capital while Aristotle and Plato were teaching in Athens E) a 1-million year high; the 1340s; the Black Death gripped Europe Answer: D Topic: Eye on the past, how fast has real GDP per person grown? Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

57) Over the last six decades, the decade with the slowest real GDP per person growth rate is A) 1960s. B) 1980s. C) 1990s. D) 2000s. E) 2010s. Answer: E Topic: Eye on the U.S. economy, U.S. growth is slowing Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Revised AACSB: Reflective thinking

58) The economic growth rate is measured as the A) annual percentage change of real GDP. B) annual percentage change of employment. C) amount of real GDP. D) annual percentage change of the population. E) amount of population. Answer: A Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

59) Economic growth is a sustained expansion of production possibilities measured as the increase in ________ over a given period. A) real GDP B) real GDP per person C) the standard of living D) capital per person E) population Answer: A Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

60) The economic growth rate is expressed as the A) annual percentage change of real GDP per person. B) growth rate of real GDP minus the growth rate of population. C) standard of living. D) annual percentage change of real GDP. E) growth rate of the population. Answer: D Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

61) Real GDP is $9 trillion in the current year and $8.6 trillion in the previous year. The economic growth rate between these years has been A) 10.31 percent. B) 4.65 percent. C) 5.67 percent. D) 7.67 percent. E) $0.4 trillion. Answer: B Topic: Calculating growth rates Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

62) The table gives information about the economy of Japan. The economic growth rate in 1997 is ________ percent. A) 8.0 B) 0.8 C) 0.08 D) 0.008 E) 4 Answer: B Topic: Calculating growth rates Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

63) The standard of living is measured by A) real GDP. B) employment. C) employment per person. D) real GDP per person. E) the population. Answer: D Topic: Standard of living Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

64) If the growth rate of population is greater than a nation's growth rate of real GDP, then its real GDP per person A) falls. B) rises. C) does not change. D) might rise, fall, or not change. E) cannot be measured. Answer: A Topic: Standard of living Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

65) The table above gives information about the economy of France. The growth rate of real GDP per person in 1998 is ________ percent. A) 3.1 B) 0.4 C) 3.6 D) 4.0 E) 1.9 Answer: C Topic: Growth rate, real GDP per person Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

66) If real GDP increases by 6 percent and at the same time the population increases by 2 percent, then real GDP per person grows by A) 6 percent. B) 4 percent. C) 2 percent. D) 8 percent. E) 3 percent. Answer: B Topic: Growth rate, real GDP per person Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

67) If real GDP grew 5 percent last year and the population grew 2 percent, then real GDP per person grew by ________ percent. A) 10 B) 5 C) 3 D) 2 E) 7 Answer: C Topic: Growth rate, real GDP per person Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

68) If a country experiences a real GDP growth rate of 4 percent, real GDP will double in A) 14 years. B) 17.5 years. C) 23.3 years. D) 35 years. E) 25 years. Answer: B Topic: Rule of 70 Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

69) Suppose that in the future, real GDP per person grows 2 percent a year in the United States and 4 percent a year in China. It will take real GDP per person approximately ________ years to double in the United States and approximately ________ years to double in China. A) 70; 35 B) 35; 17.5 C) 35; 8.75 D) 50; 25 E) 20; 10 Answer: B Topic: Rule of 70 Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

70) The table above gives information about the economy of Spain. If the growth rate in 1998 is maintained, real GDP will double in ________ years. A) 4 B) 19 C) 10 D) 18 E) 25 Answer: D Topic: Rule of 70 Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

71) When was the real GDP per person at its 1-million year lowest level? A) 1340s, during the Black Death B) 1620s, after Columbus arrived in the Americas C) 500BC, in Ancient Greece D) 1750, just before the Industrial Revolution E) 1850, before the Industrial Revolution started to boost real GDP per person Answer: A Topic: Eye on the past, how fast has real GDP per person grown? Skill: Level 1: Definition Section: Checkpoint 9.1 Status: New AACSB: Reflective thinking

72) Looking at the world economic history, during what period of time was the growth rate of real GDP per person the fastest? A) around 500 B.C. because of Aristotle and Plato knowledge spillovers B) around 400 A.D, after decline of Rome C) after 1620, when Pilgrims arrived to America D) after 1750, the Industrial Revolution E) after 1430s, the discovery of Americas Answer: D Topic: Eye on the past, how fast has real GDP per person grown? Skill: Level 1: Definition Section: Checkpoint 9.1 Status: New AACSB: Reflective thinking

73) Since the 1960s, the growth rate of US potential GDP per person has slowed from about ________ to ________ so that the real GDP doubling period in 2010s is ________. A) 3 percent; 0.5 percent; 24 years B) 5 percent; 1 percent; 30 years C) 5 percent; 1.5 percent; 34 years D) 5 percent; 3 percent; 43 years E) 3 percent, 0.5 percent; 125 years Answer: E Topic: Eye on the U.S. economy, U.S. growth is slowing Skill: Level 1: Definition Section: Checkpoint 9.1 Status: New AACSB: Reflective thinking

74) Since the 1960s, the growth rate of U.S. potential GDP per person has ________. The doubling period for potential GDP per person has changed from ________ in the 1960s to ________ in the 2010s. A) slowed; 24 years; 43 years B) stayed the same; 30 years; 35 years C) slowed; 24 years; 125 years D) increased; 43 years; 125 years E) increased; 125 years; 30 years Answer: C Topic: Eye on the U.S. economy, U.S. growth is slowing Skill: Level 1: Definition Section: Checkpoint 9.1 Status: New AACSB: Reflective thinking

17.3 Labor Productivity Growth 1) Labor productivity is defined as A) total real GDP. B) real GDP per person. C) total output multiplied by total hours of labor. D) real GDP per hour of labor. E) hours of work per person. Answer: D Topic: Sources of growth, labor productivity Skill: Level 1: Definition Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

2) Labor productivity equals A) real GDP. B) real GDP per hour of labor. C) the total production of labor. D) the quantity of labor hours divided by real GDP. E) real GDP divided by the amount of human capital. Answer: B Topic: Labor productivity Skill: Level 1: Definition Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

3) Labor productivity is equal to the quantity of A) real GDP produced by one hour of labor. B) workers employed during one hour. C) real GDP consumed by the total population in one hour. D) real GDP. E) workers who are gainfully employed. Answer: A Topic: Labor productivity Skill: Level 1: Definition Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

4) The quantity of real GDP produced by one hour of labor is defined as A) real GDP per person. B) the advance in technology. C) the growth rate of technology. D) labor productivity. E) economic growth. Answer: D Topic: Labor productivity Skill: Level 1: Definition Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

5) Labor productivity is calculated as A) (real GDP ÷ aggregate hours). B) (real GDP ÷ aggregate hours × number of workers). C) (real GDP ÷ number of workers × ratio of capital per worker). D) (real GDP ÷ technology level). E) (real GDP ÷ aggregate hours × number of workers) × 100. Answer: A Topic: Labor productivity Skill: Level 1: Definition Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

6) Sustained increases in the standard of living depend on A) increases in the quantity of labor. B) increases in the population. C) increases in aggregate hours. D) increases in labor productivity. E) decreases in labor productivity. Answer: D Topic: Sources of growth, labor productivity Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

7) An increase in labor productivity A) increases the standard of living. B) decreases the standard of living. C) might be the result of an increase in the quantity of labor. D) generally occurs when physical capital decreases because firms must then hire more workers. E) cannot occur without a corresponding increase in employment. Answer: A Topic: Labor productivity Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

8) Last year, in a nation far to the South, real GDP was $90 million and 900,000 workers were employed. This year real GDP is $100 million, 950,000 workers are employed, and the number of hours each worker works per year did not change. Hence, labor productivity A) has increased. B) has decreased. C) has remained constant. D) cannot be compared between the two years because both real GDP and the number of workers increased. E) might have changed, but more information is needed to determine if it changed. Answer: A Topic: Labor productivity Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking

9) If real GDP is $6,460 billion, the population is 184.6 million people, and aggregate hours is 170 billion hours, labor productivity is A) $2.63 an hour. B) $2.86 an hour. C) $35,000. D) $38.00 an hour. E) 920 hours. Answer: D Topic: Labor productivity Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking

10) Real GDP is $700 billion, average hours worked per week is 42 and aggregate hours 150 billion hours. What is the economy's labor productivity? A) $1.80 per hour B) $3.75 per hour C) $16.67 per hour D) $46.67 per hour E) $4.50 per hour Answer: D Topic: Labor productivity Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking

11) Labor productivity growth depends on i. saving and investment. ii. increases in human capital. iii. technological growth. A) i only B) ii only C) iii only D) Both ii and iii E) i, ii, and iii Answer: E Topic: Labor productivity growth Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

12) Labor force productivity has increased from $30 per hour to $32 per hour over the past year. This could result from A) only an increase in real GDP. B) an increase in real GDP with no change in the aggregate hours or a decrease in aggregate hours with no change in real GDP. C) only a decrease in aggregate hours. D) an increase in the labor force participation rate. E) an increase in population. Answer: B Topic: Labor productivity growth Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

13) In recent years, Taiwan has experienced increases in savings and investment. As a result of the higher investment and saving, we expect i. increases in physical capital. ii. increases in the inflation rate. iii. advances in technology. A) i and iii B) i and ii C) ii only D) ii and iii E) i, ii and iii Answer: A Topic: Labor productivity growth, physical capital Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

14) If the stock of physical capital (that is machinery, equipment, etc.) and human capital remain the same and the population increases, then A) labor productivity will increase. B) labor productivity will decrease. C) the standard of living will increase. D) the new labor will be more productive. E) real GDP decreases. Answer: B Topic: Labor productivity growth, physical capital Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

15) The widespread adoption of computers in the workplace has likely led to A) no change in the quantity of labor hours. B) an increase in labor productivity because computers are a capital good. C) a decrease in labor productivity because computers are a capital good. D) a decrease in human capital because computers are physical capital. E) an increase in the supply of labor because people are needed to operate the computers. Answer: B Topic: Labor productivity growth, physical capital Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

16) Which of the following are required for economic growth? i. more goods and services produced per hour of work ii. an increase in the average hours of labor per person iii. an increase in prices A) i and iii B) i and ii C) ii and iii D) i only E) ii only Answer: B Topic: Labor productivity growth Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

17) A reason for an increase in labor productivity growth is A) an increase in people's human capital. B) a decrease in the capital stock so that firms must hire more workers. C) growth in the supply of labor. D) an increase in the population so that firms hire more workers. E) an increase in the quantity of labor. Answer: A Topic: Labor productivity growth, human capital Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

18) Human capital refers to the A) accumulated skill and knowledge of human beings. B) accumulated equipment used by human beings. C) accumulation of money by human beings. D) accumulation of money and equipment used by human beings. E) accumulated financial capital people have acquired. Answer: A Topic: Labor productivity growth, human capital Skill: Level 1: Definition Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

19) Human capital is defined as the A) amount of machinery human beings have. B) number of factories built for human beings. C) accumulated skill and knowledge of human beings. D) accumulated amount of machinery and factories human beings own. E) skills that people are born with. Answer: C Topic: Labor productivity growth, human capital Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

20) Increases in human capital can come A) only from formal schooling. B) from employing more machinery. C) only from on-the-job experience. D) from formal education and on-the-job learning. E) from nowhere because whatever human capital an individual possesses is what he or she was born with. Answer: D Topic: Labor productivity growth, human capital Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

21) Expansion of a nation's human capital can be achieved through A) education and training. B) education and saving. C) education and technology improvements. D) education only. E) nothing because human capital is determined by the skills people are born with. Answer: A Topic: Labor productivity growth, human capital Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

22) Human capital is acquired A) only in school. B) only through on-the-job training. C) only through job experience. D) through schooling, job training, and experience. E) only at birth, that is, it's people's inborn talents. Answer: D Topic: Labor productivity growth, human capital Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

23) Labor productivity increases if i. human capital decreases. ii. technology advances. iii. quality of education decreases. A) i only B) ii only C) iii only D) i and ii E) ii and iii Answer: B Topic: Labor productivity growth, technology Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

24) ________ increases with education, training, and job experience. i. Physical capital ii. Human capital iii. Financial capital A) i only B) ii only C) iii only D) ii and iii E) i, ii, and iii Answer: B Topic: Labor productivity growth, human capital Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

25) The law of diminishing marginal returns states that A) output increases at a constant rate as more capital is added. B) output decreases at a constant rate as more capital is added. C) as both labor and capital are increased, output does not change. D) as both labor and capital are increased, output increases at a decreasing rate. E) output increases at a decreasing rate as more capital is added. Answer: E Topic: Law of diminishing marginal returns Skill: Level 1: Definition Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

26) 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) capital produces the same amount of output as an additional unit of labor. D) capital produces more output than the previous unit. E) capital produces less output than the previous unit. Answer: E Topic: Law of diminishing marginal returns Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

27) The shape of the productivity curve reflects the A) effects of capital accumulation. B) effects of technological progress. C) change in labor productivity as human capital increases. D) law of diminishing marginal returns. E) effects of population growth. Answer: D Topic: Law of diminishing marginal returns Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

28) The productivity curve is a relationship between A) real GDP per hour of labor and capital per hour of labor, with technology held constant. B) nominal GDP per hour of labor and capital per hour of labor, with technology held constant. C) real GDP per hour of labor and capital per hour of labor whenever technological growth occurs. D) real GDP per unit of capital and capital per hour of labor, with technology held constant. E) capital per hour of labor and technological growth. Answer: A Topic: Productivity curve Skill: Level 4: Applying models Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking

29) The productivity curve is a relationship between ________ and ________. A) real GDP; hours of labor B) real GDP; capital C) real GDP per hour of labor; capital D) capital per hour of labor; labor per hour of capital E) real GDP per hour of labor; capital per hour of labor Answer: E Topic: Productivity curve Skill: Level 4: Applying models Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking

30) A diagram of a productivity curve has A) real GDP per hour of labor on the y-axis and capital per hour of labor on the x-axis. B) real GDP per hour of labor on the y-axis and hours of labor on the x-axis. C) capital per hour of labor on the y-axis and real GDP per hour of labor on the x-axis. D) real wages per hour on the y-axis and real GDP per hour of labor on the x-axis. E) real GDP per hour of labor on the y-axis and real wages per hour on the x-axis. Answer: A Topic: Productivity curve Skill: Level 4: Applying models Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking

31) The productivity curve A) has a positive slope. B) has a negative slope. C) is vertical. D) is horizontal. E) is U-shaped. Answer: A Topic: Productivity curve Skill: Level 4: Applying models Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking

32) Suppose that an Intel worker rearranges existing machines and labor and increases the quantity of chips Intel can produce. Using the productivity curve graphed, this innovation would be described as A) a movement upward along the curve. B) a movement downward along the curve. C) a shift of the curve upward. D) a shift of the curve downward. E) no change to the productivity curve. Answer: C Topic: Productivity curve Skill: Level 4: Applying models Section: Checkpoint 17.3 Status: Old AACSB: Application of knowledge

33) If capital per hour of labor increases, GDP per hour of labor A) decreases for a given level of technology. B) increases because the level of technology advances. C) increases for a given level of technology. D) decreases because the level of technology decreases. E) changes only if technology also advances. Answer: C Topic: Productivity curve Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking

34) 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. E) changes only if technology also advances. Answer: D Topic: Productivity curve Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking

35) If the level of technology rises, GDP per hour of labor A) increases for any level of capital per hour of labor. B) increases because the level of capital per hour of labor increases. C) decreases for a given level of capital per hour of labor. D) decreases because the level of capital per hour of labor decreases. E) does not change because GDP increases only when capital or labor increases. Answer: A Topic: Productivity curve, technological advance Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking

36) A technological change ________ and a change in the capital stock ________. A) shifts the productivity curve; shifts the productivity curve B) shifts the productivity curve; creates a movement along the productivity curve C) creates a movement along the productivity curve; shifts the productivity curve D) does not change the productivity curve; creates a movement along the productivity curve E) does not change the productivity curve; shifts the productivity curve Answer: B Topic: Productivity curve Skill: Level 4: Applying models Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking

37) Labor productivity equals A) real GDP × aggregate hours. B) real GDP ÷ aggregate hours. C) aggregate hours ÷ real GDP. D) aggregate hours × labor productivity. E) aggregate hours ÷ labor productivity. Answer: B Topic: Labor productivity Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking

38) Labor productivity equals A) real GDP divided by the capital stock. B) real GDP divided by the population. C) total wages divided by real GDP. D) real GDP divided by aggregate hours. E) aggregate hours divided by employment. Answer: D Topic: Labor productivity Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking

39) If real GDP is $1,200 billion, the population is 60 million, and aggregate hours are 80 billion, labor productivity is A) $5.00 an hour. B) $6.67 an hour. C) $15.00 an hour. D) $20,000. E) $150 an hour. Answer: C Topic: Labor productivity Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking

40) If aggregate hours are 100 billion hours and labor productivity is $40 an hour, than real GDP equals A) $100 billion. B) $40 billion. C) $100 trillion. D) $2.5 trillion. E) $4 trillion. Answer: E Topic: Labor productivity Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking

41) Which of the following lists gives factors that increase labor productivity? A) saving and investment in physical capital, and wage increases B) expansion of human capital, labor force increases, and discovery of new technologies C) expansion of human capital, population growth, and discovery of new technologies D) saving and investment in physical capital, expansion of human capital, and discovery of new technologies E) labor force increases and wage increases Answer: D Topic: Labor productivity growth Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

42) Growth in physical capital depends most directly upon the A) amount of saving and investment. B) number of firms in the nation. C) speed of population growth. D) amount of government expenditures. E) level of human capital. Answer: A Topic: Sources of economic growth Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

43) Human capital is A) the same as labor productivity. B) a measure of the number of labor hours available. C) the accumulated skills and knowledge of workers. D) the average number of years of schooling of the labor force. E) what people are born with and cannot be changed. Answer: C Topic: Labor productivity growth, human capital Skill: Level 1: Definition Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

44) The productivity curve shifts upward when A) physical capital increases. B) human capital decreases. C) hours of labor increase. D) hours of labor decrease. E) technology advances. Answer: E Topic: Productivity curve Skill: Level 4: Applying models Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking

45) In the productivity curve figure above, when the quantity of capital per hour of labor increases, the change in the labor productivity could be illustrated as A) movement from A to B. B) movement from B to A. C) shift from A to C. D) shift from A to D. E) shift from B to D. Answer: A Topic: Productivity curve Skill: Level 3: Using models Section: Checkpoint 17.3 Status: New AACSB: Analytical thinking

46) In the productivity curve figure above, the discovery of new technologies could be illustrated as A) movement from A to B. B) movement from B to A. C) movement from C to D. D) shift from A to C. E) shift from D to B. Answer: D Topic: Productivity curve Skill: Level 3: Using models Section: Checkpoint 17.3 Status: New AACSB: Analytical thinking

47) In the productivity curve figure above, the impact of eduction and training the increases workers' human capital could be illustrated as A) movement from A to B. B) movement from B to A. C) movement from C to D. D) shift from A to C. E) shift from D to B. Answer: D Topic: Productivity curve Skill: Level 3: Using models Section: Checkpoint 17.3 Status: New AACSB: Analytical thinking

48) In the productivity curve figure above, the discovery of a better method of producing electronic chips could be illustrated as A) a movement from A to B. B) a movement from B to A. C) a movement from C to D. D) a shift from A to C. E) a shift from D to B. Answer: D Topic: Productivity curve Skill: Level 3: Using models Section: Checkpoint 17.3 Status: New AACSB: Analytical thinking

49) In the productivity curve figure above, the combined effect of capital accumulation, discovery of new technologies, and the expansion of human capital on the labor productivity could be illustrated as A) a movement from A to B. B) a movement from C to D. C) a shift from A to C. D) a shift from A to D. E) a shift from B to D. Answer: D Topic: Productivity curve Skill: Level 3: Using models Section: Checkpoint 17.3 Status: New AACSB: Analytical thinking

17.4 Achieving Faster Growth 1) At its most basic level, economic growth depends on A) creating the right incentives. B) saving by the government. C) government leadership. D) government's fixing prices to encourage stability. E) political freedom. Answer: A Topic: Preconditions for growth Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

2) If a country lacks ________, economic growth ________. A) a democratic form of government; cannot occur B) a proper incentive system; cannot occur C) pure capitalism; will be slower compared to other countries D) a proper incentive system; will occur at a pace suggested by the new growth theory E) economic freedom; will increase at a faster pace Answer: B Topic: Preconditions for growth Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

3) The presence of an incentive system that encourages growth A) guarantees that growth will occur. B) creates the right conditions for growth to occur. C) cannot exist in poor countries. D) existed even in hunter-gatherer societies. E) means that the government must be a democracy. Answer: B Topic: Preconditions for growth Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

4) All of the following are preconditions for economic growth EXCEPT i. property rights. ii. democracy. iii. free markets. A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: B Topic: Preconditions for growth Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

5) A key reason why some nations show little or no growth is A) overpopulation that overuses limited resources. B) lack of incentives to undertake actions toward growth. C) too much private property not directed by the government. D) patents in rich nations that keep technology only for the rich. E) too much international trade so that all economic growth spills over to foreigners. Answer: B Topic: Preconditions for growth Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

6) An important condition required for economic growth is A) a democratic government. B) a totalitarian government. C) a libertarian government. D) economic freedom. E) the incentive to limit international trade so that all economic growth remains within the country. Answer: D Topic: Preconditions for growth, economic freedom Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

7) A basic precondition necessary to achieve economic growth is A) well-functioning factories. B) well-being of society. C) a well-functioning legal system. D) a well-organized work force. E) a strong central government that directs the nation's research and development activities. Answer: C Topic: Preconditions for growth, economic freedom Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

8) Economic freedom A) is not important for nations to grow. B) must come from a democratic government. C) is founded, in part, on the rule of law. D) is created when the nation imposes many regulations on businesses. E) is harmed by having too many property rights. Answer: C Topic: Preconditions for growth, economic freedom Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

9) Economic freedom requires A) that there are no regulations and restrictions set on businesses and households by the government. B) the rule of law and the ability to enforce the laws. C) strong labor unions. D) freedom to bribe government officials. E) that the government be a democracy. Answer: B Topic: Preconditions for growth, economic freedom Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

10) Economic freedom provides the A) political system that encourages democracy. B) social system that supports families. C) production system that discourages property rights. D) incentive system that encourages growth-producing activities. E) necessary alternative to free markets. Answer: D Topic: Preconditions for growth, economic freedom Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

11) Countries that enjoy economic growth A) have property rights and markets which provide incentives for discovering new technologies. B) have economies that allow the government to make decisions in everyone's best interests. C) restrict international trade so that domestic industries can grow. D) place high taxes on saving and investment. E) place controls on property rights so that firms are protected from competition. Answer: A Topic: Preconditions for growth, economic freedom Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

12) For economic freedom to exist, A) copyright laws must be abolished and markets supervised by the government. B) democracy must exist. C) property rights must be protected and markets must be free. D) human capital must be given away free. E) money must be free. Answer: C Topic: Preconditions for growth, economic freedom Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

13) Hong Kong is an example of an economy that A) does not experience economic growth because it is not a democracy. B) experiences economic growth in spite of the fact that is lacks democratic freedom. C) grows more slowly than other Asian countries because property rights are not valued. D) needs to promote investment so that economic growth can occur. E) lacks economic freedom and therefore experiences the slowest economic growth of all developed economies. Answer: B Topic: Preconditions for growth, economic freedom Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

14) A condition necessary for a country to achieve economic growth is A) high tax rates so the government can purchase a lot of capital equipment. B) strict environmental regulations. C) economic freedom. D) government control of the banking system. E) democracy. Answer: C Topic: Preconditions to economic growth, economic freedom Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

15) Economic freedom is a precondition for economic growth. Which of the following is a characteristic of economic freedom? i. A democratic form of government ii. Property rights must be protected. iii. The government must support and pay for inventions and innovations. A) i only B) ii only C) i and ii D) ii and iii E) i and iii Answer: B Topic: Preconditions for growth, economic freedom Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

16) Economic freedom is present, at least in part, when A) there are no property rights to limit people's freedom. B) there is no private property. C) people are able to make personal choices. D) there is no government. E) money is free. Answer: C Topic: Preconditions for growth, economic freedom Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

17) Economic growth is slow or absent in some economies because those lack A) political freedom. B) economic freedom. C) democracy. D) cultural freedom. E) a strong government. Answer: B Topic: Preconditions for growth, economic freedom Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

18) A key reason why some countries are growing very slowly is A) they lack a democratic government. B) they lack economic freedom. C) their inflation rate is too high. D) they are too poor, so there is no saving. E) there is too much competition within their economies. Answer: B Topic: Preconditions for growth, economic freedom Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

19) A reason why many of the third world countries are not achieving an increase in their standard of living is that they A) don't have enough natural resources. B) don't have strong military power to force people to work harder. C) don't have social institutions with a strong rule of law and economic freedom. D) strongly encouraged international trade. E) don't have a strong central government. Answer: C Topic: Preconditions for growth, economic freedom Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

20) Property rights A) don't include intellectual property. B) don't include financial property. C) don't include physical property. D) include physical, financial, and intellectual property. E) slow the economic growth by placing limits on who can use what. Answer: D Topic: Preconditions for growth, property rights Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

21) Property rights assure people that A) the government will not confiscate their income or savings. B) the government will provide a minimum standard of living. C) the factors of production and goods are owned jointly by the government and the people. D) economic growth will enhance government involvement in the economy. E) international trade will be limited. Answer: A Topic: Preconditions to economic growth, property rights Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

22) Jose and Julia were discussing the necessary components to achieve economic growth. Jose stated that the economy must include free markets, specialization and trade, and an ethical judicial system. Julia reminded Jose that another key component is A) freedom of speech. B) freedom of religion. C) a guaranteed high rate of return on savings. D) property rights. E) democracy. Answer: D Topic: Preconditions for growth, property rights Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

23) One possible way of achieving faster economic growth is to A) regulate the amount of international trade and limit it so that not too much occurs. B) limit research and development because research and development does not contribute anything to today's production. C) assign the government ownership of all capital. D) protect property rights and free markets. E) tax saving so that people spend more and firms' profits are higher. Answer: D Topic: Preconditions for growth, property rights Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

24) Which of the following are important for countries to promote with property rights and incentives if economic growth is to occur? i. specialization ii. saving and investment iii. increases in human capital iv. discovery of new technology A) i, ii, iii and iv B) ii and iii C) iii and iv D) ii and iv E) i, ii and iv Answer: A Topic: Preconditions for growth, property rights Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

25) One way to achieve faster growth in GDP per person is to increase the A) number of women working in the home rather than in the workforce. B) growth rate of the quantity of money. C) growth rate of human capital. D) growth rate of the population. E) limits on international trade in order to keep more of total spending on domestically produced goods. Answer: C Topic: Preconditions for growth, human capital Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

26) The following government policies will help achieve faster economic growth EXCEPT A) discouraging saving and encouraging spending. B) encouraging research and development. C) establishing and protecting property rights. D) improving the quality of education. E) increasing saving. Answer: A Topic: Policies for faster growth, saving Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

27) If Turkey wants to promote faster economic growth, it will need to A) promote incentive systems to encourage saving, research and development, increased trade and improved education. B) restrict economic freedom so the government has better control of markets. C) restrict international trade to protects its own workers. D) promote government intervention to help markets determine incentives. E) restrict property rights so that individuals can better share inventions. Answer: A Topic: Policies for faster growth Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

28) Retirement savings accounts, such as IRAs, help increase economic growth because A) people have an incentive to work harder and longer hours to save for the future. B) they keep the interest rates high. C) savings finances investment. D) government invests them. E) they encourage international trade. Answer: C Topic: Policies for faster growth, saving Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

29) One possible way of achieving faster economic growth is to A) encourage saving. B) protect the economy from international trade. C) limit investment because investment adds nothing to production today. D) eliminate property rights because they prevent people from using other people's ideas. E) tax saving so that people spend more and businesses make more profit. Answer: A Topic: Policies for faster growth, saving Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

30) East Asian economies have grown A) rapidly because of high saving rates. B) rapidly despite a lack of property rights. C) slowly because of a lack of property rights. D) slowly because of low saving rates. E) rapidly because they virtually eliminated international trade. Answer: A Topic: Policies for faster growth, saving Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

31) One of the possible roles governments can play in sponsoring growth is to A) provide tax incentives to encourage saving. B) own more of the nation's resources in order to put them to use. C) close the nation to trade in order to protect its domestic producers. D) make decisions for its citizens as to the most suitable job. E) limit the use of property rights in order to decrease the harm they create. Answer: A Topic: Policies for faster growth, saving Skill: Level 1: Definition Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

32) Many economists argue that an incentive to save is A) high income tax rates. B) a tax on consumption rather than on income. C) a tax on income rather than a tax on consumption. D) greater government regulation of the banking and securities industries. E) strengthening the property rights that savers have to the physical capital they purchase. Answer: B Topic: Policies for faster growth, saving Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

33) One possible way of achieving faster economic growth is to A) abolish the system of patents and copyrights so that everyone can use people's ideas. B) limit international trade to only a few countries so that the nation is not hurt by too much trade. C) encourage research and development. D) limit schooling in order to have more people in the labor force, producing goods and services. E) promote tax saving so that people spend more and businesses' profits are larger. Answer: C Topic: Preconditions for growth, R&D Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

34) One possible way of achieving faster economic growth is to A) limit international trade. B) encourage international trade. C) limit research and development and concentrate on production of goods and services. D) abolish the system of patents and copyrights so that everyone can use people's ideas. E) let the government decide what research and development should be undertaken. Answer: B Topic: Policies for faster growth, international trade Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

35) Encouraging international trade will A) slow economic growth when a country is forced to specialize and trade with other countries. B) slow economic growth as many workers lose their jobs to foreign workers. C) speed economic growth as workers diversify their knowledge and limit trade. D) speed economic growth as workers specialize and trade with others. E) speed economic growth because international trade limits the harm done by property rights. Answer: D Topic: Policies for faster growth, international trade Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

36) The fastest growing nations today A) are not saving but instead are investing. B) have erected many trade barriers to protect domestic firms. C) have the fastest growing exports and imports. D) have non-democratic political systems. E) have the government directing all their research and development. Answer: C Topic: Policies for faster growth, international trade Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

37) China's growth rate has ________ that of most other countries, ________. A) topped; but its real GDP per person is still lower than other industrialized countries B) lagged behind; and its real GDP is close to other Asian economies C) lagged behind; but its real GDP per person is higher than other Asian economies D) topped; but its real GDP per person declined in 2008-09 E) equaled; and its real GDP per person declined in 2008-09 Answer: A Topic: Eye on convergence and gaps Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

38) Governments should promote education because education contributes to the nation's A) employment. B) free markets. C) economic growth potential. D) international trade. E) protection of property rights. Answer: C Topic: Policies for faster growth, education Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

39) Brian is running for state senator and if elected, pledges to improve economic growth. His plan for economic growth includes increasing spending on public education and providing tax incentives to encourage improved private education. His plan is likely to A) slow economic growth because it includes a provision for private education. B) have no effect on economic growth because property rights are not changed. C) speed economic growth as the quality of resources improve. D) fail because the provision for private education limits government involvement in education. E) have no effect on economic growth because government spending cannot affect the economic growth rate. Answer: C Topic: Policies for faster growth, education Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

40) If Kenya institutes policies that support economic freedom and growth, it is likely that Kenya will A) immediately reap the benefits of double digit increase in economic growth. B) immediately reap the benefits of a 4 percent to 6 percent increase in economic growth. C) slowly reap the benefits of economic growth as the economy grows over time. D) lose control of the economy and plunge into a long recession. E) suffer from too much competition within its economy. Answer: C Topic: Faster growth, the difference policy makes Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

41) Which of the following is NOT a necessary precondition for economic growth? A) economic freedom B) democracy C) property rights D) free markets E) ALL of the above are necessary preconditions. Answer: B Topic: Preconditions for growth Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

42) Which of the following characteristics is a precondition for economic growth? i. economic freedom ii. free markets iii. active government policy to discourage saving A) i only B) ii only C) iii only D) i and ii E) ii and iii Answer: D Topic: Preconditions for growth Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

43) Economic freedom means that A) firms are regulated by the government. B) some goods and services are free. C) people are able to make personal choices and their property is protected. D) the rule of law does not apply. E) the nation's government is a democracy. Answer: C Topic: Preconditions for growth, economic freedom Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

44) Property rights protect A) only the rights to physical property. B) only the rights to financial property. C) all rights except rights to intellectual property. D) rights to physical property, financial property, and intellectual property. E) the government's right to impose taxes. Answer: D Topic: Preconditions for growth, property rights Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

45) Activities that encourage faster growth are A) high levels of saving and investment in 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) imposing trade barriers to limit international trade and thereby protect national industries. E) limiting property rights so that everyone can use any invention. Answer: A Topic: Policies for faster growth Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

46) Which of the following statements is FALSE? A) Saving helps create economic growth. B) Improvements in quality of education are important for economic growth. C) Free international trade helps create economic growth. D) Faster population growth is the key to growth in real GDP per person. E) Economic freedom requires property rights. Answer: D Topic: Policies for faster growth Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

47) In order to increase economic growth, a government can A) discourage research and development. B) decrease funding on education. C) discourage specialization and trade. D) establish property rights and a legal system. E) tax saving in order to encourage more spending. Answer: D Topic: Policies for faster growth Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

48) Saving A) slows growth because it decreases consumption. B) finances investment which brings capital accumulation. C) has no impact on economic growth. D) is very low in most East Asian nations. E) is important for a country to gain the benefits of international trade. Answer: B Topic: Policies for faster growth, saving Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

49) A government policy that taxes saving in order to discourage saving and encourage spending will A) slow economic growth. B) speed economic growth. C) create a greater incentive for people to specialize. D) strengthen people's property rights. E) increase the growth rate of capital. Answer: A Topic: Policies for faster growth, saving Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

50) The fastest growing nations today are those with A) barriers that significantly limit international trade. B) the fastest growing exports and imports. C) government intervention in markets to ensure high prices. D) few funds spent on research and development. E) the least saving. Answer: B Topic: Policies for faster growth, international trade Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

51) Economic growth is enhanced by A) free international trade. B) limiting international trade so that the domestic economy can prosper. C) discouraging saving, because increased saving means less spending. D) ignoring incentive systems. E) increasing welfare payments to the poor so they can afford to buy goods. Answer: A Topic: Policies for faster growth, international trade Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Reflective thinking

17.5 Chapter Figures

1) The figure above shows the U.S. production function. How would an increase in capital be shown in the figure? A) an upward shift or rotation of the production function B) a downward shift or rotation of the production function C) a movement from point A to point B D) a movement from point C to point B E) None of the above because the effects of an increase in capital cannot be shown in the figure. Answer: A Topic: Production function Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

2) The figure above shows the U.S. production function. How would an increase in unemployment benefits be shown in the figure? A) a movement from point C to point B B) a movement from point A to point B C) an upward shift or rotation of the production function D) a downward shift or rotation of the production function E) None of the above because the effects of an increase in unemployment benefits cannot be shown in the figure. Answer: A Topic: Production function Skill: Level 4: Applying models Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

3) The figure above shows the U.S. production function. How would an increase in income taxes be shown in the figure? A) a movement from point C to point B B) a movement from point A to point B C) an upward shift or rotation of the production function D) a downward shift or rotation of the production function E) None of the above because the effects of an increase in taxes cannot be shown in the figure. Answer: A Topic: Production function Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

4) The figure above shows the U.S. demand for labor curve. If there is a simultaneous increase in the nominal wage rate of 10 percent and a 10 percent increase in the price level, there will be a A) rightward shift of the demand for labor curve. B) leftward shift of the demand for labor curve. C) movement downward along the demand for labor curve from a point such as A to a point such as B. D) movement upward along the demand for labor curve from a point such as C to a point such as B. E) None of the above answers is correct because there is no change in the demand for labor curve. Answer: E Topic: Demand for labor curve Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

5) The figure above shows the U.S. supply of labor curve. If there is a simultaneous increase in the nominal wage rate of 10 percent and a 10 percent increase in the price level, there will be a A) rightward shift of the supply of labor curve. B) leftward shift of the supply of labor curve. C) movement downward along the supply of labor curve from a point such as A to a point such as B. D) movement upward along the supply of labor curve from a point such as C to a point such as B. E) None of the above answers is correct because there is no change in the supply of labor curve. Answer: E Topic: Supply of labor curve Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

6) The figure above shows the U.S. supply of labor curve. An increase in the income tax rate leads to a A) rightward shift of the supply of labor curve. B) movement upward along the supply of labor curve from a point such as C to a point such as B. C) movement downward along the supply of labor curve from a point such as A to a point such as B. D) leftward shift of the supply of labor curve. E) None of the above answers is correct because there is no change in the supply of labor curve. Answer: D Topic: Supply of labor curve Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

7) The figure above shows the U.S. supply of labor curve. What was the affect of the decline in birth rates during the 1960s and 1970s on the supply of labor curve in the 1980s? A) a rightward shift of the supply of labor curve B) the supply of labor curve became steeper C) a movement downward along the supply of labor curve from a point such as A to a point such as B D) a leftward shift of the supply of labor curve E) None of the above answers is correct because there was no change in the supply of labor curve. Answer: D Topic: Supply of labor curve Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

17.6 Integrative Questions 1) If the government increases unemployment benefits, then the labor A) demand curve shifts rightward. B) demand curve shifts leftward. C) supply curve shifts rightward. D) supply curve shifts leftward. E) Both answers B and D are correct. Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

2) If the government raises income taxes, then the labor A) demand curve shifts rightward. B) demand curve shifts leftward. C) supply curve shifts rightward. D) supply curve shifts leftward. E) Both answers B and D are correct. Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

3) If the government raises income taxes, then the equilibrium amount of employment ________ and potential GDP ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; does not change Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

4) Economic growth in Cuba has been slow; what can best explain the slow growth? A) lack of economic resources B) lack of incentive mechanisms and economic freedom C) labor productivity is low. D) a non-democratic form of government E) too much competition within the economy Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking

5) The presence of government corruption in some countries A) slows their economic growth. B) speeds their economic growth. C) invalidates the new growth theory's predictions. D) supports the classical growth theory's predictions. E) invalidates the neoclassical growth theory's predictions. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

6) Which of the following policies encourages economic growth? A) increased taxes on income and business profits B) reduction of government support of higher education C) high tariffs and strict import quotas on foreign-made products D) creation of tax-free savings accounts E) limiting the years people spend in education so that they can start productive work Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking

17.7 Essay: Potential GDP 1) Define potential GDP. Under what circumstances does actual real GDP fall short of potential GDP, equal potential GDP, and exceed potential GDP? Answer: Potential GDP is the level of real GDP that the economy produces when it is at full employment. Potential GDP can be contrasted with actual real GDP, the amount of real GDP the country actually produces. Actual real GDP can be less than potential GDP when the economy is producing at less than full employment, that is, when there is less than full employment in the labor market. Actual real GDP equals potential GDP when the economy is producing at full employment. Actual real GDP can exceed potential GDP temporarily as the economy approaches and then recedes from a business cycle peak. Topic: Potential GDP Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Written and oral communication

2) Briefly define real and potential GDP, and explain the relationship between real GDP and potential GDP. How can we measure potential GDP? Answer: Real GDP is the actual level of GDP, adjusted for inflation. Potential GDP is what the GDP would be if the economy was fully employed. Because of the business cycle, real GDP fluctuates around potential GDP. Thus real GDP is sometimes greater than potential GDP, sometimes smaller than potential GDP, and sometimes equal to potential GDP. Over time, the larger-than-normal and smaller-than-normal values cancel out and we can estimate potential GDP by using the average of real GDP. Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Written and oral communication

3) Discuss the production function. How does the production function relate to the labor market and potential GDP? Answer: The 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 production. As the quantity of labor increases, real GDP increases but at a decreasing rate, that is, the production function shows diminishing returns. The production function "stands between" the labor market and potential GDP. In particular, the quantity of employment is determined in the labor market. The 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: Production function Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Written and oral communication

4) Define the production function. Discuss why the production function exhibits diminishing returns. Answer: The 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 production remain the same. The 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: Production function Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Written and oral communication

5) Explain how the real wage and the extra output produced by each worker determine the quantity of labor demanded by a firm. Answer: The firm compares the cost of hiring an extra worker (the real wage) to the benefit (the extra output produced by an extra worker). Because the firm wants to make a profit, it hires the worker as long as the extra output is greater than the real wage. Thus the firm will demand (hire) the quantity of workers such that the extra output produced by the worker is greater than or equal to the real wage rate. Because labor has diminishing returns, there is some point at which the last worker hired produces just enough output to justify the wage rate and so additional workers will not be hired. Topic: Demand for labor Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

6) 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. In other words, 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: Full employment and potential GDP Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

7) 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: Full employment and potential GDP Skill: Level 4: Applying models Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

8) 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: Full employment and potential GDP Skill: Level 4: Applying models Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

9) 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: Full employment and potential GDP Skill: Level 4: Applying models Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

10) Over the last decade, a country experiences a significant increase in labor productivity. a. Draw and label a labor market supply and demand diagram. Show how the equilibrium real wage rate and the equilibrium quantity of labor change as productivity increases. b. Draw and label a production function. Show how potential GDP changes as labor productivity increases. Answer:

a. The figure above shows the effect of an increase in productivity in the labor market. The increase in productivity shifts the labor demand curve rightward and, as illustrated, raises the real wage rate and increases the quantity of employment.

b. The production function shifts upward as shown in the figure. Potential GDP increases for two reasons: there is a greater quantity of labor, and the new production function is higher than the old one. Topic: Full employment and potential GDP Skill: Level 4: Applying models Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

17.8 Essay: The Basics of Economic Growth 1) Why is growth in GDP different from growth in a nation's standard of living? Is it possible for a nation's GDP to grow while its standard of living falls? Answer: The standard of living is measured by real GDP per person, so growth in the standard of living equals growth in real GDP per person. The growth rate of real GDP per person equals the growth rate of real GDP minus the growth rate of the population. Hence it is indeed possible for a nation's GDP to grow, while its standard of living decreases. This outcome occurs whenever the population grows more rapidly than real GDP. Topic: Standard of living Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Written and oral communication

2) How do we calculate growth in a nation's standard of living? Answer: The standard of living is measured by real GDP per person. Thus growth in the standard of living is calculated using the growth rate of real GDP per person. Topic: Standard of living Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

3) What is the Rule of 70? Answer: The Rule of 70 is that the number of years it takes for the level of any variable to double is approximately 70 divided the annual percentage growth rate of the variable. Topic: Rule of 70 Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

4) A nation's population was 250 million last year and is 255 million this year. If its real GDP was $8.5 trillion last year and is $8.8 trillion this year, what is its growth rate of real GDP per person? Answer: Last year real GDP per person equaled ($8.5 trillion)/(250 million) = $34,000 per person. This year, real GDP per person is $34,510 per person. Thus the growth in real GDP per person equals × 100 = 1.5 percent. Topic: Growth rate, real GDP per person Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

5) U.S. real GDP per person grew rapidly in the early 1960s. The table above has U.S. real GDP and population for 1961 and 1962. a. What was U.S. real GDP per person in 1961? b. What was U.S. real GDP per person in 1962? c. Between 1961 and 1962, how rapidly did U.S. real GDP per person grow? Answer: a. U.S. real GDP per person in 1961 = ($2,432 billion)/(184 million) = $13,217. b. U.S. real GDP per person in 1962 = ($2,578 billion)/(186 million) = $13,860. c.

The growth rate of real GDP per person equals

× 100 = 4.9 percent.

Topic: Growth rate, real GDP per person Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

6) If a nation's population grows at 2 percent and its real GDP grows at 4 percent, what is the growth rate of real GDP per person? Answer: The growth rate of real GDP per person equals the growth rate of real GDP minus the population growth rate. Hence, in the question at hand, the real GDP per person growth rate equals 4 percent minus 2 percent, or 2 percent. Topic: Growth rate, real GDP per person Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

7) Suppose that real GDP grows at 3 percent per year. What is the growth rate of real GDP per person if the population grows at: a. 2 percent? What happens to the standard of living? b. 3 percent? What happens to the standard of living? c. 4 percent? What happens to the standard of living? Answer: a. The growth rate of real GDP per person equals the growth rate of real GDP minus the population growth rate. Hence the growth rate of real GDP per person equals 3 percent minus 2 percent or 1 percent. The standard of living increases because real GDP per person increases. b. The growth rate of real GDP per person equals 3 percent minus 3 percent or 0 percent. The standard of living does not change because real GDP per person does not change. c. The growth rate of real GDP per person equals 3 percent minus 4 percent or -1 percent. The standard of living decreases because real GDP per person decreases. Topic: Growth rate, real GDP per person Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

8) During 2005, real GDP in Ireland grew 9.8 percent. If Ireland maintains this level of growth in the future, real GDP will double in approximately how many years? Answer: With an annual growth rate of 9.8 percent, the Rule of 70 shows that Ireland's real GDP will double in approximately 70 ÷ 9.8 = 7.1 years. Topic: Rule of 70 Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

9) Suppose real GDP grows at 7 percent per year and the population grows at 2 percent per year. How many years will it take for real GDP and real GDP per person to double? Answer: Use the Rule of 70 for both answers. The growth rate of real GDP is given in the question, and so the Rule of 70 directly indicates that real GDP doubles in 70 ÷ 7 = 10 years. To determine the number of years it takes for real GDP per person to double, it is necessary to calculate the growth rate of real GDP per person. The growth rate of real GDP per person equals 7 percent minus 2 percent or 5 percent per year. Hence the Rule of 70 shows that real GDP per person doubles in 70 ÷ 5 = 14 years. Topic: Rule of 70 Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

17.9 Essay: Labor Productivity Growth 1) Real GDP can increase either because the quantity of labor increases or because labor productivity increases. What is the effect on the standard of living if real GDP increases because a. the quantity of labor increases? b. labor productivity increases? Answer: a. An increase in real GDP because the quantity of labor increases has no effect on the standard of living. b. An increase in real GDP because labor productivity increases boosts the nation's standard of living. Topic: Labor productivity Skill: Level 1: Definition Section: Checkpoint 17.3 Status: Old AACSB: Written and oral communication

2) What is the effect on real GDP per person if labor productivity increases? What is the effect on the nation's standard of living? 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. The nation's standard of living is measured by real GDP per person. So, an increase in labor productivity boosts real GDP per person and therefore boosts the nation's standard of living. Topic: Labor productivity Skill: Level 1: Definition Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking

3) Real GDP equals $12 trillion and aggregate hours equals 300 billion hours. What does labor productivity equal? Answer: Labor productivity is defined as (real GDP ÷ aggregate hours), so labor productivity equals ($12 trillion ÷ 300 billion hours) = $40 per hour. Topic: Labor productivity Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking

4) Labor productivity is $30 per hour and aggregate hours are 165 billion hours. What does real GDP equal? Answer: Real GDP equals (labor productivity × aggregate hours) = ($30 per hour × 165 billion hours) = $4,950 billion. Topic: Labor productivity Skill: Level 1: Definition Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking

5) Labor productivity is $20 per hour and aggregate hours are 400 billion hours. a. What does real GDP equal? b. Because of technological advances, labor productivity doubles to $40 per hour. Furthermore, assume that aggregate hours decrease to 300 billion hours. What does real GDP equal? Answer: a. Real GDP equals (labor productivity × aggregate hours) = ($20 per hour × 400 billion hours) = $8 trillion. b. Real GDP now equals $12 trillion. Topic: Labor productivity Skill: Level 1: Definition Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking

6) 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 growth Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking

7) List and explain the three 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 growth Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Written and oral communication

8) 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: Labor productivity growth, human capital Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Written and oral communication

9) Explain the productivity curve and how the components interact. Answer: The productivity curve is a relationship that shows how real GDP per hour of labor varies as the amount of capital per hour of labor changes with no change in technology. An increase in the amount of capital per hour of labor leads to a movement along a productivity curve. An increase in technology shifts the productivity curve upward. Topic: Productivity curve Skill: Level 1: Definition Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking

10) What does a productivity curve reflect? What leads to movements along a productivity curve and what leads to shifts in a productivity curve? Answer: The productivity curve shows the relationship between the amount of capital per hour of labor and real GDP per hour of labor, that is, between capital per hour labor and labor productivity. The curve is upward sloping, but, due to diminishing returns, the slope becomes less steep as capital per hour of labor increases. If the amount of capital per hour of labor changes, there is a movement along the productivity curve. If the amount of human capital increases and/or technology advance occurs, the productivity curve shifts upward. Topic: Productivity curve Skill: Level 1: Definition Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking

11) What is the law of diminishing returns? Give an example of what the law of diminishing returns implies. Answer: The law of diminishing returns is the observation that as the quantity of one input increases with the quantities of all other inputs remaining the same, output increases but by ever smaller increments. Hence, as more workers (or capital) are used by a firm, each additional worker (or unit of capital) increases output, but by less than previous worker (or unit of capital). For instance, a law firm might have one paralegal typing briefs on one personal computer. Hiring an additional paralegal will increase the number of briefs, but with only one personal computer, the additional paralegal will not double the number of briefs. Similarly, buying another computer, while employing only one paralegal, might increase the number of briefs typed but will not double the number. Topic: Productivity curve Skill: Level 4: Applying models Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking

17.10 Essay: Achieving Faster Growth 1) What is economic freedom and why is it important for economic growth? Answer: Economic freedom is a condition when people are able to make their own choices, their private property is protected, and they are free to trade in markets. Economic freedom is a necessary precondition for economic growth because all three aspects of economic freedom are highly growth enhancing. People are the best judges of their own interests and abilities, so allowing them to make their own decisions creates the best decisions about what activities will be undertaken. Protecting private property is necessary in order to give people the incentives to specialize and trade as well as to save and invest, all actions that will increase economic growth. Letting people trade in free markets again respects people's abilities to make the best decisions for themselves, and also increases people's incentives to specialize and trade. Topic: Economic freedom Skill: Level 3: Using models Section: Checkpoint 17.4 Status: Old AACSB: Written and oral communication

2) Why is economic growth so slow or non-existent in many third world countries? What policies would you propose to improve the situation? Answer: Slow-growing third world countries generally lack the necessary preconditions for economic growth: economic freedom, secure property rights, and freely functioning markets. In many of these nations, a corrupt legal system and government means that the rule of law and property rights are absent. In order to increase economic growth in these nations, policies that create economic freedom, secure property rights, and free markets must be adopted. It does not matter if these policies are adopted by a democratic government or by an authoritarian government, the key point is that they are necessary for the nation to grow. Thus, specific policies include creating an efficient legal system that respects the rule of law and enforces property rights and contracts; eliminating government corruption that undermines the rule of law; and, in order to establish free markets, decreasing government bureaucracy and limits to trade, such as high taxes, regulations, and import bans. Topic: Preconditions for growth, economic freedom Skill: Level 4: Applying models Section: Checkpoint 17.4 Status: Old AACSB: Written and oral communication

3) What policies can a government undertake to achieve faster economic growth? Answer: There are several policies a government can undertake. First the government must insure that the preconditions for growth are present. The government must insure that economic freedom exists, that property rights are enforced, and that markets are free. After these crucial preconditions are in place, the government can create incentive mechanisms to save, invest, and innovate; can encourage saving; can encourage research and development; can encourage international trade; and can improve the quality of education. Topic: Policies for faster growth Skill: Level 4: Applying models Section: Checkpoint 17.4 Status: Old AACSB: Written and oral communication

4) A country's leadership believes that the neoclassical growth theory is correct. The country already has the necessary preconditions for growth, so suggest policy changes the government might enact to help speed economic growth. Answer: The policy changes should encourage technological innovation and capital formation because these are the key engines of growth within the neoclassical growth theory. Hence, the government should encourage research and development, possibly by directly funding research and development. In addition, the government should support policies that increase saving, because an increase in saving will lead to increased investment and hence new capital, some of which will have the new technologies embodied in it. Topic: Policies for faster growth, research and development Skill: Level 1: Definition Section: Checkpoint 17.4 Status: Old AACSB: Written and oral communication

5) Why are the governments of developed countries concerned about the quality of education in their countries? What effect does education play in determining the country's economic growth rate and its standard of living? Why does it have this effect? Answer: Improving the quality of education is an important policy that the government can undertake to increase the nation's economic growth rate. A higher quality education increases the nation's human capital. Increases in human capital boost labor productivity and, in turn, the increase in labor productivity raises the nation's economic growth rate as well as its standard of living. Topic: Policies for faster growth, education Skill: Level 1: Definition Section: Checkpoint 17.4 Status: Old AACSB: Written and oral communication

Essential Foundations of Economics, 8e (Bade) Chapter 18 Money and the Monetary System 18.1 What Is Money? 1) Which statement about money is most correct? A) Money is a new invention and only includes dollar bills and coins. B) Money is a new invention and can include anything that is accepted as a means of payment. C) Money has been around for a long time and can include anything that is accepted as a means of payment. D) Money has been around for a long time and only includes dollar bills and coins. E) Money has been around for a long time and only includes checking and savings accounts. Answer: C Topic: Money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

2) For a commodity or token to be money it must A) be accepted in exchange for all other goods and services. B) have a double coincidence of wants. C) be backed by government precious metals, like gold. D) be paper. E) be issued by the government or a government agency. Answer: A Topic: Money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

3) Money is any commodity or token that is A) backed by gold. B) generally accepted as a means of measurement. C) generally accepted as a means of payment. D) issued by the government. E) a store of value. Answer: C Topic: Money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

4) Money is any commodity or token that A) is generally accepted as a means of payment. B) is backed up and controlled by the government. C) is naturally accepted by households to accumulate wealth. D) does not change in value over time. E) is backed by gold. Answer: A Topic: Money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

5) In order for any given commodity to be considered money, it has to A) have some intrinsic value. B) be generally acceptable as a means of payment. C) be issued and controlled by some governmental institution. D) be convertible into gold or silver. E) be used in barter transactions. Answer: B Topic: Money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

6) For anything to be considered money it must be A) a valuable commodity, such as gold. B) a token, such as a green piece of paper. C) either a commodity or a token, as long as it is generally accepted as a means of payment. D) a mystical token, such as whale teeth. E) used in barter transactions. Answer: C Topic: Money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

7) A common trait of money through history and across cultures is that money A) always had mystical properties. B) was always issued by the local government. C) was always based on gold or some other precious commodity. D) was always generally accepted as a means of payment. E) was always fiat money. Answer: D Topic: Money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

8) Money is best defined as A) anything that has value. B) anything accepted as a means of payment. C) anything that can be sold to pay for something. D) currency. E) anything that is backed by gold. Answer: B Topic: Money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

9) Money must be ________ which includes the fact that is should ________. A) in physical form; not be transferable using electronic means B) accepted as a means of payment across countries' borders; not be fiat money C) generally accepted as a means of payment; be recognizable and divisible into small parts D) whatever is used in a barter system; transferable across countries' borders E) backed by gold; not decrease in value over time Answer: C Topic: What is money? Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

10) For an asset to be a "means of payment," the asset A) is valuable and backed by gold. B) is valuable and backed by the government. C) can be used to settle a debt. D) requires a double coincidence of wants. E) must be used when bartering. Answer: C Topic: What is money? Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

11) The functions of money are A) medium of exchange, unit of account, and store of value. B) medium of exchange, the ability to buy goods and services, and the ability to pay off debts. C) medium of exchange, the ability to buy goods and services, and checking accounts. D) credit cards, checking accounts, currency, and coins. E) store of value, use as a barter mechanism, and unit of account. Answer: A Topic: Functions of money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

12) Money serves as a A) means of payment, legal obligation, and public tax. B) medium of exchange, unit of account, and store of value. C) means of settling debts, transaction lubricant, and private commodity. D) means of worker exploitation and capitalist enrichment. E) means to conduct barter transactions. Answer: B Topic: Functions of money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

13) Which of the following is NOT among the primary functions of money? A) unit of account B) store of value C) indicator of supply D) medium of exchange E) an object that is generally accepted in return for goods and services Answer: C Topic: Functions of money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

14) Money performs all of the following functions EXCEPT serving as a i. medium of exchange. ii. unit of account. iii. barter mechanism. A) i only B) ii only C) iii only D) i and ii E) ii and iii Answer: C Topic: Functions of money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

15) When you join the local organic food market and then buy produce each month, money is used as A) only a store of value. B) only a unit of account. C) a medium of exchange and a store of value. D) a medium of exchange and a unit of account. E) a store of value and a unit of account. Answer: D Topic: Functions of money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

16) Barter requires the A) use of commodity money as a medium of payment. B) use of fiat money as a medium of exchange. C) the triple non-coincidence of wants. D) exchange of goods and services directly for other goods and services. E) use of money as a unit of account. Answer: D Topic: Functions of money, medium of exchange Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

17) The medium of exchange is defined as A) barter. B) the exchange of goods and services directly for goods and services. C) an object that is accepted in return for goods and services. D) credit cards. E) an item that can be stored and hold its value over time. Answer: C Topic: Functions of money, medium of exchange Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

18) A barter system of payment is A) similar to a money system of payment because both require a double coincidence of wants. B) similar to a money system of payment because both use one asset as a unit of account. C) different from a money system of payment because the barter system is a better unit of account. D) different from a money system of payment because money does not require a double coincidence of wants. E) similar to a money system of payment because both are used as stores of value and units of account. Answer: D Topic: Barter Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

19) In performing which of its primary functions does money solve the problem of the double coincidence of wants? A) medium of exchange B) unit of account C) store of value D) barter system E) money supply Answer: A Topic: Barter Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

20) The "double coincidence of wants" is A) what is needed to use money. B) eliminated with the use of money. C) eliminated when we barter instead of using money. D) how value is stored when we transact with money. E) money's role as a unit of account. Answer: B Topic: Barter Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

21) When we use money to purchase goods and services, we are using money as a A) unit of account. B) reserve of wealth. C) medium of exchange. D) store of value. E) bartering tool. Answer: C Topic: Functions of money, medium of exchange Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

22) When you use currency to buy lunch, money is performing which function? A) medium of exchange B) unit of purchase C) store of value D) barter token E) unit of currency Answer: A Topic: Functions of money, medium of exchange Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

23) What is a problem with barter that makes it so difficult to use? A) Individuals have to produce something to trade with. B) Barter requires a double coincidence of wants. C) Barter is very efficient but illegal because it avoids taxation. D) Barter requires use of only fiat money. E) Barter omits the store of value role for money. Answer: B Topic: Functions of money, medium of exchange Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

24) Which of the following best describes a double coincidence of wants? A) Two buyers want the same good. B) Neither buyer wants a good. C) You have what another wants and you want what they have. D) A buyer and a seller rather than two buyers or two sellers must meet. E) None of the above answers is correct. Answer: C Topic: Functions of money, medium of exchange Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

25) The unit of account is defined as A) the exchange of goods and services directly for other goods and services. B) barter. C) an object that is accepted in return for goods and services. D) an agreed upon measure for stating prices of goods and services. E) the medium of exchange. Answer: D Topic: Functions of money, unit of account Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

26) If you shop for a car online and compare car prices across dealerships, money is functioning as a A) medium of exchange. B) unit of account. C) means of payment. D) store of value. E) barter mechanism. Answer: B Topic: Functions of money, unit of account Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

27) The function of money that helps assess the opportunity cost of an activity is money's use as a A) medium of exchange. B) store of value. C) unit of account. D) store of debt. E) barter tool. Answer: C Topic: Functions of money, unit of account Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

28) When we put a price tag on goods and services, we are using money as a A) store of value. B) medium of exchange. C) barter token. D) unit of account. E) means of payment. Answer: D Topic: Functions of money, unit of account Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

29) When you see a mansion and think to yourself that it must be worth a million dollars, you are using money to perform which function? A) medium of exchange B) unit of account C) store of value D) means of payment E) method of avoiding barter Answer: B Topic: Functions of money, unit of account Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

30) Money is used as a ________ when you visit the local farmers' market and compare prices across different vendors. A) means of payment B) unit of account C) store of value D) medium of exchange E) measure of barter Answer: B Topic: Functions of money, unit of account Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

31) When money is used to compare the relative price of a burrito and a taco, money is being used as a A) medium of exchange. B) store of value. C) measurement of inflation. D) unit of account. E) token of bartering. Answer: D Topic: Functions of money, unit of account Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

32) The store of value function is defined as the A) pricing of goods and services in one measure. B) exchange of goods and services directly for other goods and services. C) holding of money from one transaction to be used later in another transaction. D) double coincidence of wants that is used in the debate over barter versus money. E) use of money as a medium of exchange. Answer: C Topic: Functions of money, store of value Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

33) When we keep part of our wealth in a bank checking account, we are using money as a A) store of value. B) medium of exchange. C) barter token. D) unit of account. E) unit of currency. Answer: A Topic: Functions of money, store of value Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

34) When we keep part of our wealth in a bank checking account, we are using money as a ________ because ________. A) store of value; we are holding the money to exchange for goods at a later time B) medium of exchange; we are holding the money to gain interest earned C) barter token; we are holding the money to exchange for goods at a later time D) unit of account; we are holding the money to exchange for goods at a later time E) unit of currency; we have agreed upon the value of the money with bank Answer: A Topic: Functions of money, store of value Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

35) Keeping $20 in currency to be able to buy gasoline, money is performing which function? A) medium of exchange B) unit of account C) store of value D) barter mechanism E) symbol of fiat Answer: C Topic: Functions of money, store of value Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

36) The word "fiat" is A) used to describe today's money because it is money set by law. B) used to describe money from when Kings ruled by decree or fiat. C) the term used to define the concept of barter. D) another word to mean the "double coincidence of wants." E) Latin for "backed by gold." Answer: A Topic: Fiat money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

37) Money today A) is the demand for loanable funds. B) is the supply of loanable funds. C) is only currency inside banks. D) is fiat money. E) in the United States, is only dollar bills and coins. Answer: D Topic: Fiat money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

38) The U.S. dollar is called A) fiat money because the law decrees it is money. B) faith money. C) commodity money, because it is convertible into gold. D) frail money because wear and tear ruins paper bills. E) convertible money because the government stands ready to convert it into gold or silver. Answer: A Topic: Fiat money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

39) Fiat money means A) Italian currency. B) money's value does not change. C) the government has decreed that something is money. D) the money can be converted into gold. E) only currency counts as money. Answer: C Topic: Fiat money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

40) The objects that we use as money today are A) checks and credit cards. B) currency and checks. C) currency and deposits. D) deposits and checks. E) currency, deposits, and gold. Answer: C Topic: What is included in money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

41) Which statement most accurately captures the state of money today? A) Money today includes currency, bank deposits and checks. B) Money today includes currency and checks but not bank deposits. C) Money today includes bank deposits and currency but not checks. D) Money today includes bank deposits and checks but not currency. E) Money today includes checks and credit cards. Answer: C Topic: What is included in money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

42) Which of the following is an example of money? A) currency in your wallet B) currency inside the banks C) checks written as payment for a good or service D) credit card used as a payment for a good or service E) a debit card Answer: A Topic: What is included in money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

43) The objects we use as money today include A) currency inside banks and bank deposits. B) currency outside the banks and bank deposits. C) only currency outside the banks. D) only deposits inside the banks. E) credit cards and debit cards. Answer: B Topic: What is included in money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

44) Checkable deposits are money because A) they are protected by the Federal Reserve. B) they are guaranteed by banks. C) checks bounce when there are not enough funds to cash them. D) they can be converted into currency on demand and are used directly as a means of payment. E) only banks and other financial institutions can offer them. Answer: D Topic: What is included in money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

45) Which of the following is the best example of money? A) phone card B) checkable deposit C) credit card D) gold E) share of Intel stock Answer: B Topic: What is included in money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

46) Which of the following is money? A) credit card B) debit card C) e-checks D) checkable deposit E) checks Answer: D Topic: What is included in money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

47) Which of the following is money? A) a credit card with no credit left B) the check you write to pay tuition C) a credit card that still has credit available on it D) a checkable deposit in your bank E) the current credit available on a credit card Answer: D Topic: What is included in money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

48) Which of the following is money? A) debit cards B) e-checks C) credit cards D) checkable deposits E) checks Answer: D Topic: What is included in money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

49) Checks are not money because they A) are just instruments to transfer money between banks. B) are not guaranteed by banks. C) can bounce when there are not enough funds to cash them. D) are not issued by the government. E) are not always accepted when trying to purchase goods or services. Answer: A Topic: What is included in money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

50) If you use a check to pay your monthly rent, A) the check is considered money because you received something in return. B) the check is not money because it is just an instruction to your bank to make a payment. C) you have used money because the landlord accepted it as a means of payment. D) the check becomes money when it arrives at the landlord's bank. E) the check is not money because it is not part of M1. Answer: B Topic: What is included in money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

51) A credit card is A) money. B) barter money. C) not money. D) fiat money. E) not money, but the card's credit line is money. Answer: C Topic: What is included in money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

52) Credit cards are A) a form of money used to make purchases. B) a special ID card that is not money. C) a special ID card that is the same as money. D) a form of money that is not generally accepted. E) included in the M1 measure of money. Answer: B Topic: What is included in money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

53) When you use a credit card to pay your tuition, A) you've used the credit card as money because it is a means of payment. B) the credit card is not money but is an ID card for an instant loan. C) the credit card is not money because it involves an electronic transaction. D) the credit card is not money because it is not officially issued by the government. E) you've used the credit card as money because you received something in return. Answer: B Topic: What is included in money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

54) Credit cards are i. a generally accepted form of payment and therefore part of M1. ii. included in M1 because you write a check to pay your monthly bill. iii. a means of borrowing money. A) i only B) ii only C) iii only D) i and ii E) i and iii Answer: C Topic: What is included in money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

55) When Dale buys a new computer for $1,000 using a credit card, A) he is taking out a loan for $1,000. B) his bank account decreases by $1,000. C) the credit card is acting as money. D) the money supply decreases by $1,000. E) the credit card is performing the function of an unit of account. Answer: A Topic: What is included in money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

56) Debit cards and e-checks are not money because A) they can be forged easily. B) they can fail their purpose of being mediums of exchange as a result of technical difficulties. C) they are just instruments to transfer money between people. D) not all banks offer them and not all businesses accept them. E) they are not regulated by the government. Answer: C Topic: What is included in money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

57) A debit card is A) money because it is a means of payment. B) not money but is used to transfer bank deposits which are money. C) money because it is generally accepted as a means of payment. D) not money because it is not officially issued by the government. E) part of the M2 money supply but not part of the M1 money supply. Answer: B Topic: What is included in money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

58) Which of the following are considered money? i. electronic checks ii. paper checks iii. the deposit transferred using an e-check A) i, ii and iii B) i and iii C) i and ii D) iii only E) ii and iii Answer: D Topic: What is included in money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

59) An official measure of money in the United States is M1, which includes the sum of A) checkable deposits plus small time deposits. B) currency plus checkable deposits. C) currency plus credit card transactions. D) currency plus traveler's checks plus time deposits. E) currency plus traveler's checks plus checkable deposits plus small time deposits plus money market funds and other deposits. Answer: B Topic: M1 Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

60) M1 is composed of A) currency held by individuals and businesses, traveler's checks, and checkable deposits owned by individuals and businesses. B) checkable deposits owned by individuals and businesses, saving deposits, and certificates of deposit. C) currency inside of banks, traveler's checks, and government-issued checks. D) traveler's checks, credit cards, and e-cash. E) currency held by individuals and businesses, traveler's checks, and the credit line on credit cards. Answer: A Topic: M1 Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

61) Which of the following are included in the M1 definition of money? A) currency and checkable deposits B) currency and savings deposits C) traveler's checks and money market mutual funds D) currency and small time deposits E) traveler's checks and savings deposits Answer: A Topic: M1 Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

62) M1 is defined as a measure of money including, in part, A) checkable deposits and currency. B) time deposits and currency. C) currency and savings deposits. D) time deposits and money market fund deposits. E) the lines of credit on credit cards and currency. Answer: A Topic: M1 Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

63) Which of the following items is included in the M1 money supply? A) $10 bills in the Bank of America B) a $5,000 student loan granted to a U.S. citizen C) coins in a Pepsi vending machine, waiting to be used as change D) a $5,000 line of credit on a newly graduated student's credit card E) $1,500 in a student's saving account Answer: C Topic: M1 Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

64) Which of the following is NOT a component of M1? A) demand deposits B) traveler's checks C) savings deposits D) currency E) Both answers C and D are correct. Answer: C Topic: Official measures of money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

65) If Rob deposits $300 in currency into his savings account at Bank of America, A) M1 decreases. B) M1 does not change. C) M2 increases. D) M2 decreases. E) M1 and M2 both increase. Answer: A Topic: M1 Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

66) Suppose you use your debit card to buy soda from a soda machine. Which of the following is true regarding the transaction? A) The debit card is not money; it's only an instruction to make a loan. B) The debit card is money; your use reflects the exchange of a good. C) The debit card is not money; its use is only a tool to cause money to move from your account. D) Your use makes the debit card money, as funds are transferred between your account and the machine owner. E) Using the debit card is like using a check and is, therefore, money. Answer: C Topic: Money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

67) When Maria deposits $100 in currency in her checkable deposit at Bank of America, the immediate effect is that the quantity of M1 A) decreases. B) does not change. C) increases. D) changes, but the direction of the change depends on whether the deposit was accepted by a thrift institution or a commercial bank. E) changes only if Bank of America does not have excess reserves. Answer: B Topic: M1 Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

68) When Maria deposits $100 in currency in her checkable deposit at Bank of America, the immediate effect is that the quantity of M1 ________ because ________. A) decreases; checkable deposits are included in M2 but are not included in M1 B) does not change; both currency and checkable deposits are included in M1 C) increases; both currency and checkable deposits are included in M1 D) changes, but the direction of the change cannot be determined; the direction of the change depends on what Bank of America does with the deposit E) changes only if Bank of America has excess reserves; if the bank does not have excess reserves, the overall effect to M1 is too small to notice Answer: B Topic: M1 Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

69) When people make deposits of currency into a bank, the quantity of M1 A) immediately decreases by the amount of the deposit. B) immediately increases by the amount of the deposit. C) does not immediately change. D) immediately changes but whether it increases or decreases depends on whether the bank had excess reserves or did not have excess reserves. E) changes only if the deposit is an open market operation. Answer: C Topic: M1 Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

70) If you deposit $1,000 in cash in your checkable deposit at your bank, the quantity of M1 immediately A) increases by $1,000. B) decreases by $1,000. C) increases by $2,000. D) does not change in size. E) changes, but more information about the required reserve ratio is necessary to determine the amount of the change. Answer: D Topic: M1 Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

71) In December 2009, currency was $400 billion, traveler's checks were $5 billion; checkable deposits owned by individuals and businesses were $600 billion, saving deposits were $2,00 billion, time deposits were $1,500 billion; and money market funds were $1,200 billion. What was the M1 in December 2009? A) M1 = $405 billion B) M1 = $1,005 billion C) M1 = $3,005 billion D) M1 = $3,500 billion E) M1 = $3,505 billion Answer: B Topic: M1 Skill: Level 1: Definition Section: Checkpoint 18.1 Status: Old AACSB: Analytical thinking

72) If Joe withdraws a $100 bill from his checking account and Jack deposits another $100 bill in his savings account, by how will M1 and M2 change? A) M1 will decrease, but M2 will remain the same. B) M1 will increase, and M2 will increase. C) M2 will decrease by $100. D) Both M1 and M2 will remain the same. E) M1 will remain the same, and M2 will increase. Answer: A Topic: M1, M2 Skill: Level 1: Definition Section: Checkpoint 18.1 Status: Old AACSB: Analytical thinking

73) Susan just sold her text books for $200 cash and deposited the cash she received in her checking account. This transaction has A) increased the quantity of M1. B) decreased the quantity of M1. C) increased the quantity of M2. D) decreased the quantity of M2. E) not changed either M1 or M2. Answer: E Topic: M1, M2 Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

74) M2 consists of A) M1 plus traveler's checks. B) M1 plus saving deposits, small time deposits, and money market funds. C) M1 plus checkable deposits. D) M1 plus currency at the banks. E) M1 plus Federal Reserve notes. Answer: B Topic: M2 Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

75) Which of the following are included in the M2 definition of money? A) currency outside of banks and checkable deposits B) currency outside of banks and credit lines on credit cards C) time deposits and the value of prime grade bonds D) currency both inside and outside of banks E) currency inside of banks and banks' reserves Answer: A Topic: M2 Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

76) If we look at the components of M2, we find that A) money market funds are the largest component. B) savings deposits are the largest component. C) currency is the largest component. D) banks' reserves are the largest component. E) loans are the largest component. Answer: B Topic: M2 Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

77) In December 2009, currency outside of banks was $400 billion, traveler's checks were $5 billion; checkable deposits owned by individuals and businesses were $600 billion, saving deposits were $2,000 billion, time deposits were $1,500 billion; and money market funds were $1,200 billion. What was the M2 in December 2009? A) M2 = $5,705 billion B) M2 = $3,705 billion C) M2 = $1,005 billion D) M2 = $2,505 billion E) M2 = $5,700 billion Answer: A Topic: M2 Skill: Level 1: Definition Section: Checkpoint 18.1 Status: Old AACSB: Analytical thinking

78) If currency outside of banks is $800 billion; traveler's checks are $10 billion; checkable deposits owned by individuals and businesses are $700 billion; savings deposits are $4,000 billion; small time deposits are $1,000 billion; and money market funds and other deposits are $800 billion, then M2 equals ________ billion. A) $7,310 B) $5,800 C) $2,510 D) $1,510 E) $710 Answer: A Topic: M2 Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

79) The above table has information about the hypothetical economy of Robotica. Based on the data, the size of M1 is A) $610 billion. B) $1,510 billion. C) $600 billion. D) $1,110 billion. E) $2,600 billion. Answer: A Topic: M1 Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Analytical thinking

80) The above table has information about the hypothetical economy of Robotica. Based on the data, the size of M2 is A) $2,600 billion. B) $2,610 billion. C) $610 billion. D) $600 billion. E) $1,710 billion. Answer: B Topic: M2 Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Analytical thinking

81) Physical currency is ________ popular than e-cash, ________. A) less; and both are portable and recognizable B) more; and both are portable and recognizable C) more; but only physical currency is portable and recognizable D) more; and both are portable, untraceable and anonymous E) less; but both are portable, untraceable and anonymous Answer: D Topic: Money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

82) ________ like a check and ________ considered money. A) Debit cards work; are not B) Debit cards work; are C) E-checks work; are D) E-cash works; is not E) E-cash works; is Answer: A Topic: Money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

83) Which of the following best defines what money is now and what it has been in the past? A) currency B) currency plus checking deposits C) currency plus credit cards D) anything accepted as a means of payment E) anything used as a store of value Answer: D Topic: Money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

84) Which of the following is NOT a function of money? i. unit of account ii. store of value iii. unit of debt A) i only B) ii only C) iii only D) ii and iii E) i and ii Answer: C Topic: Functions of money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

85) Barter is A) the exchange of goods and services for money. B) the pricing of goods and services with one agreed upon standard. C) the exchange of goods and services directly for other goods and services. D) a generally accepted means of payment. E) storing money for use at a later date. Answer: C Topic: Barter Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

86) If someone buries money in a tin can beneath a tree, the money is functioning as a A) medium of exchange. B) unit of account. C) means of payment. D) store of value. E) bartering tool. Answer: D Topic: Functions of money, store of value Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

87) Credit cards, debit cards, and e-checks are A) always counted as money. B) not money. C) sometimes counted as money, depending on how they are used. D) sometimes counted as money, depending on what is purchased. E) sometimes counted as money, depending on what measure of money is being used. Answer: B Topic: What is included in money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

88) Which of the following counts as part of M1? A) $5,000 worth of gold B) $5,000 worth of government bonds C) $5,000 in a checking account D) $5,000 credit line on a credit card E) $5,000 of real estate Answer: C Topic: M1 Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

89) M2 equals A) M1 and is just another name for currency outside of banks. B) M1 plus savings deposits, small time deposits, and money market fund deposits. C) M1 minus traveler's checks because they are not really money. D) currency plus savings deposits, all time deposits, and money market funds and other deposits. E) M1 plus savings deposits and small time deposits minus money market fund deposits. Answer: B Topic: M2 Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

90) If currency outside of banks is $800 billion; traveler's checks are $10 billion; checkable deposits owned by individuals and businesses are $700 billion; savings deposits are $4,000 billion; small time deposits are $1,000 billion; and money market funds and other deposits are $800 billion, then M1 equals ________ billion. A) $7,310 B) $5,800 C) $2,510 D) $1,510 E) $710 Answer: D Topic: M1 Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

91) Mobile wallets are A) always counted as money. B) not money. C) sometimes counted as money, depending on how they are used. D) sometimes counted as money, depending on what is purchased. E) sometimes counted as money, depending on what measure of money is being used. Answer: B Topic: What is included in money Skill: Level 2: Using definitions Section: Checkpoint 18.1 Status: New AACSB: Reflective thinking

92) E-cash A) always has counted as money. B) is not yet counted as money. C) is an electronic version of a physical wallet. D) is a debit card. E) sometimes counts as money, depending on what measure of money is being used. Answer: B Topic: What is included in money Skill: Level 2: Using definitions Section: Checkpoint 18.1 Status: New AACSB: Reflective thinking

18.2 The Banking System 1) A commercial bank is defined as A) any institution that accepts deposits. B) a firm that is chartered to accept deposits and make loans. C) the institution that sets regulations for commercial activities. D) a firm that obtains funds by selling shares and then buys U.S. Treasury bills. E) any institution that makes loans. Answer: B Topic: Commercial banks Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking

2) Which statement is most correct about the types of deposits a commercial bank can accept? A) A commercial bank accepts checking, savings and time deposits. B) A commercial bank can only accept checking deposits from commercial enterprises. C) A commercial bank accepts savings and time deposits, but not checking deposits. D) A commercial bank does not accept deposits but sells shares. E) A commercial bank can accept loan deposits, reserve deposits, and checkable deposits. Answer: A Topic: Commercial banks Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking

3) The goal of a commercial bank is to A) establish good regulations for commercial activities. B) make only safe, no-risk loans. C) maximize its stockholders' wealth. D) minimize its taxes paid to state governments. E) accept only deposits made in money. Answer: C Topic: Banks' profit Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking

4) Banks earn a profit by A) keeping as many reserves on hand as possible. B) making loans at a lower interest rate than the rate that they offer on their deposits. C) charging an interest rate on their depositors' accounts. D) making loans at a higher interest rate than the rates that they offer on their deposits. E) not paying interest on their reserves. Answer: D Topic: Banks' profit Skill: Level 1: Definition Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking

5) Which of the following are assets of commercial banks? i. reserves ii. loans iii. deposits A) i only B) ii only C) i and ii D) ii and iii E) i, ii, and iii Answer: C Topic: Banks' assets Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking

6) Banks generally earn the highest interest rate A) on service charges on individuals' checking accounts. B) by making loans to business firms. C) by making mortgage loans to individuals. D) by making credit card loans. E) by buying government securities. Answer: D Topic: Banks' assets Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking

7) The largest category of commercial banks' assets is A) loans. B) reserves. C) currency. D) securities. E) checkable deposits. Answer: A Topic: Banks' assets Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking

8) Which of the following is NOT held as an asset by banks? A) reserves B) loans C) securities D) currency in the banks' vaults E) checkable deposits Answer: E Topic: Banks' assets Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking

9) Which of the following describes the "invention" of banking? A) The British Empire created a banking system to fund its exploration of the New World. B) Members of the New York Stock Exchange founded the Bank of America in the 1700s. C) Goldsmiths in the sixteenth century issued gold receipts which entitled its owners to reclaim their gold on demand. D) Clergy in the Renaissance created the banking system to help further the growth of the church. E) The United States government founded the Federal Reserve in 1913. Answer: C Topic: Eye on the past: The "Invention" of Banking Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking

10) When goldsmiths issued receipts to gold owners, and those gold receipts circulated while gold stayed in the goldsmiths' safes, A) the gold receipts were considered money because they were used as a means of payment. B) an infant banking system developed in sixteenth century Europe. C) fiat money was created. D) money was invented. E) Both A and B are correct. Answer: E Topic: Eye on the past: The "Invention" of Banking Skill: Level 1: Definition Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking

11) A commercial bank's reserves are equal to the amount of A) the bank's deposits. B) the bank's government securities. C) the bank's loans. D) currency in the bank's vault plus the balance on its reserve account at a Federal Reserve Bank. E) only the currency in its vault. Answer: D Topic: Banks' reserves Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking

12) In 2013 banks kept reserves equal to about ________ of their assets. A) 75 percent B) 25 percent C) 17 percent D) 50 percent E) 37 percent Answer: C Topic: Banks' reserves Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Revised AACSB: Reflective thinking

13) Commercial bank reserves are typically less than 1 percent of total assets, however in 2013 bank reserves ________ because of ________. A) rose to around 88 percent; the financial crisis of 2008-2009 B) dropped drastically to near zero; the financial crisis of 2008-2009 C) rose to around 17 percent; the financial crisis of 2008-2009 D) dropped drastically to near zero; the wave of natural disasters experienced in the nation and around the world E) rose drastically to around 18 percent; the wave of natural disasters experienced in the nation and around the world Answer: C Topic: Banks' reserves Skill: Level 1: Definition Section: Checkpoint 18.2 Status: Revised AACSB: Reflective thinking

14) When a commercial bank receives a deposit, it must keep part of the deposit as cash reserves to satisfy its A) securities and loans. B) required reserves. C) excess reserves. D) interbank loans. E) loan requirements. Answer: B Topic: Banks' reserves Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking

15) A bank has checkable deposits of $1,000,000, loans of $600,000, and government securities of $400,000. If the required reserve ratio is 5 percent, the amount of required reserves is A) $100,000. B) $30,000. C) $50,000. D) $80,000. E) $20,000. Answer: C Topic: Required reserve ratio Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Analytical thinking

16) A bank has $250 in checking deposits, $1,000 in savings deposits, $1,200 in time deposits, $1,000 in loans to businesses, $400 in outstanding credit card balances, $800 in government securities, $25 in currency in its vault, and $25 in deposits at the Fed. Of these, ________ are part of M2. A) $3,450 B) $2,450 C) $2,850 D) $2,200 E) $2,600 Answer: B Topic: Banks' deposits Skill: Level 1: Definition Section: Checkpoint 18.2 Status: Old AACSB: Analytical thinking

17) A bank has $250 in checking deposits, $1,000 in savings deposits, $1,200 in time deposits, $1,000 in loans to businesses, $400 in outstanding credit card balances, $800 in government securities, $25 in currency in its vault, and $25 in deposits at the Fed. The bank's reserves are equal to A) $25. B) $275. C) $2,225. D) $50. E) $350. Answer: D Topic: Banks' reserves Skill: Level 1: Definition Section: Checkpoint 18.2 Status: Old AACSB: Analytical thinking

18) The above table gives assets and deposits for a (small) bank. The bank's deposits that are part of M1 are equal to A) $1,600. B) $600. C) $3,100. D) $3,130. E) $30. Answer: B Topic: Banks' deposits Skill: Level 1: Definition Section: Checkpoint 18.2 Status: Old AACSB: Analytical thinking

19) The above table gives assets and deposits for a (small) bank. The bank's deposits that are part of M2 are equal to A) $600. B) $1,600. C) $3,100. D) $30. E) $5,100. Answer: C Topic: Banks' deposits Skill: Level 1: Definition Section: Checkpoint 18.2 Status: Old AACSB: Analytical thinking

20) The above table gives assets and deposits for a (small) bank. The bank's reserves are equal to A) $20. B) $30. C) $600. D) $630. E) $620. Answer: B Topic: Banks' reserves Skill: Level 1: Definition Section: Checkpoint 18.2 Status: Old AACSB: Analytical thinking

21) Cisco is considering opening a financial institution that accepts savings deposits from only its employees and makes loans to only its employees. The best description of this financial institution is that it is a A) credit union. B) commercial bank. C) savings and loan association. D) savings bank. E) federal government chartered credit bank. Answer: A Topic: Credit union Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking

22) Which of the following is a thrift institution? i. a credit union ii. the Fed iii. a savings bank A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: D Topic: Thrift institutions Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking

23) A commercial bank's main goal is to A) provide loans to its customers. B) maximize the wealth of its stockholders. C) help the government when it needs money. D) lend money to the Federal Reserve Banks. E) open checking accounts. Answer: B Topic: Banks' profit Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking

24) Which of the following lists includes only banks' assets? A) liquid assets, loans, securities, and reserves B) reserves, savings deposits, securities, and loans C) reserves, securities, liquid assets, and savings deposits D) securities, reserves, checkable deposits, and liquid assets E) reserves, checkable deposits, securities, and loans Answer: A Topic: Banks' assets Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking

25) A commercial bank's reserves are A) bonds issued by the U.S. government that are very safe. B) the provision of funds to businesses and individuals. C) currency in its vault plus the balance on its reserve account at a Federal Reserve Bank. D) savings and time deposits. E) its loans. Answer: C Topic: Banks' reserves Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking

26) A bank has $400 in checkable deposits, $800 in savings deposits, $700 in time deposits, $900 in loans to businesses, $300 in outstanding credit card balances, $500 in government securities, $10 in currency in its vault, and $20 in deposits at the Fed. The bank's deposits that are part of M1 are equal to A) $1,900. B) $400. C) $1,210. D) $530. E) $410. Answer: B Topic: Banks' deposits Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Analytical thinking

27) Which of the following accept deposits from or sell shares to the general public? i. money market funds ii. thrift institutions iii. commercial banks A) i only B) ii only C) iii only D) ii and iii E) i, ii, and iii Answer: E Topic: Depository institutions Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking

28) Which of the following is a thrift institution? A) a savings and loan association B) a money market fund C) a commercial bank D) a loan institution E) the Federal Reserve Answer: A Topic: Thrift institutions Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking

29) Before the financial crisis that started in 2007, commercial banks' reserves were typically less than ________ percent of total assets but more recently reserves have been about ________ percent of assets. A) 5; 22 B) 10; 40 C) 1; 8 D) 17; 22 E) 10; 22 Answer: C Topic: Eye on the U.S. economy Skill: Level 2: Using definitions Section: Checkpoint 18.2 Status: New AACSB: Reflective thinking

18.3 The Federal Reserve System 1) A public authority that provides banking services to commercial banks and regulates financial institutions and markets is called a A) commercial bank. B) thrift institution. C) central bank. D) money market fund. E) mint. Answer: C Topic: Central banks Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

2) All of the following are financial institutions that accept deposits and make loans to people and businesses EXCEPT A) commercial banks. B) savings and loans. C) credit unions. D) central banks. E) savings banks. Answer: D Topic: Central banks Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

3) As the central bank, the Federal Reserve System provides banking services to A) individuals and controls the quantity of money. B) the government and the stock market. C) foreign corporations and determines the exchange rate. D) banks and regulates financial institutions and markets. E) banks and determines how much the U.S. government will borrow. Answer: D Topic: Central banks Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

4) Because the Federal Reserve System is a central bank, it provides banking services to A) businesses only. B) consumers and business. C) commercial banks. D) no one. E) the government only. Answer: C Topic: Central banks Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

5) The Federal Reserve System provides banking services to ________ because ________. A) consumers and businesses; it is a central bank with responsibilities to the entire U.S. population B) banks and businesses; it is a central bank with the primary purpose of regulating financial institutions and markets C) commercial banks; it is a central bank with the primary purpose of regulating financial institutions and markets D) no one; it is a central bank with the primary purpose of regulating financial markets E) FDIC insured banks; they are the ones that have paid their membership fees and the only ones the U.S. central bank guarantees Answer: C Topic: Central banks Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

6) The Fed is a central bank and as such A) does business only with the federal government. B) provides banking services to banks but not individuals. C) provides banking services to individuals and firms. D) does business with international organizations such as the United Nations. E) is where the Federal Government turns when it needs to borrow. Answer: B Topic: Central banks Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

7) What is the central bank of the United States? A) There is no central bank in the United States. B) The Department of Treasury C) The Federal Reserve System D) Each state has its own central bank, which, when all taken together, constitute the central bank of the United States. E) The U.S. Mint Answer: C Topic: Federal Reserve System Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

8) ________ the quantity of money in the United States. A) The State Department regulates B) The Department of Treasury regulates C) The Federal Reserve System regulates D) Commercial banks regulate E) The President of the United States regulates Answer: C Topic: Federal Reserve System Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

9) The Federal Reserve System is organized into A) one large district covering the entire United States. B) three districts, one for each of the countries in North America. C) 12 districts, dividing up the United States. D) 12 districts, dividing up the countries in North America. E) 50 districts, one per state. Answer: C Topic: Federal Reserve System Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

10) Conducting the nation's monetary policy is the duty of the A) Department of Commerce. B) U.S. Treasury department. C) Federal Reserve System. D) Federation of Banks. E) Federal Bank Supervisor. Answer: C Topic: Federal Reserve System Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

11) Who regulates the quantity of money circulating in the economy? A) the Federal Reserve B) the banking system C) the U.S. Congress D) the President of the United States E) The U.S. Congress and the President share the control. Answer: A Topic: Federal Reserve System Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

12) All of the following are elements in the structure of the Fed EXCEPT the A) Federal Open Market Committee. B) Executive Council to the Governor. C) 12 Federal Reserve Banks. D) Board of Governors. E) presidents of the 12 Federal Reserve Banks. Answer: B Topic: Federal Reserve System Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

13) The Board of Governors of the Federal Reserve is A) the collection of the 12 presidents of the Federal Reserve Banks. B) a seven-member board, each one serving a 14-year term. C) a 14-member board, each one serving a seven-year term. D) the main policy-making body of the Fed. E) a seven-member board, each one serving a one-year term. Answer: B Topic: Federal Reserve System, Board of Governors Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

14) The Board of Governors of the Federal Reserve System has A) seven members serving for 12-year terms. B) 12 members serving for seven-year terms. C) seven members serving for seven-year terms. D) seven members serving for 14-year terms. E) seven members serving life terms. Answer: D Topic: Federal Reserve System, Board of Governors Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

15) The Board of Governors has A) seven members appointed to 14-year terms. B) 14 members appointed to 10-year terms. C) four members appointed to seven-year terms. D) 14 members appointed to four-year terms. E) seven members appointed for life. Answer: A Topic: Federal Reserve System, Board of Governors Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

16) The Federal Open Market Committee is A) the main policy-making body of the Fed. B) a seven-member board, each serving a 14-year term. C) comprised of the presidents of the 12 Federal Reserve Banks. D) another name for the Board of Governors. E) the government committee charged with determining income tax rates. Answer: A Topic: FOMC Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

17) The main policy-making body of the Federal Reserve System is the A) Board of Governors of the Federal Reserve System. B) Board of Presidents of the Federal Reserve Banks. C) Federal Open Market Committee. D) Board of Advisors. E) Federal Monetary Conditions Board. Answer: C Topic: FOMC Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

18) Which of the following Federal Reserve Banks carries out the decisions of the FOMC? A) the Kansas City Federal Reserve Bank B) the New York Federal Reserve Bank C) the Dallas Federal Reserve Bank D) the San Francisco Federal Reserve Bank E) the Atlanta Federal Reserve Bank Answer: B Topic: FOMC Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

19) The voting members of the Federal Open Market Committee consists of the A) seven Board of Governor members and the 12 Federal Reserve Bank presidents. B) seven Board of Governor members and five Federal Reserve Bank presidents. C) 12 Board of Governor members and the seven Federal Reserve Bank presidents. D) 12 Board of Governor members and the five Federal Reserve Bank presidents. E) six Board of Governor members and six Federal Reserve Bank presidents. Answer: B Topic: FOMC Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

20) The Federal Open Market Committee consists of A) 12 members, all of whom are the presidents of Federal Reserve Banks. B) 12 members, seven of whom are the members of the Board of Governors, four of whom are presidents of Federal Reserve Banks, and the president of the United States. C) 12 members, seven of whom are the members of the Board of Governors and five of whom are presidents of Federal Reserve Banks. D) 12 committees, all serving on the Board of Governors. E) 12 members, split evenly so that six of whom are members of the Board of Governors and six of whom are presidents of Federal Reserve Banks. Answer: C Topic: FOMC Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

21) In order to influence the interest rate, the Federal Reserve System can immediately adjust the A) reserves of the banking system. B) inflation level. C) unemployment rate. D) taxes that citizens must pay. E) amount the government borrows. Answer: A Topic: Monetary policy Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

22) The four main policy tools the Federal Reserve System uses to influence the interest rate are setting A) the prime rate, open market operations, extraordinary crisis management and setting the excess reserve ratio. B) quantitative easing, market interest rate and the discount rate, as well as open market operations. C) the discount rate, open market operations, extraordinary crisis measures and setting the required reserve ratio. D) credit easing, the discount rate, setting tax rates, and setting the required reserve ratio. E) quantitative easing, open market operations, setting tax rates, and setting the required reserve ratio. Answer: C Topic: Fed policy tools Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

23) Which of the following is NOT one of the Fed's monetary policy tools? A) changing the discount rate B) conducting open market purchases of government securities C) changing the coupon rate D) changing the required reserve ratio E) conducting open market sales of government securities Answer: C Topic: Fed policy tools Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

24) Which of the following is a tool the Federal Reserve System can use to regulate the quantity of money? i. changing the discount rate ii. conducting open market operations iii. changing the required reserve ratio A) i only B) ii only C) ii and iii D) i and ii E) i, ii, and iii Answer: E Topic: Fed policy tools Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

25) Which of the following is a policy tool of the Fed? i. setting the required reserve ratios ii. conducting open market operations iii. quantitative easing A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: E Topic: Fed policy tools Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

26) The Fed influences the interest rate by using which of the following tools? i. open market operations ii. taxes on bank accounts iii. changes in required reserve ratios A) i only B) ii only C) iii only D) i and iii E) i, ii and iii Answer: D Topic: Fed policy tools Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

27) Which of the following are policy tools used by the Federal Reserve? i. the federal personal income tax ii. open market operations iii. changing the required reserve ratio A) i only B) ii only C) iii only D) ii and iii E) i, ii, and iii Answer: D Topic: Fed policy tools Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

28) Which of the following is a tool the Fed uses to adjust the quantity of money? i. The Fed can change the interest rate banks charge for loans to their prime customers. ii. The Fed can change the discount rate on loans to banks. iii. The Fed can buy or sell government securities. A) i only B) ii only C) iii only D) i and iii E) ii and iii Answer: E Topic: Fed policy tools Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

29) Required reserve ratios are the minimum amount of A) deposits any one bank is allowed to accept as percentage of its capital. B) reserves any one bank must hold as a percentage of its loans. C) reserves any one bank must hold as a percentage of its deposits. D) deposits any one bank must hold as a percentage of its reserves. E) reserves any one bank must hold as a percentage of its total assets. Answer: C Topic: Fed policy tools, required reserve ratio Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

30) The required reserve ratio is 10 percent and Charlie deposits $3,000 in her checking account. The bank must A) increase reserves by $3,000. B) increase reserves by $300. C) decrease reserves by $3,000. D) decrease reserves by $300. E) not change its reserves until Charlie decides to withdraw her funds. Answer: B Topic: Fed policy tools, required reserve ratio Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Analytical thinking

31) The required reserve ratio is the minimum percentage of ________ that banks are required to hold by regulation. A) reserves as total assets B) deposits as total assets C) reserves as deposits D) deposits as reserves E) reserves as total liabilities Answer: D Topic: Fed policy tools, required reserve ratio Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

32) The required reserve ratio is the A) amount of excess reserves the bank holds just in case. B) total amount of reserves the bank holds in its vaults. C) total amount of reserves the bank holds at the Fed. D) amount of reserves banks are required by the Fed to be held as a percentage of the bank's deposits. E) amount of reserves banks are required by the Fed to be held as a percentage of the bank's loans. Answer: D Topic: Fed policy tools, required reserve ratio Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

33) Which of the following statements is correct? A) required reserves = (total deposits) × (excess reserve ratio) B) required reserves = (total reserves) × (excess reserve ratio) C) required reserves = (total deposits) × (required reserve ratio) D) required reserves = (total deposits) ÷ (required reserve ratio) E) required reserves = (total deposits) × (required reserve ratio) - excess reserves Answer: C Topic: Fed policy tools, required reserve ratio Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Analytical thinking

34) The interest rate the Federal Reserve charges a bank when it borrows reserves from the Fed is called the A) market interest rate. B) federal funds rate. C) discount rate. D) prime rate. E) borrowing rate. Answer: C Topic: Fed policy tools, discount rate Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

35) The discount rate is the A) banks' real interest rate. B) interest rate at which the Fed will loan reserves to commercial banks. C) interest rate banks charge the Fed when the Fed borrows from the banks. D) name of the interest rate banks charge their most credit-worthy borrowers. E) interest rate paid on U.S. government securities. Answer: B Topic: Fed policy tools, discount rate Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

36) The discount rate is A) the interest rate paid when a bank borrows reserves from another bank. B) the interest rate paid when a commercial bank borrows reserves from the Fed. C) the reduction in the interest rate given to the bank's best customers. D) another name for the long-term interest rate. E) the interest rate the Fed pays banks for the reserves the banks keep at the Fed. Answer: B Topic: Fed policy tools, discount rate Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

37) The discount rate is A) the interest rate that commercial banks have to pay for any reserves that they borrow from the nonbank public. B) the interest rate that commercial banks have to pay to the owners of bank deposits. C) equal to the nominal interest rate minus the inflation rate. D) the interest rate that commercial banks pay for reserves that they borrow from the Fed. E) the interest rate that commercial banks receive for the reserves that they have on reserve at the Fed. Answer: D Topic: Fed policy tools, discount rate Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

38) If the Fed increases the discount rate, A) commercial banks pay a higher interest rate if they borrow from the Fed. B) commercial banks pay a lower interest rate if they borrow from the Fed. C) commercial banks' assets increase. D) commercial banks find it more profitable to increase their loans to businesses. E) commercial banks increase their lending to the Fed. Answer: A Topic: Fed policy tools, discount rate Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

39) If the Fed increases the discount rate, commercial banks pay a ________ interest rate if they borrow money from the Fed and will therefore ________. A) higher; borrow less money from the Fed and make fewer loans to consumers B) higher; borrow more money from the Fed and make more loans to consumers C) lower; borrow more money from the Fed and make more loans to consumers D) lower; borrow less money from the Fed and make fewer loans to consumers E) higher; deposit more money into their reserves at the Fed Answer: A Topic: Fed policy tools, discount rate Skill: Level 1: Definition Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

40) Open market operations are the A) purchase or sale of government securities by the Fed. B) lending of reserves to the banking system by the Fed. C) borrowing of reserves by the Fed from the banking system. D) minimum percentage of loans that banks must retain as reserves in the open market. E) purchase or sale of gold by the Fed. Answer: A Topic: Fed policy tools, open market operations Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

41) Open market operations are when the Fed buys or sells A) government securities from the government. B) corporate securities from banks or some other business. C) government securities from banks or some other business. D) corporate securities from the government. E) gold. Answer: C Topic: Fed policy tools, open market operations Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

42) When the Fed engages in open market operations, it is buying or selling A) capital equipment. B) U.S. government securities newly issued by the U.S. Treasury. C) U.S. government securities. D) loans made to banks to meet the legal reserve requirement ratio. E) gold. Answer: C Topic: Fed policy tools, open market operations Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

43) In response to the financial crisis in 2008, the Fed created which of the following policy tools? A) quantitative easing B) the required reserve ratio C) the discount rate D) the federal funds rate E) open market operations Answer: A Topic: Fed policy tools, crisis measures Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

44) Which of the following policy tools did the Fed create in 2008 to address the financial crisis? i. quantitative easing ii. credit easing iii. open market operations A) i and ii B) i only C) ii only D) i and iii E) ii and iii Answer: A Topic: Fed policy tools, crisis measures Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

45) Quantitative easing by the Fed refers to A) the creation of bank reserves by engaging in large-scale open market operation at very low interest rates. B) selling private securities issued by the Fed. C) decreasing the money supply during a recession to prevent inflation. D) lowering the federal funds rate while increasing the discount rate. E) lowering the required reserve ratio to zero percent. Answer: A Topic: Quantitative easing Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

46) If the Fed engages in quantitative easing, it has likely A) decreased the federal funds rate to almost zero by buying large sums of securities. B) increased the discount rate to prevent inflation. C) decreased the discount rate by selling its own securities. D) increased the federal funds rate by selling private securities. E) started paying interest on required reserves. Answer: A Topic: Quantitative easing Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

47) In 2008, the Fed created a new policy tool called A) quantitative easing, which allowed the Fed to buy private securities as well as government securities. B) quantitative easing, which required the Fed to pay interest on required reserves. C) open market operations, which required the Fed to buy securities from only the federal government. D) federal funds zero-rate, which required the Fed to lower the rate to near zero percent. E) interest rate reductions, which allowed the Fed to lower interest rates paid to banks. Answer: A Topic: Quantitative easing Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

48) ________ by the Fed means that the Fed ________. A) Credit easing; bought private securities from financial institutions B) Credit easing; made loans directly to home buyers C) Credit easing; tried to lower long-term interest rates D) Quantitative easing; required private banks to increase their lending to home buyers E) Quantitative easing; decreased in the required reserve ratio Answer: A Topic: Credit easing Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

49) The policy tool of "credit easing" refers to the A) Fed's purchase of private securities to stimulate banks' lending. B) Fed's requirement that the federal government must lend to directly to home buyers. C) federal government's requirement that the Fed must lend directly to home buyers. D) Fed's lowering of the federal funds rate to zero. E) Treasury's issuance of federal debt to finance home buying. Answer: A Topic: Credit easing Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

50) The monetary base is the sum of A) Federal Reserve notes and banks' reserves at the Fed. B) coins, Federal Reserve notes, and individuals' deposits at the Fed. C) Federal Reserve notes, Treasury deposits at the Fed, banks' reserves at the Fed, and coins. D) coins, Federal Reserve notes, and banks' reserves at the Fed. E) coins, Federal Reserve notes, and gold at the Fed. Answer: D Topic: Monetary base Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

51) The monetary base is equal to A) banks' assets plus liabilities. B) Federal Reserve notes plus coins plus banks' reserves at the Fed. C) checkable deposits plus coins plus traveler's checks. D) checkable deposits plus coins plus banks' assets. E) M2 minus M1. Answer: B Topic: Monetary base Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

52) The monetary base is equal to A) M1. B) M2. C) currency and coins in circulation plus checkable deposits. D) the sum of coins, Federal Reserve notes, and banks' reserves at the Fed. E) the sum of coins, Federal Reserve notes, and gold at the Fed. Answer: D Topic: Monetary base Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

53) The monetary base is equal to the sum of coins, A) currency and banks' reserves at the Federal Reserve. B) currency and checkable deposits at banks. C) currency, banks' reserves at the Federal Reserve and checkable deposits at banks. D) and checkable deposits at banks. E) U.S. government securities owned by the Federal Reserve and Federal Reserve notes. Answer: A Topic: Monetary base Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

54) The monetary base does NOT include which of the following items? i. Federal Reserve notes ii. banks' reserves at the Federal Reserve iii. U.S. government securities owned by the Federal Reserve A) i only B) ii only C) iii only D) i and ii E) ii and iii Answer: C Topic: Monetary base Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

55) Regulating the amount of money in the United States is one of the most important responsibilities of the A) State Department. B) state governments. C) Treasury Department. D) Federal Reserve. E) U.S. Mint. Answer: D Topic: Federal Reserve System Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

56) The Board of Governors of the Federal Reserve System has A) 12 members appointed by the president of the United States. B) 12 members elected by the public. C) seven members appointed by the president of the United States. D) seven members elected by the public. E) seven members appointed to life terms. Answer: C Topic: Federal Reserve System, Board of Governors Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

57) The Board of Governors of the Federal Reserve System has seven members appointed by the ________ that serve a term of ________ in order to ________. A) U.S. congress; 4 years; fulfill a mandate within the U.S. constitution B) U.S. senate; 14 years; provide continuity in the governing of the U.S. economy C) U.S. president and confirmed by the U.S. senate; 14 years; provide continuity in the governing of the U.S. economy D) U.S. president and confirmed by the U.S. congress; 14 years; provide continuity in the governing of the U.S. economy E) U.S. president and confirmed by the U.S. senate; 4 years; fulfill a mandate within the U.S. constitution Answer: C Topic: Federal Reserve System, Board of Governors Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

58) The Fed's policy is determined by the A) Federal Open Market Committee. B) Executive Council to the Governor. C) Regional Federal Reserve Banks. D) Board of Governors. E) Federal Monetary Policy Committee. Answer: A Topic: FOMC Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

59) The Fed's policy tools include A) required reserve ratios, the discount rate, open market operations, and extraordinary crisis measures. B) holding deposits for the U.S. government, reserve requirements, and the discount rate. C) setting regulations for lending standards and extraordinary crisis measures. D) supervision of the banking system and buying and selling commercial banks. E) required reserve ratios, income tax rates, and open market operations. Answer: A Topic: Fed policy tools Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

60) The minimum percent of deposits that banks must hold and cannot loan is determined by the A) interest rate. B) discount rate. C) required reserve ratio. D) federal funds rate. E) ratio of M2 to M1. Answer: C Topic: Fed policy tools, required reserve ratio Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

61) The discount rate is the interest rate that A) commercial banks charge their customers. B) commercial banks charge each other for the loan of reserves. C) the Fed charges the government for loans. D) the Fed charges commercial banks when it loans reserves to the banks. E) the Fed pays commercial banks on their reserves held at the Fed. Answer: D Topic: Fed policy tools, discount rate Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

62) The monetary base is the A) minimum reserve banks must hold to cover any losses from unpaid loans. B) sum of coins, Federal Reserve notes, and banks' reserves at the Fed. C) sum of gold and foreign exchange held by the Fed. D) sum of government securities and loans to banks held by the Fed. E) sum of coins, required reserves, and banks' loans. Answer: B Topic: Monetary base Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

63) If Federal Reserve notes and coins are $765 billion, and banks' reserves at the Fed are $8 billion, the gold stock is $11 billion, and the Fed owns $725 billion of government securities, what does the monetary base equal? A) $765 billion B) $773 billion C) $776 billion D) $744 billion E) $1,509 billion Answer: B Topic: Monetary base Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

64) If the Federal Reserve ________ the required reserve ratio, the interest rate ________. A) lowers; rises B) lowers; falls C) raises; does not change D) raises; falls E) Not enough information is given because the effect depends also on the size of the monetary base. Answer: B Topic: Required reserve ratio Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

65) If the Federal Reserve lowers the required reserve ratio, people will end up taking out ________ because the interest rates ________. A) fewer loans; will rise B) more loans; will fall C) the same number of loans; will not change D) more loans; will rise E) fewer loans; are controlled by the economic conditions alone Answer: B Topic: Required reserve ratio Skill: Level 1: Definition Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

66) "Operation twist" refers to the A) Fed's purchase of private securities to stimulate banks' lending. B) Fed's purchase of long-term government securities and sale of short-term government securities. C) Fed's purchase of short-term government securities and sale of long-term government securities. D) federal government's requirement that the Fed must lend directly to home buyers. E) Treasury's issuance of federal debt to finance home buying. Answer: B Topic: Operation twist Skill: Level 2: Using definitions Section: Checkpoint 18.3 Status: New AACSB: Reflective thinking

67) The idea of "operation twist" is to A) lower long-term interest rates and thereby stimulate investment expenditure. B) lower short-term interest rates and thereby stimulate investment expenditure. C) raise long-term interest rates and thereby stimulate saving. D) increase the amount of gold the Fed holds. E) make the monetary base obsolete. Answer: A Topic: Operation twist Skill: Level 2: Using definitions Section: Checkpoint 18.3 Status: New AACSB: Reflective thinking

68) As of 2016, the Fed has conducted ________ episodes of quantitative easing. A) one B) two C) three D) four E) five Answer: C Topic: Quantitative easing Skill: Level 1: Definition Section: Checkpoint 18.3 Status: New AACSB: Reflective thinking

18.4 Regulating the Quantity of Money 1) New money is created in the U.S. economy by A) increased federal government expenditures. B) banks that create checkable deposits. C) the U.S. Treasury. D) U.S. Department of Mint. E) the U.S. Congress. Answer: B Topic: How banks create money Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

2) Banks create money by A) printing dollar bills without limit. B) creating deposits without limit. C) printing money up to their required reserve limit. D) making loans and creating deposits, a process that is limited by the size of banks' excess reserves. E) buying U.S. government securities with cash. Answer: D Topic: How banks create money Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

3) Banks create money by A) printing paper money. B) minting coins. C) making loans. D) buying government securities. E) None of the above because banks cannot create money; only the Federal Reserve can create money. Answer: C Topic: How banks create money Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

4) When a bank receives deposits, A) it must hold the entire amount as reserves in case of withdrawal. B) the Fed requires it to hold only a small percentage as reserves. C) it and it alone decides how much it will hold as reserves. D) its liabilities increase in amount but its assets do not change. E) its assets increase in amount but its liabilities do not change. Answer: B Topic: How banks create money Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

5) Banks create money by A) printing currency. B) asking the Fed to print more currency. C) lending to the Fed. D) making loans. E) buying government securities. Answer: D Topic: How banks create money Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

6) The amount of loans that a bank can create is limited by A) a law enacted by Congress. B) the bank's excess reserves. C) a directive from the Federal Reserve System, which takes into account the bank's financial stability. D) the real interest rate. E) the bank's government securities. Answer: B Topic: How banks create money Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

7) The process of money creation by the banking system is limited, in part, by the A) number of banks. B) desired reserve ratio. C) number of depositors. D) Comptroller of the Currency. E) laws passed each year by the U.S. Congress. Answer: B Topic: How banks create money Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

8) Assume the First Bank of Townsville makes a loan of $2,500. This loan will A) increase the quantity of money initially by $2,500. B) decrease the quantity of money initially by $2,500. C) have no change on the quantity of money, just its composition. D) increase the First Bank of Townville's liabilities at the Fed. E) increase the First Bank of Townville's reserves. Answer: A Topic: How banks create money Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

9) When the First Bank of Townsville makes a loan, it A) prints money. B) borrows the money from the Fed. C) creates a checkable deposit. D) decreases the quantity of money. E) increases its reserves. Answer: C Topic: How banks create money Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

10) If the desired reserve ratio is 15 percent, then for every dollar that is deposited in the bank, the bank will A) keep 15 cents as reserves. B) keep 85 cents as reserves. C) keep 85 cents as reserves and loan 85 cents. D) loan 15 cents. E) keep 15 cents as reserves and loan 15 cents. Answer: A Topic: Desired reserve ratio Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

11) Riley deposits $4,000 cash in her checkable deposit at Fershur Bank. If the desired reserve ratio is 5 percent, Fershur Bank's A) desired reserves increase by $4,000. B) assets and its liabilities change in opposite directions. C) desired reserves increase by $200 and its excess reserves increase by $3,800. D) excess reserves increase by $4,000. E) liabilities do not change but its assets increase. Answer: C Topic: Desired reserve ratio Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

12) Suppose the desired reserve ratio is 10 percent. If Urban Bank has total deposits of $1,000 and total assets of $10,000, the amount of desired reserves is A) $100. B) $900. C) $1,000. D) $9,000. E) $1,100. Answer: A Topic: Desired reserve ratio Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

13) A bank has $200 of reserves and $4,000 of deposits. It is just meeting its desired reserves and has no excess reserves. Thus the desired reserve ratio is A) 10 percent. B) 20 percent. C) 25 percent. D) 5 percent. E) $200. Answer: D Topic: Desired reserve ratio Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

14) If the desired reserve ratio is 7 percent and a bank has $10,000 of deposits, then its desired reserves are A) $7. B) $700. C) $9,300. D) $930. E) $7,000. Answer: B Topic: Desired reserve ratio Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

15) When Zane deposits $20,000 cash in his checkable deposit at the Citicorp and the Citicorp's desired reserves increase by $5,000, the desired reserve ratio is A) 5 percent. B) 75 percent. C) 25 percent. D) 20 percent. E) $5,000. Answer: C Topic: Desired reserve ratio Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

16) A bank reports reserves of $500,000, physical capital of $200,000, loans of $1,000,000, deposits of $1,000,000, and owners' equity of $500,000. If the desired reserve ratio is 5 percent, the bank's desired reserves are A) $10,000. B) $25,000. C) $50,000. D) $1,000,000. E) $500,000. Answer: C Topic: Desired reserve ratio Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

17) The Banks of the Mississippi has excess reserves of $20,000, desired reserves of $80,000 and the desired reserve ratio is 5 percent. What is the total amount of deposits in this bank? A) $5,000 B) $1,000,000 C) $1,600,000 D) $100,000 E) $180,000 Answer: C Topic: Desired reserve ratio Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

18) The part of a commercial bank's reserves that are larger than desired are called A) additional reserves. B) required reserves. C) excess reserves. D) nonrequired reserves. E) unnecessary reserves. Answer: C Topic: Excess reserves Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

19) Banks can make loans as long as they have A) deposits. B) reserves. C) required reserves. D) excess reserves. E) excess government securities. Answer: D Topic: Excess reserves Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

20) Actual reserves are equal to A) minimum balances plus desired reserves. B) required reserves plus fractional deposits. C) excess reserves plus liabilities. D) desired reserves plus excess reserves. E) government securities plus cash in the bank's vault. Answer: D Topic: Excess reserves Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

21) When Grayce deposits $4,000 cash in her checkable deposit at the Beach Bank and the Beach Bank's excess reserves increase by $3,600, the desired reserve ratio is A) 5 percent. B) 10 percent. C) 15 percent. D) 90 percent. E) $400. Answer: B Topic: Excess reserves Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

22) If Bulge Bank has a desired reserve ratio of 10 percent, loans of $25,000, deposits of $100,000, vault cash of $10,000, and reserves at the Fed of $65,000, then the bank A) has no remaining capacity to make loans. B) does not have enough reserves to meet its requirement. C) has excess reserves of $65,000. D) has excess reserves of $55,000. E) has excess reserves of $75,000. Answer: C Topic: Excess reserves Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

23) The Commerce Bank of Beverly Hills has total deposits of $1,000,000 and total reserves of $220,000. The desired reserve ratio is 10 percent. The bank's excess reserves are A) $22,000. B) $120,000. C) $100,000. D) $80,000. E) $1,000,000. Answer: B Topic: Excess reserves Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

24) A bank has deposits of $400, reserves of $50, and the desired reserve ratio is 7 percent. The bank's excess reserves are A) $0. B) $22. C) $28. D) $3.50. E) $50. Answer: B Topic: Excess reserves Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

25) Suppose the desired reserve ratio is 10 percent. If the Commerce Bank has total deposits of $20,000, total assets of $10,000, and actual reserves of $8,000, the amount of excess reserves is A) $2,000. B) $6,000. C) $800. D) $100. E) $0. Answer: B Topic: Excess reserves Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

26) A bank has deposits of $100,000, reserves of $20,000, and loans of $80,000. If the desired reserve ratio is 10 percent, then its excess reserves are A) 0. B) $8,000. C) $10,000. D) $2,000. E) $12,000. Answer: C Topic: Excess reserves Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

27) The required reserve ratio is 20 percent and banks have no excess reserves. Katie deposits $300 in her bank. What are the bank's excess reserves immediately after Katie makes her deposit? A) $30 B) $90 C) $240 D) $60 E) $300 Answer: C Topic: Excess reserves Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

28) If Jose deposits $2,000 in his bank and the desired reserve ratio is 10 percent, what is the amount of new loans that the bank can make? A) $2,000 B) $200 C) $1,800 D) $1,900 E) $2,200 Answer: C Topic: Excess reserves Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

29) Suppose a bank has $1,000 in deposits and $100 in reserves. If the desired reserve ratio is 5 percent, how much can this bank increase its loans? A) $0 B) $400 C) $80 D) $50 E) $100 Answer: D Topic: Excess reserves Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

30) The desired reserve ratio is 10 percent and banks have no excess reserves. Juliet deposits $300 in her bank. What is the maximum that Juliet's bank can now loan? A) $3,000 B) $270 C) $30 D) $330 E) $300 Answer: B Topic: Money creation process Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

31) The desired reserve ratio is 3 percent. Robert deposits $3,000 in Bank America. Bank America keeps its minimum desired reserves and lends the excess to Fredrica. How much does Bank America lend to Fredrica? A) $3,000 B) $2,910 C) $300 D) $2,700 E) $900 Answer: B Topic: Money creation process Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

32) The desired reserve ratio is 10 percent. Joe deposits $1,000 in Bank A. Bank A keeps its minimum desired reserves and lends the excess to Fred. Fred spends his loan at J.C. Penney. J.C. Penney deposits the check it receives from Fred in Bank B. Bank B keeps its minimum desired reserves and lends the excess to Mary. How much can Bank B lend to Mary? A) $900 B) $90 C) $810 D) $100 E) $1,000 Answer: C Topic: Money creation process Skill: Level 4: Applying models Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

33) Whenever somebody deposits a check from bank A into a checkable deposit at bank B, bank A's reserves ________ and bank B's reserves ________. A) increase; decrease B) increase; increase C) decrease; decrease D) decrease; increase E) do not change; do not change Answer: D Topic: Clearing checks Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

34) When the Fed buys or sells securities, it is conducting ________ operation. A) a government debt B) an open market C) a money multiplier D) a deposit E) a currency Answer: B Topic: Open market operation Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

35) Open market operations are defined as A) a bank borrowing from the Fed. B) the buying and selling of securities by the Fed. C) the buying and selling of securities between banks. D) the amount banks can lend on each deposit. E) a bank making a loan to the Fed. Answer: B Topic: Open market operation Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

36) If the Fed makes an open market purchase of $1 million of government securities, the monetary base A) is decreased by $1 million. B) is unchanged in size, though its composition changes. C) is increased by $1 million. D) will decrease by a multiple of $1 million over time. E) will increase by a multiple of $1 million over time. Answer: C Topic: Open market operation and the monetary base Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

37) Assume the desired reserve ratio is 10 percent, banks loan all excess reserves and the currency drain is zero. If the Fed sells $100 million of U.S. government securities to Boise Bank, the monetary base increases by A) $1 million. B) $10 million. C) $100 million. D) $1,000 million. E) $90 million. Answer: C Topic: Open market operation and the monetary base Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

38) When the Fed buys securities from the public, banks' reserves ________ and the quantity of money ________. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases E) do not change; increases Answer: A Topic: Open market operation Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

39) When the Fed ________, the quantity of banks' reserves decreases. A) hikes taxes B) buys government securities C) sells government securities D) lowers the required reserve ratio E) raises the required reserve ratio Answer: C Topic: Open market operation Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

40) When the Fed buys government securities, the immediate effect of the purchase is that banks' A) reserves increase. B) deposits increase. C) assets increase. D) reserves decrease. E) loans decrease. Answer: A Topic: Open market operation Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

41) When the Fed buys $100 million of securities from a commercial bank, the A) monetary base increases. B) money supply decreases. C) bank's reserves decrease. D) required reserve ratio decreases. E) bank is risking its depositors' money. Answer: A Topic: Open market operation and the monetary base Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

42) If the reserve requirement is 20 percent and the Fed buys $10,000 worth of Treasury bonds, what is the change in the banks' total reserves? A) $2,000 B) $10,000 C) $20,000 D) $8,000 E) $100,000 Answer: B Topic: Open market operation and the monetary base Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

43) When the Fed sells $100 million of securities to a commercial bank, the A) monetary base increases. B) money supply increases. C) bank's reserves decrease. D) required reserve ratio decreases. E) bank's reserves do not change. Answer: C Topic: Open market operation Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

44) When the Fed purchases government securities, A) excess reserves in the banking system increase, leading to more loans being made. B) required reserves in the banking system increase, leading to more loans being made. C) excess reserves in the banking system decrease, leading to fewer loans being made. D) required reserves in the banking system decrease, leading to fewer loans being made. E) the monetary base does not change. Answer: A Topic: Open market operation Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

45) When the Fed purchases government securities ________ loans end up being made because ________. A) more; excess reserves in the banking system increase B) more; excess reserves in the banking system decrease C) fewer; excess reserves in the banking system increase D) fewer; excess reserves in the banking system decrease E) fewer; required reserves in the banking system increase but desired reserves decrease Answer: A Topic: Open market operation Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

46) To increase the quantity of money in the economy, the Federal Reserve can A) print more money and give it to the banks. B) increase the required reserve ratio. C) buy government bonds in an open market operation. D) sell government bonds in an open market operation. E) cut taxes. Answer: C Topic: Open market operation Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

47) When the Fed ________ securities in an open market operation, banks' reserves ________, and therefore lending ________. A) sells; increase; increases B) buys; increase; increases C) sells; decrease; increases D) buys; decrease; decreases E) buys; do not change; does not change Answer: B Topic: Open market operation Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

48) The Fed buys $100 million U.S. government securities from Bank of America. Bank of America's balance sheet shows this transaction as ________ in total assets and ________ in reserves. A) no change; a $100 million decrease B) no change; a $100 million increase C) a $100 million increase; no change D) a $100 million increase; a $100 million increase E) a $100 million decrease; a $100 million decrease Answer: B Topic: Open market operation Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

49) If the Fed purchases securities in the amount of $100,000 from First Union Bank, then the A) assets of First Union Bank decrease by $100,000. B) assets of the Fed decrease by $100,000. C) assets of First Union Bank change in composition but not in amount. D) liabilities of the Fed change in composition but not in amount. E) liabilities of First Union decrease by $100,000. Answer: C Topic: Open market operation Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

50) The Fed purchases $100 million of U.S. government securities from First National Bank. The balance sheet for First National Bank shows ________ in its total assets and ________ in its total liabilities. A) a $100 million increase; a $100 million increase B) a $100 million decrease; a $100 million increase C) a $100 million increase; a $100 million decrease D) no change; no change E) a $100 million increase; no change Answer: D Topic: Open market operation Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

51) Suppose the Fed buys $1 million of government securities from Bank One, a large commercial bank. Bank One's reserves ________ and its deposits ________. A) increase by $1 million; do not change B) increase by $1 million; increase by $1 million C) do not change; increase by $1 million D) do not change; do not change E) decrease by $1 million; do not change Answer: A Topic: Open market operation Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

52) The Fed sells $300 million U.S. government securities to commercial banks. This action leads to ________ in Fed assets and ________ in Fed liabilities. A) a $300 million increase; a $300 million increase B) a $300 million increase; a $300 million decrease C) no change; no change D) a $300 million decrease; a $300 million decrease in E) a $300 million decrease; a $300 million increase Answer: D Topic: Open market operation Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

53) When the Fed sells government securities to banks, the sale A) increases banks' reserves. B) increases the quantity of money. C) creates more excess reserves. D) decreases banks' reserves. E) increases the monetary base. Answer: D Topic: Open market operation Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

54) An open market purchase of securities by the Fed leads to all of the following EXCEPT A) an initial increase in excess reserves. B) an increase in bank lending. C) a decrease in the quantity of money. D) an increase in banks' reserves. E) an increase in the monetary base. Answer: C Topic: Open market operation Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

55) If the Fed sells government securities to a member of the nonbank public, then the resulting effect on the quantity of money is A) much larger than if the securities were sold to a bank. B) much smaller than if the securities were sold to a bank. C) the same as if the securities were sold to a bank. D) that there is no change in the quantity of money. E) None of the above answers is correct. Answer: C Topic: Open market operation Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

56) Comparing the effect on the monetary base between an open market purchase of government securities from a bank and the same open market operation conducted with the general public, the monetary base A) increases by a larger amount if the general public sells the securities than if a bank sells the securities. B) increases by a larger amount if a bank sells the securities than if the general public sells the securities. C) does not change if it is the general public that sells the securities. D) increases by the same amount if the general public sells the securities or if a bank sells the securities. E) decreases by the same amount if the general public sells the securities or if a bank sells the securities. Answer: D Topic: Open market operation Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

57) If the Fed buys government securities from the non-bank public, then A) reserves at banks decrease. B) loans at banks decrease. C) deposits at banks increase and banks' reserves decrease. D) deposits at banks increase and banks' reserves increase. E) deposits at banks decrease and banks' reserves increase. Answer: D Topic: Open market operation Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

58) The Fed purchases $1 million of U.S. government securities from First Bank. The desired reserve ratio is 10 percent, the currency drain ratio is zero, and banks loan all excess reserves. The Fed's purchase increases First Bank's excess reserves by how much? A) $900,000 B) $1,000,000 C) $1,100,000 D) $10,000,000 E) $100,000 Answer: B Topic: Open market operation Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

59) When the desired reserve ratio is 10 percent, suppose the Fed buys $1,000,000 of government securities from banks. As a result, the banks' excess reserves A) increase by $900,000. B) increase by $1,000,000. C) increase by $10,000. D) decrease by $10,000. E) decrease by $1,000,000. Answer: B Topic: Open market operation Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

60) The FUN Bank has no excess reserves when a new deposit of $20,000 is made. The desired reserve ratio is 5 percent. After the deposit, but before making any loans, how much does The FUN Bank have in excess reserves? A) $1,000 B) $20,000 C) $9,000 D) $19,000 E) $21,000 Answer: D Topic: Money creation process Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

61) When a bank receives $100,000 in new deposits, the amount of loans the bank can make is limited by A) federal law. B) the annual federal budget. C) the Treasury Department. D) its desired reserve ratio. E) state law, with banks in different states being able to make different amounts of loans. Answer: D Topic: Money creation process Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

62) At any point in time, a single bank can loan an amount equal to A) its excess reserves. B) its required reserves. C) its government securities. D) the amount of loans the bank made in the past. E) its total reserves. Answer: A Topic: Money creation process Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

63) Assume First Central Bank has a desired reserve ratio of 15 percent; $80,000 in total deposits, loans equal to $60,000, and has $20,000 in actual reserves. First Central can make additional loans totaling A) $8,000. B) $12,000. C) $20,000. D) $60,000. E) $80,000. Answer: A Topic: Money creation process Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

64) Bank One has reserves of $100,000, government securities of $200,000, loans of $700,000, and checkable deposits of $800,000. If the desired reserve ratio is 10 percent, Bank One can make additional loans totaling A) $0.00. B) $10,000. C) $20,000. D) $80,000. E) $100,000. Answer: C Topic: Money creation process Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

65) A new bank has reserves of $600,000, checkable deposits of $500,000, and government securities of $100,000. If the desired reserve ratio is 10 percent, the amount of loans this bank can make is A) $50,000. B) $60,000. C) $540,000. D) $550,000. E) $600,000. Answer: D Topic: Money creation process Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

66) If a single bank has $25,000 in excess reserves and the desired reserve ratio is 20 percent, what is the maximum this bank can loan? A) $5,000 B) $20,000 C) $25,000 D) $125,000 E) $30,000 Answer: C Topic: Money creation process Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

67) A-1 bank initially has no excess reserves. If the desired reserve ratio is 10 percent and a new deposit of $10,000 is made in A-1, then A-1 A) is required to hold the deposit in its reserves. B) can immediately loan a multiple of the $10,000. C) can immediately loan $9,000. D) can immediately loan $100,000. E) can immediately loan $10,000. Answer: C Topic: Money creation process Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

68) A currency drain is A) an increase in currency held outside banks. B) when the Fed buys securities, but it is not when the Fed sells securities. C) when the Fed sells securities, but it is not when the Fed buys securities. D) when the Fed either buys or sells securities. E) when the Fed raises the required reserve ratio. Answer: A Topic: Currency drain Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

69) A currency drain occurs when the A) Fed increases the required reserve ratio. B) Fed sells U.S. government securities. C) non-bank public increases its holdings of currency outside the banking system. D) banks reduce the number of loans they create with their excess reserves. E) Fed buys U.S. government securities. Answer: C Topic: Currency drain Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

70) The currency drain reduces the amount of A) reserves available to banks to make loans. B) currency the Fed has outstanding in the economy. C) currency available for banks to borrow from the Fed. D) the monetary base. E) open market operations the Fed can make. Answer: A Topic: Currency drain Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

71) A currency drain ________ the amount of bank reserves available to banks to make loans because ________. A) reduces; people are holding more money outside of the banks B) increases; people are holding less money outside of the banks C) reduces; people are holding less money outside of the banks D) reduces the monetary base; people are holding more money outside of the banks E) reduces; people are holding onto the money the banks could have borrowed from the Fed Answer: A Topic: Currency drain Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

72) Suppose the Federal Reserve buys $50 million worth of securities from a commercial bank. As a result, the monetary base ________, and the quantity of money will ________ $50 million due to the ________. A) increases; increase by more than; money multiplier B) decreases; decrease by more than; money multiplier C) increases; increase by more than; expenditure multiplier D) decreases; decrease by less than; expenditure multiplier E) increases; decrease by; currency drain Answer: A Topic: Money multiplier Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

73) The money multiplier is the A) fraction of the monetary base that is kept in currency. B) factor by which a change in the monetary base is multiplied to give the change in the quantity of money. C) factor by which a change in the deposits base is multiplied to give the change in the monetary base. D) proportion by which a change in the quantity of money changes the monetary base. E) number of times that the Fed conducts open market operations in a month. Answer: B Topic: Money multiplier Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

74) The number by which a change in the monetary base is multiplied to find the resulting change in the quantity of money is called the A) desired reserve ratio. B) money multiplier. C) currency multiplier. D) currency drain. E) open market operation. Answer: B Topic: Money multiplier Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

75) If the money multiplier is 3.0, a $1,000 increase in the monetary base A) increases quantity of money by $3,000. B) decreases quantity of money by $3,000. C) increases the monetary base by $300. D) increases the money multiplier by 3 percent. E) decreases the quantity of money by 3 percent. Answer: A Topic: Money multiplier Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

76) C/D is the currency drain ratio and R/D is the desired reserve ratio. The money multiplier equals A)

C) D) E)

. . .

Answer: A Topic: Money multiplier Skill: Level 4: Applying models Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

77) The Fed purchases $1 million of U.S. government securities from First Bank. The desired reserve ratio is 10 percent, the currency drain ratio is zero, and banks loan all excess reserves. The money multiplier is equal to A) 0.10. B) 1.0. C) 10.0. D) 100.0. E) $1 million. Answer: C Topic: Money multiplier Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

78) Suppose the currency drain ratio is 33.33 percent and the desired reserve ratio is 10 percent. The money multiplier equals A) 4.27. B) 3.00. C) 3.08. D) 2.50. E) 6.67. Answer: C Topic: Money multiplier Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

79) If the currency drain ratio is 0.2 and the desired reserve ratio is 0.03, the money multiplier is A) 0.76. B) 6.67. C) 3.23. D) 4.46. E) 5.22. Answer: E Topic: Money multiplier Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

80) Suppose the currency drain ratio is 25 percent and the desired reserve ratio is 20 percent. The money multiplier equals A) 4.00. B) 3.00. C) 2.78. D) 2.00. E) 5.42. Answer: C Topic: Money multiplier Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

81) If the currency drain ratio is 30 percent and the desired reserve ratio is 10 percent, the money multiplier is A) 0.80. B) 1.25. C) 3.25. D) 5.00. E) 10.0. Answer: C Topic: Money multiplier Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

82) The monetary multiplier is 3 and the change in the monetary base is $100,000. How much will the quantity of money increase? A) $300,000 B) $200,000 C) $100,000 D) $70,000 E) $33,333 Answer: A Topic: Money multiplier Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

83) If the currency drain ratio is zero, which of the following situations leads to the greatest total increase in the quantity of money? A) an increase in the monetary base of $100,000 when the desired reserve ratio is 5 percent B) an increase in the monetary base of $120,000 when the desired reserve ratio is 10 percent C) an increase in the monetary base of $200,000 when the desired reserve ratio is 20 percent D) an increase in the monetary base of $250,000 when the desired reserve ratio is 15 percent E) an increase in the monetary base of $100,000 when the desired reserve ratio is 50 percent Answer: A Topic: Money multiplier Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

84) The Fed buys $50,000 of government securities. The desired reserve ratio is 10 percent and the currency drain ratio is zero. What will be the change in the quantity of money? A) $5,000 B) $50,000 C) $500,000 D) $5,000,000 E) $0 Answer: C Topic: Money multiplier Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

85) The Fed buys $25,000 of government securities. The desired reserve ratio is 20 percent and the currency drain ratio is zero. What will be the change in the quantity of money? A) $5,000 B) $20,000 C) $25,000 D) $125,000 E) $50,000 Answer: D Topic: Money multiplier Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

86) If the desired reserve ratio is 10 percent and there is no currency drain, then a $100 increase in the monetary base leads the banking system to increase the quantity of money by A) $1,000. B) $400. C) $900. D) $110. E) $1,100. Answer: A Topic: Money multiplier Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

87) Suppose the desired reserve ratio is 20 percent and there is no currency drain. Then a $1 increase in the monetary base leads to the banking system to increase the quantity of money by A) $0.02. B) $4. C) $5. D) $20. E) $2. Answer: C Topic: Money multiplier Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

88) Suppose the desired reserve ratio is 10 percent and there is no currency drain. Then a $200 increase in the monetary base results in the banking system increasing the quantity of money by A) $200. B) $2,000. C) $20. D) $10. E) $2,190. Answer: B Topic: Money multiplier Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

89) If the required reserve ratio is 15 percent, there is no currency drain, and banks loan all of their excess reserves, an increase in the monetary base of $20,000 leads to a total increase in the quantity of money of A) $3,000. B) $20,000. C) $133,333. D) $200,000. E) $300,000. Answer: C Topic: Money multiplier Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

90) The Fed conducts an open market purchase of securities of $5,000. If the currency drain ratio is 0 percent and the desired reserve ratio is 10 percent, then the total increase in the quantity of money is A) $5,000. B) $20,000. C) $50,000. D) $10,000. E) $4,000. Answer: C Topic: Money multiplier Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

91) Suppose the Fed sells $100 of government securities. If the desired reserve ratio is 20 percent and there is no currency drain, then the quantity of money A) decreases by $100. B) decreases by $500. C) decreases by $400. D) increases by $100. E) decreases by $80. Answer: B Topic: Money multiplier Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

92) The Fed buys $20,000 of government securities. The desired reserve ratio is 5 percent and the currency drain ratio is zero. What will be the change in the quantity of money? A) $20,000 B) $400,000 C) $399,980 D) $19,000 E) $5,000 Answer: B Topic: Money multiplier Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

93) If the Fed buys $10 million of government securities when the desired reserve ratio is 20 percent and the currency drain ratio is 5 percent, the quantity of money A) increases by $42 million. B) increases by $50 million. C) decreases by $42 million. D) decreases by $50 million. E) increases by $7.5 million. Answer: A Topic: Money multiplier Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

94) Which of the following reduces the money multiplier? A) Banks loan all their excess reserves. B) Bank customers hold some of the loan proceeds as currency outside the banking system. C) The Fed reduces the required reserve ratio. D) Banks impose a currency drain on bank customers. E) The Fed sells U.S. government securities. Answer: B Topic: Size of money multiplier Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

95) The quantity of money decreases if A) the currency drain ratio increases. B) the desired reserve ratio decreases. C) banks loan all excess reserves. D) the Treasury Department issues fewer government securities. E) the Fed buys U.S. government securities. Answer: A Topic: Size of money multiplier Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

96) ________ in the currency drain ratio and ________ in the desired reserve ratio ________ the money multiplier. A) An increase; an increase; increase B) An increase; a decrease; decrease C) A decrease; an increase; decrease D) A decrease; a decrease; increase E) An increase; a decrease; increase Answer: D Topic: Size of money multiplier Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

97) An increase in the currency drain ratio A) increases the size of the money multiplier. B) decreases the size of the money multiplier. C) increases the deposits in all banks. D) decreases the size of the monetary base. E) increases the size of the monetary base. Answer: B Topic: Size of money multiplier Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

98) An increase in the currency drain ratio A) decreases the size of the money multiplier. B) increases the size of the money multiplier. C) increases the money supply. D) decreases the required reserve ratio. E) increases the desired reserve ratio. Answer: A Topic: Size of money multiplier Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

99) If there is an increase in the amount of currency held outside banks, then the A) monetary base will decrease. B) quantity of money will increase. C) quantity of money and the monetary base will decrease. D) quantity of money will decrease. E) quantity of money will not change. Answer: D Topic: Size of money multiplier Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

100) An increase in the currency drain ratio A) decreases the monetary base. B) increases the quantity of money. C) increases bank reserves. D) does not change the amount of the monetary base. E) does not change the quantity of money. Answer: D Topic: Size of money multiplier Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

101) An increase in the currency drain ratio A) decreases the quantity of money. B) decreases the monetary base. C) increases banks' reserves. D) increases banks' deposits. E) has no effect on the amount of the monetary base or the quantity of money. Answer: A Topic: Size of money multiplier Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

102) ________ increases the size of the money multiplier. A) An increase in the currency drain ratio B) An open market purchase of government securities by the Fed C) A reduction in the desired reserve ratio D) An open market sale of government securities by the Fed E) An increase in the size of open market operations Answer: C Topic: Size of money multiplier Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

103) If the monetary base does not change and the desired reserve ratio increases, the money multiplier ________ and the quantity of money ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) decreases; does not change Answer: D Topic: Size of money multiplier Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

104) The ________ the desired reserve ratio, the ________ the ________ in the quantity of money created from an initial increase of $100,000 in the monetary base. A) larger; larger; decrease B) larger; larger; increase C) larger; smaller; decrease D) smaller; larger; decrease E) smaller; larger; increase Answer: E Topic: Size of money multiplier Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

105) When part of a bank loan does not return to the banking system but rather remains outside the banking system as currency, then the money multiplier ________ in size and the amount of money created by an open market operation ________. A) increases; decreases B) does not change; increases C) decreases; decreases D) increases; increases E) decreases; does not change Answer: C Topic: Size of money multiplier Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

106) Decisions of ________ determine the magnitude of the monetary multiplier. A) only the Fed B) only the public C) both the Fed and the public D) neither the Fed nor the public E) the Fed and the U.S. Congress Answer: C Topic: Size of money multiplier Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

107) As a result of the Fed's actions during the 2008 financial crisis and banks' lending policies, A) the M2 money multiplier has fallen from about 9 to about 4. B) the M2 money multiplier more than doubled. C) the monetary base decreased by 50 percent. D) the ratio of currency to M2 deposits more than doubled. E) the reserve requirement ratio increased. Answer: A Topic: Eye on creating money Skill: Level 4: Applying models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

108) As a result of the Fed's actions during the 2008 financial crisis and banks' lending policies, the money multiplier ________ as a direct result of the ________. A) fell from about 9 to about 4; surge in banks' desired reserve ratios as they took on less risk B) rose from about 4 to about 9; surge in banks' desired reserve ratios as they took on less risk C) fell from about 9 to about 4; low risk experienced by banks because of the FDIC increasing their default coverage amounts D) rose drastically; consistent decrease in banks' desired reserve ratios as they took on less risk E) decreased drastically; consistent decrease in banks' desired reserve ratios as they took on less risk Answer: A Topic: Eye on creating money Skill: Level 4: Applying models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

109) As of 2016, the U.S. monetary base has ________ its pre-financial crisis level, as a direct result of ________. A) quadrupled; the Fed's actions with quantitative easing B) doubled; the Fed's actions with quantitative easing C) tripled; the Fed's actions with quantitative easing D) quadrupled; the Fed's actions and the resulting reduction of the money multiplier E) tripled; the Fed's actions and the resulting reduction of the currency drain Answer: A Topic: Eye on creating money Skill: Level 4: Applying models Section: Checkpoint 18.4 Status: Revised AACSB: Reflective thinking

110) The M2 multiplier in the United States is currently about A) 1. B) 4. C) 16. D) 50. E) 23. Answer: B Topic: Eye on creating money Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

111) During the 2008 financial crisis, banks restricted ________, and the M2 money multiplier ________. A) lending; decreased B) lending; increased C) deposits; increased D) buying securities; increased E) deposits; decreased Answer: A Topic: Eye on creating money Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

112) Excess reserves are the A) same as the required reserves. B) amount of reserves the Fed requires banks to hold. C) amount of reserves held over what is desired. D) amount of reserves a bank holds at the Fed. E) amount of reserves banks keep in their vaults. Answer: C Topic: Excess reserves Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

113) Banks can make loans up to an amount equal to their A) total deposits. B) total reserves. C) required reserves. D) excess reserves. E) total government securities. Answer: D Topic: Excess reserves Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

114) If the Fed buys government securities, then A) the quantity of money is not changed, just its composition. B) new bank reserves are created. C) the quantity of money decreases. D) bank reserves are destroyed. E) banks' excess reserves decrease. Answer: B Topic: Open market operation Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

115) The Citizens First Bank sells $100,000 of government securities to the Fed. This sale immediately A) decreases the quantity of money. B) decreases the bank's checkable deposits. C) increases the bank's reserves. D) decreases the bank's assets. E) increases the bank's required reserves. Answer: C Topic: Open market operation Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

116) When the Fed conducts an open market purchase, the first round changes in the money creation process are that excess reserves ________, bank deposits ________, and the quantity of money ________. A) decrease; decrease; decreases B) increase; do not change; increases C) decrease; increase; does not change D) do not change; increase; increases E) increase; increase; increases Answer: E Topic: Open market operation Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

117) A currency drain is cash ________ and has ________ effect on the money multiplier. A) draining into the banks; no B) draining into the banks; an C) held outside the banks; an D) held at the Fed; an E) held as reserves; no Answer: C Topic: Currency drain Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

118) The money multiplier is used to determine how much the A) monetary base increases when the Fed purchases government securities. B) quantity of money increases when the monetary base increases. C) monetary base increases when the quantity of money increases. D) quantity of money increases when the required reserve ratio increases. E) monetary base increases when the Fed sells government securities. Answer: B Topic: Money multiplier Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

119) The Fed makes an open market operation purchase of $200,000. The currency drain ratio is 33.33 percent and the desired reserve ratio is 10 percent. By how much does the quantity of money increase? A) $800,000 B) $333,333 C) $2,000,000 D) $615,416 E) $465,116 Answer: D Topic: Money multiplier Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

120) In 2008 the M2 money multiplier collapsed from near 9.0 to about 4.5 because of A) a surge in banks' desired reserve ratio. B) an increase in the currency drain ratio. C) a decrease in the currency drain ratio. D) a decrease in banks' desired reserve ratio. E) none of the above. Answer: A Topic: Eye on creating money Skill: Level 5: Critical thinking Section: Checkpoint 18.4 Status: New AACSB: Analytical thinking

121) The extraordinary ________ the money multiplier is primary explained by ________. A) fall in 2008 of; tenfold increase in the desired reserve ratio B) fluctuations in; an increasingly volatile currency drain ratio C) fluctuation in; a massive decrease in the desired reserve ratio D) rise in 2008 of; a huge decrease in the desired reserve ratio E) fall in 2008 of; a volatile currency drain ratio Answer: A Topic: Eye on creating money Skill: Level 5: Critical thinking Section: Checkpoint 18.4 Status: New AACSB: Analytical thinking

18.5 Integrative Questions 1) Money market mutual funds A) are included in M2 but not M1. B) are included in M1 but not M2. C) are included in M1 and M2. D) are the largest part of the monetary base. E) None of the above is correct. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

2) Which of the following financial institutions does NOT have to meet minimum reserve ratios? i. the Fed ii. commercial banks iii. credit unions A) i only B) ii only C) iii only D) ii and iii E) i, ii, and iii Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

3) If the desired reserve ratio increases, then A) banks' desired reserves increase and their excess reserves decrease. B) bank customers become more willing to make deposits in banks. C) banks are able to make more loans. D) banks can buy more government securities. E) the Fed has supplied banks with more reserves. Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking

4) If the desired reserve ratio decreases, then A) banks' desired reserves increase and their excess reserves decrease. B) bank customers become more willing to make deposits in banks. C) banks are able to make more loans. D) banks are forced to buy fewer government securities. E) banks' desired reserves decrease and their excess reserves do not change. Answer: C Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking

5) If the Fed buys a $100,000 government security from a bank when the desired reserve ratio is 20 percent and the currency drain ratio is 5 percent, the bank can loan a maximum of A) $75,000. B) $80,000. C) $100,000. D) $95,000. E) $85,000. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

6) If the Fed buys a $100,000 government security from a bank when the desired reserve ratio is 10 percent and the currency drain ratio is 50 percent, the bank can loan a maximum of A) $50,000. B) $40,000. C) $100,000. D) $90,000. E) $60,000. Answer: D Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

18.6 Essay: What Is Money? 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: Money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

2) List and define the three functions of money. Answer: The three functions of money are a medium of exchange, a unit of account, and a store of value. A medium of exchange is an object that is generally accepted in exchange for goods and services. A unit of account is an agreed upon measure for stating the prices of goods and services. A store of value is anything that can be held and later exchanged for goods and services. Money serves all three of these functions. Topic: Functions of money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Written and oral communication

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: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Written and oral communication

4) 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 (b), 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 Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Written and oral communication

5) What is fiat money? Answer: Fiat money is objects that are money because the law declares them to be money. Today's money is fiat money. In past times, money used to be items, such as salt or gold, that had an intrinsic value, that is, a value of their own outside of their role as money. Topic: Fiat money Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Written and oral communication

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 checkable deposits, are a means of payment and fulfill all the functions of money. These deposits are therefore money. Topic: Deposits Skill: Level 3: Using models Section: Checkpoint 18.1 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 Skill: Level 3: Using models Section: Checkpoint 18.1 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 card Skill: Level 3: Using models Section: Checkpoint 18.1 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 card, debit card Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Written and oral communication

10) What makes up M1? Is M1 larger or smaller than real GDP? Answer: M1 is the sum of currency held by individuals and businesses 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 much smaller than real GDP. Real GDP is about 7 times larger than M1. Topic: M1 Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Written and oral communication

11) 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 held by individuals and businesses 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: M1, M2 Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Written and oral communication

12) Explain what is included in M1 and M2. Is all of M1 money? Is all of M2 money? Answer: M1 is equal to the sum of currency held by individuals and businesses plus traveler's checks plus checking deposits owned by individuals and businesses. These assets are all money because they are all a means of payment. M2 is equal to M1 plus saving deposits plus small time deposits plus money market funds. Not all of M2 is money because not all of M2 are a means of payment. In other words, some parts of M2, such as time deposits, cannot be used directly to make a purchase. Topic: M1, M2 Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Written and oral communication

13) What is larger: M1 or M2? Why? Answer: M2 is larger than M1. M2 includes M1 plus additional assets, so M2 must be larger than M1. In June, 2011, M1 was approximately $1,950 billion and M2 was about 5 times larger at approximately $9,100 billion. Topic: M1, M2 Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Analytical thinking

14) "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: M2 Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

15) 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: M1 Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Analytical thinking

16) 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: M2 Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Analytical thinking

18.7 Essay: The Banking System 1) What are the institutions that make up the nation's banking system? Answer: Part of the nation's banking system is the Federal Reserve System. The other part consists of the banks and other institutions that accept deposits and that provide the services that enable people and businesses to make and receive payments. There are three general types of financial institutions: commercial banks, thrift institutions, and money market funds. Topic: Monetary institutions Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking

2) What are the three types of financial institutions that accept deposits that are part of the U.S. money supply? Briefly describe each of the three types of financial institutions. Answer: The three institutions are commercial banks, thrift institutions, and money market funds. Commercial banks are financial firms that accept deposits and make loans. There are about 8,600 commercial banks in the United States. Thrift institutions include savings and loan associations, savings banks, and credit unions. These firms also accept deposits and make loans. The last type of financial institution is money market funds. Money market funds obtain funds by selling shares and using the proceeds to buy assets such as U.S. Treasury bills. Topic: Monetary institutions Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Written and oral communication

3) Explain what is meant by the phrase "a bank's balancing act." Answer: Banks accept deposits and make loans with the funds they receive from the deposits. Banks profit if the interest rate they charge on their loans exceeds the interest rate they pay on their deposits. Loans are made for a specified length of time and cannot be called in before they are due. However, deposits can be withdrawn at any time by the depositors. Therefore a bank must perform a balancing act: It is risky to lend too much of the deposits and run the risk of mass withdrawals that would create a crisis for the bank. However, it is by making loans that the bank earns a profit. Topic: Bank profit Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Written and oral communication

4) "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: Bank profit Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking

5) "Banks hold about 50 percent of their assets as reserves." Is the previous statement correct or not? Answer: The statement is incorrect. In 2011 banks kept an average of 13 percent of their assets as reserves. Topic: Banks' reserves Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking

6) "To count as required reserves, the reserves must be on deposit at the bank's district Federal Reserve Bank." Is the previous statement correct or incorrect? Answer: The statement is incorrect. Currency held in the bank's vault also counts as reserves. Topic: Banks' reserves Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking

7) 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: Banks' reserves Skill: Level 1: Definition Section: Checkpoint 18.2 Status: Old AACSB: Analytical thinking

8) 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: Banks' reserves Skill: Level 1: Definition Section: Checkpoint 18.2 Status: Old AACSB: Analytical thinking

9) 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: Bank's balance sheet Skill: Level 1: Definition Section: Checkpoint 18.2 Status: Old AACSB: Analytical thinking

10) 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: Bank's balance sheet Skill: Level 1: Definition Section: Checkpoint 18.2 Status: Old AACSB: Analytical thinking

18.8 Essay: The Federal Reserve System 1) The Federal Reserve is the nation's central bank. Therefore, does it provide banking services to individual citizens? Answer: No, because it is the nation's central bank, the Federal Reserve provides banking services to the nation's banks but not to individual citizens. Topic: Central banks Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

2) 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: Structure of the Federal Reserve Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

3) 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: Structure of the Federal Reserve Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

4) The president of which Federal Reserve Bank is always a voting member of the FOMC? Why? 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: FOMC Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

5) 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: FOMC Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Written and oral communication

6) "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: FOMC Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Written and oral communication

7) 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: Structure of the Federal Reserve Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Written and oral communication

8) 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. Each of these 12 banks has nine directors who appoint the bank's president, which is subject to approval by the Board of Governors. 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: Structure of the Federal Reserve Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Written and oral communication

9) 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: Federal Reserve System Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Written and oral communication

10) List the Fed's main policy tools and briefly explain each one. Answer: The Fed's main policy tools are: required reserve ratios, the discount rate, open market operations, and extraordinary crisis measures. 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 discount rate is the rate that the Fed charges commercial banks that borrow reserves from it. An open market operation is the buying and selling of government bonds by the Fed in the open market. Extraordinary crisis measures have been undertaken since the financial crisis of 2008. They consist of quantitative easing, when the Fed creates a massive amount of reserves at a very low-possibly zero--federal funds rate, credit easing, when the Fed buys private securities or makes loans to financial institutions to stimulate their lending, and operation twist, when the Fed buys long-term securities and sells short-term securities to lower long-term interest rates. Topic: Fed policy tools Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Written and oral communication

11) 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: Fed policy tools, discount rate Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

12) 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 Reserve 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: Level 1: Definition Section: Checkpoint 18.3 Status: Old AACSB: Analytical thinking

18.9 Essay: Regulating the Quantity of Money 1) Describe how actual reserves are calculated. Explain the difference between required 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. Required reserves are equal to the required reserve ratio multiplied by the bank's deposits. Banks might want to keep reserves over and above their required reserves. The amount of reserves banks want to keep is their desired reserves. Excess reserves equal actual reserves minus desired reserves. A bank can make loans equal to the amount of its excess reserves. Topic: Required reserves Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Written and oral communication

2) "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: Required reserves Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Written and oral communication

3) A bank reports reserves of $100,000, government securities of $250,000, loans of $750,000, checkable deposits of $900,000, and owners' equity of $200,000. The desired reserve ratio is 10 percent and the bank wants to hold as reserves only the amount it is required to hold. 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 desires to keep 10 percent of its checkable deposits as reserves, so the desired reserves are ($900,000) × 0.10 = $90,000. Thus excess reserves equal $100,000 - $90,000 = $10,000. Topic: Required reserves Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

4) 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 desires to have ($250,000) × (0.10) = $25,000 as desired reserves. Its actual reserves equal $25,000. Therefore its excess reserves equal $25,000 - $25,000, or $0. Topic: Excess reserves Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

5) 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. What are the bank's assets and what are its liabilities? b. How much does the bank have in excess reserves? c. What can the bank do with its excess reserves that will affect the quantity of money? Answer: a. Assets are reserves, loans, and securities. Liabilities are deposits. b. The excess reserves are $30, equal to the actual reserves of $50 minus the desired reserves of $20 (= 20 percent of $100 of deposits). c. The bank can use its excess reserves to make loans. When it makes the loan, it will increase the quantity of money. Topic: Money creation process Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

6) 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: Money creation process Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Written and oral communication

7) 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: Open market operation Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

8) The Fed conducts an open market operation and 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. None of these reserves are desired reserves, so Commerce Bank's excess reserves also increase by $50,000. Topic: Open market operation Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

9) 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: Open market operation Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Written and oral communication

10) When the Fed buys a government security, 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 a government security, 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: Open market operation Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Written and oral communication

11) "When the Fed makes an open market purchase of government securities, the quantity of money will eventually decrease 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 makes an open market purchase of government securities, the quantity of money will increase rather than decrease. Second, the money multiplier points out that the change in the quantity of money will be greater than, not less than, the initial change in the monetary base. Topic: Open market operation Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Written and oral communication

12) 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: The rounds of money creation Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

13) How can a new deposit of $10,000 at one bank create other new deposits at other banks? Suppose the desired reserve ratio is 10 percent and people keep no currency outside of the banks. What will be the new amount of deposits in the second and third rounds? Answer: When the bank receives a new deposit of $10,000, it will loan some of the deposit. The proceeds of the loan will be deposited in another bank, which will then loan some of its new deposits. Hence an initial deposit at one bank leads to deposits at other banks. With the desired reserve ratio of 10 percent, the first bank keeps $1,000 as reserves (10 percent of $10,000) and it can loan the remainder, $9,000. Thus the deposit at the second round bank will be $9,000. The second round bank keeps $900 as reserves (10 percent of $9,000) and can loan the remainder, $8,100. The deposit in the third round bank will be $8,100. Topic: The rounds of money creation Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

14) The Fed conducts an open market operation and increases a bank's excess reserves by $2,000. Explain the first five rounds of the money creation process if the desired reserve ratio is 25 percent and if people keep no currency outside of the banking system. Answer: In round one, the bank gains $2,000 of reserves which it lends. The next bank receives as a deposit the amount of the loan. The bank keeps $500 as desired reserves and lends $1,500. In round three, the third bank receives the $1,500 in a deposit. It keeps 25 percent, or $375, as desired reserves and lends the rest, $1,125. In round four, the fourth bank receives the $1,125 in a deposit. It keeps 25 percent, $281.25, as desired reserves and lends the remainder, $843.75. Finally in round five, the next bank receives the $843.75 in a deposit. It keeps $210.94 as desired reserves and lends the rest, $632.81. Topic: The rounds of money creation Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

15) "If the currency drain ratio increases, the monetary base decreases." Explain whether the previous statement is correct or incorrect. Answer: The statement is false. If the currency drain ratio increases, the money multiplier (and the quantity of money) decreases but the monetary base itself is unaffected. Topic: Currency drain Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

16) 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: Currency drain Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Written and oral communication

17) 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: Currency drain Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Written and oral communication

18) Explain how the currency drain ratio affects the size of the money multiplier. In your explanation, suppose that in one round of the money creation process a bank gains $1 million in new deposits and reserves. Further suppose that the desired reserve ratio is 10 percent and the currency drain ratio is 50 percent. Answer: The currency drain ratio 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 keeps $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 the currency drain ratio is 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 deposits) is kept outside the banks as currency. Hence the second bank, which keeps $60,000 as reserves, can loan only $540,000. And of this loan and ensuing deposit, 50 percent or $180,000 is kept as currency and only $360,000 is left 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: Currency drain Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

19) If the currency drain ratio increases, how can the Fed adjust the monetary base to offset the effect on the quantity of money? Answer: If the currency drain ratio 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: Currency drain Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Written and oral communication

20) Suppose the Fed conducts an open market operation in which it 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: Money multiplier Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Written and oral communication

21) If the currency drain ratio is 40 percent and the desired reserve ratio is 15 percent, what does the money multiplier equal? Answer: The money multiplier is 2.55. The money multiplier equals . Therefore, the money multiplier equals

with C/D = 0.40 and = 2.55.

Topic: Money multiplier Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

22) Suppose the currency drain is 20 ratio percent and the desired reserve ratio is 10 percent. a. What does the money multiplier equal? b. If the Fed purchases $10 million of U.S. government securities, by how much will the quantity of money increase or decrease? Answer: a.

The money multiplier is 4.00. The money multiplier equals

Therefore, the money multiplier equals

with C/D = 0.20 and

= 4.00.

b. If the Fed purchases $10 million of U.S. government securities, the quantity of money increases by ($10 million × 4.00) = $40.0 million. Topic: Money multiplier Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

23) The Fed purchases $100,000 of U.S. government securities from One Bank. Assuming the desired reserve ratio is 10 percent, banks loan all excess reserves, and the currency drain is 20 percent, how much does the quantity of money increase? Answer: The quantity of money increases by (money multiplier × $100,000). The money multiplier equals with C/D = 0.20 and R/D = 0.10. Therefore, the money multiplier equals . So the quantity of money increases by (4.00) × ($100,000) = $400,000. Topic: Money multiplier Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

Essential Foundations of Economics, 8e (Bade) Chapter 19 Aggregate Supply and Aggregate Demand 19.1 Aggregate Supply 1) Over the business cycle, factors such as the quantity of capital, human capital and technology A) grow but do not fluctuate as much as the quantity of labor employed. B) change drastically, fluctuating more than the quantity of labor employed. C) fluctuate about the same amount as the quantity of labor employed. D) do not grow and are therefore not the source of economic growth. E) change randomly, sometimes growing, sometimes falling. Answer: A Topic: Aggregate supply basics Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

2) Over a business cycle, the quantities of capital, human capital, and entrepreneurial talent A) change gradually and do not fluctuate much. B) cycle alongside real GDP. C) are completely unpredictable and cannot be forecast. D) cycle more than real GDP. E) are constant and do not change. Answer: A Topic: Aggregate supply basics Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

3) Which of the following does NOT affect potential GDP? A) the quantity of money B) the quantity of labor employed C) the quantity of capital and human capital D) the amount of entrepreneurial talent available E) the quantity of land and natural resources Answer: A Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

4) Potential GDP A) increases as the price level increases because firms supply more goods and services. B) decreases as the price level increases because people demand fewer goods and services. C) might either increase or decrease as the price level increases, depending on whether aggregate demand increases or decreases. D) is independent of the price level. E) never changes. Answer: D Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

5) The line showing potential GDP is a vertical straight line because A) there is only one level of full employment at any point in time. B) economists are unsure about how to determine potential GDP. C) it represents the minimum level of real GDP in a recession. D) when nothing else changes, a higher price level has no effect on real GDP. E) the aggregate supply curve is upward sloping. Answer: A Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

6) A rise in the price level produces ________ the potential GDP line. A) a rightward shift of B) a movement downward along C) a leftward shift of D) a movement upward along E) neither a shift of the potential GDP line nor a movement along Answer: D Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

7) Which of the following is true? A) Aggregate supply is another name for potential GDP. B) Potential GDP increases as the price level increases. C) At full employment, aggregate supply is equal to potential GDP. D) Potential GDP decreases as the price level increases. E) The potential GDP line has a negative slope. Answer: C Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

8) Moving along the potential GDP line, when the price level changes, the i. real wage rate stays at the full-employment equilibrium level. ii. money wage rate changes by the same percentage. iii. money prices of non-labor resources change by the same percentage. A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: E Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

9) The real wage rate definitely falls if the money wage rate ________ and the price level ________. A) remains constant; rises B) remains constant; falls C) rises; falls D) rises; rises E) falls; falls Answer: A Topic: Real wage rate Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking

10) A fall in the real wage rate ________ firms' profits and leads to ________ in the quantity supplied. A) raises; an increase B) raises; a decrease C) lowers; an increase D) lowers; a decrease E) does not change; no change Answer: A Topic: Real wage rate Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

11) The aggregate supply curve shows the relationship between A) potential GDP and the price level. B) potential GDP and real GDP. C) the quantity of real GDP supplied and the price level. D) the quantity of real GDP supplied and the interest rate. E) potential GDP and the aggregate demand curve. Answer: C Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

12) The slope of the aggregate supply curve shows that, all else the same, the A) quantity of real GDP supplied increases as the price level increases. B) quantity of real GDP supplied decreases as the price level increases. C) quantity of real GDP supplied remains constant as the price level increases. D) price level remains constant as real GDP increases. E) price level remains constant as potential GDP increases. Answer: A Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

13) Other things remaining the same, an increase in the price level A) increases aggregate supply. B) decreases aggregate supply. C) increases the quantity of real GDP supplied. D) decreases the quantity of real GDP supplied. E) neither changes aggregate supply nor changes the quantity of real GDP supplied. Answer: C Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

14) Moving along the AS curve, when the price level increases, the A) real wage rate falls, and there is an increase in the quantity of real GDP supplied. B) real wage rate rises, and there is an increase in the quantity of real GDP supplied. C) nominal wage rate falls, and there is an increase in the quantity of real GDP supplied. D) nominal wage rate rises, and there is a decrease in the quantity of real GDP supplied. E) real wage rate rises, and there is a decrease in the quantity of real GDP supplied. Answer: A Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

15) Moving along the aggregate supply curve, when the price level rises, A) the quantity supplied does not change because the aggregate supply curve is a vertical line. B) the quantity supplied increases. C) the quantity supplied decreases. D) the aggregate demand curve shifts rightward. E) the aggregate demand curve shifts leftward. Answer: B Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

16) An increase in the price level leads to A) an upward movement along the aggregate supply curve. B) a downward movement along the aggregate supply curve. C) a leftward shift of the aggregate supply curve. D) a rightward shift of the aggregate supply curve. E) neither a movement along the aggregate supply curve nor a shift of the aggregate supply curve. Answer: A Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

17) The ________, the ________ is the quantity of real GDP supplied. A) lower the price level; greater B) higher the price level; greater C) greater the demand for labor; smaller D) lower the supply of labor; greater E) lower aggregate demand; greater Answer: B Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

18) The slope of the aggregate supply curve shows that the ________ the price level, the ________. A) higher; greater is the quantity of real GDP supplied B) higher; smaller is the quantity of real GDP supplied C) lower; greater is the quantity of real GDP supplied D) higher; is the quantity of potential GDP supplied E) lower; is the quantity of potential GDP supplied Answer: A Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

19) ________ increases the quantity of real GDP supplied and is shown as a movement along the AS curve. A) A decrease in the quantity of money B) A decrease in consumption expenditure C) A fall in the expected rate of profit D) A rise in the price level E) An increase in potential GDP Answer: D Topic: Aggregate supply curve Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking

20) The aggregate supply curve illustrates that the A) higher the price level, the greater the quantity of real GDP supplied. B) higher the price level, the smaller the quantity of real GDP supplied. C) aggregate demand curve is not needed to determine the aggregate price level. D) price level does not affect the quantity of real GDP supplied. E) amount of potential GDP increases when the price level rises. Answer: A Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

21) Because there is a ________ relationship between the price level and the quantity of real GDP supplied, the aggregate supply curve is ________ curve. A) negative; an upward-sloping B) positive; a downward-sloping C) positive; an upward-sloping D) negative; a downward-sloping E) positive; a vertical Answer: C Topic: Aggregate supply curve Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

22) The aggregate supply curve is a(n) ________ curve because it represents the relationship between price level and the quantity of real GDP supplied, two items that are ________ correlated. A) upward-sloping; negatively B) downward-sloping; positively C) upward-sloping; positively D) downward-sloping; negatively E) vertical; not Answer: C Topic: Aggregate supply curve Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

23) If there is a rise in the price level, there is ________ in the quantity of real GDP supplied and a movement ________ along the AS curve. A) a decrease; downward B) an increase; upward C) an increase; downward D) a decrease; upward E) no change; upward Answer: B Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

24) If there is a rise in the price level, there is a(n) ________ movement along the AS curve because there is ________ in the quantity of real GDP supplied. A) downward; a decrease B) upward; an increase C) downward; an increase D) upward; a decrease E) upward; no change Answer: B Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

25) If the price level increases from 110.0 to 115.0, the quantity of A) real GDP supplied will increase. B) real GDP supplied will decrease. C) potential GDP will decrease. D) real GDP demanded will increase. E) potential GDP will increase. Answer: A Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

26) A change in the price level A) shifts the aggregate supply curve rightward. B) shifts the potential GDP line. C) shifts the aggregate supply curve leftward. D) changes the quantity of real GDP supplied. E) shifts the aggregate demand curve leftward. Answer: D Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

27) The quantity of real GDP supplied increases when the price level increases because A) investment increases. B) the quantity of money increases. C) the real wage rate falls. D) the real wage rate rises. E) aggregate demand increases. Answer: C Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

28) The quantity of real GDP supplied ________ when the price level increases because ________. A) decreases; investment increases B) increases; the quantity of money increases C) increases; the real wage rate falls D) decreases; the real wage rate rises E) increases; aggregate demand increases Answer: C Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

29) During 2010, a country reports that its price level fell and the money wage rate did not change. These changes led to A) a higher real wage rate, lower profits, and a decrease in the quantity of real GDP supplied. B) a higher real wage rate, higher profits, and an increase in the quantity of real GDP supplied. C) a lower real wage rate, lower profits, and a decrease in the quantity of real GDP supplied. D) a lower real wage rate, higher profits, and an increase in the quantity of real GDP supplied. E) no change in the real wage rate and an increase in aggregate demand. Answer: A Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

30) During 2012, a country reports that its price level fell and the money wage rate did not change. These changes led to a(n) ________ because their country experienced a(n) ________. A) decrease in the quantity of real GDP supplied; higher real wage rate and lower profits for firms B) increase in the quantity of real GDP supplied; higher real wage rate and lower profits for firms C) decrease in the quantity of real GDP supplied; lower real wage rate and lower profits for firms D) increase in the quantity of real GDP supplied; lower real wage rate and higher profits for firms E) decrease in aggregate demand; economic expansion Answer: A Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

31) The quantity of real GDP supplied decreases if the price level ________ because it ________ profits. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) None of the above answers is correct because the AS curve is vertical so that the quantity of real GDP supplied does not change when the price level changes. Answer: D Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

32) If profits are high because the price level rose, A) it is likely the result of an increase in the real wage rate. B) new businesses open and the quantity of real GDP supplied increases. C) business failures rise and the quantity of real GDP supplied increases. D) potential GDP must be decreasing. E) the AS curve shifts leftward. Answer: B Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

33) When the price level rises, the quantity of real GDP supplied ________ because ________. A) decreases; new businesses open B) increases; new businesses open C) decreases; businesses fail and have to shut their doors D) increases; AS curve shifts rightward E) increases; businesses fail and have to shut their doors Answer: B Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

34) If the price level rises but the money wage rate does not, then firms will hire ________ labor and the quantity of real GDP supplied will ________. A) more; increase B) the same amount of; not change C) less; decrease D) more; not change E) less; increase Answer: A Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

35) It is profitable to hire more labor if the price level ________ and the money wage rate ________. A) rises; falls B) falls; rises C) falls; does not change D) does not change; rises E) rises; rises by the same percentage Answer: A Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

36) If the price level falls and the money wage rate does not change, some firms ________ and there is ________. A) shut down; a leftward shift of the aggregate supply curve B) start up; a rightward shift of the aggregate supply curve C) shut down; a decrease in the quantity of real GDP supplied D) shut down; a decrease in potential GDP E) start up; an increase in potential GDP Answer: C Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

37) When the price level rises and the money wage rate does not change, A) the quantity of real GDP supplied increases as more businesses start up and potential GDP does not change. B) the quantity of real GDP supplied decreases as more businesses fail and potential GDP does not change. C) profits fall and more businesses fail. D) existing businesses do not change their level of output. E) the quantity of potential GDP increases because the quantity of real GDP supplied increases. Answer: A Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

38) Moving along the aggregate supply curve, A) the quantity of capital used increases. B) only the price level changes. C) technology advances. D) the stock of human capital increases. E) the real wage rate is constant. Answer: B Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

39) A rise in the price level produces a ________ the aggregate supply curve. A) rightward shift of B) movement downward along C) leftward shift of D) movement upward along E) rightward shift of the aggregate supply curve and a movement downward along Answer: D Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

40) A fall in the price level produces a ________ the aggregate supply curve. A) rightward shift of B) movement downward along C) leftward shift of D) movement upward along E) rightward shift of the aggregate supply curve and a movement downward along Answer: B Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

41) If the money wage rate does not change, a decrease in the price level will ________ the real wage rate and ________ firms' profit. A) raise; decrease B) raise; increase C) lower; decrease D) lower; increase E) lower; not change Answer: A Topic: Aggregate supply, real wage rate Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

42) The money wage rate is constant when moving along A) only the aggregate supply curve. B) only the aggregate supply curve and the potential GDP line. C) only the potential GDP line. D) neither the aggregate supply curve nor the potential GDP line. E) the aggregate supply curve, the potential GDP line, and the aggregate demand curve. Answer: A Topic: Aggregate supply, real wage rate Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

43) The aggregate supply curve slopes ________ because a ________ in the price level brings a ________ in the real wage rate. A) upward; rise; rise B) downward; fall; rise C) upward; rise; fall D) upward; fall; fall E) downward; rise; rise Answer: C Topic: Aggregate supply, real wage rate Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

44) Along the aggregate supply curve, the quantity of real GDP supplied increases when the price level rises because A) profits decrease. B) the real wage rate falls. C) the real wage rate rises. D) the real wage rate and profits both fall. E) the demand for the goods and services increases. Answer: B Topic: Aggregate supply, real wage rate Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

45) A fall in the price level brings a ________ in the real wage rate that ________ profits and can lead to ________. A) rise; reduces; firms going out of business B) rise; reduces; new firms entering business C) fall; increases; firms going out of business D) rise; increases; new firms entering business E) fall; decreases; new firms entering business Answer: A Topic: Aggregate supply, real wage rate Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

46) A rise in the price level brings a ________ in the real wage rate that ________ profits which leads to ________ production. A) rise; reduces; decreasing B) rise; reduces; increasing C) fall; increases; increasing D) rise; increases; decreasing E) fall; decreases; decreasing Answer: C Topic: Aggregate supply, real wage rate Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

47) A fall in the price level brings a ________ in the real wage rate that ________ profits which leads to ________. A) rise; reduces; firms restarting production B) rise; reduces; firms temporarily shutting down C) fall; increases; firms temporarily shutting down D) rise; increases; firms restarting production E) rise; increases; firms temporarily shutting down Answer: B Topic: Aggregate supply, real wage rate Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

48) Which of the following changes aggregate supply and shifts the aggregate supply curve? i. change in the price level ii. change in potential GDP iii. change in the money wage rate A) i only B) ii only C) iii only D) ii and iii E) i, ii, and iii Answer: D Topic: Changes in aggregate supply Skill: Level 1: Definition Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

49) Changes in which of the following shifts the aggregate supply curve? i. the price level ii. the money wage rate iii. potential GDP A) i only B) ii only C) iii only D) ii and iii E) i, ii, and iii Answer: D Topic: Changes in aggregate supply Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

50) Which of the following does NOT shift the aggregate supply curve? A) An increase in energy prices. B) An increase in the nominal wage rate. C) An increase in the price level. D) A decrease in the capital stock. E) None of the above are correct because they all shift the aggregate supply curve. Answer: C Topic: Changes in aggregate supply Skill: Level 3: Using models Section: Checkpoint 19.1 Status: New AACSB: Reflective thinking

51) An increase in the money wage rate ________ and an increase in the money prices of raw materials ________. A) shifts the AS curve rightward; shifts the AS curve rightward B) shifts the AS curve leftward; shifts the AS curve leftward C) shifts the AS curve rightward; shifts the AS curve leftward D) shifts the AS curve leftward; shifts the AS curve rightward E) shifts the AS curve leftward; does not shift the AS curve Answer: B Topic: Changes in aggregate supply Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

52) Changes in which of the following do NOT shift the AS curve? i. the price level ii. potential GDP iii. the money wage rate A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: A Topic: Changes in aggregate supply Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

53) A change in the price level brings a ________ the aggregate supply curve, NOT a ________ the aggregate supply curve. A) shift in; movement along B) vertical displacement of; change in the slope of C) movement along; shift in D) change in the slope of; horizontal displacement of E) shift in; change in the slope of Answer: C Topic: Changes in aggregate supply Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

54) Which of the following changes aggregate supply and shifts the AS curve? i. a change in the price of a major resource ii. increases in the amount of capital iii. a change in the money income of consumers A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: D Topic: Changes in aggregate supply Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

55) If the costs of production decrease, there is A) an increase in aggregate supply and the AS curve shifts rightward. B) a decrease in aggregate supply and the AS curve shifts leftward. C) an increase in the quantity of real GDP supplied and a movement up along the AS curve. D) a decrease in the quantity of real GDP supplied and a movement down along the AS curve. E) an increase in aggregate supply and the AS curve shifts leftward. Answer: A Topic: Shifts in the aggregate supply curve Skill: Level 1: Definition Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

56) If the costs of production increase, there is A) an increase in aggregate supply and the AS curve shifts rightward. B) a decrease in aggregate supply and the AS curve shifts leftward. C) an increase in the quantity of real GDP supplied and a movement up along the AS curve. D) a decrease in the quantity of real GDP supplied and a movement down along the AS curve. E) a decrease in aggregate supply and the AS curve shifts rightward. Answer: B Topic: Shifts in the aggregate supply curve Skill: Level 1: Definition Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

57) Which of the following shifts the aggregate supply curve rightward? i. The money wage rate rises. ii. Potential GDP increases. iii. Government expenditure on goods and services increases. A) i only B) ii only C) iii only D) ii and iii E) i, ii, and iii Answer: B Topic: Shifts in the aggregate supply curve Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

58) Which of the following best describes the effect on the aggregate supply curve if political negotiations result in a substantial decrease in the price of oil? A) The AS curve shifts rightward. B) There is no change to the AS curve. C) The AS curve does not shift but there is an upward movement along it. D) The AS curve does not shift but there is a downward movement along it. E) The AS curve shifts leftward. Answer: A Topic: Changes in aggregate supply, money prices of resources Skill: Level 1: Definition Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

59) The aggregate supply curve shifts rightward when A) potential GDP decreases. B) the money wage rate falls. C) income taxes increase. D) government purchases increase. E) the money wage rate rises. Answer: B Topic: Changes in aggregate supply, money wage rate Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

60) The aggregate supply curve shifts A) rightward if potential GDP decreases. B) rightward if the money wage rate falls. C) rightward if the money wage rate rises. D) leftward if potential GDP increases. E) leftward if the aggregate demand curve shifts leftward. Answer: B Topic: Changes in aggregate supply, money wage rate Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

61) A fall in the money wage rate ________ aggregate supply and ________. A) decreases; shifts the AS curve rightward B) increases; shifts the AS curve leftward C) increases; shifts the AS curve rightward D) decreases; shifts the AS curve leftward E) does not change; does not shift the AS curve Answer: C Topic: Changes in aggregate supply, money wage rate Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

62) An increase in the money wage rate leads to A) an upward movement along the aggregate supply curve. B) a downward movement along the aggregate supply curve. C) a leftward shift of the aggregate supply curve. D) a rightward shift of the aggregate supply curve. E) a leftward shift of the aggregate demand curve. Answer: C Topic: Changes in aggregate supply, money wage rate Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

63) A rise in the money wage rate shifts the A) AD curve rightward. B) AD curve leftward. C) AS curve rightward. D) AS curve leftward. E) potential GDP curve rightward. Answer: D Topic: Changes in aggregate supply, money wage rate Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

64) An increase in the money wage A) raises firms' costs and shifts the aggregate supply curve rightward. B) raises firms' costs and shifts the aggregate supply curve leftward. C) raises firms' sales and increases potential output. D) raises firms' costs and decreases potential output. E) has no effect on the aggregate supply curve. Answer: B Topic: Changes in aggregate supply, money wage rate Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: New AACSB: Reflective thinking

65) If the money wage rate increases, then the A) aggregate supply curve shifts rightward. B) potential GDP increases. C) potential GDP decreases. D) aggregate supply curve shifts leftward. E) aggregate demand curve shifts leftward. Answer: D Topic: Changes in aggregate supply, money wage rate Skill: Level 1: Definition Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

66) ________ decreases aggregate supply. A) An increase in potential GDP B) An increase the quantity of capital C) A rise in the price level D) A rise in the money wage rate E) A fall in the money wage rate Answer: D Topic: Changes in aggregate supply, money wage rate Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

67) Which of the following shifts the aggregate supply curve leftward? A) increase in potential GDP B) increase in the money wage rate C) increase in real GDP D) decrease in the money price of oil E) a fall in the price level Answer: B Topic: Changes in aggregate supply, money wage rate Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

68) Which of the following statements is true? A) An increase in potential GDP increases aggregate supply and shifts the AS curve leftward. B) A decrease in potential GDP decreases aggregate supply and shifts the AS curve leftward. C) An increase in the money wage rate shifts the AS curve rightward. D) A fall in the price level shifts the AS curve leftward. E) An increase in the money wage rate increases potential GDP. Answer: B Topic: Changes in aggregate supply, potential GDP Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking

69) Which of the following shifts the aggregate supply curve leftward? A) a decrease in potential GDP B) a fall in the money wage rate C) a decrease in the price level D) a fall in the real wage rate E) an increase in potential GDP Answer: A Topic: Changes in aggregate supply, potential GDP Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

70) An increase in potential GDP ________ aggregate supply and ________. A) decreases; shifts the AS curve rightward B) increases; shifts the AS curve leftward C) increases; shifts the AS curve rightward D) decreases; shifts the AS curve leftward E) has no effect on; does not shift the AS curve Answer: C Topic: Changes in aggregate supply, potential GDP Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking

71) If potential GDP increases, then the A) aggregate supply curve shifts leftward. B) aggregate supply curve shifts rightward. C) real wage rate increases. D) real wage rate falls. E) aggregate demand curve shifts rightward. Answer: B Topic: Changes in aggregate supply, potential GDP Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

72) Which of the following shifts the aggregate supply curve rightward? A) increase in potential GDP B) increase in the money wage rate C) increase in real GDP D) increase in the money price of oil E) increase in consumers' incomes Answer: A Topic: Changes in aggregate supply, potential GDP Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

73) If potential GDP increases, A) aggregate supply does not change. B) the quantity of aggregate supply decreases. C) aggregate supply increases. D) the price level rises. E) the money wage rate must have fallen. Answer: C Topic: Changes in aggregate supply, potential GDP Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

74) When potential GDP increases, the potential GDP line ________, and the aggregate supply curve ________. A) shifts rightward; shifts rightward B) shifts rightward; shifts leftward C) shifts leftward; shifts rightward D) shifts leftward; shifts leftward E) shifts rightward; does not shift Answer: A Topic: Changes in aggregate supply, technology Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking

75) An increase in ________ increases potential GDP and ________ aggregate supply. A) technology; increases B) technology; decreases C) the money wage rate; increases D) the money price of oil; decreases E) the money wage rate; decreases Answer: A Topic: Changes in aggregate supply, potential GDP Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

76) An increase in technology ________ potential GDP and ________ aggregate supply. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; does not change Answer: A Topic: Changes in aggregate supply, potential GDP Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

77) A technological advance ________ potential GDP, ________ aggregate supply, and shifts the aggregate supply curve ________. A) increases; increases; leftward B) decreases; decreases; leftward C) increases; increases; rightward D) decreases; increases; rightward E) increases; decreases; leftward Answer: C Topic: Changes in aggregate supply, potential GDP Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

78) The change in potential real GDP and aggregate supply shown in the graph above can be a result of A) an increase in the real wage rate. B) an increase in the quantity of capital. C) a decrease in the money wage rate. D) a decrease in the money price of oil. E) a fall in the price level. Answer: B Topic: Changes in aggregate supply, potential GDP Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking

79) As the money wage rate increases, A) potential GDP increases. B) potential GDP decreases. C) aggregate supply increases. D) aggregate supply decreases. E) aggregate supply and potential GDP do not change. Answer: D Topic: Changes in aggregate supply, money wage rate Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking

80) The change reflected in the above figure might be a result of A) a decrease in the money wage rate. B) a decrease in the real wage rate. C) an increase in the money wage rate. D) an increase in the real wage rate. E) a rise in the price level. Answer: A Topic: Changes in aggregate supply, money wage rate Skill: Level 1: Definition Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking

81) The change reflected in the above figure might be a result of A) a decrease in the quantity of capital. B) an increase in the quantity of labor. C) a rise in the money wage rate. D) a decrease in the money prices of resources other than labor. E) a fall in the price level. Answer: C Topic: Changes in aggregate supply, money wage rate Skill: Level 1: Definition Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking

82) Moving along the potential GDP line, the money wage rate changes by the same percentage as the change in the price level so that the real wage rate A) increases. B) decreases. C) stays at the full-employment equilibrium level. D) might either increase or decrease. E) stays the same, though not necessarily at the full-employment equilibrium level. Answer: C Topic: Potential GDP Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

83) The aggregate supply curve is A) upward sloping. B) downward sloping. C) a vertical line. D) a horizontal line. E) U-shaped. Answer: A Topic: Aggregate supply curve Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

84) When the price level falls, A) the AS curve shifts rightward but the potential GDP line does not shift. B) there is a movement upward along the AS curve. C) the AS curve shifts leftward but the potential GDP line does not shift. D) there is a movement downward along the AS curve. E) both the potential GDP line and the AS curve shift leftward. Answer: D Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking

85) As the price level rises relative to costs and the real wage rate falls, profits ________ and the number of firms in business ________. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases E) do not change; do not change Answer: A Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

86) When potential GDP increases, A) the AS curve shifts rightward. B) there is a movement up along the AS curve. C) the AS curve shifts leftward. D) there is a movement down along the AS curve. E) there is neither a movement along nor a shift in the AS curve. Answer: A Topic: Changes in aggregate supply, potential GDP Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking

87) If the money wage rate rises, A) the AS curve shifts rightward. B) there is a movement up along the AS curve. C) the AS curve shifts leftward. D) there is a movement down along the AS curve. E) there is neither a movement along or a shift in the AS curve. Answer: C Topic: Changes in aggregate supply, money wage rate Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking

19.2 Aggregate Demand 1) A rise in the price level A) decreases aggregate demand. B) increases aggregate demand. C) decreases the quantity of real GDP demanded. D) increases the quantity of real GDP demanded. E) has no effect on aggregate demand or on the quantity of real GDP demanded. Answer: C Topic: Aggregate demand Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

2) Which of the following statements is correct? A) The price level does not affect the level of real GDP demanded. B) The lower the price level, the greater the quantity of real GDP demanded. C) The lower the price level, the more the aggregate demand curve shifts rightward. D) The lower the price level, the more the aggregate demand curve shifts leftward. E) The higher the price level, the more the aggregate demand curve shifts rightward. Answer: B Topic: Aggregate demand Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

3) The AD curve is a graph depicting the A) relationship between the price level and the quantity of real GDP supplied. B) business cycle during expansions and recessions. C) relationship between the price level and the quantity of real GDP demanded. D) relationship between the price level and potential GDP. E) relationship between the aggregate quantity of real GDP demanded and the aggregate quantity of real GDP supplied. Answer: C Topic: Aggregate demand curve Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

4) The aggregate demand curve illustrates the relationship between A) the price level and the quantity of goods demanded by households, firms, government, and foreigners. B) the real wage rate and the hours of labor demanded by firms. C) the price level and the potential quantity demanded of real GDP. D) the price level and the quantity of goods supplied by firms. E) the price level and the potential demand for real GDP. Answer: A Topic: Aggregate demand curve Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

5) Which of the following produces a movement along the aggregate demand curve and does not shift the aggregate demand curve? A) a change in foreign incomes B) a change in the price level C) a change in monetary policy D) a change in expectations about the future E) a change in government expenditures on goods and services Answer: B Topic: Aggregate demand curve Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

6) A change in the price level produces a ________ the aggregate demand curve. i. shift in ii. change in the slope of iii. movement along A) i only B) ii only C) iii only D) i and iii E) i and ii Answer: C Topic: Aggregate demand curve Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

7) A fall in the price level produces a ________ the aggregate demand curve. A) rightward shift of B) movement downward along C) leftward shift of D) movement upward along E) change in the slope of Answer: B Topic: Aggregate demand curve Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

8) An increase in the price level leads to A) a rightward shift of the aggregate demand curve. B) a leftward shift of the aggregate demand curve. C) a movement upward along the aggregate demand curve. D) a movement downward along the aggregate demand curve. E) neither a shift in the aggregate demand curve nor a movement along it. Answer: C Topic: Aggregate demand curve Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

9) If the price level increases, there is ________ the AD curve and the quantity of real GDP demanded ________. A) a movement upward along; increases B) a movement downward along; increases C) a movement upward along; decreases D) a leftward shift in; decreases E) no change in; does not change Answer: C Topic: Aggregate demand curve Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

10) A rise in the price level ________ the buying power of money and ________ the quantity of real GDP demanded. A) does not affect; increases B) lowers; increases C) raises; decreases D) lowers; decreases E) does not affect; does not change Answer: D Topic: Buying power of money Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

11) A rise in the price level brings a ________ in the buying power of money that ________ consumption expenditures and causes the quantity of real GDP demanded to ________. A) rise; decreases; decrease B) fall; decreases; decrease C) fall; increases; increase D) rise; increases; increase E) fall; decreases; increase Answer: B Topic: Buying power of money Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

12) When the price level increases there is ________ movement along the aggregate demand curve because the buying power of money ________. A) an upward; decreases B) a downward; decreases C) an upward; increases D) a downward; increases E) no; does not change Answer: A Topic: Buying power of money Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

13) Last year the price level increased from 118 to 122. The increase in the price level leads to a decrease in A) the buying power of money. B) the real interest rate. C) the money wage rate. D) the price of domestic goods and services relative to foreign goods and services. E) potential GDP. Answer: A Topic: Buying power of money Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

14) At a price level of 100, John has savings equal to $20,000. If the price level increases to 130, the buying power of John's savings is approximately A) $12,780. B) $15,400. C) $20,000. D) $26,000. E) $30,000. Answer: B Topic: Buying power of money Skill: Level 1: Definition Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking

15) A year over year ________ in the buying power of money means that definitely ________ from one year to the next. A) decrease; the price level increased B) increase; the price level increased C) decrease; inflation increased D) increase; inflation increased E) Both answers A and C are correct. Answer: A Topic: Buying power of money Skill: Level 1: Definition Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking

16) If the price level doubles, it will A) increase the quantity of money. B) have no effect on the buying power of money. C) decrease the buying power of money. D) increase potential GDP. E) decrease potential GDP. Answer: C Topic: Buying power of money Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

17) When the price level rises and increases the demand for money, the nominal interest rate ________ and the real interest rate ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls E) does not change; does not change Answer: A Topic: Buying power of money Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

18) In the short run, a rise in the price level brings a ________ in the real interest rate that ________ investment, bringing ________ in the quantity of real GDP demanded. A) rise; decreases; a decrease B) fall; decreases; a decrease C) fall; increases; an increase D) rise; increases; an increase E) rise; decreases; an increase Answer: A Topic: Buying power of money Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

19) A reason why an increase in the price level decreases the quantity of real GDP demanded is that A) the buying power of money increases. B) the real interest rate falls. C) the price of domestic goods and services increases relative to foreign goods and services. D) the inflation rate decreases. E) potential GDP decreases. Answer: C Topic: Relative price of domestic and foreign goods Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

20) A rise in the U.S. price level brings a ________ in the price of U.S. exports relative to imports that ________ exports of U.S. goods, bringing ________ in the quantity of U.S. real GDP demanded. A) rise; decreases; a decrease B) fall; decreases; a decrease C) fall; increases; an increase D) rise; increases; an increase E) rise; increases; a decrease Answer: A Topic: Relative price of domestic and foreign goods Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

21) When the U.S. price level rises relative to other nations' price levels, then A) U.S. firms' profits increase and the aggregate demand curve shifts rightward. B) U.S. exports increase and the aggregate demand curve shifts rightward. C) U.S. exports decrease, U.S. imports increase, and the aggregate demand curve shifts leftward. D) U.S. exports decrease, U.S. imports increase, and there is a movement upward along the aggregate demand curve. E) U.S. exports decrease, U.S. imports increase, and the aggregate demand curve shifts rightward. Answer: D Topic: Relative price of domestic and foreign goods Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

22) Sherri lives in Canada and is considering buying a new sofa. If the price level in Canada falls and the price level in the United States does not change, Canadian manufactured sofas are relatively A) more expensive, so Sherri will likely purchase a U.S. manufactured sofa. B) more expensive, so Sherri will likely purchase a Canadian manufactured sofa. C) less expensive, so Sherri will likely purchase a U.S. manufactured sofa. D) less expensive, so Sherri will likely purchase a Canadian manufactured sofa. E) Both answers B and D could be correct depending on whether U.S. manufactured sofas were initially more expensive or less expensive than Canadian sofas. Answer: D Topic: Relative price of domestic and foreign goods Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

23) When the domestic price level increases, exports decrease and imports increase. Other things the same, this change is illustrated by a A) movement upward along the aggregate demand curve. B) movement downward along the aggregate demand curve. C) rightward shift of the aggregate demand curve. D) leftward shift of the aggregate demand curve. E) rightward shift of the aggregate supply curve. Answer: A Topic: Relative price of domestic and foreign goods Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

24) The aggregate demand curve shifts when any of the following factors change EXCEPT A) foreign income. B) the price level. C) monetary policy. D) expectations about the future. E) fiscal policy. Answer: B Topic: Changes in aggregate demand Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

25) Which of the following does NOT shift the aggregate demand curve? A) a change in the money wage B) a change in expectations about the future C) a change in monetary policy D) a change in fiscal policy E) a change in foreign income Answer: A Topic: Changes in aggregate demand Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

26) Changes in ________ cause a movement along the aggregate demand curve while changes in ________ shift the aggregate demand curve. A) price level; taxes B) taxes; government spending C) government spending; price level D) money wage rate; price level E) price level; money wage rate Answer: A Topic: Changes in aggregate demand Skill: Level 1: Definition Section: Checkpoint 19.2 Status: New AACSB: Reflective thinking

27) All of the following shift the aggregate demand curve to the right EXCEPT A) an increase in taxes. B) an expansion of the global economy. C) an increase in foreign income. D) an increase in government expenditure. E) an increase in expected future profit. Answer: A Topic: Changes in aggregate demand Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

28) All of the following actions shift the aggregate demand curve to the right EXCEPT A) the Fed raises the interest rate. B) an increase in government transfer payments. C) inflation is expected to rise next year. D) an increase in expected future profit. E) a decrease in taxes. Answer: A Topic: Changes in aggregate demand Skill: Level 1: Definition Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

29) If there is an increase in expected future income, then A) the aggregate demand curve shifts rightward. B) the aggregate demand curve shifts leftward. C) there is an upward movement along the aggregate demand curve. D) there is a downward movement along the aggregate demand curve. E) the aggregate demand curve becomes steeper. Answer: A Topic: Changes in aggregate demand, expectations Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

30) Aggregate demand A) decreases if expected future income rises. B) increases if the exchange rate rises. C) increases if government expenditures decrease. D) increases if the expected inflation rate increases. E) increases if aggregate supply increases. Answer: D Topic: Changes in aggregate demand, expectations Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

31) Aggregate demand ________ if the expected inflation rate increases because ________. A) increases; people expect to receive cost of living raises as the inflation begins B) decreases; people wait for the exchange rates to change before making purchases C) does not change; inflation does not affect the aggregate demand curve D) increases; people want to make purchases now before the price of goods and services begin to increase E) decreases; people want to wait for the price of goods and services begin to decrease Answer: D Topic: Changes in aggregate demand, expectations Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

32) If people's expectations about future income improve so they think their future income will be higher than previously believed, then the AD curve A) will not change until income actually rises. B) will shift leftward because people will spend less now. C) will shift rightward because people will increase spending now. D) and the AS curve will both shift leftward because people will increase their saving. E) will not shift, but potential GDP will increase. Answer: C Topic: Changes in aggregate demand, expectations Skill: Level 1: Definition Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

33) If firms' expectations about the future become pessimistic so that they think future profits will be lower, then A) aggregate demand decreases and the AD curve shifts leftward. B) aggregate demand increases and the AD curve shifts rightward. C) the quantity of real GDP demanded decreases, and there is a movement up along the AD curve. D) the quantity of real GDP demanded increases, and there is a movement down along the AD curve. E) the aggregate demand curve does not shift, but potential GDP decreases. Answer: A Topic: Changes in aggregate demand, expectations Skill: Level 1: Definition Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

34) Which of the following decreases aggregate demand and shifts the AD curve leftward? A) a tax cut B) a decrease in price level C) a decrease in government expenditures D) a decrease in the price of exported goods and services E) a decrease in potential GDP Answer: C Topic: Changes in aggregate demand, fiscal policy Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

35) An increase in government expenditure on goods and services leads to the A) aggregate supply curve shifting rightward. B) aggregate supply curve shifting leftward. C) aggregate demand curve shifting rightward. D) aggregate demand curve shifting leftward. E) potential GDP increasing. Answer: C Topic: Changes in aggregate demand, fiscal policy Skill: Level 1: Definition Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

36) An increase in government expenditure on goods and services A) shifts the aggregate supply curve leftward but does not change potential GDP. B) shifts the aggregate supply curve leftward and decreases potential GDP. C) shifts the aggregate demand curve leftward. D) shifts the aggregate demand curve rightward. E) has no effect on the aggregate supply or aggregate demand. Answer: D Topic: Changes in aggregate demand, fiscal policy Skill: Level 3: Using models Section: Checkpoint 19.2 Status: New AACSB: Reflective thinking

37) Aggregate demand ________ and shifts the AD curve ________ when ________. A) increases; rightward; government expenditure increases B) increases; rightward; taxes increase C) increases; rightward; future expected profit decreases D) decreases; leftward; foreign income increases E) increases; leftward; government expenditure increases Answer: A Topic: Changes in aggregate demand, fiscal policy Skill: Level 1: Definition Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking

38) A tax increase A) decreases aggregate demand and the AD curve shifts leftward. B) increases aggregate demand and the AD curve shifts rightward. C) decreases the quantity of real GDP demanded and there is a movement up along the AD curve. D) increases the quantity of real GDP demanded and there is a movement down along the AD curve. E) does not shift or lead to a movement along the aggregate demand curve. Answer: A Topic: Changes in aggregate demand, fiscal policy Skill: Level 1: Definition Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

39) Which of the following shifts the aggregate demand curve rightward? A) a decrease in expected future income B) a decrease in the price level C) a tax cut D) a decrease in the quantity of money E) a decrease in government expenditures on goods and services Answer: C Topic: Changes in aggregate demand, fiscal policy Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

40) A tax cut ________ aggregate demand and ________. A) decreases; shifts the AD curve rightward B) increases; shifts the AD curve leftward C) increases; shifts the AD curve rightward D) decreases; shifts the AD curve leftward E) does not change; does not shift the AD curve Answer: C Topic: Changes in aggregate demand, fiscal policy Skill: Level 1: Definition Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

41) Which of the following statements is correct? A) An increase in people's expected future income shifts the aggregate demand curve leftward. B) A tax increase shifts the aggregate demand curve leftward. C) An increase in potential GDP shifts the aggregate demand curve rightward. D) An increase in exports shifts the aggregate demand curve leftward. E) The higher the price level, the larger is the quantity of real GDP demanded. Answer: B Topic: Changes in aggregate demand, fiscal policy Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

42) If taxes are cut, there is A) an increase in aggregate demand and the AD curve shifts rightward. B) a decrease in aggregate demand and the AD curve shifts leftward. C) an increase in the quantity of real GDP demanded and a movement up along the AD curve. D) a decrease in the quantity of real GDP demanded and a movement down along the AD curve. E) no change in aggregate demand, only a change in potential GDP. Answer: A Topic: Changes in aggregate demand, fiscal policy Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

43) Which of the following decreases aggregate demand and shifts the AD curve leftward? A) a tax cut B) an interest rate hike C) an increase in quantity of money D) an increase in government expenditures on goods and services E) a decrease in potential GDP Answer: B Topic: Changes in aggregate demand, monetary policy Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

44) If a country is trying to recover from a recent recession, it is unlikely their government officials will decide to ________ because it would ________. A) lower interest rates; decrease aggregate demand B) raise interest rates; decrease aggregate demand C) raise interest rates; increase aggregate demand D) institute a tax cut; increase aggregate demand E) increase taxes; increase aggregate demand Answer: B Topic: Changes in aggregate demand, monetary policy Skill: Level 1: Definition Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

45) If the Fed increases the quantity of money, then A) aggregate demand decreases and the AD curve shifts leftward. B) aggregate demand increases and the AD curve shifts rightward. C) the quantity of real GDP demanded decreases and there is a movement up along the AD curve. D) the quantity of real GDP demanded increases and there is a movement down along the AD curve. E) both the aggregate demand curve and the aggregate supply curve shift leftward. Answer: B Topic: Changes in aggregate demand, monetary policy Skill: Level 1: Definition Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

46) An increase in the quantity of money ________ aggregate demand and ________. A) increases; shifts the aggregate demand curve rightward B) increases; shifts the aggregate demand curve leftward C) decreases; shifts the aggregate demand curve rightward D) decreases; shifts the aggregate demand curve leftward E) increases; rotates the aggregate demand curve so it is steeper Answer: A Topic: Changes in aggregate demand, monetary policy Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

47) Which of the following statements is correct? A) An increase in the price level shifts the aggregate demand curve rightward. B) An increase in the price level shifts the aggregate demand curve leftward. C) An increase in the quantity of the money shifts the aggregate demand curve rightward. D) An increase in the real interest rate shifts the aggregate demand curve rightward. E) An increase in the money wage rate shifts the aggregate demand curve leftward. Answer: C Topic: Aggregate demand curve Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

48) Aggregate demand ________ and shifts the AD curve ________ when ________. A) decreases; leftward; government expenditure increases B) increases; rightward; taxes increase C) decreases; leftward; foreign incomes decrease D) decreases; rightward; government expenditure increases E) increases; leftward; taxes decrease Answer: C Topic: Changes in aggregate demand, foreign income Skill: Level 1: Definition Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking

49) Aggregate demand ________ and shifts the AD curve ________ when ________. A) decreases; leftward; the price level rises B) increases; leftward; taxes increase C) increases; rightward; foreign incomes increase D) decreases; rightward; government expenditure increases E) increases; rightward; taxes increase Answer: C Topic: Changes in aggregate demand, foreign income Skill: Level 1: Definition Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking

50) One of the influences that the world economy has on U.S. aggregate demand comes from changes in A) world opinion. B) foreign income. C) foreign governments. D) world pollution. E) foreign aid. Answer: B Topic: Changes in aggregate demand, foreign income Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

51) If European economies enter a recession, A) U.S. aggregate demand decreases and the U.S. AD curve shifts leftward. B) U.S. aggregate demand increases and the U.S. AD curve shifts rightward. C) the quantity of real GDP demanded in the United States decreases and there is a movement down along the U.S. AD curve. D) the quantity of real GDP demanded in the United States increases and there is a movement up along the U.S. AD curve. E) U.S. aggregate demand decreases and the U.S. AD curve shifts rightward. Answer: A Topic: Changes in aggregate demand, foreign income Skill: Level 1: Definition Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

52) A decrease in foreign income ________ exports of U.S.-made goods, so aggregate demand ________ and the aggregate demand curve shifts ________. A) increases; increases; rightward B) decreases; decreases; leftward C) decreases; increases; rightward D) increases; increases; leftward E) decreases; decreases; rightward Answer: B Topic: Changes in aggregate demand, foreign income Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking

53) Suppose the exchange rate in the year 2010 was 4 yuan per dollar and in 2011 the exchange rate fell to 3 yuan per dollar. If the price of a Chinese sweater was 120 yuan in both years, the new dollar price in 2011 would be ________ and imports of Chinese sweaters would ________. A) $40; increase B) $30; decrease C) $40; decrease D) $30; increase E) $40; stay the same because the price stayed the same at 120 yuan Answer: C Topic: Changes in aggregate demand, foreign exchange rate Skill: Level 1: Definition Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking

54) In the figure above, as the price level increases, the aggregate demand curve will A) shift from AD1 to AD3. B) shift from AD1 to AD2. C) not shift, but the aggregate demand curve will change so that it is positively sloped. D) not shift. E) shift from AD1 to AD3 and then back to AD1. Answer: D Topic: Aggregate demand curve Skill: Level 1: Definition Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking

55) In the figure above, the shift in the aggregate demand curve from AD1 to AD2 could be result of A) a fall in the price level. B) a decrease in the quantity of money. C) an increase in government expenditures on goods and services. D) an increase in taxes. E) a rise in the price level. Answer: C Topic: Changes in aggregate demand, fiscal policy Skill: Level 1: Definition Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking

56) In the figure above, the shift in the aggregate demand curve from AD1 to AD3 could be the result of A) a decrease in the real interest rate. B) a decrease in the buying power of money. C) an increased expectation of a recession that lowers the expected rate of profit from investment. D) a decrease in the foreign exchange rate. E) an increase in the price level. Answer: C Topic: Changes in aggregate demand, expectations Skill: Level 1: Definition Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking

57) In the figure above, the shift in the aggregate demand curve from AD1 to AD3 could be the result of A) a fall in the price level. B) a tax cut. C) an increased expectation of a recession that lowers people's expected future incomes. D) a decrease in the foreign exchange rate. E) a rise in the price level. Answer: C Topic: Changes in aggregate demand, expectations Skill: Level 1: Definition Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking

58) In the figure above, the shift in the aggregate demand curve from AD1 to AD3 could be the result of an increase in A) expected future income. B) the foreign exchange rate. C) foreign incomes. D) the price level. E) aggregate supply. Answer: B Topic: Changes in aggregate demand, foreign exchange rate Skill: Level 1: Definition Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking

59) A change in any component of aggregate demand creates a larger change in overall aggregate demand. This is the ________ effect, and it means, for example, that a(n) ________ in consumption will cause an even larger ________ in AD. A) multiplier; increase; increase B) liquidity; decrease; decrease C) growth; increase; decrease D) multiplier; decrease; decrease E) liquidity; increase; increase Answer: D Topic: Aggregate demand multiplier Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking

60) The aggregate demand multiplier effect says that an initial increase in expenditure plans leads to an induced A) increase in consumption expenditure. B) increase in production expenditure. C) increase in government expenditures on goods and services. D) decrease in the price level. E) increase in exports. Answer: A Topic: Aggregate demand multiplier Skill: Level 1: Definition Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

61) Because of the existence of the aggregate demand multiplier, a $10 billion change in expenditure A) shifts the aggregate demand curve by more than $10 billion. B) shifts the aggregate demand curve by $10 billion. C) shifts the aggregate demand curve by less than $10 billion. D) changes the slope of the aggregate demand curve so it is less steep. E) changes the slope of the aggregate demand curve so it is steeper. Answer: A Topic: Aggregate demand multiplier Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking

62) If investment spending increases by $1 million, then the aggregate demand curve shifts A) rightward by $1 million. B) rightward by more than $1 million. C) rightward by less than $1 million. D) leftward by more than $1 million. E) leftward by less than $1 million. Answer: B Topic: Aggregate demand multiplier Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking

63) When the price level rises there is a ________ the aggregate demand curve. A) rightward shift of B) movement down along C) leftward shift of D) movement up along E) rotation of Answer: D Topic: Changes in the price level Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

64) A rise in the price level A) raises the buying power of money. B) decreases the prices of exports. C) lowers the buying power of money. D) increases aggregate demand. E) makes the aggregate demand curve steeper. Answer: C Topic: Buying power of money Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

65) When the price level rises, the real interest rate ________ and the quantity of real GDP demanded ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) does not change; does not change Answer: B Topic: Real interest rate Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

66) A change in any of the following factors EXCEPT ________ shifts the aggregate demand curve. A) expectations about the future B) the money wage rate C) monetary and fiscal policy D) foreign income E) the foreign exchange rate Answer: B Topic: Changes in aggregate demand Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking

67) Which of the following shifts the aggregate demand curve leftward? A) a decrease in government expenditure on goods and services B) an increase in the price level C) a tax cut D) an increase in foreign income E) a decrease in the price level Answer: A Topic: Changes in aggregate demand, expectations Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking

68) When investment increases, the ________ in aggregate demand is ________ the change in investment. A) increase; greater than B) increase; smaller than C) increase; the same as D) decrease; the same as E) decrease; greater than Answer: A Topic: Aggregate demand multiplier Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking

19.3 Explaining Economic Trends and Fluctuations 1) Macroeconomic equilibrium occurs when A) there is no inflation. B) real GDP is equal to potential GDP. C) the aggregate quantity demanded is equal to the aggregate quantity supplied. D) the economy is fully employed. E) the price level equals the potential price level. Answer: C Topic: Macroeconomic equilibrium Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

2) A macroeconomic equilibrium occurs when the A) quantity of real GDP demanded is greater than the quantity of real GDP supplied. B) quantity of real GDP demanded is less than the quantity of real GDP supplied. C) quantity of real GDP demanded equals the quantity of real GDP supplied even if they are not equal to potential GDP. D) quantity of real GDP demanded equals the quantity of real GDP supplied and both equal potential GDP. E) None of the above answers is correct. Answer: C Topic: Macroeconomic equilibrium Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

3) If the economy is at macroeconomic equilibrium, then real GDP A) must equal potential GDP. B) must be less than potential GDP. C) must be great than potential GDP. D) might be equal to, greater than, or less than potential GDP. E) cannot be compared to potential GDP. Answer: D Topic: Macroeconomic equilibrium Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

4) According to the AS-AD model, A) the aggregate quantity supplied is typically greater than the aggregate quantity demanded, thereby leading to unemployment. B) the equilibrium is where the AS curve crosses the AD curve, but the amount of real GDP at this point is not always equal to potential GDP. C) the aggregate quantity demanded is typically greater than the aggregate quantity supplied, thereby leading to inflation. D) the AS curve is always equal to potential GDP. E) changes in the amount of potential GDP is the only factor that shifts both the aggregate supply curve and the aggregate demand curve. Answer: B Topic: Macroeconomic equilibrium Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

5) In its macroeconomic equilibrium, the economy can be producing at i. below full employment. ii. full employment. iii. above full employment. A) i only B) ii only C) iii only D) i or ii E) i, ii, or iii Answer: E Topic: Macroeconomic equilibrium Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

6) When the quantity of real GDP demanded exceeds the quantity of real GDP supplied, firms A) increase production and prices. B) decrease production and prices. C) increase production and lower prices. D) decrease production and increase prices. E) do not change production because aggregate demand and potential GDP will adjust. Answer: A Topic: Macroeconomic equilibrium Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

7) If the quantity of real GDP demanded is less than the quantity of real GDP supplied, then A) the economy must be producing at potential GDP. B) the price level falls and firms decrease production. C) the price level falls and firms increase production. D) the price level rises to restore the macroeconomic equilibrium. E) aggregate demand changes to restore the equilibrium. Answer: B Topic: Macroeconomic equilibrium Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

8) If the quantity of real GDP demanded is greater than the quantity of real GDP supplied, then A) the economy must be producing at potential GDP. B) the price level falls and firms decrease production. C) the price level rises and firms increase production. D) the price level falls to restore the macroeconomic equilibrium. E) aggregate demand changes to restore equilibrium. Answer: C Topic: Macroeconomic equilibrium Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

9) If real GDP is greater than potential GDP, then to restore equilibrium, ________ and the price level ________. A) the aggregate demand curve shifts leftward; rises B) the aggregate demand curve shifts rightward; falls C) the aggregate supply curve shifts leftward; rises D) the aggregate supply curve shifts rightward; falls E) potential GDP increases; falls Answer: C Topic: Inflationary gap Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

10) If the aggregate demand curve and the aggregate supply curve intersect at a level of real GDP more than potential GDP, there is A) a recessionary gap. B) an inflationary gap. C) a falling price level. D) a rising real GDP. E) a below-full employment equilibrium. Answer: B Topic: Inflationary gap Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

11) During an inflationary gap, A) real GDP is less than potential GDP. B) the aggregate demand curve and the aggregate supply curve intersect at potential GDP. C) the aggregate demand curve and the aggregate supply curve intersect at a level of real GDP that exceeds potential GDP. D) the aggregate demand curve and the aggregate supply curve do not intersect. E) the price level will fall to restore the long-run equilibrium. Answer: C Topic: Inflationary gap Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

12) Starting from a situation of full employment, an increase in aggregate demand creates ________ and ________ the price level. A) an inflationary gap; raises B) a recessionary gap; lowers C) a recessionary gap; raises D) an inflationary gap; lowers E) a recessionary gap; does not change Answer: A Topic: Inflationary gap Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

13) If real GDP is less than potential GDP, then the money wage rate ________, and aggregate supply ________ so that the price level ________. A) rises; decreases; rises B) falls; increases; falls C) rises; increases; falls D) falls; decreases; rises E) does not change; increases; falls Answer: B Topic: Recessionary gap Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

14) If real GDP is less than potential GDP, then the ________ and the price level ________. A) aggregate demand curve shifts leftward; rises B) aggregate demand curve shifts rightward; falls C) aggregate supply curve shifts leftward; rises D) aggregate supply curve shifts rightward; falls E) amount of potential GDP increases; falls Answer: D Topic: Recessionary gap Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

15) A recessionary gap occurs when ________ so that real GDP is ________ potential GDP. A) aggregate supply increases; less than B) aggregate supply decreases; less than C) aggregate demand increases; greater than D) aggregate demand decreases; less than E) potential GDP decreases; greater than Answer: D Topic: Recessionary gap Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

16) If the aggregate demand curve and the aggregate supply curve intersect at a level of real GDP less than potential GDP, there is A) a recessionary gap. B) an inflationary gap. C) a rising price level. D) a falling real GDP. E) an above full-employment equilibrium. Answer: A Topic: Recessionary gap Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

17) If the equilibrium price level is 135 but the actual price level is 150, then A) firms increase their production because they are able to sell their output at a higher than expected price. B) the quantity of real GDP demanded is less than the quantity of real GDP supplied. C) the quantity of real GDP demanded is greater than the quantity of real GDP supplied. D) aggregate demand will increase to restore equilibrium. E) aggregate demand will decrease to restore equilibrium. Answer: B Topic: Macroeconomic equilibrium Skill: Level 4: Applying models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

18) If the equilibrium price level is 135 but the actual price level is 120, then A) firms decrease their production because they cannot sell the output they produce. B) the quantity of real GDP demanded is less than the quantity of real GDP supplied. C) the quantity of real GDP demanded is greater than the quantity of real GDP supplied. D) aggregate demand will increase to restore equilibrium. E) aggregate demand will decrease to restore equilibrium. Answer: C Topic: Macroeconomic equilibrium Skill: Level 4: Applying models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

19) At a peak in the business cycle, the macroeconomic equilibrium is ________ the level of potential real GDP. A) greater than B) equal to C) less than D) falling below E) None of the above answers is always correct because the relationship depends on whether the previous phase of the business cycle had been a recession or an expansion. Answer: A Topic: Macroeconomic equilibrium Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

20) At a trough in the business cycle, the macroeconomic equilibrium is ________ the level of potential real GDP. A) greater than B) rising above C) equal to D) less than E) None of the above answers is always correct because the relationship depends on whether the previous phase of the business cycle had been a recession or an expansion. Answer: D Topic: Macroeconomic equilibrium Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

The table gives the aggregate demand and aggregate supply schedules for a nation. 21) Based on the table above, equilibrium real GDP is A) $10 trillion. B) $9 trillion. C) $8 trillion. D) $7 trillion. E) $6 trillion. Answer: D Topic: Equilibrium AD and AS Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

22) Based on the table above, the equilibrium price level is A) 130. B) 120. C) 110. D) 100. E) 90. Answer: C Topic: Equilibrium AD and AS Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

23) Refer to the table above. If the price level is 120, then the aggregate quantity demanded is ________ than the aggregate quantity supplied and the price level ________. A) greater; rises B) greater; falls C) less; rises D) less; falls E) less; might fall, rise or not change depending on whether real GDP is more than, less than, or equal to potential GDP. Answer: D Topic: Equilibrium AD and AS Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

24) If the price level is 90, then the price level will ________ because ________. A) either fall or rise; markets are unstable and macroeconomic equilibrium is difficult to predict B) fall; the aggregate quantity demanded is less than the aggregate quantity supplied C) rise; the aggregate quantity demanded is less than the aggregate quantity supplied D) rise; the aggregate quantity demanded is greater than the aggregate quantity supplied E) fall; the aggregate quantity demanded is greater than the aggregate quantity supplied Answer: D Topic: Equilibrium AD and AS Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

25) The table above gives data for the nation of Pearl, a small island in the South Pacific. The economy is at full employment when real GDP is A) $25 billion. B) $28 billion. C) $22 billion. D) $31 billion. E) $34 billion. Answer: A Topic: Equilibrium AD and AS Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

26) The table above gives data for the nation of Pearl, a small island in the South Pacific. When the economy is at full employment the price level is A) 130. B) 120. C) 110. D) 140. E) 150. Answer: B Topic: Equilibrium AD and AS Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

27) The table above gives data for the nation of Pearl, a small island in the South Pacific. If a supply shock decreases the quantity of real GDP supplied by $6 billion at each price level, the new equilibrium real GDP is A) $16 billion. B) $19 billion. C) $22 billion. D) $23 billion. E) $17 billion. Answer: C Topic: Equilibrium AD and AS Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

28) The table above gives data for the nation of Pearl, a small island in the South Pacific. If aggregate demand increases so that the quantity of real GDP demanded is $6 billion more at each price level, the new equilibrium real GDP is A) $34 billion. B) $31 billion. C) $28 billion. D) $25 billion. E) $23 billion. Answer: C Topic: Equilibrium AD and AS Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

29) The table above gives data for the nation of Pearl, a small island in the South Pacific. If aggregate demand increases so that the quantity of real GDP demanded is $6 billion more at each price level, the new equilibrium real GDP is ________, and the nation is now experiencing a(n) ________. A) $22 billion; inflationary gap B) $22 billion; recessionary gap C) $28 billion; inflationary gap D) $28 billion; recessionary gap E) $25 billion; equilibrium Answer: C Topic: Equilibrium AD and AS Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

30) According to the figure above, which point or points correspond to full employment? A) only point a B) only point b C) only point c D) points a and b E) points a, b, and c Answer: D Topic: Adjustment to full employment Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

31) In the figure above, the short-run equilibrium occurs at A) point a only. B) point b only. C) either point a or point b but more information is needed to determine which. D) point c only. E) None of the above answers is necessarily correct. Answer: D Topic: Adjustment to full employment Skill: Level 2: Using definitions Section: Checkpoint 13.3 Status: New AACSB: Analytical thinking

32) In the figure above, the economy is at an equilibrium with real GDP of $16 trillion and a price level of 110. At this point there is A) an inflationary gap. B) a recessionary gap. C) price stability. D) a full-employment equilibrium. E) an above full-employment equilibrium. Answer: B Topic: Recessionary gap Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

33) In the figure above, the economy is at an equilibrium with real GDP of $16 trillion and a price level of 110. As the economy moves toward its ultimate equilibrium, the ________ curve shifts ________. A) aggregate supply; leftward B) aggregate supply; rightward C) aggregate demand; rightward D) aggregate demand; leftward E) potential GDP; leftward Answer: B Topic: Adjustment to full employment Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

34) In the figure above, the economy is at an equilibrium with real GDP of $16 trillion and a price level of 110. As the economy moves toward its ultimate equilibrium, the ________ curve shifts ________ because ________. A) aggregate supply; leftward; the money wage rate rises B) aggregate supply; rightward; the money wage rate falls C) aggregate demand; rightward; the money wage rate falls D) aggregate demand; leftward; the money wage rate rises E) potential GDP; leftward; the money wage rate falls Answer: B Topic: Adjustment to full employment Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

35) An economy experiences a recessionary gap. As the economy adjusts to full employment, the money wage rate A) falls, shifting the aggregate supply curve rightward. B) rises, shifting the aggregate supply curve leftward. C) rises, shifting the aggregate demand curve rightward. D) falls, shifting the aggregate demand curve leftward. E) falls, increasing potential GDP. Answer: A Topic: Adjustment to full employment Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

36) If the economy is above full employment, there is ________ gap, and as the economy adjusts toward full employment, the price level ________. A) an inflationary; rises B) an inflationary; falls C) a recessionary; rises D) a recessionary; falls E) an inflationary; does not change Answer: A Topic: Adjustment to full employment Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

37) 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. E) Answers A, B, and C are correct. Answer: D Topic: Inflation Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

38) 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. E) an increase in aggregate demand or an increase in potential GDP. Answer: B Topic: Inflation Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

39) Demand-pull inflation starts with A) an increase in aggregate demand. B) a decrease in aggregate demand. C) an increase in potential GDP. D) an increase in aggregate supply. E) a decrease in aggregate supply. Answer: A Topic: Demand-pull inflation, start Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

40) Demand-pull inflation starts with a shift of the A) AS curve rightward. B) AD curve rightward. C) AS curve leftward. D) AD curve leftward. E) potential GDP line leftward. Answer: B Topic: Demand-pull inflation, start Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

41) 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. E) a decrease in the money price of resources. Answer: B Topic: Demand-pull inflation, start Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

42) 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 the money wage rate D) an increase in the money wage rate E) an increase in the quantity of money Answer: E Topic: Demand-pull inflation, start Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

43) 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 E) None of the above is correct because increases in the quantity of money are necessary to continue an inflation but cannot start an inflation. Answer: A Topic: Demand-pull inflation, start Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

44) 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. E) decrease potential GDP. Answer: B Topic: Demand-pull inflation Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

45) 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. E) no change in real output and a labor shortage. Answer: A Topic: Demand-pull inflation Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

46) If demand pull inflation occurs when the economy is already at potential GDP, then following the initial increase in aggregate demand, the A) AS curve shifts rightward. B) potential GDP line shifts rightward. C) AS curve shifts leftward. D) potential GDP line shifts leftward. E) None of the above is correct because demand-pull inflation shifts only the aggregate demand curve. Answer: C Topic: Demand-pull inflation Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

47) Compared to the initial equilibrium, an initial increase in aggregate demand that is NOT followed by an increase in the quantity of money results in new 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) the same price level and the same real GDP. E) None of the above answers is correct. Answer: A Topic: Demand-pull inflation Skill: Level 4: Applying models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

48) A demand-pull inflation consists of ________ shifts in the AD curve and ________ shifts in the AS curve. A) rightward; rightward B) rightward; leftward C) right; no D) leftward; rightward E) leftward; leftward Answer: B Topic: Demand-pull inflation Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

49) In a persisting demand-pull inflation, A) aggregate supply decreases and aggregate demand increases. B) aggregate demand decreases and aggregate supply decreases. C) aggregate demand increases and potential GDP decreases. D) aggregate supply increases and aggregate demand increases. E) None of the above answers is correct. Answer: A Topic: Demand-pull inflation Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

50) Demand-pull inflation results from continually increasing the quantity of money, which leads to continually A) decreasing potential GDP. B) increasing potential GDP. C) increasing aggregate supply. D) decreasing aggregate demand. E) increasing aggregate demand. Answer: E Topic: Demand-pull inflation Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

51) Demand-pull inflation persists because of A) continuing increases in government expenditures. B) continuing increases in the quantity of money. C) continuing increases in the real wage rate. D) continuing decreases in the money wage rate. E) continuing increases in aggregate supply. Answer: B Topic: Demand-pull inflation Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

52) For a demand-pull inflation to persist requires persistent increases in A) tax rates. B) the real wage rate. C) real GDP. D) the quantity of money. E) government expenditures. Answer: D Topic: Demand-pull inflation Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

53) During a demand-pull inflation, if the Fed tries to maintain a level of real GDP above potential GDP, the AD curve will ________ and the AS curve will ________. A) shift rightward once; shift rightward continuously B) shift rightward continuously; shift rightward continuously C) shift rightward continuously; not shift D) not shift; shift rightward continuously E) shift rightward continuously; shift leftward continuously Answer: E Topic: Demand-pull inflation Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

54) 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. E) an increase in aggregate supply creates a labor shortage. Answer: C Topic: Demand-pull inflation Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

55) To prevent demand-pull inflation, A) firms must refuse to increase the money wage rate. B) firms must refuse to increase the real wage rate. C) the Fed must not let the quantity of money persistently rise. D) the natural unemployment rate must increase. E) real GDP must increase. Answer: C Topic: Demand-pull inflation Skill: Level 4: Applying models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

56) 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. E) None of the above answers is correct. Answer: D Topic: Demand-pull inflation Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

57) The main sources of cost-push inflation are increases in A) the money wage rate and the price of raw materials. B) the real wage rate and the price of raw materials. C) the money wage rate and aggregate demand. D) the quantity of money and the real wage rate. E) government expenditure and the quantity of money. Answer: A Topic: Cost-push inflation Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

58) 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) an increase in government expenditure on goods and services. E) a decrease in government expenditure on goods and services. Answer: B Topic: Cost-push inflation Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

59) 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 government expenditure. E) a decrease in the quantity of money. Answer: B Topic: Cost-push inflation Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

60) Cost-push inflation might initially result from A) an increase in the quantity of money. B) a decrease in the quantity of money. C) the use of new technology. D) an increase in government expenditure. E) an increase in the cost of resources. Answer: E Topic: Cost-push inflation Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

61) Cost-push inflation starts with A) an increase in aggregate demand. B) a decrease in aggregate demand. C) an increase in aggregate supply. D) a decrease in aggregate supply. E) an increase in potential GDP. Answer: D Topic: Cost-push inflation Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

62) When cost-push inflation starts, real GDP ________ and the unemployment rate ________. A) decreases; falls B) does not change; falls C) decreases; rises D) does not change; does not change E) increases; falls Answer: C Topic: Cost-push inflation Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

63) When cost-push inflation starts, real GDP ________ and the price level ________. A) decreases; falls B) does not change; falls C) decreases; rises D) does not change; does not change E) increases; falls Answer: C Topic: Cost-push inflation Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

64) At the start of a cost-push inflation, A) the price level remains constant and real GDP decreases. B) the price level and real GDP both increase. C) the price level remains constant and real GDP increases. D) the price level rises and real GDP decreases. E) the price level rises and real GDP does not change. Answer: D Topic: Cost-push inflation Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

65) 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) i and ii C) ii and iii D) i and iii E) iii only Answer: E Topic: Cost-push inflation Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

66) By itself, an increase in the price of oil shifts the A) aggregate supply curve leftward and does not shift the aggregate demand curve. B) aggregate supply curve rightward and does not shift the aggregate demand curve. C) aggregate demand curve leftward and does not shift the aggregate supply curve. D) aggregate demand curve rightward and does not shift the aggregate supply curve. E) aggregate demand curve rightward and shifts the potential GDP line rightward. Answer: A Topic: Cost-push inflation Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

67) The AS 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. E) government expenditure increases. Answer: D Topic: Cost-push inflation Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

68) 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 E) not change; rise Answer: C Topic: Cost-push inflation Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

69) 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) raise; not change D) lower; increase E) lower; decrease Answer: B Topic: Cost-push inflation Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

70) 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 result in persisting inflation. C) be inflationary as long as there is no policy response. D) result in persisting inflation if aggregate supply persistently increases. E) result in a persisting wage-price spiral. Answer: B Topic: Cost-push inflation Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

71) A combination of recession and inflation is called A) an expansion. B) stagflation. C) a business cycle. D) a depression. E) a recession. Answer: B Topic: Stagflation Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

72) Stagflation is defined as a period when real GDP ________ and the price level ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) is constant; rises rapidly Answer: C Topic: Stagflation Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

73) A combination of declining real GDP and rising price level is referred to as A) an expansion. B) a trough. C) stagflation. D) deflation. E) a depression. Answer: C Topic: Stagflation Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

74) Reasons that the recession of 2008-2009 did not become a depression include: i. The Fed bailed out troubled financial institutions. ii. The government aggressively balanced its budget. iii. The government increased its expenditures, which increased aggregate demand. A) i only B) ii only C) iii only D) i and iii E) i and ii Answer: D Topic: 2008-2009 recession Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

75) As a result of OPEC ________ oil prices in 1973 and 1980, real GDP in United States ________. A) increasing; increased B) increasing; decreased C) decreasing; increased D) decreasing; decreased E) increasing; did not change Answer: B Topic: Eye on the past, oil price cycles in U.S. & global economies Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

76) Oil price hikes A) increase aggregate supply. B) decrease aggregate supply. C) increase aggregate demand. D) decrease aggregate demand. E) increase potential GDP. Answer: B Topic: Eye on the past, oil price cycles in U.S. & global economies Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

77) When OPEC nearly tripled the price of oil in late 1973, A) U.S. real GDP increased as profits by oil producers increased. B) U.S. real GDP did not change although the price level rose. C) the U.S. price level fell because production became too expensive. D) the U.S. price level rose and real GDP decreased. E) both U.S. real GDP and the price level increased. Answer: D Topic: Eye on the past, oil price cycles in U.S. & global economies Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

78) At the beginning of 2015, a country is at full-employment. During 2015, oil-producing countries decrease oil production leading to much higher oil prices. The higher oil prices can A) increase aggregate demand and lead to an expansion. B) increase aggregate supply and lead to an expansion. C) decrease aggregate demand and lead to a stagflation. D) decrease aggregate supply and lead to a stagflation. E) decrease aggregate demand and lead to a higher price level. Answer: D Topic: Eye on the past, oil price cycles in U.S. & global economies Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

79) Potential GDP increased from 4.7 trillion to 16.6 trillion between 1970 and 2013 resulting in economic growth. Also, during this time ________ occurred because ________. A) inflation; aggregate demand decreased by more than potential GDP B) stagflation; aggregate demand increased by more than potential GDP C) deflation; aggregate demand increased by more than potential GDP D) inflation; aggregate demand increased by more than potential GDP E) inflation; aggregate demand increased by less than potential GDP Answer: D Topic: Eye on the U.S. economy Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

80) In reality, AD rarely ________; however, the economy performs as though it does when it ________. A) decreases; fluctuates with potential GDP B) increases; decreases at a pace much slower than potential GDP C) stagnates; increases at a pace much faster than potential GDP D) decreases; increases at a pace much slower than potential GDP E) decreases; increases at a pace much faster than potential GDP Answer: D Topic: Eye on the U.S. economy Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

81) The 2008-2009 recession must have been a result of ________ because otherwise the combination of the ________ cannot be explained. A) a decrease in AD and an increase in AS; fall in the price level and the decrease in real GDP B) a decrease in AD and an increase in AS; rise in the price level and the decrease in real GDP C) an increase in AD and AS; rise in the price level and the decrease in real GDP D) a decrease in AD and AS; rise in the price level and the decrease in real GDP E) a decrease in AD and AS; decrease in the price level and the decrease in real GDP Answer: D Topic: Eye on the U.S. economy Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

82) If the quantity of real GDP supplied equals the quantity of real GDP demanded, then A) nominal GDP must equal real GDP. B) real GDP must equal potential GDP. C) real GDP must be greater than potential GDP. D) real GDP might be greater than, equal to, or less than potential GDP. E) real GDP must be less than potential GDP. Answer: D Topic: Macroeconomic equilibrium Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

83) An increase in investment ________ aggregate demand, the aggregate demand curve shifts ________ and the economy is in the ________ phase of the business cycle. A) decreases; rightward; expansion B) increases; rightward; expansion C) decreases; leftward; recession D) increases; rightward; recession E) increases; leftward; recession Answer: B Topic: Aggregate demand fluctuations Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

84) If the price of oil rises, the A) AD curve shifts rightward, real GDP increases, and the price level rises. B) AS curve shifts leftward, the price level rises, and real GDP decreases. C) AD curve and the AS curve shift leftward, real GDP decreases, and the price level rises. D) AD curve and the AS curve shift rightward, the price level rises, and real GDP decreases. E) AS curve shifts leftward, the price level rises, and real GDP increases. Answer: B Topic: Aggregate supply fluctuations Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

85) Stagflation is a combination of ________ real GDP and a ________ price level. A) increasing; rising B) increasing; falling C) decreasing; rising D) decreasing; falling E) no change in; rising Answer: C Topic: Stagflation Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

86) An inflationary gap is created when A) real GDP is greater than potential GDP. B) real GDP equal to potential GDP. C) the inflation rate is less than potential inflation. D) the price level exceeds the equilibrium price level. E) potential GDP is greater than real GDP. Answer: A Topic: Inflationary gap Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

87) The economy is at full employment. If aggregate demand increases, A) an inflationary gap is created and the AS curve shifts leftward as the money wage rate rises. B) an inflationary gap is created and the AD curve shifts leftward. C) an inflationary gap is created and potential GDP increases to close the gap. D) a recessionary gap is created and the AS curve shifts leftward as the money wage rate falls. E) a recessionary gap is created and the AS curve shifts leftward as the money wage rate rises. Answer: A Topic: Adjustment to full employment Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

19.4 Chapter Figures

The figure above shows the aggregate supply curve and potential GDP. 1) Based on the figure above, the aggregate supply curve shifts rightward and the potential GDP line does not change when A) the money wage rate rises. B) the price level rises. C) the money wage rate falls. D) the price level falls. E) both the price level and money wage rate rise by the same proportion. Answer: C Topic: Shifts in the aggregate supply curve Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

2) If potential GDP increases, then in the figure above the potential GDP line ________, and the aggregate supply curve ________. A) shifts rightward; does not shift B) does not shift; shifts rightward C) shifts rightward; shifts rightward D) shifts rightward; shifts leftward E) does not shift; does not shift Answer: C Topic: Shifts in the aggregate supply curve Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

3) If the money wage rate and the price level both rise by the same proportion, then in the figure above the potential GDP line ________, and the aggregate supply curve ________. A) shifts rightward; does not shift B) does not shift; shifts rightward C) shifts rightward; shifts rightward D) shifts rightward; shifts leftward E) does not shift; shifts leftward Answer: E Topic: Shifts in the aggregate supply curve Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

The figure above shows the aggregate demand curve. 4) The aggregate demand curve in the figure above shifts rightward if A) potential GDP increases. B) the money wage rate falls. C) taxes are hiked. D) government expenditure decreases. E) the expected future profit increases so that investment increases. Answer: E Topic: Shifts in the aggregate demand curve Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

5) The aggregate demand curve in the figure above shifts rightward if A) potential GDP increases. B) the money wage rate falls. C) taxes are cut. D) government expenditure decreases. E) the Federal Reserve raises the interest rate. Answer: C Topic: Shifts in the aggregate demand curve Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

6) The aggregate demand curve in the figure above shifts rightward if A) potential GDP increases. B) the money wage rate falls. C) taxes are raised. D) government expenditure increases. E) the Federal Reserve raises the interest rate. Answer: D Topic: Shifts in the aggregate demand curve Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

7) The aggregate demand curve in the figure above shifts rightward if A) potential GDP increases. B) the money wage rate falls. C) taxes are raised. D) government expenditure decreases. E) the Federal Reserve lowers the interest rate. Answer: E Topic: Shifts in the aggregate demand curve Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

The figure above shows aggregate demand curves. 8) Based on the figure above, the aggregate demand curve will shift from AD0 to AD1 when A) potential GDP increases. B) the price level falls. C) the price level rises. D) government expenditure decreases. E) the Federal Reserve lowers the interest rate. Answer: E Topic: Shifts in the aggregate demand curve Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

9) Based on the figure above, the aggregate demand curve will shift from AD0 to AD2 when A) potential GDP increases. B) the price level falls. C) the price level rises. D) government expenditure decreases. E) the Federal Reserve lowers the interest rate. Answer: D Topic: Shifts in the aggregate demand curve Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

10) Based on the figure above, the aggregate demand curve will shift from AD0 to AD2 when A) potential GDP increases. B) the price level falls. C) taxes are lowered. D) government expenditure increases. E) the Federal Reserve raises the interest rate. Answer: E Topic: Shifts in the aggregate demand curve Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

11) Based on the figure above, the aggregate demand curve will shift from AD0 to AD2 when A) potential GDP increases. B) the price level falls. C) the price level rises. D) government expenditure decreases. E) taxes are lowered. Answer: E Topic: Shifts in the aggregate demand curve Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

19.5 Integrative Questions 1) An increase in the price level ________ the aggregate quantity supplied and ________ the aggregate quantity demanded. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; decreases Answer: B Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking

2) The ________, the ________ is the quantity of real GDP supplied and the ________ is the quantity of real GDP demanded. A) lower the price level; greater; smaller B) higher the price level; greater; smaller C) greater the demand for labor; smaller; greater D) lower the supply of labor; greater; smaller E) lower aggregate demand; greater; smaller Answer: B Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking

3) The aggregate supply curve shifts A) rightward if potential GDP decreases. B) rightward if the money wage rate falls. C) rightward if the money wage rate rises. D) leftward if potential GDP increases. E) leftward if the aggregate demand curve shifts leftward. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

4) During the late 1960s, U.S. defense spending increased as the United States fought in Vietnam. This increase in government expenditure on goods and services most likely created A) a recessionary gap. B) an inflationary gap. C) a decrease in aggregate supply. D) a decrease in aggregate demand because consumers' expenditures decreased. E) an increase in potential GDP. Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

5) A recession in the rest of the world means U.S. A) aggregate supply decreases. B) aggregate demand decreases. C) potential GDP decreases. D) exports increase. E) potential GDP increases. Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking

6) ________ increases potential GDP. A) A decrease in the money wage rate B) A recessionary gap C) A recession D) An increase in the amount of human capital E) An increase in aggregate demand Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking

7) Unemployment increases when A) an inflationary gap is created. B) potential GDP increases. C) the government decreases its expenditure on goods and services. D) aggregate demand increases. E) aggregate supply increases. Answer: C Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking

8) In the late 1920s, the U.S. economy experienced a decrease in investment, which perhaps triggered the Great Depression. The decrease in investment A) increased aggregate supply. B) decreased aggregate supply. C) increased aggregate demand. D) decreased aggregate demand. E) increased potential GDP. Answer: D Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Analytical thinking

9) When the macroeconomic equilibrium is such that real GDP exceeds potential real GDP, the economy is suffering from ________, and the government policy to eliminate this gap will ________ real GDP and ________ the price level. A) an inflationary gap; increase; increase B) a recessionary gap; decrease; decrease C) an inflationary gap; increase; decrease D) a recessionary gap; increase; decrease E) an inflationary gap; decrease; decrease Answer: E Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Analytical thinking

10) When the macroeconomic equilibrium is such that real GDP is less than potential real GDP, the economy is suffering from ________, and the government policy to eliminate this gap will ________ real GDP and ________ the price level. A) a recessionary gap; decrease; decrease B) an inflationary gap; increase; decrease C) a recessionary gap; increase; increase D) an inflationary gap; decrease; increase E) a recessionary gap; decrease; increase Answer: C Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Analytical thinking

11) A decrease in investment leads to ________ in aggregate demand and ________ in real GDP. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease E) no change; a decrease Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

12) A deep recession hits the world economy, and real GDP in the rest of the world decreases. In the United States, A) aggregate supply and aggregate demand both increase, and the price level rises. B) aggregate supply decreases while aggregate demand does not change, and the price level rises. C) aggregate demand decreases while aggregate supply does not change, and the price level falls. D) aggregate supply increases and aggregate demand decreases, so the effect on the price level is uncertain. E) aggregate supply and aggregate demand both decrease, and the price level rises. Answer: C Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

13) If the AD curve shifts rightward, then A) both the price level and real GDP will increase. B) the price level will increase, but no change will occur in real GDP. C) the price level will not change, but real GDP will increase. D) both the price level and real GDP will decrease. E) potential GDP increases. Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

14) An economy is at a full-employment equilibrium, and then the aggregate demand curve shifts leftward. As a result, the price level ________ and real GDP ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) falls; does not change Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

15) An increase in government expenditure on goods and services ________ aggregate demand, shifting the aggregate demand curve ________ and potentially bringing the ________ phase of the business cycle. A) decreases; rightward; expansion B) increases; rightward; recession C) decreases; leftward; recession D) increases; rightward; expansion E) increases; leftward; recession Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

16) The the government increases the level of government expenditure. If there is no change in the aggregate supply curve, then aggregate demand will ________, real GDP will ________, and the price level will ________. A) increase; remain the same; increase B) remain the same; increase; increase C) increase; increase; increase D) decrease; increase; increase E) decrease; remain the same; decrease Answer: C Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

17) If the AD curve shifts rightward while the AS curve and potential GDP don't change, then A) the economy will move from a peak into recession. B) the expansion phase of the business cycle occurs. C) there will be no change in real GDP, so the economy is at the peak of the cycle. D) there will be no change in real GDP, so the economy is at the trough of the cycle. E) real GDP does not change. Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking

18) The global economy enters a recession, thereby decreasing the level of U.S. exports. If the aggregate supply curve does not shift, then aggregate demand will ________, real GDP will ________, and the price level will ________. A) increase; remain the same; increase B) remain the same; increase; increase C) increase; increase; remain the same D) decrease; increase; increase E) decrease; decrease; decrease Answer: E Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

19) The government passes a law which doubles the wages of all workers. Aggregate supply will ________, and real GDP will ________, and the price level will ________. A) increase; remain the same; increase. B) remain the same; increase; increase. C) increase; increase; remain the same. D) decrease; increase; increase. E) decrease; decrease; increase. Answer: E Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

20) A technological advance ________ aggregate supply, shifting the aggregate supply curve ________ and potentially bringing the ________ phase of the business cycle. A) decreases; rightward; expansion B) decreases; leftward recession C) increases; rightward; expansion D) increases; rightward; recession E) increases; leftward; expansion Answer: C Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

21) An increase in the price of oil ________ aggregate supply, shifting the aggregate supply curve ________ and potentially bringing the ________ phase of the business cycle. A) decreases; rightward; expansion B) increases; rightward; recession C) increases; rightward; expansion D) decreases; leftward; recession E) decreases; rightward; recession Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

22) A crisis in the Middle East drastically raises the price of petroleum. If the aggregate demand curve does not shift, then aggregate supply will ________, real GDP will ________, and the price level will ________. A) increase; remain the same; increase B) decrease; decrease; increase C) increase; increase; increase D) remain the same; increase; increase E) decrease; remain the same; decrease Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

23) Which of the following could result in a recession? A) a rise in the price of oil B) an increase in investment C) a tax cut D) an increase in the quantity of money E) an increase in government expenditures on goods and services Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking

24) ________ could result in a recession because it would ________. A) A rise in the price of oil; shift the AS curve to the left B) An increase in investment; shift the AD curve to the right C) A tax cut; shift the AS curve to the left D) An increase in the quantity of money; shift the AS curve to the right E) An increase in government expenditures on goods and services; shift the AD curve to the right Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking

25) Real GDP definitely increases if A) both the AD curve and the AS curve shift rightward. B) both the AD curve and AS curve shift leftward. C) the AD curve shifts leftward and the AS curve shifts rightward. D) the AS curve shifts leftward and the AD curve does not shift. E) potential GDP decreases so that real GDP exceeds potential GDP. Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

19.6 Essay: Aggregate Supply 1) Name the four factors of production that determine the quantity of real GDP supplied. Which one fluctuates the most over the course of the business cycle? Answer: The factors are the quantity of labor employed, the quantities of capital and human capital and the technologies they employ, the quantities of land and natural resources, and the amount of entrepreneurial talent available. Over the course of a business cycle, the quantity of labor employed fluctuates the most. Topic: Aggregate supply Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Written and oral communication

2) What factor changes the quantity of real GDP supplied and results in a movement along the AS curve? Answer: Changes in the price level change the quantity of real GDP supplied and result in a movement along the AS curve. Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

3) Does a rise in the price level bring a movement along the aggregate supply curve or does it shift the aggregate supply curve? Answer: A rise in the price level results in an upward movement along the aggregate supply curve. It does not shift the aggregate supply curve. Topic: Aggregate supply, price level Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

4) If the money wage rate is constant and the price level increases, what happens to the real wage rate, firms' profits, and the aggregate quantity supplied? Answer: The real wage rate falls. Because the price level has increased and money wage rates are constant while real wage rates are lower, firms' profits increase. As a result, the aggregate quantity of goods and services supplied increases. Topic: Aggregate supply, price level Skill: Level 1: Definition Section: Checkpoint 19.1 Status: Old AACSB: Written and oral communication

5) List three changes that lead to a shift of the aggregate supply curve. Discuss why each change shifts the aggregate supply curve and in which direction the curve shifts. Answer: A change in potential GDP, a change in the money wage rate, and a change in the money prices of other resources shift the aggregate supply curve. If potential GDP increases (decreases) or the money wage rate decreases (increases) or the money prices of other resources decrease (increase), aggregate supply increases (decreases) and the AS curve shifts rightward (leftward). Topic: Changes in aggregate supply Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Written and oral communication

6) How does a fall in the money wage rate affect the aggregate supply curve? Answer: A fall in the money wage rate lowers firms' costs and shifts the aggregate supply curve rightward. Topic: Changes in aggregate supply, money wage rate Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

7) Give examples of factors that decrease aggregate supply. Which way does the AS curve shift? Answer: Aggregate supply decreases if potential GDP decreases. A rise in the money wage rate or the money price of other resources such as the price of oil raises firms' costs and decreases aggregate supply. The AS curve shifts leftward. Topic: Aggregate supply curve Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Written and oral communication

8) What is the effect on aggregate supply and potential GDP of an increase in the money wage rate? Answer: An increase in the money wage rate decreases aggregate supply and shifts the aggregate supply curve leftward. It has no effect on potential GDP. Topic: Changes in aggregate supply, money wage rate Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

9) "Moving along the AS curve, the real wage rate is constant while moving along the potential GDP line, the real wage rate changes." Explain whether the previous statement is correct or incorrect. Answer: The statement is incorrect. It reverses the situation. Moving along the AS curve, the money wage rate is constant and so the real wage rate changes. Moving along the potential GDP line, money wage rates have adjusted to the change in the price level and so the real wage rate is constant. Topic: Changes in aggregate supply, money wage rate Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Written and oral communication

10) What can lead to the shift illustrated in the figure above? Answer: A decrease in the money wage rate or in the money prices of other resources, such as the price of oil, increase aggregate supply and shift the AS curve rightward while not changing potential GDP. Topic: Changes in aggregate supply, money wage rate Skill: Level 1: Definition Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking

11) In the above figure, illustrate the effect on the AS curve from an increase in the money price of a key resource such as oil. Answer:

An increase in the money price of a key resource such as oil squeezes firms' profits and decreases aggregate supply. As illustrated in the figure above, the AS curve shifts leftward, in the figure from AS1 to AS2. Topic: Changes in aggregate supply, money prices of resources Skill: Level 1: Definition Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking

19.7 Essay: Aggregate Demand 1) 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. Topic: Aggregate demand curve Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Written and oral communication

2) How does an increase in the price level affect the aggregate quantity of goods and services demanded? Answer: An increase in the price level decreases the aggregate quantity of goods and services demanded for three reasons. First, it decreases the buying power of money. As a result, people decrease their demand for goods and services. Second, it raises the real interest rate. The real interest rate rises because an increase in the price level increases the demand for money, which raises the nominal interest rate, which, in the short run, raises the real interest rate. When the real interest rate rises, people and businesses delay plans for investment and purchases of big-ticket items. Finally, an increase in the price level makes domestically produced goods and services more expensive relative to foreign-produced goods and services. As a result, people and firms buy more foreign produced and fewer domestically produced goods and services, which decreases the quantity demanded of domestically produced goods and services. Topic: Aggregate demand curve Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Written and oral communication

3) Explain the difference between a movement along the aggregate demand curve and a shift of the aggregate demand curve. Answer: There is a movement along the aggregate demand curve if there is a change in the price level. If some factor that affects aggregate demand other than the price level changes, such as monetary or fiscal policy, income in the rest of the world, or expectations, there is a shift in the aggregate demand curve. Topic: Aggregate demand curve Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Written and oral communication

4) How does the aggregate demand curve reflect an increase in aggregate demand? Answer: An increase in aggregate demand means that the aggregate demand curve shifts rightward. Topic: Aggregate demand curve Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

5) State how each of the following affect the aggregate demand curve. a. The price level increases. b. Consumers expect higher inflation in the future. c. The exchange rate rises. d. Foreign income decreases. Answer: a. There is a movement upward along the aggregate demand curve. The aggregate demand curve does not shift. b. The aggregate demand curve shifts rightward. c. The aggregate demand curve shifts leftward. d. The aggregate demand curve shifts leftward. Topic: Changes in aggregate demand Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking

6) Give examples of factors that decrease aggregate demand. Which way does the aggregate demand curve shift? Answer: Anything that decreases spending decreases aggregate demand. A rise in the interest rate, a decrease in the quantity of money, a decrease in government expenditures or a tax hike, and a decrease in real GDP in the rest of the world all decrease spending and decrease aggregate demand. The aggregate demand curve shifts leftward. Topic: Changes in aggregate demand Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Written and oral communication

7) How does a rise in the foreign exchange rate affect aggregate demand in the United States? Explain your answer. Answer: An increase in the foreign exchange rate decreases U.S. aggregate demand. The foreign exchange rate is the amount of a foreign currency that a dollar can buy. If the exchange rate rises, a dollar buys more foreign currency. As a result, foreign goods and services become cheaper to U.S. citizens because U.S. citizens need to spend fewer dollars to buy foreign-produced goods and services. Simultaneously, U.S.-produced goods and services become more expensive to foreigners because they must spend more of their currency in order to buy the dollars necessary to buy the U.S.-produced goods and services. As a result, U.S. imports increase and U.S. exports decrease, both of which decrease U.S. aggregate demand. Topic: Changes in aggregate demand, foreign exchange rate Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Written and oral communication

8) How does a recession in Asia affect U.S. aggregate demand and the U.S. aggregate demand curve? Answer: A recession in Asia means that Asians purchase fewer U.S.-made goods and services. As a result, U.S. exports decrease so that U.S. aggregate demand decreases and the U.S. aggregate demand curve shifts leftward. Topic: Changes in aggregate demand, world income Skill: Level 1: Definition Section: Checkpoint 19.2 Status: Old AACSB: Written and oral communication

9) "An increase in Mexican income decreases aggregate demand in the United States." Is the preceding statement correct or incorrect? Briefly explain your answer. Answer: The statement is incorrect. An increase in Mexican income means that Mexican citizens buy more goods and services exported from the United States. The increase in U.S. exports increases U.S. aggregate demand. Topic: Changes in aggregate demand, world income Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Written and oral communication

10) What are the two channels through which the world economy can affect U.S. aggregate demand? State what changes in the world economy can increase U.S. aggregate demand. Answer: The world economy can affect aggregate demand through the foreign exchange rate and foreign income. If the foreign exchange rate falls, then U.S. aggregate demand increases because U.S. exports become cheaper to foreign residents while U.S. imports become more expensive to U.S. citizens. If foreign income increases, then U.S. aggregate demand increases because foreign citizens will spend some of their increased income on U.S.-produced goods and services. Topic: Changes in aggregate demand, world economy Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Written and oral communication

11) "The aggregate demand multiplier results in the aggregate demand curve shifting by more than any given initial change in expenditure." Is the previous statement correct or incorrect? Answer: The statement is correct. The implication is that a, say $10 billion increase in investment shifts the aggregate demand curve rightward by more than $10 billion. Topic: Aggregate demand multiplier Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

12) What is the aggregate demand multiplier and why does it occur? Answer: The aggregate demand multiplier is an effect that magnifies changes in expenditure plans. So, for example, if some component of expenditure such as investment increases, aggregate demand increases by more than the increase in investment. The aggregate demand multiplier exists because when aggregate demand increases, households' incomes increase. Then the increase in income results in an increase in consumption expenditure, which adds to the initial increase in aggregate demand. Topic: Aggregate demand multiplier Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Written and oral communication

19.8 Essay: Explaining Economic Trends and Fluctuations 1) What two variables are determined in an aggregate supply-aggregate demand figure? Is the slope of the 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: Aggregate supply and aggregate demand model Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Written and oral communication

2) Can actual real GDP exceed potential GDP? Answer: Yes, actual real GDP temporarily can exceed potential GDP as the economy nears a business cycle peak. Topic: Business cycle Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

3) Define potential GDP. Under what circumstances does actual real GDP fall short of potential GDP, equal potential GDP, and exceed potential GDP? Answer: Potential GDP is the level of real GDP that the economy produces when it is at full employment. Potential GDP can be contrasted with actual real GDP, the amount of real GDP the country actually produces. Actual real GDP can be less than potential GDP when the economy is producing at less than full employment, that is, when there is less than full employment in the labor market. Actual real GDP equals potential GDP when the economy is producing at full employment. Actual real GDP can exceed potential GDP temporarily as the economy approaches and then recedes from a business cycle peak. Topic: Business cycle Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

4) 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 with a recessionary gap. c. If potential GDP is $9.0 trillion, then the economy is at an equilibrium that is an above fullemployment equilibrium with an inflationary gap. Topic: Inflationary gap and recessionary gap Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

5) Suppose that during 2005, 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 full-employment equilibrium with an inflationary gap. Topic: Inflationary gap Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

6) When the aggregate supply curve intersects the aggregate demand curve at a level of real GDP that exceeds potential GDP, is there an inflationary gap or a deflationary gap? What adjustments will take place? Answer: There is an inflationary gap because real GDP exceeds potential GDP. In this situation, the money wage rate will rise, shifting the aggregate supply curve leftward and raising the price level. Eventually the economy will return to potential GDP. At this time, real GDP is lower than when the inflationary gap existed but the price level is higher. Topic: Inflationary gap Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Written and oral communication

7) The economy is at full employment and then aggregate demand increases. Describe what happens as an immediate result of the increase in aggregate demand. Describe how the economy adjusts back to full employment. Answer: The immediate effect of an increase in aggregate demand is to increase both the price level and real GDP. The money wage rate does not change, so with the higher price level the real wage rate falls. Eventually, however, workers demand a higher (money) wage rate to compensate for the higher price level. As firms pay the higher money wage rate, aggregate supply decreases. The decrease in aggregate supply means that the price level rises and real GDP decreases. Workers continue to demand a higher money wage rate and aggregate supply continues to decrease until finally the economy returns to full employment. At that point, the money wage rate has increased enough so that the real wage rate is back to its initial level. Real GDP once again equals potential GDP, so the changes in real GDP were only temporary. The price level, though, is higher than its initial level, so the increase in the price level is permanent. Topic: Inflationary gap Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Written and oral communication

8) What is the current equilibrium price level and real GDP for the economy illustrated in the figure above? Does this economy have an inflationary gap, a recessionary gap, or neither? As it adjusts toward full employment, which curve shifts? What is the equilibrium real GDP and price level that the economy will ultimately reach? Answer: The equilibrium is where the aggregate demand and aggregate supply curves intersect. Thus the equilibrium price level is 110 and equilibrium real GDP is $16.5 trillion. Real GDP exceeds potential GDP, so the economy has an inflationary gap. The aggregate supply curve will shift leftward as the economy adjusts to full employment. Ultimately the aggregate supply curve will shift so that it intersects the aggregate demand curve where the aggregate demand curve crosses the potential GDP line. Thus ultimately equilibrium real GDP equals potential GDP, $16.0 trillion, and the price level is 120. Topic: Inflationary gap Skill: Level 4: Applying models Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

9) Explain how changes in foreign income can impact real GDP in a country. Answer: Changes in the income of any nation impact the level of exports and imports of all other nations trading with it. For example, in the United States aggregate demand increases if the income of our trading partners, such as Mexico and Canada, increases because some of the increase in Mexican and Canadian income translates into buying goods and services imported from the United States. As a result, U.S. aggregate demand increases, which means that U.S. real GDP increases. Thus increases in foreign income increase domestic real GDP while decreases in foreign income decrease domestic real GDP. Topic: Aggregate demand fluctuations Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Written and oral communication

10) How does a cut in interest rates that increases investment affect the quantity of real GDP demanded, the aggregate demand curve, real GDP, and the price level? Answer: The increase in investment increases the aggregate quantity demanded and shifts the AD curve rightward. As a result, the equilibrium price level rises and the equilibrium real GDP increases. Topic: Aggregate demand fluctuations Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

11) State how shifts in the aggregate demand curve can explain the movement of real GDP around potential GDP. Answer: When the aggregate demand curve and the aggregate supply curve intersect at the level of potential GDP, then real GDP is equal to potential GDP. When something shifts the aggregate demand curve rightward, then the aggregate demand curve and the aggregate supply curve will intersect at a level of real GDP that is above potential GDP. The economy will be in an expansion. When something shifts the aggregate demand curve leftward, then the aggregate demand curve and the aggregate supply curve will intersect at a level of real GDP that is below potential GDP. The economy will be in a recession. Topic: Aggregate demand fluctuations Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

12) 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: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

13) 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 aggregate supply decreases and the AS 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: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Written and oral communication

14) 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: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

15) 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: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

16) 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 aggregate supply, that is, a leftward shift of the AS curve. The decrease in 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 aggregate supply. The dilemma for the Fed is that the decreases in 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 cost-push inflation might well occur. Topic: Cost-push inflation Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Written and oral communication

17) Define "stagflation" and explain how it can be created. Answer: Stagflation is a combination of two words: stagnation and inflation. Stagnation means real GDP is below the full employment level and falling, that is, the economy is in recession while at the same time the price level is rising, that is, the economy is experiencing inflation. An increase in the price of a major resource that decreases aggregate supply can trigger stagflation. Topic: Stagflation Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

Essential Foundations of Economics, 8e (Bade) Chapter 20 Fiscal Policy and Monetary Policy 20.1 The Federal Budget and Fiscal Policy 1) The federal budget A) is required to balance by law. B) can have a surplus but not a deficit. C) can have a deficit but not a surplus. D) can have a deficit or a surplus but cannot be balanced. E) can have a deficit, a surplus, or a balance. Answer: E Topic: Federal budget process Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

2) In the United States for the year 2017, the federal government had a ________ so the national debt was ________. A) budget deficit; increasing B) balanced budget; not changing C) budget surplus; decreasing D) budget deficit; decreasing E) budget surplus; increasing Answer: A Topic: Federal budget Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Revised AACSB: Reflective thinking

3) Transfer payments include i. social security benefits. ii. medicare and medicaid benefits. iii. unemployment benefits. A) i only B) ii only C) iii only D) i, ii, and iii E) i and iii Answer: D Topic: Federal budget Skill: Level 1: Definition Section: Checkpoint 20.1 Status: New AACSB: Reflective thinking

4) If the federal government has a budget surplus, then it is definitely the case that A) tax revenue exceeds government outlays. B) tax revenue and government outlays are equal. C) the tax revenue is falling and government outlays are rising. D) government outlays exceed tax revenue. E) the tax revenue is rising and government outlays are falling. Answer: A Topic: Budget surplus Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

5) The government has a budget surplus if A) there is no national debt. B) tax revenue is greater than outlays. C) government outlays are greater than tax revenue. D) the budget is balanced. E) a fiscal stimulus is being used to combat a recession. Answer: B Topic: Budget surplus Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

6) When tax revenue exceed the government's outlays, the budget A) has a deficit and the national debt is increasing. B) is balanced and the national debt is decreasing. C) has a surplus and the national debt is decreasing. D) has a surplus and the national debt is increasing. E) None of the above because by law tax revenue cannot exceed the government's expenditures. Answer: C Topic: Budget surplus Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

7) When tax revenue ________ outlays is positive, then the government has a budget ________. A) minus; surplus B) divided by; surplus C) minus; deficit D) plus; deficit E) plus; surplus Answer: A Topic: Budget surplus Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

8) When the government's expenditures exceed its tax revenue, the budget A) has a deficit and the national debt is increasing. B) is balanced and the national debt is increasing. C) has a surplus and the national debt is increasing. D) has a deficit and the national debt is decreasing. E) None of the above because by law the government's expenditures cannot exceed its tax revenue. Answer: A Topic: Budget deficit Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

9) If the federal government has a budget deficit, then it is definitely the case that A) the tax revenue exceed government outlays. B) the tax revenue and government outlays are equal. C) the tax revenue is falling and government outlays are rising. D) government outlays exceed tax revenue. E) the tax revenue is rising and government outlays are falling. Answer: D Topic: Budget deficit Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

10) When government outlays exceed tax revenue, the situation is called a budget A) with a negative balance. B) deficit. C) surplus. D) debt. E) with no balance. Answer: B Topic: Budget deficit Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

11) When tax revenue ________ outlays is negative, then the government has a budget ________. A) minus; surplus B) divided by; surplus C) minus; deficit D) plus; deficit E) plus; surplus Answer: A Topic: Budget deficit Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

12) The government collects tax revenue of $100 million and has $105 million in outlays. The budget balance is a A) surplus of $5 million. B) deficit of $5 million. C) surplus of $105 million. D) deficit of $105 million. E) surplus of $100 million and a deficit of $105 million. Answer: B Topic: Budget deficit Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

13) When tax revenues equal government outlays, the situation is referred to as A) a balanced budget. B) an equivalent budget. C) an equal budget. D) an equilibrium budget. E) a legal budget. Answer: A Topic: Balanced budget Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

14) When the government's outlays equal its tax revenue, then the budget A) is in deficit. B) is in surplus. C) is balanced. D) could be either in surplus or deficit. E) is legal only because expenditures equal tax revenues. Answer: C Topic: Balanced budget Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

15) The government collects tax revenue of $100 million and has $105 million in outlays. The budget balance is a A) surplus of $5 million. B) deficit of $5 million. C) surplus of $105 million. D) deficit of $105 million. E) surplus of $100 million and a deficit of $105 million. Answer: B Topic: Budget deficit Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

16) When tax revenues minus outlays is i. positive, the government has a budget surplus. ii. negative, the government has a budget deficit. iii. zero, the government has a balanced budget. A) i, ii, and iii B) i and ii C) ii and iii D) i only E) iii only Answer: A Topic: Budget deficit and budget surplus Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

The table above gives a nation's government outlays and tax revenues for 2012 through 2016. 17) During which years did the country have a budget surplus? A) 2012 and 2013 B) 2016 only C) 2015 only D) 2014 and 2016 E) all except 2015 Answer: A Topic: Budget deficit and budget surplus Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Revised AACSB: Analytical thinking

18) During which years did the country have a budget deficit? A) 2012 and 2013 B) 2016 only C) 2015 only D) 2014 and 2016 E) all except 2015 Answer: D Topic: Budget deficit and budget surplus Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Revised AACSB: Analytical thinking

19) During which years did the country have a balanced budget? A) 2012 and 2013 B) 2016 only C) 2015 only D) 2014 and 2016 E) all except 2015 Answer: C Topic: Budget deficit and budget surplus Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Revised AACSB: Analytical thinking

20) The above table gives the government outlays and tax revenues from 2012 through 2016 for two countries. In 2015 country A had a ________ and country B had a ________. A) budget deficit; budget deficit B) balanced budget; budget surplus C) balanced budget; budget deficit D) budget surplus; budget surplus E) budget surplus; balanced budget Answer: C Topic: Budget deficit and budget surplus Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

21) The above table gives the government outlays and tax revenues from 2012 through 2016 for two countries. In 2014 country A had a ________ and country B had a ________. A) budget deficit; budget deficit B) budget deficit; budget surplus C) balanced budget; budget deficit D) budget surplus; budget surplus E) budget surplus; budget deficit Answer: B Topic: Budget deficit and budget surplus Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

22) The national debt is the amount A) by which government tax revenue exceed outlays in a given year. B) of debt outstanding that arises from past budget deficits. C) by which government outlays exceed tax revenue in a given year. D) of government outlays summed over time. E) of all future entitlement spending. Answer: B Topic: National debt Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

23) The national debt is A) tax revenue minus government outlays. B) government outlays minus tax revenue. C) the amount borrowed by the government to finance past budget deficits. D) the amount lent by the government of past budget surpluses. E) the excess of this year's budget surplus minus this year's budget deficit. Answer: C Topic: National debt Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

24) When the government's outlays equal its tax revenue, the budget A) has a deficit and the national debt is increasing. B) is balanced and the national debt is not changing. C) has a surplus and the national debt is increasing. D) has a deficit and the national debt is decreasing. E) has a surplus and the national debt is decreasing. Answer: B Topic: Balanced budget Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

25) When the government's outlays exceed its tax revenue, the national debt A) shrinks thanks to the budget surplus. B) grows to finance the budget deficit. C) shrinks thanks to the budget deficit. D) grows to finance the budget surplus. E) does not change because it has nothing to do with government outlays and tax revenue. Answer: B Topic: National debt Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

26) The national debt can only be reduced if A) the federal budget is in deficit. B) the federal budget is in surplus. C) there are no tax multiplier effects. D) the economy has a deflationary gap. E) the economy has an inflationary gap. Answer: B Topic: National debt Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

27) If tax revenue is $230 billion and the government's outlays are $235 billion, then the budget A) deficit is $5 billion, and government debt will remain the same. B) surplus is $5 billion, and government debt will increase by $5 billion. C) deficit is $5 billion, and government debt will increase by $5 billion. D) deficit is $5 billion, and government debt will decrease by $5 billion. E) surplus is $230 billion, and the budget deficit is $235 billion. Answer: C Topic: National debt Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

28) Since 2000, the U.S. government has generally had a government budget ________ and so the national debt has ________. A) surplus; decreased B) surplus; increased C) deficit; decreased D) deficit; increased E) deficit; not changed Answer: D Topic: Eye on the past, federal revenues and expenditures Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

29) Discretionary fiscal policy is defined as fiscal policy A) left to the discretion of military authorities. B) initiated by an act of Congress. C) initiated by a Presidential proclamation. D) triggered by the state of the economy. E) with multiplier effects. Answer: B Topic: Discretionary fiscal policy Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

30) In 2009, Congress passed tax laws to reduce income tax rates for some taxpayers. This action is called A) a discretionary fiscal policy. B) a discretionary revenue policy. C) an automatic fiscal policy. D) an annual tax policy. E) induced tax policy. Answer: A Topic: Discretionary fiscal policy Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

31) Discretionary fiscal policy is a fiscal policy action, such as A) an interest rate cut, initiated by an act of Congress. B) an increase in payments to the unemployed, initiated by the state of the economy. C) a tax cut, initiated by an act of Congress. D) a decrease in tax receipts, initiated by the state of the economy. E) an increase in the quantity of money. Answer: C Topic: Discretionary fiscal policy Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

32) The government expenditure multiplier is used to determine the A) extra scrutiny government action receives. B) amount aggregate demand is affected by a change in government expenditure. C) amount aggregate supply is affected by a change in government expenditure. D) amount private consumption is decreased by government expenditure. E) extent to which automatic stabilizers must be changed in order to avoid recessions. Answer: B Topic: Government expenditure multiplier Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

33) The magnitude of the government expenditure multiplier is ________ the magnitude of the tax multiplier. A) greater than B) equal to C) less than D) not comparable to E) greater than for expansionary policy and less than for contractionary policy Answer: A Topic: Government expenditure multiplier Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

34) If government expenditures on goods and services increases by $20 billion, then aggregate demand A) increases by $20 billion. B) increases by more than $20 billion. C) decreases by $20 billion. D) decreases by more than $20 billion. E) increases by less than $20 billion. Answer: B Topic: Government expenditure multiplier Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

35) If government expenditure on goods and services increase by $100 billion, then aggregate demand A) increases by $100 billion. B) increases by less than $100 billion. C) increases by more than $100 billion. D) remains unchanged. E) decreases by more than $100 billion. Answer: C Topic: Government expenditure multiplier Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

36) A $100 million decrease in government expenditure on goods and services leads to an even larger decrease in aggregate demand because of A) induced changes in consumption expenditures. B) automatic fiscal policy. C) induced changes in aggregate supply. D) discretionary fiscal policy. E) the reinforcing effect of monetary policy. Answer: A Topic: Government expenditure multiplier Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

37) If government expenditure on goods and services increases by $10 billion, then aggregate demand A) increases by $10 billion. B) increases by $10 billion multiplied by the government expenditure multiplier. C) increases by $10 billion multiplied by the tax multiplier. D) decreases by $10 billion. E) decreases by $10 billion multiplied by the government expenditure multiplier. Answer: B Topic: Government expenditure multiplier Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

38) If the government reduces expenditure on goods and services by $30 billion, then aggregate demand A) decreases by more than $30 billion and real GDP decreases. B) decreases by $30 billion and real GDP decreases. C) increases by $30 billion and real GDP increases. D) increases and potential GDP increases. E) increases by more than $30 billion and real GDP increases. Answer: A Topic: Government expenditure multiplier Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

39) The tax multiplier is the A) magnification effect of a change in taxes on aggregate demand. B) magnification effect of a change in taxes on the budget deficit. C) magnification effect of a change in taxes on government expenditures. D) magnification effect of a change in taxes on aggregate supply. E) magnification effect of a change in taxes on the national debt. Answer: A Topic: Tax multiplier Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

40) The magnitude of the tax multiplier is smaller than the magnitude of the government expenditure multiplier because A) a change in taxes does not change expenditures. B) an increase in taxes decreases expenditures. C) a decrease in government expenditure decreases tax revenue. D) a change in taxes does not change expenditures by as much as the same size change in government expenditure. E) a change in taxes creates additional induced taxes. Answer: D Topic: Tax multiplier Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

41) If a change in the tax laws leads to a $100 billion decrease in tax revenue, then aggregate demand A) increases by $100 billion. B) increases by less than $100 billion. C) increases by more than $100 billion. D) decreases by $100 billion. E) decreases by more than $100 billion. Answer: C Topic: Tax multiplier Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

42) If federal taxes are cut by $10 billion, aggregate demand A) increases by $10 billion. B) increases by $10 billion multiplied by the government expenditure multiplier. C) increases by $10 billion multiplied by the tax multiplier. D) decreases by $10 billion. E) decreases by $10 billion multiplied by the tax multiplier. Answer: C Topic: Tax multiplier Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

43) The government expenditure multiplier and the tax multiplier are A) identical in size. B) different in size, and the tax multiplier is larger. C) different in size, and the government expenditure multiplier is larger. D) not comparable because the government expenditure multiplier applies to aggregate demand, and the tax multiplier applies to aggregate supply. E) not comparable because the government expenditure multiplier applies to aggregate supply, and the tax multiplier applies to aggregate demand. Answer: C Topic: Government expenditure multiplier, tax multiplier Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

44) Ignoring any supply-side effects, suppose the government is considering cutting taxes by $100 billion or increasing government expenditures on goods and services by $100 billion. Then A) both policies would increase aggregate demand by the same amount. B) both policies would increase aggregate demand but the tax cut has a smaller effect. C) both policies would increase aggregate demand but the increase in government expenditure has a smaller effect. D) the tax cut would decrease aggregate demand and the increase in government expenditure would increase aggregate demand. E) the tax cut would increase aggregate demand and the increase in government expenditure would decrease aggregate demand. Answer: B Topic: Government expenditure multiplier, tax multiplier Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

45) The balanced budget multiplier is A) positive because the magnitude of government expenditure multiplier is larger than the magnitude of tax multiplier. B) negative because the magnitude of government expenditure multiplier is larger than the magnitude of the tax multiplier. C) positive because the magnitude of government expenditure multiplier is smaller than the magnitude of tax multiplier. D) equal to zero. E) negative because the magnitude of the tax multiplier is larger than the magnitude of the government expenditure multiplier. Answer: A Topic: Balanced budget multiplier Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

46) When comparing a $100 billion increase in government expenditure to a $100 billion decrease in tax revenue, the effect of the increase in government expenditure on aggregate demand is A) greater than the effect of the tax decrease. B) equal to the effect of the tax decrease. C) less than the effect of the tax decrease. D) positive whereas the effect of the tax decrease is negative. E) negative whereas the effect of the tax decrease is positive. Answer: A Topic: Balanced budget multiplier Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

47) The balanced budget multiplier is A) equal to zero because taxes and government expenditure are changed to leave the budget balanced. B) misnamed because it does not leave the budget balanced. C) greater than zero and less than the government expenditure multiplier. D) greater than zero and greater than the government expenditure multiplier. E) less than zero, that is, it is negative. Answer: C Topic: Balanced budget multiplier Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

48) The balanced budget multiplier is based on the point that the ________ multiplier is larger than the ________ multiplier so that an equal increase in government expenditure and taxes ________ aggregate demand. A) tax; expenditure; does not change B) expenditure; tax; does not change C) expenditure; tax; decreases D) expenditure; tax; increases E) tax; expenditure; decreases Answer: D Topic: Balanced budget multiplier Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

49) The balanced budget multiplier applies when a $50 billion increase in government expenditure is financed by a $50 billion ________ in tax revenue and the balanced budget multiplier shows that in this case there is ________ effect on aggregate demand. A) decrease; no B) decrease; a positive C) increase; no D) increase; a positive E) increase; a negative Answer: D Topic: Balanced budget multiplier Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

50) If government expenditure increases by $200 billion and taxes simultaneously increase by $200 billion, then aggregate demand A) remains the same. B) decreases no matter what happens to aggregate supply. C) increases no matter what happens to aggregate supply. D) increases only if aggregate supply increases. E) increases only if aggregate supply decreases. Answer: C Topic: Balanced budget multiplier Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

51) Ignoring any supply-side effects, if government expenditure on goods and services increase by $10 billion and taxes increase by $10 billion, then real GDP ________ and the price level ________. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls E) does not change; does not change Answer: A Topic: Balanced budget multiplier Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

52) Ignoring any supply-side effects, if government expenditure on goods and services decreases by $10 billion and taxes decrease by $10 billion, then real GDP ________ and the price level ________. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls E) does not change; does not change Answer: D Topic: Balanced budget multiplier Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

53) If the economy is in equilibrium with real GDP less than potential GDP, there is ________ gap and a fiscal policy that ________ is appropriate. A) an inflationary; increases aggregate demand B) an inflationary; decreases aggregate demand C) a recessionary; increases aggregate demand D) a recessionary; decreases aggregate demand E) a recessionary; increases potential GDP Answer: C Topic: Fiscal stimulus Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

54) In order to help the economy recover from a recession using fiscal policy, the government can ________ so that aggregate demand increases. A) cut taxes B) raise taxes C) cut government expenditure on goods and services D) raise interest rates E) decrease the quantity of money Answer: A Topic: Fiscal stimulus Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

55) Which of the following is an example of a fiscal stimulus? A) decrease in government expenditure on goods and services B) decrease in transfer payments C) increase in taxes D) decrease in taxes E) none of the above Answer: D Topic: Fiscal stimulus Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

56) Suppose the economy is in an equilibrium in which real GDP is less than potential GDP. To increase real GDP, the government can use a fiscal stimulus of A) increasing taxes only. B) decreasing government expenditure only. C) decreasing taxes and/or increasing government expenditure. D) decreasing government expenditure and simultaneously increasing taxes. E) increasing the quantity of money. Answer: C Topic: Fiscal stimulus Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

57) If the economy is in an equilibrium with real GDP less than potential GDP, a fiscal stimulus could move the economy toward potential GDP by simultaneously ________ taxes and ________ government expenditures on goods and services. A) raising; increasing B) raising; decreasing C) cutting; increasing D) cutting; decreasing E) raising; not changing Answer: C Topic: Fiscal stimulus Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

58) To eliminate a recessionary gap, the government can ________ government expenditures on goods and services or ________ taxes. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) increase; not change Answer: B Topic: Fiscal stimulus Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

59) If the government uses fiscal policy to close a recessionary gap, government A) expenditure must be increased by more than the gap because of the government expenditure multiplier. B) taxes must be cut by more than the gap because of the tax multiplier. C) expenditure can be increased by less than the gap because of the government expenditure multiplier. D) taxes can be raised by less than the gap because of the tax multiplier. E) taxes must be raised by more than the gap because of the tax multiplier. Answer: C Topic: Fiscal stimulus Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

60) Ignoring any supply-side effects, to close a recessionary gap of $100 billion with a government expenditure multiplier of 5, the government could A) increase government expenditure on goods and services by $100 billion. B) increase government expenditure on goods and services by $20 billion. C) raise taxes by $100 billion. D) raise taxes by more than $20 billion. E) decrease government expenditure on goods and services by $20 billion. Answer: B Topic: Fiscal stimulus Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

61) An economy is at a short-run equilibrium as illustrated in the above figure. An appropriate fiscal policy option to move the economy to full employment is to A) increase government expenditure and move the economy to a full-employment equilibrium at point c. B) increase tax rates and move the economy to a full-employment equilibrium at point c. C) increase government expenditure and move the economy to a full-employment equilibrium at point b. D) increase tax rates and move the economy to a full-employment equilibrium at point b. E) lower the interest rate by increasing the quantity of money and move the economy to a fullemployment equilibrium at point b. Answer: C Topic: Fiscal stimulus Skill: Level 4: Applying models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

62) If the government increases spending to eliminate the recessionary gap portrayed in the above figure, the result is ________ price level and ________ government budget deficit. A) a higher; a larger B) a higher; a lower C) a lower; a larger D) a lower; a lower E) no change in the; no change in the Answer: A Topic: Fiscal stimulus Skill: Level 4: Applying models Section: Checkpoint 20.1 Status: New AACSB: Analytical thinking

63) Government expenditure ________ change potential GDP and taxes ________ change potential GDP. A) can; can B) cannot; can C) can; cannot D) cannot; cannot E) None of the above answers is correct. Answer: A Topic: Fiscal policy and potential GDP Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

64) An increase in government expenditure can ________ potential GDP and an increase in taxes can ________ potential GDP. A) increase; increase B) increase; never change C) decrease; decrease D) never change; never change E) increase; decrease Answer: E Topic: Fiscal policy and potential GDP Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

65) 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. E) None of the above is correct. Answer: D Topic: Taxes and potential GDP Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

66) An income tax hike A) increases potential GDP. B) increases employment. C) decreases potential GDP. D) Both answers A and B are correct. E) Both answers B and C are correct. Answer: C Topic: Taxes and potential GDP Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

67) The supply-side effects show that a tax cut on labor income ________ employment and ________ potential GDP. A) increases; increases B) increases; does not change C) increases; decreases D) decreases; increases E) decreases; decreases Answer: A Topic: Taxes and potential GDP Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

68) 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 decrease potential GDP because the real wage rate falls. D) tax cuts cannot affect aggregate demand. E) Both answers B and C are correct. Answer: A Topic: Taxes and potential GDP Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

69) An increase in income taxes ________ employment and ________ potential GDP. A) increases; increases B) increases; does not change C) decreases; decreases D) does not change; does not change E) increases; decreases Answer: C Topic: Taxes and potential GDP Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

70) If a tax cut increases aggregate demand more than aggregate supply, real GDP ________ and the price level ________. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls E) increases; does not change Answer: A Topic: Fiscal policy, combined supply-side and demand-side effects Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

71) Which of the following is a limitation of discretionary fiscal policy? i. lawmaking lags ii. estimating potential GDP iii. income gap A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: D Topic: Limitations of fiscal policy Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

72) The use of discretionary fiscal policy is hampered by i. difficulty of estimating the level of potential GDP. ii. lack of accuracy of economic forecasts. iii. the small impact tax cuts and increases in government expenditure have on aggregate demand. A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: D Topic: Limitations of fiscal policy Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

73) There are four limitations to the effectiveness of discretionary fiscal policy. Which item below is NOT one of these limitations? A) shrinking area of lawmaker discretion B) lawmaking time lag C) estimating potential GDP D) fiscal multiplier E) economic forecasting Answer: D Topic: Limitations of fiscal policy Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

74) The lawmaking time lag is best described as the time that it takes A) Congress to realize that new laws must be passed to change taxes or spending. B) a newly passed law to become the norm in daily lives. C) the President to sign a bill sent from Congress. D) a jury to render a verdict. E) Congress to pass laws needed to change taxes or spending. Answer: E Topic: Limitations of fiscal policy Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

75) A reason why discretionary fiscal policy might move the economy away from potential GDP instead of toward potential GDP is that A) economic forecasts consistently underestimate the impact of fiscal policy. B) it is difficult to know whether real GDP is above or below potential GDP. C) during a recession, politicians prefer increases in government spending over decreasing taxes. D) government programs automatically move real GDP away from potential GDP. E) government programs are always expansionary. Answer: B Topic: Limitations of fiscal policy Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

76) In order for the United States to use discretionary fiscal policy to deal with a recessionary gap, A) the public must elect members of Congress that understand economics. B) the President and Congress must agree on which taxes to hike. C) time must pass in order for Congress to decide what taxes and government programs to change. D) the President's and Congress's economic advisors must agree on the proper government programs to slash. E) the public must understand economics. Answer: C Topic: Limitations of fiscal policy Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

77) Automatic stabilizers are defined as A) actions taken by the President without Congressional consent to stabilize the economy. B) actions taken by an act of Congress to stabilize the economy. C) policy that stabilizes without the need for action by the government. D) discretionary policy taken to stabilize the economy. E) policy that has no multiplier effects. Answer: C Topic: Automatic stabilizer Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

78) Automatic changes in tax revenues and expenditures that occur as a result of fluctuations in real GDP are referred to as automatic A) taxes and expenditure. B) discretionary taxes and expenditure. C) government. D) stabilizers. E) discretionary policy. Answer: D Topic: Automatic stabilizer Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

79) Fiscal policies that move the economy toward potential GDP without a change in policy are called A) routine stabilizers. B) automatic stabilizers. C) spending stabilizers. D) economic stabilizers. E) GDP stabilizers. Answer: B Topic: Automatic stabilizer Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

80) An example of automatic fiscal policy is A) Congress passing a tax rate reduction package. B) the federal government expanding spending at the Department of Education. C) expenditure for unemployment compensation increasing as economic growth slows. D) the Federal Reserve reducing interest rates as economic growth slows. E) a change in taxes that has no multiplier effect. Answer: C Topic: Automatic stabilizer Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

81) Which of the following is an example of an automatic fiscal policy action? A) increased unemployment payments resulting from higher unemployment B) an increase in spending on defense goods resulting from increased world tensions C) an increase in the tax rate resulting from a desire to shrink the budget deficit D) a decrease in the tax rate resulting from an effort to increase aggregate demand to combat a recession E) None of the above answers is correct. Answer: A Topic: Automatic stabilizer Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

82) In an expansion, federal tax receipts increase proportionally more than real GDP without the need for any government policy. This increase is an example of A) discretionary monetary policy. B) automatic monetary policy. C) automatic fiscal policy. D) discretionary fiscal policy. E) the effect of deficit spending. Answer: C Topic: Automatic stabilizer, induced taxes Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

83) Taxes that change with the level of real GDP and income are called A) voluntary taxes. B) GDP taxes. C) induced taxes. D) forced taxes. E) flexible taxes. Answer: C Topic: Automatic stabilizer, induced taxes Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

84) Induced taxes are defined as taxes A) we are forced to pay for services from the government. B) that vary with real GDP. C) that are avoided with the use of legal tax shelters. D) enacted by Congress that explicitly state the amount to be paid. E) that rise in recessions and fall in expansions. Answer: B Topic: Automatic stabilizer, induced taxes Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

85) Needs-tested spending is defined as A) spending by Congress on its own perks of office. B) taxes paid by those qualified by their income. C) spending on programs for people qualified to receive benefits. D) spending by the President on the White House. E) spending that increases in expansions and decreases in recessions. Answer: C Topic: Automatic stabilizer, needs-tested spending Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

86) Needs-tested spending is best described as A) spending on programs that entitle qualified persons and businesses to receive benefits. B) spending on programs that have been tested in some manner. C) spending on programs that have proven over time to be sound investments. D) spending on programs that are considered necessities (needed) according to surveys of the public. E) not spending at all but a reference to the reliability of budget. Answer: A Topic: Automatic stabilizer, needs-tested spending Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

87) Needs-tested spending A) increases as real GDP increases. B) increases as unemployment increases. C) decreases as unemployment increases. D) decreases in recession. E) makes recessions more severe. Answer: B Topic: Automatic stabilizer, needs-tested spending Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

88) During a recession, unemployment compensation payments increase without the need for any government action. This increase is an example of A) discretionary monetary policy. B) automatic monetary policy. C) automatic fiscal policy. D) discretionary fiscal policy. E) government expenditure, but it is not an example of either discretionary or automatic policy. Answer: C Topic: Automatic stabilizer, needs-tested spending Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

89) Needs-tested spending A) increases in recessions and decreases in expansions. B) decreases in recessions and increases in expansions. C) does not change with the level of economic activity. D) is always increasing regardless of whether we are in an expansion or a recession. E) cannot be changed unless the government changes the spending laws. Answer: A Topic: Automatic stabilizer, needs-tested spending Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

90) Needs-tested spending A) is directing government spending and taxes to states that need the most help. B) is giving tax cuts to wealthy people so they will increase their spending. C) includes transfer payments such as food stamps and unemployment benefits. D) includes homeland defense spending. E) cannot be changed without changes in the laws. Answer: C Topic: Automatic stabilizer, needs-tested spending Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

91) Automatic stabilizers include A) changes in induced taxes and changes in needs-tested spending. B) increases or decreases of tax rates and changes in needs-tested spending. C) changes in induced taxes and changes in discretionary spending. D) changes in discretionary spending and changes in needs-tested spending. E) changes in the federal funds interest rate brought about by Fed policy. Answer: A Topic: Automatic stabilizer Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

92) In a recession, needs-tested spending ________ and induced taxes ________. A) increases; increase B) increases; decrease C) decreases; increase D) decreases; decrease E) increase; do not change Answer: B Topic: Automatic stabilizer Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

93) An economic expansion leads to ________ needs-tested spending and ________ induced taxes. A) higher; lower B) lower; higher C) higher; higher D) lower; lower E) lower; no change in Answer: B Topic: Automatic stabilizer Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

94) Automatic stabilizers decrease the impact of a recession on the level of economic activity because they A) reduce the interest rate and so allow firms to increase their level of investment. B) increase taxes so the budget is always balanced. C) raise the exchange rate so U.S. exports become more attractive to foreigners. D) mean disposable income does not change by as much as real GDP. E) increase the quantity of money in circulation. Answer: D Topic: Automatic stabilizer Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

95) Which of the following is true? A) Automatic stabilizers are used to eliminate recessions. B) Discretionary fiscal policy cannot eliminate a recession. C) Automatic stabilizers help to reduce the impact of a recession. D) Discretionary fiscal policy can automatically eliminate a recession. E) Automatic stabilizers make discretionary policy more effective by increasing the magnitude of the multipliers. Answer: C Topic: Automatic stabilizer Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

96) Automatic stabilizers A) increase the magnitude of the government expenditure multiplier. B) decrease the magnitude of the government expenditure multiplier. C) have no effect on the magnitude of the government expenditure multiplier. D) reduce the government expenditure multiplier to zero. E) increase the magnitude of the tax multiplier. Answer: B Topic: Automatic stabilizer Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

97) The annual statement of the outlays, tax revenues, and surplus or deficit of the government of the United States is the federal A) surplus record. B) deficit record. C) budget. D) spending. E) debt to the public. Answer: C Topic: Federal budget Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

98) When government outlays are less than tax revenues, the government has A) a budget with a positive balance. B) a budget deficit. C) a budget surplus. D) a budget with a negative debt. E) an illegal budget because outlays must exceed tax revenues. Answer: C Topic: Budget deficit Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

99) National debt decreases in a given year when a country has A) a budget deficit. B) a balanced budget. C) a budget supplement. D) a budget surplus. E) no discretionary fiscal policy. Answer: D Topic: National debt Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

100) Discretionary fiscal policy is a fiscal policy action, such as A) an interest rate cut, initiated by an act of Congress. B) an increase in payments to the unemployed, initiated by the state of the economy. C) a tax cut, initiated by an act of Congress. D) a decrease in tax receipts, initiated by the state of the economy. E) an increase in the quantity of money. Answer: C Topic: Discretionary fiscal policy Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

101) An example of automatic fiscal policy is A) an interest rate cut, initiated by an act of Congress. B) an increase in the quantity of money. C) a tax cut, initiated by an act of Congress. D) a decrease in tax revenues, triggered by the state of the economy. E) any change in the interest rate, regardless of its cause. Answer: D Topic: Automatic fiscal policy Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

102) The government expenditure multiplier is the magnification effect of a change in government expenditure on A) aggregate demand. B) the budget deficit. C) tax receipts. D) aggregate supply. E) potential GDP. Answer: A Topic: Government expenditure multiplier Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

103) The magnitude of the tax multiplier is ________ the magnitude of the government expenditure multiplier. A) equal to B) greater than C) smaller than D) the inverse of E) exactly one half Answer: C Topic: Balanced budget multiplier Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

104) An example of a fiscal stimulus is A) increasing the quantity of money. B) lowering the interest rate. C) decreasing government expenditure. D) decreasing needs-tested spending. E) cutting taxes. Answer: E Topic: Fiscal stimulus Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

105) A fiscal stimulus works to close a recessionary gap by shifting the A) AD curve leftward. B) AS curve leftward. C) AD curve leftward and AS curve leftward. D) AD curve rightward. E) potential GDP line leftward. Answer: D Topic: Fiscal stimulus Skill: Level 4: Applying models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

106) The supply-side effects of an income tax cut ________ potential GDP and ________ aggregate supply. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) increase; do not change Answer: A Topic: Taxes, supply-side effects Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

107) A tax hike ________ aggregate demand and ________ aggregate supply. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change;increases Answer: D Topic: Fiscal policy, combined supply-side and demand-side effects Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

108) Discretionary fiscal policy is handicapped by A) lawmaking time lags, induced taxes, and automatic stabilizers. B) lawmaking time lags, estimation of potential GDP, and economic forecasting. C) economic forecasting, lawmaking time lags, and induced taxes. D) automatic stabilizers, lawmaking time lags, and potential GDP estimation. E) automatic stabilizers, the multipliers, and potential GDP estimation. Answer: B Topic: Limitations of fiscal policy Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

20.2 The Federal Reserve and Monetary Policy 1) Control of monetary policy rests with A) Congress. B) the President. C) the Federal Reserve. D) the Comptroller of the Currency. E) the U.S. Treasury. Answer: C Topic: Monetary policy process Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

2) In the United States, A) Congress must approve monetary policy changes. B) Congress initializes changes in monetary policy and the Fed approves the changes. C) the Federal Reserve sets monetary policy. D) the Federal Reserve sets monetary and fiscal policies. E) the President initializes changes in monetary policy and the Fed approves the changes. Answer: C Topic: Monetary policy process Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

3) Which of the following statements are correct? i. The Federal Reserve's monetary policy must be approved by the President of the United States . ii. The Federal Reserve Board of Directors meets approximately every six months to review the state of the economy and determine monetary policy. iii. The Federal Reserve has determined it will use the monetary base as its policy instrument. A) i and ii B) ii only C) i only D) iii only E) None of the above answers is correct. Answer: E Topic: Monetary policy Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

4) Which of the following statements are correct? i. Congress does not play a role in making monetary policy decisions. ii. The FOMC meets eight times a year to make monetary policy decisions. iii. The President of the United States appoints members and the Chairman of the Board of governors but has little other formal authority over monetary policy. A) i, ii, and iii B) i,and ii C) ii only D) i and iii E) ii and iii Answer: A Topic: Monetary policy Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

5) Monetary policy decisions are made by the A) Federal Reserve Economic Committee. B) Federal Open Market Committee. C) Council of Economic Advisors. D) Congress of the United States. E) U.S. Mint. Answer: B Topic: Monetary policy process Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

6) The FOMC is the A) report the Fed gives to Congress twice a year. B) group within the Fed that makes monetary policy. C) report that summarizes the economy across Fed districts. D) name of the meeting the Fed has with Congress twice a year. E) interest rate the Fed most directly influences. Answer: B Topic: Monetary policy process Skill: Level 1: Definition Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

7) The steps in the transmission of monetary policy are A) Congress increases government expenditures on goods and services, leading to an increase in aggregate demand. B) Congress increases the money supply, which lowers the interest rate, and leads to an increase in aggregate demand. C) the Federal Reserve increases government expenditures on goods and services, leading to an increase in aggregate demand. D) the Federal Reserve lowers the federal funds rate, which lowers the real interest rate and leads to an increase in aggregate demand. E) Congress increases the budget deficit, which increases the money supply, which increases aggregate supply. Answer: D Topic: Monetary policy transmission Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

8) Which of the following is NOT an effect from a change in the federal funds rate? A) change in the real interest rate B) change in investment C) change in government expenditures D) change in aggregate demand E) change in the quantity of money Answer: C Topic: Monetary policy transmission Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

9) A hike in the federal funds rate results in ________ in the real interest rate, which leads to ________ in investment. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease E) a decrease; no change Answer: B Topic: Changing the interest rate, Fed policy Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

10) When the Fed raises the federal funds rate, A) the real interest rate is unchanged so investment and consumption expenditure are not changed. B) the real interest rate increases, thereby decreasing investment and consumption expenditure. C) the real interest rate falls, thereby increasing investment and consumption expenditure. D) investment and consumption expenditure increase, thereby raising the real interest rate. E) the real interest rate increases, thereby decreasing investment and increasing consumption expenditure. Answer: B Topic: Influencing the real interest rate, Fed policy Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

11) When the Fed increases the federal funds rate, A) there is no effect on investment because investment depends on the real interest rate. B) the real interest rate falls, and investment increases. C) the real interest rate rises, and investment decreases. D) the real interest rate is unaffected, but investment still decreases. E) the real interest rate rises, and investment does not change. Answer: C Topic: Influencing the real interest rate, Fed policy Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

12) When the Fed ________ the federal funds rate, the opportunity cost of firms' investment ________ and so the quantity of investment ________. A) decreases; rises; decreases B) increases; rises; decreases C) increases; rises; increases D) decreases; falls; decreases E) increases; falls; increases Answer: B Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

13) If the Fed lowers the federal funds rate, which of the following occurs? A) Investment increases. B) Consumption expenditure decreases. C) The price of the dollar on the foreign exchange market increases. D) Net exports decrease. E) Government expenditure on goods and services increases. Answer: A Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

14) When the FOMC raises the federal funds rate, almost immediately ________ and a few weeks later the ________. A) short-term interest rates rise; quantity of money and supply of loanable funds decrease B) long-term interest rates rise; quantity of money and supply of loanable funds decrease C) short-term interest rates fall; quantity of money and supply of loanable funds decrease D) long-term interest rates rise; quantity of money and supply of loanable funds increase E) short-term interest rates fall; quantity of money and supply of loanable funds increase Answer: A Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

15) Suppose the Fed raises the federal funds rate. Put the following changes in order in which they occur, starting with the changes that take place almost immediately and ending with the changes that may occur up to two years afterwards: i. Short-term interest rates rise. ii. Long-term interest real interest rate rises. iii. Aggregate demand decreases. iv. Inflation rate decreases. A) i-ii-iii-iv B) ii-i-iii-iv C) i-ii-iv-iii D) i-iii-ii-iv E) ii-i-iv-iii Answer: A Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking

16) The Fed raises the federal funds rate. Which of the following changes takes the longest time before it occurs? A) Short-term interest rates rise. B) Exchange rate rises. C) Quantity of money decreases. D) Supply of loanable funds decreases. E) Aggregate demand decreases. Answer: E Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

17) The Fed raises the federal funds rate. Which of the following changes occurs most rapidly? A) Exchange rate rises. B) Consumption expenditure decreases. C) Aggregate demand decreases. D) Real GDP growth decreases. E) Inflation rate decreases. Answer: A Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

18) Which of the following statements about the ripple effects of monetary policy is FALSE? Monetary policy can A) raise the federal funds rate, thereby decreasing the quantity of money, 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) lower the federal funds rate, thereby lowering the real interest rate and increasing aggregate demand. D) raise the federal funds rate and shift the aggregate demand curve leftward. E) raise the federal funds rate, thereby raising the real interest rate and increasing potential GDP. Answer: E Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

19) If the Federal Reserve lowers the Federal funds rate, A) other short-term interest rates fall. B) net exports decreases. C) other short-term interest rates rise. D) the price level falls. E) Both answers A and C are correct. Answer: A Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

20) If the Fed raises the federal funds rate, which of the following happens? A) Net exports increase. B) The real interest rate falls. C) Aggregate demand decreases. D) Real GDP increases. E) The price level rises. Answer: C Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

21) The FOMC is concerned about inflation and has ________ the federal funds rate. Due to substitution effects, other ________ interest rates will ________ almost immediately. A) increased; short-term; increase B) decreased; long-term; decrease C) increased; long-term; increase D) increased; short-term; decrease E) decreased; short-term; decrease Answer: A Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

22) If the Federal Reserve decreases the Federal funds rate, other short-term interest rates ________ and the exchange rate ________. A) fall; falls B) do not change; rises C) fall; does not change D) fall; rises E) do not change; falls Answer: A Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

23) 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 supply of loanable funds, raises the real interest rate, and decreases aggregate demand. E) decreases the demand for loanable funds, lowers the real interest rate, and decreases aggregate demand. Answer: B Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

24) A fall in the federal funds rate leads to A) a decrease in the quantity of money. B) a rise in the real interest rate. C) a decrease in investment. D) a rise in the price level. E) a decrease in real GDP. Answer: D Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking

25) If the Fed lowers the federal funds rate, which of the following will NOT happen? A) The real interest rate falls. B) Other short-term interest rates fall. C) Aggregate demand increases. D) Real GDP increases. E) The price level falls. Answer: E Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

26) If the Fed is concerned about a possible recession, it ________ the federal funds rate, which ________ the quantity of money and ________ the amount of bank loans. A) raises; decreases; decreases B) lowers; decreases; decreases C) lowers; increases; decreases D) raises; increases; increases E) lowers; increases; increases Answer: E Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

27) The Fed is concerned about inflation. Its policy will ________ U.S. short-term interest rates and, in the foreign exchange market, lead to the value of the U.S. dollar ________. A) lower; rising B) raise; rising C) raise; not changing D) lower; falling E) lower; not changing Answer: B Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

28) If the Fed is concerned about inflation, its actions ________ long-term interest rates so that investment ________ and net exports ________. A) lower; increases; increase B) lower; increases; decrease C) raise; decreases; decrease D) lower; decreases; decrease E) raise; increases; increase Answer: C Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

29) When the Federal Reserve increases the federal funds rate, bank loans ________, the supply of loanable funds ________, and the real interest rate ________. A) decrease; decreases; rises B) do not change; decreases; rises C) increase; increases; falls D) increase; increases; rises E) decrease; does not change; rises Answer: A Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

30) A change in monetary policy affects A) consumption expenditure, government expenditures on goods and services, and net exports. B) consumption expenditure, investment, and net exports. C) investment, government expenditures on goods and services, and net exports. D) consumption expenditure, productivity, and net exports. E) government expenditures on goods and services because it affects the government's budget balance. Answer: B Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

31) If the Fed increases interest rates, other things remaining the same, foreigners demand ________ dollars thereby ________ the exchange rate. A) more; increasing B) more; decreasing C) fewer; increasing D) fewer; decreasing E) the same number of; not affecting Answer: A Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

32) If the Fed lowers the interest rate, then A) only consumption expenditure decreases. B) only investment decreases. C) both consumption expenditure and investment decrease. D) net exports will increase. E) consumption expenditure decreases and investment increases. Answer: D Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

33) If the Fed raises the federal funds rate, A) investment increases. B) real GDP increases. C) exports increase and imports decrease. D) exports decrease and imports increase. E) in the short run the interest rate falls. Answer: D Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

34) Because investment, consumption expenditure, and net exports are interest-sensitive components of expenditure, a ________ in the federal funds rate brings ________ in ________. A) fall; a decrease; aggregate demand B) fall; an increase; aggregate demand C) rise; an increase; aggregate supply D) rise; an increase; aggregate demand E) fall; a decrease; aggregate supply Answer: B Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking

35) If the Fed's policies aim to increase aggregate demand, the Fed must fear A) inflation. B) recession. C) stagflation. D) a supply shock that decreases potential GDP. E) a supply shock that increases aggregate supply. Answer: B Topic: Monetary policy, recession Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

36) If the Fed is concerned about a possible recession, it ________ the federal funds rate and, in response, long-term interest rates ________ by a ________ amount than the change in short-term rates. A) raises; increase; larger B) lowers; increase; smaller C) raises; decrease; larger D) lowers; decrease; smaller E) raises; increase; smaller Answer: D Topic: Monetary policy, recession Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking

37) The Federal Reserve fears that the United States economy is growing too slowly and is stuck in a recession. To move the economy back to its potential GDP, the most likely policy action for the Fed is to ________ the federal funds and thus ________ . A) raise; increase aggregate demand B) raise; decrease aggregate demand C) lower; increase aggregate supply D) lower; decrease aggregate supply E) lower; increase aggregate demand Answer: E Topic: Monetary policy, recession Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking

38) As the Fed lowers the federal funds rate, A) aggregate demand increases. B) real GDP decreases. C) the price level falls. D) aggregate income decreases. E) aggregate supply increases. Answer: A Topic: Monetary policy, recession Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

39) If the Fed lowers the federal funds rate, eventually the A) AD curve shifts leftward, decreasing real GDP and raising the price level. B) AS curve shifts leftward, decreasing real GDP and raising the price level. C) AD curve shifts rightward, increasing real GDP and raising the price level. D) AD curve shifts leftward, decreasing real GDP and lowering the price level. E) AS curve shifts rightward, decreasing real GDP and raising the price level. Answer: C Topic: Monetary policy, recession Skill: Level 4: Applying models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking

40) When the economy is in a recession, the Fed can ________ the federal funds rate, which ________ aggregate demand and ________ real GDP. A) lower; increases; decreases B) raise; decreases; increases C) lower; increases; increases D) raise; increases; decreases E) lower; decreases; decreases Answer: C Topic: Monetary policy, recession Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking

41) If the Fed increases the quantity of money and lowers the federal funds rate, real GDP ________ and the price level ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) increases; does not change Answer: A Topic: Monetary policy, recession Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking

42) In the short run, lowering the federal funds rate shifts the aggregate demand curve ________ so that real GDP ________ and the price level ________. A) rightward; increases; rises B) leftward; decreases; rises C) rightward; increases; falls D) leftward; decreases; falls E) rightward; decreases; rises Answer: A Topic: Monetary policy, recession Skill: Level 4: Applying models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking

43) In a recession, the Fed's monetary policy aims to ________ the real interest rate, ________ aggregate demand, and ________ aggregate supply. A) increase; decrease; not change B) decrease; increase; not change C) increase; not change; increase D) decrease; increase; increase E) increase; increase; increase Answer: B Topic: Monetary policy, recession Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

44) Using the data in the above table, if potential GDP for this economy is $25 billion, then at the present moment real GDP is A) less than potential GDP. B) equal to potential GDP. C) greater than potential GDP. D) at the full-employment level of output. E) not comparable to potential GDP. Answer: A Topic: Recessionary gap Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking

45) Using the data in the above table, if potential GDP for this economy is $25 billion, then in order to restore full employment, the federal funds rate can be A) lowered so that government expenditure on goods and services increase. B) raised so that consumption expenditure, investment, and net exports increase. C) lowered so that consumption expenditure, investment, and net exports increase. D) raised so that net exports increase. E) lowered so that consumption expenditure and investment increase, though net exports decrease. Answer: C Topic: Monetary policy, recession Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking

46) The Fed raises the interest rate when it A) fears recession. B) wants to increase the quantity of money. C) fears inflation. D) wants to encourage bank lending. E) cannot change the quantity of money. Answer: C Topic: Monetary policy, inflation Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

47) When the Fed worries about inflation, it ________ the federal funds rate and, in the short run, ________ the real interest rate. A) lowers; lowers B) lowers; raises C) raises; lowers D) raises; raises E) does not change; the Fed raises Answer: D Topic: Monetary policy, inflation Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

48) If the AS and the AD curve intersect at a level of real GDP that exceeds potential GDP, then the appropriate monetary policy is one that ________ the federal funds rate and ________ aggregate demand. A) raises; increases B) raises; decreases C) lowers; increases D) lowers; decreases E) raises; has no effect on Answer: B Topic: Monetary policy, inflation Skill: Level 4: Applying models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking

49) If real GDP exceeds potential GDP, to move the economy to potential GDP the Fed A) raises the federal funds rate to increase potential GDP but not real GDP. B) lowers the federal funds rate to decrease real GDP but not potential GDP. C) raises the federal funds rate to decrease real GDP but not potential GDP. D) lowers the federal funds rate to increase potential GDP but not real GDP. E) raises the federal funds rate to decrease both real GDP and potential GDP. Answer: C Topic: Monetary policy, inflation Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

50) If the Fed raises the federal funds rate, eventually the A) AD curve shifts rightward and real GDP increases. B) AD curve shifts leftward and real GDP decreases. C) AS curve shifts rightward and real GDP increases. D) AS curve shifts leftward and real GDP decreases. E) AD curve shifts rightward and real GDP decreases. Answer: B Topic: Monetary policy, inflation Skill: Level 4: Applying models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking

51) If the Fed raises the federal funds rate, eventually the A) AD curve shifts leftward, decreasing real GDP and increasing the price level. B) AS curve shifts leftward, decreasing real GDP and increasing the price level. C) AD curve shifts rightward, increasing real GDP and the price level. D) AD curve shifts leftward, decreasing real GDP and the price level. E) AS curve shifts rightward, decreasing real GDP and increasing the price level. Answer: D Topic: Monetary policy, inflation Skill: Level 4: Applying models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking

52) When there is a threat of inflation in the economy, the Fed can ________ the federal funds rate so as to ________ aggregate demand and ________ the price level. A) lower; increase; decrease B) raise; decrease; increase C) lower; increase; increase D) raise; decrease; decrease E) raise; increase; decrease Answer: D Topic: Monetary policy, inflation Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking

53) Raising the federal funds rate shifts the aggregate demand curve ________ so that real GDP ________ and the price level ________. A) rightward; increases; rises B) leftward; decreases; rises C) rightward; increases; falls D) leftward; decreases; falls E) leftward; increases; rises Answer: D Topic: Monetary policy, inflation Skill: Level 4: Applying models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking

54) 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 must reveal to the public anytime the Fed changes its policy. D) The Fed cannot control the federal funds rate. E) None of the above answers is correct. Answer: A Topic: Monetary policy problems Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

55) 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) that the Fed's policy sometimes has a large impact on potential GDP as well as its usual impact on aggregate demand. D) the tight relationship that the Federal funds rate has to aggregate spending. E) the frequent misalignment of the spread between the Federal funds rate and the Federal funds rate target. Answer: A Topic: Monetary policy problems Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

56) The FOMC is the A) report the Fed gives to Congress twice a year. B) report that summarizes the economy across Fed districts. C) group within the Fed that makes monetary policy decisions. D) name of the meeting that the Fed has with Congress twice a year. E) interest rate the Fed most directly influences. Answer: C Topic: FOMC Skill: Level 1: Definition Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

57) The Fed affects aggregate demand through monetary policy by changing A) tax rates on only interest income and so influencing disposable income. B) government expenditure and so influencing the budget balance. C) the quantity of reserves and determining government expenditure. D) tax rates and influencing disposable income. E) the federal funds rate and the quantity of reserves. Answer: E Topic: Changing the interest rate, Fed policy Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

58) If the Fed sells government securities, other interest rates ________ and then exchange rate ________. A) rise; does not change B) fall; falls C) do not change; rises D) rise; falls E) rise; rises Answer: E Topic: Monetary policy transmission Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

59) If the Fed lowers the federal funds rate, which of the following occurs? A) Consumption expenditure decreases. B) Investment increases. C) The price of the dollar on the foreign exchange market increases. D) Net exports decreases. E) Government expenditure on goods and services increases. Answer: B Topic: Monetary policy transmission Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

60) If the Fed raises the federal funds rate, which of the following occurs? A) Consumption expenditure decreases. B) Investment increases. C) The price of the dollar on the foreign exchange market increases. D) Net exports increase. E) Aggregate demand increases. Answer: C Topic: Monetary policy transmission Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

61) The Fed raises the federal funds rate when it A) fears inflation. B) wants to increase the quantity of money. C) fears recession. D) wants to encourage bank lending. E) cannot change the quantity of money. Answer: A Topic: Monetary policy Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

62) Raising the federal funds rate shifts the aggregate demand curve ________, so that real GDP________ and the price level ________. A) rightward; increases; rises B) leftward; decreases; rises C) rightward; increases; falls D) leftward; increases; rises E) leftward; decreases; falls Answer: E Topic: Monetary policy transmission Skill: Level 4: Applying models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking

63) To fight a recession, the Fed can A) lower the federal funds rate by buying securities. B) lower the federal funds rate by selling securities. C) raise the federal funds rate by buying securities. D) raise the federal funds rate by selling securities. E) lower income taxes on interest income. Answer: A Topic: Monetary policy transmission Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking

64) When the economy is in a recession, the Fed can ________ the federal funds rate, which ________ aggregate demand and ________ real GDP. A) lower; increases; decreases B) raise; decreases; increases C) lower; increases; increases D) raise; increases; decreases E) lower; decreases; decreases Answer: C Topic: Monetary policy transmission Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking

65) An advantage monetary policy has over fiscal policy is that monetary policy A) can be quickly changed and implemented. B) is coordinated with fiscal policy. C) is approved by the president of the United States. D) affects consumption expenditure and investment without impacting international trade. E) has no multiplier effects. Answer: A Topic: Monetary policy Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

20.3 Chapter Figures

The figure above shows a nation's aggregate demand curve, aggregate supply curve, and potential GDP. 1) In the figure above, the ________ gap is one trillion dollars. To close the gap, the government can change expenditure by ________ one trillion dollars. A) recessionary; less than B) inflationary; exactly C) inflationary; more than D) recessionary; more than E) recessionary; exactly Answer: A Topic: Fiscal stimulus Skill: Level 4: Applying models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

2) In the figure above, the ________ gap is equal to ________. A) recessionary; $1 trillion B) inflationary; $1 trillion C) recessionary; $12 trillion D) inflationary; $12 trillion E) recessionary; $13 trillion Answer: A Topic: Fiscal stimulus Skill: Level 4: Applying models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

3) In the figure above, the ________ gap is one trillion dollars. To close the gap, the government can ________ government expenditure and/or ________ taxes. A) recessionary; increase; decrease B) inflationary; decrease; increase C) inflationary; increase; increase D) recessionary; decrease; decrease E) recessionary; decrease; increase Answer: A Topic: Fiscal stimulus Skill: Level 4: Applying models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

4) In the figure above, to use fiscal policy to move the economy back to potential GDP, the government must increase government expenditure by ________ $1 trillion and/or decrease taxes by ________ $1 trillion. A) exactly; exactly B) more than; less than C) less than; more than D) less than; less than E) more than; more than Answer: D Topic: Fiscal stimulus Skill: Level 4: Applying models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

20.4 Integrative Questions 1) Do automatic fiscal stabilizers eliminate business cycles? A) Yes B) No, because they have no effect if the business cycle is the result of some unanticipated change C) No, but they do moderate business cycles D) No, they increase the likelihood that a business cycle occurs E) No, they make business cycle fluctuations more severe Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

2) President Reagan often stated he preferred supply side policies. Which of the following federal government policies would be considered supply side? i. decrease the quantity of money ii. lower taxes iii. lower the interest rate A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

3) When the economy is in a recession, ________ taxes decrease while ________ spending increases and, as a result of this automatic fiscal policy, aggregate demand ________. A) needs-tested; induced; decreases B) induced; needs-tested; increases C) induced; discretionary; is not changed D) discretionary; needs-tested; increases E) discretionary; induced; is not changed Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

4) Government tax revenues ________ during an expansion and ________ during a recession, which leads to larger budget deficits during the ________ phase of the business cycle. A) increase; decrease; recession B) increase; increase; recession C) decrease; increase; expansion D) decrease; decrease; expansion E) increase; decrease; expansion Answer: E Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

5) Need-based spending ________ during an expansion and ________ during a recession, which leads to larger budget deficits during the ________ phase of the business cycle. A) increases; decreases; recession B) decreases; increases; expansion C) decreases; increases; recession D) decreases; decreases; expansion E) increases; decreases; expansion Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

6) Assume the federal government raises taxes (a contractionary fiscal policy). If the tax increase affects AS and AD equally, then real GDP will ________ and the price level will ________. A) decrease; decrease B) increase; be unchanged C) increase; increase D) decrease; be unchanged E) increase; decrease Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

7) The Fed decreases the quantity of money to counteract A) a recessionary gap. B) a federal budget deficit. C) positive net exports. D) an inflationary gap. E) a rise in the unemployment rate. Answer: D Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

8) The Fed increases the quantity of money to counteract A) a recessionary gap. B) a federal budget surplus. C) negative net exports. D) an inflationary gap. E) inflation. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

9) During the Great Depression, real GDP decreased, unemployment soared, and the inflation rate was negative. Which would have been the appropriate federal government policy combination to improve economic performance? A) increase government expenditure, decrease taxes, increase the quantity of money B) increase government expenditure, decrease taxes, decrease the quantity of money C) decrease government expenditure, increase taxes, decrease the quantity of money D) do not change government expenditures or taxes , increase the quantity of money E) decrease government expenditures, increase taxes, do not change the quantity of money Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

10) During the late 1960s, real GDP increased, unemployment fell, and the inflation rate started to rise. Which would have been the appropriate federal government policy combination to improve economic performance by lowering the inflation rate? A) increase government expenditures, decrease taxes, increase the quantity of money B) increase government expenditures, decrease taxes, decrease the quantity of money C) decrease government expenditures, increase taxes, decrease the quantity of money D) do not change government expenditures or taxes , increase the quantity of money E) increase government expenditures, decrease taxes, do not change the quantity of money Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

20.5 Essay: The Federal Budget and Fiscal Policy 1) "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: Federal budget Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

2) Depending on the relative size of the federal government's expenditures and tax revenues, 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 expenditures and tax revenues 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 revenues are greater than government expenditures; a deficit occurs when tax receipts are less than government expenditures; and a balanced budget occurs when tax revenues are equal to government expenditures. Topic: Federal budget Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Written and oral communication

3) When government outlays exceed tax revenues, does the government have a budget deficit or surplus? Answer: When government outlays exceed tax revenues, the government is running a budget deficit. Topic: Budget surplus Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

4) Discuss the federal budget history of the United States since 1970. Make sure to note specifically the budget position of the United States during the last of the 1990s and compare it to the situation in 2012. Answer: Starting in the early 1970s, the federal budget went into deficit and remained there until 1997. Then from 1997 to 2001, the government had a budget surplus, that changed back to a deficit in 2002. Some of the budget deficits, particularly those in the 1980s and in recent years, were quite large. In the late 1990s the U.S. budget surplus was, at times, large—over $200 billion a year. In 2012, the budget deficit is very large, over $1,200 billion. Topic: Eye on the past, federal revenues and expenditures Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Written and oral communication

5) A country reports that its government outlays total $0.8 trillion and its tax revenues total $0.6 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 deficit Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

6) The above table gives a country's government outlays and tax revenue for 2008 through 2012. During which years did the country have a balanced budget, budget surplus, and budget deficit? Answer: The country had a balanced budget in 2011 because in that year government outlays equaled tax revenues. The country had a budget surplus in 2008 and 2009 because in those years tax revenues exceeded government outlays. The country had a budget deficit in 2010 and 2011 because in those years government outlays exceeded tax revenues. Topic: Budget deficit and budget surplus Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

7) Describe the difference between discretionary and automatic fiscal policy. Answer: Discretionary fiscal policy is initiated by an act of Congress. Automatic fiscal policy is determined by the state of the economy; no act of Congress is necessary to initiate automatic fiscal policy. Topic: Discretionary and automatic fiscal policy Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

8) Explain the difference between discretionary and automatic fiscal policy. Provide examples of each. Answer: Discretionary policy is an action that is initiated by an act of Congress such as implementation of a spending program or a change to tax law. Automatic fiscal policy is triggered by the state of economy and happens naturally such as a decrease in tax revenues as a result of a fall in incomes or an increase in unemployment payments due to an increase in the unemployment rate. Topic: Discretionary and automatic fiscal policy Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

9) "Discretionary fiscal policy is a fiscal action initiated by an act of the Federal Reserve, while automatic fiscal policy is a fiscal action induced by the state of the economy." Is the previous statement correct or incorrect? Explain your answer. Answer: The statement is incorrect. The statement is correct about automatic fiscal policy. But it is incorrect about discretionary fiscal policy because discretionary fiscal policy is not initiated by the Federal Reserve—it is initiated by an act of Congress. Topic: Discretionary and automatic fiscal policy Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Written and oral communication

10) "As the saying goes, the only sure things in life are death and taxes. This saying points out the result that everything having to do with taxes is an automatic fiscal policy." Is the preceding analysis correct or incorrect? Explain your answer. Answer: The analysis is incorrect because whenever Congress changes the tax law, it is a discretionary fiscal policy. For instance, if Congress passes a tax cut, the change in taxes is a discretionary fiscal policy. However, for any given set of tax laws, a change in the state of the economy will automatically change the tax revenues and so for a given set of tax laws, tax revenue do operate as an automatic fiscal policy. Topic: Discretionary and automatic fiscal policy Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Written and oral communication

11) 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 expenditures has an initial effect on aggregate demand of $1. In other words, a $1 increase in government expenditures 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: Government expenditure multiplier Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Written and oral communication

12) "As long as supply-side effects are ignored, the balanced budget multiplier is equal to zero." Is the previous statement correct or incorrect? Define the balanced budget multiplier and then explain your answer. Answer: The statement is incorrect because, even ignoring any supply-side effects, the balanced budget multiplier is greater than zero. The balanced budget multiplier shows the effect on aggregate demand from a simultaneous change in government expenditure and taxes that leaves the budget balance unchanged. (Say, for instance, a simultaneous increase in government expenditures of $50 billion balanced by a simultaneous increase in tax receipts of $50 billion.) Why is the balanced budget multiplier greater than zero? Suppose the government increases its expenditure and taxes by the same amount, say $50 billion. The $50 billion tax increase decreases aggregate demand while the $50 billion increase in government expenditure increases aggregate demand. The balanced budget multiplier gives the net effect on aggregate demand. And, the increase in aggregate demand from the increase in government expenditure is greater than the decrease in aggregate demand from the increase in taxes. So on net aggregate demand increases and the amount of the increase is given by the balanced budget multiplier. Topic: Balanced budget multiplier Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Written and oral communication

13) Define the balanced budget multiplier and explain how it works. In your answer, ignore any supplyside effects. Answer: The balanced budget multiplier indicates the effect on aggregate demand of a simultaneous change in government expenditure and taxes that leaves the budget balance unchanged. Suppose the government increases its expenditure and taxes by the same amount. The tax increase decreases aggregate demand but the increase in expenditure increases aggregate demand. The increase in aggregate demand from the increase in government expenditure is greater than the decrease in aggregate demand from the increase in taxes. Thus, on net, aggregate demand increases and the amount of the increase is indicated by the balanced budget multiplier. Topic: Balanced budget multiplier Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Written and oral communication

14) If the government increases expenditure by $40 billion and increases tax revenue by $40 billion, what is the impact on aggregate demand? Explain your answer. Answer: Aggregate demand increases. The government expenditure multiplier shows that the increase in government expenditure increases aggregate demand by more than $40 billion. And the government tax multiplier shows that the increase in tax revenue decreases real GDP by more than $40 billion. But, the magnitude of the government expenditure multiplier exceeds the magnitude of the tax multiplier, so the net effect, which is the balanced budget multiplier, is that aggregate demand increases. Topic: Balanced budget multiplier Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

15) Which has a larger effect on aggregate demand: an increase in government expenditure or an equal sized decrease in taxes? Explain your answer. Answer: The multiplier for a change in government expenditure is larger than the multiplier for a tax cut so the effect on aggregate demand from the increase in government expenditure exceeds that from the decrease in taxes. The difference occurs because with an increase in government expenditure on goods and services, real GDP is immediately increased. This increase then leads to a multiplier effect as household's incomes increase and so their consumption expenditure increases. With an equal sized tax cut, however, households save part of the increase in disposable income. As a result, the first impact on real GDP is smaller, which leads to a smaller effect after the multiplier is taken into account. Topic: Balanced budget multiplier Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Written and oral communication

16) To eliminate a recessionary gap, what fiscal policy should the government pursue? Answer: A recessionary gap occurs when real GDP is less than potential GDP. To restore full employment, the government should increase its expenditures on goods or services or decrease its taxes. Topic: Fiscal stimulus Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

17) 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: Level 4: Applying models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

18) 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 $13.5 trillion but real GDP equals only $13.0 trillion. In order to restore real GDP back to potential GDP using fiscal policy, the government could increase government expenditures on goods and services and/or decrease taxes. Topic: Fiscal stimulus Skill: Level 4: Applying models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

19) Explain how an increase in government expenditure designed to increase aggregate demand can increase potential GDP and aggregate supply. Answer: Some types of government expenditure provide goods and services that increase the nation's production possibilities. For instance, additional government spending on law and order, public education, public health, social infrastructure such as roads and bridges, and productive capital all increase the economy's production possibilities. So an increase in government expenditure that provides these goods and services all increase potential GDP and increase aggregate supply. Topic: Discretionary fiscal policy, supply-side effects Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Written and oral communication

20) Explain how a tax cut effects employment, labor productivity, and potential GDP. Answer: A tax cut increases the incentive to work thereby increasing the labor supply and employment. A tax cut also increases the incentive to save and invest thereby increasing the quantity of capital which in turn increases productivity. These two items, increased employment and increased labor productivity, both result in an increase in potential GDP. Topic: Taxes and potential GDP Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Written and oral communication

21) An economy is experiencing a recession and policymakers are considering using discretionary fiscal policy to eliminate the recessionary gap. What are the four limitations that policymakers face when using discretionary fiscal policy? Briefly discuss each. Answer: The limitations are lawmaking time lags, a shrinking area of lawmaker discretion, problems estimating potential GDP, and difficulty making economic forecasts. The lawmaking time lag refers to the point that after all the Congressional debate is concluded and the act is finally signed into law, the lag involved means that the economy might no longer be in recession. The shrinking area of lawmaker discretion points out that more and more of the government budget is "out of bounds" for change. For instance, the government is highly unlikely in the near future to decrease expenditure on Social Security. As the budget includes more of these "untouchables," there is less room left for changes needed for fiscal policy. The problem with estimating potential GDP means that the recession might be less severe than believed. As a result, fiscal policy might be too strong and although it eliminates the recession, the fiscal policy might increase real GDP so much that it moves the economy farther away from potential GDP. Finally, the difficulty making economic forecasts means that forecasters cannot be sure what will be the state of the economy when the fiscal policy is finally implemented. If the economy is naturally recovering from the recession and this recovery is not forecast, then when the fiscal policy is implemented, the policy might push the economy well past potential GDP. Topic: Limitations of fiscal policy Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Written and oral communication

22) Explain four reasons why it is difficult to use discretionary fiscal policy to eliminate a deflationary or inflationary gap. Answer: Three limitations of using discretionary fiscal policy are the lawmaking lag (the point that the policy-making process is slow), the shrinking area of lawmaker discretion (the point that an increasingly large part of the budget is effectively off limits to change), the difficulty in determining potential GDP at any given time (the point that at times it is difficult to know if the economy is in a recession or an expansion), and the difficulty in forecasting real GDP (the point that the proper policy depends on where real GDP is relative to potential GDP in the future when the policy is actually implemented). Topic: Limitations of fiscal policy Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Written and oral communication

23) What are lawmaking lags? What effect do they have on the use of discretionary fiscal policy? Answer: Lawmaking lags refer to the fact that before discretionary policy can be implemented, Congress must pass an act. There can be significant time involved for Congress to debate and reach consensus on a specific piece of legislation. The time it takes is called the "lawmaking lag." Lawmaking lags make discretionary fiscal policy more difficult because by the time the policy is actually implemented, the state of the economy might have changed and so the newly enacted discretionary fiscal policy might now be the wrong policy. Topic: Lawmaking lags Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Written and oral communication

24) What are automatic stabilizers? How do they affect the budget deficit and/or budget surplus during a recession and during an expansion? Answer: Automatic stabilizers are features of fiscal policy that stabilize real GDP without the need for explicit policy action by the government. Automatic stabilizers include induced taxes and needs-tested spending. During a recession, induced taxes decrease and needs-tested spending increases, so the budget deficit increases (or the budget surplus decreases). During an expansion, induced taxes increase and means-tested spending decreases, so the budget deficit decreases (or the budget surplus increases). Topic: Automatic stabilizer Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

25) What are automatic stabilizers? How do they help stabilize real GDP? Answer: Automatic stabilizers are features of fiscal policy that stabilize real GDP without the need for explicit policy action by the government. Automatic stabilizers include induced taxes and needs-tested spending. To see how automatic stabilizers work, consider a decrease in real GDP, that is, a recession. As GDP decreases, people's incomes decrease and so induced taxes, such as income taxes, decrease. As a result, people's disposable incomes do not decrease by as much as their total income and so consumption expenditure does not decrease by as much as it would otherwise. Moreover, as the economy moves into a recession, needs-tested spending, such as unemployment benefits, increases. The increase in needs-tested spending helps keep people's disposable incomes higher than otherwise and so, once again, consumption expenditure does not decrease by as much as it would otherwise. Because consumption expenditure is greater than otherwise, aggregate demand remains greater than otherwise and so the decrease in real GDP is lessened. Topic: Automatic stabilizer Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

26) Explain how tax revenue can be both an automatic fiscal policy and a discretionary fiscal policy. Answer: When Congress changes the tax law, it is a discretionary policy. For any given set of tax laws, a change in the state of the economy will automatically change the tax revenue. Hence for a given set of tax laws, tax revenues operate as an automatic fiscal policy. Topic: Discretionary and automatic fiscal policy Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Written and oral communication

20.6 Essay: The Federal Reserve and Monetary Policy 1) Explain the role the Fed, Congress, and the President play in making monetary policy. Answer: Ultimately the Federal Reserve maintains responsibility for setting monetary policy in the United States. The Federal Reserve Act gives the Board of Governors and Federal Open Market Committee responsibility to conduct monetary policy. The FOMC meets eight times a year to make monetary policy decisions. The Congress does not play a role in setting monetary policy. However, the Board of Governors is required to report on monetary policy and actions to Congress as laid out in the Federal Reserve Act. The President of the United States has a limited role in monetary policy. The President appoints members to the Board of Governors of the federal Reserve and also appoints the Chair of the Board of Governors. Topic: Monetary policy Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Written and oral communication

2) "The Federal Open Market Committee (FOMC) is the group within the Federal Reserve that makes monetary policy decisions. The FOMC meets twice a year and each meeting lasts eight days." Are these two statements correct or incorrect? Why? Answer: The first statement is correct. The second statement is incorrect. It is indeed the case that the FOMC is the group within the Fed that makes monetary policy decisions. However the FOMC meets eight times a year, not twice. Of these eight meetings, six are for one day and two of the meetings last for two days. Topic: Monetary policy process Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

3) When the Fed lowers the federal funds rate and the real interest rate falls, what happens to the opportunity cost of investment? What happens to investment? Answer: The opportunity cost of investment is the real interest rate. When the Fed lowers the federal rate so that the real interest rate falls, the opportunity cost of investment decreases. In response, investment increases. Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

4) Discuss how the Fed raising the federal funds rate ripples through the different sectors of the economy. Answer: When the Fed raises the federal funds rate it does so by decreasing banks' reserves. The decrease in reserves decreases the quantity of money. The supply of loanable funds decreases so the real interest rate rises. The higher real interest rate decreases investment and consumption expenditure, especially consumption expenditure on durable goods. In the foreign exchange market, the higher interest rates increase the attractiveness of U.S. securities. Foreigners increase their demand for U.S. dollars in order to purchase these securities and so the price of the dollar rises on the foreign exchange market. The rise in the price of the dollar 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: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Written and oral communication

5) After the Fed raises the federal funds rate, the effects on the economy can take up to two years before they occur. Is this statement accurate? Lay out the time path of how an increase in the federal funds rate affects the economy. Answer: The statement is accurate. While there are immediate, short-term effects from the Fed raising the federal funds rate, there are also long-term effects. Immediately, short-term interest rates and the exchange rate rise. Within a few weeks to months the quantity of money and supply of loanable funds decreases and the long-term interest rate rises. Up to a year later, consumption expenditure, investment, net exports, aggregate demand, and the real GDP growth rate all decrease. Finally, around two years later the inflation rate decreases. Topic: Ripple effects of the Fed's action Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking

6) List and briefly explain the steps in how monetary policy affects real GDP in the AS/AD model using as your example the case 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 and bank loans increase. The increase in loans increases the supply of loanable funds, which then lowers the real interest rate. Next the fall in the real 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: Monetary policy, recession Skill: Level 1: Definition Section: Checkpoint 20.2 Status: Old AACSB: Written and oral communication

7) When the economy is in recession, does the Fed want to raise the federal funds rate so as to increase aggregate demand and increase real GDP? Explain your answer. Answer: When the economy is in a recession, the Fed surely wants to increase aggregate demand and hence GDP, but raising the federal funds rate is the wrong policy. A boost in the federal funds 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 federal funds rate. Topic: Monetary policy, recession Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Written and oral communication

8) 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, that is, when there is an inflationary gap. 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. Hence in this case, 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: Monetary policy, inflation Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

9) If there is an inflationary gap, what is the proper monetary policy to restore price stability? What actions can the Fed undertake to restore price stability? Answer: An inflationary gap occurs when real GDP exceeds potential GDP. With no action by the Fed, the inflationary gap will be closed by inflation occurring as the money wage rate rises and aggregate supply decreases. In order to avoid the inflation, the Fed needs to decrease aggregate demand and thereby decrease real GDP back to potential GDP. To decrease aggregate demand, the Fed must raise the federal funds rate. Topic: Monetary policy, inflation Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

10) How does a rise in the federal funds rate affect aggregate demand, real GDP, and the price level? Answer: A rise in the federal funds leads to investment, consumption expenditure, and net exports all decreasing, which, in turn, decreases aggregate demand. The decrease in aggregate demand then decreases real GDP and lowers the price level. Topic: Monetary policy, inflation Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

11) In the above figure, is the Fed likely to be afraid that inflation will occur or that a recession will occur? Discuss the appropriate monetary policy that should be made to restore the economy to potential GDP. Answer: The Fed will fear inflation. The economy is in a short-run equilibrium with real GDP of $13.5 trillion, which exceeds potential GDP of $13.0 trillion. If the Fed does nothing, the aggregate supply curve will begin to shift leftward, raising the price level and creating inflation as it moves the economy back to potential GDP. In order to limit the inflation, the Fed needs to raise the federal funds rate, thereby decreasing aggregate demand. Topic: Fed and inflation Skill: Level 4: Applying models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking